______________________________________________________________________
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended February 26, 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 95052
Santa Clara, California (Zip Code)
(Address of principal executive offices)
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 March 26, 1999, 361,875,595 shares of the Registrant's Common
Stock were outstanding.
______________________________________________________________________
3Com Corporation
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
Three and Nine Months Ended February 26, 1999 and March 1, 1998
Condensed Consolidated Balance Sheets
February 26, 1999 and May 31, 1998
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 26, 1999 and March 1, 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
3Com, AccessBuilder, CoreBuilder, Graffiti and U.S. Robotics are
registered trademarks of 3Com Corporation or its subsidiaries. Palm
and x2 are trademarks of 3Com Corporation or its subsidiaries.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3Com Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
----------------------- -----------------------
February 26, March 1, February 26, March 1,
1999 1998 1999 1998
---- ---- ---- ----
Sales $1,410,529 $1,250,191 $4,356,577 $4,044,896
Cost of sales 743,019 707,188 2,336,297 2,183,961
---------- ---------- ---------- ----------
Gross margin 667,510 543,003 2,020,280 1,860,935
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 324,711 315,174 949,982 955,886
Research and development 162,114 144,237 468,706 432,013
General and administrative 69,157 67,775 193,151 201,905
Purchased in-process
technology 7,115 - 7,115 -
Merger-related charges
(credits)and other (7,315) (9,926) (16,895) 258,632
---------- ---------- ---------- ----------
Total operating
expenses 555,782 517,260 1,602,059 1,848,436
---------- ---------- ---------- ----------
Operating income 111,728 25,743 418,221 12,499
Interest and other income
(expense), net 18,100 (4,423) 40,019 6,175
---------- ---------- ---------- ----------
Income before income taxes 129,828 21,320 458,240 18,674
Income tax provision 40,247 7,462 142,055 52,028
Equity interest in loss of
consolidated joint venture (156) - (156) -
---------- ---------- ---------- ----------
Net income (loss) $ 89,737 $ 13,858 $ 316,341 $ (33,354)
========== ========== ========== ==========
Net income (loss) per share:
Basic $ 0.25 $ 0.04 $ 0.88 $ (0.10)
Diluted $ 0.24 $ 0.04 $ 0.86 $ (0.10)
Shares used in computing
per share amounts:
Basic 361,766 354,766 359,534 349,028
Diluted 374,699 366,116 369,777 349,028
See Notes to Condensed Consolidated Financial Statements.
3Com Corporation
Condensed Consolidated Balance Sheets
(In thousands, except par value)
February 26, May 31,
1999 1998
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 981,520 $ 528,981
Short-term investments 742,726 547,097
Accounts receivable, net 981,017 849,640
Inventories, net 409,216 644,771
Deferred income taxes 368,738 430,182
Other 99,420 134,001
---------- ----------
Total current assets 3,582,637 3,134,672
Property and equipment, net 837,316 858,779
Other long-term assets 144,412 87,069
---------- ----------
Total assets $4,564,365 $4,080,520
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 366,009 $ 332,992
Accrued liabilities and other 670,462 673,311
Income taxes payable 171,645 177,612
---------- ----------
Total current liabilities 1,208,116 1,183,915
Long-term debt 30,442 35,878
Deferred income taxes and other long-term obligations 59,515 53,232
Equity interest in consolidated joint venture 5,093 -
Stockholders' equity:
Common stock, $.01 par value, 990,000 shares
authorized; shares issued: February 26, 1999,
365,838; May 31, 1998, 358,870 1,934,004 1,730,676
Unamortized restricted stock grants (5,185) (4,157)
Retained earnings 1,334,322 1,079,775
Unrealized gain (loss) on investments, net (946) 827
Accumulated translation adjustments (996) 374
---------- ----------
Total stockholders' equity 3,261,199 2,807,495
---------- ----------
Total liabilities and stockholders' equity $4,564,365 $4,080,520
========== ==========
See Notes to Condensed Consolidated Financial Statements.
3Com Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
----------------------
February 26, March 1,
1999 1998
---- ----
Cash flows from operating activities:
Net income (loss) $ 316,341 $ (33,354)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 201,359 198,112
Deferred income taxes 62,155 (25,750)
Adjustment to conform fiscal year of
pooled entity-U.S. Robotics - 15,052
Purchased in-process technology 7,115 -
Merger-related charges (credits) and other (16,895) 258,632
Equity interest in loss of consolidated
joint venture (156) -
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable (128,483) 107,125
Inventories 231,846 (318,320)
Other current assets 30,040 (70,673)
Accounts payable 30,192 97,976
Accrued liabilities and other 7,258 112,221
Income taxes payable 71,534 28,342
---------- ----------
Net cash provided by operating activities 812,306 369,363
---------- ----------
Cash flows from investing activities:
Purchase of short-term investments (419,336) (276,556)
Proceeds from short-term investments 216,422 295,735
Purchase of property and equipment (186,542) (324,426)
Proceeds from sale of property and equipment 29,347 -
Businesses acquired in purchase transactions,
net of cash acquired (39,213) -
Other, net (16,594) (19,476)
---------- ----------
Net cash used for investing activities (415,916) (324,723)
---------- ----------
Cash flows from financing activities:
Issuance of common stock 189,923 241,401
Repurchase of common stock (130,398) -
Repayments of short-term debt, notes payable
and capital lease obligations - (168,066)
Repayments of long-term borrowings (12,000) (122,880)
Net proceeds from issuance of debt 7,723 33,300
Other, net 901 6,396
---------- ----------
Net cash provided by (used for) financing activities 56,149 (9,849)
---------- ----------
Increase in cash and equivalents 452,539 34,791
Cash and equivalents, beginning of period 528,981 351,237
---------- ----------
Cash and equivalents, end of period $ 981,520 $ 386,028
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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 (the Company) and include
the accounts of the Company and its wholly-owned and consolidated
subsidiaries. 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 the
Company's financial position as of February 26, 1999, and the
results of operations for the three and nine months ended
February 26, 1999 and March 1, 1998 and cash flows for the nine
months ended February 26, 1999 and March 1, 1998.
On June 1, 1998, the Company adopted a 52-53 week fiscal
year ending on the Friday nearest to May 31, which for fiscal
1999 will be May 28, 1999. Previously, the Company operated on a
52-53 week fiscal year ending on the Sunday nearest to May 31.
This change did not have a significant effect on the Company's
condensed consolidated financial statements for the three and
nine months ended February 26, 1999 as compared to the three and
nine months ended March 1, 1998. The results of operations for
the three and nine months ended February 26, 1999 may not
necessarily be indicative of the results to be expected for the
fiscal year ending May 28, 1999. These condensed consolidated
financial statements should be read in conjunction with the
consolidated financial statements and related notes thereto
included in the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1998.
2. Merger-Related Charges (Credits) and Other
On June 12, 1997, the Company completed a merger with U.S.
Robotics Corporation (U.S. Robotics), which was accounted for as
a pooling-of-interests. Through February 26, 1999, the Company
has recorded aggregate merger-related charges of $244.4 million,
which included approximately $200.6 million of integration
expenses and $43.8 million of direct transaction costs
(consisting primarily of investment banking and other
professional fees). Integration expenses included:
- - $39.5 million related to the closure and elimination of
owned and leased facilities, primarily duplicate corporate
headquarters, distribution sites and sales offices;
- - $58.4 million for severance and outplacement costs related
to the merger, including amounts related to termination
benefits associated with employment agreements. Employee
groups impacted by the merger included personnel involved in
duplicate corporate services, manufacturing and logistics,
product organizations and sales;
- - $37.9 million associated with certain long-term assets,
primarily including duplicate finance, manufacturing, human
resource and other management information systems, and
capitalized purchased research and development costs related
to a discontinued product; and
- - $64.8 million primarily associated with the elimination and
phase-out of duplicate wide area networking products (i.e.,
3Com's AccessBuilder(Registered Trademark) 2000, 4000, 5000 and
8000 products and U.S. Robotics(Registered Trademark) TOTALswitch,
ATM switch, LANLinker and related small office, home office products),
and the discontinuance of U.S. Robotics' telephony products. The
charge primarily included inventory write-offs, costs related to
return of discontinued products, and noncancelable purchase
commitments.
During the third quarter of fiscal 1999, the Company recorded
adjustments to previously recorded merger and restructuring
charges, which totaled a net credit of $7.3 million. This net
amount reflects a $7.6 million reduction in the estimated costs
for duplicate facilities, a $2.4 million gain on the sale of
excess real estate realized in the third quarter, a $2.1 million
charge reflecting a change in the estimated net realizable value
of a closed manufacturing plant in Chicago, and a charge of $0.6
million for costs associated with employment agreements.
The remaining U.S. Robotics merger-related accrual at
February 26, 1999 was approximately $13.0 million. Remaining
cash expenditures relating to the U.S. Robotics merger charge are
estimated to be approximately $4.0 million.
3. Business Combinations and Joint Venture
During the third quarter of fiscal 1999, the Company completed
the following transactions:
- - Acquired certain assets of ICS Networking, Inc. (ICS), a
wholly-owned subsidiary of Integrated Circuit Systems, Inc.
