______________________________________________________________
United States
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-Q/A
X Quarterly report pursuant to section 13 or 15(d) of
the securities exchange act of 1934
For the Quarterly Period Ended November 30, 1997 Commission File No. 0-12867
or
Transition report pursuant to section 13 or 15(d) of
the securities exchange act of 1934
For the transition period from to
____________
3Com Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2605794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 Bayfront Plaza 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 November 30, 1997, 354,562,107 shares of the
Registrant's Common Stock were outstanding.
_______________________________________________________________
3Com Corporation
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
Three and Six Months Ended November 30, 1997 and 1996
Consolidated Balance Sheets
November 30, 1997 and May 31, 1997
Consolidated Statements of Cash Flows
Six Months Ended November 30, 1997 and 1996
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
3Com, AccessBuilder and U.S. Robotics are registered trademarks
of 3Com Corporation or its subsidiaries. CoreBuilder, HiPer,
Palm, PalmPilot, Total Control, and x2 are trademarks of 3Com
Corporation or its subsidiaries.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3Com Corporation
Consolidated Statements of Operations
(As restated, see Note 2)
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
Sales $1,197,189 $1,459,939 $2,794,705 $2,771,443
Cost of sales 645,344 756,916 1,476,773 1,450,509
--------- --------- --------- ---------
Gross margin 551,845 703,023 1,317,932 1,320,934
--------- --------- --------- ---------
Operating expenses:
Sales and marketing 338,334 253,160 640,712 475,637
Research and development 144,978 113,328 287,776 211,381
General and administrative 71,265 56,417 134,130 106,153
Purchased in-process
technology - - - 54,000
Merger-related charges (1,229) 6,600 268,558 6,600
--------- --------- --------- ---------
Total operating expenses 553,348 429,505 1,331,176 853,771
--------- --------- --------- ---------
Operating income (loss) (1,503) 273,518 (13,244) 467,163
Interest and other income,
net 7,637 3,532 10,598 5,810
--------- --------- --------- ---------
Income (loss) before income
taxes 6,134 277,050 (2,646) 472,973
Income tax provision 2,113 102,452 44,566 193,331
--------- --------- --------- ---------
Net income (loss) $ 4,021 $ 174,598 $ (47,212) $ 279,642
========= ========= ========= =========
Net income (loss) per common
and equivalent share:
Primary $ 0.01 $ 0.49 $ (0.13) $ 0.79
Fully diluted $ 0.01 $ 0.49 $ (0.13) $ 0.79
Shares used in computing
per share amounts:
Primary 365,085 354,787 353,529 352,563
Fully diluted 365,105 355,979 353,529 353,586
See notes to consolidated financial statements.
3Com Corporation
Consolidated Balance Sheets
(As restated, see Note 2)
(In thousands, except par value)
(Unaudited)
November 30, May 31,
1997 1997
---- ----
ASSETS
Current assets:
Cash and equivalents $ 539,748 $ 351,237
Short-term investments 596,062 538,706
Accounts receivable, net 908,401 996,080
Inventories, net 635,972 513,740
Deferred income taxes 296,337 196,875
Other 111,289 93,040
--------- ---------
Total current assets 3,087,809 2,689,678
Property and equipment, net 773,137 731,301
Deposits and other assets 105,116 118,804
--------- ---------
Total assets $3,966,062 $3,539,783
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 110,000 $ 134,700
Accounts payable 327,862 308,581
Other accrued liabilities 786,656 503,232
Income taxes payable 73,156 168,942
--------- ---------
Total current liabilities 1,297,674 1,115,455
Long-term obligations 46,717 170,652
Deferred income taxes 60,685 25,332
Stockholders' equity:
Preferred stock, no par value,
10,000 shares authorized;
none outstanding - -
Common stock, $.01 par value,
990,000 shares authorized;
shares outstanding: November 30, 1997:
354,562; May 31, 1997: 334,944 1,564,586 1,183,926
Retained earnings 1,002,280 1,049,561
Unrealized gain on investments, net 536 2,320
Unamortized restricted stock grants (4,912) (5,165)
Accumulated translation adjustments (1,504) (2,298)
--------- ---------
Total stockholders' equity 2,560,986 2,228,344
--------- ---------
Total liabilities and stockholders' equity $3,966,062 $3,539,783
========= =========
See notes to consolidated financial statements.
3Com Corporation
Consolidated Statements of Cash Flows
(As restated, see Note 2)
(Dollars in thousands)
(Unaudited)
Six Months Ended
November 30,
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ (47,212) $ 279,642
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 128,201 95,790
Deferred income taxes (81,971) 8,471
Pooling of interests: OnStream - 4,850
U.S. Robotics 15,052 29,195
Purchased in-process technology - 54,000
Merger-related charges 268,558 (6,600)
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable 87,679 (405,581)
Inventories (173,432) 85,919
Other current assets (22,010) (24,894)
Accounts payable 19,281 95,609
Other accrued liabilities 145,227 38,788
Income taxes payable 54,572 128,884
--------- ---------
Net cash provided by operating activities 393,945 384,073
Cash flows from investing activities:
Purchase of short-term investments (269,631) (211,257)
Proceeds from short-term investments 209,603 171,362
Purchase of property and equipment (211,222) (213,624)
Business acquired in purchase transaction - (66,547)
Other, net (25,418) (28,658)
--------- ---------
Net cash used for investing activities (296,668) (348,724)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 234,110 53,782
Repayments of short-term debt, notes payable
and capital lease obligations (168,066) (1,386)
Repayments of long-term obligations (12,397) (177)
Net proceeds from issuance of debt 33,300 50,000
Other, net 4,287 (2,274)
--------- ---------
Net cash provided by financing activities 91,234 99,945
--------- ---------
Increase in cash and equivalents 188,511 135,294
Cash and equivalents, beginning of period 351,237 233,573
--------- ---------
Cash and equivalents, end of period $ 539,748 $ 368,867
========= =========
Non-cash financing and investing activities:
Tax benefit on stock option transactions $ 131,351 $ 70,104
Unrealized gain (loss) on investments, net $ (1,784) $ 1,923
See notes to consolidated financial statements.
3Com Corporation
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
On June 12, 1997, 3Com Corporation (the Company)
completed the merger with U.S. Robotics Corporation (U.S.
Robotics), the leading supplier of products and systems
for accessing information across the wide area network,
including modems and remote access products. This merger
was accounted for as a pooling-of-interests. The Company
issued approximately 158 million shares of its common
stock in exchange for all outstanding common stock of
U.S. Robotics. The Company also assumed and exchanged
all options to purchase U.S. Robotics' stock for options
to purchase approximately 31 million shares of the
Company's common stock. All financial data of the
Company presented in this Form 10-Q/A have been restated
to include the historical financial information of U.S.
Robotics 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 November 30, 1997, and
the results of operations for the three and six months
ended November 30, 1997 and 1996 and cash flows for the
six months ended November 30, 1997 and 1996.
On June 1, 1997, the Company adopted a 52-53 week
fiscal year ending on the Sunday nearest to May 31, which
for fiscal 1998 will be May 31, 1998. The Company does
not expect this change to have a material impact on the
Company's financial statements. The results of
operations for the three and six months ended November
30, 1997 may not necessarily be indicative of the results
to be expected for the fiscal year ending May 31, 1998.
These financial statements should be read in conjunction
with the consolidated financial statements and related
notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1997.
2. Restatements
In response to a review by the staff of the Securities
and Exchange Commission of the Company's Form 10-Q
filings for the quarterly periods ended August 31, 1997
and November 30, 1997, the Company is revising previously
reported financial statements. Specifically, and as
discussed in detail below, the consolidated financial
statements as of and for the year ended May 31, 1997, and
as of and for the three and six months ended November 30,
1997 and 1996 have been restated to (1) recombine the
periods presented for fiscal 1997, (2) adjust the merger-
related charge recorded in the quarter ended August 31,
1997, and (3) exclude the effect of conforming the two
companies' fixed asset capitalization policies.
Recombination of Fiscal 1997
- ----------------------------
The Company is revising the methodology for presenting
the combined historical financial results of 3Com and
U.S. Robotics for fiscal 1997. The Company had
previously combined the 12-month period ended May 31,
1997 for 3Com with the 12-month period ended March 30,
1997 for U.S. Robotics. This combining methodology
resulted in U.S. Robotics' April and May 1997 operating
results, a net loss of $160.3 million, being recorded as
a decrease to the Company's retained earnings as of June
1, 1997 rather than as a component of the fiscal 1997
statement of operations.
The Company is now combining the fiscal year ended May
31, 1997 for 3Com with the period from July 1, 1996
through May 25, 1997 for U.S. Robotics. This combining
methodology includes the last three reported quarters of
U.S. Robotics, ended September 29, 1996, December 29,
1996, and March 30, 1997, and the months of April and May
1997. To reflect a complete 12-month year and a 3-month
fourth quarter and thereby enhance comparability of
periodic reported results, U.S. Robotics' results of
operations for the month ended March 30, 1997 are
included in both the three-month period ended March 30,
1997 and the three-month period ended May 25, 1997.
Consistent with U.S. Robotics' non-linear quarterly sales
pattern, sales were relatively low in the first two
months of each quarter and significantly higher in the
third month of each quarter, which March 1997 represents.
By using this method, the last month of a quarter is
included in each of the four quarters for fiscal 1997.
