<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 27, 1999 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
SANTA CLARA, CALIFORNIA 95052
----------------------- -----
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 326-5000
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 SEPTEMBER 24, 1999, 345,029,440 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
THIS REPORT CONTAINS A TOTAL OF 31 PAGES OF WHICH THIS PAGE IS NUMBER 1.
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<PAGE>
3COM CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations
QUARTERS ENDED AUGUST 27, 1999 AND AUGUST 28, 1998 3
Condensed Consolidated Balance Sheets
AUGUST 27, 1999 AND MAY 28, 1999 4
Condensed Consolidated Statements of Cash Flows
QUARTERS ENDED AUGUST 27, 1999 AND AUGUST 28, 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 27
ITEM 2. Changes in Securities and Use of Proceeds 28
ITEM 3. Defaults Upon Senior Securities 28
ITEM 4. Submission of Matters to a Vote of Security Holders 28
ITEM 5. Other Information 28
ITEM 6. Exhibits and Reports on Form 8-K 28
Signatures 31
</TABLE>
3Com, U.S. Robotics, Palm Computing, Graffiti, Total Control, CoreBuilder, NBX,
and Palm OS are registered trademarks of 3Com Corporation or its subsidiaries.
Palm, Palm IIIx, Palm V, Palm VII, and Palm.Net are trademarks of 3Com
Corporation or its subsidiaries.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------
August 27, August 28,
1999 1998
---- ----
<S> <C> <C>
Sales $ 1,387,409 $ 1,405,511
Cost of sales 739,078 802,039
--------- ---------
Gross margin 648,331 603,472
--------- ---------
Operating expenses:
Sales and marketing 272,825 278,651
Research and development 162,844 147,497
General and administrative 61,240 59,406
Merger-related credits (2,105) (10,218)
--------- ---------
Total operating expenses 494,804 475,336
--------- ---------
Operating income 153,527 128,136
Gains on sales of investments 23,551 -
Interest and other income, net 15,914 9,645
--------- ---------
Income before income taxes 192,992 137,781
Income tax provision 56,476 44,090
Equity interest in loss of consolidated joint venture (975) -
--------- ---------
Net income $ 137,491 $ 93,691
========= =========
Net income per share:
Basic $ 0.39 $ 0.26
Diluted $ 0.38 $ 0.26
Shares used in computing per share amounts:
Basic 353,243 358,533
Diluted 357,703 366,425
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
3COM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
<TABLE>
<CAPTION>
August 27, May 28,
1999 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,003,263 $ 952,249
Short-term investments 702,262 709,365
Accounts receivable, net 757,092 925,598
Inventories, net 350,526 354,272
Deferred income taxes 110,387 312,011
Investments and other 578,989 166,357
--------- ---------
Total current assets 3,502,519 3,419,852
Property and equipment, net 796,255 831,557
Goodwill, intangibles, deposits and other assets 233,289 243,980
--------- ---------
Total assets $ 4,532,063 $ 4,495,389
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 401,434 $ 336,503
Accrued liabilities and other 620,898 674,375
Income taxes payable 182,966 173,116
Current portion of long-term debt 14,337 14,568
--------- ---------
Total current liabilities 1,219,635 1,198,562
Long-term debt 19,413 30,405
Deferred income taxes and other long-term obligations 55,952 64,492
Equity interest in consolidated joint venture 4,500 5,475
Stockholders' equity:
Preferred stock, $.01 par value, 10,000 shares
authorized; none outstanding - -
Common stock, $.01 par value, 990,000 shares
authorized; shares outstanding: August 27, 1999,
365,827; May 28, 1999, 365,805 1,968,131 1,954,204
Treasury stock at cost, August 27, 1999, 21,091
shares; May 28, 1999, 8,190 shares (527,656) (197,064)
Unamortized restricted stock grants (4,995) (5,303)
Retained earnings 1,504,287 1,403,709
Accumulated other comprehensive income 292,796 40,909
--------- ---------
Total stockholders' equity 3,232,563 3,196,455
--------- ---------
Total liabilities and stockholders' equity $ 4,532,063 $ 4,495,389
========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
3COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------
August 27, August 28,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 137,491 $ 93,691
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 81,802 66,131
Gains on sales of investments (23,551) -
Deferred income taxes 25,292 29,872
Merger-related credits (2,105) (10,218)
Equity interest in loss of consolidated joint venture (975) -
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable 168,506 (130,614)
Inventories 1,252 141,621
Investments and other assets 18,759 33,330
Accounts payable 64,931 (922)
Accrued liabilities and other (53,223) (19,405)
Income taxes payable 24,412 18,121
--------- ---------
Net cash provided by operating activities 442,591 221,607
--------- ---------
Cash flows from investing activities:
Purchase of investments (168,461) (123,230)
Proceeds from maturities and sales of investments 180,373 55,747
Purchase of property and equipment (39,156) (45,417)
Proceeds from sale of property and equipment 6,790 14,746
Other, net 8,100 18,660
--------- ---------
Net cash used for investing activities (12,354) (79,494)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 23,436 6,293
Repurchase of common stock (391,744) (29,481)
Repayments of long-term borrowings (12,000) (12,000)
Other, net 1,085 (6,397)
--------- ---------
Net cash used for financing activities (379,223) (41,585)
--------- ---------
Increase in cash and equivalents 51,014 100,528
Cash and equivalents, beginning of period 952,249 528,981
--------- ---------
Cash and equivalents, end of period $ 1,003,263 $ 629,509
========= =======
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
3COM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared by 3Com Corporation ("3Com" or "us", "we", "our") and include
the accounts of 3Com, its wholly-owned subsidiaries and joint venture.
All significant intercompany balances and transactions have been
eliminated. In the opinion of management, these unaudited condensed
consolidated financial statements include all adjustments necessary for
a fair presentation of 3Com's financial position as of August 27, 1999,
results of operations for the quarters ended August 27, 1999 and August
28, 1998, and cash flows for the quarters ended August 27, 1999 and
August 28, 1998. Certain amounts from the prior year have been
reclassified to conform to the current year presentation.
Effective June 1, 1998, 3Com adopted a 52-53 week fiscal year ending on
the Friday nearest to May 31. Accordingly, fiscal 2000 will end on June
2, 2000, resulting in a 53 week fiscal 2000, rather than 52 weeks as
reported in fiscal 1999. For fiscal year 2000, the first three quarters
will contain 13 weeks, whereas the fourth quarter will contain 14
weeks. This change did not have a significant effect on 3Com's
condensed consolidated financial statements for the quarter ended
August 27, 1999 as compared to the quarter ended August 28, 1998. The
results of operations for the quarter ended August 27, 1999 may not be
indicative of the results to be expected for the fiscal year ending
June 2, 2000. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and
related notes thereto included in 3Com's Annual Report on Form 10-K for
the fiscal year ended May 28, 1999.
2. Merger-Related Charges
On June 12, 1997, 3Com completed a merger with U.S. Robotics, which was
accounted for as a pooling-of-interests. As a result of this merger,
3Com has recorded aggregate merger-related charges of $240.1 million
through August 27, 1999, which included $196.3 million of integration
expenses and $43.8 million of direct transaction costs (consisting
primarily of investment banking and other professional fees). Of the
aggregate merger-related charges recorded to date, $10.2 million was
recorded as a revision in estimate in the first quarter of fiscal 1999.
The following table displays a rollforward of the activity and balances
of the U.S. Robotics merger reserve from May 29, 1999 through August
27, 1999 (in thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
First Quarter 2000
----------------------------
Revisions in
Type of cost May 28, 1999 Estimates Deductions Aug 27, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Facilities $ 13,935 $ (2,091) $ 10,257 $ 1,587
Long-term assets and other 1,338 (14) 759 565
--------------------------------------------------------------------------------------------------
Total $ 15,273 $ (2,105) $ 11,016 $ 2,152
--------------------------------------------------------------------------------------------------
</TABLE>
Remaining cash expenditures relating to the U.S. Robotics merger charge
are estimated to be approximately $1.1 million. As of August 27, 1999,
substantially all benefits had been paid to terminated employees.
6
<PAGE>
3. Comprehensive Income
The components of comprehensive income, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------
August 27, August 28,
1999 1998
---------- ----------
<S> <C> <C>
Net income $ 137,491 $ 93,691
Other comprehensive income:
Change in net unrealized gain on investments 251,743 1,096
Change in accumulated translation adjustments 144 (8,094)
--------- ----------
Total comprehensive income $ 389,378 $ 86,693
========= ==========
</TABLE>
4. Net Income Per Share
The following table presents the calculation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------
August 27, August 28,
1999 1998
---------- ----------
<S> <C> <C>
Net income $ 137,491 $ 93,691
========== ==========
Weighted average shares-Basic 353,243 358,533
Effect of dilutive securities:
Employee stock options 4,279 7,671
Restricted stock 181 221
---------- ----------
Weighted average shares-Diluted 357,703 366,425
========== ==========
Net income per share-Basic $ 0.39 $ 0.26
Net income per share-Diluted $ 0.38 $ 0.26
</TABLE>
5 Inventories
Inventories, net, consist of (in thousands):
<TABLE>
<CAPTION>
August 27, May 28,
1999 1999
---------- ----------
<S> <C> <C>
Finished goods $ 217,613 $ 237,515
Work-in-process 58,975 49,452
Raw materials 73,938 67,305
---------- ----------
Total $ 350,526 $ 354,272
========== ==========
</TABLE>
7
<PAGE>
6. Business Segment Information
In fiscal 1999, we adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting information about operating segments and
related disclosures about products, geographic information, and major
customers. Information on reportable segments for the quarters ended
August 27, 1999 and August 28, 1998 is as follows (in thousands):
Quarter ended August 27, 1999:
<TABLE>
<CAPTION>
Network Personal Handheld Corporate
Systems Connectivity Computing and Other (1) Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 674,207 $ 538,989 $ 174,213 $ - $1,387,409
Segment income 72,325 87,488 12,396 (34,718) 137,491
Inventory 165,545 144,802 40,179 - 350,526
</TABLE>
Quarter ended August 28, 1998:
<TABLE>
<CAPTION>
Network Personal Handheld Corporate
Systems Connectivity Computing and Other (1) Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 620,811 $ 668,855 $ 115,845 $ - $1,405,511
Segment income 20,804 111,433 6,180 (44,726) 93,691
Inventory 245,232 237,846 18,200 - 501,278
</TABLE>
(1) Included in the corporate and other category are the
following: bonuses based on 3Com results; unallocated
corporate expenses; unallocated merger credits; gains on sales
of investments; interest and other income, net; income tax
provision; and equity interest in loss of consolidated joint
venture.
7. Subsequent Events
On September 13, 1999, we announced our plans to conduct an initial
public offering of our Palm Computing subsidiary in early calendar
2000. The initial public offering will be for less than 20 percent of
the shares of the Palm Computing subsidiary. We intend to subsequently
distribute the balance of the shares of the Palm Computing company to
our shareholders, contingent upon receiving certain tax and regulatory
approvals. Under this plan, 3Com shareholders will ultimately own
shares in both companies. We intend to complete these actions in
calendar 2000 subject to market conditions.
In the second quarter of fiscal 1999, 3Com entered in to a joint
venture named ADMTek, Inc. In September 1999, we sold a portion of our
shares in the joint venture, and we intend to relinquish our ability to
exercise significant influence over operating and financial policies of
the joint venture. Accordingly, in future periods, the results of the
joint venture will not be consolidated into our results of operations.
We do not expect these actions to have a significant impact on our
financial statements.
In September 1999, the board of directors authorized the repurchase of
an additional 10 million shares of 3Com's common stock, bringing the
total number of authorized shares remaining for repurchase to 14.8
million shares. The share authorization will be used for purchases made
in the open market from time to time or the sale of put warrants on
3Com's common stock.
8
<PAGE>
Also during September 1999, the board of directors approved a revised
employee stock purchase plan which extends the offering period to 24
months, allowing for four six-month purchase periods. Price declines,
if any, will be reflected at the beginning of each six-month purchase
period and remain in effect for the next 24-month offering period.
8. Litigation
We are a party to lawsuits in the normal course of our business.
Litigation in general, and intellectual property and securities
litigation in particular, can be expensive and disruptive to normal
business operations. Moreover, the results of complex legal proceedings
are difficult to predict. We believe that we have defenses in each of
the cases set forth below and are vigorously contesting each of these
matters. An unfavorable resolution of one or more of the following
lawsuits could adversely affect our business, results of operations, or
financial condition.
SECURITIES LITIGATION
On March 24 and May 5, 1997, securities class action lawsuits,
captioned HIRSCH V. 3COM CORPORATION, ET AL., Civil Action No. CV764977
(HIRSCH), and KRAVITZ V. 3COM CORPORATION, ET AL., Civil Action No.
CV765962 (KRAVITZ), respectively, were filed against 3Com and certain
of its officers and directors in the California Superior Court, Santa
Clara County. The complaints allege violations of Sections 25400 and
25500 of the California Corporations Code and seek unspecified damages
on behalf of a class of purchasers of 3Com common stock during the
period from September 24, 1996 through February 10, 1997. The actions
are in discovery. No trial date has been set.
On February 10, 1998, a securities class action, captioned EUREDJIAN V.
3COM CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN),
was filed against 3Com and several of its present and former officers
and directors in United States District Court for the Northern District
of California asserting the same class period and factual allegations
as the HIRSCH and KRAVITZ actions. The complaint alleges violations of
the federal securities laws, specifically Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and seeks unspecified damages. The
plaintiffs have filed an amended complaint. 3Com has filed an answer to
the amended complaint. No trial date has been set.
In December 1997, a securities class action, captioned REIVER V. 3COM
CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed
in the United States District Court for the Northern District of
California. Several similar actions have been consolidated into this
action, including FLORIDA STATE BOARD OF ADMINISTRATION AND TEACHERS
RETIREMENT SYSTEM OF LOUISIANA V. 3COM CORPORATION, ET AL., Civil
Action No. C-98-1355. On August 17, 1998, the plaintiffs filed a
consolidated amended complaint which alleges violations of the federal
securities laws, specifically Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934, and which seeks unspecified
damages on behalf of a purported class of purchasers of 3Com common
stock during the period from April 23, 1997 through November 5, 1997.
In July 1999, the court dismissed the complaint and granted the
plaintiffs the right to file an amended complaint. Plaintiffs have
filed an amended complaint and defendants have filed a motion to
dismiss.
In October 1998, a securities class action lawsuit, captioned ADLER V.
3COM CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed
against 3Com and certain of its officers and directors in the
California Superior Court, Santa Clara County, asserting the same class
period and factual allegations as the REIVER action. The complaint
alleges violations of Sections 25400 and 25500 of the California
Corporations Code and seeks unspecified damages. The action is in
discovery. No trial date has been set.
9
<PAGE>
In October 1998, two shareholder derivative actions purportedly on
behalf of 3Com, captioned SHAEV V. BARKSDALE, ET AL., Civil Action No.
16721-NC, and BLUM V. BARKSDALE, ET AL., Civil Action No. 16733-NC,
were filed in Delaware Chancery Court. The complaints allege that
3Com's directors breached their fiduciary duties to 3Com through the
issuance of and disclosures concerning director stock options. 3Com is
named solely as a nominal defendant, against whom the plaintiffs seek
no recovery. 3Com and the individual defendants have filed a motion to
dismiss these actions.
On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM
CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (GAYLINN), was
filed against 3Com and several of its present and former officers and
directors in United States District Court for the Northern District of
California. Several similar actions have been consolidated into the
GAYLINN action. On September 10, 1999, the plaintiffs filed a
consolidated complaint which alleges violations of the federal
securities laws, specifically Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and seeks unspecified damages on
behalf of a purported class of purchasers of 3Com common stock during
the period from September 22, 1998 through March 2, 1999. 3Com has not
responded to the complaint.
INTELLECTUAL PROPERTY LITIGATION
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States
District Court for the Western District of New York. The case is now
captioned: Xerox Corporation v. U.S. Robotics Corporation, U.S.
Robotics Access Corp., Palm Computing, Inc. and 3Com Corporation, Civil
Action No. 97-CV-6182T. The complaint alleges willful infringement of a
United States patent relating to computerized interpretation of
handwriting. The complaint further prays for unspecified damages and
injunctive relief. Xerox has asserted that Graffiti-Registered
Trademark- software and certain products of Palm Computing, Inc.
infringe the patent. On June 25, 1999, the Court stayed the action
pending reexamination of the patent by the U.S. Patent and Trademark
Office.