The Company purchased customer-owned tooling (COT) technology
and other intellectual property for approximately $16.1
million in cash. Approximately $5.0 million of the total
purchase price represented purchased in-process technology
that had not yet reached technological feasibility, had no
alternative future use and was charged to the Company's
operations in the third quarter of fiscal 1999.
- - Acquired Smartcode Technologie (Smartcode), a provider of
wireless data communications and Internet access software
technology, based in France. The transaction, valued at $17.4
million, included cash for all outstanding shares and was
accounted for as a purchase. Approximately $2.1 million of the
total purchase price represented purchased in-process
technology that had not yet reached technological feasibility,
had no alternative future use and was charged to the Company's
operations in the third quarter of fiscal 1999.
- - Entered into a joint venture agreement with a Taiwanese
networking company. The Company contributed approximately
$5.3 million in cash for a 44 percent interest in the joint
venture. Under the terms of the joint venture agreement, the
Company has certain rights to increase its ownership of the
joint venture. The financial statements of the joint venture
have been consolidated since the date of the investment.
During the second quarter of fiscal 1999, the Company
acquired EuPhonics, Inc. (EuPhonics), a developer of DSP-based
audio software that drives integrated circuits, sound cards,
consumer electronics, and other hardware. The transaction,
valued at $8.3 million and accounted for as a purchase, included
cash for all outstanding shares and the exchange of EuPhonics
stock options for 3Com stock options. The charge for purchased
in-process technology associated with the acquisition was not
material, and was included in research and development expenses
in the second quarter of fiscal 1999.
4. Comprehensive Income (Loss)
On June 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which requires that an enterprise report, by major
components and as a single total, the change in net assets during
the period from non-owner sources. The reconciliation of net
income (loss) to comprehensive income (loss) is as follows (in
thousands):
Three Months Ended Nine Months Ended
----------------------- -----------------------
February 26, March 1, February 26, March 1,
1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $ 89,737 $ 13,858 $ 316,341 $ (33,354)
Other comprehensive gain
(loss):
Unrealized gain (loss) on
investments, net (2,656) 1,009 (1,773) (775)
Accumulated translation
adjustments 923 1,497 (1,370) 2,291
---------- ---------- ---------- ----------
Total comprehensive income
(loss) $ 88,004 $ 16,364 $ 313,198 $ (31,838)
========== ========== ========== ==========
5. Net Income (Loss) Per Share
The following table presents the calculation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
----------------------- -----------------------
February 26, March 1, February 26, March 1,
1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $ 89,737 $ 13,858 $ 316,341 $ (33,354)
========== ========== ========== ==========
Weighted average shares-
Basic 361,766 354,766 359,534 349,028
Effect of dilutive securities:
Employee stock options 12,732 11,157 10,041 -
Restricted stock 201 193 202 -
Weighted average shares-
Diluted 374,699 366,116 369,777 349,028
========== ========== ========== ==========
Net income (loss) per
share-Basic $ 0.25 $ 0.04 $ 0.88 $ (0.10)
Net income (loss) per
share-Diluted $ 0.24 $ 0.04 $ 0.86 $ (0.10)
Dilutive securities are excluded from the calculation of diluted
earnings per share, as they were antidilutive for the nine months
ended March 1, 1998.
6. Inventories
Inventories, net consisted of (in thousands):
February 26, May 31,
1999 1998
---- ----
Finished goods $ 272,208 $ 457,726
Work-in-process 52,104 51,510
Raw materials 84,904 135,535
---------- ----------
Total $ 409,216 $ 644,771
========== ==========
7. Subsequent Events
During the third quarter of fiscal 1999, the Company
announced a definitive agreement to acquire NBX Corporation
(NBX), a developer of network-based telephony systems that
integrate voice and data communications over small business LANs
and WANs. The transaction was completed on March 5, 1999 and was
valued at approximately $90 million in cash and assumed stock
options. The acquisition will be accounted for as a purchase in
the Company's fiscal fourth quarter results.
In the fourth quarter of fiscal 1999, the Board of Directors
authorized the repurchase of up to 10 million shares of the
Company's common stock. Such purchases will be made in the open
market from time to time.
8. Litigation
The Company is a party to lawsuits in the normal course of
its 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. The
Company believes that it has defenses in each of the cases set
forth below and is vigorously contesting each of these matters.
An unfavorable resolution of one or more of the following
lawsuits could have a material adverse affect on the business,
results of operations or financial condition of the Company.
Securities Litigation
On March 24 and May 5, 1997, putative 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 the Company 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 purported 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 putative 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.
On March 1, 1999, the Court dismissed the complaint. The Court
granted leave for plaintiffs to file an amended complaint.
In December 1997, a putative 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, 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. The Company
has filed a motion to dismiss the complaint.
In October 1998, a putative securities class action lawsuit,
captioned Adler v. 3Com Corporation, et al., Civil Action No.
CV777368 (Adler), was filed against the Company 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 Company
plans to file a motion to dismiss this action.
In January 1998, two purported shareholder complaints relating to
the Company's June 1997 merger with U.S. Robotics, captioned
Stanley Grossman v. 3Com Corporation, et al., Civil Action No.
CV771335, and Jason v. 3Com Corporation, et al., Civil Action No.
CV771713, were filed in California Superior Court, Santa Clara
County. The actions allege that 3Com, several of its officers
and directors, and several former U.S. Robotics officers violated
Sections 11 and 15 of the Securities Act of 1933 by making
alleged misrepresentations and omissions in a May 8, 1997
registration statement. The complaints seek damages in an
unspecified amount on behalf of a purported class of persons who
received the Company's stock during the merger pursuant to the
registration statement. On September 25, 1998, the Delaware
Chancery Court issued an injunction preventing plaintiffs from
proceeding with these actions, finding that plaintiffs' claims
are barred by a settlement in a prior action. On March 15, 1999,
the Delaware Chancery Court issued an order denying a motion by
plaintiffs to set aside the settlement in the prior action.
In February 1998, a shareholder derivative action purportedly on
behalf of the Company, captioned, Wasserman v. Benhamou, et al.,
Civil Action No. 16200-NC, was filed in Delaware Chancery Court.
The complaint alleges that the Company's directors breached their
fiduciary duties to the Company by engaging in alleged wrongful
conduct from mid-1996 through November 1997, including the
conduct complained of in the securities litigation described
above. The Company is named solely as a nominal defendant,
against whom the plaintiff seeks no recovery. The Company and
the individual defendants have filed a motion to dismiss the
complaint.
In October 1998, two shareholder derivative actions
purportedly on behalf of the Company, 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 the
Company's directors breached their fiduciary duties to the
Company through the issuance of and disclosures concerning stock
options. The Company is named solely as a nominal defendant,
against whom the plaintiffs seek no recovery. The Company and
the individual defendants have filed a motion to dismiss these
actions.
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 entitled: 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.
Consumer Litigation
A putative consumer class action pending against the Company and
U.S. Robotics in the California Superior Court, Marin County,
Bendall, et al. v. U.S. Robotics Corporation, et al., Civil
Action No. 170441, arising out of the purchase of x2(Trademark)
products and products upgradeable to x2 technology, was coordinated
with a previously filed individual action in the California Superior
Court, San Francisco County, Intervention Inc. v. U.S. Robotics
Corporation, Civil Action No. 984352. The coordinated proceeding
(Case number CV769903) is pending in the California Superior
Court, Santa Clara County. Two putative consumer class action
lawsuits pending against the Company and U.S. Robotics in Cook
County, Illinois arising out of the same facts as those alleged
in the California cases are stayed, Lippman, et al. v. 3Com,
Civil Action No. 97 CH 09773, and Michaels, et al. v. U.S.
Robotics Access Corporation, et al., Civil Action No. 97 CH 14417.
A class has not been certified, and discovery is under way.
9. Effects of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS 131, "Disclosures About Segments of an Enterprise and
Related Information." This Statement requires that financial
information be reported on the basis used internally for
evaluating segment performance and deciding how to allocate
resources to segments. SFAS 131 will be effective for the
Company's fiscal year ended May 28, 1999 and requires disclosure
of historical information for comparative purposes. Management
of the Company is currently evaluating the effects of this
Statement on its reporting of segment information.
In June 1998, the FASB issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement
requires 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. SFAS 133 will be
effective for the Company's fiscal year 2001. Management believes
that this Statement will not have a significant impact on the
Company.
