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 November 27, 1998 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 December 25, 1998, 358,764,498 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 Six Months Ended November 27, 1998 and
November 30, 1997
Condensed Consolidated Balance Sheets
November 27, 1998 and May 31, 1998
Condensed Consolidated Statements of Cash Flows
Six Months Ended November 27, 1998 and November 30, 1997
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, Graffiti, Palm Computing and U.S. Robotics are
registered trademarks of 3Com Corporation or its subsidiaries. Palm III
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 Six Months Ended
-------------------------- --------------------------
November 27, November 30, November 27, November 30,
1998 1997 1998 1997
---- ---- ---- ----
Sales $1,540,537 $1,197,189 $2,946,048 $2,794,705
Cost of sales 817,503 645,344 1,593,278 1,476,773
---------- ---------- ---------- ----------
Gross margin 723,034 551,845 1,352,770 1,317,932
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 321,693 338,334 625,271 640,712
Research and
development 157,758 144,978 306,592 287,776
General and
administrative 64,588 71,265 123,994 134,130
Merger-related
charges (credits)
and other 638 (1,229) (9,580) 268,558
---------- ---------- ---------- ----------
Total operating
expenses 544,677 553,348 1,046,277 1,331,176
---------- ---------- ---------- ----------
Operating income
(loss) 178,357 (1,503) 306,493 (13,244)
Interest and other
income, net 12,274 7,637 21,919 10,598
---------- ---------- ---------- ----------
Income (loss) before
income taxes 190,631 6,134 328,412 (2,646)
Income tax provision 57,718 2,113 101,808 44,566
---------- ---------- ---------- ----------
Net income (loss) $ 132,913 $ 4,021 $ 226,604 $ (47,212)
========== ========== ========== ==========
Net income (loss) per share:
Basic $ 0.37 $ 0.01 $ 0.63 $ (0.14)
Diluted $ 0.36 $ 0.01 $ 0.62 $ (0.14)
Shares used in computing per share amounts:
Basic 358,302 350,600 358,418 346,159
Diluted 368,207 365,085 367,316 346,159
See Notes to Condensed Consolidated Financial Statements.
3Com Corporation
Condensed Consolidated Balance Sheets
(In thousands, except par value)
November 27, May 31,
1998 1998
------------ -------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 607,106 $ 528,981
Short-term investments 743,749 547,097
Accounts receivable, net 1,117,449 849,640
Inventories, net 443,488 644,771
Deferred income taxes 368,772 430,182
Other 93,060 134,001
---------- ----------
Total current assets 3,373,624 3,134,672
Property and equipment, net 839,945 858,779
Deposits and other assets 102,812 87,069
---------- ----------
Total assets $4,316,381 $4,080,520
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 383,611 $ 332,992
Accrued liabilities and other 677,218 673,311
Income taxes payable 196,093 177,612
---------- ----------
Total current liabilities 1,256,922 1,183,915
Long-term debt 24,000 35,878
Deferred income taxes and other
long-term obligations 58,365 53,232
Stockholders' equity:
Preferred stock, no par value,
10,000 shares authorized;
none outstanding - -
Common stock, $.01 par value,
990,000 shares authorized;
shares issued: November 27,
1998, 359,129; May 31, 1998,
358,870 1,754,399 1,730,676
Treasury stock at cost: 912
shares at November 27, 1998
and none at May 31, 1998 (31,650) -
Unamortized restricted stock
grants (6,168) (4,157)
Retained earnings 1,260,722 1,079,775
Unrealized gain on investments,
net 1,710 827
Accumulated translation
adjustments (1,919) 374
---------- ----------
Total stockholders' equity 2,977,094 2,807,495
---------- ----------
Total liabilities and
stockholders' equity $4,316,381 $4,080,520
========== ==========
See Notes to Condensed Consolidated Financial Statements.
3Com Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
---------------------------
November 27, November 30,
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 226,604 $ (47,212)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 131,836 128,201
Deferred income taxes 60,830 (81,971)
Adjustment to conform fiscal year of
pooled entity-U.S. Robotics - 15,052
Merger-related charges (credits)
and other (9,580) 268,558
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable (267,809) 87,679
Inventories 198,770 (173,432)
Other current assets 38,592 (22,010)
Accounts payable 50,619 19,281
Accrued liabilities and other 11,429 145,227
Income taxes payable 37,568 54,572
---------- ----------
Net cash provided by operating
activities 478,859 393,945
---------- ----------
Cash flows from investing activities:
Purchase of short-term investments (318,999) (269,631)
Proceeds from short-term investments 120,538 209,603
Purchase of property and equipment (118,201) (211,222)
Proceeds from the sale of property and
equipment 14,746 -
Business acquired in purchase transaction (6,258) -
Other, net (2,402) (25,418)
---------- ----------
Net cash used for investing activities (310,576) (296,668)
---------- ----------
Cash flows from financing activities:
Issuance of common stock 53,147 234,110
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) (12,397)
Net proceeds from issuance of debt - 33,300
Other, net (907) 4,287
---------- ----------
Net cash (used for) provided by financing
activities (90,158) 91,234
---------- ----------
Increase in cash and equivalents 78,125 188,511
Cash and equivalents, beginning of period 528,981 351,237
---------- ----------
Cash and equivalents, end of period $ 607,106 $ 539,748
========== ==========
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 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 November 27, 1998, and the
results of operations for the three and six months ended
November 27, 1998 and November 30, 1997 and cash flows
for the six months ended November 27, 1998 and November
30, 1997.
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 six
months ended November 27, 1998 as compared to the three
and six months ended November 30, 1997. The results of
operations for the three and six months ended November
27, 1998 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. U.S. Robotics Merger-Related Charges (Credits) and Other
On June 12, 1997, the Company completed the merger with
U.S. Robotics Corporation (U.S. Robotics), the leading
supplier of products and systems for accessing
information across the wide area network (WAN), including
modems and remote access products. This merger was
accounted for as a pooling-of-interests. The Company
issued approximately 158 million shares of its common
stock in exchange for all outstanding common stock of
U.S. Robotics. The Company also assumed all options to
purchase U.S. Robotics' stock, which were converted into
options to purchase approximately 31 million shares of
the Company's common stock, pursuant to the terms of the
merger.
In connection with this merger, through November 27,
1998, the Company has recorded aggregate merger-related
charges of $253.8 million, which included approximately
$210.0 million of integration expenses and $43.8 million
of direct transaction costs (consisting primarily of
investment banking and other professional fees).
Integration expenses included:
- - $49.3 million related to the closure and elimination
of owned and leased facilities, primarily duplicate
corporate headquarters, distribution sites and sales
offices;
- - $57.6 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;
- - $38.1 million associated with certain long-term
assets, primarily including duplicate finance,
manufacturing, human resource and other management
information systems, and capitalized purchased research
and development costs related to a discontinued
product; and
- - $65.0 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 second quarter of fiscal 1999, the
Company recorded approximately $3.8 million of merger
charges primarily related to an increase in the estimates
for remaining charges associated with duplicate
facilities which were included in merger-related charges
(credits) and other.
The remaining U.S. Robotics merger-related accrual at November 27,
1998 was approximately $25.3 million. Total expected
cash expenditures relating to the U.S. Robotics merger
charge are estimated to be approximately $116 million, of
which approximately $104 million was disbursed prior to
November 27, 1998. Benefits paid to approximately 900
employees terminated through November 27, 1998 were
approximately $57 million. Substantially all benefits
have been paid.
Other charges (credits) includes a $4.2 million net
gain on the sale of land, which had previously been
deferred pending resolution of certain contingencies that
were resolved during the quarter. Also included in other
charges (credits) was a charge of $1.0 million related to
a manufacturing plant in Chicago that was closed in the
fourth quarter of fiscal 1998. The charge reflects a
change in the estimated net realizable value of the
plant, reflecting current market conditions.