9. Effects of Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 requires that entities capitalize certain
costs related to internal-use software if certain criteria are met.
3Com adopted SOP 98-1 for our fiscal year ending June 2, 2000. The
adoption of SOP 98-1 did not have a significant impact on our financial
results for the quarter ended August 27, 1999.
In June 1998 and June 1999, the Financial Accounting Standards Board
(FASB) issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" and SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133." These statements require companies to record
derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. These
statements will be effective for 3Com's fiscal year ending May 31,
2002. We believe that the adoption of these statements will not have a
significant impact on our financial results.
10
<PAGE>
3COM CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total sales represented by the line items reflected in 3Com's condensed
consolidated statements of operations:
<TABLE>
<CAPTION>
Quarter Ended
-------------
August 27, May 28, August 28,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
Sales ................................................. 100.0% 100.0% 100.0%
Cost of sales ......................................... 53.3 55.3 57.1
---- ---- ----
Gross margin .......................................... 46.7 44.7 42.9
---- ---- ----
Operating expenses:
Sales and marketing ............................... 19.7 20.5 19.8
Research and development .......................... 11.7 11.7 10.5
General and administrative ........................ 4.4 4.5 4.2
Non-recurring charges (credits):
Purchased in-process technology ................. - 0.4 -
Merger-related credits .......................... (0.2) (0.3) (0.7)
---- ---- ----
Total operating expenses ..................... 35.6 36.8 33.8
---- ---- ----
Operating income ...................................... 11.1 7.9 9.1
Gains (losses) on sales of investments ................ 1.7 (0.2) -
Interest and other income, net ........................ 1.1 1.2 0.7
---- ---- ----
Income before income taxes ............................ 13.9 8.9 9.8
Income tax provision .................................. 4.1 2.8 3.1
Equity interest in loss of consolidated joint
venture ........................................... (0.1) (0.1) -
------- ------- -------
Net income ............................................ 9.9% 6.2% 6.7%
==== ==== ====
Excluding non-recurring credits and other:
Total operating expenses .......................... 35.8% 36.7% 34.5%
Operating income .................................. 10.9 8.0 8.4
Net income ........................................ 8.6 6.4 6.2
</TABLE>
SALES
Sales in the first quarter of fiscal 2000 totaled $1.39 billion, a decrease of
$28 million or two percent from the fourth quarter of fiscal 1999, and a
decrease of $18 million or one percent from the corresponding quarter a year
ago. Sales for the first quarter of fiscal 2000 were impacted by the seasonality
of our business. The first quarter of each of our fiscal years has traditionally
been a slow sales quarter, as it includes the three summer months of June, July,
and August.
NETWORK SYSTEMS. Sales of network systems products (E.G., switches, hubs, remote
access concentrators, routers, and customer service and support) in the first
quarter of fiscal 2000 increased nine percent compared to the same quarter a
year ago. The increase was primarily due to growth in our workgroup systems
product lines as well as growth of the Total Control-Registered Trademark- and
CoreBuilder-Registered Trademark- platforms. Sales of network systems products
in the first quarter of fiscal 2000 represented 48 percent of total sales
compared to 44 percent in the first quarter of fiscal 1999.
11
<PAGE>
PERSONAL CONNECTIVITY. Sales of personal connectivity products (E.G., desktop
network interface cards (NICs), desktop modems, and personal computers (PC)
cards for mobile computers) in the first quarter of fiscal 2000 decreased 19
percent compared to the same quarter one year ago. The decrease compared to the
first quarter of fiscal 1999 was primarily due to average selling price declines
in both analog modems and network interface cards. Sales of personal
connectivity products in the first quarter of fiscal 2000 represented 39 percent
of total sales compared to 48 percent in the first quarter of fiscal 1999.
Historically, a significant portion of our sales has been derived from desktop
NICs and analog modems, which have entered the mature phase of their product
life cycles. Sales in these product lines are declining because they are
particularly sensitive to price competition and are beginning to be replaced by
newer technologies. Further, our NICs and modems are increasingly being
distributed through the PC original equipment manufacturer (OEM) channel which
carries lower average selling prices. Sales of NICs and modems are also highly
correlated with sales in the PC market. While the overall PC market continues to
grow, sales of low-end PCs are growing faster than high-end PCs. Lower priced
PCs are not typically sold with high performance NICs and modems such as those
offered by 3Com.
HANDHELD COMPUTING. Sales of handheld computing products in the first quarter of
fiscal 2000 increased 50 percent compared to the same quarter one year ago. The
increase was primarily due to increased market acceptance of our new products
including the Palm IIIx-TM- and Palm V-TM- handheld computing products as well
as expansion of the market for handheld computing. Sales of handheld computing
products in the first quarter of fiscal 2000 represented 13 percent of total
sales compared to eight percent in the first quarter of fiscal 1999.
GEOGRAPHIC. U.S. sales represented 55 percent of total sales in the first
quarter of fiscal 2000 and decreased five percent over the same period a year
ago. International sales increased four percent over the same period a year ago.
International sales reflected strong growth in Asia Pacific and Canada,
partially offset by lower sales in Europe.
GROSS MARGIN
Gross margin as a percentage of sales was 46.7 percent in the first quarter of
fiscal 2000, compared to 44.7 percent in the fourth quarter of fiscal 1999 and
42.9 percent in the first quarter of fiscal 1999. The sequential gross margin
improvement was due primarily to the following two items, which occurred in the
fourth quarter of fiscal 1999: 1) the signing of a broad long-term cross
licensing agreement, and 2) changes in our service delivery programs. Both of
these items had an adverse impact on our fourth quarter of fiscal 1999 gross
margins and did not have a material impact in the first quarter of fiscal 2000.
Additionally, our gross margins improved sequentially and year-over-year due to
the favorable impact of continued improvements in inventory management, which
resulted in reduced manufacturing period costs, and improvements in our
operational management. An increased mix of certain higher margin network
systems products also contributed to the gross margin improvement compared to
the first quarter of fiscal 1999.
OPERATING EXPENSES
Operating expenses in the first quarter of fiscal 2000 were $494.8 million, or
35.6 percent of sales, compared to $519.8 million, or 36.8 percent of sales in
the fourth quarter of fiscal 1999 and $475.3 million, or 33.8 percent of sales
in the first quarter of fiscal 1999. Excluding non-recurring items, operating
expenses for the first quarter of fiscal 2000 were $496.9 million, or 35.8
percent of sales, compared to $519.1 million, or 36.7 percent of sales in the
fourth quarter of fiscal 1999 and $485.6 million, or 34.5 percent of sales in
the first quarter of fiscal 1999.
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SALES AND MARKETING. Sales and marketing expenses in the first quarter of fiscal
2000 decreased $18.0 million or six percent from the fourth quarter of fiscal
1999, and decreased to 19.7 percent of sales in the first quarter of fiscal 2000
compared to 20.5 percent in the fourth quarter of fiscal 1999. This decrease was
due primarily to seasonality in our marketing spending. Sales and marketing
expenses in the first quarter of fiscal 2000 decreased $5.8 million or two
percent from the first quarter of fiscal 1999, and decreased to 19.7 percent of
sales in the first quarter of fiscal 2000 compared to 19.8 percent in the first
quarter of fiscal 1999. This decrease was due primarily to reduced international
expenses as well as lower employee-related expenses, partially offset by
increased selling and marketing costs for our handheld computing products.
RESEARCH AND DEVELOPMENT. Research and development expenses in the first quarter
of fiscal 2000 decreased $2.3 million or one percent from the fourth quarter of
fiscal 1999, and were 11.7 percent of sales in both the first quarter of fiscal
2000 and the fourth quarter of fiscal 1999. Research and development expenses in
the first quarter of fiscal 2000 increased $15.3 million or 10.4 percent from
the first quarter of fiscal 1999, and increased to 11.7 percent of sales in the
first quarter of fiscal 2000 compared to 10.5 percent in the first quarter of
fiscal 1999. This year-over-year increase was primarily due to increased
investments in new and emerging technologies and markets including voice over
the internet protocol (VoIP) and local area network (LAN) telephony, wireless
access, handheld computing, broadband access (primarily cable and digital
subscriber line (DSL)), and home networking, partially offset by decreased
spending related to mature product lines such as analog modems.
GENERAL AND ADMINISTRATIVE. General and administrative expenses in the first
quarter of fiscal 2000 decreased $1.9 million or three percent from the fourth
quarter of fiscal 1999, and decreased to 4.4 percent of sales in the first
quarter of fiscal 2000 compared to 4.5 percent in the fourth quarter of fiscal
1999. General and administrative expenses in the first quarter of fiscal 2000
increased $1.8 million or three percent from the first quarter of fiscal 1999,
and increased to 4.4 percent of sales in the first quarter of fiscal 2000
compared to 4.2 percent in the first quarter of fiscal 1999.
MERGER-RELATED CREDITS. During the first quarter of fiscal 2000, 3Com reversed
approximately $2.1 million of previously recorded merger charges primarily
related to reductions in the estimates for remaining charges associated with the
sale of a facility in Chicago. During the first quarter of fiscal 1999, we
reversed approximately $10.2 million of previously recorded merger charges
primarily related to reductions in the estimates for remaining charges
associated with duplicate facilities and employee termination benefits.
GAINS ON SALES OF INVESTMENTS
Gains on sales of investments in the first quarter of fiscal 2000 of $23.6
million reflected gains realized from sales of several investments in equity
securities.
INTEREST AND OTHER INCOME, NET
Interest and other income, net in the first quarter of fiscal 2000 decreased
$0.7 million compared to the fourth quarter of fiscal 1999. Interest and other
income, net in the first quarter of fiscal 2000 increased $6.3 million compared
to the first quarter of fiscal 1999, primarily due to higher interest income due
to higher cash and investment balances, and improved foreign currency results.
INCOME TAX PROVISION
3Com's effective income tax rate was 29.3 percent in the first quarter of fiscal
2000 compared to 31.4 percent in the fourth quarter of fiscal 1999 and 32.0
percent in the first quarter of fiscal 1999. This rate reduction is primarily
attributable to increased offshore manufacturing in countries with tax rates
significantly below the U.S. statutory rate.
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EQUITY INTEREST IN LOSS OF CONSOLIDATED JOINT VENTURE
Equity interest in loss of consolidated joint venture was $1.0 million for the
first quarter of fiscal 2000. This amount represents the pro-rata share of the
joint venture's loss allocated to the other investors for the first quarter of
fiscal 2000.
NET INCOME AND NET INCOME PER SHARE
Net income for the first quarter of fiscal 2000 was $137.5 million, or $0.38 per
share, compared to net income of $87.5 million, or $0.24 per share for the
fourth quarter of fiscal 1999 and net income of $93.7 million, or $0.26 per
share, for the first quarter of fiscal 1999. Excluding the pre-tax
merger-related credits and the gains on sales of investments, net income was
$119.3 million, or $0.33 per share for the first quarter of fiscal 2000.
Excluding the pre-tax charge for purchased in-process technology and the pre-tax
credit for merger-related activities, net income was $88.0 million, or $0.24 per
share for the fourth quarter of fiscal 1999. Excluding the pre-tax
merger-related credit, net income was $86.7 million, or $0.24 per share for the
first quarter of fiscal 1999.
BUSINESS ENVIRONMENT AND RISK FACTORS
This Report on Form 10-Q contains forward-looking statements, including
statements concerning the growth of new markets within networking, the planned
initial public offering and stock distribution of Palm Computing, future sales
of certain products and in certain markets (including NICs, analog modems,
stackable hubs, LAN switching, remote access concentrators and wide area network
(WAN) access), expected sales in the first half of fiscal 2000, expected
reduction in operating expenses as a percentage of sales, expectations
concerning our long-term financial model, expectations concerning the pattern of
quarterly sales during fiscal 2000, and our Year 2000 readiness and expectations
of the impact of Year 2000 issues. These statements are subject to certain risks
and uncertainties. Some of the factors that could cause future events or results
to materially differ from those projected in the forward-looking statements are
discussed below.
TRANSITIONING OF SALES BASE TO HIGH-GROWTH MARKETS
We participate in many markets that are growing at varying rates. Historically,
a significant portion of our sales has been derived from desktop NICs, analog
modems, and stackable hubs, which have entered the mature phase of their product
life cycles. Sales in these product markets are declining, because they are
particularly sensitive to price competition or are beginning to be replaced by
newer technologies. Consequently, we believe that sales derived from these
products will decline as a percent of our total sales. Moderate growth markets
in which we participate include LAN switching, remote access concentrators, and
WAN access. We expect these segments will continue to account for a significant
portion of our sales. In addition, we are increasing our investments in several
high-growth and emerging markets that are forecasted to grow significantly
higher than the networking industry average. We expect these businesses to
account for a higher percentage of our sales over time. In particular, we are
focused on the following high-growth and emerging markets:
- Handheld Computing
- VoIP and LAN Telephony
- Broadband Access (primarily cable and DSL)
- Wireless Access
- Home Networking
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The transition of our sales base to these new markets may cause disruption in
our sales, research and development efforts, and manufacturing operations. We
cannot be certain that these emerging markets will materialize in the timeframes
that we expect, that we will introduce products for these markets in a timely
manner, that the market will accept these products, or that we will successfully
generate significant sales and profitability from these markets. In addition,
sales from our mature product lines may decline more rapidly than growth in
emerging product lines, and therefore, our results could be materially impacted.
Due to the transition of our sales base, we expect sales in the first half of
fiscal year 2000 will be lower than sales in the first half of fiscal 1999.
CONSOLIDATION IN OUR INDUSTRY
There have been many mergers and acquisitions in the networking industry in the
past several years. More recently, there have also been mergers between
telecommunications equipment providers and networking companies, as well as
between networking companies and computer component suppliers. Examples from
January 1999 through August 1999 include:
- 3Com acquired Smartcode, NBX-R- and certain assets of ICS;
- Lucent Technologies, a telecommunications company, acquired 11
companies, including networking equipment supplier Ascend
Communications;
- Cisco Systems, a networking equipment supplier, acquired 12
companies;
- Nortel Networks, a telecommunications company, acquired three
companies and integrated the operations of previously acquired
Bay Networks, a networking equipment supplier;
- Alcatel, a telecommunications company, acquired four
companies, including Xylan, a networking equipment supplier;
- Siemens A.G., a telecommunications company, acquired three
networking firms;
- General Electric Company, an engineering firm, acquired Fore,
a networking equipment supplier;
- Intel Corporation, a computer components manufacturer,
acquired four companies with networking technology.
Future business combinations in the networking industry may result in more
companies with greater resources and stronger competitive positions and products
than 3Com. Continued industry consolidation may adversely affect our operating
results or financial condition.
COMPETITION AND PRICING PRESSURE
We participate in a highly volatile industry characterized by vigorous
competition for market share as well as rapid product and technology development
and maturation. In addition, both 3Com and our competitors sometimes lower
product prices in order to gain market share or create more demand for our
products. For example, we experienced pricing competition for analog modems,
cable modems, and DSL modems in the first quarter of 2000. Intense pricing
competition in our industry may adversely affect our business, operating
results, or financial condition.
Our competition historically has come from start-up companies, well-capitalized
computer systems and communications companies, and other technology companies
focusing on data networking. However, our industry is changing, resulting in new
and other potential competitors who have greater financial, marketing, and
technical resources than 3Com. For example, technology innovations are driving
the convergence of voice, video, and data traffic onto a single network
infrastructure, and we now compete with much larger telecommunications equipment
companies such as Lucent Technologies Inc. and Nortel Networks.
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We are also selling products into new markets where we compete with different
companies than in the past. Our Palm-TM- handheld computing products compete
with product offerings from other handheld device manufacturers and other
companies who license competing operating systems to device manufacturers.