The Company believes that there is no preferable practical
alternative to this combining method. Nevertheless, this
method does double-count March 1997 results. As discussed
more fully below, product returns in April and May 1997 were
higher than anticipated and resulted in an increase in the
provision for estimated product returns at May 25, 1997. An
indeterminate amount of these returns were related to
March 1997 sales; however, the Company believes that this
amount is not significant to the combined results and that
inclusion of March 1997 in both the third and fourth
quarters of fiscal 1997 is appropriate. 3Com's balance sheet
as of May 31, 1997 was recombined with U.S. Robotics' balance
sheet as of May 25, 1997. The U.S. Robotics' March 1997 net
income of $112.9 million was reflected once in the Company's
retained earnings at May 31, 1997. The previously reported
and revised combining periods are as follows:
Fiscal 1997 Quarterly Periods
-------------------------------------------------
Q1'97 Q2'97 Q3'97 Q4'97
----- ----- ----- -----
3Com August`96 November`96 February`97 May`97
U.S. Robotics
Previously reported June`96 September`96 December`96 March`97
As recombined September`96 December`96 March`97 May`97*
*Three-month period which includes March, April, and May.
Supplemental Operating Information for U.S. Robotics
- ----------------------------------------------------
Following is supplemental information regarding U.S.
Robotics' results of operations for the three-month
period ended May 25, 1997 (in thousands). Results for
these periods exclude reclassifications made to conform
to the Company's financial statement presentation.
Three
March April/May Months Ended
1997 1997 May 25, 1997
---- ---- ------------
Sales $ 541,662 $ 15,277 $ 556,939
Gross margin 279,411 (49,204) 230,207
Total operating expenses 97,457 187,557 285,014
--------- --------- ---------
Operating income (loss) 181,954 (236,761) (54,807)
Income (loss) before income taxes 179,647 (242,929) (63,282)
Income tax provision (benefit) 66,720 (82,625) (15,905)
--------- --------- ---------
Net income (loss) $ 112,927 $ (160,304) $ (47,377)
========= ========= =========
U.S. Robotics' sales for the month ended March 30, 1997
(March 1997) were approximately $541.7 million,
reflecting strong market demand worldwide for information
access devices including the introduction and initial
high volume shipments of products incorporating x2TM
technology (x2 products). x2 technology increases the
potential speed for downloading data from 28.8 or 33.6
Kilobits per second (Kbps) for standard V.34 modems to 56
Kbps. Consistent with U.S. Robotics' non-linear
quarterly sales pattern, sales in the first two months of
the quarter were relatively low and in the third month of
the quarter, which March 1997 represents, were
significantly higher.
Gross margin for March 1997 was approximately $279.4
million, or 51.6 percent of sales. The overall gross
margin reflected the initial high volume shipments of x2
products, which generated higher gross margins due to U.
S. Robotics' temporary "first to market" advantage over
competitors in the 56 Kbps modem market. Also, to a
lesser extent, the overall gross margin reflected higher
margins on the initial sales of newer generation handheld
organizer products introduced during the month.
Total operating expenses for March 1997 were
approximately $97.5 million, or 18.0 percent of sales.
Sales and marketing expenses reflected significant
spending related to the introduction of x2 products,
other marketing programs designed to generate continuing
growth in sales and expand market share, and continuing
investments to increase the worldwide sales force with
the intent of increasing sales of network systems
products. General and administrative expenses and
research and development expenses reflected continuing
investments in personnel and systems necessary to support
U.S. Robotics' expanded level of business activity and
its commitment to new product and technology development.
As a percentage of sales, total operating expenses for
March 1997 were low due to the non-linear sales pattern
described above.
Gross sales for the two months ended May 25, 1997 were
approximately $200.3 million. Net sales after
provisions, primarily for product returns of $143 million
and price protection of $33 million, were approximately
$15.3 million. These results principally reflect the
following factors: U.S. Robotics' non-linear sales
pattern, as described above; lower than anticipated sales
out of the channel, due in part to confusion about the
new 56 Kbps technologies and concerns regarding the
absence of an industry standard for 56 Kbps modems;
efforts to reduce levels of channel inventory, including
increased emphasis on sales out of the channel via price
reductions and other promotions; and product returns from
channel partners whose sales out had been lower than
anticipated.
Returns during the two months ended May 25, 1997 totaled
$82.3 million, reflecting primarily desktop modems and
remote access concentrators. The majority of the desktop
modem returns consisted of older generation products which
were heavily impacted by the March 1997 introduction of
U.S. Robotics' 56 Kbps modem with x2 technology. Returns
of remote access concentrators were due primarily to lower
than anticipated sales out of the distribution channel.
Based on negotiations with individual customers, U.S. Robotics
allowed returns during this period in excess of customers'
contractual rights due to the 56 Kbps technology transition
and the desire to reduce channel inventory. Returns during
this period exceeded the March 30, 1997 balance in the
allowance for sales returns of $48.9 million by $33.4 million.
The price protection provision of $33 million related primarily
to price reductions effective subsequent to March 30, 1997
for desktop modems and remote access concentrator product
lines.
Gross margin for this period was affected adversely by
the provision for price protection described above, a
provision for potentially excess and obsolete inventory
of approximately $15.4 million, and unabsorbed
manufacturing costs.
Operating expenses for the two months ended May 25, 1997
were approximately $187.6 million. Sales and marketing
expenses reflected significant spending related to the
introduction of x2 products and newer generation handheld
organizer products, other marketing programs designed to
generate continuing growth in sales and expand market
share, and continuing investments to increase the
worldwide sales force with the intent of increasing sales
of network systems products. General and administrative
expenses and research and development expenses reflected
continuing investments in personnel and systems necessary
to support U.S. Robotics' anticipated growth and its
commitment to new product and technology development. As
a percentage of sales, total operating expenses for the
two months ended May 25, 1997 were high due to the non-
linear sales pattern described above.
Other expenses, net, for the two months ended May 25,
1997 were approximately $6.2 million. Such expenses
reflected higher interest expense due to increased short
term borrowing. During these two months, U.S. Robotics
increased its short-term borrowings from approximately
$61 million to approximately $135 million, $10 million
under an existing $90 million short-term borrowing
arrangement and $125 million under an existing $300 million
revolving credit facility. Such borrowings were primarily
necessary to fund ongoing operating expenses, including
costs associated with the launch of the new x2 technology,
as well as capital expenditures. The Company repaid such
short-term borrowing shortly after the closing of the merger
in June 1997 between 3Com and U.S. Robotics and the use of
these borrowing arrangements is no longer expected to be
required.
The provision for income taxes for the two months ended
May 25, 1997 was a net benefit of approximately $82.6
million, resulting in an effective tax rate of 34.0
percent.
Merger Related Charge
- ---------------------
During the Company's first fiscal quarter ended August
31, 1997, the Company recorded a merger-related charge of
$426.0 million. As a result of a reassessment of this
charge, the Company is reducing the merger-related charge
by $156.2 million to $269.8 million, as follows (in
millions):
Total merger-related charge as previously reported $426.0
Less reductions:
Product swap-out program (61.8)
Duplicate facilities and real estate (25.4)
Goodwill (20.8)
Duplicate fixed assets (13.4)
Severance and outplacement (8.9)
Other assets and obligations (25.9)
-----
Total merger-related charge, as revised $269.8
=====
The $61.8 million decrease in the charge reflects a
change in the amount and timing of recording the product
swap-out costs associated with certain discontinued
products. The Company expects the total cost of the swap-out
program will be significantly less than the amount originally
accrued. As originally recorded, shipment of replacement
products resulted in the recognition of sales and cost
of sales. The revised accounting for the swap-out program
records the net cost of the swap-out as a merger-related
charge as the costs are incurred. Accordingly, sales and
cost of sales were reduced in the second quarter by
$23.1 million and $5.5 million, respectively. For the six
months ended November 30, 1997, the reduction of sales and
cost of sales totaled $26.4 million and $6.7 million,
respectively.
The $25.4 million decrease in the charge for the
elimination of duplicate owned and leased facilities
primarily reflects a refinement of costs based on
detailed asset records rather than estimates. The $20.8
million decrease in the charge for goodwill reflects a
reinstatement of the goodwill recorded by U.S. Robotics
in conjunction with acquisitions of several international
distributors prior to the merger with 3Com.
Other reductions to the charge primarily reflect
revisions to fixed asset write-offs, severance and
outplacement costs, costs for a development contract
which was not terminated, and a reduction in the amount
of loss expected on discontinued product inventory and
other assets.
The Company expects there will be minimal impact on
future operating results attributable to the
aforementioned adjustments to the merger-related charge.
In future quarters the Company estimates there will be a
total of approximately $10 to $15 million of additional
merger-related costs associated with the product swap-out
program.
The revised charge of $269.8 million includes
approximately $227.9 million of integration expenses and
$41.9 million of direct transaction costs (consisting
primarily of investment banking and other professional
fees). Integration expenses included:
- - $76.1 million related to the closure and elimination
of owned and leased facilities, primarily duplicate
corporate headquarters and domestic and European sales
offices;
- - $63.0 million for severance and outplacement costs
related to the merger, including amounts related to
termination benefits associated with employment
agreements. Employee groups impacted by the merger
include personnel involved in duplicate corporate
services, manufacturing and logistics, product
organizations and sales;
- - $49.1 million associated with certain long-term
assets, primarily including duplicate finance,
manufacturing, human resource and other management
information systems, and capitalized purchased research
and development costs related to a discontinued
product; and
- - $39.7 million primarily associated with the
elimination and phase-out of duplicate wide area
networking products (i.e., 3Com's AccessBuilder (registered
trademark) 2000, 4000, 5000 and 8000 products and U.S. Robotics
(registered trademark) TOTALswitch, ATM switch, LANLinker and
related small office home office products), and the discontinuance
of U.S. Robotics' telephony products. The charge primarily
includes inventory write-offs and noncancelable purchase
commitments.
The remaining merger-related accrual at November 30,
1997 was approximately $162 million. Total expected cash
expenditures relating to the merger charge are estimated
to be approximately $138 million, of which approximately
$64 million was disbursed prior to November 30, 1997.
