_________________________________________________________________
united states
securities and exchange commission
Washington, D. C. 20549
FORM 10-Q
quarterly report pursuant to section 13 or 15(d) of
the securities exchange act of 1934
For the Quarterly Period Ended February 29, 1996 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.)
5400 Bayfront Plaza 95052
Santa Clara, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (408) 764-5000
Former name, former address and former fiscal year, if changed since last
report: N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes ....XX.... No ................
As of February 29, 1996, 167,080,326 shares of the Registrant's Common
Stock were outstanding.
_________________________________________________________________
3Com Corporation
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
February 29, 1996 and May 31, 1995
Consolidated Statements of Income
Quarters and Nine Months Ended February 29, 1996 and
February 28, 1995
Consolidated Statements of Cash Flows
Nine Months Ended February 29, 1996 and February 28, 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3Com Corporation
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
February 29, May 31,
1996 1995
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 193,887 $ 159,908
Temporary cash investments 285,307 225,660
Trade receivables 373,311 245,258
Inventories 216,308 182,759
Deferred income taxes 61,544 55,273
Other 33,191 26,698
--------- ---------
Total current assets 1,163,548 895,556
Property and equipment--net 207,497 144,944
Deposits and other assets 44,050 34,310
--------- ---------
Total $1,415,095 $1,074,810
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 126,399 $ 118,377
Accrued and other liabilities 202,922 150,076
Income taxes payable 48,867 56,412
--------- ---------
Total current liabilities 378,188 324,865
Long-term debt 110,000 110,000
Other long-term obligations 5,141 6,221
Deferred income taxes 17,541 -
Shareholders' Equity:
Preferred stock, no par value, 3,000,000
shares authorized; none outstanding - -
Common stock, no par value, 400,000,000
shares authorized; shares outstanding:
February 29, 1996: 167,080,326;
May 31, 1995: 160,911,572 543,934 435,922
Unamortized restricted stock grants (3,452) (2,037)
Retained earnings 351,246 200,030
Unrealized net gain (loss) on available
for-sale securities 12,948 (22)
Accumulated translation adjustments (451) (169)
--------- ---------
Total shareholders' equity 904,225 633,724
--------- ---------
Total $1,415,095 $1,074,810
========= =========
See notes to consolidated financial statements.
3Com Corporation
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Quarter Ended Nine Months Ended
------------------------- -------------------------
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
---- ---- ---- ----
Sales $ 606,002 $ 425,759 $1,666,835 $1,117,213
Costs and expenses:
Cost of sales 284,819 196,926 787,088 518,692
Sales and marketing 122,816 83,413 343,947 223,336
Research and development 59,830 43,887 167,460 117,127
General and administrative 25,527 17,895 69,370 48,003
Purchased in-process technology - 7,900 - 68,696
Acquisition related charges and
other - - 69,000 4,025
--------- --------- --------- ---------
Total 492,992 350,021 1,436,865 979,879
========= ========= ========= =========
Operating income 113,010 75,738 229,970 137,334
Other income--net 1,743 386 4,926 3,754
--------- --------- --------- ---------
Income before income taxes 114,753 76,124 234,896 141,088
Income tax provision 40,163 27,620 86,540 50,682
--------- --------- --------- ---------
Net income $ 74,590 $ 48,504 $ 148,356 $ 90,406
========= ========= ========= =========
Net income per common and
equivalent share:
Primary $ .42 $ .28 $ .84 $ .54
Fully diluted $ .42 $ .28 $ .84 $ .53
Common and equivalent shares used
in computing per share amounts:
Primary 177,378 170,467 175,844 168,041
Fully diluted 177,868 170,897 176,262 169,595
See notes to consolidated financial statements.
3Com Corporation
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
Nine Months Ended,
February 29, February 28,
------------ ------------
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 148,356 $ 90,406
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 62,335 41,946
Deferred income taxes 10,845 (24,030)
Purchased in-process technology - 68,696
Adjustment to conform fiscal year of pooled
entity (3,048) 3,013
Non-cash acquisition-related costs 44,320 -
Non-cash restructuring costs - (1,100)
Changes in assets and liabilities, net of effects
of acquisitions:
Trade receivables (140,562) (81,563)
Inventories (45,656) (42,301)
Other current assets (6,552) (7,358)
Accounts payable 18,682 45,468
Accrued and other liabilities 39,819 10,230
Income taxes payable 41,205 47,011
Accrued acquisition-related costs 13,025 -
Restructuring liabilities - (1,894)
--------- ---------
Net cash provided by operating activities 182,769 148,524
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (119,482) (64,326)
Purchase of temporary cash investments (250,445) (146,533)
Proceeds from temporary cash investments 179,475 59,659
Businesses acquired in purchase transactions - (53,234)
Other--net (6,395) 1,103
--------- ---------
Net cash used for investing activities (196,847) (203,331)
--------- ---------
Cash flows from financing activities:
Sale of stock 52,777 20,037
Repurchases of common stock (975) (19,592)
Net proceeds from issuance of debt - 107,330
Repayments of notes payable and capital
lease obligations (3,376) (3,839)
Other--net (369) 7
--------- ---------
Net cash provided by financing activities 48,057 103,943
--------- ---------
Increase in cash and cash equivalents 33,979 49,136
Cash and cash equivalents at beginning of period 159,908 80,625
--------- ---------
Cash and cash equivalents at end of period $ 193,887 $ 129,761
========= =========
Non-cash operating, investing and financing activities:
Tax benefit on stock option transactions $ 51,083 $ 19,870
Unrealized net gain (loss) on available-for
sale securities $ 12,819 $ (188)
See notes to consolidated financial statements.
3Com Corporation
Notes to Consolidated Financial Statements
1. Basis of Presentation
On October 13, 1995, 3Com Corporation (the Company)
acquired Chipcom Corporation (Chipcom) which was accounted
for as a pooling-of-interests. All financial data of the
Company, including the Company's previously issued financial
statements for the periods presented in this Form 10-Q, have
been restated to include the historical financial
information of Chipcom in accordance with generally accepted
accounting principles and pursuant to Regulation S-X.
The unaudited consolidated financial statements have
been prepared by the Company and include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
In the opinion of management, these unaudited consolidated
financial statements include all adjustments necessary for a
fair presentation of the Company's financial position as of
February 29, 1996, and the results of operations and cash
flows for the quarters and nine months ended February 29,
1996 and February 28, 1995.
The results of operations for the quarter and nine
months ended February 29, 1996 may not necessarily be
indicative of the results to be expected for the fiscal year
ending May 31, 1996.
These financial statements should be read in
conjunction with the consolidated financial statements and
related notes thereto for the fiscal year ended May 31, 1995
included in the Company's fiscal 1995 Form 10-K and the
Company's Joint Proxy Statement/Prospectus dated September
11, 1995.
2. Inventories consisted of (in thousands):
February 29, May 31,
1996 1995
---- ----
Finished goods $ 122,746 $ 83,221
Work-in-process 21,096 31,102
Raw materials 72,466 68,436
--------- ---------
Total $ 216,308 $ 182,759
========= =========
3. Net Income Per Share
Net income per common and equivalent share is computed
based on the weighted average number of common shares and
the dilutive effects of stock options outstanding during the
period using the treasury stock method. The effect of the
assumed conversion of the 10.25% convertible subordinated
notes was antidilutive for the periods presented. Weighted
average shares outstanding and per share amounts have been
restated to reflect the two-for-one stock split on August
25, 1995 for shareholders of record on August 4, 1995.
4. Business Combinations
On October 13, 1995, the Company acquired Chipcom by
issuing approximately 18.3 million shares of its common
stock in exchange for all the outstanding stock of Chipcom.