For example, our Palm Computing-Registered Trademark- products compete with
products from companies such as Compaq, Hewlett-Packard, Sharp, Casio, and
Phillips that are based on the Microsoft Windows CE operating system. Due to
the rapid growth of the handheld computing market and our leadership
position, we expect intensified competition from start-up companies,
well-capitalized computer software and hardware companies, and consumer
electronics companies. Our competitors may develop products and technologies
that render our products obsolete or noncompetitive, which could adversely
affect our business, operating results, or financial condition. In response
to product introductions by new and existing competitors as well as price
reductions by resellers of our competitors' products to reduce their
inventories, Palm Computing may have to reduce prices and increase marketing
expenditures, which could adversely affect revenue and profitability. Price
reductions may not be sufficient to protect market share, thus resulting in
revenue and profit declines. In addition, by licensing our Palm OS-Registered
Trademark- operating system, we will enable new competitors to enter the
handheld device market. These new licensees, while important to driving the
growth and pervasiveness of our Palm OS operating system, may create
competitive and pricing threats to our Palm handheld device business.
MARKET GROWTH RATES
Our financial success is dependent on the overall growth rate of the networking
industry as well the mix of our business coming from various markets within it.
In calendar 1998 and early 1999, the networking industry in aggregate grew more
slowly than in the past, particularly in the segments that currently comprise a
large portion of 3Com's sales. Over the last year, several new, high-growth
networking markets have begun to emerge, while other traditional networking
markets have reached maturity and are declining. For example, analog modems,
once a market with significant growth rates, has become a declining market,
while newer broadband access technologies such as cable and DSL are high-growth
and emerging markets. Industry reports indicate that the segments of the
industry in which we participate grew in aggregate by 14 percent during calendar
1998 and is expected to grow by approximately 15 percent in calendar 1999.
Independent market analysis indicates that aggregate growth rates in our markets
may decline over the next year, both because the industry as a whole is maturing
and because many companies may delay equipment purchases through at least the
end of the calendar year due to costs associated with Year 2000 date conversion.
Over time, declines in mature markets may be offset by the high-growth of newer
markets within networking. However, the high-growth, emerging markets in which
we participate, such as broadband access (primarily cable and DSL), are very
small today and as such do not yet comprise a significant source of revenues for
us.
The growth of related industries such as the PC market also affects 3Com's
growth. Recent industry reports indicate that the PC market grew by 12 percent
in calendar 1998 and is projected to grow by 16 percent in calendar 1999. Much
of the growth in this sector is occurring in the low-end of the market. These
inexpensive PCs typically do not include high performance NICs and modems such
as those offered by 3Com. Our business, operating results, or financial
condition may be adversely affected by any decreases in growth rates of
networking or PC markets. In addition, we cannot be certain that our results in
any particular period will be consistent with the future growth rate of the
industry.
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PALM COMPUTING SEPARATION
On September 13, 1999, we announced our plans to conduct an initial public
offering of our Palm Computing subsidiary in early calendar 2000. The initial
public offering will be for less than 20 percent of the shares of the Palm
Computing subsidiary. We intend to subsequently distribute the balance of the
shares of the Palm Computing company to our shareholders, contingent upon
receiving certain tax and regulatory approvals. Under this plan, 3Com
shareholders will ultimately own shares in both companies. We intend to complete
these actions in calendar 2000 subject to market conditions. Planning and
implementing the separation of Palm Computing from 3Com will require the
dedication of management resources, and we expect to incur certain incremental
expenses in future periods related to the separation. Efforts required to
separate the operations of Palm Computing may disrupt our ongoing business
activities. These factors could have an adverse affect on our results of
operations or financial condition.
MANAGEMENT OF STRATEGIC RELATIONSHIPS AND INVESTMENTS
In addition to mergers and acquisitions, technology companies are continually
entering into strategic relationships. For example, during calendar 1999, we
announced or expanded strategic relationships with several companies including
the following:
- Microsoft Corporation
- Siemens A.G.
- Dell Computer
- IBM
- Hewlett-Packard
- Sun Microsystems
- Motorola
- Symbol
Our results of operations or financial condition could be adversely impacted if
we experience difficulties managing relationships with our partners or if
projects with partners are unsuccessful. In addition, if our competitors enter
into successful strategic relationships, they could increase the competition
that we face.
We have also made strategic investments in several other networking companies.
Some of these investments have significantly appreciated in value since the
companies became publicly-traded. Our results of operations or financial
condition could be adversely impacted if the market value of our investments
declines.
RELIANCE ON DISTRIBUTORS, RESELLERS, AND PC OEMS
We distribute many of our products through indirect distribution channels that
include distributors, systems integrators, value-added resellers, and retailers.
We also sell our products through the PC OEM channel. Our future results and
financial condition are partially dependent on a number of factors relating to
this distribution model, including issues associated with competition among and
within our channels, selling to PC OEMs, and inventory and customer
concentration.
We believe our indirect distribution channels are experiencing heightened
competition from Internet-based suppliers and PC OEMs that distribute directly
to end user customers. We are reducing the number of distributors in the United
States through whom we sell our products. Further, 3Com is building in-house
capabilities to sell directly to end-user customers over the Internet
(e-business). If this initiative is successful, it could cause conflict with our
current indirect channels of distribution. If we are unsuccessful in selling
through our e-business channel, we could lose market share to competitors who
have more successfully developed these capabilities. These changes in the
pattern of distribution of networking products could have a material adverse
affect on our sales and financial results.
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Our distributors and resellers maintain significant levels of our products in
their inventories. We attempt to ensure that appropriate levels of products are
available to end-users by working closely with distributors and resellers to
monitor inventory levels. If channel partners attempt to reduce their levels of
inventory or if they do not maintain sufficient levels to meet customer demand,
our sales could be negatively impacted.
PC related networking products such as modems and NICs are increasingly being
sold through the PC OEM channel rather than the distribution channel. We derive
a significant portion of our personal connectivity product sales from PC OEMs
such as Dell Computer, Toshiba, Gateway, Hewlett-Packard, and IBM, who
incorporate our NICs, analog modems, or chipsets into their products. While
sales to PC OEMs are important, products sold through the PC OEM channel
typically have a lower average selling price than those sold through other
channels. Therefore, our sales and margins may be adversely impacted if sales to
PC OEMs continue to become a larger percentage of our business. In addition, PC
OEMs sometimes choose to integrate NIC and modem functions onto the PC
motherboard. For example, we currently sell networking chipsets to Dell Computer
that are integrated directly onto the PC motherboard of Dell's high-end Optiplex
line of PCs. Competitors such as large semiconductor companies who can integrate
networking and other computer processing functions onto a single chip might
offer PC OEMs a cheaper alternative to our solutions. If the integration of
networking and computer processing functionality on a reduced number of
components increases, our future sales growth and profitability could be
adversely affected.
Moreover, in the first quarter of fiscal 2000, there were two customers who
individually accounted for 10% or more of our total sales. We cannot be certain
that these customers will continue to purchase our products at current levels.
We typically do not enter into contracts with our customers that require them to
purchase minimum quantities of our products, and our customers have some rights
to extend or delay the shipment of their orders. Because our sales are becoming
more concentrated among a smaller number of customers, our results of
operations, financial condition, or market share could be adversely affected if
our customers:
- stopped purchasing our products or focused more on selling our
competitors' products;
- reduced, delayed, or canceled their orders;
- were unable to sell our products because we did not timely
ship the products to them; or
- experienced competitive or financial difficulties resulting in
less demand from them for our products or impairing our
ability to collect payments from them.
OUR FINANCIAL MODEL
In managing our business, we periodically establish and revise a long-term
financial model (LTFM) based on observed and anticipated trends in technology
and the marketplace. The model, which includes ranges for gross margin,
operating expenses, and operating income, is not intended to be a prediction of
future financial results. Instead, our management uses it in making decisions
about the allocation of resources and investments. The current model is as
follows:
Gross margin 44.5 - 46.0%
Operating expenses 28.0 - 29.5%
Operating income 15.0 - 18.0%
In the first quarter of fiscal 2000, we operated slightly above the LTFM gross
margin range due to improvements in our inventory management and our operating
management. We expect to perform near or within the current LTFM gross margin
range in the near term. In the first quarter of fiscal 2000, our operating
expense and operating income percentages were unfavorable compared to the LTFM
range. We do not expect to reach the current LTFM operating expense or operating
income ranges in the current fiscal year. We intend to establish and communicate
an updated model in the second or third quarter of fiscal 2000.
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UNCERTAINTIES OF INTERNATIONAL MARKETS
We operate internationally and expect that international markets will continue
to account for a significant percentage of our sales. Some international markets
are characterized by economic and political instability and currency
fluctuations that can adversely affect our operating results or financial
condition.
Historically, the Asia Pacific and Latin American regions have been high-growth
regions for the networking industry and 3Com. Local economic turmoil has limited
growth in these regions during the last several years. Recently, however, there
have been some indications that economic growth is returning to the Asia Pacific
region. As strength returns to the Asia Pacific region and as our sales to this
region increase, we may be exposed to additional credit risk, particularly if
there is another economic downturn. The continued instability in the Latin
American financial market negatively affected our sales in this market by, among
other things, increasing competition from local competitors and reducing access
to sources of capital needed by customers to make purchases. The prolonged
economic difficulties in the Latin American region subject our resellers to
financial hardships, which may increase our credit risk if our customers become
insolvent or their ability to meet obligations is otherwise impaired.
ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS
Products in the networking and handheld computing industries have short life
cycles. Therefore, our success depends on our ability to identify new market and
product opportunities, to timely develop and introduce new products, and to gain
market acceptance of new products, particularly in the emerging markets
described above. For example, the introduction of the Palm VII-TM- handheld
computing product creates risks involving our ability to successfully support
the Palm.Net-TM- service on a large scale and price the service at a level that
produces expected returns. Also, the timely introduction and delivery of a next
generation multi-service access platform will be important for our long-term
success in the Carrier/Network Service Provider market.
INDUSTRY STANDARDS AND REGULATIONS
Our success also depends on:
- the timely adoption of industry standards;
- resolution of conflicting U.S. and international standards
requirements created by the convergence of technology such as
voice onto data networks;
- the timely introduction of new standards-compliant products;
and
- a favorable regulatory environment.
Slow market acceptance of new technologies and industry standards could
adversely affect our results of operations or financial condition. For example,
the Wireless Access Protocol (WAP) used by companies such as Nokia, Motorola,
Ericsson, Symbian, and Phone.Com competes with our web clipping protocol. If the
WAP protocol becomes the industry standard, this could affect our sales of
products which incorporate the web clipping protocol, such as the Palm VII
product, which in turn could adversely impact our results of operations or
financial condition. In addition, if we fail to achieve timely certification of
compliance to industry standards for our products, our sales of such products
and our results of operations or financial condition could be adversely
affected. Further, a number of new product initiatives, particularly in the area
of VoIP and LAN Telephony, could be impacted by new or revised regulations,
which in turn could adversely affect our results of operations or financial
condition.
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CUSTOMER ORDER FULFILLMENT
The timing and amount of our sales depend on a number of factors that make
estimating operating results prior to the end of any period uncertain. For
example, we do not typically maintain a significant backlog. Consequently,
product sales in any quarter depend on orders booked and shipped in that
quarter. In addition, our customers historically request fulfillment of orders
in a short period of time, resulting in limited visibility to sales trends. As a
result, our operating results depend on the volume and timing of orders and our
ability to fulfill the orders in a timely manner. Historically, our sales in the
third month of the quarter have been higher than sales in each of the first two
months of the quarter. Non-linear sales patterns make business planning
difficult, and increase the risk that our quarterly results will fluctuate due
to disruptions in functions such as manufacturing, order management, information
systems, and shipping.
WARRANTIES AND INTERNATIONAL REQUIREMENTS
Because our products are often covered by warranties, we may be subject to
contractual and/or legal commitments to perform under such warranties. If our
products fail to perform as warranted and we do not resolve product quality or
performance issues in a timely manner, our operating results or financial
condition could be adversely affected. Likewise, if we fail to meet commitments
related to the installation of networks, we could be subject to claims for
business disruption or consequential damages if a network implementation is not
successfully or timely completed.
In addition, because our products are sold and marketed in many countries, our
products must function in and meet the requirements of many different
telecommunications environments and be compatible with various
telecommunications systems and products. If our products fail to meet the
requirements of international telecommunication environments, our sales could be
negatively impacted.
SUPPLY CHAIN MANAGEMENT
Some key components of our products are currently available only from single or
limited sources. Likewise, some services on which we rely are furnished from
single or limited service providers. In addition, some of our suppliers are also
our competitors. While we generally have been able to obtain adequate supplies
of components from existing sources, we cannot be certain that in the future our
suppliers will be able to meet our demand for components in a timely and
cost-effective manner. For example, the earthquake in Taiwan in September 1999
could cause temporary global shortages in supplies of certain components and/or
result in price increases for these components. Our business, operating results,
financial condition, or customer relationships could be adversely affected by
either an increase in prices for, or an interruption or reduction in supply of,
key components, or a similar disruption in the availability of key services.
We are working to significantly reduce our supply chain cycle time, from
ordering raw materials, to manufacturing products and delivering the products to
customers. Should these changes temporarily disrupt our ability to ship product
to our customers, our financial condition or results of operations could be
negatively impacted.
COMMERCIAL COMMITMENTS
We sometimes enter into minimum quantity or other non-cancelable commitments. If
sales volumes fluctuate significantly, our obligation to meet commitments could
adversely affect our results of operations or financial condition.
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INTELLECTUAL PROPERTY RIGHTS
Many of our competitors, such as telecommunications and computer equipment
manufacturers, have large intellectual property portfolios, including patents
that may cover technologies that are relevant to our business. In addition, many
smaller companies, universities, and individual inventors have obtained or
applied for patents in areas of technology that may relate to our business. The
industry is moving towards aggressive assertion, licensing, and litigation of
patents and other intellectual property rights.
In the course of our business, we frequently receive claims of infringement or
otherwise become aware of potentially relevant patents or other intellectual
property rights held by other parties. We evaluate the validity and
applicability of these intellectual property rights, and determine in each case
whether we must negotiate licenses or cross-licenses to incorporate or use the
proprietary technologies, protocols, or specifications in our products. If we
are unable to obtain and maintain licenses on favorable terms for intellectual
property rights required for the manufacture, sale, and use of our products,
particularly those which must comply with industry standard protocols and
specifications to be commercially viable, our business, results of operations,
or financial condition could be adversely impacted.
In addition to disputes relating to the validity or alleged infringement of
other parties' rights, we may become involved in disputes relating to our
assertion of our intellectual property rights. Whether we are defending the
assertion of intellectual property rights against us or asserting our
intellectual property rights against others, intellectual property litigation
can be complex, costly, protracted, and highly disruptive to business operations
by diverting the attention and energies of management and key technical
personnel. Further, plaintiffs in intellectual property cases often seek
injunctive relief and the measures of damages in intellectual property
litigation are complex and often subjective or uncertain. Thus, the existence of
or any adverse determinations in this litigation could subject us to significant
liabilities and costs. In addition, if we are the alleged infringer, we could be
required to seek licenses from others or be prevented from manufacturing or
selling our products, which could cause disruptions to our operations or the
markets in which we compete. If we are asserting our intellectual property
rights, we could be prevented from stopping others from manufacturing or selling
competitive products. Any one of these factors could adversely affect our
results of operations or financial condition.
PROPOSED CHANGES IN ACCOUNTING FOR BUSINESS COMBINATIONS AND INTANGIBLE ASSETS
The Financial Accounting Standards Board (FASB) began deliberation of revisions
to the rules for business combinations and intangible assets in 1996. Some of
these deliberations have included accounting rule-making bodies from other
nations as the financial communities attempt to develop global consistency where
possible. Business combination rules govern the accounting for mergers and
acquisitions used in either a purchase or a pooling-of-interests combination.
Business combinations may generate intangible assets (including goodwill) which
represent the excess purchase price of an acquired enterprise over net
identifiable assets.
Tentative conclusions of the FASB will prohibit the use of pooling-of-interests
and will establish new accounting standards and financial presentation for
intangible assets. The FASB expects to issue a final standard by the end of
calendar year 2000. Changes to the current accounting rules for business
combinations and intangible assets will not preclude mergers or acquisitions but
may increase the earnings dilution associated with future transactions. In
addition, if pooling-of-interests accounting is no longer available, we may use
cash more often than our common stock to pay for acquisitions of other
companies.
During this period of deliberation and rule change, the Securities and Exchange
Commission has heightened its review of transactions intended to qualify for
pooling-of-interests accounting, transactions in which a large percentage of the
purchase price is associated with purchased in-process technology, and
restructuring and impairment charges recorded at the time of a business
combination. If the Commission issues new guidance or interpretation of existing
rules as proposed, our future results may be adversely impacted.