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
the Company's condensed consolidated statements of operations:
Three months ended Nine months ended
---------------------- ----------------------
February 26, March 1, February 26, March 1,
1999 1998 1999 1998
---- ---- ---- ----
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 52.7 56.6 53.6 54.0
----- ----- ----- -----
Gross margin 47.3 43.4 46.4 46.0
Operating expenses:
Sales and marketing 23.0 25.2 21.8 23.6
Research and development 11.5 11.5 10.8 10.7
General and administrative 4.9 5.4 4.4 5.0
Non-recurring charges (credits):
Purchased in-process
technology 0.5 - 0.2 -
Merger-related charges
(credits) and other (0.5) (0.8) (0.4) 6.4
----- ----- ----- -----
Total operating
expenses 39.4 41.3 36.8 45.7
----- ----- ----- -----
Operating income 7.9 2.1 9.6 0.3
Interest and other income
(expense), net 1.3 (0.4) 0.9 0.2
----- ----- ----- -----
Income before income taxes 9.2 1.7 10.5 0.5
Income tax provision 2.8 0.6 3.2 1.3
Equity interest in loss of
consolidated joint venture - - - -
----- ----- ----- -----
Net income (loss) 6.4 % 1.1 % 7.3 % (0.8)%
===== ===== ===== =====
Excluding non-recurring charges (credits):
Total operating expenses 39.4 % 42.1 % 37.0 % 39.3 %
Operating income 7.9 % 1.3 % 9.4 % 6.7 %
Net income 6.4 % 0.6 % 7.1 % 4.5 %
Sales
- -----
Sales in the third quarter of fiscal 1999 totaled $1.4 billion, an
increase of $160.3 million or 13 percent from the corresponding
quarter a year ago and a decrease of $130.0 million or eight percent
from the second quarter of fiscal 1999. Sales in the first nine
months of fiscal 1999 totaled $4.4 billion, an increase of $311.7
million or eight percent compared to the first nine months of fiscal
1998.
Client Access. Sales of client access products (e.g., desktop network
interface cards (NICs), desktop modems, mobile personal computer (PC)
cards and a pro-rata allocation of handheld computer products) in the
third quarter of fiscal 1999 increased one percent from the same
quarter a year ago and decreased 11 percent from the second quarter of
fiscal 1999. Sequentially lower sales of client access products were
primarily due to lower sales of mobile PC Cards, desktop modems, and
10 megabits per second (Mbps) Ethernet NICs. Sales of client access
products in the third quarter of fiscal 1999 represented 50 percent of
total sales, compared to 52 percent in the second quarter of fiscal
1999 and 56 percent in the third quarter of fiscal 1998.
Sales of client access products in the first nine months of fiscal
1999 increased two percent compared to the first nine months of fiscal
1998. Sales of client access products in the first nine months of
fiscal 1999 represented 51 percent of total sales compared to 54
percent in the first nine months of fiscal 1998. Excluding sales of
handheld computer products, sales for client access products declined
three percent in the first nine months of fiscal 1999 when compared to
the first nine months of fiscal 1998.
Systems. Sales of network systems products (e.g., switches, hubs,
remote access concentrators, routers and a pro-rata allocation of
handheld computer products) in the third quarter of fiscal 1999
increased 28 percent compared to the same quarter a year ago and
decreased five percent compared to the second quarter of fiscal 1999.
Sequentially lower sales of systems products were primarily due to
lower sales of hubs and switches to enterprise customers, whereas
carrier system product sales increased. Sales of network systems
products in the third quarter of fiscal 1999 represented 50 percent of
total sales, compared to 48 percent in the second quarter of fiscal
1999 and 44 percent in the third quarter of fiscal 1998.
Sales of network systems products in the first nine months of fiscal
1999 increased 15 percent compared to the first nine months of fiscal
1998. Sales of network systems products in the first nine months of
fiscal 1999 represented 49 percent of total sales compared to 46
percent in the first nine months of fiscal 1998. Excluding sales of
handheld computer products, sales of network systems products
increased nine percent in the first nine months of fiscal 1999 when
compared to the first nine months of fiscal 1998.
Geographic. International sales represented 52 percent of total sales
for the third quarter of fiscal 1999 and increased 28 percent over the
same period a year ago and five percent sequentially. U.S. sales were
flat compared to the same period a year ago and decreased 20 percent
sequentially.
Sales in the U.S. represented 53 percent of total sales for the first
nine months of fiscal 1999. U.S. sales increased three percent when
compared to the first nine months of fiscal 1998. International sales
increased 13 percent when compared to the first nine months of fiscal
1998.
The Company believes sales for the third quarter and the first nine
months of fiscal 1999 were affected by the following factors:
Seasonality. The Company's sales are subject to seasonality,
reflecting spending patterns in different geographies and customer
segments. Sales in the third quarter, which consists of the winter
months of December, January and February, decreased eight percent
compared to the second fiscal quarter, due in part to the impact of
seasonally slower sales from consumer-related products. Historically,
sales in the first quarter, which includes the summer months of June,
July and August, have exhibited little or no sequential growth, in
part due to slower sales in the European region. The second quarter
of the fiscal year has historically been the strongest sales quarter,
due in part to seasonal strength in international regions and holiday
spending patterns. Third quarter sales have historically been either
sequentially lower, or only slightly up as compared to sales from the
prior quarter. In the third quarter of fiscal 1999, sales were down
eight percent sequentially, a more pronounced seasonal pattern due in
part to the increasing mix of consumer-related products, such as
handheld computers and modems, which tend to have strong growth in the
second quarter and decline sequentially in the third quarter. The
fourth quarter of the fiscal year has typically been a growth quarter
for 3Com. However, given the fiscal third quarter results and the
current market environment, the Company expects sequential sales
growth for the fourth quarter of fiscal 1999 to be modest.
End-User Demand and Distribution Partners. Beyond traditional winter
seasonality, third quarter sales were impacted by other factors. The
Company believes that a slowdown in end-user demand for networking
products within the enterprise market, particularly in the Americas
region, negatively impacted the Company's sales. In addition, several
of the Company's large distributors reported disappointing earnings,
primarily related to weaker than expected sales of PC-related
products. The Company believes that distributors' weakness in PC-
related sales negatively impacted sales of networking products as
well.
Industry Growth Rates. The networking industry continues to grow, but
at a slower pace than in previous years. Industry reports indicate
that the networking industry worldwide grew by less than 20 percent
during 1997 and less than 15 percent during 1998. A recent market
analyst research report states that the networking industry growth
rate will continue to decline as the industry matures and as companies
faced with the costs associated with Year 2000 issues delay network
equipment purchases.
Global Economic Trends. Historically, the Asia Pacific and Latin
American regions have been high growth regions for the networking
industry and the Company. During the first quarter of fiscal 1999,
the Asia Pacific and Latin American regions experienced a weakening of
their local currencies and turmoil in their financial markets and
institutions. In the second quarter of fiscal 1999, sales in the
Latin American and Asia Pacific regions improved sequentially. In the
third quarter of fiscal 1999, sales in the Asia Pacific region
increased 16 percent sequentially, while sales in the Latin American
region declined 37 percent sequentially and 25 percent when compared
to the third quarter of the prior year. Sales in the Asia Pacific and
Latin American regions decreased three percent and seven percent,
respectively during the first nine months of fiscal 1999 compared to
the first nine months of fiscal 1998.
Gross Margin
- ------------
Gross margin as a percentage of sales was 47.3 percent in the third
quarter of fiscal 1999, compared to 43.4 percent in the third quarter
of fiscal 1998 and 46.9 percent in the second quarter of fiscal 1999.
The gross margin increase from the same quarter a year ago is
primarily due to an increased mix of higher margin products,
specifically workgroup switches and remote access equipment; a more
stable pricing environment, particularly for desktop modems and
workgroup switches; and cost reductions on NICs. The gross margin
improvement from the second quarter of fiscal 1999 was due to
favorable product mix and improved inventory management, including
lower requirements for warranty and excess and obsolete inventory
provisions. Gross margin as a percentage of sales was 46.4 percent in
the first nine months of fiscal 1999, compared to 46.0 percent in the
first nine months of fiscal 1998.
Operating Expenses
- ------------------
Operating expenses in the third quarter of fiscal 1999 were $555.8
million, or 39.4 percent of sales, compared to $517.3 million, or 41.3
percent of sales in the third quarter of fiscal 1998 and $544.7
million, or 35.3 percent of sales in the second quarter of fiscal
1999. Excluding the net pre-tax charge for purchased in-process
technology and the net pre-tax merger-related charges (credits) and
other, operating expenses for the third quarter of fiscal 1999 were
$556.0 million, or 39.4 percent of sales, compared to $527.2 million,
or 42.1 percent of sales in the third quarter of fiscal 1998 and
$544.0 million, or 35.3 percent of sales for the second quarter of
fiscal 1999.
Operating expenses for the first nine months of fiscal 1999 were $1.6
billion, or 36.8 percent of sales, compared to $1.8 billion, or 45.7
percent in the first nine months of fiscal 1998. Excluding the net
pre-tax charge for purchased in-process technology and the net pre-tax
merger-related charges (credits) and other, operating expenses for the
first nine months of fiscal 1999 were $1.6 billion, or 37.0 percent of
sales compared to $1.6 billion, or 39.3 percent of sales for the first
nine months of fiscal 1998.
The Company expects operating expenses to increase in the fourth
quarter of fiscal 1999 due largely to the incremental employee and
asset costs associated with the March 1999 acquisition of NBX
Corporation as well as the February 1999 acquisitions of Smartcode
Technologie and certain assets of ICS Networking, Inc.