Termination benefits paid to 561 employees terminated
through November 30, 1997 (approximately 56 percent of
the total planned severances) were approximately $30
million. The remaining severance and outplacement
amounts are expected to be paid within the next nine
months.
Fixed Asset Capitalization Policies
- -----------------------------------
The financial statements in the Company's Form 10-Q for
the period ended August 31, 1997 included the effect of
conforming the two companies' fixed asset capitalization
policies, which reduced retained earnings by $41.4
million at May 31, 1997. The Company subsequently
determined that this change was not appropriate.
Eliminating this change did not have a material impact on
the Company's consolidated financial statements.
Effect of Restatements on Consolidated Financial Statements
- -----------------------------------------------------------
The effect of the restatements described above on the
consolidated balance sheets as of November 30, 1997 and
May 31, 1997 and the consolidated statements of
operations for the three and six months ended November
30, 1997 and 1996 is as follows (in thousands):
November 30, 1997 May 31, 1997
----------------- ------------
As As
Previously As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
Total current assets $3,099,914 $3,087,809 $2,836,564 $2,689,678
Property and equipment, net 743,195 773,137 723,962 731,301
Total assets 3,923,202 3,966,062 3,673,170 3,539,783
Total current liabilities 1,339,339 1,297,674 1,095,813 1,115,455
Total stockholders' equity 2,476,461 2,560,986 2,381,042 2,228,344
Three Months Ended Three Months Ended
November 30, 1997 November 30, 1996
----------------- -----------------
As As
Previously As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
Sales $1,220,253 $1,197,189 $1,421,660 $1,459,939
Cost of sales 651,094 645,344 738,252 756,916
--------- --------- --------- ---------
Gross margin 569,159 551,845 683,408 703,023
--------- --------- --------- ---------
Operating expenses:
Sales and marketing 337,594 338,334 243,893 253,160
Research and development 145,491 144,978 107,388 113,328
General and administrative 70,507 71,265 55,256 56,417
Purchased in-process technology - - 54,000 -
Merger-related charges - (1,229) 6,600 6,600
--------- --------- --------- ---------
Total operating expenses 553,592 553,348 467,137 429,505
--------- --------- --------- ---------
Operating income (loss) 15,567 (1,503) 216,271 273,518
Interest and other income, net 7,637 7,637 4,133 3,532
--------- --------- --------- ---------
Income before income taxes 23,204 6,134 220,404 277,050
Income tax provision 8,121 2,113 101,363 102,452
--------- --------- --------- ---------
Net income $ 15,083 $ 4,021 $ 119,041 $ 174,598
========= ========= ========= =========
Net income per common
and equivalent share:
Primary $ 0.04 $ 0.01 $ 0.34 $ 0.49
Fully diluted $ 0.04 $ 0.01 $ 0.34 $ 0.49
Shares used in computing
per share amounts:
Primary 365,085 365,085 353,657 354,787
Fully diluted 365,105 365,105 355,158 355,979
Six Months Ended Six Months Ended
November 30,1997 November 30, 1996
---------------- -----------------
As As
Previously As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
Sales $2,821,115 $2,794,705 $2,671,720 $2,771,443
Cost of sales 1,483,902 1,476,773 1,395,649 1,450,509
--------- --------- --------- ---------
Gross margin 1,337,213 1,317,932 1,276,071 1,320,934
--------- --------- --------- ---------
Operating expenses:
Sales and marketing 638,901 640,712 449,350 475,637
Research and development 287,608 287,776 205,504 211,381
General and administrative 133,096 134,130 102,565 106,153
Purchased in-process technology - - 54,000 54,000
Merger-related charges 426,000 268,558 6,600 6,600
--------- --------- --------- ---------
Total operating expenses 1,485,605 1,331,176 818,019 853,771
--------- --------- --------- ---------
Operating income (loss) (148,392) (13,244) 458,052 467,163
Interest and other income, net 10,598 10,598 7,106 5,810
--------- --------- --------- ---------
Income (loss) before income
taxes (137,794) (2,646) 465,158 472,973
Income tax provision (benefit) (6,057) 44,566 191,247 193,331
--------- --------- --------- ---------
Net income (loss) $ (131,737) $ (47,212) $ 273,911 $ 279,642
========= ========= ========= =========
Net income (loss) per common
and equivalent share:
Primary $ (0.37) $ (0.13) $ 0.78 $ 0.79
Fully diluted $ (0.37) $ (0.13) $ 0.77 $ 0.79
Shares used in computing
per share amounts:
Primary 353,529 353,529 352,814 352,563
Fully diluted 353,539 353,529 353,772 353,586
Effect of Restatement on Pro Forma Information
- ----------------------------------------------
The fiscal 1997 consolidated financial statements have
been restated to include U.S. Robotics information on
the basis described above. The consolidated statements
of income for the fiscal years ended May 31, 1996 and
1995 include the U.S. Robotics statements of income for
the fiscal years ended September 29, 1996 and October 1,
1995, respectively. This presentation has the effect of
including U.S. Robotics' results of operations for the
three month period ended September 29, 1996 in both the
combined years ended May 31, 1997 and 1996, and reflects
sales of $611.4 million and net income of $13.5 million,
which has been reported as a decrease to the Company's
fiscal 1997 retained earnings.
The combined results below reflect reclassifications to
conform financial statement presentation. Summarized
proforma operating results as previously reported and as
restated for the three and six months ended November 30,
1996 are as follows:
Three Months Ended Six Months Ended
November 30, November 30,
1996 1996
--------------------------------------------------
(In thousands, except per share amounts)
As Previously As As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
Sales:
3Com $ 820,296 $ 820,296 $1,530,436 $1,530,436
U.S. Robotics 611,410 645,412 1,158,195 1,256,822
Reclassifications to
conform financial
statement presentation (10,046) (5,769) (16,911) (15,815)
--------- --------- --------- ---------
Combined $1,421,660 $1,459,939 $2,671,720 $2,771,443
========= ========= ========= =========
Net income:
3Com $ 105,569 $ 105,569 $ 197,141 $ 197,141
U.S. Robotics 13,472 69,029 76,770 82,501
--------- --------- --------- ---------
Combined $ 119,041 $ 174,598 $ 273,911 $ 279,642
========= ========= ========= =========
Net income per common
and equivalent share
(on a fully diluted basis):
3Com $ 0.56 $ 0.56 $ 1.06 $ 0.53
U.S. Robotics (1) 0.08 0.41 0.45 0.49
--------- --------- --------- ---------
Combined $ 0.34 $ 0.49 $ 0.77 $ 0.79
========= ========= ========= =========
(1) Adjusted for effect of exchange ratio of 1.75 shares
of 3Com Common Stock for each share of U.S. Robotics
Common Stock.
3. Inventories consisted of (in thousands):
November 30, 1997 May 31, 1997
---------------------- ----------------------
As As
Previously As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
Finished goods $ 459,692 $ 466,690 $ 262,023 $ 346,631
Work-in-process 53,620 53,620 35,462 31,606
Raw materials 115,662 115,662 104,871 135,503
--------- --------- --------- ---------
Total $ 628,974 $ 635,972 $ 402,356 $ 513,740
========= ========= ========= =========
4. Net Income (Loss) Per Common and Equivalent Share
Net income (loss) 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. Common equivalent shares were not included in
the calculation of earnings per share for the six months
ended November 30, 1997 as they were antidilutive. The
effect of the assumed conversion of the 10.25 percent
convertible subordinated notes was antidilutive for all
periods presented.
5. Litigation
The Company is a party to lawsuits in the normal course
of its business. The Company notes that (i) litigation
in general and patent litigation in particular can be
expensive and disruptive to normal business operations
and (ii) the results of complex legal proceedings can be
very difficult to predict with any certainty.
Securities Litigation
In December 1997 and January 1998, several putative
shareholder class action lawsuits were filed against the
Company and certain of its officers and directors in the
United States District Court for the Northern District of
Illinois and in the United States District Court for the
Northern District of California. The complaints allege
violations of the federal securities laws, specifically
Sections 10(b) and 20(a) of the Securities and Exchange
Act of 1934. The complaints allege class periods between
May 19, 1997 and November 14, 1997 and do not specify the
damages sought. The Company believes it has meritorious
defenses to the claims and intends to contest the
lawsuits vigorously. An unfavorable resolution of the
actions could have a material adverse effect on the
business, results of operations or financial condition of
the Company.
U.S. Robotics, certain of its directors, and the Company
were named as defendants in shareholder class actions
relating to the merger between the Company and U.S.
Robotics. (In re: U.S. Robotics Corporation Shareholders
Litigation, Delaware Chancery Court Consolidated Civil
Action No. 15580). On October 7, 1997, all claims
related to such suits were settled pursuant to a
settlement approved by the Delaware Chancery Court.
Results of the settlement did not have a material effect
on the Company's results of operations or financial
condition.
On March 24, and May 5, 1997, putative shareholder class
action lawsuits, entitled Hirsch v. 3Com Corporation, et
al., Civil Action No. CV764977, and Kravitz v. 3Com
Corporation, et al., Civil Action No. CV765962,
respectively, were filed against the Company and certain
of its officers and directors in the California Superior
Court, Santa Clara County (the Superior Court).
Following resolution of a demurrer filed by the Company,
the remaining causes of action in the complaints allege
violations of the state securities laws, specifically
sections 25400 and 25500 of the California Corporations
Code. The complaints, which cover a putative period of
September 24, 1996 through February 10, 1997, do not
specify the damages sought. The Company believes it has
meritorious defenses to the claims and intends to contest
the lawsuits vigorously. An unfavorable resolution of
the actions could have a material adverse effect on the
business, results of operations or financial condition of
the Company.