3. Business Combinations
During the second quarter of fiscal 1999, the
Company acquired EuPhonics, Inc. (EuPhonics), a leading
developer of DSP-based audio software that drives
integrated circuits, sound cards, consumer electronics,
and other hardware. The transaction, valued at $8.3
million, included cash for the outstanding shares,
assumption of EuPhonics employee stock options, and
direct transaction costs, and was accounted for as a
purchase. 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
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 Six Months Ended
------------------------- -------------------------
November 27, November 30, November 27, November 30,
1998 1997 1998 1997
---- ---- ---- ----
Net income (loss) $ 132,913 $ 4,021 $ 226,604 $ (47,212)
Other comprehensive
gain (loss):
Unrealized gain (loss)
on investments, net (213) (1,868) 883 (1,784)
Accumulated translation
adjustments 5,801 (2,675) (2,293) 794
---------- ---------- ---------- ----------
Total comprehensive
income (loss) $ 138,501 $ (522) $ 225,194 $ (48,202)
========== ========== ========== ==========
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 Six Months Ended
------------------------- -------------------------
November 27, November 30, November 27, November 30,
1998 1997 1998 1997
---- ---- ---- ----
Net income (loss) $ 132,913 $ 4,021 $ 226,604 $ (47,212)
========== ========== ========== ==========
Weighted average
shares-Basic 358,302 350,600 358,418 346,159
Effect of dilutive
securities:
Employee stock options 9,721 14,246 8,696 -
Restricted stock 184 239 202 -
---------- ---------- ---------- ----------
Weighted average shares-
Diluted 368,207 365,085 367,316 346,159
========== ========== ========== ==========
Net income (loss) per
share-Basic $ 0.37 $ 0.01 $ 0.63 $ (0.14)
Net income (loss) per
share-Diluted $ 0.36 $ 0.01 $ 0.62 $ (0.14)
6. Inventories
Inventories, net consisted of (in thousands):
November 27, May 31,
1998 1998
---- ----
Finished goods $ 291,732 $ 457,726
Work-in-process 53,961 51,510
Raw materials 97,795 135,535
---------- ----------
Total $ 443,488 $ 644,771
========== ==========
7. Litigation
The Company is a party to lawsuits in the normal
course of its business. The Company notes that (i)
litigation in general, and intellectual property and
securities litigation in particular, can be expensive and
disruptive to normal business operations and (ii) the
results of complex legal proceedings can be very
difficult to predict with any certainty. 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. The Company has filed a motion to
dismiss the 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 has not
responded to the complaint.
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. Plaintiffs have
filed a motion seeking to set aside that settlement.
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.
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, 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. Two putative consumer
class action lawsuits pending against the Company and U.S.
Robotics in state court of 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.
8. 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 Six months ended
------------------------- -------------------------
November 27, November 30, November 27, November 30,
1998 1997 1998 1997
---- ---- ---- ----
Sales ..................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales ............. 53.1 53.9 54.1 52.8
---- ---- ---- ----
Gross margin .............. 46.9 46.1 45.9 47.2
Operating expenses:
Sales and marketing ....... 20.9 28.2 21.2 22.9
Research and development .. 10.2 12.1 10.4 10.3
General and administrative 4.2 6.0 4.2 4.8
Merger-related charges
(credits) and other .. - (0.1) (0.3) 9.7
---- ---- ---- ----
Total operating expenses .. 35.3 46.2 35.5 47.7
---- ---- ---- ----
Operating income (loss) ... 11.6 (0.1) 10.4 (0.5)
Interest and other income,
net...................... 0.8 0.6 0.7 0.4
---- ---- ---- ----
Income (loss) before
income taxes............. 12.4 0.5 11.1 (0.1)
Income tax provision ...... 3.8 0.2 3.4 1.6
---- ---- ---- ----
Net income (loss) ......... 8.6 % 0.3 % 7.7 % (1.7)%
==== ==== ==== ====
Excluding merger-related charges
(credits) and other:
Total operating expenses. 35.3 % 46.3 % 35.8 % 38.0 %
Operating income (loss).. 11.6 (0.2) 10.1 9.1
Net income............... 8.7 0.3 7.5 6.2
Sales
- -----
Sales in the second quarter of fiscal 1999 totaled $1.54
billion, an increase of $135.0 million or ten percent from
the first quarter of fiscal 1999, and an increase of $343.3
million or 29 percent from the corresponding quarter a year
ago. Sales in the first six months of fiscal 1999 totaled
$2.9 billion, an increase of $151.3 million or five percent
compared to the first six months of fiscal 1998.
Client Access. Sales of client access products (e.g., modems,
network interface cards (NICs) and a pro-rata allocation of
handheld connected organizer products) in the second quarter
of fiscal 1999 increased ten percent from the first quarter of
fiscal 1999, and increased 33 percent from the same quarter a
year ago. Sales of client access products in the second
quarter of fiscal 1999 and the first quarter of fiscal 1999
represented 52 percent and 51 percent of total sales,
respectively, compared to 50 percent in the second quarter of
fiscal 1998.
Sales of client access products in the first six months of
fiscal 1999 increased two percent from the first six months of
fiscal 1998. Sales of client access products in the first six
months of fiscal 1999 represented 52 percent of total sales
compared to 53 percent in the first six months of fiscal 1998.
Excluding sales of handheld connected organizer products,
sales for client access products declined three percent in the
first six months of fiscal 1999 when compared to the first six
months of fiscal 1998.
Systems. Sales of network systems products (e.g., switches,
routers, hubs, remote access concentrators and a pro-rata
allocation of handheld connected organizer products) in the
second quarter of fiscal 1999 increased nine percent compared
to the first quarter of fiscal 1999 and increased 25 percent
compared to the same quarter a year ago. Sales of network
systems products in the second quarter of fiscal 1999 and
first quarter of fiscal 1999 represented 48 percent and 49
percent of total sales, respectively, compared to 50 percent
in the second quarter of fiscal 1998.
Sales of network systems products in the first six months of
fiscal 1999 increased nine percent from the first six months
of fiscal 1998. Sales of network systems products in the
first six months of fiscal 1999 represented 48 percent of
total sales compared to 47 percent in the first six months of
fiscal 1998. Excluding sales of handheld connected organizer
products, sales of network systems products increased four
percent in the first six months of fiscal 1999 when compared
to the first six months of fiscal 1998.
Geographic. Sales in the U.S. represented 55 percent of total
sales for the second quarter of fiscal 1999. U.S. sales
increased four percent sequentially and increased 22 percent
compared to the same period a year ago. International sales
increased 17 percent sequentially and 38 percent over the same
period a year ago.
Sales in the U.S. represented 56 percent of total sales for
the first six months of fiscal 1999. U.S. sales increased five
percent when compared to the first six months of fiscal 1998.
International sales increased six percent when compared to the
first six months of fiscal 1998.
Sales for the second quarter and the first six months of
fiscal 1999 were affected by the following factors:
Industry Growth Rates. Networking industry growth rates
slowed in calendar year 1998. Industry reports indicate
that the networking industry worldwide grew by less than 20
percent during 1997 and less than 15 percent during 1998.
Global Economic Turmoil. Historically, the Asia Pacific and
Latin America 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 America 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 America and Asia
Pacific regions improved sequentially. However, sales in the
Asia Pacific region decreased 14 percent during the first six
months of fiscal 1999 compared to the first six months of
fiscal 1998.
Pricing and Competition. Price decreases for networking
products in the first half of fiscal 1999 were less than those
experienced in previous periods. However, the industry
remains highly competitive, and therefore the Company believes
that networking prices will be subject to further decreases at
a high rate.
Handheld Connected Organizers, NICs, Modems and Switching
Products. Sales of handheld connected organizer products in
the second quarter and first six months of fiscal 1999 more
than doubled compared to the same periods in the prior year.
In addition, sales of handheld connected organizer products
grew significantly from the first quarter of fiscal 1999. The
Company's workgroup switching and NIC products also
experienced significant unit volume and sales growth in the
second quarter and first six months of fiscal 1999 compared to
the same periods in fiscal 1998, despite declines in average
selling prices, primarily in workgroup switching products.
Sales of modem products for the second quarter of fiscal 1999
increased compared to the second quarter of fiscal 1998 and
the first quarter of fiscal 1999, but decreased for the six
months of fiscal 1999 compared with the same period a year
ago.
Seasonality. Sales in the second quarter of fiscal 1999
increased ten percent compared to the first quarter of fiscal
1999, due primarily to strength in international regions and
consumer products. The Company's sales are typically subject
to seasonal patterns. Historically, sales in the first
quarter, which includes the summer months of June, July and
August, have exhibited little or no growth sequentially, 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 to seasonal strength in international
regions. Third quarter sales have historically had either
sequentially lower sales, or only slightly increased sales
from the prior quarter. These historical patterns are likely
to become more pronounced due to the increasing mix of
consumer-related products, such as handheld connected
organizers and modems, which tend to have strong growth in the
second quarter and decline sequentially in the third quarter.
Gross Margin
- ------------
Gross margin as a percentage of sales was 46.9 percent in the
second quarter of fiscal 1999, compared to 44.8 percent in the
first quarter of fiscal 1999 and 46.1 percent in the second
quarter of fiscal 1998. The gross margin improvement from the
first quarter of fiscal 1999 reflected a relatively stable
pricing environment and continued improvement in the Company's
inventory levels and turns. The gross margin increase from the
same quarter a year ago is primarily due to a significant increase
in unit volume in workgroup switching and NICs with little change
in average selling prices for NICs. Gross margin as a percentage of
sales was 45.9 percent in the first six months of fiscal 1999,
compared to 47.2 percent in the first six months of fiscal
1998.