Sales and Marketing. Sales and marketing expenses in the third
quarter of fiscal 1999 increased $9.5 million or three percent from
the same quarter a year ago, but decreased to 23.0 percent of sales in
the third quarter of fiscal 1999, compared to 25.2 percent in the
third quarter of fiscal 1998. The decrease as a percentage of sales
reflected the Company's growth of expenses at a slower rate than
sales. Sales and marketing expenses in the third quarter of fiscal
1999 increased $3.0 million or one percent from the second quarter of
fiscal 1999 and increased as a percentage of sales to 23.0 percent in
the third quarter of fiscal 1999, compared to 20.9 percent in the
second quarter of fiscal 1999. The increase as a percentage of sales
was primarily the result of reduced sales in the third quarter. In
addition, the Company increased advertising and marketing program
spending, particularly for consumer products. Sales and marketing
expenses for the first nine months of fiscal 1999 decreased $5.9
million, or one percent compared to the first nine months of fiscal 1998,
and decreased as a percentage of sales to 21.8 percent for the first nine
months of fiscal 1999 compared to 23.6 percent for the first nine
months of fiscal 1998.
Research and Development. Research and development expenses in the
third quarter of fiscal 1999 increased $17.9 million or 12 percent
from the year-ago period, and remained flat as a percentage
of sales. The increase in absolute dollars was mainly a result of
increased spending on client access and handheld computer products.
Research and development expenses increased $4.4 million, or three
percent when compared to the second quarter of fiscal 1999 and
increased to 11.5 percent of sales in the third quarter of fiscal 1999
from 10.2 percent of sales in the second quarter of fiscal 1999. The
increase as a percentage of sales was primarily the result of reduced
sales in the third quarter. Research and development expenses for the
first nine months of fiscal 1999 increased $36.7 million compared to
the first nine months of fiscal 1998, but as a percentage of sales,
remained relatively flat.
General and Administrative. General and administrative expenses in
the third quarter of fiscal 1999 increased $1.4 million or two percent
from the same quarter a year ago, but decreased to 4.9 percent of
sales in the third quarter of fiscal 1999, compared to 5.4
percent in the third quarter of fiscal 1998. The decrease as a
percentage of sales reflected the growth of expenses at a slower rate
than sales. General and administrative expenses increased $4.6
million or seven percent from the second quarter of fiscal 1999, and
increased as a percentage of sales to 4.9 percent in the third
quarter of fiscal 1999, compared to 4.2 percent in the second quarter
of fiscal 1999. The increase as a percentage of sales resulted
primarily from reduced sales in the third quarter. In addition, the
Company increased the allowance for doubtful accounts due to economic
instability in Asia and Latin America. General and administrative
expenses for the first nine months of fiscal 1999 decreased $8.8
million, or four percent compared to the first nine months of fiscal 1998,
and decreased as a percentage of sales to 4.4 percent for the first
nine months of fiscal 1999 compared to 5.0 percent for the first nine
months of fiscal 1998.
Purchased In-Process Technology. In the third quarter of fiscal 1999,
the Company recorded a charge for purchased in-process technology of
approximately $7.1 million associated with the acquisitions of
Smartcode Technologie and certain assets of ICS Networking, Inc.
Merger-Related Charges (Credits) and Other. During the third quarter
of fiscal 1999, the Company recorded adjustments to previously
recorded merger and restructuring charges, which totaled a net pre-tax
credit of approximately $7.3 million. This net amount reflects a $7.6
million reduction in the estimated costs for duplicate facilities, a
$2.4 million gain on the sale of excess real estate realized in the
third quarter, a $2.1 million charge reflecting a change in the
estimated net realizable value of a closed manufacturing plant
in Chicago, and an incremental $0.6 million of costs associated with
employment contracts. During the third quarter of fiscal 1998, the
Company recorded a net pre-tax credit of $9.9 million which included
reductions in the estimates for remaining charges associated with
duplicate facilities and information systems, partially offset by
costs incurred for a product swap-out program associated with certain
discontinued products. During the second quarter of fiscal 1999, the
Company recorded a net pre-tax charge of approximately $0.6 million, which
represented $4.8 million of expenses recognized due to revisions in
the estimated sales prices for duplicate facilities reflecting current
market conditions, and a $4.2 million gain on the sale of land.
Interest and Other Income (Expense), Net
- ----------------------------------------
Interest and other income (expense), net in the third quarter of
fiscal 1999 increased $22.5 million compared to the third quarter of
fiscal 1998 primarily due to improved foreign currency results,
increased interest income due to higher cash and investment balances,
and reduced interest expense. In the third quarter of fiscal
1998, the Company had approximately $8.5 million of foreign
currency losses, primarily related to Korean operations, where
foreign exchange hedges were not available, or were available only to
a limited extent. In addition, in the third quarter of fiscal 1998,
the Company recorded a charge of approximately $4.7 million related to
an early call premium and write-off of unamortized issuance fees
associated with the redemption of convertible notes. Interest and
other income (expense), net in the third quarter of fiscal 1999
increased $5.8 million compared to thesecond quarter of fiscal 1999
primarily due to improved foreign currency results and increased
interest income as a result of higher cash and investment balances.
Interest and other income (expense), net increased $33.8 million in
the first nine months of fiscal 1999compared to the first nine months
of fiscal 1998.
The majority of the Company's sales are denominated in U.S. Dollars.
Where available, the Company enters into foreign exchange forward
contracts to hedge significant balance sheet exposures and
intercompany balances against future movements in foreign exchange
rates.
Income Tax Provision
- --------------------
The Company's effective income tax rate was 31.0 percent in the third
quarter of fiscal 1999 compared to 35.0 percent in the third quarter
of fiscal 1998 and 30.3 percent in the second quarter of fiscal 1999.
The decrease in the tax rate from the third quarter of fiscal 1998
relates to increased offshore manufacturing in countries with tax
rates significantly below the U.S. statutory rate. The increase in
the tax rate from the second quarter of fiscal 1999 was due to the
cumulative benefit of the Tax and Trade Relief Extension Act of 1998,
which retroactively extended the research and development tax credit
to the beginning of the Company's fiscal year.
The effective tax rate for the first nine months of fiscal 1999 was
31.0 percent. The Company recorded a tax provision of $142.1 million
for the first nine months of fiscal 1999 compared to $52.0 million for
the first nine months of fiscal 1998. The provision in the first nine
months of 1998 reflected the non-deductibility of certain merger
costs. Excluding these costs, the pro forma effective income tax rate
was 35.0 percent for the first nine months of fiscal 1998.
Equity Interest in Loss of Consolidated Joint Venture
- -----------------------------------------------------
Equity interest in loss of consolidated joint venture was $0.2
million for the third quarter of fiscal 1999. This amount represents
the pro-rata share of the joint venture's loss allocated to the other
investors for the period between the date of investment and the end of the
Company's third fiscal quarter of 1999. The Company entered into this
joint venture in the third quarter of fiscal 1999. See Note 3 of
Notes to Condensed Consolidated Financial Statements, "Business
Combinations and Joint Venture."
Net Income (Loss) and Net Income (Loss) Per Share
- -------------------------------------------------
Net income for the third quarter of fiscal 1999 was $89.7 million, or
$0.24 per share, compared to net income of $13.9 million, or $0.04 per
share, for the third quarter of fiscal 1998, and net income of $132.9
million, or $0.36 per share, for the second quarter of fiscal 1999.
Excluding the net pre-tax charge for purchased in-process technology
and the net pre-tax merger-related charges (credits) and other, net
income was $89.6 million, or $0.24 per share, for the third quarter of
fiscal 1999 compared to $7.4 million, or $0.02 per share, for the
third quarter of fiscal 1998 and $133.4 million, or $0.36 per share,
for the second quarter of fiscal 1999.
Net income for the first nine months of fiscal 1999 was $316.3
million, or $0.86 per share, compared to a net loss of $33.4 million,
or $0.10 per share, for the first nine months of fiscal 1998.
Excluding the net pre-tax charge for purchased in-process technology
and the net pre-tax merger-related charges (credits) and other, net
income was $309.7 million, or $0.84 per share, for the first nine
months of fiscal 1999 compared to $180.2 million, or $0.49 per share,
for the first nine months of fiscal 1998.
Business Environment and Industry Trends
The forward-looking statements of 3Com Corporation (including those in
this report on Form 10-Q concerning fourth quarter of fiscal 1999
growth, pricing, and growth of emerging markets) are subject to risks
and uncertainties. Some of the factors that could cause future
results to materially differ from the Company's recent results or
those projected in the forward-looking statements include, but are not
limited to, the factors set forth below.
Industry Growth Rates. The Company's success is dependent, in part,
on the overall growth rate of the networking industry. In 1997 and
1998, industry growth was below historical rates. Industry reports
indicate that the networking industry worldwide grew by less than 20
percent during 1997 and less than 15 percent during 1998. A recent
market analyst research report states that the networking industry
growth rate will continue to decline as the industry matures and as
companies faced with the costs associated with Year 2000 issues delay
network equipment purchases. For example, in the third quarter of
fiscal 1999, the Company believes that a slowdown in end-user demand
for networking products in the enterprise market, particularly in the
Americas region, negatively impacted the Company's sales.
The Company's success is also impacted by the growth of related
industries such as the personal computer (PC) market. During the
third quarter of fiscal 1999, several of the Company's large
distributors reported disappointing earnings, primarily related to
weaker than expected sales of PC-related products. The Company
believes that distributors' weakness in PC-related sales negatively
impacted sales of networking products as well. The Company's
business, operating results or financial condition may be adversely
affected by any further decrease in growth rates of networking or
related industries. In addition, there can be no assurance that the
Company's results in any particular period will be consistent with the
future growth rate of the industry.