Intellectual Property Litigation
In September 1997, Livingston Enterprises, Inc.
(Livingston) filed suit against U.S. Robotics in the
United States District Court for the Northern District of
California (Livingston Enterprises, Inc. v. U.S. Robotics
Access Corporation, Case No. C-97-3551(CRB)), claiming
copyright infringement, misappropriation of trade
secrets, breach of contract and unfair competition with
respect to certain software code previously licensed to
U.S. Robotics for incorporation in certain of its remote
access server and concentrator products. Livingston
seeks injunctive relief and damages that are not
specified as to amount. The Company believes it has
meritorious defenses to Livingston's claims and intends
to contest the lawsuit vigorously. In September 1997,
Livingston filed a separate action in the same federal
court (Livingston Enterprises, Inc. v. U.S. Robotics
Access Corporation, Case No. C-97-3487 (CRB)) seeking a
declaratory judgment to the effect that one of U.S.
Robotics' U.S. patent is invalid and not infringed by
Livingston's products, as well as unspecified damages.
U.S. Robotics has answered this complaint and filed
counterclaims alleging infringement of such patent by
Livingston. An unfavorable resolution of the action could
have a material adverse effect on the business, results
of operations or financial condition of the Company.
On April 26, 1997, Xerox Corporation filed suit against
U.S. Robotics in the United States District Court for the
Western District of New York (Xerox Corporation v. U.S.
Robotics Corporation and U.S. Robotics Access Corp., No.
97-CV-6182T), claiming infringement of one United States
Patent. The complaint alleges willful infringement and
prays for unspecified damages and injunctive relief. In
a press release dated April 30, 1997, Xerox alleged that
its patent, issued January 21, 1997, "covers the use and
recognition of handwritten text using an alphabet system
designed especially for reliable recognition in pen
computers," and that Palm Computing Corporation's (Palm)
PalmPilotTM hand-held computer and "Graffiti" software in
its PalmTM operating system infringe the Xerox patent.
Palm is a wholly-owned subsidiary of the Company. The
Company believes it has meritorious defenses to Xerox's
claims and intends to contest the lawsuit vigorously. An
adverse resolution of the action could have a material
adverse effect on the Company's results of operations and
financial condition in the quarter in which such adverse
resolution occurs.
On February 13, 1997, Motorola, Inc. filed suit against
U.S. Robotics in the United States District Court for the
District of Massachusetts (Motorola, Inc. v. U.S.
Robotics Corporation, et al., Civil Action No. 97-
10339RCL), claiming infringement of eight United States
patents. The complaint alleges willful infringement and
prays for unspecified damages and injunctive relief.
U.S. Robotics has filed an answer to Motorola's claims
setting forth its defenses and asserting counterclaims
which allege infringement of a U.S. Robotics patent,
violation of antitrust laws, promissory estoppel and
unfair competition. The Company believes it has
meritorious defenses to the claims and intends to contest
the lawsuit vigorously. An unfavorable resolution of the
action could have a material adverse effect on the
business, results of operations or financial condition of
the Company.
Consumer Litigation
During 1997, three putative class action lawsuits
were filed against the Company or its subsidiary, U.S.
Robotics in the state courts of California and Illinois.
Each of the actions seeks damages as a result of alleged
misrepresentations by the Company or U.S. Robotics in
connection with the sale of its new x2TM products and
products upgradeable to x2 under various California and
Illinois consumer fraud statutes and under common law
theories including fraud and negligent misrepresentation.
Plaintiffs in Bendall, et al. v. U.S. Robotics
Corporation, et al., (No. 170441, Superior Court of Marin
County, California), Lippman, et al v. 3Com, (No. 97 CH
09773, Circuit Court of Cook County, Illinois), and
Michaels, et al. v. U.S. Robotics Access Corporation et
al., (No. 94 CH 14417, Circuit Court of Cook County,
Illinois) seek certification respectively of nationwide
classes of purchasers of x2 technology during the
approximate period November 1996 through at least May
1997. U.S. Robotics' motion to dismiss the Bendall
action is presently pending; the Lippman action presently
is stayed, and a responsive pleading is not yet due in
the Michaels action. The complaints seek injunctive
relief and an unspecified amount of damages. Two other
actions purporting to be brought in the public interest
have also been filed against U.S. Robotics in state court
in California under California statutes arising out of
U.S. Robotics alleged misrepresentation in connection
with the sale of the x2 products. Levy v. U.S. Robotics
Corporation, (No. 170968, Superior Court of Marin County,
California) and Intervention Inc. v. U.S. Robotics
Corporation, (No. 984352, Superior Court of San
Francisco, California) seek injunctive and unspecified
monetary relief. The Company believes it has meritorious
defenses to these lawsuits and intends to contest the
lawsuits vigorously. An unfavorable resolution of the
actions could have a material adverse effect on the
business, results of operations or financial condition of
the Company.
6. Effects of Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings per Share." This
Statement establishes and simplifies standards for
computing and presenting earnings per share. SFAS 128
will be effective for the Company's third quarter of
fiscal 1998, and requires restatement of all previously
reported earnings per share data that are presented.
Early adoption of this Statement is not permitted. SFAS
128 replaces primary and fully diluted earnings per share
with basic and diluted earnings per share. Under SFAS
128, the Company's reported earnings per share for the
three and six months ended November 30, 1997 and 1996
would have been:
Three Months Ended Six Months Ended
November 30, November 30,
1997 1996 1997 1996
---- ---- ---- ----
Basic $ 0.01 $ 0.53 $ (0.14) $ 0.85
Diluted $ 0.01 $ 0.49 $ (0.14) $ 0.79
In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income." This statement establishes
standards for the reporting and display of comprehensive
income and its components. SFAS 130 will be effective
for the Company's fiscal year 1999 and requires
reclassification of financial statements for earlier
periods for comparative purposes.
In June 1997, the FASB issued SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information."
This statement requires that financial information be
reported on the basis used internally for evaluating
segment performance and deciding how to allocate
resources to segments. SFAS 131 is effective for the
Company's fiscal year 1999 and requires restatement of
all previously reported information for comparative
purposes.
7. Subsequent Events
On December 17, 1997, the Company's Board of Directors
approved the repricing of certain employee stock options
with an exercise price in excess of the fair market value
of the Company's common stock on January 12, 1998. The
exercise price of such employee stock options was reset
to the closing market price on January 12, 1998. All
such options retain their original vesting schedules but
are subject to a nine-month period in which exercises are
prohibited. Stock options held by executive officers and
directors were not eligible for such repricing.
On December 23, 1997, the Company redeemed its
convertible subordinated notes totaling $110 million.
Under the terms of the note agreement, cash payments
related to principal, accrued interest and prepayment
penalties totaled approximately $115 million.
3Com Corporation
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company has restated its consolidated financial statements
for the three and six months ended November 30, 1997 and 1996,
and the fiscal year ended May 31, 1997. For a detailed
description of the restatements, please see Notes 1 and 2 of
Notes to Consolidated Financial Statements. The following
Management's Discussion and Analysis of Financial Condition
and Results of Operations pertains to the consolidated
financial statements, as restated.
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, the
percentage of total sales represented by the line items
reflected in the Company's consolidated statements of
operations:
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
Sales.......................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales.................. 53.9 51.8 52.8 52.3
----- ----- ----- -----
Gross margin................... 46.1 48.2 47.2 47.7
----- ----- ----- -----
Operating expenses:
Sales and marketing.......... 28.2 17.3 22.9 17.2
Research and development..... 12.1 7.8 10.3 7.6
General and
administrative............. 6.0 3.9 4.8 3.8
Purchased in-process
technology................. - - - 1.9
Merger-related charges....... (0.1) 0.5 9.7 0.3
----- ----- ----- -----
Total operating expenses... 46.2 29.5 47.7 30.8
----- ----- ----- -----
Operating income (loss)........ (0.1) 18.7 (0.5) 16.9
Interest and other income,
net.......................... 0.6 0.3 0.4 0.2
----- ----- ----- -----
Income (loss) before income
taxes........................ 0.5 19.0 (0.1) 17.1
Income tax provision........... 0.2 7.0 1.6 7.0
----- ----- ----- -----
Net income (loss).............. 0.3 % 12.0 % (1.7)% 10.1 %
===== ===== ===== =====
Excluding merger-related
and purchased in-process
technology charges:
Total operating expenses.. 46.3 % 29.0 % 38.0 % 28.6 %
Operating income (loss)... (0.2) 19.2 9.1 19.0
Net income................ 0.2 12.4 6.2 12.3
Sales in the second quarter of fiscal 1998 totaled $1.2
billion, a decrease of $262.8 million or 18 percent from the
corresponding quarter a year ago. Sales of network systems
products (e.g., switches, routers, hubs, and remote access
concentrators) in the second quarter of fiscal 1998 decreased
three percent from the same quarter one year ago and decreased
16 percent compared to the first quarter of fiscal 1998.
Sales of network systems products represented 50 percent of
total sales in the second quarter of fiscal 1998, compared to
42 percent in the year ago quarter. Sales of client access
products (e.g., modems and network interface cards (NICs) in
the second quarter of fiscal 1998 decreased 29 percent from
the same quarter a year ago and 32 percent from the first
quarter of fiscal 1998. Net sales of modem products during
the second quarter were approximately $325 million. Sales of
client access products in the second quarter of fiscal 1998
represented 50 percent of total sales compared to 58 percent
in the second quarter of fiscal 1997. Domestic sales
represented 58 percent of total sales for the second quarter
of fiscal 1998. Domestic and international sales decreased 17
percent and 19 percent, respectively, when compared to the
second quarter of fiscal 1997. The Company also experienced a
sequential decline from the first quarter of fiscal 1998 in
domestic and international sales of 22 percent and 29 percent,
respectively.