Operating Expenses
- ------------------
Operating expenses in the second quarter of fiscal 1999 were
$544.7 million, or 35.3 percent of sales, compared to $501.6
million, or 35.7 percent of sales in the first quarter of
fiscal 1999 and $553.3 million, or 46.2 percent of sales in
the second quarter of fiscal 1998. Excluding the net pre-tax
merger-related charges (credits) and other, operating expenses
for the second quarter of fiscal 1999 were $544.0 million, or
35.3 percent of sales, compared to $511.8 million, or 36.4
percent of sales for the first quarter and $554.6 million, or
46.3 percent of sales in the second quarter of fiscal 1998.
Operating expenses for the first six months of fiscal 1999
were $1.0 billion, or 35.5 percent of sales, compared to $1.3
billion, or 47.7 percent in the first six months of fiscal
1998. Excluding the net pre-tax merger-related charges
(credits) and other, operating expenses for the first six
months of fiscal 1999 were $1.1 billion, or 35.8 percent of
sales compared to $1.1 billion, or 38.0 percent of sales for
the first six months of fiscal 1998.
Sales and Marketing. Sales and marketing expenses in the
second quarter of fiscal 1999 increased $18.1 million or six
percent from the first quarter of fiscal 1999 and decreased as
a percentage of sales to 20.9 percent in the second quarter of
fiscal 1999, from 21.6 percent in the first quarter of fiscal
1999. The sequential increase in absolute dollars in sales
and marketing expenses was related, in part, to higher
spending on handheld connected organizer products and customer
service consistent with sales growth, and increased holiday
advertising costs associated with modem products and handheld
connected organizer products. Sales and marketing expenses in
the second quarter of fiscal 1999 decreased $16.6 million or
five percent from the second quarter a year ago and decreased
as a percentage of sales to 20.9 percent in the second quarter
of fiscal 1999, from 28.2 percent in the second quarter of
fiscal 1998. The decrease was primarily a result of a
significant marketing promotion and higher product advertising
on certain modem products that occurred in the second quarter
of fiscal 1998. In addition, the Company reduced its
worldwide sales spending as it worked to combine the 3Com and
U.S. Robotics sales forces. Partially offsetting the
decreased sales and marketing expenses in the second quarter
of fiscal 1999 compared to the second quarter of fiscal 1998
were increases in handheld connected organizer sales and
marketing costs as well as global customer support costs.
Sales and marketing expenses for the first six months of
fiscal 1999 decreased $15.4 million compared to the first six
months of fiscal 1998.
Research and Development. Research and development expenses
in the second quarter of fiscal 1999 increased $8.9 million,
or six percent when compared to the first quarter of fiscal
1999 and decreased to 10.2 percent of sales in the second quarter
of fiscal 1999 from 10.6 percent of sales in the first quarter of
fiscal 1999. Research and development expenses increased $12.8
million or nine percent from the year-ago period, and decreased to
10.2 percent of total sales in the second quarter of fiscal 1999,
compared to 12.1 percent in the second quarter of fiscal 1998. The
decrease as a percentage of sales both sequentially and year-
over-year was a result of research and development spending
growing slower than sales. Research and development expenses
for the first six months of fiscal 1999 increased $18.8
million compared to the first six months of fiscal 1998, but
as a percentage of sales, remained relatively flat.
General and Administrative. General and administrative
expenses in the second quarter of fiscal 1999 increased $5.2
million or nine percent from the first quarter of fiscal 1999
but remained flat as a percentage of sales at 4.2 percent.
General and administrative expenses in the second quarter of
fiscal 1999 decreased $6.7 million or nine percent from the
same period a year ago, and decreased to 4.2 percent of total
sales in the second quarter of fiscal 1999, compared to 6.0
percent in the second quarter of fiscal 1998. The decrease in
dollars and as a percentage of sales in the second quarter of
fiscal 1999 compared to the second quarter of fiscal 1998
resulted from lower spending in corporate administration expenses,
reflecting elimination of duplicate infrastructure resulting from
the merger with U.S. Robotics. This decrease was partially offset
by an increase in provisions for bad debt. General and
administrative expenses for the first six months of fiscal
1999 decreased $10.1 million compared to the first six months
of fiscal 1998.
Merger-Related Charges (Credits) and Other. During the second
quarter of fiscal 1999, the Company recorded a charge of
approximately $0.6 million. This charge represented $4.8
million of expenses primarily related to the U.S. Robotics
merger, net of a $4.2 million gain on the sale of land, which
had previously been deferred pending resolution of certain
contingencies that were resolved during the quarter. The $4.8
million charge was primarily due to revisions in the estimated
sales prices for duplicate facilities, reflecting current
market conditions. During the first quarter of fiscal 1999,
the Company reversed approximately $10.2 million of previously
recorded merger charges related to reductions in estimates for
remaining charges associated with duplicate facilities and
employee termination benefits. During the second quarter of
fiscal 1998, merger-related charges associated with the merger
with U.S. Robotics were a net credit of $1.2 million. The net
credit of $1.2 million consisted of a $15.4 million reduction
in previously recorded merger-related costs, primarily due to
a reduction in the estimate of costs associated with duplicate
facilities, which was partially offset by $14.2 million of
product swap-out costs incurred during the quarter.
Interest and Other Income, Net
- ------------------------------
Interest and other income, net in the second quarter of fiscal
1999 increased $2.6 million compared to the first quarter of
fiscal 1999 primarily due to increased interest income as a
result of higher cash and investment balances. Interest and
other income, net in the second quarter of fiscal 1999
increased $4.6 million compared to the second quarter of
fiscal 1998, primarily due to reduced interest expense due to
lower debt balances and increased interest income due to
higher cash and investment balances. Interest and other
income, net increased $11.3 million in the first six months of
fiscal 1999 compared to the first six months of fiscal 1998.
This increase was attributable to reduced interest expense,
increased interest income, and improved foreign currency
results. 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 30.3 percent in
the second quarter of fiscal 1999 compared to 32.0 percent in
the first quarter of fiscal 1999 and 34.4 percent in the
second quarter of fiscal 1998. The decrease in the tax rate
from the first quarter of fiscal 1999 was attributable to the
Tax and Trade Relief Extension Act of 1998 which retroactively
extended the research and development tax credit. The
decrease in the tax rate from the second quarter of fiscal
1998 relates to increased offshore manufacturing in countries
with tax rates significantly below the U.S. statutory rate.
The effective tax rate for the first six months of fiscal 1999
was 31.0 percent. The Company recorded a tax provision of
$101.8 million for the first six months of fiscal 1999
compared to $44.6 million for the first six months of fiscal
1998. The provision in the first six months of 1998 reflected
the non-deductibility of certain costs associated with the
U.S. Robotics merger. Excluding these costs, the pro forma
effective income tax rate was 35.0 percent for the first six
months of fiscal 1998.
Net Income (Loss) and Net Income (Loss) Per Share
- -------------------------------------------------
Net income for the second quarter of fiscal 1999 was $132.9
million, or $0.36 per share, compared to net income of $93.7
million, or $0.26 per share for the first quarter of fiscal
1999 and net income of $4.0 million, or $0.01 per share, for
the second quarter of fiscal 1998. Excluding the net pre-tax
merger-related charges (credits) and other, net income was
$133.4 million, or $0.36 per share for the second quarter of
fiscal 1999 compared to $86.7 million, or $0.24 per share for
the first quarter of fiscal 1999 and $3.2 million, or $0.01
per share for the second quarter of fiscal 1998.
Net income for the first six months of fiscal 1999 was $226.6
million, or $0.62 per share compared to a net loss of $47.2
million, or ($0.14) per share for the first six months of
fiscal 1998. Excluding the net pre-tax merger-related charges
(credits) and other, net income was $220.1 million, or $0.60
per share for the first six months of fiscal 1999 compared to
$172.8 million, or $0.48 per share for the first six 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, 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 calendar year
1997 and less than 15 percent during calendar year 1998.
There can be no assurance that the networking industry will
continue to grow or that it will achieve higher growth rates.
The Company's business, operating results or financial
condition may be adversely affected by any further decrease in
industry growth rates. In addition, there can be no assurance
that the Company's results in any particular period will fall
within the ranges for growth forecast by market researchers.