The Company also assumed and exchanged all options to
purchase Chipcom stock for options to purchase approximately
2.4 million shares of the Company's common stock. Chipcom
designs, manufactures and distributes computer networking
multi-function platforms. The acquisition was accounted for
as a pooling-of-interests. All financial data of the
Company has been restated to include the historical
financial information of Chipcom. Chipcom maintained its
financial records on a 52-53 week fiscal year ending nearest
to December 31. The May 31, 1995 restated consolidated
balance sheet includes the balance sheet of Chipcom as of
December 31, 1994. The restated consolidated statements of
income and cash flows for the quarter and nine months ended
February 28, 1995 include Chipcom's statements of income and
cash flows for the quarter and nine months ended September 24,
1994. The results of operations of Chipcom for the five
month period ended May 31, 1995, which reflected revenues of
$118.1 million and net income of $2.4 million, has been
reported as an increase in the Company's fiscal 1996
retained earnings. No significant adjustments were required
to conform the accounting policies of the Company and
Chipcom. Financial information as of February 29, 1996 and
for the quarter and nine months ended reflects the Company's
and Chipcom's operations for those periods.
The following table shows the effect on the results of
operations as restated for the quarters ended August 31,
1995 and August 31, 1994 and for the nine months ended
February 28, 1995. The Company's quarter ended August 31,
1994 and nine months ended February 28, 1995 has been
combined with Chipcom's quarter ended March 26, 1994 and
nine months ended September 24, 1994, respectively.
Quarter ended August 31, Nine Months Ended
------------------------ -----------------
1995 1994 February 28, 1995
---- ---- -----------------
(in thousands)
Sales:
3Com $ 430,354 $ 262,801 $ 932,321
Chipcom 66,935 51,882 184,892
--------- --------- ---------
Combined $ 497,289 $ 314,683 $1,117,213
========= ========= =========
Net Income (loss):
3Com $ 59,421 $ 30,772 $ 80,153
Chipcom (2,000) 1,873 10,253
--------- --------- ---------
Combined $ 57,421 $ 32,645 $ 90,406
========= ========= =========
As a result of the acquisition, the Company recorded
acquisition-related charges totaling $69.0 million in the
second quarter of fiscal 1996. These charges include $60.8
million of integration expenses and $8.2 million of direct
transaction costs (consisting primarily of investment
banking and other professional fees). Integration expenses
include approximately $37.8 million of costs of eliminating
duplicate and discontinued products, $5.1 million of
severance and related costs for approximately 80 employees
primarily associated with duplicate or discontinued product
lines, field sales and administrative functions, $4.3
million of costs of eliminating duplicate facilities and
$13.6 million of other acquisition-related costs. Total
expected cash expenditures relating to the acquisition-
related charges are $24.7 million, of which $11.7 million
was disbursed prior to February 29, 1996 and the remaining
$13.0 million is expected to be paid within the next twelve
months.
On June 9, 1995, the Company acquired Primary Access
Corporation (Primary Access) by issuing approximately 4.6
million shares of its common stock 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 1.0 million shares of the Company's common
stock. Primary Access develops, manufactures and markets
network access systems. The acquisition was accounted for
as a pooling-of-interests. All financial data of the
Company has been restated to include the operating results
of Primary Access. No significant adjustments were required
to conform the accounting policies of the Company and
Primary Access.
5. Litigation
On October 13, 1995, the Company acquired Chipcom,
which had already been named as a defendant in the
litigation described below. On May 30, 1995, a complaint
was filed in the United States District Court for the
District of Massachusetts entitled Lucille Nappo, Marc
Linsky, Constandine Machakos, and Mary Machakos v. Chipcom
Corp., John Robert Held, Robert Peter Badavas, Bruce L.
Cohen, Menachem E. Abraham, and Jerald G. Fishman. The
named plaintiffs purport to represent the class of persons
who purchased Chipcom's common stock during the period from
and including February 8, 1995 through and including May 26,
1995. The complaint alleges violations by the defendants of
Sections 10(b) and 20(a) of the Securities and Exchange Act
of 1934, and seeks unspecified damages. On June 7, 1995, a
complaint alleging very similar claims was filed against the
same defendants in the same Court by Anthony Mallozzi. A
third similar complaint was filed against the same
defendants in the same Court on June 8, 1995, by Daniel
List. A fourth similar complaint was filed in the same
Court on June 16, 1995, entitled Sean J. Carney and Nicholas
Giannantonio v. Chipcom Corp., John Held, and Robert
Badavas. A fifth similar complaint was filed in the same
Court on June 16, 1995, entitled Manuel C. DeSousa and
Barbara J. DeSousa v. Chipcom Corp., John Held, and Robert
Badavas. The cases have been consolidated for pretrial
purposes pursuant to an order entered by the Court on June
15, 1995. The consolidated action is entitled In re:
Chipcom Securities Litigation, Civil Action No. 95-111114-
DPW. A Consolidated Complaint was filed on September 13,
1995, and an Amended Consolidated Complaint was filed on
November 30, 1995. The defendants have moved to dismiss the
Amended Consolidated Complaint, dispute the merits of the
allegations in the consolidated complaint, and intend to
defend the actions vigorously. Although the ultimate
outcome of this litigation is difficult to predict, based on
the facts currently known, management does not believe this
matter will have a material adverse effect on the financial
position of the Company.
3Com Corporation
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Acquisitions
During the quarter ended November 30, 1995, 3Com (the
Company) enhanced its enterprise-wide solutions with the
acquisition of Chipcom Corporation (Chipcom), a provider of
computer networking multi-function platforms, including hubs,
switching and network management products. The acquisition was
completed on October 13, 1995. The Company issued approximately
18.3 million shares of its common stock in exchange for all the
outstanding stock of Chipcom. The Company also assumed and
exchanged all options to purchase Chipcom stock for options to
purchase approximately 2.4 million shares of the Company's common
stock. The acquisition was accounted for as a pooling-of-
interests and all financial data of the Company prior to the
acquisition has been restated to include the historical financial
information of Chipcom.
During the quarter ended August 31, 1995, 3Com extended its
reach to network service providers and carriers with the
acquisition of Primary Access Corporation (Primary Access), a
provider of integrated network access systems. The acquisition
was completed on June 9, 1995. The Company issued approximately
4.6 million shares of its 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 1.0
million shares of the Company's common stock. The acquisition
was accounted for as a pooling-of-interests and all financial
data of the Company prior to the acquisition has been restated to
include the historical financial data of Primary Access.
See Note 4 of Notes to Consolidated Financial Statements for
additional information on the Company's business combinations.
Results of Operations
Quarter Ended February 29, 1996 and February 28, 1995
The Company achieved record sales in the third quarter of
fiscal 1996 totaling $606.0 million, an increase of $180.2
million or 42 percent from the corresponding quarter a year ago.
Compared with the second quarter of fiscal 1996, sales for the
third quarter of fiscal 1996 increased $42.5 million or 8
percent.
The Company believes that the year-over-year increase in
third quarter sales is due to several factors, including rapid
growth in sales outside the US, continued strength in the data
networking market as customers migrate to new technologies such
as LAN switching and Fast Ethernet, increases in worldwide
personal computer sales, the breadth of 3Com's product offerings
and its ability to deliver complete data networking solutions for
different connectivity environments.