Sales in the first six months of fiscal 1998 totaled $2.8
billion, an increase of $23.3 million or one percent from the
corresponding period a year ago. Sales of network systems
products in the first six months of fiscal 1998 increased 8
percent from the same period one year ago, and represented 47
percent of total sales, compared to 44 percent in the year ago
period. Sales of client access products in the first six
months of fiscal 1998 decreased five percent from the same
period one year ago, and represented 53 percent of total
sales, compared to 56 percent in the first six months of
fiscal 1997. Domestic sales for the first six months of
fiscal 1998 comprised 56 percent of total sales compared to 60
percent in the same period a year ago. Domestic sales
decreased five percent while international sales increased
nine percent when compared to the first six months of fiscal
1997. During the quarter, the Company began transitioning to
next generation platforms across several major product
categories. For example, the Company introduced and began
shipping new CoreBuilderTM High-Function Switches and began
shipping the Total ControlTM HiPerTM Access System. In
addition, the pricing environment continued to be very
competitive, and although the Company experienced significant
year-over-year unit growth in key products such as Fast
Ethernet NICs and workgroup switches, these gains were
partially offset by declines in average selling prices.
The Company believes that the year-over-year decrease in
second quarter sales and the sequential decrease in sales from
the first quarter of fiscal 1998 is due to a variety of
factors, including those discussed below.
In light of information received late in the second quarter,
the Company adopted a new inventory business model. The new
model generally calls for fewer weeks supply of inventory in
the channel. In order to begin implementing the new model,
the Company constrained sales into its distribution channels.
The Company made progress during the second quarter in
implementing the new model.
The Company believes another factor affecting sales, in
particular modem and remote access concentrator sales, was the
failure of the International Telecommunications Union (ITU) to
determine a standard for 56 Kbps technology. The Company
believes that the delay in finalizing such standards resulted
in customers postponing buying decisions.
During the second quarter of fiscal 1998, sales in the Asia
Pacific region compared to the second quarter of fiscal 1997
and the first quarter of fiscal 1998 decreased nine percent
and 35 percent, respectively. Historically, the Asia Pacific
region had been a high growth region for the networking
industry and the Company. During the second quarter of fiscal
1998, however, several Asian countries experienced a weakening
of their local currencies and turmoil in their financial
markets and institutions, which the Company believes adversely
affected financial results for the second quarter of fiscal
1998.
An additional factor affecting second quarter results was an
apparent slowdown in the growth of the networking industry.
Recent reports by industry sources indicated that the
networking industry worldwide grew by less than 20 percent
during 1997, well below historical growth rates.
Gross margin as a percentage of sales was 46.1 percent in the
second quarter of fiscal 1998, compared to 48.2 percent in the
second quarter of fiscal 1997 and 48.0 percent in the first
quarter of fiscal 1998. The decline in margins during the
second quarter of fiscal 1998 resulted, in part, from period
costs being a higher percentage of sales. Margins also
reflected higher sales of certain NICs and workgroup switching
products which have lower margins than other NICs and
workgroup switching products. These factors were partially
offset by increased sales of higher margin modem products,
such as the U.S. Robotics (registered trademark) brand 56 Kbps
modem with x2TM technology. Gross margin as a percentage of sales
was 47.2 percent in the first six months of fiscal 1998, compared
to 47.7 percent for the first six months of fiscal 1997.
Operating expenses in the second quarter of fiscal 1998 were
$553.3 million or 46.2 percent of sales, compared to $429.5
million or 29.5 percent of sales in second quarter of fiscal
1997 and $777.8 million or 48.7 percent of sales in the first
quarter of fiscal 1998. Operating expenses in the first six
months of fiscal 1998 were $1,331.2 million or 47.7 percent of
sales, compared to $853.8 million or 30.8 percent of sales in
first six months of fiscal 1997. Operating expenses as a
percentage of sales were higher than historical levels
primarily due to the reduced level of sales for the second
quarter of fiscal 1998, as discussed above. Excluding a charge
of $6.6 million associated with 3Com's acquisition of OnStream
Networks, Inc. (OnStream), operating expenses would have been
$422.9 million, or 29.0 percent of sales for the second
quarter of fiscal 1997. Excluding the merger-related charge
of $268.6 million in the first six months of fiscal 1998,
operating expenses would have been $1,062.6 million or 38.0
percent of sales.
Sales and marketing expenses in the second quarter of fiscal
1998 increased $85.2 million or 34 percent from the second
quarter of fiscal 1997 and $36.0 million or 12 percent from
the first quarter of fiscal 1998. Sales and marketing
expenses as a percentage of sales increased to 28.2 percent of
sales in the second quarter of fiscal 1998, from 17.3 percent
in the corresponding fiscal 1997 period and 18.9 percent in
the first quarter of fiscal 1998. Sales and marketing
expenses in the first six months of fiscal 1998 increased
$165.1 million or 35 percent from the first six months of
fiscal 1997. The increase in absolute dollars primarily
reflected an increase in field sales, marketing and customer
support.
Research and development expenses in the second quarter of
fiscal 1998 increased $31.7 million or 28 percent from the
year-ago period, and $2.2 million or 2 percent from the first
quarter of fiscal 1998. Research and development expenses
increased to 12.1 percent of total sales in the second quarter
of fiscal 1998, compared to 7.8 percent in second quarter of
fiscal 1997 and 8.9 percent in the first quarter of fiscal
1998. Research and development expenses in the first six
months of fiscal 1998 increased $76.4 million or 36 percent
from the year-ago six-month period. The increase in research
and development expenses in absolute dollars was primarily
attributable to the cost of developing the Company's new
products in the areas of client access, switching, and network
management, and its expansion into new technologies and
markets. The Company believes the timely introduction of new
technologies and products is crucial to its success, and plans
to continue to make acquisitions or strategic investments to
accelerate time to market where appropriate.
General and administrative expenses in the second quarter of
fiscal 1998 increased $14.8 million or 26 percent from the
same period a year ago, and $8.4 million or 13 percent from
the first quarter of fiscal 1998. General and administrative
expenses increased to 6.0 percent of total sales in the second
quarter of fiscal 1998, compared to 3.9 percent in the second
quarter of fiscal 1997 and 4.0 percent in the first quarter of
fiscal 1998. General and administrative expenses in the first
six months of fiscal 1998 increased $28.0 million or 26
percent from the same period a year ago. The increase in
general and administrative expenses in absolute dollars
primarily reflected an expansion of the Company's
infrastructure.
During the second quarter of fiscal 1998, merger-related
charges were a net credit of $1.2 million. A $15.4 million
reduction in previously recorded merger-related costs,
primarily due to a reduction in the estimate of costs
associated with duplicate facilities, was partially offset by
$14.2 million of product swap-out costs incurred during the
quarter.
Interest and other income, net, increased $4.1 million or 116
percent compared to the second quarter of fiscal 1997 and $4.7
million compared to the first quarter of fiscal 1998.
Interest and other income, net, increased approximately $4.8
million in the first six months of fiscal 1998 compared to the
first six months of fiscal 1997. Such increases were due to
higher interest income in the second quarter of fiscal 1998
and lower foreign currency losses. The majority of the
Company's sales are denominated in U.S. Dollars. Where
available, the Company enters into foreign exchange forward
contracts to hedge certain balance sheet exposures and
intercompany balances against future movements in foreign
exchange rates.
The Company's effective income tax rate was approximately 34.4
percent in the second quarter of fiscal 1998 compared to 37.0
percent in the second quarter of fiscal 1997. Excluding the
merger-related charge associated with OnStream, the pro forma
income tax rate was 36.1 percent for the second quarter of
fiscal 1997. The Company recorded a tax provision of $44.6
million for the first six months of fiscal 1998, compared to
$193.3 million for the first six months of fiscal 1997. The
provision in the first six months of fiscal 1998 reflected the
non-deductibility of certain costs associated with the U.S.
Robotics merger. Excluding these costs, the pro forma
effective income tax rate was 35.0 percent for the first six
months of fiscal 1998. The provision for the first six months
of fiscal 1997 reflected the non-deductibility of the
purchased in-process technology charge associated with the
acquisition of Scorpio and merger-related charge associated
with OnStream. Excluding these charges, the pro forma income
tax rate was 36.2 percent for the first six months of fiscal
1997.
Net income for the second quarter of fiscal 1998 was $4.0
million, or $0.01 per share, compared to net income of $174.6
million, or $0.49 per share, for the second quarter of fiscal
1997. Excluding the merger-related charge associated with
OnStream, net income was $181.2 million, or $0.51 per share
for the second quarter of fiscal 1997. Net loss for the first
six months of fiscal 1998 was $47.2 million, or $0.13 per
share, compared to net income of $279.6 million, or $0.79 per
share, for the first six months of fiscal 1997. Excluding the
merger-related charges associated with U.S. Robotics, net
income was $172.8 million, or $0.48 per share for the first
six months of fiscal 1998. Excluding the purchased in-process
technology and merger-related charges associated with Scorpio
and OnStream, net income was $340.2 million, or $0.96 per
share for the first six months of fiscal 1997.
Business Environment and Risk Factors
This report contains certain forward looking statements,
including statements regarding future trends in market growth,
sales, gross margins, and inventory levels. Actual results
could vary materially based on a number of factors, including
but not limited to those set forth below.