Industry Consolidation. The networking industry continues to
experience significant consolidation, both among networking companies
and between networking and telecommunications equipment providers. For
example, from January 1998 through March 1999:
- - 3Com acquired Lanworks Technologies, Inc., EuPhonics, Inc.,
Smartcode Technologie, NBX Corporation and certain assets of ICS
Networking, Inc.;
- - Lucent Technologies acquired ten companies, and
announced plans to acquire Ascend Communications;
- - Cisco Systems acquired ten companies;
- - Nortel Networks acquired four companies, including Bay Networks;
- - Alcatel announced plans to acquire Xylan;
- - Siemens A.G. announced plans to acquire Argon Networks,
Castle Networks, and Redstone Communications.
Consolidation is also occurring between networking companies and
networking components suppliers. Examples of this trend include the
Company's acquisition of certain assets of ICS Networking, Inc. and
Intel's planned acquisition of Level One Communications, Inc.
Future business combinations in the networking industry may result in
companies with greater resources and stronger competitive positions
and products than the Company's. Continued industry consolidation may
have a material adverse effect on the Company's operating results or
financial condition.
Changes in the Distribution Channels. Like many suppliers of computer
and computer communications equipment, the Company distributes its
products primarily through a two-tier distribution channel. The first
tier includes large distributors that aggregate products from
suppliers and distribute those products to the second tier, which is a
broader group of distributors and value-added resellers that sell
networking products directly to end-users. In recent
months, several large first-tier distributors have experienced
financial pressure, which the Company believes reflects new or
heightened competition from non-traditional competitors, including
Internet-based suppliers and PC manufacturers that distribute directly
to end-users. With the emergence of new channels, there can be no
assurance that large distributors will be able to generate sales of
networking products at historic levels. Changes in the pattern of
distribution of networking products could have a material adverse
affect on 3Com's sales.
Shift to PC Original Equipment Manufacturer Distribution.
Distribution of PC-related networking products, such as modems and
network interface cards (NICs), is shifting from the distribution channel
to the PC original equipment manufacturer (OEM) channel. Products
sold through the PC OEM channel typically have a lower average selling
price and lower margins than those sold through the distribution
channel or through retailers. The Company derives a significant
portion of its sales from PC OEMs such as Dell Computer, Toshiba,
Hewlett-Packard and IBM that bundle 3Com NICs and modems and
incorporate 3Com chipsets into their products. As a result, the
Company's future operating results are dependent, in part, on the
Company's ability to establish, maintain and strengthen relationships
with PC OEMs. The Company's sales and gross margins may be adversely
impacted as PC OEMs continue to become a larger percentage of the
business.
In addition, certain PC OEMs have, from time to time, chosen to
integrate NIC and modem functions on the PC motherboard. For example,
the Company currently sells networking chipsets to Dell Computer that
are integrated directly onto the PC motherboard of Dell's high-end
Optiplex line of PCs. Further, competitors who are able to integrate
networking and other computer processing functions onto a single chip
might offer PC OEMs an alternative to traditional networking chip
solutions. Should the shift to the integration of networking and
computer processing functionality on a reduced number of components
increase, the Company's ability to become and/or continue to be a
supplier of the integrated components could impact future sales growth
and profitability.
Competition and Pricing. The Company participates in a highly
volatile industry characterized by vigorous competition for market
share, rapid product and technology development, uncertainty over
adoption of industry standards and declining prices. For example,
during the third quarter of fiscal 1999, Cisco Systems began shipping
a new multi-gigabit enterprise switch, which competes directly with
the Company's CoreBuilder(Registered Trademark) 9000 family of high-
performance switches. Xircom increased its market share substantially
in the mobile PC Card combination NIC and modem category. In addition,
competitors in the low-end handheld computer market, such as Olivetti,
Compaq, and Hewlett-Packard introduced new products with aggressive
prices. Also, in recent months, several competitors have emerged in
the handheld computing market space with products based upon the
Microsoft Windows CE platform. The Company believes that given the
highly competitive nature of the industry and the recent slowdown in
end-user demand for networking products in the enterprise market,
networking prices will be subject to further price
decreases. There can be no assurance that intense competition in the
industry and particular actions of the Company's competitors will not
have an adverse effect on the Company's business, operating results
or financial condition.
The Company's competition historically has come from start-up
companies, well-capitalized computer systems and communications
companies, and other technology companies focusing on data networking.
However, the industry within which the Company competes is changing,
resulting in new and other potential competitors in addition to
current competitors who have greater financial, marketing and
technical resources than the Company. In particular, with the
convergence of voice, video, and data traffic on a single network
infrastructure, the Company now competes with much larger companies
such as Lucent Technologies, Inc., Nortel Networks and other
telecommunications equipment providers. The Company's business may be
adversely impacted by the development by competitors of products and
technologies that render certain of the Company's products obsolete or
noncompetitive.
Strategic Relationships. In addition to mergers and acquisitions,
technology companies are continually entering into strategic
relationships. For example, in the third quarter of fiscal 1999, the
Company announced a strategic relationship with Microsoft Corporation,
a joint venture with Siemens A.G., and expanded its relationship with
Dell Computer. In the second quarter of fiscal 1999, the Company
announced strategic PC OEM relationships with IBM, Hewlett-Packard and
Toshiba America. If the Company experiences difficulties managing
relationships with its partners or if projects with partners are
unsuccessful, there could be an adverse impact on the Company's
results of operations or financial condition. In addition, if the
Company's competitors enter into successful strategic relationships,
they could become more competitive in the market than 3Com.
Electronic Commerce and Electronic Data Interchange (EDI). Many
vendors, distributors and resellers have been successful in the direct
sale of products to customers who order products on the Internet or
through EDI. These trends have enabled manufacturers to increase
business volume and lower their cost structures. There can be no
assurance that the Company will continue to expand its sales through
the Internet or EDI. Failure to do so could adversely affect
operating results or financial condition.
International Markets. The Company operates internationally and
expects that international markets will continue to account for a
significant percentage of the Company's sales. Some international
markets are characterized by economic and political instability and
currency fluctuations that can adversely affect the Company's
operating results or financial condition.
For example, during the first nine months of fiscal 1999, the Company
experienced lower sales in the Latin American and Asia Pacific regions
compared to the first nine months of fiscal 1998, due in large part to
economic and political instability and currency fluctuations. The
instability in the Latin American and Asia Pacific financial markets
negatively impacted the Company's sales in those markets by, among
other things, decreasing end-user purchases, increasing competition
from local competitors, and reducing access to sources of capital
needed by customers to make purchases. In addition to reducing sales,
difficulties in the Latin American and Asia Pacific regions subject
the Company's resellers to financial hardships, which may increase the
Company's credit risk as customers become insolvent or otherwise have
their ability to meet obligations impaired. There can be no assurance
that other regions will not experience similar economic or political
instability, which would have an adverse effect on the Company's
operating results or financial condition.
Euro-Currency. The Single European Currency (Euro) was introduced on
January 1, 1999 with complete transition to this new currency required
by January 2002. The Company has made and expects to continue to make
changes to its internal systems in order to accommodate doing business
in the Euro. The transition to the Euro could result in increased
fluctuations in foreign currency hedging results. Any delays in the
Company's ability to be Euro-compliant could have an adverse impact on
the Company's operating results or financial condition.
Public Policy.
Telecommunications. Significant changes in telecommunication
regulations, particularly in the U.S., are anticipated in the near
future, which could impact the rate of expansion of service providers'
network infrastructures. Future changes by regulatory agencies or
application of new requirements could affect sales of the Company's
products for certain classes of customers. Additionally, the
Company's products must comply with various telecommunications
requirements and regulations of the U.S. Federal Communications
Commission and countries in which the Company's products are used.
Changes in regulations, or failure by the Company to obtain timely
approval of products, could have a material adverse effect on the
Company's results of operations or financial condition.
Internet. The application of laws and regulations with respect to
access to, or commerce on, the Internet is unsettled. Changes in laws
or interpretation of laws which govern the development of the
Internet, commerce over the Internet, voice transmissions over the
Internet and access charges for Internet service providers, as well as
the continuing deregulation of the telecommunications industry, could
have a material adverse impact on the Company's operating results or
financial condition.
Accounting For Business Combinations. The Financial Accounting
Standards Board (FASB) began deliberation of revisions to the rules
for business combinations 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
acquisitions used in either a purchase or a pooling-of-interests
combination. Tentative conclusions of the FASB severely restrict the
use of pooling-of-interests and prohibit the immediate write-off of
purchased in-process technology. The FASB expects to reach a
conclusion on some of the business combination revisions in calendar
1999. Changes to the current accounting rules for business
combinations will not preclude acquisitions but may increase the
earnings dilution associated with future transactions.
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 merger. If the Commission issues new
guidance or interpretation of existing rules, previously filed
financial statements of the Company may require restatement and future
results may be adversely impacted.