Sales of network systems products (i.e., internetworking
platforms, remote access servers, hubs and switching products) in
the third quarter of fiscal 1996 represented 56 percent of total
sales and increased 48 percent from the same quarter one year
ago. In the third quarter of fiscal 1995, sales of network
systems products represented 53 percent of total sales. The
increase in network systems product sales was led primarily by
the LinkBuilder(R) FMS(TM) II stackable hub, the LANplex(R) family of
switching products and the AccessBuilder(TM) 8000 integrated network
access systems. Also contributing to the sales increase was the
introduction of the LinkSwitch(TM) stackable switches during fiscal
1996. The increase in network systems products was partially
offset by declines in sales of certain product lines acquired
from Chipcom.
Sales of network adapters in the third quarter of fiscal
1996 represented 41 percent of total sales and increased 35
percent from the year-ago period. In the third quarter of fiscal
1995, sales of network adapters represented 44 percent of total
sales. The increase in network adapter sales represented a
significant increase in unit volume. This increase was primarily
led by the sales of the EtherLink(R) III network adapters, the
EtherLink PC Card adapter and the Fast EtherLink PCI adapter.
Average selling prices for adapters remained flat as the
industry-wide trend toward decreasing average selling prices in
both the Ethernet and Token Ring markets were offset by the
higher mix of Fast Ethernet and PC Card products.
Sales of other products (i.e., terminal servers, customer
service and other products) represented three percent of total
sales in the third quarter of fiscal 1996 and fiscal 1995. Sales
of other products increased 46 percent from the year-ago period,
although they continued to represent a small percentage of the
Company's total sales, as expected.
Sales outside of the United States comprised 54 percent of
total sales in the third quarter of fiscal 1996, compared to
56 percent for the same period last year. Sales within the
United States increased 49 percent from the same period last year
due largely to increased sales of network access systems to
network service providers and carriers. International sales rose
37 percent from the prior year, primarily in the Asia Pacific
region. The Company's operations were not significantly impacted
by fluctuations in foreign currency exchange rates in the third
quarters of fiscal 1996 and 1995.
Cost of sales as a percentage of sales was 47.0 percent in
the third quarter of fiscal 1996, compared to 46.3 percent for
the third quarter of fiscal 1995. The corresponding decline in
gross margin in the third quarter of fiscal 1996 was the result
of a number of factors including increased provisions for obsolete
and excess inventory, which taken separately would have reduced
gross margin by 1.2 percentage points, and a higher mix of certain
lower margin adapter and network access system products, which taken
separately would have reduced gross margin by .7 percentage points.
Factors causing a decline in gross margin were partially offset by a
favorable shipment mix toward the Company's switching and stackable hub
products, which taken separately would have improved gross margin
by 1.2 percentage points.
Total operating expenses in the third quarter of fiscal 1996
were $208.2 million or 34.4% of sales, compared to $153.1 million
in the third quarter of fiscal 1995. Excluding a charge for
purchased in-process technology associated with Chipcom's
acquisition of DSI ExpressNetworks, Inc. (DSI), total operating
expenses in the third quarter of fiscal 1995 were $145.2 million,
or 34.1% of sales.
Sales and marketing expenses in the third quarter of fiscal
1996 increased $39.4 million or 47 percent from fiscal 1995. The
increase in such expenses reflected increased selling costs
related to the increase in sales volume, higher costs associated
with marketing promotions and customer support programs, and a 35
percent year-over-year increase in sales and marketing personnel.
As a result, sales and marketing expenses as a percentage of
sales increased to 20.3 percent in the third quarter of fiscal
1996, from 19.6 percent in the corresponding fiscal 1995 period.
Research and development expenses in the third quarter of
fiscal 1996 increased $15.9 million or 36 percent from the year-
ago period. The increase in research and development expenses
was primarily attributable to the cost of developing 3Com's new
products including the Company's expansion into new technologies
and markets. The Company believes the timely introduction of new
technologies and products is crucial to its success, and will
continue to make strategic acquisitions to accelerate time to
market where appropriate. Most of the in-process technology
acquired in connection with businesses purchased by the Company
since December 1993 have been completed. The nature of costs for
the projects that are still in process are primarily labor costs
for design, prototype development and testing. The Company
estimates that the remaining costs in connection with the
completion of all acquired research and development projects are
not significant. As a percentage of sales, research and
development expenses decreased to 9.9 percent in the third
quarter of fiscal 1996, compared to 10.3 percent in the third
quarter of fiscal 1995.
General and administrative expenses in the third quarter of
fiscal 1996 increased $7.6 million or 43 percent from the same
period a year-ago. The increase in general and administrative
expenses reflected expansion of the Company's infrastructure.
General and administrative personnel increased 29 percent from
the prior year. As a percentage of sales, such expenses remained
at 4.2 percent in the third quarter of fiscal 1996, consistent
with the corresponding fiscal 1995 period.
Other income (net) was $1.7 million in the third quarter of
fiscal 1996, compared to $0.4 million in the third quarter of
fiscal 1995. Higher interest income from larger cash balances
caused the increase in other income.
The Company's effective income tax rate was approximately 35
percent in the third quarter of fiscal 1996 and approximately 36
percent in the third quarter of fiscal 1995.
Net income for the third quarter of fiscal 1996 was $74.6
million, or $0.42 per share, compared to net income of $48.5
million, or $0.28 per share, for the third quarter of fiscal
1995. If the aforementioned $7.9 million charge associated with
the acquisition of DSI was excluded, the Company would have
realized net income of $53.5 million, or $0.31 per share, for the
third quarter of fiscal 1995.
Nine Months Ended February 29, 1996 and February 28, 1995
The Company achieved record sales for the first nine months
of fiscal 1996 totaling $1,666.8 million, an increase of $549.6
million or 49 percent from the corresponding period a year ago.
Sales of network systems products in the first nine months of
fiscal 1996 represented 56 percent of total sales and increased
60 percent from the same period one year ago. Sales of network
adapters in the first nine months of fiscal 1996 represented 40
percent of total sales and increased 36 percent from the same
period last year. International sales comprised 53 percent of
total sales and increased 53 percent from the first nine months
of fiscal 1995.
Cost of sales as a percentage of sales was 47.2 percent for
the first nine months of fiscal 1996, compared to 46.4 percent
for the corresponding fiscal 1995 period. The corresponding
decline in gross margin in the first nine months of fiscal 1996
was the result of a number of factors including a higher mix of
certain lower margin adapter, Chipcom and network access system
products, which taken separately would have reduced gross margin by
1.3 percentage points, and higher period costs for obsolete and excess
inventories and freight and duties, which taken separately would have
reduced gross margin by 1.0 percentage point. Factors causing the
decline in gross margin were partially offset by a favorable shipment
mix toward the Company's switching products and reductions in adapter
product material costs, which taken separately would have improved
gross margin by 1.5 percentage points.
Total operating expenses in the first nine months of fiscal
1996 were $649.8 million compared to $461.2 million in the first
nine months of fiscal 1995. Excluding the acquisition-related
charge of $69.0 million for Chipcom (see Note 4 of Notes to
Consolidated Financial Statements), total operating expenses in
the first nine months of fiscal 1996 were $580.8 million, or 34.8
percent of sales. Excluding the one-time charge of $68.7 million
for purchased in-process technology primarily associated with the
acquisitions of DSI and NiceCom, Ltd., a charge of $5.1 million
for merger costs associated with Chipcom's acquisition of Artel
Communications Corporation, and a non-recurring credit of $1.1
million for the reduction in accrued restructuring costs, total
operating expenses in the first nine months of fiscal 1995 were
$388.5 million, or 34.8 percent of sales. The increase in
recurring operating expenses of $192.3 million, or 50 percent,
reflected increased selling costs related to higher sales volume,
the cost of developing and promoting the Company's products and
an average headcount increase of 33 percent over the first nine
months of fiscal 1995.