Industry Consolidation and Strategic Relationships. The
networking industry continues to be in a period of significant
consolidation. For example, during calendar year 1998, the
Company acquired Lanworks Technologies, Inc. and EuPhonics,
Inc.; Lucent Technologies acquired nine companies; Cisco
Systems acquired nine companies; and Northern Telecom acquired
four companies, including Bay Networks. The Company expects
that networking industry consolidation will continue,
including combinations between traditional telecommunications
suppliers and networking companies. Future business
combinations may result in companies with strong competitive
positions and products. Continued consolidation may have a
material adverse effect on the Company's operating results or
financial condition.
In addition to mergers and acquisitions, companies are
continually entering into strategic relationships. For
example, in the second quarter of fiscal 1999, the Company
announced strategic relationships with IBM, Hewlett-Packard
and Toshiba America. In December, the Company announced plans
to form a joint venture with Siemens AG and expanded its
relationship with Dell Computer. If the Company experiences
difficulties managing relationships with its partners or if
the partners' projects are unsuccessful, there could be an
adverse impact on the Company's results of operations or
financial condition.
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. The Company's competition comes from start-up
companies, well-capitalized computer systems and
communications companies, and other technology companies.
Many of the Company's current and potential competitors have
greater financial, marketing and technical resources than the
Company. In addition, with the highly competitive nature of
the Company's industry, new products are routinely introduced
by competitors. For example, in recent months several
competitors have emerged in the handheld connected organizer
market space with products based upon the Microsoft Windows CE
platform. 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. In particular, growth rates in the handheld
connected organizer market may not be sustainable in the face
of increasing competition.
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. In particular, the
Company expects that prices on many of its products will
continue to decrease in the future and that the pace and
magnitude of such price decreases may have an adverse impact
on the results of operations or financial condition of the
Company.
Product Integration and Bundling. Certain OEMs in the PC
industry have, from time to time, chosen to integrate NICs 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. In addition, the
Company has become a primary supplier of networking products
for Hewlett-Packard's full family of PCs. Should the shift to
product integration and bundling 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.
Electronic Commerce and Electronic Data Interchange (EDI).
Many vendors, distributors and resellers have been successful
in the direct sale of products to customers who wish to 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 successfully implement or continue to expand such
systems in a timely manner, and a failure to do so could
adversely affect results of operations or financial condition.
In addition, as the industry and 3Com move to do more business
over the Internet, it may become more difficult to sell product
through the distributor channel, which could impact the Company's
sales levels.
International Markets. The Company operates internationally
and expects that international markets will continue to
account for a significant percentage of the Company's sales.
Many 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 six months of fiscal 1999, the
Company experienced lower sales in the Asia Pacific region
compared to the first six months of fiscal 1998, due in large
part to economic and political instability and currency
fluctuations. The instability in the Asian 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 Asia Pacific
region 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. Significant
fluctuations in foreign currency could have an adverse impact
on the Company's sales, collection of accounts receivable, and/or
foreign currency exchange exposures.
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 Company expects that introduction and use of the Euro will
affect the Company's foreign exchange and hedging activities,
and may 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
results of operations or financial condition.
Telecommunication Deregulation and Public Policy. Significant
changes in U.S. telecommunication regulations 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 Federal Communication Commission and
local telecommunications requirements and regulations.
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.
Certain of the Company's products are subject to export
controls, import controls and/or use restrictions under the
laws of the United States and other countries. For example,
because of U.S. Government controls on the exportation of
encryption products and technology, the Company is unable to
freely export some of its products with the most powerful
encryption technology. The continuing evolution of export and
import laws and regulations could negatively impact the
Company's sales and also increase the Company's cost of
selling its products. In addition, there are currently few
laws or regulations that apply directly to access or commerce
on the Internet. Changes in laws or regulations governing the
Internet and Internet commerce could have a material adverse
impact on the Company's operating results or financial
condition.
Accounting For Business Combinations. Recent actions and
comments from the Securities and Exchange Commission have
indicated they are reviewing the current valuation methodology
for determining the amount of the accounting charge for
purchased in-process technology acquired in a business
combination. There can be no assurance that the Commission
will not seek to retroactively apply new guidance and change
the amount of purchased in-process technology previously
expensed by the Company. This could result in the restatement
of previously filed financial statements of the Company and
could have a material impact on future financial results.
Company-Specific Trends and Risks
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. During the second quarter of fiscal 1999, the
Company revised the model. As reflected below, the ranges for
gross margin and operating expenses as a percentage of sales
were increased and narrowed while the range for operating
income as a percentage of sales was decreased and narrowed.
Both the new and old models are as follows:
New model Old model
--------- ---------
Gross margin 46.5 - 48.0% 45.5 - 47.5%
Operating expenses 30.0 - 31.5% 27.5 - 29.5%
Operating income 15.0 - 18.0% 16.0 - 20.0%
The change in gross margin reflects a stronger new product
cycle as well as improvements in supply chain management. The
change in operating expenses reflects incremental investments
that the Company intends to make in research and development
and sales and marketing in certain emerging segments, such as
LAN telephony, Voice over IP, handheld connected organizers,
storage area networking, home networking, wireless
connectivity, and broadband access. 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
fiscal 1999. It will be difficult for the Company to make
further progress toward these ranges in the third quarter of
fiscal 1999, as the third quarter of the fiscal year has
historically had either sequentially lower sales, or only
slightly increased sales from the prior quarter.
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. In addition, as the portion of
the Company's consumer-related business grows, for example
with products such as the Palm III(trademark) handheld connected
organizer, this 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 last two quarters, the Company
recorded approximately half of its sales in the last five
weeks of the fiscal quarter. This subjects the Company to
risks such as unexpected disruptions in functions including
manufacturing, order management, information systems and
shipping. Should the percentage of sales in the last five
weeks of a quarter escalate further, or should a significant
disruption in the Company's internal business functions occur,
there could be an adverse affect on the Company's results of
operations or financial condition.
Development and Introduction of New Products. The Company is
actively engaged in the research and development of new
technologies and products. The Company's success depends, in
substantial part, on the identification of new market and
product opportunities and the timely development and market
acceptance of new products. This includes the Company's next
generation products under development in the areas of LAN
telephony, Voice over IP, handheld connected organizers,
storage area networking, home networking, wireless
connectivity, and broadband access. The Company's operating
results or financial condition may be adversely affected by a
change in one or more of the technologies affecting network
communications, a change in market demand for products based
on a particular technology, a failure to develop new products
on a successful and timely basis, delays in manufacturing and
shipment of new products, or technical problems with new
products or critical components.
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.
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 Distributors, Resellers and OEMs. The Company
sells a significant portion of its products to distributors,
resellers and OEMs. The Company's reliance on these channels
subjects the Company to many risks, including inventory,
credit and business concentration.
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 manage inventory levels. There
can be no assurance that the Company will be successful in
efforts to manage the inventory levels of its distributors and
resellers or that the Company will be able to successfully
operate its business within its desired channel inventory
business model. Any failure by the Company to do so could
adversely affect the Company's operating results or financial
condition.
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.
The Company derives a significant portion of its sales from
OEMs, including PC companies 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 OEMs. Because sales to OEMs are
typically at lower prices and result in lower margins to the
Company, the Company's sales and gross margins may be
adversely impacted if OEMs become a larger percentage of the
business.
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 purchase commitments. Should
sales volumes fluctuate significantly, the obligation to meet
purchase 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 increase in 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 complex, protracted litigation.
Intellectual property litigation is typically very costly and
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. As a result of
such transitions, the Company may experience system
disruptions, which may have an adverse effect on the results
of operations or financial condition. 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.
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. 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
revenue growth or attrition levels vary significantly, there
could be an adverse effect on 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 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.
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 most of these applications for Year 2000
compliance, and has begun remediation or replacement of
systems, where necessary. The Company expects to achieve
fiscal year 2000 readiness by the end of May 1999, and to
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 in the process of evaluating Year 2000 compliance
of its equipment and facilities. Critical equipment, such as
manufacturing equipment, has been identified, and the Company is
currently in the process of contacting the suppliers to ascertain
Year 2000 compliance. The Company expects to achieve Year 2000
readiness for critical equipment by the end of September 1999.
In the event that 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.
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
March 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 its current products are largely Year 2000 compliant. 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. 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. 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 in the process of 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 believes that critical non-compliant
suppliers will be identified by the end of January 1999, and plans
to work with such suppliers for assessment, remediation and
testing of Year 2000 compliance. 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, contingency plans have not yet
been determined. As the assessments are completed,
contingency plans will be developed 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 of
these programs will range between $25 million and $35 million.
Approximately $2 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
second quarter of fiscal 1999, no significant internal
information technology projects have been deferred due to the
Company's Year 2000 efforts.
Future 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. 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 November
27, 1998 were $1.4 billion, an increase of $274.8 million from
May 31, 1998.