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FLUCTUATIONS IN QUARTERLY RESULTS
Our quarterly operating results are difficult to predict and may fluctuate
significantly. A wide variety of factors can cause these fluctuations,
including:
- seasonality with respect to the volume and timing of orders;
- the introduction and acceptance of new products and
technologies;
- price competition;
- general conditions and trends in the networking industry and
technology sector;
- disruption in international markets;
- general economic conditions;
- industry consolidation, acquisitions, or litigation;
- disruption in the distribution channel; and
- timing of orders received within the quarter.
In recent years, as the consumer mix of our business has grown, our third fiscal
quarter has been a seasonally weaker period characterized by sequentially lower
sales. We expect this pattern to continue in fiscal 2000. These factors, and
accompanying fluctuations in periodic operating results, could have a
significant adverse impact on the market price of our common stock.
COMPETITION FOR KEY PERSONNEL
Our success depends to a significant extent upon a number of key employees and
management. Over the last six months, we have experienced an increasing rate of
employee turnover. The loss of the services of key employees could adversely
affect our business, operating results, or financial condition.
Recruiting and retaining skilled personnel, including engineers, is highly
competitive. If we cannot successfully recruit and retain skilled personnel, our
ability to compete may be adversely affected. In addition, we must carefully
balance the growth of our employees commensurate with our anticipated sales
growth. If our sales growth or attrition levels vary significantly, our results
of operations or financial condition could be adversely affected. Further,
3Com's common stock price has been, and may continue to be, extremely volatile.
When the 3Com common stock price is less than the exercise price of stock
options granted to employees, turnover is likely to increase, which could
adversely affect our results of operations or financial condition.
YEAR 2000 READINESS DISCLOSURE
As is true for most companies, 3Com faces a risk from the Year 2000 issue.
3Com's operations could be adversely affected if systems do not correctly
recognize date information when the year changes to 2000. The Year 2000 issue
affects us at the end of the calendar year 1999. 3Com faces risk primarily in
the following areas:
- systems used by 3Com to run our business including information
systems, equipment and facilities
- systems used by 3Com's suppliers
- potential warranty or other claims from 3Com customers
- potential for reduced spending by other companies on
networking solutions as a result of significant information
systems spending on Year 2000 remediation
3Com continues to evaluate and mitigate our exposure in these areas where
appropriate. We intend for some of our disclosures and announcements concerning
our products and Year 2000 programs, including those in this report on Form
10-K, to constitute "Year 2000 Readiness Disclosures" as defined in the recently
enacted Year 2000 Information and Readiness Disclosure Act. We cannot be certain
that Year 2000 issues will not have a material adverse impact on us.
22
<PAGE>
RISK SUMMARY. Based on currently available information, management believes that
Year 2000-related disruptions affecting the above-noted components of business
operations, or in products sold to customers, will not have a significant
adverse impact on our operational results or financial condition.
As with many companies, 3Com is dependent on third parties, both public and
commercial, for provision of power, telecommunications, water, transportation,
and key raw materials, and on the accuracy of Year 2000 readiness statements
made by those parties to us. Although contingency plans will be in place to
address interruptions in the availability to 3Com of goods and services, failure
to ensure Year 2000 readiness by a supplier, customer, or other third party may
have a significant adverse impact on our operational results or financial
condition.
STATE OF READINESS AND RISKS. 3Com has identified four key exposure areas within
3Com with respect to the Year 2000 issue, namely: key transaction processing
applications, equipment and facilities, 3Com products, and key suppliers.
KEY TRANSACTION PROCESSING APPLICATIONS. Key transaction processing applications
include those used to run 3Com's business, such as finance, manufacturing, order
processing, and distribution. We have completed our evaluation of these
applications for Year 2000 readiness and have been fixing or replacing systems,
where necessary. We have successfully completed integration testing of all of
our applications as of the end of August 1999. If we identify significant new
non-compliance issues or encounter unexpected difficulties in areas previously
considered to be Year 2000 ready, our ability to conduct our business or record
transactions could be disrupted, which could adversely affect our results of
operations or financial condition.
EQUIPMENT AND FACILITIES. 3Com is evaluating Year 2000 readiness of its
equipment and facilities. As of the end of September 1999, we have completed
contacting our key suppliers to ascertain Year 2000 compliance of our critical
equipment. If we are delayed in upgrading or replacing any non-Year 2000 ready
equipment, or if we encounter any unexpected difficulties in areas previously
considered to be Year 2000 ready, our design, production, and shipping
capabilities could be disrupted, which could adversely affect our results of
operations or financial condition.
3Com is also assessing the Year 2000 readiness of our owned and leased
facilities worldwide. We are giving priority to critical facilities that house
large numbers of employees or significant operations. We have completed these
assessment activities as of the end of August 1999. We have also completed
remediation efforts identified in our assessment activities. Any unexpected
problems with respect to these facilities could adversely affect our results of
operations or financial condition.
PRODUCTS. 3Com has conducted an extensive evaluation of our currently available
and installed base of products. We believe that the products on our current
price list are Year 2000 ready. We have identified some obsolete products that
are not Year 2000 ready. While we still support some of these obsolete products,
all can be upgraded or replaced with a 3Com Year 2000 ready product. We cannot
be certain that older releases of our products will be Year 2000 ready with
customers' systems or within existing networks. To assist our customers in
evaluating the Year 2000 readiness of 3Com's products, we have developed a list
that indicates the capability of our products. We have published the list on our
website (www.3Com.com) and periodically update it as we complete our assessment
of additional products. If any of our products do not operate properly in the
Year 2000, we could have increased warranty costs, customer satisfaction issues,
litigation, or other material costs and liabilities, which could adversely
affect our results of operations or financial condition.
KEY SUPPLIERS. 3Com has contacted our critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are Year 2000 ready. Confirmation of the continued Year
2000 readiness of these key suppliers will continue throughout the remainder of
1999. If key suppliers fail to adequately address the Year 2000 issue for the
products or services they provide to 3Com, critical materials, products, and
services may not be delivered in a timely manner, which could adversely affect
our results of operations or financial condition.
23
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MOST REASONABLY LIKELY WORST-CASE SCENARIO. We believe that our most reasonably
likely worst-case Year 2000 scenario would relate to problems with the systems
and services of third parties rather than with 3Com's internal systems or
products. 3Com's operations are conducted in a variety of domestic and
international facilities. We believe the risks are greatest with infrastructure
(e.g., electricity, water, and sewer service), telecommunications,
transportation and distribution channels, and critical suppliers of materials
and services. Each location relies on local private and governmental suppliers
for utilities, telephone, and other necessary services and supplies.
3Com cannot identify all possible disruption scenarios. We are preparing
contingency plans specifying our actions if failures occur in key internal
systems and/or critical third party systems and services. The process includes
identifying and prioritizing risks, assessing the business impact of those
risks, evaluating risk mitigation alternatives, and preparing written
contingency plans for those failures with the greatest business risk to 3Com.
Contingency plans for critical business operations are expected to be in place
by mid-November 1999. Throughout the remainder of the calendar year these plans
will be validated and modified as needed, and as we learn more about the
preparations and potential exposure of third parties to Year 2000 disruptions.
COSTS TO ADDRESS YEAR 2000 ISSUES. We currently estimate that the total cost of
our Year 2000 related programs will range between approximately $22 million and
$31 million. Through August 27, 1999, we have spent $8.6 million on the program.
In order to adequately prepare ourselves for the Year 2000 changeover, we expect
to spend approximately $2.5 million between August 28, 1999 and January 1, 2000,
primarily for computer equipment, consultant and contractor fees, and costs to
ramp up our customer service organization for the expected increase in support
calls during the Year 2000 transition. Excluding contingencies, we expect to
spend approximately $5.2 million in calendar 2000, primarily for increased
staffing in our customer service organization to address potential Year 2000
issues, premium pay and bonuses for employees working during the Year 2000 date
rollover period, and remediation of non-critical applications, equipment and
facilities, and products and services. All expected costs are based on our
current evaluation of the Year 2000 programs and may change as the program
progresses.
Our estimate includes amounts for contingencies of approximately $6 million to
$15 million related to the following items:
- hardware and software upgrades or replacements related to
desktop systems and telephone equipment
- consultant and contractor fees to assist in remediation
efforts
- further increased staffing in our customer service area to
address the expected increase in support calls during the Year
2000 transition
- a contingency for potential disruption in supplier product or
service delivery or in manufacturing operations
- a contingency for potential product upgrades or replacements
- a contingency for potential unexpected costs associated with
replacing or repairing consumer products previously considered
to be Year 2000 ready
We have not included in the total cost estimate any costs associated with
potential Year 2000 litigation exposure since these costs are not estimable.
We have adequate funds to pay for the expected costs of Year 2000 programs. As
of August 27, 1999, we have not deferred any significant internal information
technology projects due to our Year 2000 efforts.
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<PAGE>
SALES IMPACT. Year 2000 readiness is an issue for virtually all businesses whose
computer systems and applications may require significant hardware and software
upgrades or modifications. Companies owning and operating such systems may plan
to devote a substantial portion of their information systems' spending to fund
such upgrades and modifications and divert spending away from networking
solutions. In addition, companies may defer spending on networking solutions
while they test and ensure the stability of their current network
configurations. Such changes in customers' spending patterns could adversely
affect our sales, operating results, or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents and short-term investments at August 27, 1999 were $1.7
billion, consistent with the balance of $1.7 billion at May 28, 1999.
For the quarter ended August 27, 1999, net cash generated from operating
activities was $442.6 million. Accounts receivable at August 27, 1999 decreased
$168.5 million from May 28, 1999 to $757.1 million. Days sales outstanding in
receivables decreased to 49 days at August 27, 1999, compared to 59 days at May
28, 1999 primarily due to a lower percentage of sales in the last month of the
August quarter compared to the last month of the May quarter. Inventory levels
at August 27, 1999 decreased $3.7 million from May 28, 1999 to $350.5 million.
Annualized inventory turnover was 8.3 turns for the quarter ended August 27,
1999, compared to 8.2 turns for the quarter ended May 28, 1999.
As part of our 3Com Ventures initiative, we selectively make strategic
investments in the equity securities of privately-held companies. For those
securities which have become publicly-traded, we have marked the cost basis to
market. During the quarter ended August 27, 1999, 3Com's investments in the
equity securities of privately-held and publicly-traded companies increased by
$423.6 million, primarily due to market value appreciation of our investments in
publicly-traded companies.
During the quarter ended August 27, 1999, 3Com made $39.2 million in capital
expenditures. Major capital expenditures included upgrades and expansion of our
facilities and purchases and upgrades of software and computer equipment.
Additionally, in the first quarter of fiscal 2000, 3Com sold one building in the
Chicago area and machinery and equipment for total net proceeds of $6.8 million.
As of August 27, 1999, we had approximately $11.6 million in capital expenditure
commitments outstanding primarily associated with the expansion of our
facilities and purchases and upgrades of software and computer equipment. In
addition, we have commitments related to operating lease arrangements in the
U.S., under which we have an option to purchase the properties for an aggregate
of $322.2 million, or arrange for the sale of the properties to a third party.
If the properties are sold to a third party at less than the option price, 3Com
retains an obligation for the shortfall, subject to certain provisions of the
lease.
In September 1999, the board of directors authorized the repurchase of an
additional 10 million shares of 3Com's common stock, bringing the total number
of authorized shares remaining for repurchase to 14.8 million shares. The share
authorization will be used for purchases made in the open market from time to
time or the sale of put warrants on 3Com's common stock. During the first
quarter of fiscal 2000, we repurchased 15.4 million shares of common stock at a
total purchase price of $391.7 million. During the first quarter of fiscal 2000,
we received net cash of $23.4 million from the sale of our common stock to
employees through our employee stock purchase and option plans.
3Com has a $100 million revolving bank credit agreement, which expires December
20, 1999. Payment of cash dividends is permitted under the credit agreement,
subject to certain limitations based on our net income levels. We have not paid
and do not anticipate we will pay cash dividends on our common stock. The credit
agreement requires us to maintain specified financial covenants. As of August
27, 1999, there were no outstanding borrowings under the credit agreement, and
we were in compliance with all required covenants.
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<PAGE>
During the quarter ended August 27, 1999, we repaid $12 million of borrowings
under the 7.52% Unsecured Senior Notes agreement. As of August 27, 1999, $24
million of this debt remained outstanding, of which $12 million is classified as
current.
During the first quarter of fiscal 2000, we recorded a tax benefit on stock
option transactions of $14.6 million. During the same quarter a year ago, we
recorded a similar benefit totaling $2.7 million.
Based on current plans and business conditions, we believe that our existing
cash and equivalents, short-term investments, and cash generated from operations
will be sufficient to satisfy anticipated cash requirements for at least the
next twelve months.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software if
certain criteria are met. 3Com adopted SOP 98-1 for our fiscal year ending June
2, 2000. The adoption of SOP 98-1 did not have a significant impact on our
financial results for the quarter ended August 27, 1999.
In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities"
and SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133." These
statements require companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. These
statements will be effective for 3Com's fiscal year ending May 31, 2002. We
believe that the adoption of these statements will not have a significant impact
on our financial results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
3Com holds a small portfolio of marketable-equity traded securities that are
subject to market price volatility. Equity security price fluctuations of plus
or minus 15 percent would have a $76.3 million impact on the value of these
securities in the first quarter of fiscal 2000.
For interest rate sensitivity and foreign currency exchange risk, reference is
made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market
Risk, in our Annual Report on Form 10-K for the year ended May 28, 1999.
26
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to lawsuits in the normal course of our business. Litigation
in general, and intellectual property and securities litigation in
particular, can be expensive and disruptive to normal business operations.
Moreover, the results of complex legal proceedings are difficult to predict.
We believe that we have defenses in each of the cases set forth below and are
vigorously contesting each of these matters. An unfavorable resolution of one
or more of the following lawsuits could adversely affect our business,
results of operations, or financial condition.
SECURITIES LITIGATION
On March 24 and May 5, 1997, securities class action lawsuits, captioned
HIRSCH V. 3COM CORPORATION, ET AL., Civil Action No. CV764977 (HIRSCH), and
KRAVITZ V. 3COM CORPORATION, ET AL., Civil Action No. CV765962 (KRAVITZ),
respectively, were filed against 3Com and certain of its officers and
directors in the California Superior Court, Santa Clara County. The
complaints allege violations of Sections 25400 and 25500 of the California
Corporations Code and seek unspecified damages on behalf of a class of
purchasers of 3Com common stock during the period from September 24, 1996
through February 10, 1997. The actions are in discovery. No trial date has
been set.
On February 10, 1998, a securities class action, captioned EUREDJIAN V. 3COM
CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN), was filed
against 3Com and several of its present and former officers and directors in
United States District Court for the Northern District of California
asserting the same class period and factual allegations as the HIRSCH and
KRAVITZ actions. The complaint alleges violations of the federal securities
laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and seeks unspecified damages. The plaintiffs have filed an amended
complaint. 3Com has filed an answer to the amended complaint. No trial date
has been set.
In December 1997, a securities class action, captioned REIVER V. 3COM
CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed in the
United States District Court for the Northern District of California. Several
similar actions have been consolidated into this action, including FLORIDA
STATE BOARD OF ADMINISTRATION AND TEACHERS RETIREMENT SYSTEM OF LOUISIANA V.
3COM CORPORATION, ET AL., Civil Action No. C-98-1355. On August 17, 1998, the
plaintiffs filed a consolidated amended complaint which alleges violations of
the federal securities laws, specifically Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934, and which seeks unspecified damages on
behalf of a purported class of purchasers of 3Com common stock during the
period from April 23, 1997 through November 5, 1997. In July 1999, the court
dismissed the complaint and granted the plaintiffs the right to file an
amended complaint. Plaintiffs have filed an amended complaint and defendants
have filed a motion to dismiss.
In October 1998, a securities class action lawsuit, captioned ADLER V. 3COM
CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed against
3Com and certain of its officers and directors in the California Superior
Court, Santa Clara County, asserting the same class period and factual
allegations as the REIVER action. The complaint alleges violations of
Sections 25400 and 25500 of the California Corporations Code and seeks
unspecified damages. The action is in discovery. No trial date has been set.