In the first nine months of fiscal 1996, sales and marketing
expenses increased $120.6 million or 54 percent from the prior
year and increased to 20.6 percent of sales, compared to 20.0
percent of sales in fiscal 1995. The Company believes the
Chipcom acquisition caused some loss of productivity due to
disruptions associated with integration of sales forces during
fiscal 1996. Research and development expenses increased $50.3
million in the first nine months of fiscal 1996, but decreased as
a percentage of sales to 10.0 percent compared to 10.5 percent in
fiscal 1995. General and administrative expenses increased $21.4
million in the first nine months of fiscal 1996, but decreased as
a percentage of sales to 4.2 percent compared to 4.3 percent in
fiscal 1995.
Other income (net) was $4.9 million for the first nine
months of fiscal 1996, compared to $3.8 million in the
corresponding period one year ago. The increase in other income
was due primarily to higher interest income on larger cash
balances in fiscal 1996.
The Company's effective income tax rate was approximately 37
percent in the first nine months of fiscal 1996 and approximately
36 percent in the first nine months of fiscal 1995. Excluding
the merger costs associated with the Chipcom acquisition, which
were not fully tax deductible, the effective tax rate was 35
percent for the first nine months of fiscal 1996.
Net income for the first nine months of fiscal 1996 was
$148.4 million, or $0.84 per share, compared to net income of
$90.4 million, or $0.53 per share, for the first nine months of
fiscal 1995. Excluding the aforementioned $69.0 million charge
associated with the acquisition of Chipcom, net income was $197.6
million, or $1.12 per share, for the first nine months of fiscal
1996. Excluding the $68.7 million charge associated with
purchased in-process technology, the $5.1 million charge for
merger costs and the $1.1 million credit for the reduction in the
restructuring reserve, net income was $135.3 million, or $0.80
per share, for the first nine months of fiscal 1995. Net income
per share for fiscal 1995 has been restated to reflect the two-
for-one stock split on August 25, 1995.
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. In accordance with the
provisions of the Private Securities Litigation Reform Act of
1995, the cautionary statements set forth below identify
important factors that could cause actual results to differ
materially from those in any forward-looking statements contained
in this report. Such trends and factors include adverse changes
in general economic conditions or conditions in the specific
markets for the Company's products, governmental regulation or
intervention affecting communications or data networking,
fluctuations in foreign exchange rates, and other factors,
including those 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, as well as the entrance or expansion
of computer and telecommunication companies into the data
networking market, 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 if the Company
does not respond timely and effectively to such changes. The
Company is engaged in research and development activities in
certain emerging LAN and WAN high-speed technologies, such as
ATM, ISDN and Fast Ethernet. As the industry standardizes on
high-speed technologies, there can be no assurance that the
Company will be able to respond timely and cost effectively 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 primarily distributes its products through third
party resellers. Due to the consolidation in the distribution
and reseller channels and the Company's increased volume of sales
into these channels, the Company has experienced an increased
concentration of credit risk. While the Company continuously
monitors and manages this risk, financial difficulties on the
part of one or more of the Company's resellers may have a
material adverse effect on the Company. Likewise, the Company's
expansion into certain emerging geographic markets, characterized
by economic and political instability and currency fluctuations,
may subject the Company's resellers to financial difficulties
which may have an adverse impact on the Company.
Acquisitions of complementary businesses and technologies,
including technologies and products under development, are an
active part of the Company's overall business strategy. The
Company has recently consummated acquisitions of several
companies, including AXON Networks Inc., Chipcom and Primary
Access. There can be no assurance that products, technologies,
distribution channels, key personnel and businesses of acquired
companies will be effectively assimilated into the Company's
business or product offerings, or that such integration will not
adversely affect the Company's business, financial condition or
results of operations. The difficulties of such integration may
be increased by the size and number of such acquisitions and the
necessity of coordinating geographically separated organizations.
There can be no assurance that any acquired products,
technologies or businesses will contribute to the Company's
revenues or earnings, that the sales and earnings from acquired
businesses will not be adversely affected by the integration
process or other general factors. The acquisition of Chipcom is
the largest acquisition the Company has undertaken, and the
factors identified above are therefore more significant to the
Company's business following the Chipcom acquisition than for
prior transactions. There can be no assurance that the Company
will continue to be able to identify and consummate suitable
acquisition transactions in the future.
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,
challenges associated with integration of businesses 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.
During the third quarter of fiscal 1996, the Company
transitioned its core order processing, logistics and financial
systems to a new set of applications which operate on a client
server based platform. Further development of the client server
system will be required to assure production stability of the new
application systems. As a result of the transition to the client
server platform, the Company may experience order processing,
shipping or financial system disruptions, which may have an
adverse affect on the Company.
Notwithstanding the Company's increased geographical
diversification, 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. The Company's business, financial condition and
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 and
performance should not be presumed by investors to be an accurate
indicator of future results or trends.
Liquidity and Capital Resources
Cash, cash equivalents and temporary cash investments at
February 29, 1996 were $479.2 million, increasing $93.6 million
from May 31, 1995.
During the quarter ended November 30, 1995, the Company
completed the acquisition of Chipcom. As a result of the
acquisition, the Company recorded acquisition-related charges
totaling $69.0 million. Total expected cash expenditures
relating to the acquisition-related charges are $24.7 million, of
which $11.7 million was disbursed prior to February 29, 1996 and
the remaining $13.0 million is expected to be paid within the
next twelve months (See Note 4 of Notes to Consolidated Financial
Statements.).
For the nine months ended February 29, 1996, net cash
generated from operating activities was $182.8 million. Trade
receivables at February 29, 1996 increased $128.1 million from
May 31, 1995. Days sales outstanding in receivables was 55 days
at February 29, 1996, compared to 46 days at May 31, 1995, due
primarily to an increase in international and carrier sales and
the shortened accounting period in February, which has
historically increased days sales outstanding in receivables.
Inventory levels at February 29, 1996 increased $33.5 million
from the prior fiscal year-end, net of a $27.1 million provision
included in the acquisition charge for duplicate and discontinued
Chipcom products. Inventory turnover was 5.5 turns at February
29, 1996, compared to 5.4 turns at May 31, 1995.
During the nine months ended February 29, 1996, the Company
made $119.5 million in capital expenditures. Major capital
expenditures included upgrades of desktop systems, upgrades and
additions to product manufacturing lines and facilities in Santa
Clara and Ireland, purchase of facilities in the Boston area and
furnishings and improvements to new facilities in Santa Clara and
the Boston area.
During the first nine months of fiscal 1996, the Company
received cash of $52.8 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, the Company signed
a five-year lease for 225,000 square feet (Phase I) of office and
manufacturing space to be built on land adjacent to its existing
headquarters in Santa Clara. The Company commenced occupancy of
the facility in the first quarter of fiscal 1996, and payments on
the lease started in the second quarter of fiscal 1996. The
Company amended the lease agreement on February 1, 1996 to add
150,000 square feet of office and manufacturing space and a
parking garage (Phase II) to be built on adjacent land. The
amended lease expires in five years and provides the Company with
an option to purchase both Phase I and II properties or arrange
for the sale of the properties to a third party with a guaranteed
residual value of up to $57.6 million to the seller of the
property. The Company anticipates that it will commence
occupancy of and begin lease payments on the significant portion
of the Phase II property in the fourth quarter of fiscal 1997.
During the third quarter of fiscal 1996, the Company signed
an agreement to purchase an office facility in the UK. The cost
of the property is approximately $17 million and will be paid in
the fourth quarter of fiscal 1996. The Company anticipates it
will spend approximately $12 million over the next nine months
for expansion, refurbishment and furnishings for the property.
The Company has a $40 million revolving bank credit
agreement which expires December 31, 1996. No amount is
outstanding under the credit agreement and the Company 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 for at least the next
twelve months.