Company-Specific Trends and Risks
Transition of Sales Base to Include Additional High-Growth
Businesses. A significant portion of the Company's sales are
derived from products such as NICs and analog modems. The market for
these products is slowing and is particularly sensitive to price
competition, resulting in lower sales growth. Consequently, the
Company believes that sales growth attributable to these products
will likely decline. Other markets in which the Company participates,
such as carrier-class switching and access products, are expected to
grow. In recent months, 3Com has entered several emerging markets for
networking products that are forecasted to grow significantly. In
particular, the Company has announced its focus on the following high
growth and/or emerging markets:
- - Handheld Computing
- - IP and LAN Telephony (VoIP and LAN Telephony)
- - Broadband Access (primarily cable and DSL)
- - Wireless Access
- - Home Networking
The transition of the Company's focus to these high growth and
emerging markets may cause disruption in the Company's research and
development efforts, sales, profits, distribution channels,
organization and market position. There can be no assurance that
these emerging markets will materialize in the timeframes expected by
the Company, that the Company will introduce products for these
markets in a timely manner or that the market will accept these products,
or that the Company will successfully generate significant revenues from
these markets. Additionally, the implementation of this transition could
result in changes in the Company's utilization of resources such as
its manufacturing capabilities, fixed assets and the nature and
location of its workforce.
Development and Introduction of New Products. The Company is actively
engaged in the research and development of new technologies and
products. Products in the networking industry have short life cycles.
Therefore, the Company's success depends, in substantial part, on the
identification of new market and product opportunities and the timely
development, introduction, and market acceptance of new products,
particularly in the emerging markets described above.
Industry Standards. The Company's success also depends, in part, 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 market
acceptance of these products. Slow market acceptance of new
technologies and industry standards could have an adverse impact on
the Company's results of operations or financial condition. Failure
to achieve timely certification of compliance to industry standards
for its products could have an adverse impact on sales of such
products and on the Company's results of operations or financial
condition.
Reliance on Distributors, Resellers and OEMs. The Company sells a
significant portion of its products to distributors, resellers and PC
OEMs. The Company's reliance on these channels subjects the Company
to many risks, including inventory, credit and business concentration.
In particular, the Company's distributors and resellers maintain
significant levels of the Company's products in their inventories.
The Company attempts to ensure that appropriate levels of products are
available to end-users by working closely with distributors and
resellers to monitor inventory levels. There can be no assurance that
the Company will be successful in efforts to operate within its
desired channel inventory business model.
The distribution and reseller channels utilized by the Company have
undergone a significant level of consolidation. As a result, the
Company has an increased concentration of credit risk. While the
Company monitors and attempts to manage this risk, financial
difficulties on the part of one or more of the Company's distributors
or resellers may have a material adverse effect on the Company's
results of operations or financial condition.
Financial Model. In managing its business, the Company periodically
establishes a long-term financial model 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, rather, it is used to assist the Company's
management in making decisions about the allocation of resources and
investments. The current model is as follows:
Gross margin 46.5 - 48.0%
Operating expenses 30.0 - 31.5%
Operating income 15.0 - 18.0%
The Company currently is not operating within some ranges of the model
and does not expect to achieve performance within all of the ranges in
calendar 1999.
Fluctuations in Quarterly Results. The Company's operating results
for any particular quarter are difficult to predict and may be subject
to significant fluctuations. These fluctuations can be caused by a
wide variety of factors, including seasonality with respect to the
volume and timing of orders (see Seasonality in Results of
Operations), 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, and extraordinary events such as
industry consolidation, acquisitions, or litigation. For example, the
first quarter of the fiscal year is a seasonally slower quarter and
has historically had either sequentially flat or only slightly
increased sales. In addition, as the portion of the Company's
consumer-related business grows, for example with products such as the
Palm(Trademark) line of handheld computers, seasonality will likely
become more pronounced. These factors, and accompanying fluctuations
in periodic operating results, could have a significant adverse impact
on the market price of the Company's common stock.
Ability to Satisfy Product Orders. The timing and amount of the
Company's sales are dependent on a number of factors that make
estimating operating results prior to the end of any period uncertain.
For example, the Company does not typically maintain a significant
backlog and, as a result, product sales in any quarter are dependent
on orders booked and shipped in that quarter. In addition, the
Company's customers historically request fulfillment of orders in a
short period of time, resulting in limited visibility to sales trends.
As a result, the Company's operating results depend on the volume and
timing of orders and the Company's ability to fulfill the orders in a
timely manner. The Company's results of operations or financial
condition would be adversely affected if incoming order rates decline,
if ordered products are not readily available, or if the Company is
not able to immediately fill orders.
Shipment Linearity. In the third quarter of fiscal 1999, the Company
recorded over half of its sales in the last five weeks of the quarter.
Non-linear sales patterns make business planning difficult and subject
the Company to increased risk of fluctuation in quarterly results from
disruptions in functions including manufacturing, order management,
information systems and shipping. Such disruptions to the Company's
operations could adversely affect the Company's results of operations
or financial condition.
Product Warranties and International Homologation. The Company's
products are often covered by legal and contractual warranties, and
the Company may be subject to contractual and/or legal commitments to
perform under such warranties. In addition, as the Company's products
are sold and marketed in many countries, the Company's products are
required to function in many different telecommunications environments
and in connection with various telecommunications systems and
products. If circumstances arise such that certain of the Company's
products fail to perform as intended and the Company is not successful
in timely resolution of such product quality or performance issues,
such failure could have a material adverse impact on the operating
results or financial condition of the Company. Likewise, failure to
meet commitments related to installation of enterprise networks may
subject the Company to claims for business disruption or consequential
damages if a network cutover is not successfully or timely completed.
Reliance on Suppliers. Some key components of the Company's products
are currently available only from single or limited sources.
Likewise, certain services on which the Company relies are furnished
from single or limited service providers. In addition, certain of the
Company's suppliers are competitors of the Company. While the Company
has generally been able to obtain adequate supplies of components from
existing sources, there can be no assurance that in the future the
Company's suppliers will be able to meet the Company's demand for
components in a timely and cost-effective manner. The Company's
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.
Commercial Commitments. The Company sometimes enters into minimum or
other non-cancelable commitments. Should sales volumes fluctuate
significantly or product delivery schedules slip, the obligation to
meet commitments could adversely affect the Company's results of
operations or financial condition.
Intellectual Property Rights. Many of the Company's competitors, in
particular, the large, well established telecommunications and
computer equipment manufacturers, have large intellectual property
portfolios, including patents which may cover technologies that are
relevant to the Company's business. In addition, many smaller
companies, universities and individual inventors are actively engaged
in research and development and have obtained or applied for patents
in areas of technology that may relate to the Company's business. The
industry is trending toward aggressive assertion, licensing and
litigation of patents and other intellectual property rights.
In the course of its business, the Company frequently receives
assertions of infringement and invitations to take licenses or
otherwise becomes aware of potentially relevant patents or other
intellectual property rights held by third parties. For example, in
recent periods, the Company has received a significant number of
assertions of infringement and invitations to take licenses. The
Company evaluates the validity and applicability of any such
intellectual property rights and the merits of any such third party
claims, and determines in each case whether it must negotiate licenses
or cross-licenses to incorporate or use the subject proprietary
technologies, protocols or specifications in the Company's products.
Any failure by the Company to obtain and maintain licenses, on
favorable terms, for intellectual property rights required for the
manufacture, sale and use of its products, particularly those which
must comply with industry standard protocols and specifications to be
commercially viable, could have a material adverse effect on the
Company's business, results of operations or financial condition.
In connection with the enforcement of its own intellectual property
rights or in connection with disputes relating to the validity or
alleged infringement of third party rights, the Company may be subject
to litigation. Intellectual property litigation may be complex,
costly and protracted. Such litigation can be 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 such litigation could subject the Company to
significant liabilities and costs, require the Company to seek
licenses from others, prevent the Company from manufacturing or
selling its products, or cause severe disruptions to the Company's
operations or the markets in which it competes, any one of which could
have a material adverse effect on the results of operations or
financial condition of the Company.
Information Systems. The Company is in the process of transitioning
its manufacturing, distribution, order administration, and finance
functions to the Company's primary transaction processing application
systems. In particular, during the fourth quarter of fiscal 1999, the
Company plans to convert a large number of U.S. and international
locations to the Company's primary transaction processing systems. As
a result of these transitions, the Company may experience system
disruptions in the areas of manufacturing, distribution, and
transaction processing, which could have an adverse effect on the
Company's results of operations or financial condition.
In addition, the Company is dependent on its information systems and
software to capture, process and store data. Should the Company
experience technical difficulties with any of its critical information
systems or software applications, there could be an adverse effect on
the Company's results of operations or financial condition.
Key Personnel and Recruiting. The success of the Company will depend
to a significant extent upon a number of key employees and management.
During the third quarter of fiscal 1999, the Company made significant
changes in executive management positions. The loss of the services
of key employees could have a material adverse effect on the Company's
business, operating results or financial condition.
Recruiting and retaining skilled personnel, including engineers, is
highly competitive. If the Company cannot successfully recruit and
retain skilled personnel, the Company's financial results may be
adversely affected. In addition, the Company must carefully manage
the growth in employees commensurate with anticipated growth in the
Company. Should the Company's sales growth or attrition levels vary
significantly, there could be an adverse effect on results of
operations or financial condition. Further, the market price of the
Company's common stock has been, and may continue to be extremely
volatile. If the market price of the Company's common stock is less
than the exercise price of stock options granted to employees,
turnover may increase, which could have an adverse effect on the Company's
results of operations or financial condition.