In October 1998, two shareholder derivative actions purportedly on behalf of
3Com, captioned SHAEV V. BARKSDALE, ET AL., Civil Action No. 16721-NC, and
BLUM V. BARKSDALE, ET AL., Civil Action No. 16733-NC, were filed in Delaware
Chancery Court. The complaints allege that 3Com's directors breached their
fiduciary duties to 3Com through the issuance of and disclosures concerning
director stock options. 3Com is named solely as a nominal defendant, against
whom the plaintiffs seek no recovery. 3Com and the individual defendants have
filed a motion to dismiss these actions.
27
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On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM
CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (GAYLINN), was filed
against 3Com and several of its present and former officers and directors in
United States District Court for the Northern District of California. Several
similar actions have been consolidated into the GAYLINN action. On September
10, 1999, the plaintiffs filed a consolidated complaint which alleges
violations of the federal securities laws, specifically Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages
on behalf of a purported class of purchasers of 3Com common stock during the
period from September 22, 1998 through March 2, 1999. 3Com has not responded
to the complaint.
INTELLECTUAL PROPERTY LITIGATION
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District
Court for the Western District of New York. The case is now captioned: Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm
Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The
complaint alleges willful infringement of a United States patent relating to
computerized interpretation of handwriting. The complaint further prays for
unspecified damages and injunctive relief. Xerox has asserted that Graffiti
software and certain products of Palm Computing, Inc. infringe the patent. On
June 25, 1999, the Court stayed the action pending reexamination of the
patent by the U.S. Patent and Trademark Office.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation (11)
3.2 Certificate of Correction Filed to Correct a
Certain Error in the Certificate of
Incorporation (11)
3.3 Certificate of Merger (11)
3.4 Corrected Certificate of Merger
3.5 Bylaws of 3Com Corporation, As Amended (12)
4.1 Amended and Restated Rights Agreement dated
December 31, 1994 (Exhibit 10.27 to Form 10-Q) (4)
4.2 Amended and Restated Senior Notes Agreement
between U.S. Robotics Corporation, Metropolitan
Life Insurance Company, The Northwestern Mutual
Life Insurance Company, and Metropolitan Property
and Casualty Insurance Company (5)
28
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4.3 Amendment to amended and restated note agreements
between 3Com Corporation, Metropolitan Life
Insurance Company, The Northwestern Mutual Life
Insurance Company, and Metropolitan Property and
Casualty Insurance Company (13)
4.4 Second amendment to amended and restated note
agreements between 3Com Corporation, Metropolitan
Life Insurance Company, The Northwestern Mutual
Life Insurance Company, and Metropolitan Property
and Casualty Insurance Company
10.1 1983 Stock Option Plan, as amended*
10.2 Amended and Restated Incentive Stock Option
Plan (2)*
10.3 License Agreement dated March 19, 1981 (1)
10.4 Second Amended and Restated 1984 Employee Stock
Purchase Plan (Exhibit 10.5 to Form 10-Q) (6)*
10.5 3Com Corporation Director Stock Option Plan, as
amended (Exhibit 19.3 to Form 10-Q) (3)*
10.6 Amended 3Com Corporation Director Stock Option
Plan (Exhibit 10.8 to Form 10-Q) (6)*
10.7 3Com Corporation Restricted Stock Plan, as amended
(Exhibit 10.17 to Form 10-Q) (6)*
10.8 1994 Stock Option Plan, as amended*
10.9 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) (8)
10.10 Purchase Agreement between BNP Leasing
Corporation, and 3Com Corporation, effective as of
November 20, 1996 (Exhibit 10.38 to Form 10-Q) (8)
10.11 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) (7)
10.12 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) (10)
10.13 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) (10)
10.14 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) (10)
10.15 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 (9)
10.16 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 (11)
10.17 Purchase Agreement between BNP Leasing Corporation
and 3Com Corporation, effective as of July 25,
1997 for the Great America Phase III (PAL) site
(11)
10.18 Lease Agreement between BNP Leasing Corporation,
as Landlord, and 3Com Corporation, as Tenant,
effective as of July 29, 1997 for the Marlborough
site (11)
10.19 Purchase agreement between BNP Leasing Corporation
and 3Com Corporation, effective as of July 29,
1997 for the Marlborough site (11)
29
<PAGE>
10.20 Lease Agreement between BNP Leasing Corporation,
as Landlord, and 3Com Corporation, as Tenant,
effective as of August 11, 1997 for the Rolling
Meadows site (11)
10.21 Purchase Agreement between BNP Leasing
Corporation, and 3Com Corporation, effective as of
August 11, 1997 for the Rolling Meadows site (11)
10.22 First Amendment to Credit Agreement (11)
27.1 Financial Data Schedule
- -------------------------------------------------------------------------------
* Indicates a management contract or compensatory
plan.
(1) Incorporated by reference to the corresponding
Exhibit previously filed as an Exhibit to
Registrant's Registration Statement on Form S-1
filed on 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-Q filed on January
10, 1992 (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 on January
13, 1995 (File No. 0-12867)
(5) Incorporated by reference to the Exhibit
identified in parentheses previously filed as an
Exhibit to Registrant's Form 10-Q filed on May 16,
1995 (File No. 0-19550)
(6) 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)
(7) 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 October 11, 1996 (File No.
333-13993)
(8) 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)
(9) 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)
(10) 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)
(11) 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)
(12) Incorporated by reference to the Exhibit
identified in parentheses previously filed as an
Exhibit to Registrant's Form 10-Q filed on January
11, 1999 (File No. 0-12867)
(13) Incorporated by reference to the Exhibit
identified in parentheses previously filed as an
Exhibit to Registrant's Form 10-K filed on
August 17, 1999 (File No. 0-12867)
(b) Reports on Form 8-K
None.
30
<PAGE>
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: October 8, 1999 By: /s/ Christopher B. Paisley
------------------------- --------------------------------------
Christopher B. Paisley
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
31
<PAGE>
EXHIBIT A
CERTIFICATE OF MERGER
OF
3COM CORPORATION
(A CALIFORNIA CORPORATION)
INTO
3COM (DELAWARE) CORPORATION.
(A DELAWARE CORPORATION)
(UNDER SECTION 252 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE)
The undersigned corporation, a Delaware corporation, does
hereby certify:
First: That the name and state of incorporation of each of the
constituent corporations of the merger is as follows:
Name State of Incorporation
---------------------------- -------------------------------
3Com Corporation California
3Com (Delaware) Corporation Delaware
Second: That an Agreement and Plan of Merger and Reincorporation dated
as of March 14, 1997 by and between 3Com Corporation and 3Com (Delaware)
Corporation has been approved, adopted, certified, executed and acknowledged
by each of the constituent corporations in accordance with the provisions of
Section 252 of the General Corporation Law of the State of Delaware.
Third: That the name of the surviving corporation of the merger is 3Com
(Delaware) Corporation, a Delaware corporation (the "Surviving Corporation").
Fourth: That the Certificate of Incorporation of 3Com (Delaware)
Corporation in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation, and that the
Certificate of Incorporation is hereby amended to read in full as follows:
"FIRST: The name of the Corporation is 3Com Corporation (hereinafter
sometimes referred to as the "Corporation").
1
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SECOND: The address of the registered office of the Corporation
in the State of Delaware is 1013 Centre Road, in the City of Wilmington,
County of Newcastle. The name of the registered agent at that address is
Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of Delaware.
FOURTH:
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is One Billion Shares
(1,000,000,000) consisting of:
1. Nine Hundred Ninety Million (990,000,000) shares of
Common Stock, par value one cent ($.01) per share (the "Common Stock"); and
2. Ten Million (10,000,000) shares of Preferred Stock,
par value one cent ($.01) per share (the "Preferred Stock").
B. The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance of shares of
Preferred Stock in one or more series and, by filing a certificate
pursuant to the applicable law of the State of Delaware, from time to
time to determine the designation of any series, to fix the number of
shares of any series, to determine or alter the rights, preferences,
privileges and powers granted to any wholly unissued series of Preferred
Stock and any qualifications, limitations or restrictions imposed
thereon, and, within the limits of restrictions stated in any resolution
or resolutions of the Board of Directors originally fixing the number of
shares constituting any series, to increase or decrease (but not below
the number of shares of any such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of that
series.
FIFTH: The following provisions are inserted for the management of
the business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:
A. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors. In addition to the
powers and authority expressly conferred upon them by statute or by this
Certificate of Incorporation or the Bylaws of the Corporation, the
directors are hereby empowered to exercise all such powers and do all
such acts and things as may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
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C. Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual
or special meeting of stockholders of the Corporation and may not be
effected by any consent in writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be
called only by either the Board of Directors, the Chairman of the Board
of Directors or the President.
SIXTH:
A. The number of directors shall initially be eleven (11) and
thereafter shall be fixed from time to time exclusively by the Board of
Directors pursuant to a resolution adopted by a majority of the total
number of authorized directors (whether or not there exist any vacancies
in previously authorized directorships at the time any such resolution
is presented to the Board of Directors for adoption). As of the
effective time of the merger of 3Com Corporation, a California
corporation, with and into the Corporation (the "Effective Time") the
directors shall be divided into two classes with the term of office of
the first class to expire at the first annual meeting of the
stockholders following the Effective Time and the term of office of the
second class to expire at the second annual meeting of stockholders held
following the Effective Time, and thereafter for each such term to
expire at each second succeeding annual meeting of stockholders after
such election. All directors shall hold office until the expiration of
the term for which elected, and until their respective successors are
elected, except in the case of the death, resignation, or removal of any
director.
B. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created directorships resulting
from any increase in the authorized number of directors or any vacancies
in the Board of Directors resulting from death, resignation or other
cause (including removal from office by a vote of the stockholders) may
be filled only by a majority vote of the directors then in office,
though less than a quorum, or by a sole remaining director, and
directors so chosen shall hold office for a term expiring at the next
annual meeting of stockholders at which the term of office of the class
to which they have been elected expires, and until their respective
successors are elected, except in the case of the death, resignation, or
removal of any director.
C. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any duly called annual or
special meeting, but only for cause and only by the affirmative vote of
the holders of at least a majority of the voting power of all of the
then outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors, voting together as a single
class.
3
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SEVENTH: The Board of Directors is expressly empowered to adopt, amend
or repeal Bylaws of the Corporation. The stockholders shall also have
power to adopt, amend or repeal the Bylaws of the Corporation. Any
adoption, amendment or repeal of Bylaws of the Corporation by the
stockholders shall require, in addition to any vote of the holders of
any class or series of stock of the Corporation required by law or by
this Certificate of Incorporation, the affirmative vote of the holders
of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors,
voting together as a single class.
EIGHTH: A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involved intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit.
If the General Corporation Law of the State of Delaware is hereafter
amended to authorize the further elimination or limitation of the
liability of a director, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
Any repeal or modification of the foregoing provisions of this Article
EIGHTH by the stockholders of the Corporation shall not adversely affect
any right or protection of a director of the Corporation existing at the
time of such repeal or modification.
NINTH: The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred
upon stockholders are granted subject to this reservation; PROVIDED,
HOWEVER, that, notwithstanding any other provision of this Certificate
of Incorporation or any provision of law which might otherwise permit a
lesser vote or no vote, but in addition to any vote of the holders of
any class or series of the stock of this Corporation required by law or
by this Certificate of Incorporation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the
voting power of all of the then outstanding shares of the capital stock
of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to amend
or repeal this Article NINTH, Article FIFTH, Article SIXTH, Article
SEVENTH or Article EIGHTH."
Fifth: That the Bylaws, as amended, of 3Com (Delaware) Corporation as in
effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Corporation.
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Sixth: That the directors (including their respective denomination as
Class I or Class II directors) and officers of 3Com Corporation immediately
prior to the Effective Time shall be the initial directors and officers of
the Surviving Corporation, until their respective successors are duly elected
or appointed.
Seventh: That the executed Agreement and Plan of Merger and
Reincorporation is on file at the principal place of business of the
Surviving Corporation. The address of said principal place of business is
5400 Bayfront Plaza, Santa Clara, California 95052.
Eighth: That a copy of the Agreement and Plan of Merger and
Reincorporation will be furnished by the Surviving Corporation upon request
and without charge to any stockholder of any constituent corporation.
Ninth: The authorized capital Stock of 3Com Corporation is 400,000,000
shares of Common Stock, $0.01 par value, and 3,000,000 shares of Preferred
Stock, without par value.
Tenth: That this Certificate of Merger shall be effective on June 12,
1997 at 5:00 p.m. (Eastern Time). IN WITNESS WHEREOF, the undersigned has
caused this Certificate to be executed by its President and attested by its
Secretary this 11th day of June, 1997.
3COM (DELAWARE) CORPORATION
(a Delaware corporation)
By: Mark D. Michael
----------------------------
Mark D. Michael, President
Dated: June 11, 1997
ATTESTED TO BY:
Mark D. Michael
- ------------------------------
Mark D. Michael, Secretary
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<PAGE>
CORRECTED CERTIFICATE OF MERGER
OF
3COM CORPORATION
The undersigned hereby certifies:
1. The name of the corporation is 3Com Corporation.
2. The corporation was incorporated in the State of Delaware on March 10,
1997.
3. The Certificate of Merger which was filed in the Office of the Delaware
Secretary of State on June 12, 1997 requires correction as permitted by
Section 103 of the Delaware General Corporation Law, in that the restated
Certificate of Incorporation as set forth therein failed to include Articles
SECOND, THIRD, and FIFTH through NINTH.
4. The document in corrected form is attached hereto as Exhibit A.
IN WITNESS WHEREOF, the undersigned has executed this Corrected Certificate
of Merger this 24th day of March, 1999.
/s/ Mark D. Michael
------------------------------
Mark D. Michael, Secretary
<PAGE>
STATE OF DELAWARE
PAGE 1
OFFICE OF THE SECRETARY OF STATE
------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF CORRECTED
CERTIFICATE OF MERGER OF "3COM CORPORATION", FILED IN THIS OFFICE ON THE
TWENTY-SIXTH DAY OF MARCH, A.D. 1999, AT 9 O'CLOCK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
[SEAL] /s/ Edward J. Freel
------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
AUTHENTICATION: 9654630
DATE: 03-26-99
<PAGE>
================================================================================
3COM CORPORATION, as successor to
U.S. Robotics Corporation
---------------------------------------
SECOND AMENDMENT TO AMENDED AND RESTATED NOTE AGREEMENTS
Dated as of July 31, 1999
to
Amended and Restated Note Agreements
Dated as of March 1, 1995
---------------------------------------
Re: $60,000,000 7.52% Senior Notes
Due June 30, 2001
================================================================================
<PAGE>
SECOND AMENDMENT TO AMENDED AND RESTATED NOTE AGREEMENTS
THIS SECOND AMENDMENT TO AMENDED AND RESTATED NOTE AGREEMENTS dated as of
July 31, 1999 (the or this "AMENDMENT") to the Amended and Restated Note
Agreements dated as of March 1, 1995 (the "NOTE AGREEMENT") is among 3Com
Corporation, a Delaware corporation (the "COMPANY"), The Northwestern Mutual
Life Insurance Company ("NORTHWESTERN MUTUAL"), Metropolitan Life Insurance
Company ("METLIFE") and Metropolitan Property and Casualty Insurance Company
("MET PROPERTY") (Northwestern Mutual, MetLife and Met Property are hereinafter
collectively referred to as the "NOTEHOLDERS").
RECITALS:
WHEREAS, U.S. Robotics Corporation, a Delaware corporation ("USR") entered
into those separate Amended and Restated Note Agreements, each dated as of March
1, 1995 (the "NOTE AGREEMENTS"), with each of the Purchasers, respectively,
pursuant to which USR issued to such Purchasers its Amended and Restated 7.52%
Senior Notes, due June 30, 2001, in the aggregate principal amount of
$60,000,000 (the "NOTES"); and
WHEREAS, the Company became the successor by merger to USR on June 12,
1997; and
WHEREAS, pursuant to an Assignment and Assumption Agreement (the
"ASSUMPTION AGREEMENT") dated as of June 12, 1997, the parties effected the
assignment by USR to the Company and the assumption by the Company of all the
right, title, obligations and interest of USR in, to and under the Note
Agreements and the Notes; and
WHEREAS, the Company and the Noteholders executed the Amendment (the "FIRST
AMENDMENT") to Amended and Restated Note Agreements dated as of May 28, 1999,
which amended Section 5.10(a) of the Note Agreements (the Note Agreements, as
amended by the First Amendment, is hereinafter referred to as the "AMENDED NOTE
AGREEMENTS"); and
WHEREAS, the Company and the Noteholders now wish to further amend the Note
Agreements as hereinafter set forth; and
WHEREAS, capitalized terms used herein which are not defined herein shall
have the meanings given to them in the Amended Note Agreements; and
NOW, THEREFORE, upon the full and complete satisfaction of the conditions
precedent to the effectiveness of the Amendment set forth in Section 3.1 hereof,
and in
2
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consideration of good and valuable consideration the receipt and sufficiency of
which is hereby acknowledged, the Company and the Noteholders do hereby agree
as follows:
SECTION 1. AMENDMENTS.