Subsequent Event
On March 12, 1996, the Company completed the acquisition of AXON
Networks Inc. of Newton, Massachusetts, a technological leader in
remote network management and monitoring of data network traffic.
The acquisition, which will be accounted for as a purchase, was
completed for approximately $65 million, including transaction
costs. It is anticipated that in the fourth quarter of fiscal
1996 the Company will charge to operations approximately $45-50
million of purchased in-process technology related to the
acquisition. The source of funds for the acquisition is expected
to be the Company's existing balances of cash, cash equivalents
and temporary cash investments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 13, 1995, the Company acquired Chipcom,
which had already been named as a defendant in the
litigation described below. On May 30, 1995, a complaint
was filed in the United States District Court for the
District of Massachusetts entitled Lucille Nappo, Marc
Linsky, Constandine Machakos, and Mary Machakos v.
Chipcom Corp., John Robert Held, Robert Peter Badavas,
Bruce L. Cohen, Menachem E. Abraham, and Jerald G.
Fishman. The named plaintiffs purport to represent the
class of persons who purchased Chipcom's common stock
during the period from and including February 8, 1995
through and including May 26, 1995. The complaint
alleges violations by the defendants of Sections 10(b)
and 20(a) of the Securities and Exchange Act of 1934, and
seeks unspecified damages. On June 7, 1995, a complaint
alleging very similar claims was filed against the same
defendants in the same Court by Anthony Mallozzi. A
third similar complaint was filed against the same
defendants in the same Court on June 8, 1995, by Daniel
List. A fourth similar complaint was filed in the same
Court on June 16, 1995, entitled Sean J. Carney and
Nicholas Giannantonio v. Chipcom Corp., John Held, and
Robert Badavas. A fifth similar complaint was filed in
the same Court on June 16, 1995, entitled Manuel C.
DeSousa and Barbara J. DeSousa v. Chipcom Corp., John
Held, and Robert Badavas. The cases have been
consolidated for pretrial purposes pursuant to an order
entered by the Court on June 15, 1995. The consolidated
action is entitled In re: Chipcom Securities Litigation,
Civil Action No. 95-111114-DPW. A Consolidated Complaint
was filed on September 13, 1995, and an Amended
Consolidated Complaint was filed on November 30, 1995.
The defendants have moved to dismiss the Amended
Consolidated Complaint, dispute the merits of the
allegations in the consolidated complaint, and intend to
defend the actions vigorously.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Articles of Incorporation
(Exhibit 19.1 to Form 10-Q) (6)
3.2 Certificate of Amendment of the Amended and
Restated Articles of Incorporation (Exhibit 3.2
to Form 10-K) (15)
3.3 Bylaws, as amended and restated (Exhibit 4.2 to
Form S-8) (10)
3.4 Certificate of Amendment of the Amended and
Restated Articles of Incorporation (Exhibit 4.1
to Form S-8) (23)
4.1 Reference is made to Exhibit 3.1 (Exhibit 4.1 to
Form 10-K) (15)
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) (18)
4.3 Placement Agreement for the private placement of
convertible subordinated notes dated November 8,
1994 (Exhibit 5.1 to Form 8-K) (18)
4.4 Amended and Restated Rights Agreement dated
December 31, 1994 (Exhibit 10.27 to Form 10-Q) (19)
10.1 1983 Stock Option Plan, as amended (Exhibit 10.1
to Form 10-K) (7)*
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) (8)*
10.5 Second Amended and Restated 1984 Employee Stock
Purchase Plan (Exhibit 10.5 to Form 10-Q)(24)*
10.6 License Agreement dated as of June 1, 1986 (Exhibit
10.16 to Form 10-K) (3)
10.7 3Com Corporation Director Stock Option Plan, as
amended (Exhibit 19.3 to Form 10-Q) (8)*
10.8 Amended 3Com Corporation Director Stock Option Plan
(Exhibit 10.8 to Form 10-Q)(24)*
10.9 Bridge Communications, Inc. 1983 Stock Option Plan,
as amended (Exhibit 4.7 to Form S-8) (2)*
10.10 3Com Headquarters Lease dated December 1, 1988, as
amended (Exhibit 10.14 to Form 10-K) (7)
10.11 Ground Lease dated July 5, 1989 (Exhibit 10.19 to
Form 10-K) (5)
10.12 Sublease Agreement dated February 9, 1989 (Exhibit
10.20 to Form 10-K) (5)
10.13 Credit Agreement dated April 21, 1993 (Exhibit
10.11 to Form 10-K) (9)
10.14 Amendment to Credit Agreement (Exhibit 10.20 to
Form 10-Q) (14)
10.15 Second Amendment to Credit Agreement (Exhibit 10.21
to Form 10-Q) (14)
10.16 3Com Corporation Restricted Stock Plan dated July 9,
1991 (Exhibit 19.2 to Form 10-Q) (8)*
10.17 Amended 3Com Corporation Restricted Stock Plan
(Exhibit 10.17 to Form 10-Q)(24)*
10.18 Form of Escrow and Indemnification Agreement for
Directors and Officers (Exhibit 10.15 to Form 10-Q)
(11)
10.19 Agreement and Plan of Reorganization dated
December 16, 1993 among 3Com Corporation, 3Sub
Corporation and Synernetics, Inc. (Exhibit 7.1 to
Form 8-K) (12)
10.20 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) (12)
10.21 Agreement and Plan of Reorganization dated
January 18, 1994 (Exhibit 7.2 to Form 8-K) (13)
10.22 Indemnification and Escrow Agreement dated
February 2, 1994 (Exhibit 7.3 to Form 8-K) (13)
10.23 1994 Stock Option Plan (Exhibit 10.22 to Form 10-K)
(15)*
10.24 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)
(16)
10.25 Second amendment to Lease Agreement between BNP
Leasing Corporation, as Landlord, and 3Com
Corporation, as Tenant, dated February 1, 1996
10.26 Purchase Agreement between BNP Leasing Corporation
and 3Com Corporation, dated July 14, 1994 (Exhibit
10.24 to Form 10-Q) (16)
10.27 First amendment to Purchase Agreement between BNP
Leasing Corporation and 3Com Corporation, dated
February 1, 1996
10.28 Asset Purchase Agreement dated September 18, 1994
among 3Com Corporation, NiceCom, Ltd., and Nice
Systems, Ltd. (Exhibit 7.1 to Form 8-K) (17)
10.29 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) (17)
10.30 Acquisition and Exchange Agreement dated March 22,
1995 among 3Com Corporation and Shareholders of
Sonix Communications Limited (Exhibit 7.1 to Form
8-K) (20)
10.31 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) (21)
10.32 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) (21)
10.33 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) (21)
10.34 Agreement and Plan of Merger dated as of July 26,
1995 among 3Com Corporation, Chipcom Acquisition
Corporation and Chipcom Corporation (Exhibit 2.1 to
Form S-4) (22)
*Indicated 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 Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form
10-K filed on August 28, 1989 (File No. 0-12867)
(6) Incorporated by reference to 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)
(7) 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)
(8) 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)
(9) 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)
(10) Incorporated by reference to the Exhibit identified
in parentheses previously filed as an Exhibit to
Registrant's Registration Statement on Form S-8,
filed on November 24, 1993 (File No. 33-72158)
(11) 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)
(12) 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)
(13) 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)
(14) Incorporated by reference to the Exhibit identified
in parentheses previously filed as an Exhibit to
Registrant's Form 10-Q filed on April 13, 1994
(File No. 0-12867)
(15) 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)
(16) 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)
(17) 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)
(18) 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)
(19) 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)
(20) 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)
(21) 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)
(22) Incorporated by reference to the Exhibit identified
in parentheses previously filed as an Exhibit to
Registrant's Registration Statement on Form S-4,
originally filed on August 31, 1995 (File No.