The Company participates in a highly volatile industry which
is characterized by vigorous competition for market share,
rapid technological development, consolidations, and
uncertainty over adoption of industry standards. This has in
the past resulted and could in the future result in aggressive
pricing practices and increased competition, both from start-
up companies and from well-capitalized computer systems,
communications and other major technology companies. For
example, in the third quarter of fiscal 1997, a major
competitor reduced its average selling prices on Fast Ethernet
NIC products by approximately 40 percent. The Company
immediately responded with similar price cuts. As a result,
the Company experienced a significant downward pressure on
this product's gross margin and an accelerated transition from
10 Mbps Ethernet to Fast Ethernet NICs. In addition, as new
competitors enter the market and offer competing products,
pricing may be affected. The Company believes there is a risk
of downward pricing pressure on the Company's products,
including products incorporating 56 Kbps modem technology.
Pricing pressure intensified across a variety of the Company's
products during the second quarter of fiscal 1998, and may
intensify in coming quarters.
Recently, market researchers have reported slower industry
growth worldwide in calendar 1997 than in the past. Although
market researchers generally forecast a small increase in
networking growth rates in calendar 1998 from 1997 levels,
there can be no assurance that this will occur. Similarly,
there can be no assurances that the Company's results in any
particular quarter will fall within market researchers'
forecasted ranges.
The Company sells a significant portion of its products to
distributors and resellers. In turn, such distributors and
resellers maintain significant levels of the Company's
products in their inventories. The Company attempts to ensure
appropriate levels of inventory are available to end users by
working closely with these resellers and distributors. In
light of information received late in the second quarter, the
Company adopted a new inventory business model. The new model
generally calls for fewer weeks supply of inventory in the
channel. In order to begin implementing the new model, the
Company constrained sales into its distribution channels. The
Company made progress during the second quarter in
implementing the new model. However, the Company anticipates
that the full implementation of the new inventory business
model will require additional reductions in channel inventory
during the third quarter and possibly beyond. Such reductions
could adversely affect the Company's sales and results of
operations.
The Company distributes a significant portion of its products
through third party distributors and resellers. Due to
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 continually 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's results of operations.
The Company's operations in certain markets, which are
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. For example, the recent instability in the Asian
financial markets appears to have negatively impacted sales,
and may continue to negatively impact sales in those markets
in a number of ways, including: increasing competition from
local competitors that offer sales terms in local currencies,
reducing access to sources of capital needed by customers to
make purchases, and slowing end user purchases. Should the
Asian economic environment fail to improve, the Company would
consider continuing to expand its exposure to foreign
currencies to preserve long-term customer relationships. A
significant fluctuation in foreign currency could have an
adverse impact on the Company. Finally, the aforementioned
instability may increase credit risks as the recent weakening
of certain Asian currencies may result in insolvencies or
otherwise impair customers' ability to repay existing
obligations. Depending on the situation in Asia in coming
quarters, any or all of these factors could adversely impact
the Company's financial results in future quarters.
Typically, quarterly sales and results of operations depend on
the volume and timing of orders, and the ability to fulfill
them within the quarter. The Company's customers historically
request fulfillment of orders in a short period of time,
resulting in a minimal backlog and limited visibility to
future sales trends. Should incoming order rates decline, if
ordered products are not readily available, or if the Company
does not immediately fill orders in an attempt to further
reduce channel inventory levels, the Company's results of
operations could be adversely affected.
The Company historically has sold a large percentage of its
products in the third month of each quarter. This subjects
the Company to additional business risks due to unexpected
disruptions in functions, including but not limited to
manufacturing, order management, information systems and
shipping, which could have an adverse affect on the Company's
results of operations.
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
network communications, or in market demand for products based
on a particular technology, or entry by new competitors, could
lead to a slowdown in sales of certain products, and 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 standards and high-speed technologies, such as: Fast
Ethernet, Gigabit Ethernet, ATM, 56 Kbps, ISDN, xDSL and data-
over-cable. As the industry standardizes on high-speed
technologies, there can be no assurance that the Company will
be able to respond promptly and cost-effectively to compete in
the marketplace.
The Company's success depends, in substantial part, on the
adoption of industry standards, the timely and successful
introduction of products that are compliant with new industry
standards, and the Company's ability to address competing
technological and product developments. Delays in adoption of
industry standards or adoption of standards incorporating
competing technologies or competitors' intellectual property
could adversely affect the Company's sales or operating
margins. In December, a technical compromise was reached
among ITU members that may result in the determination of a
standard for 56 Kbps technology in January 1998 with official
adoption in September. While the Company believes that it will
be able to comply quickly with this proposed standard and
offer its customers software upgrades to the new standard,
there can be no assurances that the development of this
standard and the Company's compliance with it will proceed as
rapidly or smoothly as expected or that these events will
result in increased demand for the Company's 56 Kbps products.
Any benefits which the Company may derive from the expected
adoption of this proposed standard will continue to be
dependent upon the timing and extent to which the standard 56
Kbps technology is deployed by Internet Service Providers and
accepted by Internet users. Moreover, consumer confusion
regarding 56 Kbps technology, which has negatively impacted
sales to date, may persist notwithstanding final determination
of the ITU standard.
The Company operates in an industry in which the ability to
compete is dependent on the development or acquisition and
protection of proprietary technology, which must be protected
both to secure the benefits of the Company's innovations in
its own products and to better enable the Company to license
proprietary technology from others on acceptable terms. The
Company attempts to perfect and preserve intellectual property
rights in the technologies it develops through a combination
of trade secrets, patents, copyrights and trademarks. There
can be no assurance that the steps taken by the Company will
be sufficient to prevent misappropriation or infringement of
its intellectual property or that competitors will not
independently develop technologies or procure intellectual
property rights that are equivalent or superior to those of
the Company.
The Company, from time to time, must negotiate licenses with
third parties in order to obtain rights to incorporate
proprietary technologies, including de facto and official
standard networking and communications protocols and
specifications, into its products. In most instances, the
owners of intellectual property rights covering technologies
required to implement official standards have undertaken to
license such rights on reasonable and non-discriminatory
terms, and as a general rule the Company has no reason to
believe that these parties will fail to honor their
undertakings and the Company anticipates that it will be able
to enter into licenses with such parties on reasonable terms
that will be comparable to those available to its competitors.
There can be no assurances in this regard, however, and there
is always the potential for disputes and litigation, even
where a third party owner of intellectual property rights has
undertaken to make licenses generally available or has
actually entered into licenses upon which the Company has
relied in designing and making its products. By way of
example, the Company is currently involved in disputes with
Motorola, Inc. over patents related to certain modem standards
and with Livingston Enterprises, Inc. over certain software
previously licensed by U.S. Robotics. See Part II. Item 1.
Legal Proceedings. The Company's failure to obtain and
maintain licenses for all of the third party intellectual
property rights required for the manufacture, sale and use of
its products, particularly those which must comply with
industry standard protocols and specifications in order to be
commercially viable, could have a material adverse effect on
the Company's business, results of operation, and financial
condition.
The Company derives a portion of its sales from original
equipment manufacture (OEM) partners including PC companies
who bundle 3Com network interface cards and modems, and
incorporate chip-sets into their products. The Company
believes that future sales growth of these products is
dependent, in part, on the Company's ability to strengthen
relationships and increase business with OEM partners. OEM
sales are characterized as having lower average selling prices
and gross margins. Consequently, the Company's overall gross
margin percentage may be adversely impacted if OEM sales
become a larger percentage of the Company's business. Certain
OEMs in the PC industry are integrating communication
subsystems on the PC motherboard. If such integration becomes
a trend, the Company's future sales growth may be adversely
impacted.
Acquisitions of complementary businesses and technologies,
including technologies and products under development, are an
active part of the Company's overall business strategy.
Certain of the Company's major competitors have also been
engaged in merger and acquisition transactions. Such
consolidations by competitors are creating entities with
increased market share, customer base, technology and
marketing expertise, sales force size, or proprietary
technology in segments in which the Company competes. These
developments may adversely affect the Company's ability to
compete in such segments.
In June 1997, the Company merged with U.S. Robotics, the
largest acquisition in the history of the networking industry.
Large acquisitions are challenging, in general, and there can
be no assurance that products, technologies, distribution
channels, customer support operations, management information
systems, key personnel and businesses of U.S. Robotics or
other 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 inability
of management to successfully integrate the operations of the
two companies in a timely manner could have a material adverse
effect on the business, results of operations, and financial
condition of the Company.
The high-growth nature of the computer networking industry,
coupled with critical time-to-market factors, has caused
increased competition and consolidation. As a result, there
has been a significant increase in the cost of acquiring
computer networking companies. There can be no assurance that
the Company will continue to be able to identify and
consummate suitable acquisition transactions in the future.
However, should the Company consummate acquisitions in the
future, the impact may result in increased dilution of the
Company's future earnings.
The Company's products are covered by warranties and the
Company is subject to contractual commitments. If unexpected
circumstances arise such that the product does not perform as
intended and the Company is not successful in resolving
product quality or performance issues, there could be an
adverse impact on the financial results of the Company.
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.
Recruiting and retaining skilled personnel, especially in
certain locations in which the Company operates, is highly
competitive. Recently, for example, recruiting of qualified
engineers has been extremely competitive. If the Company
cannot successfully recruit and retain such skilled personnel,
the Company's financial results may be adversely affected.
The Company is in the process of transitioning its
manufacturing requirements planning, accounts payable,
purchasing and intercompany accounting systems to a new set of
applications which operate on a client server based platform.
The third quarter of fiscal 1998 will be the first quarter in
which some of the Company's major manufacturing sites utilize
the new system. As a result of the planned transition to the
new client server platform, the Company may experience
production, development, sales processing, financial system,
or other disruptions, which may have an adverse financial
effect on the Company.
Many computer systems were not designed with the year 2000
issues in mind, and may require significant hardware and
software modifications. During the next few years, companies
owning and operating such systems may plan to devote a
substantial portion of their information systems' spending to
make such modifications and divert spending away from networking
solutions. This could have an adverse impact on the Company's
sales and results of operations. The Company believes the
majority of its major systems are currently Year 2000
compliant, and costs to transition the Company's remaining
systems to Year 2000 compliance are not anticipated to be
material.