1.1. Section 5.6 of the Amended Note Agreements shall be and is hereby
amended in its entirety to read as follows:
"The Company will at all times keep and maintain Consolidated
Tangible Net Worth at an amount not less than the sum of (a)
$1,713,559,000 PLUS (b) the aggregate of 50% of positive
Consolidated Net Income computed on a cumulative basis from and
after March 1, 1999 to the end of the most recently completed
fiscal quarter (PROVIDED that for purposes of the foregoing
calculation, Consolidated Net Income shall be deemed to be zero
for any period for which Consolidated Net Income is less than or
equal to zero) LESS (c) (without duplication) 100% of
restructuring and acquisition charges related to Acquisitions
permitted hereunder (if they are expensed in the same fiscal
quarter as such Acquisition is completed) on and after February
26, 1999."
1.2. Section 5.7 of the Amended Note Agreements shall be and is hereby
amended in its entirety to read as follows:
"INTEREST COVERAGE RATIO AND QUICK RATIO. The Company will at
all times keep and maintain (a) the ratio of EBIT to Interest
Expense determined at the end of each fiscal quarter for the
period of the most recently completed four consecutive fiscal
quarters at not less than 3.25 to 1.0 and (b) the ratio of Quick
Assets of the Company and its Subsidiaries (determined on a
consolidated basis) to the sum of Current Liabilities of the
Company and its Subsidiaries (determined on a consolidated
basis) at not less than 1.00 to 1.00.
As used in Section 5.7(b):
"Current Liabilities" means all liabilities of the Company and its
Subsidiaries treated as current liabilities in accordance with GAAP,
including without limitation (a) all obligations payable on demand or
within one year after the date in which the determination is made and
(b) installment and
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<PAGE>
sinking fund payments required to be made within one year after
the date on which determination is made, but excluding all such
liabilities or obligations which are renewable or extendable at
the option of such entity to a date more than one year from the
date of determination.
"Long-Term Investments" means those investments described below
(to the extent that they are not classified as short term
investments in accordance with GAAP), provided that such
investments shall have maturities of not longer than two years,
and are rated not less than A- by Standard & Poor's Corporation or
less than A by Moody's Investors Service, Inc.:
(1) securities issued or fully guaranteed or fully insured
by the United States government or any agency thereof and backed
by the full faith and credit of the United States;
(2) certificates of deposit, time deposits, eurodollar time
deposits, repurchase agreements, or banker's acceptances that are
issued by either one of the 50 largest (in assets) banks in the
United States or by one of the 100 largest (in assets) banks in
the world; and
(3) municipal notes and bonds.
"Quick Assets" means the sum (without duplication of any item) of
unencumbered cash plus other unencumbered marketable securities
which are classified as short term investments according to GAAP,
plus the fair market value of unencumbered Long-Term Investments,
plus unencumbered current net accounts receivable. For purposes
of determining Quick Assets, assets will be deemed to be
"unencumbered" if they are actually unencumbered or if they are
encumbered only by Liens, from which, at the time of the
applicable determination of Quick Assets, the Company or its
Subsidiary, as applicable, is entitled to a release of such assets
upon no more than ninety days' notice, without any payment (other
than the payment of ministerial fees and costs), without
subjecting other assets to any Lien and without otherwise
satisfying any condition that is beyond such entity's control and
ability.
4
<PAGE>
1.3. Section 5.8, subclause (b), of the Amended Note Agreements shall be
and is hereby amended in its entirety to read as follows: "The Company will not
at any time permit the aggregate of (1) Consolidated Funded Debt and (2) all
obligations, contingent or otherwise, under Puts and Calls, to exceed an amount
equal to 35% of Consolidated Total Capitalization."
1.4. Section 5.10, subclause (a)(2), of the Amended Note Agreements shall
be and is hereby amended by deleting the following phrase therefrom: "any
shares of its capital stock of any class or".
1.5. Section 5.10, subclause (a)(3), of the Amended Note Agreements shall
be and is hereby amended by the addition of the following parenthetical phrase
after the word "stock": "(it being understood that, subject to Section 5.8(b)
hereof with respect to Puts and Calls, nothing in this Section 5.10 is intended
to prevent the purchase, redemption or retirement by the Company, directly or
indirectly, or through any Subsidiary, or through any Affiliate of the Company,
of its capital stock of any class, so long as no Default or Event of Default
hereunder shall be in existence hereunder or result therefrom)."
1.6. The penultimate parenthetical phrase in Section 5.10, subclause (a)
of the Amended Notes Agreements shall be and is hereby amended by the deletion
of the words "capital stock and" therefrom.
1.7. Section 5.11, subclause (d), of the Amended Note Agreements shall be
and is hereby amended by deleting the number "10%" and replacing it with the
number "15%".
1.8. Section 5.12, subclause (b)(2)(i), of the Amended Note Agreements
shall be and is hereby amended by deleting the number "10%" and replacing it
with the number "20%".
1.9. Section 8.1 of the Amended Note Agreement shall be and hereby is
amended by the addition of the following definitions:
"ACQUISITION" means any transaction or series of related
transactions for the purpose of or resulting directly or
indirectly, in (a) the acquisition of all or substantially all
of the assets of a Person, or of any business or division of a
Person, (b) the acquisition of in excess of 50% of the capital
stock, partnership interests, membership interests or equity of
any Person, or otherwise causing any Person to become a
Subsidiary, or (c) a merger or consolidation or any other
combination with another Person (other than a Person that is a
Subsidiary) provided that the Company or the Subsidiary is the
surviving entity.
5
<PAGE>
"PERMITTED INVESTMENTS" shall mean any investment by the
Company or any Subsidiary complying with the Cash Investment
Policy established and approved by the board of directors of the
Company on September 24, 1998, a copy of which is set forth on
Schedule IV hereto, or any other Cash Investment Policy which
has been provided to the Noteholders accompanied by a
certificate with respect thereto of a Responsible Officer that
said replacement policy has been established and approved by the
board of directors of the Company to replace such policy.
"PUTS AND CALLS" shall mean arrangements whereby (i) a
holder of the Company's capital stock may require the Company or
any of its Subsidiaries or Affiliates to purchase from such
holder the Company's stock at the option of such holder and/or
(ii) the Company or any of its Subsidiaries or Affiliates may
require a holder of its capital stock to sell such stock to the
Company or any of its Subsidiaries or Affiliates at its option.
1.10. The contents of Schedule IV to the Amended Note Agreements shall be
and hereby is replaced in its entirety by the contents of Schedule 1 hereto.
SECTION 2. REPRESENTATIONS AND WARRANTIES.
2.1. To induce the Noteholders to execute and deliver this Amendment, the
Company represents and warrants to the Noteholders (which representations shall
survive the execution and delivery of this Amendment) that:
(a) this Amendment has been duly authorized, executed and delivered
by it and this Amendment constitutes the legal, valid and binding
obligation, contract and agreement of the Company enforceable against it in
accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws or
equitable principles relating to or limiting creditors' rights generally;
(b) the Amended Note Agreements, as amended by this Amendment,
constitute the legal, valid and binding obligation, contract and agreement
of the Company enforceable against it in accordance with its terms, except
as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws or equitable principles relating to or limiting
creditors' rights generally;
6
<PAGE>
(c) the execution, delivery and performance by the Company of this
Amendment (i) have been duly authorized by all requisite corporate action
and, if required, shareholder action, (ii) do not require the consent or
approval of any governmental or regulatory body or agency, and (iii) will
not (A) violate (1) any provision of law, statute, rule or regulation or
its certificate of incorporation or bylaws, (2) any order of any court or
any rule, regulation or order of any other agency or government binding
upon it, (B) violate or require any consent under or with respect to any
provision of any material indenture, agreement or other instrument to which
it is a party or by which its properties or assets are or may be bound,
including, without limitation, the Credit Agreement dated as of December
20, 1996, as amended, among the Company, Bank of America National Trust and
Savings Association, and the other financial institutions party thereto
(the "Bank Agreement"), or (C) result in a breach or constitute (alone or
with due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument, including the Bank Agreement;
(d) as of the date hereof and after giving effect to this Amendment,
no Default or Event of Default (as defined in the Amended Note Agreements)
has occurred which is continuing;
(e) since February 26, 1999, there has been no material adverse
change in the financial condition, operations, business, properties or
prospects of the Company or any Subsidiary; and
(f) all the representations, warranties and covenants contained in
Section 3 of the Assumption Agreement are true and correct in all material
respects with the same force and effect as if made by the Company on and as
of the date hereof.
SECTION 3. CONDITIONS PRECEDENT; MISCELLANEOUS.
3.1. This Amendment shall not become effective until each and every one of
the following conditions shall have been satisfied:
(a) executed counterparts of this Amendment, duly executed by the
Company and the holders of at least 51%% of the outstanding principal of
the Notes, shall have been delivered to the Noteholders;
(b) the Noteholders shall have received a copy of the resolutions of
the Board of Directors of the Company authorizing the execution, delivery
and performance by the Company of this Amendment, certified by its
Secretary or an Assistant Secretary; and
7
<PAGE>
(c) each of the Noteholders shall have received payment in full of
their pro rata portion of the $30,000 aggregate fee due and payable upon
execution hereof pursuant to the Fee Schedule dated May 28, 1999 among the
Company and the Noteholders.
Upon receipt of all of the foregoing, this Amendment shall become effective
as of July 31, 1999.
3.2. This Amendment shall be construed in connection with and as part of
the Amended Note Agreements, and except as modified and expressly amended by
this Amendment, all terms, conditions and covenants contained in the Amended
Note Agreements and the Notes are hereby ratified and shall be and remain in
full force and effect.
3.3. Any and all notices, requests, certificates and other instruments
executed and delivered after the execution and delivery of this Amendment may
refer to the Amended Note Agreements without making specific reference to this
Amendment but nevertheless all such references shall include this Amendment
unless the context otherwise requires.
3.4. The descriptive headings of the various Sections or parts of this
Amendment are for convenience only and shall not affect the meaning or
construction of any of the provisions hereof.
3.5. This Amendment shall be governed by and construed in accordance with
Illinois law.
3.6. This Amendment may be executed in any number of counterparts, each
executed counterpart constituting an original, but all together only one
agreement.
3COM CORPORATION
By:____________________________________
Its ___________________________________
8
<PAGE>
Accepted and Agreed to
as of July 31, 1999.
THE NORTHWESTERN MUTUAL
LIFE INSURANCE COMPANY
By:____________________________________
Its ___________________________________
9
<PAGE>
Accepted and Agreed to
as of July 31, 1999.
METROPOLITAN LIFE INSURANCE COMPANY
By:____________________________________
Its ___________________________________
10
<PAGE>
Accepted and Agreed to
as of July 31, 1999.
METROPOLITAN PROPERTY AND
CASUALTY INSURANCE COMPANY
By:____________________________________
Its ___________________________________
11
<PAGE>
3COM CORPORATION
1983 STOCK OPTION PLAN
1. PURPOSE. The 3Com Corporation 1983 Stock Option Plan (the Plan) is
established to create additional incentive for key employees of 3Com Corporation
and any present or future parent and/or subsidiary corporation of such
corporation (collectively referred to as the Company) to promote the financial
success and progress of the Company. For purposes of the Plan, a parent
corporation and a subsidiary corporation shall be defined in sections 425(e) and
425(f) of the Internal Revenue Code of 1954, as amended (the Code).
2. ADMINISTRATION. The Plan shall be administered by the Board of
Directors (the Board) and/or by a duly appointed committee of the Board having
such powers as shall be specified by the Board. Any subsequent references to
the Board shall also mean the committee if it has been appointed. All questions
of interpretation of the Plan or of any options granted under the Plan (an
Option) shall be determined by the Board, and such determinations shall be final
and binding upon all persons having an interest in the Plan and/or any Option.
Options may be either incentive stock options as defined in Section 422A of the
Code or nonqualified stock options. All incentive stock options and
nonqualified stock options granted to an Optionee shall be set forth in separate
Options.
3. ELIGIBILITY.
(a) ELIGIBLE PERSONS. The Options may be granted only to employees
(including officers) of the Company. The Board shall, in its sole discretion,
determine which persons shall be granted Options (an Optionee). A director of
the of the Company shall not be granted an Option unless the director is also an
employee of the Company. An Optionee may, if he is otherwise eligible, be
granted additional Options.
(b) FAIR MARKET VALUE LIMITATION. Notwithstanding any other
provisions in the Plan to the contrary, any Option which is designated as an
incentive stock option and is granted pursuant to the Plan on or after January
1, 1987 shall comply with the limitations set forth in section 422A(b)(7) of the
Internal Revenue Code of 1986 (the 1986 Code) (i.e., shall not become
exercisable at a rate faster than $100,000 per calendar year). In the event an
Option is subsequently determined to have exceeded the foregoing limitation, the
Option shall be amended, if necessary, in accordance with applicable Treasury
Regulations and rulings to preserve, as the first priority, to the maximum
possible extent, the status of the Option as an incentive stock option and to
preserve, as a second priority, to the maximum possible extent, the total number
of shares subject to the Option. Notwithstanding the above, the Board of
Directors shall have the authority, in its sole discretion, to amend the Plan to
eliminate the limitation set forth in the first sentence of this paragraph or
any limitation set forth in the Plan setting forth or otherwise designed to
comply with the provisions of section 441A(b)(8) of the Internal Revenue Code of
1954, as amended prior to the Tax Reform Act of 1986 (the 1954 Code), and/or to
grant Options which comply with either limitation referred to above but which do
not comply with both such limitations.
4. SHARES SUBJECT TO OPTION. The maximum number of share which may be
issued under the Plan shall be 59,800,000 shares of the Company's authorized but
unissued common stock, subject to adjustment as provided in paragraph 7. In the
event that any outstanding Option for any reason expires or is terminated and/or
shares subject to repurchase are repurchased by the
<PAGE>
Company, the shares of common stock allocable to the unexercised portion of
such Option or so repurchased may again be subjected to an Option.
5. TIME FOR GRANTING OPTIONS. All options shall be granted, if at all, on
or before July 8, 2002.
6. TERMS, CONDITIONS AND FORM OF OPTIONS. Subject to the provisions of
the Plan, the Board shall determine for each Option (which need not be
incidental) the number of shares for which the Option shall be granted, the
option price of the Option, the exercisability of the Option, whether the Option
is a nonqualified stock option or an incentive stock option, and all other terms
and conditions of the Option not inconsistent with this paragraph 6. Options
granted pursuant to the Plan shall be evidenced by written agreements specifying
the number of shares covered thereby, in such form as the Board shall from time
to time establish, and shall comply with and be subject to the following terms
and conditions:
(a) OPTION PRICE.
(i) The option price for any incentive stock option shall be not
less than the fair market value as determined by the Board of the shares of
common stock of 3Com on the date of the granting of such Option, except that, as
to an Optionee who at the time the Option is granted owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company within the meaning of section 422A(b)(6) of the Code (a Ten Percent
Owner Optionee), the option price for any incentive stock option granted to the
Ten Percent Owner Optionee shall not be less than 110% of the fair market value
of the shares on the date the Option is granted.
(ii) The option price for any nonqualified stock option shall be
not less than 85% of the fair market value as determined by the Board of the
shares of common stock of 3Com on the date of granting of such Option.
(b) EXERCISE PERIOD OF OPTIONS. The Board shall have the power to
set the time or times within which each Option shall be exercisable or the event
or events upon the occurrence of which all or a portion of each Option shall be
exercisable and the term of each Option; provided, however, that no Option shall
be exercisable after the expiration of ten (10) years from the date such Option
is granted, and provided further that no Option granted to a Ten Percent Owner
Optionee which is extended to be an incentive stock option shall be exercisable
after the expiration of five (5) years from the date such Option is granted.