For the six months ended November 27, 1998, net cash generated
from operating activities was $478.9 million. Accounts
receivable at November 27, 1998 increased $267.8 million from
May 31, 1998 to $1.1 billion. Days sales outstanding in
receivables increased to 65 days at November 27, 1998,
compared to 56 days at May 31, 1998 primarily due to a higher
concentration of sales in the third month of the quarter ended
November 27, 1998, compared to the third month of the quarter
ended May 31, 1998. Inventory levels at November 27, 1998
decreased $201.3 million, of which $166.0 million was finished
goods, from the prior fiscal year-end to $443.5 million.
Average inventory turnover was 6.9 turns for the quarter ended
November 27, 1998, compared to 4.4 turns for the quarter ended
May 31, 1998, primarily as a result of the decrease in
inventory balances.
During the six months ended November 27, 1998, the Company
made $118.2 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 desktop
systems and other equipment. Additionally, in the first six
months of fiscal 1999, the Company sold two facilities and
equipment in the Chicago area for total net proceeds of $14.7
million. As of November 27, 1998, the Company had
approximately $34.2 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, the Company's Board of Directors authorized the
repurchase of up to 10 million shares of the Company's common
stock. Such purchases are made in the open market from time
to time. During the first six 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 six months of
fiscal 1999, the Company received net cash of $53.1 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 November 27, 1998, there were no outstanding
borrowings under the credit agreement, and the Company was in
compliance with all required covenants.
During the first six months of fiscal 1999, the Company repaid
$12.0 million of borrowings under the 7.52% Unsecured Senior
Notes agreement. As of November 27, 1998, $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.
The remaining U.S. Robotics merger-related accrual at November
27, 1998 was approximately $25.3 million. Total expected cash
expenditures relating to the U.S. Robotics merger charge are
estimated to be approximately $116 million, of which
approximately $104 million was disbursed prior to November 27,
1998. Benefits paid to approximately 900 employees terminated
through November 27, 1998 were approximately $57 million.
Substantially all benefits have been paid.
During the first six months of fiscal 1999, the Company
recorded a tax benefit on stock option transactions of $19.1
million. During the same period a year ago, the Company
recorded a tax benefit on stock option transactions totaling
$131.4 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. The Company notes that (i) litigation in general,
and intellectual property and securities litigation in
particular, can be expensive and disruptive to normal business
operations and (ii) the results of complex legal proceedings
can be very difficult to predict with any certainty. 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. The
Company has filed a motion to dismiss the 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 has not responded to the complaint.
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. Plaintiffs have filed a motion
seeking to set aside that settlement.
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.
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, 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. Two
putative consumer class action lawsuits pending against the
Company and U.S. Robotics in state court of 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
(a) The Annual Meeting of Shareholders was held on
September 24, 1998.
(b) Each of the persons named in the Proxy Statement
as a nominee for director was elected and the proposals listed below
were approved. The following are the voting results of the proposals:
Broker
Proposal I For Withheld Non-Votes
---------- --- -------- ---------
Election of Directors:
James L. Barksdale 316,114,579 3,924,859 0
Eric A. Benhamou 315,810,612 4,228,826 0
Gordon A. Campbell 316,148,193 3,891,245 0
James E. Cowie 316,344,683 3,694,755 0
Phillip C. Kantz 316,339,152 3,700,286 0
Broker
Proposal II For Against Abstain Non-Votes
----------- --- ------- ------- ---------
To approve an increase
in the share reserve
under the Company's 1984
Employee Stock Purchase
Plan by 2,000,000 shares
of Common Stock. 308,490,622 10,283,030 1,265,786 0
Broker
Proposal III For Against Abstain Non-Votes
------------ --- ------- ------- ---------
To approve an increase
in the share reserve
under the Company's
Director Stock Option
Plan by 1,000,000 shares
of Common Stock. 252,327,456 66,254,691 1,457,291 0
Broker
Proposal IV For Against Abstain Non-Votes
----------- --- ------- ------- ---------
To ratify the appointment
of Deloitte & Touche LLP
as the Company's independent
public accountants for the
fiscal year ending May 28, 1999.
317,855,653 1,473,968 709,817 0
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 Meadowssite (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: January 8, 1999 By: /s/ Christopher B. Paisley
----------------- --------------------------
Christopher B. Paisley
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
[ARTICLE] 5
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] MAY-28-1999
[PERIOD-END] NOV-27-1998
[CASH] 607,106
[SECURITIES] 743,749
[RECEIVABLES] 1,117,449
[ALLOWANCES] (85,232)
[INVENTORY] 443,488
[CURRENT-ASSETS] 3,373,624
[PP&E] 1,570,096
[DEPRECIATION] (730,151)
[TOTAL-ASSETS] 4,316,381
[CURRENT-LIABILITIES] 1,256,922
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 1,754,399
[OTHER-SE] 1,222,695
[TOTAL-LIABILITY-AND-EQUITY] 4,316,381
[SALES] 2,946,048
[TOTAL-REVENUES] 2,946,048
[CGS] 1,593,278
[TOTAL-COSTS] 2,218,549
[OTHER-EXPENSES] 373,533
[LOSS-PROVISION] 23,763
[INTEREST-EXPENSE] 1,791
[INCOME-PRETAX] 328,412
[INCOME-TAX] 101,808
[INCOME-CONTINUING] 226,604
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 226,604
[EPS-PRIMARY] 0.63
[EPS-DILUTED] 0.62
</TABLE>
BYLAWS
OF
3COM CORPORATION
TABLE OF CONTENTS
- -----------------
ARTICLE I STOCKHOLDERS
Section 1.1 Annual Meeting
Section 1.2 Special Meetings
Section 1.3 Notice of Meetings
Section 1.4 Quorum
Section 1.5 Organization
Section 1.6 Conduct of Business
Section 1.7 Notice of Stockholder Business
Section 1.8 Proxies and Voting
Section 1.9 Stock List
Section 1.10 Stockholder Action by Written Consent
ARTICLE II BOARD OF DIRECTORS
Section 2.1 Number and Term of Office
Section 2.2 Vacancies and Newly Created Directorships
Section 2.3 Removal
Section 2.4 Regular Meetings
Section 2.5 Special Meetings
Section 2.6 Quorum
Section 2.7 Participation in Meetings by Conference
Telephone
Section 2.8 Conduct of Business
Section 2.9 Powers
Section 2.10 Action Without Meeting
Section 2.11 Compensation of Directors
Section 2.12 Nomination of Director Candidates
ARTICLE III COMMITTEES
Section 3.1 Committees of the Board of Directors
Section 3.2 Conduct of Business
ARTICLE IV OFFICERS
Section 4.1 Generally
Section 4.2 Chairman of the Board
Section 4.3 Chief Executive Officer
Section 4.4 President
Section 4.5 Chief Operating Officer
Section 4.6 Vice President
Section 4.7 Chief Financial Officer
Section 4.8 Secretary
Section 4.9 Delegation of Authority
Section 4.10 Removal
Section 4.11 Action With Respect to Securities of
Other Corporations
ARTICLE V STOCK
Section 5.1 Certificates of Stock
Section 5.2 Transfers of Stock
Section 5.3 Record Date
Section 5.4 Lost, Stolen or Destroyed Certificates
Section 5.5 Regulations
ARTICLE VI NOTICES
Section 6.1 Notices
Section 6.2 Waivers
ARTICLE VII MISCELLANEOUS
Section 7.1 Facsimile Signatures
Section 7.2 Corporate Seal
Section 7.3 Reliance Upon Books, Reports and Records
Section 7.4 Fiscal Year
Section 7.5 Time Periods
ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.1 Right to Indemnification
Section 8.2 Right of Claimant to Bring Suit
Section 8.3 Indemnification of Employees and Agents
Section 8.4 Non-Exclusivity of Rights
Section 8.5 Indemnification Contracts
Section 8.6 Insurance
Section 8.7 Effect of Amendment
Section 8.8 Savings Clause
ARTICLE IX AMENDMENTS
BYLAWS
OF
3Com CORPORATION
ARTICLE I
STOCKHOLDERS
Section 1.1. Annual Meeting.
An annual meeting of the stockholders of 3Com Corporation (the
"Corporation"), for the election of directors and for the
transaction of such other business as may properly come before
the meeting, shall be held at such place, on such date, and at
such time as the Board of Directors shall each year fix, which
date shall be within thirteen months after the organization of
the Corporation or after its last annual meeting of
stockholders.
Section 1.2. Special Meetings.
Special meetings of the stockholders, for any purpose or
purposes prescribed in the notice of the meeting, may be
called by (a) the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such
resolution is presented to the Board for adoption), (b) the
Chairman of the Board, (c) the President or (d) the holders of
shares entitled to cast not less than twenty percent (20%) of
the votes at the meeting, and shall be held at such place, on
such date, and at such time as they shall fix. Business
transacted at special meetings shall be confined to the
purpose or purposes stated in the notice.