The market price of the Company's common stock has been, and
may continue to be, extremely volatile. Factors such as new
product, pricing or acquisition 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, such as a decline in industry growth rates, 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.
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, equivalents and short-term investments at November 30,
1997 were $1.1 billion, increasing $245.9 million from May 31,
1997.
For the six months ended November 30, 1997, net cash generated
from operating activities was $393.9 million. Accounts
receivable at November 30, 1997 decreased $87.7 million from
May 31, 1997 to $908.4 million. Days sales outstanding in
receivables increased to 68 days at November 30, 1997,
compared to 65 days at May 31, 1997 due primarily to a higher
concentration of sales in the third month of the quarter ended
November 30, 1997, compared to the third month of the quarter
ended May 31, 1997. Inventory levels at November 30, 1997
increased $122.2 million, of which $120.1 million was finished
goods, from the prior fiscal year-end to $636.0 million.
Inventory turnover was 4.9 turns at November 30, 1997,
compared to 6.4 turns at May 31, 1997, primarily as a result
of the increase in the Company's inventory due to reduced
sales levels, as previously discussed.
During the six months ended November 30, 1997, the Company
made $211.2 million in capital expenditures. Major capital
expenditures included upgrades and expansion of the Company's
facilities in the U.K., Santa Clara, California and Illinois
and the continuing development of the Company's worldwide
information systems. As of November 30, 1997, the Company had
approximately $170 million in capital expenditure commitments
outstanding primarily associated with the construction and
expansion of office and manufacturing space in Santa Clara,
Illinois, the U.K., and Singapore.
During the first six months of fiscal 1998, the Company
received cash of $234.1 million from the sale of approximately
20 million shares of its common stock to employees through its
employee stock purchase and option plans. These cash inflows
related primarily to the exercise of stock options by employees
of U.S. Robotics. Pursuant to a change-in-control feature of the
U.S. Robotics' employee stock option plans, substantially all
outstanding options held by employees of U.S. Robotics became fully
vestedand exercisable upon closing of the merger in June 1997. In
addition, the Section 16(b) affiliates of both U.S. Robotics
and 3Com were subject to restrictions on the sale of their
shares because of the rules applicable to a pooling-of-
interests and such affiliate restrictions lapsed in September
1997.
During the first quarter of fiscal 1998, the Company signed a
lease, which replaces a previous land lease, for 300,000
square feet of office and research and development space and a
data center to be built on land adjacent to the Company's
headquarters site. The lease expires in August 2002, with an
option to extend the lease term for two successive periods of
five years each. The Company has an option to purchase the
property for $83.6 million, or at the end of the lease arrange
for the sale of the property to a third party with the Company
retaining an obligation to the owner for the difference
between the sale price and $83.6 million, subject to certain
provisions of the lease. Construction of the buildings began
in July 1997, and the Company anticipates that it will occupy
and begin lease payments in the second quarter of fiscal 1999.
During the first quarter of fiscal 1998, the Company signed a
lease, which replaces a previous land lease, for 525,000
square feet of office, research and development and
manufacturing space to be built on land in Marlborough,
Massachusetts. The lease expires in August 2002, with an
option to extend the lease term for two successive periods of
five years each. The Company has an option to purchase the
property for $86.0 million, or at the end of the lease arrange
for the sale of the property to a third party with the Company
retaining an obligation to the owner for the difference
between the sale price and $86.0 million, subject to certain
provisions of the lease. Construction of the buildings began
in the first quarter of fiscal 1998, and the Company
anticipates that it will occupy and begin lease payments in
the third quarter of fiscal 1999.
During the first quarter of fiscal 1998, the Company signed a
lease for an existing 400,000 square foot building and for
100,000 square feet to be built on adjacent land in Rolling
Meadows, Illinois. The new and renovated facility will be
used for research and development and office space. The lease
expires in September 2002, with an option to extend the lease
term for two successive periods of five years each. The
Company has an option to purchase the property for $95.0
million, or at the end of the lease arrange for the sale of
the property to a third party with the Company retaining an
obligation to the owner for the difference between the sale
price and $95.0 million, subject to certain provisions of the
lease. The lessor began construction of the buildings in the
second quarter of fiscal 1998, and the Company anticipates it
will occupy and begin lease payments in the first quarter of
fiscal 1999.
The three aforementioned leases require the Company to
maintain specified financial covenants, all of which the
Company was in compliance with as of November 30, 1997.
The Company has a $100 million revolving bank credit agreement
which expires December 20, 1999. Payment of cash dividends
are permitted under the credit agreement, subject to certain
limitations based on net income levels of the Company. The
Company has not paid and does not anticipate it will pay cash
dividends on its common stock. The credit agreement requires
the Company to maintain specified financial covenants. As of
November 30, 1997, there were no outstanding borrowings under
the credit agreement and the Company was in compliance with
all required covenants. During the quarter ended August 31,
1997, the Company repaid $168.1 million of short-term
borrowings incurred by U.S. Robotics, which included $33.3
million of borrowings that occurred between May 25 and June
12, 1997.
On December 23, 1997, the Company redeemed convertible
subordinated notes totaling $110 million. Under the terms of
the agreement, the Company paid cash of approximately $115
million for principal, accrued interest and early payment
penalties.
During the quarter ended August 31, 1997, the Company
completed the merger transaction with U.S. Robotics. As a
result, the Company recorded merger-related charges of $269.8
million. The remaining merger-related accrual at November 30,
1997 was approximately $162 million. Total expected cash
expenditures relating to the merger charge are estimated to be
approximately $138 million, of which approximately $64 million
was disbursed prior to November 30, 1997. Termination
benefits paid to 561 employees terminated through November 30,
1997 (approximately 56 percent of the total planned
severances) were approximately $30 million. The remaining
severance and outplacement amounts are expected to be paid
within the next nine months.
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.
Effects of Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No.
128 (SFAS 128), "Earnings per Share." This Statement
establishes and simplifies standards for computing and
presenting earnings per share. SFAS 128 will be effective for
the Company's third quarter of fiscal 1998, and requires
restatement of all previously reported earnings per share data
that are presented. Early adoption of this Statement is not
permitted. SFAS 128 replaces primary and fully diluted
earnings per share with basic and diluted earnings per share.
Under SFAS 128, the Company's reported earnings per share for
the three and six months ended November 30, 1997 and 1996
would have been:
Three Months Ended Six Months Ended
November 30, November 30,
1997 1996 1997 1996
---- ---- ---- ----
Basic $ 0.01 $ 0.53 $ (0.14) $ 0.85
Diluted $ 0.01 $ 0.49 $ (0.14) $ 0.79
In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income." This statement establishes standards
for the reporting and display of comprehensive income and its
components. SFAS 130 will be effective for the Company's
fiscal year 1999 and requires reclassification of financial
statements for earlier periods for comparative purposes.
In June 1997, the FASB issued SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information." This
statement requires that financial information be reported on
the basis used internally for evaluating segment performance
and deciding how to allocate resources to segments. SFAS 131
is effective for the Company's fiscal year 1999 and requires
restatement of all previously reported information for
comparative purposes.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to lawsuits in the normal course of its
business. The Company notes that (i) litigation in general
and patent litigation in particular can be expensive and
disruptive to normal business operations and (ii) the results
of complex legal proceedings can be very difficult to predict
with any certainty.
Securities Litigation
In December 1997 and January 1998, several putative
shareholder class action lawsuits were filed against the
Company and certain of its officers and directors in the
United States District Court for the Northern District of
Illinois and in the United States District Court for the
Northern District of California. The complaints allege
violations of the federal securities laws, specifically
Sections 10(b) and 20(a) of the Securities and Exchange Act of
1934. The complaints allege class periods between May 19,
1997 and November 14, 1997 and do not specify the damages
sought. The Company believes it has meritorious defenses to
the claims and intends to contest the lawsuits vigorously. An
unfavorable resolution of the actions could have a material
adverse effect on the business, results of operations or
financial condition of the Company.
U.S. Robotics, certain of its directors, and the Company were
named as defendants in shareholder class actions relating to
the merger between the Company and U.S. Robotics. (In re:
U.S. Robotics Corporation Shareholders Litigation, Delaware
Chancery Court Consolidated Civil Action No. 15580). On
October 7, 1997, all claims related to such suits were settled
pursuant to a settlement approved by the Delaware Chancery
Court. Results of the settlement did not have a material
effect on the Company's results of operations or financial
condition.
On March 24, and May 5, 1997, putative shareholder class
action lawsuits, entitled Hirsch v. 3Com Corporation, et al.,
Civil Action No. CV764977, and Kravitz v. 3Com Corporation, et
al., Civil Action No. CV765962, respectively, were filed
against the Company and certain of its officers and directors
in the California Superior Court, Santa Clara County (the
Superior Court). Following resolution of a demurrer filed by
the Company, the remaining causes of action in the complaints
allege violations of the state securities laws, specifically
sections 25400 and 25500 of the California Corporations Code.
The complaints, which cover a putative period of September 24,
1996 through February 10, 1997, do not specify the damages
sought. The Company believes it has meritorious defenses to
the claims and intends to contest the lawsuits vigorously. An
unfavorable resolution of the actions could have a material
adverse effect on the business, results of operations or
financial condition of the Company.
Intellectual Property Litigation
In September 1997, Livingston Enterprises, Inc. (Livingston)
filed suit against U.S. Robotics in the United States District
Court for the Northern District of California (Livingston
Enterprises, Inc. v. U.S. Robotics Access Corporation, Case
No. C-97-3551(CRB)), claiming copyright infringement,
misappropriation of trade secrets, breach of contract and
unfair competition with respect to certain software code
previously licensed to U.S. Robotics for incorporation in
certain of its remote access server and concentrator products.