(c) STOCKHOLDER APPROVAL. An Option is not exercisable until such
time as the Plan is duly approved by the stockholders of the Company.
(d) PAYMENT OF OPTION PRICE. Payment of the option price for the
number of shares being purchased shall be made (1) in cash, (2) by tender to the
Company of shares of the Company's common stock which (a) either has been owned
by the Optionee for more than one (1) year or was not acquired, directly or
indirectly from the Company, and (b) has a fair market value not less than the
option price, or (3) by such other consideration (including, without limitation,
the Optionee's promissory note) as the Board may approve at the time the Option
is granted. Notwithstanding the foregoing, the Option may not be exercised by
the tender of the Company's common stock to the extent such tender of stock
would constitute a violation of the provisions of section 500 ET SEQ. of the
California Corporations Code, or the corresponding provisions of other
applicable law. In the event the Board permits the exercise of an Option in
whole or in part by means of the Optionee's promissory note, the Board shall
determine the provisions of such note;
<PAGE>
provided, however, that the note shall not represent more than ninety-five
(95%) of the option price, the principal shall be due and payable not more
than four (4) years after the Option is exercised and interest shall be
payable at least annually and be at least equal to the minimum interest rate
to avoid imputed interest pursuant to section 483 of the Code.
(e) SEQUENTIAL EXERCISE LIMITATION. Notwithstanding any other
provision of the Plan to the contrary, the Board of Directors shall have the
authority, in its sole discretion, to grant Options on or after January 1, 1987
designated as incentive stock options which are subject to any restrictions on
exercise set forth in the Plan setting forth or otherwise designed to comply
with the provisions of section 422A(b)(7) of the 1954 Code.
(f) OPTIONS NON-TRANSFERABLE. During the lifetime of the Optionee,
the Option shall be exercisable only by said Optionee. No Option shall be
assignable or transferable by the Optionee, except by will or by the laws of
descent and distribution.
(g) STANDARD OPTION TERMS.
(i) INCENTIVE STOCK OPTIONS. Unless otherwise provided for the
Board in the grant of an Option, an Option designated by the Board as an
incentive stock option shall comply with and be subject to terms and conditions
set forth in the form of Incentive Stock Option Agreement attached hereto as
Exhibit A and incorporated herein by reference.
(ii) NONQUALIFIED STOCK OPTIONS. Unless otherwise provided for
by the Board in the grant of an Option, an Option designated by the Board as a
nonqualified stock option shall comply with and be subject to the terms and
conditions set forth in the form of Nonqualified Stock Option Agreement attached
hereto as Exhibit B and incorporated herein by reference.
(iii) AUTHORITY TO VARY TERMS. The Board shall have the
authority from time to time to vary the terms of the option agreements set forth
as Exhibits A and/or B either in connection with the grant of an individual
Option or in connection with the authorization of a new standard form or forms;
provided, however, that the terms and conditions of such option agreements shall
be in accordance with the terms of the Plan. Such authority shall include, but
not by way of limitation, the authority to grant Options that are not
immediately exercisable.
7. EFFECT OF CHANGE IN STOCK SUBJECT TO PLAN. Appropriate adjustments
shall be made in the number and class of shares of stock subject to this Plan
and to any outstanding Options and in the exercise price of any outstanding
Options in the event of a stock dividend, stock split, reverse stock split or
like change in the capital structure of the Company.
8. TERMINATION OR AMENDMENT OF PLAN. The Board may at any time terminate
or amend the Plan, provided that without stockholder approval there shall be (i)
no change in the maximum number of shares covered by the Plan (except by
operation of the provisions of Paragraph 7 above); (ii) no change in the class
of persons eligible to received Options; (iii) no reduction in the exercise
price at which Options may be granted; and (iv) no extensions to the periods
during which Options may be granted or exercised.
9. EFFECT OF PRIOR PLAN AS TO OUTSTANDING OPTIONS. The Company has
heretofore adopted the 3Com Corporation Amended and Restated Incentive Stock
Option Plan (the Earlier Plan). The Plan in all respects is independent of
and not a continuation or amendment of the Earlier Plan. Accordingly, the
terms of the Earlier Plan shall remain in effect and apply to Options granted
pursuant to the Earlier Plan.
<PAGE>
10. CERTAIN TERMINATIONS WITHIN TWELVE MONTHS FOLLOWING A TRANSFER OF
CONTROL. In the event that, within twelve (12) months following a "Transfer
of Control" (as such term is defined in the Option Agreement) an Optionee's
employment with the "Participating Company Group" (as such term is defined in
the Option Agreement) is terminated involuntarily by his or her employer
other than for "Cause" (as defined herein), then such Optionee's Options
shall become fifty percent (50%) vested and exercisable as of the date of
such termination of employment.
For this purpose, "Cause" means (i) an act of personal dishonesty taken by
the Optionee in connection with his or her responsibilities as an employee and
intended to result in substantial personal enrichment of the Optionee,
(ii) Optionee being convicted of a felony, (iii) a willful act by the Optionee
which constitutes gross misconduct and which is injurious to the Company,
(iv) following delivery to the Optionee of a written demand for performance from
the Company which describes the basis for the Company's reasonable belief that
the Optionee has not substantially performed his or her duties, continued
violations by the Optionee of the Optionee's obligations to the Company which
are demonstrably willful and deliberate on the Optionee's part.
Notwithstanding the foregoing, nothing in this Plan or in the Option
Agreement modifies the "at-will" employment relationship of the Optionee, which
may be terminated at any time, with or without cause or notice, at the option of
either the Optionee or his or her employer.
<PAGE>
3COM CORPORATION
1994 STOCK OPTION PLAN
1. PURPOSE. The 3Com Corporation 1994 Stock Option Plan (the "Plan") is
established to create additional incentive for eligible employees of
3Com Corporation and any successor corporation thereto (collectively
referred to as the "Company"), and any present or future parent and/or
subsidiary corporations of such corporation (all of whom along with
the Company being individually referred to as a "Participating
Company" and collectively referred to as the "Participating Company
Group"), to promote the financial success and progress of the
Participating Company Group. For purposes of the Plan, a parent
corporation and a subsidiary corporation shall be as defined in
sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code").
2. ADMINISTRATION.
(a) GENERAL. The Plan shall be administered by the Board of
Directors of the Company (the "Board") and/or by a duly appointed
committee of the Board having such powers as shall be specified
by the Board. Any subsequent references herein to the Board
shall also mean the committee if such committee has been
appointed and, unless the powers of the committee have been
specifically limited, the committee shall have all of the powers
of the Board granted herein, including, without limitation, the
power to terminate or amend the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
All questions of interpretation of the Plan or of any options
granted under the Plan (an "Option") shall be determined by the
Board, and such determinations shall be final and binding upon
all persons having an interest in the Plan and/or any Option.
(b) OPTIONS AUTHORIZED. Options may be only nonqualified stock
options, that is, options which are not incentive stock options
as defined in section 422 of the Code.
(c) AUTHORITY OF OFFICERS. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with
respect to any matter, right, obligation, or election which is
the responsibility of or which is allocated to the Company
herein, provided the officer has apparent authority with respect
to such matter, right, obligation, or election.
3. ELIGIBILITY. The Options may be granted only to employees of the
Participating Company Group; provided, however, that no Option may be
granted to (i) a person who, at the time of such grant, is an officer
or director of the Company or a beneficial owner of more than ten
percent (10%) of any class of equity securities of the Company
registered pursuant to section 12 of the Securities Exchange Act of
1934, as amended, or (ii) any person whose eligibility to participate
in the Plan would require the Company to obtain shareholder approval
of the Plan pursuant to the Bylaws of the National Association of
Securities Dealers (and any schedules thereto) or the
<PAGE>
provisions contained in the New York Stock Exchange Listed Company
Manual. For purposes of the foregoing sentence, "employees" shall
include (i) prospective employees to whom Options are granted in
connection with written offers of employment with the Participating
Company Group and (ii) individuals to whom substituted options are
granted under this Plan in connection with a "corporate
reorganization" (within the meaning of Section 424(a) of the Code).
The Board shall, in the Board's sole discretion, determine which
eligible persons shall be granted Options (an "Optionee"). An
Optionee may, if otherwise eligible, be granted additional Options.
4. SHARES SUBJECT TO OPTION. Options shall be options for the purchase
of the authorized but unissued common stock of the Company (the
"Stock"), subject to adjustment as provided in paragraph 9 below. The
maximum number of shares of Stock which may be issued under the Plan
shall be Twenty-Nine Million Seven Hundred Seventy Thousand
(29,770,000) shares. In the event that any outstanding Option for any
reason expires or is terminated or canceled and/or shares of Stock
subject to repurchase are repurchased by the Company, the shares
allocable to the unexercised portion of such Option, or such
repurchased shares, may again be subjected to an Option.
5. TIME FOR GRANTING OPTIONS. The Plan shall continue until terminated
by the Board or until all of the shares of Stock reserved for issuance
under the Plan have been issued, whichever shall first occur.
6. TERMS, CONDITIONS AND FORM OF OPTIONS. Subject to the provisions of
the Plan, the Board shall determine for each Option (which need not be
identical) the number of shares of Stock for which the Option shall be
granted, the exercise price of the Option, the exercisability of the
Option, and all other terms and conditions of the Option not
inconsistent with the Plan. Options granted pursuant to the Plan
shall be evidenced by written agreements specifying the number of
shares of Stock covered thereby, in such form as the Board shall from
time to time establish, and shall comply with and be subject to the
following terms and conditions:
(a) EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided,
however, that the exercise price per share shall not be less than
the fair market value, as determined by the Board, of a share of
Stock on the date of the granting of the Option. Notwithstanding
the foregoing, an Option may be granted with an exercise price
lower than the minimum exercise price set forth above if such
Option is granted pursuant to an assumption or substitution for
another option in a manner qualifying with the provisions of
section 424(a) of the Code.
(b) EXERCISE PERIOD OF OPTIONS. The Board shall have the power to
set the time or times within which each Option shall be
exercisable or the event or events upon the occurrence of which
all or a portion of each Option shall be exercisable and the term
of each Option; provided, however, that no Option shall be
exercisable after the expiration of ten (10) years after the date
such Option is granted.
<PAGE>
(c) PAYMENT OF EXERCISE PRICE. Payment of the exercise price for the
number of shares of Stock being purchased pursuant to any Option
shall be made (i) in cash, by check, or cash equivalent, (ii) by
tender to the Company of shares of the Company's stock owned by
the Optionee having a value, as determined by the Board (but
without regard to any restrictions on transferability applicable
to such stock by reason of federal or state securities laws or
agreements with an underwriter for the Company), not less than
the exercise price, (iii) by the assignment of the proceeds of a
sale of some or all of the shares being acquired upon the
exercise of an Option (including, without limitation, through an
exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the
Federal Reserve System), or (iv) by any combination thereof. The
Board may at any time or from time to time, by adoption of or by
amendment to the form of Standard Option Agreement described in
paragraph 7 below, or by other means, grant Options which do not
permit all of the foregoing forms of consideration to be used in
payment of the exercise price and/or which otherwise restrict one
(1) or more forms of consideration. Notwithstanding the
foregoing, an Option may not be exercised by tender to the
Company of shares of the Company's stock to the extent such
tender of stock would constitute a violation of the provisions of
any law, regulation and/or agreement restricting the redemption
of the Company's stock.
(x) Unless otherwise provided by the Board, an Option may not be
exercised by tender to the Company of the Company's stock unless
such shares of the Company's stock either have been owned by the
Optionee for more than one (1) year or were not acquired,
directly or indirectly, from the Company.
(y) The Company reserves, at any and all times, the right, in the
Company's sole and absolute discretion, to establish, decline to
approve and/or terminate any program and/or procedures for the
exercise of Options by means of an assignment of the proceeds of
a sale of some or all of the shares of Stock to be acquired upon
such exercise.
7. STANDARD FORM OF STOCK OPTION AGREEMENT.
(a) NONQUALIFIED STOCK OPTIONS. Unless otherwise provided for by the
Board at the time an Option is granted, an Option shall comply
with and be subject to the terms and conditions set forth in the
form of nonqualified stock option agreement attached hereto as
EXHIBIT A and incorporated herein by reference.
(b) STANDARD TERM FOR OPTIONS. Unless otherwise provided for by the
Board in the grant of an Option, any Option granted hereunder
shall be exercisable for a term of ten (10) years.
8. AUTHORITY TO VARY TERMS. The Board shall have the authority from time
to time to vary the terms of the Standard Option Agreement described
in paragraph 7 above either in connection with the grant of an
individual Option or in connection with the authorization of a new
standard form or forms; provided, however, that the terms and
conditions of such revised or amended standard form or forms of stock
option agreement shall be in accordance with the terms of the Plan.
Such authority shall
<PAGE>
include, but not by way of limitation, the authority to grant Options
which are immediately exercisable.
9. EFFECT OF CHANGE IN STOCK SUBJECT TO PLAN. Appropriate adjustments
shall be made in the number and class of shares of Stock subject to
the Plan and to any outstanding Options and in the exercise price of
any outstanding Options in the event of a stock dividend, stock split,
reverse stock split, combination, reorganization, reclassification, or
like change in the capital structure of the Company.
10. TRANSFER OF CONTROL. For purposes hereof, "Control Company" shall
mean the Participating Company whose stock is subject to the Option.
An "Ownership Change" shall be deemed to have occurred in the event
any of the following occurs with respect to the Control Company.
(a) a direct or indirect sale or exchange by the shareholders of the
Control Company of all or substantially all of the stock of the
Control Company;
(b) a merger in which the Control Company is a party; or
(c) the sale, exchange, or transfer of all or substantially all of
the Control Company's assets (other than a sale, exchange, or
transfer to one (1) or more corporations where the shareholders
of the Control Company before such sale, exchange, or transfer
retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the corporation(s) to
which the assets were transferred).
A "Transfer of Control" shall mean an Ownership Change in which
the shareholders of the Control Company before such Ownership
Change do not retain, directly or indirectly, at least a majority
of the beneficial interest in the voting stock of the Control
Company. In the event of a Transfer of Control, any
unexercisable and/or unvested portion of the outstanding Options
shall be immediately exercisable and vested as of 30 days prior
to the Transfer of Control unless the surviving, continuing,
successor, or purchasing corporation, as the case may be (the
"Acquiring Corporation") assumes the Company's rights and
obligations under outstanding stock option agreements or
substitutes options for the Acquiring Corporation's stock for
such outstanding Options. The exercise and/or vesting of any
Option that was permissible solely by reason of this paragraph 10
shall be conditioned upon the consummation of the Transfer of
Control. Any Options which are neither assumed by the Acquiring
Corporation nor exercised as of the date of the Transfer of
Control shall terminate effective as of the date of the Transfer
of Control.
(d) In the event that, within twelve (12) months following a Transfer
of Control, an Optionee's employment with the Participating
Company Group is terminated involuntarily by his or her employer
other than for "Cause" (as defined herein), then such Optionee's
Options shall vest as to an additional fifty percent (50%) of the
unvested shares on the date of such termination of employment.
For this purpose, "Cause" means (i) an act of personal dishonesty
taken by
<PAGE>
the Optionee in connection with his or her responsibilities as
an employee and intended to result in substantial personal
enrichment of the Optionee, (ii) Optionee being convicted of a
felony, (iii) a willful act by the Optionee which constitutes
gross misconduct and which is injurious to the Company, (iv)
following delivery to the Optionee of a written demand for
performance from the Company which describes the basis for the
Company's reasonable belief that the Optionee has not
substantially performed his or her duties, continued
violations by the Optionee of the Optionee's obligations to
the Company which are demonstrably willful and deliberate on
the Optionee's part.
Notwithstanding the foregoing, nothing in this Plan or in the
Option Agreement modifies the "at-will" employment relationship
of the Optionee, which may be terminated at any time, with or
without cause or notice, at the option of either the Optionee or
his or her employer.
11. PROVISION OF INFORMATION. Each Optionee shall be given access to
information concerning the Company equivalent to that information
generally made available to the Company's common shareholders.
12. OPTIONS NON-TRANSFERABLE. Unless otherwise provided by the Board,
during the lifetime of the Optionee, the Option shall be exercisable
only by the Optionee, and no Option shall be assignable or
transferable by the Optionee, except by will or by the laws of descent
and distribution.