Section 1.3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of
the stockholders shall be given, not less than ten (10) nor
more than sixty (60) days before the date on which the meeting
is to be held, to each stockholder entitled to vote at such
meeting, except as otherwise provided herein or required by
law (meaning, here and hereinafter, as required from time to
time by the Delaware General Corporation Law or the
Certificate of Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time,
written notice need not be given of the adjourned meeting if
the place, date and time thereof are announced at the meeting
at which the adjournment is taken; provided, however, that if
the date of any adjourned meeting is more than thirty (30)
days after the date for which the meeting was originally
noticed, or if a new record date is fixed for the adjourned
meeting, written notice of the place, date, and time of the
adjourned meeting shall be given in conformity herewith. At
any adjourned meeting, any business may be transacted which
might have been transacted at the original meeting.
Section 1.4. Quorum.
At any meeting of the stockholders, the holders of a majority
of all of the shares of the stock entitled to vote at the
meeting, present in person or by proxy, shall constitute a
quorum for all purposes, unless or except to the extent that
the presence of a larger number may be required by law or by
the Certificate of Incorporation.
If a quorum shall fail to attend any meeting, the chairman of
the meeting or the holders of a majority of the shares of
stock entitled to vote who are present, in person or by proxy,
may adjourn the meeting to another place, date, or time.
If a notice of any adjourned special meeting of stockholders
is sent to all stockholders entitled to vote thereat, stating
that it will be held with those present constituting a quorum,
then except as otherwise required by law, those present at
such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at
such meeting.
Section 1.5. Organization.
Such person as the Board of Directors may have designated or,
in the absence of such a person, the President of the
Corporation or, in his absence, such person as may be chosen
by the holders of a majority of the shares entitled to vote
who are present, in person or by proxy, shall call to order
any meeting of the stockholders and act as chairman of the
meeting. The secretary of the meeting shall be such person as
the chairman appoints.
Section 1.6. Conduct of Business.
The chairman of any meeting of stockholders shall determine
the order of business and the procedure at the meeting,
including such regulation of the manner of voting and the
conduct of discussion as seem to him in order.
Section 1.7. Notice of Stockholder Business.
At an annual or special meeting of the stockholders, only such
business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before a
meeting, business must be (a) specified in the notice of
meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) properly brought
before the meeting by or at the direction of the Board of
Directors, or (c) properly brought before an annual meeting by
a stockholder and if, and only if, the notice of a special
meeting provides for business to be brought before the meeting
by stockholders, properly brought before the special meeting
by a stockholder. For business to be properly brought before
a meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal offices
of the Corporation no later than (i) in the case of an annual
meeting, ninety (90) days before the anticipated date of the
next annual meeting, under the assumption that the next annual
meeting will occur on the same calendar day as the day of the
most recent annual meeting, and (ii) in the case of a special
meeting, ten (10) days prior to date of such meeting. A
stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the
annual or special meeting (1) a brief description of the
business desired to be brought before the annual or special
meeting and the reasons for conducting such business at the
annual or special meeting, (2) the name and address, as they
appear on the Corporation's books, of the stockholder
proposing such business, (3) the class and number of shares of
the Corporation which are beneficially owned by the
stockholder, and (4) any material interest of the stockholder
in such business. Notwithstanding anything in the Bylaws to
the contrary, no business shall be conducted at an annual or
special meeting except in accordance with the procedures set
forth in this Section 1.7. The chairman of an annual or
special meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of
this Section 1.7, and if he should so determine, he shall so
declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
Section 1.8. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled
to vote may vote in person or by proxy authorized by an
instrument in writing filed in accordance with the procedure
established for the meeting.
Each stockholder shall have one vote for every share of stock
entitled to vote which is registered in his name on the record
date for the meeting, except as otherwise provided herein or
required by law.
All voting, including on the election of directors, and except
where otherwise required by law, may be by a voice vote;
provided, however, that upon demand therefor by a stockholder
entitled to vote or by his proxy, a stock vote shall be taken.
Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and
such other information as may be required under the procedure
established for the meeting. Every vote taken by ballots
shall be counted by an inspector or inspectors appointed by
the chairman of the meeting.
All elections shall be determined by a plurality of the votes
cast, and except as otherwise required by law or the
Certificate of Incorporation or the Bylaws of this
Corporation, all other matters shall be determined by a
majority of the votes cast.
Section 1.9. Stock List.
A complete list of stockholders entitled to vote at any
meeting of stockholders, arranged in alphabetical order for
each class of stock and showing the address of each such
stockholder and the number of shares registered in his name,
shall be open to the examination of any such stockholder, for
any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the
meeting is to be held.
The stock list shall also be kept at the place of the meeting
during the whole time thereof and shall be open to the
examination of any such stockholder who is present. This list
shall presumptively determine the identity of the stockholders
entitled to vote at the meeting and the number of shares held
by each of them.
Section 1.10. Stockholder Action by Written Consent.
An action which may be taken at any annual or special meeting
of stockholders may be taken without a meeting and without
prior notice, if a consent in writing, setting forth the
actions so taken, is signed by the holders of outstanding
shares having not less than the minimum number of votes which
would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were
present and voted. All such consents shall be filed with the
Secretary of the Corporation and shall be maintained in the
corporate records. Prompt notice of the taking of a corporate
action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not
consented in writing.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1. Number and Term of Office.
The authorized number of directors shall initially be one (1)
and thereafter shall be fixed from time to time exclusively by
the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors. The
Board of Directors shall be comprised of ten (10) Directors.
The number of Directors provided in this Section 2.1 may be
changed by a Bylaw duly adopted by the affirmative vote of a
majority of the outstanding shares entitled to vote.
Section 2.2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created directorships
resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting
from death, resignation, retirement, disqualification, or
other cause (other than removal from office by a vote of the
stockholders) may be filled only by a majority vote of the
directors then in office, though less than a quorum, and
directors so chosen shall hold office for a term expiring at
the next annual meeting of stockholders. No decrease in the
number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
Section 2.3. Removal.
Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any director, or the entire
Board of Directors, may be removed from office at any time,
with or without cause, but only by the affirmative vote of the
holders of at least a majority of the voting power of the then
outstanding shares of stock of the Corporation entitled to
vote generally in the election of directors, voting together
as a single class. Vacancies in the Board of Directors
resulting form such removal may be filled by (i) a majority of
the directors then in office, though less than a quorum, or
(ii) the stockholders at a special meeting of the stockholders
properly called for that purpose, by the vote of the holders
of a plurality of the shares entitled to vote at such special
meeting. Directors so chosen shall hold office until the next
annual meeting of stockholders.
Section 2.4. Regular Meetings.
Regular meetings of the Board of Directors shall be held at
such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of
Directors and publicized among all directors. A notice of
each regular meeting shall not be required.
Section 2.5. Special Meetings.
Special meetings of the Board of Directors may be called by a
majority of the directors then in office (rounded up to the
nearest whole number), by the Chairman of the Board or by the
President and shall be held at such place, on such date, and
at such time as they or he shall fix. Notice of the place,
date, and time of each such special meeting shall be given to
each director who does not waive the right to a notice by (i)
mailing written notice not less than five (5) days before the
meeting, (ii) sending notice one (1) day before the meeting by
an overnight courier service and two (2) days before the
meeting if by overseas courier service, or (iii) by
telephoning, telecopying, telegraphing or personally
delivering the same not less than twenty-four (24) hours
before the meeting. Unless otherwise indicated in the notice
thereof, any and all business may be transacted at a special
meeting.
Section 2.6. Quorum.
At any meeting of the Board of Directors, a majority of the
total number of authorized directors shall constitute a quorum
for all purposes. If a quorum shall fail to attend any
meeting, a majority of those present may adjourn the meeting
to another place, date, or time, without further notice or
waiver thereof.
Section 2.7. Participation in Meetings by Conference Telephone.
Members of the Board of Directors, or of any committee of the
Board of Directors, may participate in a meeting of such Board
or committee by means of conference telephone or similar
communications equipment by means of which all persons
participating in the meeting can hear each other and such
participation shall constitute presence in person at such
meeting.
Section 2.8. Conduct of Business.
At any meeting of the Board of Directors, business shall be
transacted in such order and manner as the Board may from time
to time determine, and all matters shall be determined by the
vote of a majority of the directors present, except as
otherwise provided herein or required by law.
Section 2.9. Powers.