33-62297)
(23) Incorporated by reference to the Exhibit identified
in parentheses previously filed as an Exhibit to
Registrant's Registration Statement on Form S-8,
filed on October 19, 1995 (File No. 33-63547)
(24) Incorporated by reference to the Exhibit identified
in parentheses previously files as an Exhibit to
Registrant's Registration Statement on Form 10-Q,
filed on January 15, 1996 (File No. 0-12867)
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
3Com Corporation
(Registrant)
Dated: April 15, 1996 By: /s/ Christopher B. Paisley
--------------------------
Christopher B. Paisley
Vice President Finance and
Chief Financial Officer
(Principal Financial Officer)
Exhibit 10.25
MODIFICATION AGREEMENT
(SECOND AMENDMENT TO LEASE)
This MODIFICATION AGREEMENT (SECOND AMENDMENT TO LEASE) (this
"Amendment") is made as of February 1, 1996, by and between BNP
LEASING CORPORATION, a Delaware corporation ("Landlord"), and 3COM
CORPORATION, a California corporation ("Tenant").
R E C I T A L S
A. Landlord and Tenant executed a Lease Agreement dated
as of July 14, 1994, evidenced by a short form dated July 15, 1994,
recorded in Book N520, Page 1474 of the Official Records of Santa
Clara County, California. Such Lease Agreement, as previously
amended by a Modification Agreement (First Amendment to Lease)
dated as of February 1, 1995, is hereinafter called the "Original
Lease". Capitalized terms used in this Amendment and not
otherwise defined herein shall have the meanings given to them in
the Original Lease, unless amended herein.
B. The first Base Rental Period under the Original Lease
began September 1, 1995.
C. The Initial Funding Advance under the Original Lease
was $6,700,000 and the Outstanding Construction Allowance on the date
hereof is $26,287,950. Accordingly, the Stipulated Loss Value on
the date hereof is $32,987,950.
D. Landlord and Tenant wish to modify and amend the
Original Lease in order to increase the Maximum Construction
Allowance, such increase to be used for an extension to the
existing building located on the Land and a new building and
parking garage to be located on the Land.
NOW, THEREFORE, in consideration of the above recitals and
other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Landlord and Tenant, with
the consent of the Participants, agree as follows:
I. Amendment of the Lease. Effective as of the date of this
Amendment:
A. Definitions.
(1) The following terms defined in Paragraph 1 of the Lease
are hereby amended in their entirety to read as follows:
(c) Advance Date. "Advance Date" means, regardless
of whether any Construction Advance shall actually be made thereon, the
first Business Day of every calendar month until and including the Last
Advance Date.
(j) Base Rent Date. "Base Rent Date" means the
first Business Day of each third calendar month, beginning with the
first Business Day of the third calendar month after the Base Rent
Commencement Date and continuing regularly thereafter to and including
the Designated Payment Date.
(u) Completion Deadline. "Completion Deadline"
means August 31, 1998.
(y) Construction Periods. The first "Construction
Period" shall be a short period beginning on and including the effective
date hereof and ending on but not including the first Advance Date.
Each successive "Construction Period" after the first Construction Period
shall be a period of approximately one (1) month, and shall begin on and
include the day on which the preceding Construction Period ends and shall
end on but not include the next following Advance Date. The last
"Construction Period" shall end on but not include the Last Advance Date.
(au) Funding Advances. "Funding Advances" means
(1) the Initial Funding Advance and (2) all advances made after the
Initial Funding Advance (which, together with the Initial Funding
Advance, are expected to total $67,987,950) made by Landlord's Lender
or by any Participant to or on behalf of Landlord to allow Landlord to
provide the Construction Allowance hereunder.
(be) Last Advance Date. "Last Advance Date" means
the earlier of (1) the Completion Deadline, or (2) the Designated
Payment Date, or (3) the first Base Rental Date that occurs at least
ten (10) days after Landlord has received a Notice of Last Advance
or a Completion Notice, as such term is amended by the Modification
Agreement (Second Amendment to Lease).
(bi) Maximum Construction Allowance. "Maximum
Construction Allowance" means an amount equal to $67,987,950, less
the Initial Funding Advance.
(ce) Stipulated Loss Value. "Stipulated Loss
Value" means the amount computed from time to time in accordance with
the formula specified in this definition. Such amount shall equal
the Initial Funding Advance (i.e., $6,700,000), PLUS the Outstanding
Construction Allowance as of the date a computation is required
hereunder, LESS the amount (if any) of Qualified Payments paid to
Landlord on or prior to such date that have not been deducted in
calculating the Outstanding Construction Allowance. Thus, for example,
if a determination of Stipulated Loss Value is required under
subparagraph 3(a) on the first date of the applicable Base Rental
Period, and if Tenant has used the entire $61,287,950 Construction
Allowance to make the Initial Improvements to the Leased Property,
but the Leased Property has been damaged by fire or other casualty
with the result that $5,000,000 of net insurance proceeds have been
paid to Landlord and retained by Landlord as Qualified Payments, then
the "Stipulated Loss Value" as of the date of the required determination
shall equal $62,987,950:
The Initial Funding Advance ($6,700,000) PLUS the
Outstanding Construction Allowance--after accounting for Qualified
Payments that were applied to reduce the Outstanding Construction
Allowance--($61,287,950 - $5,000,000 = $56,287,950) LESS zero
(since all Qualified Payments were applied to reduce the Outstanding
Construction Allowance) = $6,700,000 + $56,287,950 - $0 = $62,987,950.
(2) The following new definitions are hereby added to
the Original Lease at the end of Paragraph 1 thereof:
(ck) Base Rent Component. "Base Rent Component"
means, at the time in question, the amount of Stipulated Loss Value
at such time less the amount of the Carrying Costs Component at such
time.
(cl) Phase I. "Phase I" means the Improvements
for which Tenant has paid (or reimbursed itself) with Construction
Advances made on or before January 31, 1996.
(cm) Phase II. "Phase II" means all Improvements
other than Phase I Improvements.
(co) Phase II Carrying Costs Period. "Phase II
Carrying Costs Period" means the period from and including February 1,
1996 until the earlier of (1) the Last Advance Date, or (2) the first
Base Rental Date that occurs at least ten (10) days after Landlord
has received a notice from Tenant stating that Tenant elects to have
the Phase II Carrying Costs Period end.
(cp) Carrying Costs Component. "Carrying Costs
Component" means, at the time in question, the portion of the
Outstanding Construction Allowance attributable to Phase II that has
not been designated as part of the Base Rent Component pursuant to
an Election Notice delivered to Lender pursuant to Paragraph 6(e);
provided that at the end of the Phase II Carrying Costs Period the
remainder of the Carrying Costs Component shall automatically become
part of the Base Rent Component.
B. Term. The first sentence of Paragraph 2 of the
Original Lease is hereby amended in its entirety to read as follows:
2. Term. The term of this Lease (herein called
the "Term") shall commence on and include July 14, 1994 and shall end
at 8:00 A.M. on February 1, 2001 (or the next following Business Day
if February 2, 2001 is not a Business Day), unless extended or sooner
terminated as herein provided.
C. Rental. Paragraph 3(a) of the Original Lease is
hereby amended in its entirety to read as follows:
(a) Base Rent.