13. TERMINATION OR AMENDMENT OF PLAN OR OPTIONS. The Board, including any
duly appointed committee of the Board, may terminate or amend the Plan
or any Option at any time. In any event, no amendment may adversely
affect any then outstanding Option or any unexercised portion thereof,
without the consent of the Optionee.
<PAGE>
EXHIBIT A
STANDARD FORM OF
3COM CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
3Com Corporation (the "Company"), granted to the individual named below an
option to purchase certain shares of common stock of the Company, in the manner
and subject to the provisions of this Option Agreement and the 3Com Corporation
1994 Stock Option Plan (the "Plan"), all of the terms of which are incorporated
by reference herein.
1. Definitions:
(a) "Notice" shall mean the "3Com Corporation NOTICE OF GRANT OF
STOCK OPTIONS AND GRANT AGREEMENT" which is attached hereto.
(b) "Optionee" shall mean the individual whose name is set forth in
the Notice.
(c) "Date of Option Grant" shall mean the "Date of Grant" set forth
in the Notice.
(d) "Number of Option Shares" shall mean the "Total Number of Shares
Granted" as set forth in the Notice. Such number of shares of
common stock of the Company may be adjusted from time to time
pursuant to paragraph 9 below.
(e) "Exercise Price" shall mean the "Option Price per Share" set
forth in the Notice. Such price per share as adjusted from time
to time pursuant to paragraph 9 below.
(f) "Initial Exercise Date" shall be the Initial Vesting Date.
(g) "Initial Vesting Date" for employees outside of the U.K. shall be
the date occurring one (1) year after the Date of Option Grant.
For employees of the U.K. "Initial Vesting Date" shall be the
latter of (i) the date occurring one (1) month after the Date of
Option Grant, or (ii) the date occurring six (6) months after the
date on which the employee commenced employment with the Company.
(h) Determination of "Vested Ratio"
(1) Determination of "Vested Ratio" for employees outside of the
U.K.:
<TABLE>
<CAPTION>
Vested Ratio
- -------------------------------------------------------------------------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, for each full 1/4
year of the Optionee's continuous
<PAGE>
employment by a Participating Company from
the Date of Option Grant until the Initial Vesting Date
PLUS
For each full year of the Optionee's 1/4
continuous employment by a Participating
Company from the Initial Vesting Date
</TABLE>
In no event shall the Vested Ratio exceed 1/1.
(2) Determination of "Vested Ratio" for employees receiving
grants under the Plan or any U.K. sub-plan of the Plan:
<TABLE>
<CAPTION>
Vested Ratio
- --------------------------------------------------------------------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, for each full 1/48
month of the Optionee's continuous
employment by a Participating Company from
the Date of Option Grant until
the Initial Vesting Date
PLUS
For each full month of the Optionee's 1/48
continuous emplyoment by a Participating
Company from the Initial Vesting Date
</TABLE>
In no event shall the Vested Ratio exceed 1/1.
(i) "Option Term Date" shall mean the date ten (10) years after the
Date of Option Grant.
(j) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(k) "Company" shall mean 3Com Corporation, a California corporation,
and any successor corporation thereto.
(l) "Participating Company" shall mean (i) the Company and (ii) any
present or future parent and/or subsidiary corporation of the
Company while such corporation is a parent or subsidiary of the
Company. For purposes of this Option Agreement, a parent
corporation and a subsidiary corporation shall be as defined in
sections 424(e) and 424(f) of the Code.
(m) "Participating Company Group" shall mean at any point in time all
corporations collectively which are then a Participating Company.
<PAGE>
2. STATUS OF THE OPTION. This Option is intended to be a nonqualified
stock option and shall not be treated as an incentive stock option as
described in Section 422 of the Code.
3. ADMINISTRATION. All questions of interpretation concerning this
Option Agreement shall be determined by the Board of Directors of the
Company (the "Board") and/or by a duly appointed committee of the
Board having such powers as shall be specified by the Board. Any
subsequent references herein to the Board shall also mean the
committee if such committee has been appointed and, unless the powers
of the committee have been specifically limited, the committee shall
have all of the powers of the Board granted in the Plan, including,
without limitation, the power to terminate or amend the Plan at any
time, subject to the terms of the Plan and any applicable limitations
imposed by law. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any
officer of a Participating Company shall have the authority to act on
behalf of the Company with respect to any matter, right, obligation,
or election which is the responsibility of or which is allocated to
the Company herein, provided the officer has apparent authority with
respect to such matter, right, obligation, or election.
4. EXERCISE OF THE OPTION.
(a) RIGHT TO EXERCISE. The Option shall first become exercisable on
the Initial Exercise Date. The Option shall be exercisable on
and after the Initial Exercise Date and prior to the termination
of the Option in the amount equal to the Number of Option Shares
multiplied by the Vested Ratio as set forth in paragraph 1 above
less the number of shares previously acquired upon exercise of
the Option. In no event shall the Option be exercisable for more
shares than the Number of Option Shares.
(b) METHOD OF EXERCISE. The Option may be exercised by written
notice to the Company which must state the election to exercise
the Option, the number of shares for which the Option is being
exercised and such other representations and agreements as to the
Optionee's investment intent with respect to such shares as may
be required pursuant to the provisions of this Option Agreement.
The written notice must be signed by the Optionee and must be
delivered in person or by certified or registered mail, return
receipt requested, to the Chief Financial Officer of the Company,
or other authorized representative of the Participating Company
Group, prior to the termination of the Option as set forth in
paragraph 6 below, accompanied by full payment of the exercise
price for the number of shares being purchased.
(c) FORM OF PAYMENT OF EXERCISE PRICE. Such payment shall be made
(i) in cash, by check, or cash equivalent, (ii) by tender to the
Company of shares of the Company's common stock owned by the
Optionee having a value not less than the exercise price, which
either have been owned by the Optionee for more than one (1) year
or were not acquired, directly or indirectly, from the Company,
(iii) by Immediate Sales Proceeds, as defined below, or (iv) by
any combination of the foregoing. Notwithstanding the foregoing,
the Option may not be exercised by tender to the Company of
shares of the Company's
<PAGE>
common stock to the extent such tender of stock would
constitute a violation of the provisions of any law,
regulation and/or agreement restricting the redemption of the
Company's common stock. "Immediate Sales Proceeds" shall mean
the assignment in form acceptable to the Company of the
proceeds of a sale of some or all of the shares acquired upon
the exercise of the Option pursuant to a program and/or
procedure approved by the Company (including, without
limitation, through an exercise complying with the provisions
of Regulation T as promulgated from time to time by the Board
of Governors of the Federal Reserve System). The Company
reserves, at any and all times, the right, in the Company's
sole and absolute discretion, to decline to approve any such
program and/or procedure.
(d) TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the
Company, the Optionee hereby authorizes payroll withholding and
otherwise agrees to make adequate provision for foreign, federal
and state tax withholding obligations of the Company, if any,
which arise in connection with the Option, including, without
limitation, obligations arising upon (i) the exercise, in whole
or in part, of the Option, (ii) the transfer, in whole or in
part, of any shares acquired on exercise of the Option, or (iii)
the lapsing of any restriction with respect to any shares
acquired on exercise of the Option.
(e) CERTIFICATE REGISTRATION. The certificate or certificates for
the shares as to which the Option shall be exercised shall be
registered in the name of the Optionee, or, if applicable, the
heirs of the Optionee.
(f) RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of the shares upon exercise
of the Option shall be subject to compliance with all applicable
requirements of federal or state law with respect to such
securities. The Option may not be exercised if the issuance of
shares upon such exercise would constitute a violation of any
applicable federal or state securities laws or other law or
regulations. In addition, no Option may be exercised unless (i)
a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), shall at the time of exercise of
the Option be in effect with respect to the shares issuable upon
exercise of the Option or (ii) in the opinion of legal counsel to
the Company, the shares issuable upon exercise of the Option may
be issued in accordance with the terms of an applicable exemption
from the registration requirements of the Securities Act. THE
OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISABLE
UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE
OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN
THOUGH THE OPTION IS VESTED. As a condition to the exercise of
the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence
compliance with any applicable law or regulation and to make any
representation or warranty with respect thereto as may be
requested by the Company.
(g) FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
<PAGE>
5. NON-TRANSFERABILITY OF THE OPTION. The Option may be exercised during
the lifetime of the Optionee only by the Optionee and may not be
assigned or transferred in any manner except by will or by the laws of
descent and distribution.
<PAGE>
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
longer be exercised on the first to occur of (a) the Option Term Date
as defined above, (b) the last date for exercising the Option
following termination of employment as described in paragraph 7 below,
or (c) upon a Transfer of Control as described in paragraph 8 below.
7. TERMINATION OF EMPLOYMENT.
(a) TERMINATION OF THE OPTION. If the Optionee ceases to be an
employee of the Participating Company Group for any reason except
death or disability within the meaning of section 422(c) of the
Code, the Option, to the extent unexercised and exercisable by
the Optionee on the date on which the Optionee ceased to be an
employee, may be exercised by the Optionee within three (3)
months after the date on which the Optionee's employment
terminates, but in any event no later than the Option Term Date.
If the Optionee's employment with the Participating Company Group
is terminated because of the death or disability of the Optionee
within the meaning of section 422(c) of the Code, the Option, to
the extent unexercised and exercisable by the Optionee on the
date on which the Optionee ceased to be an employee, may be
exercised by the Optionee (or the Optionee's legal
representative) at any time prior to the expiration of twelve
(12) months from the date the Optionee's employment terminated,
but in any event no later than the Option Term Date. The
Optionee's employment shall be deemed to have terminated on
account of death if the Optionee dies within three (3) months
after the Optionee's termination of employment.
(b) TERMINATION OF EMPLOYMENT DEFINED. For purposes of this
paragraph 7, the Optionee's employment shall be deemed to have
terminated either upon an actual termination of employment or
upon the Optionee's employer ceasing to be a Participating
Company.
(c) EXTENSION IF EXERCISE PREVENTED BY LAW. Except as provided in
this paragraph 7, the Option shall terminate and may not be
exercised after the Optionee's employment with the Participating
Company Group terminates unless the exercise of the Option in
accordance with this paragraph 7 is prevented by the provisions
of paragraph 4(f) above. If the exercise of the Option is so
prevented, the Option shall remain exercisable until three (3)
months after the date the Optionee is notified by the Company
that the Option is exercisable, but in any event no later than
the Option Term Date.
(d) LEAVE OF ABSENCE. For purposes hereof, the Optionee's employment
with the Participating Company Group shall not be deemed to
terminate if the Optionee takes any military leave, sick leave,
or other bona fide leave of absence approved by the Company of
ninety (90) days or less. In the event of a leave in excess of
ninety (90) days, the Optionee's employment shall be deemed to
terminate on the ninety-first (91st) day of the leave unless the
Optionee's right to reemployment with the Participating Company
Group remains guaranteed by statute or contract. Notwithstanding
the foregoing, however, a leave of absence shall be treated as
employment for purposes of determining the Optionee's Vested
Ratio if and only if the leave of absence is designated by
<PAGE>
the Company as (or required by law to be) a leave for which
vesting credit is given.
8. TRANSFER OF CONTROL. For purposes hereof, "Control Company" shall
mean the Participating Company whose stock is subject to the Option.
An "Ownership Change" shall be deemed to have occurred in the event
any of the following occurs with respect to the Control Company.
(a) a direct or indirect sale or exchange by the shareholders of the
Control Company of all or substantially all of the stock of the
Control Company;
(b) a merger in which the Control Company is a party; or
(c) the sale, exchange, or transfer of all or substantially all of
the Control Company's assets (other than a sale, exchange, or
transfer to one (1) or more corporations where the shareholders
of the Control Company before such sale, exchange, or transfer
retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the corporation(s) to
which the assets were transferred).
A "Transfer of Control" shall mean an Ownership Change in which
the shareholders of the Control Company before such Ownership
Change do not retain, directly or indirectly, at least a majority
of the beneficial interest in the voting stock of the Control
Company. In the event of a Transfer of Control, any
unexercisable and/or unvested portion of the Option shall be
immediately exercisable and vested as of 30 days prior to the
Transfer of Control unless the surviving, continuing, successor,
or purchasing corporation, as the case may be (the "Acquiring
Corporation") assumes the Company's rights and obligations under
this Option Agreement or substitutes options for the Acquiring
Corporation's stock for the Option. The exercise and/or vesting
of any Option that was permissible solely by reason of this
paragraph 8 shall be conditioned upon the consummation of the
Transfer of Control. The Option shall terminate effective as of
the date of the Transfer of Control to the extent that the Option
is neither assumed or substituted for by the Acquiring
Corporation nor exercised as of the date of the Transfer of
Control.
9. EFFECT OF CHANGE IN STOCK SUBJECT TO THE OPTION. Appropriate
adjustments shall be made in the number, exercise price and class of
shares of stock subject to the Option in the event of a stock
dividend, stock split, reverse stock split, combination,
reorganization, reclassification, or like change in the capital
structure of the Company. In the event a majority of the shares which
are of the same class as the shares that are subject to the Option are
exchanged for, converted into, or otherwise become shares of another
corporation (the "New Shares"), the Company may unilaterally amend the
Option to provide that the Option is exercisable for New Shares. In
the event of any such amendment, the number of shares and the exercise
price shall be adjusted in a fair and equitable manner.
10. RIGHTS AS A SHAREHOLDER OR EMPLOYEE. The Optionee shall have no
rights as a shareholder with respect to any shares covered by the
Option until the date of the issuance of a certificate or certificates
for the shares for which the Option has been
<PAGE>
exercised. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to
the date such certificate or certificates are issued, except as
provided in paragraph 9 above. Nothing in the Option shall confer
upon the Optionee any right to continue in the employ of a
Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionee's employment
at any time.
11. LEGENDS. The Company may at any time place legends referencing any
applicable federal or state securities law restrictions on all
certificates representing shares of stock subject to the provisions of
this Option Agreement. The Optionee shall, at the request of the
Company, promptly present to the Company any and all certificates
representing shares acquired pursuant to the Option in the possession
of the Optionee in order to effectuate the provisions of this
paragraph.
12. BINDING EFFECT. This Option Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
13. TERMINATION OR AMENDMENT. The Board, including any duly appointed
committee of the Board, may terminate or amend the Plan and/or the
Option at any time; provided, however, that no such termination or
amendment may adversely affect the Option or any unexercised portion
hereof without the consent of the Optionee.
14. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
understanding and agreement of the Optionee and the Participating
Company Group with respect to the subject matter contained herein, and
there are no agreements, understandings, restrictions,
representations, or warranties among the Optionee and the Company
other than those as set forth or provided for herein. To the extent
contemplated herein, the provisions of this Option Agreement shall
survive any exercise of the Option and shall remain in full force and
effect.
15. APPLICABLE LAW. This Option Agreement shall be governed by the laws
of the State of California.
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement and hereby accepts the Option subject to all
of the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.3Com Corporation (the
"Company"), granted to the individual named below an option to purchase certain
shares of common stock of the Company, in the manner and subject to the
provisions of this Option Agreement and the 3Com Corporation 1994 Stock Option
Plan (the "Plan"), all of the terms of which are incorporated by reference
herein.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-02-2000
<PERIOD-END> AUG-27-1999
<CASH> 1,003,263
<SECURITIES> 702,262
<RECEIVABLES> 757,092
<ALLOWANCES> (107,720)
<INVENTORY> 350,526
<CURRENT-ASSETS> 3,502,519
<PP&E> 1,610,701
<DEPRECIATION> (814,446)
<TOTAL-ASSETS> 4,532,063
<CURRENT-LIABILITIES> 1,219,635
<BONDS> 0
0
0
<COMMON> 1,440,475
<OTHER-SE> 1,792,088
<TOTAL-LIABILITY-AND-EQUITY> 4,532,063
<SALES> 1,387,409
<TOTAL-REVENUES> 1,387,409
<CGS> 739,078
<TOTAL-COSTS> 1,011,903
<OTHER-EXPENSES> 177,334
<LOSS-PROVISION> 4,312
<INTEREST-EXPENSE> 868
<INCOME-PRETAX> 192,992
<INCOME-TAX> 56,476
<INCOME-CONTINUING> 137,491
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,491
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.38
</TABLE>