The Board of Directors may, except as otherwise required by
law, exercise all such powers and do all such acts and things
as may be exercised or done by the Corporation, including,
without limiting the generality of the foregoing, the
unqualified power:
(1) To declare dividends from time to time in accordance with
law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such
form as it may determine, of written obligations of every
kind, negotiable or non-negotiable, secured or unsecured, and
to do all things necessary in connection therewith;
(4) To remove any officer of the Corporation with or without
cause, and from time to time to pass on the powers and duties
of any officer upon any other person for the time being;
(5) To confer upon any officer of the Corporation the power
to appoint, remove and suspend subordinate officers, employees
and agents;
(6) To adopt from time to time such stock option, stock
purchase, bonus or other compensation plans for directors,
officers, employees and agents of the Corporation and its
subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement,
and other benefit plans for directors, officers, employees and
agents of the Corporation and its subsidiaries as it may
determine; and
(8) To adopt from time to time regulations, not inconsistent
with these Bylaws, for the management of the Corporation's
business and affairs.
Section 2.10. Action Without Meeting.
Any action required or permitted to be taken at any meeting of
the Board of Directors may be taken without a meeting, if all
members of the Board shall individually or collectively
consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of
the Board. Such action by written consent shall have the same
force and effect as a unanimous vote of such directors.
Section 2.11. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the
Board of Directors, fixed fees and other compensation for
their services as directors, including, without limitation,
their services as members of committees of the Board of
Directors.
Section 2.12. Nomination of Director Candidates.
Subject to any limitations stated in the Certificate of
Incorporation of this Corporation, nominations for the
election of directors may be made by the Board of Directors or
a proxy committee appointed by the Board of Directors or by
any stockholder entitled to vote in the election of directors.
ARTICLE III
COMMITTEES
Section 3.1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the whole
Board, may from time to time designate one or more committees
of the Board, with such lawfully delegable powers and duties
as it thereby confers, to serve at the pleasure of the Board
and shall, for those committees and any others provided for
herein, elect a director or directors to serve as the member
or members, designating, if it desires, other directors as
alternate members who may replace any absent or disqualified
member at any meeting of the committee. Any committee so
designated may exercise the power and authority of the Board
of Directors to declare a dividend, to authorize the issuance
of stock or to adopt a certificate of ownership and merger if
the resolution which designates the committee or a
supplemental resolution of the Board of Directors shall so
provide. In the absence or disqualification of any member of
any committee and any alternate member in his place, the
member or members of the committee present at the meeting and
not disqualified from voting, whether or not he or they
constitute a quorum, may by unanimous vote appoint another
member of the Board of Directors to act at the meeting in the
place of the absent or disqualified member.
Section 3.2. Conduct of Business.
Each committee may determine the procedural rules for meeting
and conducting its business and shall act in accordance
therewith, except as otherwise provided herein or required by
law. Adequate provision shall be made for notice to members
of all meetings; one-half of the authorized members shall
constitute a quorum unless the committee shall consist of one
or two members, in which event all members of the committee
shall constitute a quorum; and all matters shall be determined
by a majority vote of the members present. Action may be
taken by any committee without a meeting if all members
thereof consent thereto in writing. Such written consent or
consents shall be filed with the minutes of the proceedings of
such committee.
ARTICLE IV
OFFICERS
Section 4.1. Generally.
The officers of the Corporation shall consist of a President,
a Secretary and a Chief Financial Officer. The Corporation
may also have, at the discretion of the Board of Directors, a
Chairman of the Board, a Chief Executive Officer, a Chief
Operating Officer, a President, one or more Vice Presidents, a
Treasurer, one or more Assistant Secretaries, one or more
Assistant Treasurers, and such other officers as may from time
to time be appointed by the Board of Directors. Officers
shall be elected by the Board of Directors, which shall
consider that subject at its first meeting after every annual
meeting of stockholders. Each officer shall hold office at
the pleasure of the Board, until his or her successor is
elected and qualified or until his or her earlier resignation
or removal. Any number of offices may be held by the same
person.
Section 4.2. Chairman of the Board.
The Chairman of the Board, if there shall be such an officer,
shall, if present, preside at all meetings of the Board of
Directors, and exercise and perform such other powers and
duties as may be from time to time assigned to him or her by
the Board of Directors or as provided by these Bylaws.
Section 4.3. Chief Executive Officer.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the Chairman of the Board, if there
be such an officer, the Chief Executive Officer (the "CEO")
shall perform the duties normally expected of a chief
executive officer and shall, subject only to the higher
authority and control of the Board of Directors, have primary
responsibility for general supervision, direction and control
of the business (including long-term strategy and policy) and
of the other officers, employees and agents of the
Corporation. The CEO shall preside at all meetings of the
stockholders. He or she shall be an ex-officio member of all
the standing committees including the executive committee, if
any, shall have the general powers and duties of management
usually vested in the office of chief executive officer of a
corporation, and shall have such other powers and duties as
may be prescribed by the Board of Directors or these Bylaws.
The CEO shall have power to sign all stock certificates,
contracts and other instruments of the Corporation that are
authorized by the Board of Directors.
Section 4.4. President.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the Chairman of the Board and the
CEO, if there be such officers, the President shall be the
general manager of the Corporation and shall, subject to the
control of the Board of Directors and the powers of the CEO,
have general day-to-day supervision, direction and control of
the business and other officers (other than the Chairman of
the Board, the CEO and the CEO's staff), employees and agents
of the Corporation. In the absence of the CEO, the President
shall have all of the powers of the CEO (as enumerated in
Section 4.3 hereof) and shall preside at all meetings of the
stockholders. The President shall have the general powers and
duties of management usually vested in the office of president
of a corporation, and shall have such other powers and duties
as may be prescribed by the CEO, the Board of Directors or
these Bylaws. The President shall have power to sign all
stock certificates, contracts and other instruments of the
Corporation that are authorized by the Board of Directors.
Section 4.5. Chief Operating Officer.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the Chairman of the Board, the Chief
Executive Officer and the President, if there be such
officers, the Chief Operating Officer (the "COO") shall be
responsible for implementing on an operational basis the
strategy and policies of the Corporation (as set by the Board
of Directors and the CEO) and shall, subject to the control of
the Board of Directors and the powers of the CEO and the
President, have general day-to-day supervision, direction and
control of the business and other officers (other than the
Chairman of the Board, the CEO and the President, and their
respective staffs), employees and agents of the Corporation.
The COO shall have the general powers and duties of management
usually vested in the office of a chief operating officer or
general manager of operations of a corporation, and shall have
such other powers and duties as may be prescribed by the CEO,
the President, the Board of Directors or these Bylaws. The
COO shall have power to sign all stock certificates, contracts
and other instruments of the Corporation that are authorized
by the Board of Directors.
Section 4.6. Vice President.
In the absence or disability of the CEO, the President and the
COO, the Vice Presidents, if any, in order of their rank as
fixed by the Board of Directors, or, if not ranked, the Vice
President designated by the Board of Directors, shall perform
the duties of the CEO, President or COO, as the case may be,
and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the CEO, President or
COO, as the case may be. The Vice Presidents, if any, shall
have such other powers and perform such other duties as from
time to time may be prescribed for them by the Board of
Directors or these Bylaws.
Section 4.7. Chief Financial Officer.
The Chief Financial Officer (the "CFO") shall keep and
maintain, or cause to be kept and maintained, adequate and
correct financial books and records of account of the
Corporation in written form or any other form capable of being
converted into written form.
The CFO shall deposit all monies and other valuables in the
name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors.
The CFO shall disburse all funds of the Corporation as may be
ordered by the Board of Directors, shall render to the CEO,
the President and the Board of Directors, whenever they or any
of them request it, an account of all of his or her
transactions as CFO and of the financial condition of the
Corporation, and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or
by these Bylaws.
Section 4.8. Secretary.
The Secretary shall keep, or cause to be kept, a book of
minutes in written form of the proceedings of the Board of
Directors, committees of the Board and stockholders. Such
minutes shall include all waivers of notice, consents to the
holding of meetings and approvals of the minutes of meetings
executed pursuant to these Bylaws or the Delaware General
Corporation Law. The Secretary shall keep, or cause to be
kept, at the principal executive office or at the office of
the Corporation's transfer agent or registrar, a record of its
stockholders, giving the names and addresses of all
stockholders and the number and class of shares held by each.
The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors
required by these Bylaws or by law to be given, and shall keep
the seal of the Corporation in safe custody, and shall have
such other powers and perform such other duties as may be
prescribed by the Board of Directors or these Bylaws.
Section 4.9. Delegation of Authority.
The Board of Directors may from time to time delegate the
powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
Section 4.10. Removal.
Any officer of the Corporation may be removed at any time,
with or without cause, by the Board of Directors.
Section 4.11. Action With Respect to Securities of Other
Corporations.