(i) Obligation to Pay. Tenant shall
pay Landlord rent (herein called "Base Rent") in arrears, in currency
that at the time of payment is legal tender for public and private
debts in the United States of America, in installments on each Base
Rent Date through the end of the Term. Each payment of Base Rent must
be received by Landlord no later that 12:00 noon (San Francisco time)
on the date it becomes due; if received after 12:00 noon it will be
considered for purposes of this Lease as received on the next
following Business Day. Each installment of Base Rent shall represent
rent allocable to the Base Rental Period ending on the date on which
the installment is due. Landlord shall notify Tenant in writing of
the Base Rent payable for each Base Rent Period or portion
thereof at least fifteen (15) days prior to the Base Rent Date on
which such Base Rent is actually due. Any failure by Landlord to
so notify Tenant shall not constitute a waiver of Landlord's right
to payment, but absent such notice Tenant shall not be in default for
any underpayment resulting therefrom if Tenant, in good faith,
reasonably estimates the payment required, makes a timely payment of
the amount so estimated and corrects any underpayment within three
(3) Business Days after being notified by Landlord of the underpayment.
If Tenant or any other Applicable Purchaser purchases Landlord's
interest in the Leased Property pursuant to the Purchase Agreement,
any Base Rent for the period ending on the date of purchase
(including, if the date of purchase is not a Base Rent Date, a pro
rated portion of the Base Rent which would become due on the next
Base Rent Date but for the purchase) and all outstanding Additional
Rent shall be due on the Designated Payment Date in addition to the
purchase price and other sums due Landlord under the Purchase Agreement.
(ii) Calculation of Base Rent. The Base
Rent for each Base Rental Period shall equal (a) the Base Rent
Component on the first day of such Base Rental Period, times
(B) the Effective Rate with respect to such Base Rental Period times
(C) the number of days in such Base Rental Period, divided by
(D) three hundred sixty (360).
D. Upfront Fees. As used in the Lease, "Upfront Fee"
shall mean collectively, the fee described in Paragraph 3(b) of
the Original Lease and the fee paid to Landlord in connection with
the execution and delivery of this Amendment. Such fee shall
represent Additional Rent for the month of February 1996.
E. Phase II Carrying Costs. Charges accruing at the
Effective Rate for each Construction Period ending on or after
March 1, 1996 (herein called "Phase II Carrying Costs") will be added
to (and thereafter be included in) the Outstanding Construction
Allowance (and to the Carrying Costs Component included in the
Outstanding Construction Allowance) on the last day of such
Construction Period. As used in the Lease, "Carrying Costs" shall
mean, collectively, the Carrying Costs which accrued prior to the
date of this Amendment as described in paragraph 6.(a)(ii) of the
Original Lease and the Phase II Carrying Costs.
F. Application of Qualified Payments. To the extent that
any Qualified Payments are deducted from time to time in computing
the Outstanding Construction Allowance, they will be deemed
deducted first from the Carrying Cost Component and second from
the portion of the Outstanding Construction Allowance included in
the Base Rent Component. Further, Landlord shall not be required
to apply any Escrowed Proceeds as a Qualified Payment reducing the
Base Rent Component on any Advance Date which is not also a Base
Rent Date.
G. Completion Notice and Base Rent Election Notice.
Any Completion Notice delivered prior to the date of this Amendment
will be deemed rescinded, and Paragraph 6(d) of the Original Lease
is hereby replaced in its entirety with the following Paragraph
6(d) and new Paragraph 6(e):
(d) Completion Notice. Tenant shall provide a
notice to Landlord (the "Completion Notice") promptly after the
construction of Phase II is substantially complete and more than
fifty percent (50%) of Phase II is being occupied by Tenant.
(e) Base Rent Election Notice. By February 15,
1996, Tenant may elect, by delivering to Landlord a Base Rent
Election Notice in the form of Schedule 2 hereto (a "Base Rent
Election Notice"), to transfer an amount of the Carrying Costs
Component which equals or exceeds $200,000 to the Base Rent Component,
which transfer shall be effective upon March 1, 1996. At any other
time when the Carrying Costs Component equals or exceeds $10,000,000,
Tenant may elect, by delivering to Landlord a Base Rent Election
Notice to transfer an amount of the Carrying Costs Component which
equals or exceeds $10,000,000 to the Base Rent Component, which
transfer shall be effective upon the first Base Rent Payment Date
which occurs at least ten (10) days after the date on which such
Base Rent Election Notice is received by Landlord. Each Base Rent
Election Notice shall be irrevocable.
H. Amount of Advances. The number "$17,500,000" set
forth in Paragraph 6(c)(ii)(c) of the Original Lease is hereby
amended to read "30,000,000".
I. Base Rent Commencement Date. Landlord and Tenant
hereby agree that the Base Rent Commencement Date is September 1, 1995.
J. Initial Advance for Phase II. In the event that a
Construction Advance is not made on February 1, 1996, Landlord
agrees to make a Construction Advance (the "Initial Phase II
Advance") at the request of Tenant on any Business Day that occurs
within five (5) Business Days after the date hereof; provided that
Landlord shall have received Tenant's written request therefor at
least one Business Day prior to the requested advance date. For
each day during the period beginning on the date on which the
Initial Phase II Advance is made until but not including March 1,
1996 (the "Initial Period"), the "Effective Rate" for purposes of
calculating Phase II Carrying Costs on the Initial Phase II
Advance shall equal the Spread plus the per anum rate charged to
Landlord by Landlord's Lender for the use of funds on such day, it
being understood that the rate charged to Landlord by Landlord's
Lender on such day will be equal to the rate Landlord's Lender
established internally as its marginal cost of funds. Any
determination by Landlord of the Effective Rate under this
Paragraph J shall, in the absence of clear and demonstrable error,
be conclusive and binding. Phase II Carrying Costs for the
Initial Period shall be added to (and thereafter included in) the
Outstanding Construction Allowance (and to the Carrying Costs
Component included in the Outstanding Construction Allowance) at
the end of the Initial Period and shall equal the sum of the Phase
II Carrying Costs for each day during the Initial Period. Phase
II Carrying Costs for each such day shall equal the Initial
Funding Advance times the per annum Effective Rate for such day,
divided by three hundred sixty (360).
K. Exhibits; Schedules.
Exhibit C to the Original Lease Agreement to this Amendment
is hereby amended by adding thereto the information set forth in
Exhibit C to this Amendment. Schedule 2 to this Amendment is hereby
added to the Original Lease as Schedule 2.
III. Ratification. The Original Lease, as amended by this
Amendment, is hereby ratified and confirmed in all respects.
IV. Entire Agreement. The Original Lease, as modified by this
Amendment, and the documents and agreements referred to in the Lease
set forth the entire agreement between the parties concerning the
subject matter of the Lease and no further amendment or modification
of the Lease or this Amendment shall be binding or valid unless
expressed in a writing executed by both parties hereto.
V. Successors and Assigns. All of the covenants, agreements,
terms and conditions to be observed and performed by the parties
hereto shall be applicable to and binding upon their respective
heirs, personal representatives, successors and, to the extent
assignment is permitted under the Lease, their respective assigns.
VI. References to the Lease. From and after the date of this
Amendment, all references to the "Lease" in other documents
related to this transaction are intended to mean the Original
Lease as modified by this Amendment, unless the context shall
otherwise require.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first above written.