Year 2000 Readiness Disclosure
As is true for most companies, the Year 2000 issue creates a risk for
3Com. If systems do not correctly recognize date information when the
year changes to 2000, there could be an adverse impact on the
Company's operations. The Year 2000 issue not only impacts the
Company at the end of the calendar year 1999, but also, in certain
instances, the Company's fiscal year 2000, which for 3Com begins on
May 29, 1999. The risk for 3Com exists primarily in the following
areas: systems used by the Company to run its business including
information systems, equipment and facilities; systems used by the
Company's suppliers; potential warranty or other claims from 3Com
customers; and the potential for reduced spending by other companies
on networking solutions as a result of significant information systems
spending on Year 2000 remediation. The Company is continuing to
evaluate and mitigate its exposure in these areas where appropriate.
Certain of the Company's disclosures and announcements concerning its
products and Year 2000 programs, including those in this report on
Form 10-Q, are intended to constitute "Year 2000 Readiness
Disclosures" as defined in the recently enacted Year 2000 Information
and Readiness Disclosure Act.
State of Readiness and Risks. The Company has identified four key
exposure areas within the Company 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 the Company's business, such as
finance, manufacturing, order processing and distribution. The
Company has completed its evaluation of these applications for Year
2000 compliance, and has begun remediation or replacement of systems,
where necessary, and is conducting integration tests for fiscal and
calendar year readiness. The Company expects to complete testing and
achieve fiscal year 2000 readiness by the end of the Company's fiscal
year in May 1999, and to complete testing and achieve calendar year
2000 readiness by the end of September 1999. In the event that
implementation of replacement systems is delayed, or if significant
new non-compliance issues are identified, the Company's ability to
conduct its business or record transactions could be disrupted, which
could adversely affect results of operations or financial condition.
Equipment and facilities. The Company is evaluating Year 2000
compliance of its equipment and facilities. The Company is in the
final stage of contacting the suppliers to ascertain Year 2000
compliance of its critical equipment. The Company expects to achieve
Year 2000 readiness for critical equipment by the end of September
1999. If identification of non-compliant equipment and any upgrade or
replacement of equipment is delayed, the Company's design, production
and shipping capabilities could be disrupted, which could adversely
affect the Company's results of operations or financial condition.
3Com is also evaluating each PC in use at 3Com worldwide, assessing
its Year 2000 readiness, and upgrading as required. Because not all
of the Company's PCs can be upgraded, a certain number will need to be
replaced. The Company is currently expecting replacements to be
required for less than 10% of the PCs deployed worldwide and has
included the cost of these replacements in its total Year 2000 cost
estimates. The Company expects that the upgrade or replacement of PCs
will be completed by the end of the calendar year.
The Company is assessing the Year 2000 readiness of its owned and
leased facilities worldwide. Priority is being placed on the 3Com
owned facilities and other critical facilities that house large
numbers of employees or significant operations. The Company expects
to complete its assessment activities by the end of April 1999 and expects
to complete remediation efforts by September 1999. The function of
these facilities is critical to operations, and as such, any delays in
achieving Year 2000 compliance with respect to these facilities could
adversely affect the Company's results of operations or financial
condition.
Products. The Company has conducted extensive evaluation of its
currently available and installed base of products. The Company
believes that products on its current price list are Year 2000
compliant. The Company has identified certain obsolete products that
are not Year 2000 compliant. While the Company still supports some of
these obsolete products, all can be upgraded or replaced with a 3Com
Year 2000 compliant product. There can be no assurance that certain
previous releases of the Company's products will prove to be Year 2000
compliant with customers' systems or within existing networks. To
assist customers in evaluating Year 2000 readiness of 3Com's products,
the Company has developed a list that indicates the capability of its
products. The list is located on the Company's website (www.3Com.com)
and is periodically updated as assessment of additional products is
completed. The inability of any of the Company's products to operate
properly in the year 2000 could result in increased warranty costs,
customer satisfaction issues, litigation or other material costs and
liabilities, which could adversely affect the Company's results of
operations or financial condition.
Key suppliers. The Company is currently contacting its critical
suppliers of products and services to determine that the suppliers'
operations and the products and services they provide are Year 2000
compliant. Follow-up efforts are underway to obtain feedback from
these suppliers. The Company expects that all critical non-compliant
suppliers will be identified (along with an appropriate remediation or
contingency plan) by the end of April 1999. As needed, the Company
will identify alternative sources of supply. The Company expects to
complete confirmation of supplier Year 2000 readiness by the end of
September 1999. If key suppliers fail to adequately address the Year
2000 issue for the products or services they provide to the Company,
critical materials, products and services may not be delivered in a
timely manner, which could adversely affect the Company's results of
operations or financial condition.
Contingency Plans. As the Company is still assessing its Year 2000
compliance in all areas, a full contingency plan has not yet been
finalized. As the assessments are completed, contingency plans have
been or will be developed for each area, as needed. For example,
contingency plans for production facilities could include shifting
production and distribution to other Company facilities or engaging
subcontractors.
Costs to Address Year 2000 Issues. Based on the Company's current
assessments, it is expected that the total cost, including currently
estimated contingency costs, of these programs will range between $25
million and $35 million. Approximately $3 million has been spent on
the programs to date. All expected costs are based on the Company's
current evaluation of the Year 2000 programs and are subject to change
as the programs progress. It is anticipated that the majority of the
Year 2000 costs incurred will include consultant fees and internal
hardware and software upgrades or replacements. The Company does not
separately track the internal labor costs associated with the Year
2000 project unless it is an individual's primary focus. These costs,
including employee efforts involved in assessing the Company's Year
2000 exposures, testing, and remediating non-compliant Year 2000
systems, communicating with customers, and various other employee-
related tasks, have not been included in the total estimated costs.
Any costs associated with potential Year 2000 litigation exposure are
not estimable and are not included in the total cost estimate above.
The majority of the Company's Year 2000 costs relate to the Company's
key transaction processing applications and products. The Company has
adequate funds to pay for the expected costs of Year 2000 programs.
As of the end of the third quarter of fiscal 1999, no significant
internal information technology projects have been deferred due to the
Company's Year 2000 efforts.
Sales Impact. Year 2000 compliance 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 have a material adverse impact on the Company's sales,
operating results or financial condition.
Liquidity and Capital Resources
Cash and equivalents and short-term investments at February 26, 1999
were $1.7 billion, an increase of $648.2 million or 60 percent from
May 31, 1998.
For the nine months ended February 26, 1999, net cash generated from
operating activities was $812.3 million. Accounts receivable at
February 26, 1999 increased $131.4 million from May 31, 1998 to $981.0
million. Days sales outstanding in receivables increased to 63 days
at February 26, 1999, compared to 56 days at May 31, 1998 primarily
due to a higher concentration of sales in the third month of the
quarter ended February 26, 1999, compared to the third month of the
quarter ended May 31, 1998. Inventory levels at February 26, 1999
decreased $235.6 million, of which $185.5 million was finished goods,
from the prior fiscal year-end to $409.2 million. Average inventory
turnover was 7.0 turns for the quarter ended February 26, 1999,
compared to 4.4 turns for the quarter ended May 31, 1998, primarily as
a result of the decrease in inventory balances.
In the first nine months of fiscal 1999, the Company acquired two
companies and certain assets of a third for a combined total of $39.2
million in cash, net of cash acquired. The cost to complete products
under development at the time of these acquisitions is not expected to
be material to the Company's financial results.
During the nine months ended February 26, 1999, the Company made
$186.5 million in capital expenditures. Major capital expenditures
included upgrades and expansion of the Company's facilities in the
U.S. and purchases and upgrades of systems and other equipment.
Additionally, in the first nine months of fiscal 1999, the Company
sold three facilities in the Chicago and Boxborough areas and
equipment in the Chicago area for total net proceeds of $29.3 million.
As of February 26, 1999, the Company had approximately $33.6 million
in capital expenditure commitments outstanding, primarily associated
with the consolidation of facilities in the Chicago area. In
addition, the Company has commitments related to operating lease
arrangements in the U.S., under which the Company has 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, the Company
retains an obligation for the difference, subject to certain
provisions of the lease.
In June 1998 and March 1999, the Company's Board of Directors
authorized the repurchase of up to a total of 20 million shares of the
Company's common stock. Such purchases are made in the open market
from time to time. During the first nine months of fiscal 1999, the
Company repurchased 4.3 million shares of common stock at a total cost
of $130.4 million. During the first nine months of fiscal 1999, the
Company received net cash of $189.9 million from the sale of shares of
its common stock to employees through its employee stock purchase and
option plans.
The Company has a $100 million revolving bank credit agreement, which
expires December 20, 1999. Payment of cash dividends are permitted
under the credit agreement, subject to certain limitations based on
net income levels of the Company. The Company has not paid and does
not anticipate it will pay cash dividends on its common stock. The
credit agreement requires the Company to maintain specified financial
covenants. As of February 26, 1999, there were no outstanding
borrowings under the credit agreement, and the Company was in
compliance with all required covenants.