Unless otherwise directed by the Board of Directors, the CEO,
the President, the COO and any officer of the Corporation
authorized by the CEO shall have power to vote and otherwise
act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action
of stockholders of any other corporation in which this
Corporation may hold securities and otherwise to exercise any
and all rights and powers that this Corporation may possess by
reason of its ownership of securities in such other
corporation.
ARTICLE V
STOCK
Section 5.1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by,
or in the name of the Corporation by, the President or a Vice
President, and the Secretary, an Assistant Secretary or the
Chief Financial Officer, certifying the number of shares owned
by him or her. Any or all the signatures on the certificate
may be facsimile.
Section 5.2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books
of the Corporation kept at an office of the Corporation or by
transfer agents designated to transfer shares of the stock of
the Corporation. Except where a certificate is issued in
accordance with Section 5.4 of these Bylaws, an outstanding
certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is
issued therefor.
Section 5.3. Record Date.
The Board of Directors may fix a record date, which shall not
be more than sixty (60) nor fewer than ten (10) days before
the date of any meeting of stockholders, nor more than sixty
(60) days prior to the time for the other action hereinafter
described, as of which there shall be determined the
stockholders who are entitled: to notice of or to vote at any
meeting of stockholders or any adjournment thereof; to express
consent to corporate action in writing without a meeting; to
receive payment of any dividend or other distribution or
allotment of any rights; or to exercise any rights with
respect to any change, conversion or exchange of stock or with
respect to any other lawful action.
Section 5.4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any
certificate of stock, another may be issued in its place
pursuant to such regulations as the Board of Directors may
establish concerning proof of such loss, theft or destruction
and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5.5. Regulations.
The issue, transfer, conversion and registration of
certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VI
NOTICES
Section 6.1. Notices.
Except as otherwise specifically provided herein or required
by law, all notices required to be given to any stockholder,
director, officer, employee or agent shall be in writing and
may in every instance be effectively given by hand delivery to
the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram,
mailgram or commercial courier service. Any such notice shall
be addressed to such stockholder, director, officer, employee
or agent at this last known address as the same appears on the
books of the Corporation. The time when such notice is
received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of
such person, if hand delivered, or dispatched, if delivered
through the mails or by telegram, courier or mailgram, shall
be the time of the giving of the notice.
Section 6.2. Waivers.
A written waiver of any notice, signed by a stockholder,
director, officer, employee or agent, whether before or after
the time of the event for which notice is to be given, shall
be deemed equivalent to the notice required to be given to
such stockholder, director, officer, employee or agent.
Neither the business nor the purpose of any meeting need be
specified in such a waiver. Attendance of a person at a
meeting shall constitute a waiver of notice for such meeting,
except when the person attends a meeting for the express
purpose of objecting, and does in fact object, at the
beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
ARTICLE VII
MISCELLANEOUS
Section 7.1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures
elsewhere specifically authorized in these Bylaws, facsimile
signatures of any officer or officers of the Corporation may
be used whenever and as authorized by the Board of Directors
or a committee thereof.
Section 7.2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing
the name of the Corporation, which seal shall be in the charge
of the Secretary. If and when so directed by the Board of
Directors or a committee thereof, duplicates of the seal may
be kept and used by the Chief Financial Officer or by an
Assistant Secretary or other officer designated by the Board
of Directors.
Section 7.3. Reliance Upon Books, Reports and Records.
Each director, each member of any committee designated by the
Board of Directors, and each officer of the Corporation shall,
in the performance of his duties, be fully protected in
relying in good faith upon the books of account or other
records of the Corporation, including reports made to the
Corporation by any of its officers, by an independent
certified public accountant, or by an appraiser.
Section 7.4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the
Board of Directors.
Section 7.5. Time Periods.
In applying any provision of these Bylaws which require that
an act be done or not done a specified number of days prior to
an event or that an act be done during a period of a specified
number of days prior to an event, calendar days shall be used,
the day of the doing of the act shall be excluded, and the day
of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.1. Right to Indemnification.
Each person who was or is made a party or is threatened to be
made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or
investigative ("Proceeding"), by reason of the fact that he or
she, or a person of whom he or she is the legal
representative, is or was a director or officer of the
Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust
or other enterprise, including service with respect to
employee benefit plans, whether the basis of such Proceeding
is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while
serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the
fullest extent authorized by the General Corporation Law of
Delaware, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that
such amendment permits the Corporation to provide broader
indemnification rights than said Law permitted the Corporation
to provide prior to such amendment) against all expenses,
liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to
be paid in settlement) reasonably incurred or suffered by such
person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided,
however, that, except as provided in Section 8.2, the
Corporation shall indemnify any such person seeking indemnity
in connection with a Proceeding (or part thereof) initiated by
such person only if such Proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. Such
right shall be a contract right and shall include the right to
be paid by the Corporation expenses incurred in defending any
such Proceeding in advance of its final disposition; provided,
however, that, if required by the General Corporation Law of
Delaware, the payment of such expenses incurred by a director
or officer in his or her capacity as a director or officer
(and not in any other capacity in which service was or is
rendered by such person while a director or officer,
including, without limitation, service to an employee benefit
plan) in advance of the final disposition of such Proceeding,
shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it should be determined
ultimately that such director or officer is not entitled to be
indemnified under this Section or otherwise.
Any indemnification as provided herein (unless ordered by a
court) shall be made by the Corporation only as authorized in
the specific case upon a determination that indemnification of
a director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of
conduct set forth in the General Corporation Law of Delaware.
Such determination shall be made (1) by the Board of Directors
by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the
stockholders.
Section 8.2. Right of Claimant to Bring Suit.
If a claim under Section 8.1 is not paid in full by the
Corporation within ninety (90) days after a written claim has
been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the
unpaid amount of the claim and, if successful in whole or in
part, the claimant shall be entitled to be paid also the
expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a
claim for expenses incurred in defending any
Proceeding in advance of its final disposition where the
required undertaking, if any, has been tendered to the
Corporation) that the claimant has not met the standards of
conduct which make it permissible under the General
Corporation Law of Delaware for the Corporation to indemnify
the claimant for the amount claimed. Neither the failure of
the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct
set forth in the General Corporation Law of Delaware, nor an
actual determination by the Corporation (including its Board
of Directors, independent legal counsel, or its stockholders)
that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a
presumption that claimant has not met the applicable standard
of conduct.
Section 8.3. Indemnification of Employees and Agents.
The Corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to
indemnification, and to the advancement of related expenses,
to any employee or agent of the Corporation to the fullest
extent of the provisions of this Article with respect to the
indemnification of and advancement of expenses to directors
and officers of the Corporation.
Section 8.4 Non-Exclusivity of Rights.
The rights conferred on any person by Sections 8.1, 8.2 and
8.3 shall not be exclusive of any other right which such
persons may have or hereafter acquire under any statute,
provisions of the Certificate of Incorporation, bylaw,
agreement, vote of stockholders or disinterested directors or
otherwise.
Section 8.5. Indemnification Contracts.
The Board of Directors is authorized to enter into a contract
with any director, officer, employee or agent of the
Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or
other enterprise, including employee benefit plans, providing
for indemnification rights equivalent to those provided for in
this Article VIII.
Section 8.6. Insurance.
The Corporation may maintain insurance, at its expense, to
protect itself and any such director, officer, employee or
agent of the Corporation or another corporation, partnership,
joint venture trust or other enterprise against any such
expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such
expenses, liability or loss under Delaware General Corporation
Law.
Section 8.7. Effect of Amendment.
Any amendment, repeal or modification of any provision of this
Article VIII by the stockholders or the directors of the
Corporation shall not adversely affect any right or protection
of a director or officer of the Corporation existing at the
time of such amendment, repeal or modification.
Section 8.8. Savings Clause.
If this Article or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director,
officer, employee and agent of the Corporation as to costs,
charges and expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement with respect to any
action, suit or proceeding, whether civil, criminal,
administrative or investigative, including an action by or in
the right of the Corporation, to the fullest extent permitted
by any applicable portion of this Article that shall not have
been invalidated and to the fullest extent permitted by
applicable law.
ARTICLE IX
AMENDMENTS
The Board of Directors is expressly empowered to adopt, amend,
alter or repeal Bylaws of the Corporation, subject to the
right of the stockholders to adopt, amend, alter or repeal the
Bylaws of the Corporation. Any adoption, amendment or repeal
of Bylaws of the Corporation by the Board of Directors shall
require the approval of a majority of the total number of
authorized directors (whether or not there exist any vacancies
in previously authorized directorships at the time any
resolution providing for adoption, amendment or repeal is
presented to the Board). The stockholders shall also have
power to adopt, amend, alter or repeal the Bylaws of the
Corporation.