BNP LEASING CORPORATION,
a Delaware corporation
By: /s/ Lloyd G. Cox
____________________________
Lloyd G. Cox, Vice President
3COM CORPORATION,
a California corporation
By: /s/ Judy Bruner
___________________________
Its: VP and Treasurer
SCHEDULE 2
BASE RENT ELECTION NOTICE
BNP Leasing Corporation
c/o Banque Nationale de Paris, San Francisco
180 Montgomery Street
San Francisco, California 94104
Attention: William J. La Herran
Re: Lease Agreement dated July 14, 1994, between
3COM Corporation, as tenant ("Tenant"), and
BNP Leasing Corporation, as landlord ("Landlord")
Gentlemen:
Capitalized terms used in this letter are intended to have
the meanings assigned to them in the Lease Agreement referenced
above. This letter constitutes notice to you that Tenant elects
to transfer $_________ of Carrying Costs from the Carrying Costs
Component to the Base Rent Component, which transfer shall be
effective on _____________, 199__, which is the first Base Rent
Payment Date to occur at least ten (10) days after your receipt
hereof. The election made by this Base Rent Election Notice is
irrevocable.
Executed this _____ day of ______________, 199___.
3COM CORPORATION
By: _________________________
Name:_________________________
Title:________________________
[cc all Participants]
Exhibit 10.27
MODIFICATION AGREEMENT
(FIRST AMENDMENT TO PURCHASE AGREEMENT)
This MODIFICATION AGREEMENT (FIRST AMENDMENT TO PURCHASE
AGREEMENT) (this "Amendment") is made as of February 1, 1996, by
and between BNP LEASING CORPORATION, a Delaware corporation
("BNP"), and 3COM CORPORATION, a California corporation ("3COM").
R E C I T A L S
A. BNP and 3COM executed a Purchase Agreement dated as of
July 14, 1994, hereinafter called the "Original Purchase Agreement".
Capitalized terms used in this Amendment and not otherwise defined
herein shall have the meanings given to them in the Original Purchase
Agreement, unless amended herein.
B. BNP and 3COM wish to amend the Original Purchase
Agreement in order to modify certain provisions relating to the
purchase price for the Property.
NOW, THEREFORE, in consideration of the above recitals and
other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, BNP and 3COM, with the consent
of the Participants, agree as follows:
I. Amendment of the Original Purchase Agreement. Effective as
of the date of this Amendment, the Original Purchase Agreement is
hereby amended as follows:
A. The definition of "Closing Deadline" in Section 1(b)
is hereby amended in its entirety to read as follows:
"(b) Closing Deadline. "Closing Deadline" means
February 2, 2001, or if February 2, 2001 is not a Business Day, then
the next following Business Day."
B. Paragraph 2(a)(ii) of the Original Purchase Agreement
is hereby amended in its entirety to read as follows:
"(ii) cause the Applicable Purchaser to purchase BNP's
interest in the Property and in Escrowed Proceeds, if any, for a net
cash price not less than the lesser of (a) the Fair Market Value of
the Property or (b) fifteen percent (15%) of Stipulated Loss Value
outstanding immediately prior to the purchase. If, however, the Fair
Market Value is less than fifteen percent (15%) of Stipulated Loss
Value, BNP may elect to keep the Property and any Escrowed Proceeds
rather than sell to the Applicable Purchaser, in which case 3COM shall
pay BNP an amount equal to (A) eighty-five percent (85%) of Stipulated
Loss Value, less (B) any Escrowed Proceeds then held and to be retained
by BNP. Unless BNP elects to keep the Property pursuant to the
preceding sentence, 3COM must make a supplemental payment to BNP on
the Designated Payment Date equal to the excess (if any) of the
Purchase Price over the net cash price actually paid to BNP on the
Designated Payment Date by the Applicable Purchaser for BNP's
interest in the Property and in Escrowed Proceeds, if any. However,
provided no Event of Default has occurred and is continuing under the
Lease, and provided further that neither 3COM nor any Applicable
Purchaser has failed to pay any amount required to be paid by this
Agreement on the date such amount first became due, any supplemental
payment required by the preceding sentence shall not exceed eighty-five
percent (85%) of Stipulated Loss Value on the Designated Payment Date.
Any supplemental payment payable to BNP by 3COM, rather than by the
Applicable Purchaser, pursuant to this clause (ii) is hereinafter
referred to as the "Shortage Amount." If the net cash price
actually paid by the Applicable Purchaser to BNP exceeds the Purchase
Price and all other sums that are then due from 3COM to BNP, 3COM
shall be entitled to such excess."
C. Paragraph 2(b)(1) of the Original Purchase Agreement
is hereby amended in its entirety to read as follows:
"(1) To give BNP the opportunity to have the Fair
Market Value determined by an appraiser as provided in Pargraph 1(d)
before the Designated Payment Date, 3COM must, unless 3COM agrees that
Fair Market Value will not be less than fifteen percent (15%) of
Stipulated Loss Value on the Designated Payment Date, provide BNP
with a Remarketing Notice. "Remarketing Notice" means a notice given
by 3COM to BNP (and each of the Participants) no earlier than one-
hundred eighty (180) days before the Designated Payment Date and no
later than ninety (90) days before the Designated Payment Date
specifying that 3COM does not agree that the Fair Market Value is
equal to or greater than fifteen percent (15%) of the Stipulated Loss
Value. A Remarketing Notice will be required only if 3COM does not
agree that Fair Market Value will equal or exceed fifteen percent
(15%) of Stipulated Loss Value on the Designated Payment Date. But
if for any reason (including but not limited to any acceleration of
the Designated Payment Date pursuant to clause (2) of the definition
of Designated Payment Date above), 3COM fails to provide a Remarketing
Notice within the time periods specified in the definition of Remarketing
Notice above, Fair Market Value shall, for purposes of this Agreement,
be deemed to be no less than fifteen percent (15%) of Stipulated Loss
Value on the Designated Payment Date."
II. Ratification. The Original Purchase Agreement, as amended
by this Amendment, is hereby ratified and confirmed in all respects.
III. Entire Agreement. The Original Purchase Agreement, as
modified by this Amendment, and the documents and agreements
referred to in the Original Purchase Agreement set forth the entire
agreement between the parties concerning the subject matter of the
Original Purchase Agreement and no further amendment or modification
of the Original Purchase Agreement or this Amendment shall be binding
or valid unless expressed in a writing executed by both parties hereto.
IV. Successors and Assigns. All of the covenants, agreements,
terms and conditions to be observed and performed by the parties
hereto shall be applicable to and binding upon their respective
heirs, personal representatives, successors and, to the extent
assignment is permitted under the Original Purchase Agreement,
their respective assigns.
V. References to the Original Purchase Agreement. From and
after the date of this Amendment, all references to the "Purchase
Agreement" in other documents related to this transaction are
intended to mean the Original Purchase Agreement as modified by
this Amendment, unless the context shall otherwise require.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first above written.
BNP LEASING CORPORATION,
a Delaware corporation
By: /s/ Lloyd G. Cox
____________________________
Lloyd G. Cox, Vice President
3COM CORPORATION,
a California corporation
By: /s/ Judy Bruner
____________________________
Its: VP and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> FEB-29-1996
<CASH> 193,887
<SECURITIES> 285,307
<RECEIVABLES> 400,242
<ALLOWANCES> (26,931)
<INVENTORY> 216,308
<CURRENT-ASSETS> 1,163,548
<PP&E> 412,861
<DEPRECIATION> (205,364)
<TOTAL-ASSETS> 1,415,095
<CURRENT-LIABILITIES> 378,188
<BONDS> 0
<COMMON> 543,934
0
0
<OTHER-SE> 360,291
<TOTAL-LIABILITY-AND-EQUITY> 1,415,095
<SALES> 1,666,835
<TOTAL-REVENUES> 1,666,835
<CGS> 787,088
<TOTAL-COSTS> 1,131,035
<OTHER-EXPENSES> 284,788
<LOSS-PROVISION> 6,501
<INTEREST-EXPENSE> 9,615
<INCOME-PRETAX> 234,896
<INCOME-TAX> 86,540
<INCOME-CONTINUING> 148,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148,356
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
</TABLE>