During the first nine months of fiscal 1999, the Company repaid $12.0
million of borrowings under the 7.52% Unsecured Senior Notes
agreement. As of February 26, 1999, $36.0 million of this debt
remained outstanding, of which $12.0 million is classified as current,
and is included in accrued liabilities and other.
During the first nine months of fiscal 1999, the Company
increased borrowings by approximately $9.5 million compared to May 31,
1998 primarily related to a $7.7 million equipment financing transaction,
debt acquired in the Smartcode Technologie acquisition and debt
acquired as a result of a consolidation of a joint venture.
During the first nine months of fiscal 1999, the Company recorded a
non-cash tax benefit on stock option transactions of $77.8 million.
During the same period a year ago, the Company recorded a tax benefit
on stock option transactions totaling $153.1 million.
Based on current plans and business conditions, the Company believes
that its existing cash and equivalents, short-term investments, cash
generated from operations and the available credit agreement will be
sufficient to satisfy anticipated cash requirements for at least the
next twelve months.
Effects of Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of
an Enterprise and Related Information." This Statement requires that
financial information be reported on the basis used internally for
evaluating segment performance and deciding how to allocate resources
to segments. SFAS 131 will be effective for the Company's fiscal year
ended May 28, 1999 and requires disclosure of historical information
for comparative purposes. Management of the Company is currently
evaluating the effects of this Statement on its reporting of segment
information.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires
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. SFAS 133 will be effective for the Company's fiscal
year 2001. Management believes that this Statement will not have a
significant impact on the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on
Form 10-K for the year ended May 31, 1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to lawsuits in the normal course of its
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. The Company believes that it
has defenses in each of the cases set forth below and is vigorously
contesting each of these matters. An unfavorable resolution of one or
more of the following lawsuits could have a material adverse affect on
the business, results of operations or financial condition of the
Company.
Securities Litigation
On March 24 and May 5, 1997, putative 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 the
Company 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 purported 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 putative 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. On March 1, 1999, the Court dismissed the
complaint. The Court granted leave for plaintiffs to file an amended
complaint.
In December 1997, a putative 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,
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. The Company has filed a motion to dismiss the
complaint.
In October 1998, a putative securities class action lawsuit, captioned
Adler v. 3Com Corporation, et al., Civil Action No. CV777368 (Adler),
was filed against the Company 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 Company plans to file a motion to dismiss this action.
In January 1998, two purported shareholder complaints relating to the
Company's June 1997 merger with U.S. Robotics, captioned Stanley
Grossman v. 3Com Corporation, et al., Civil Action No. CV771335, and
Jason v. 3Com Corporation, et al., Civil Action No. CV771713, were
filed in California Superior Court, Santa Clara County. The actions
allege that 3Com, several of its officers and directors, and several
former U.S. Robotics officers violated Sections 11 and 15 of the
Securities Act of 1933 by making alleged misrepresentations and
omissions in a May 8, 1997 registration statement. The complaints
seek damages in an unspecified amount on behalf of a purported class
of persons who received the Company's stock during the merger pursuant
to the registration statement. On September 25, 1998, the Delaware
Chancery Court issued an injunction preventing plaintiffs from
proceeding with these actions, finding that plaintiffs' claims are
barred by a settlement in a prior action. On March 15, 1999, the
Delaware Chancery Court issued an order denying a motion by plaintiffs
to set aside the settlement in the prior action.
In February 1998, a shareholder derivative action purportedly on
behalf of the Company, captioned, Wasserman v. Benhamou, et al., Civil
Action No. 16200-NC, was filed in Delaware Chancery Court. The
complaint alleges that the Company's directors breached their
fiduciary duties to the Company by engaging in alleged wrongful
conduct from mid-1996 through November 1997, including the conduct
complained of in the securities litigation described above. The
Company is named solely as a nominal defendant, against whom the
plaintiff seeks no recovery. The Company and the individual
defendants have filed a motion to dismiss the complaint.
In October 1998, two shareholder derivative actions purportedly on
behalf of the Company, 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 the Company's directors breached their fiduciary duties to
the Company through the issuance of and disclosures concerning stock
options. The Company is named solely as a nominal defendant, against
whom the plaintiffs seek no recovery. The Company and the individual
defendants have filed a motion to dismiss these actions.
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
entitled: 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.
Consumer Litigation
A putative consumer class action pending against the Company and U.S.
Robotics in the California Superior Court, Marin County, Bendall, et
al. v. U.S. Robotics Corporation, et al., Civil Action No. 170441,
arising out of the purchase of x2 products and products upgradeable to
x2 technology, was coordinated with a previously filed individual
action in the California Superior Court, San Francisco County,
Intervention Inc. v. U.S. Robotics Corporation, Civil Action
No. 984352. The coordinated proceeding (Case number CV769903) is
pending in the California Superior Court, Santa Clara County. Two
putative consumer class action lawsuits pending against the Company
and U.S. Robotics in Cook County, Illinois arising out of the same
facts as those alleged in the California cases are stayed, Lippman, et
al. v. 3Com, Civil Action No. 97 CH 09773, and Michaels, et al. v.
U.S. Robotics Access Corporation, et al., Civil Action
No. 97 CH 14417. A class has not been certified, and discovery is
under way.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities and Use of Proceeds
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 (13)
3.2 Certificate of Correction Filed to Correct a Certain
Error in the Certificate of Incorporation (13)
3.3 Certificate of Merger (13)
3.4 Bylaws of 3Com Corporation, As Amended
4.1 Amended and Restated Rights Agreement dated December 31,
1994 (Exhibit 10.27 to Form 10-Q) (6)
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 (7)
10.1 1983 Stock Option Plan, as amended (Exhibit 10.1 to Form
10-K) (3)*
10.2 Amended and Restated Incentive Stock Option Plan (2)*
10.3 License Agreement dated March 19, 1981 (1)
10.4 Second Amended and Restated 1984 Employee Stock Purchase
Plan (Exhibit 10.5 to Form 10-Q) (8)*
10.5 3Com Corporation Director Stock Option Plan, as amended
(Exhibit 19.3 to Form 10-Q) (4)*
10.6 Amended 3Com Corporation Director Stock Option Plan
(Exhibit 10.8 to Form 10-Q) (8)*
10.7 3Com Corporation Restricted Stock Plan, as amended
(Exhibit 10.17 to Form 10-Q) (8)*
10.8 1994 Stock Option Plan (Exhibit 10.22 to Form 10-K) (5)*
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) (10)
10.10 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of November 20, 1996 (Exhibit 10.38
to Form 10-Q) (10)
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) (9)
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) (12)
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) (12)
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) (12)
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 (11)
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 (13)
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 (13)
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 (13)
10.19 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of July 29, 1997 for the
Marlborough site (13)
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 (13)
10.21 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of August 11, 1997 for the Rolling
Meadows site (13)
10.22 First Amendment to Credit Agreement (13)
- -----------------------------------------------------------------------------
* Indicates a management contract or compensatory plan.
(1) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Registration Statement on
Form S-1 filed 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-K filed
on August 27, 1991 (File No. 0-12867)
(4) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed
January 10, 1992 (File No. 0-12867)
(5) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-K filed
on August 31, 1994 (File No. 0-12867)
(6) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed
on January 13, 1995 (File No. 0-12867)
(7) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed
on May 16, 1995 (File No. 0-19550)
(8) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed
on January 15, 1996 (File No. 0-12867)
(9) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Registration
Statement on Form S-4, originally filed on October 11, 1996 (File No. 333-
13993)
(10) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed
on January 13, 1997 (File No. 0-12867)
(11) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Registration
Statement on Form S-4, filed on March 17, 1997 (File No. 333-23465)
(12) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed
on April 11, 1997 (File No. 0-12867)
(13) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed
on October 14, 1997 (File No. 0-12867)
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
3Com Corporation
(Registrant)
Dated: April 7, 1999 By: /s/ Christopher B. Paisley
------------- ----------------------------------
Christopher B. Paisley
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-28-1999
<PERIOD-END> FEB-26-1999
<CASH> 981,520
<SECURITIES> 742,726
<RECEIVABLES> 981,017
<ALLOWANCES> (99,697)
<INVENTORY> 409,216
<CURRENT-ASSETS> 3,582,637
<PP&E> 1,605,943
<DEPRECIATION> (768,627)
<TOTAL-ASSETS> 4,564,365
<CURRENT-LIABILITIES> 1,208,116
<BONDS> 0
0
0
<COMMON> 1,934,004
<OTHER-SE> 1,327,195
<TOTAL-LIABILITY-AND-EQUITY> 4,564,365
<SALES> 4,356,577
<TOTAL-REVENUES> 4,356,577
<CGS> 2,336,297
<TOTAL-COSTS> 3,286,279
<OTHER-EXPENSES> 567,195
<LOSS-PROVISION> 42,087
<INTEREST-EXPENSE> 2,776
<INCOME-PRETAX> 458,240
<INCOME-TAX> 142,055
<INCOME-CONTINUING> 316,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 316,341
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.86
</TABLE>