Livingston seeks injunctive relief and damages that are not
specified as to amount. The Company believes it has
meritorious defenses to Livingston's claims and intends to
contest the lawsuit vigorously. In September 1997, Livingston
filed a separate action in the same federal court (Livingston
Enterprises, Inc. v. U.S. Robotics Access Corporation, Case
No. C-97-3487 (CRB)) seeking a declaratory judgment to the
effect that one of U.S. Robotics' U.S. patent is invalid and
not infringed by Livingston's products, as well as unspecified
damages. U.S. Robotics has answered this complaint and filed
counterclaims alleging infringement of such patent by
Livingston. An unfavorable resolution of the action could have
a material adverse effect on the business, results of
operations or financial condition of the Company.
On April 26, 1997, Xerox Corporation filed suit against U.S.
Robotics in the United States District Court for the Western
District of New York (Xerox Corporation v. U.S. Robotics
Corporation and U.S. Robotics Access Corp., No. 97-CV-6182T),
claiming infringement of one United States Patent. The
complaint alleges willful infringement and prays for
unspecified damages and injunctive relief. In a press release
dated April 30, 1997, Xerox alleged that its patent, issued
January 21, 1997, "covers the use and recognition of
handwritten text using an alphabet system designed especially
for reliable recognition in pen computers," and that Palm
Computing Corporation's (Palm) PalmPilotTM hand-held computer
and "Graffiti" software in its PalmTM operating system
infringe the Xerox patent. Palm is a wholly-owned subsidiary
of the Company. The Company believes it has meritorious
defenses to Xerox's claims and intends to contest the lawsuit
vigorously. An adverse resolution of the action could have a
material adverse effect on the Company's results of operations
and financial condition in the quarter in which such adverse
resolution occurs.
On February 13, 1997, Motorola, Inc. filed suit against U.S.
Robotics in the United States District Court for the District
of Massachusetts (Motorola, Inc. v. U.S. Robotics Corporation,
et al., Civil Action No. 97-10339RCL), claiming infringement
of eight United States patents. The complaint alleges willful
infringement and prays for unspecified damages and injunctive
relief. U.S. Robotics has filed an answer to Motorola's
claims setting forth its defenses and asserting counterclaims
which allege infringement of a U.S. Robotics patent, violation
of antitrust laws, promissory estoppel and unfair competition.
The Company believes it has meritorious defenses to the claims
and intends to contest the lawsuit vigorously. An unfavorable
resolution of the action could have a material adverse effect
on the business, results of operations or financial condition
of the Company.
Consumer Litigation
During 1997, three putative class action lawsuits were
filed against the Company or its subsidiary, U.S. Robotics in
the state courts of California and Illinois. Each of the
actions seeks damages as a result of alleged
misrepresentations by the Company or U.S. Robotics in
connection with the sale of its new x2TM products and products
upgradeable to x2 under various California and Illinois
consumer fraud statutes and under common law theories
including fraud and negligent misrepresentation. Plaintiffs
in Bendall, et al. v. U.S. Robotics Corporation, et al., (No.
170441, Superior Court of Marin County, California), Lippman,
et al v. 3Com, (No. 97 CH 09773, Circuit Court of Cook County,
Illinois), and Michaels, et al. v. U.S. Robotics Access
Corporation et al., (No. 94 CH 14417, Circuit Court of Cook
County, Illinois) seek certification respectively of
nationwide classes of purchasers of x2 technology during the
approximate period November 1996 through at least May 1997.
U.S. Robotics' motion to dismiss the Bendall action is
presently pending; the Lippman action presently is stayed, and
a responsive pleading is not yet due in the Michaels action.
The complaints seek injunctive relief and an unspecified
amount of damages. Two other actions purporting to be brought
in the public interest have also been filed against U.S.
Robotics in state court in California under California
statutes arising out of U.S. Robotics alleged
misrepresentation in connection with the sale of the x2
products. Levy v. U.S. Robotics Corporation, (No. 170968,
Superior Court of Marin County, California) and Intervention
Inc. v. U.S. Robotics Corporation, (No. 984352, Superior Court
of San Francisco, California) seek injunctive and unspecified
monetary relief. The Company believes it has meritorious
defenses to these lawsuits and intends to contest the lawsuits
vigorously. An unfavorable resolution of the actions could
have a material adverse effect on the business, results of
operations or financial condition of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on
October 7, 1997.
(b) Each of the persons named in the Proxy Statement as
a nominee for director was elected and the proposals listed
below were approved. The following are the voting results
of the proposals:
Proposal I In Favor Instructed Withheld
- ---------- -------- ---------- --------
Election of Directors 294,476,345 57,881 1,516,491
Proposal II In Favor Opposed Abstain
- ----------- -------- ------- -------
To approve an increase in
the share reserve under the
Company's 1983 Stock Option
Plan by 7,000,000 shares. 255,933,552 38,672,866 1,444,299
Proposal III In Favor Opposed Abstain
- ------------ -------- ------- -------
To ratify the appointment
of Deloitte & Touche LLP
as the Company's independent
public accountants for the
fiscal year ending May 31,
1998 294,752,931 510,203 787,583
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation (13)
3.2 Certificate of Correction Filed to Correct a Certain Error
in the Certificate of Incorporation (13)
3.3 Certificate of Merger (13)
3.4 Bylaws of 3Com Corporation, As Amended (13)
4.1 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) (6)
4.2 Placement Agreement for the private placement of convertible
subordinated notes dated November 8, 1994 (Exhibit 5.1 to Form 8-K) (6)
4.3 Amended and Restated Rights Agreement dated December 31, 1994
(Exhibit 10.27 to Form 10-Q) (7)
10.1 1983 Stock Option Plan, as amended (Exhibit 10.1 to Form
10-K) (3)*
10.2 Amended and Restated Incentive Stock Option Plan (2)*
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) (4)*
10.5 Second Amended and Restated 1984 Employee Stock Purchase
Plan (Exhibit 10.5 to Form 10-Q)(8)*
10.6 3Com Corporation Director Stock Option Plan, as amended
(Exhibit 19.3 to Form 10-Q) (4)*
10.7 Amended 3Com Corporation Director Stock Option Plan
(Exhibit 10.8 to Form 10-Q)(8)*
10.8 3Com Corporation Restricted Stock Plan, as Amended
(Exhibit 10.17 to Form 10-Q)(8)*
10.9 1994 Stock Option Plan (Exhibit 10.22 to Form 10-K) (5)*
10.10 Lease Agreement between BNP Leasing Corporation, as
Landlord, and 3Com Corporation, as Tenant, effective as of November 20, 1996
(Exhibit 10.37 to Form 10-Q) (10)
10.11 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of November 20, 1996 (Exhibit 10.38 to Form 10-Q)
(10)
10.12 Agreement and Plan of Reorganization among 3Com Corporation,
OnStream Acquisition Corporation and OnStream Networks, Inc. dated as of
October 5, 1996 (Exhibit 2.1 to Form S-4) (9)
10.13 Lease Agreement between BNP Leasing Corporation, as Landlord,
and 3Com Corporation, as Tenant, effective as of February 3, 1997 for the
Combined Great America Headquarters site (Exhibit 10.19 to Form 10-Q) (12)
10.14 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of February 3, 1997 for the Combined Great America
Headquarters site (Exhibit 10.20 to Form 10-Q) (12)
10.15 Credit Agreement dated as of December 20, 1996 among 3Com
Corporation, Bank of America National Trust and Savings Association, as
Agent,and the Other Financial Institutions Party Hereto Arranged by BA
Securities, Inc. (Exhibit 10.21 to Form 10-Q) (12)
10.16 Amended and Restated Agreement and Plan of Merger by and
among 3Com Corporation, TR Acquisitions Corporation, 3Com (Delaware)
Corporation, and U.S. Robotics Corporation, dated as of February 26, 1997
and amended as of March 14, 1997(11)
10.17 Lease Agreement between BNP Leasing Corporation, as Landlord,
and 3Com Corporation, as Tenant, effective as of July 25, 1997 for the
Great America Phase III (PAL) site (13)
10.18 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of July 25, 1997 for the Great America Phase III
(PAL) site (13)
10.19 Lease Agreement between BNP Leasing Corporation, as Landlord,
and 3Com Corporation, as Tenant, effective as of July 29, 1997 for the
Marlborough site (13)
10.20 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of July 29, 1997 for the Marlborough site (13)
10.21 Lease Agreement between BNP Leasing Corporation, as Landlord,
and 3Com Corporation, as Tenant, effective as of August 11, 1997 for the
Rolling Meadows site (13)
10.22 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of August 11, 1997 for the Rolling Meadows site
10.23 First Amendment to Credit Agreement (13)
* 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 Exhibit 10.2 to Registrant's
Registration Statement on Form S-4 filed on August 31, 1987 (File No.
33-16850)
(3) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-K filed
on August 27, 1991 (File No. 0-12867)
(4) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed
January 10, 1992 (File No. 0-12867)
(5) 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)
(6) 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)
(7) 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)
(8) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed
on January 15, 1996 (File No. 0-12867)
(9) 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 October 11, 1996 (File No.
333-13993)
(10) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed
on January 13, 1997 (File No. 0-12867)
(11) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Registration
Statement on Form S-4, filed on March 17, 1997 (File No. 333-23465)
(12) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed
on April 11, 1997 (File No. 0-12867)
(13) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed
on October 14, 1997 (File No. 0-12867)
(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: March 18, 1998 By: /s/ Christopher B. Paisley
--------------------- --------------------------
Christopher B. Paisley
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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