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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 1, 2000 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 29, 2000, 340,239,764 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
THIS REPORT CONTAINS A TOTAL OF 43 PAGES OF WHICH THIS PAGE IS NUMBER 1.
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3COM CORPORATION
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations
THREE AND SIX MONTHS ENDED DECEMBER 1, 2000 AND NOVEMBER 26, 1999 3
Condensed Consolidated Balance Sheets
DECEMBER 1, 2000 AND JUNE 2, 2000 4
Condensed Consolidated Statements of Cash Flows
SIX MONTHS ENDED DECEMBER 1, 2000 AND NOVEMBER 26, 1999 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 35
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 36
ITEM 2. Changes in Securities and Use of Proceeds 39
ITEM 3. Defaults Upon Senior Securities 39
ITEM 4. Submission of Matters to a Vote of Security Holders 39
ITEM 5. Other Information 39
ITEM 6. Exhibits and Reports on Form 8-K 40
Signatures 43
3Com, AirConnect, CommWorks, SuperStack and Total Control are registered
trademarks of 3Com Corporation or its subsidiaries. Audrey and Kerbango are
trademarks of 3Com Corporation or its subsidiaries. U.S. Robotics is a
registered trademark of U.S. Robotics Corporation.
2
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
-------------------------- --------------------------
December 1, November 26, December 1, November 26,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Sales $ 789,498 $ 1,214,097 $ 1,723,262 $ 2,427,293
Cost of sales 498,101 645,037 1,091,137 1,283,137
----------- ----------- ----------- -----------
Gross margin 291,397 569,060 632,125 1,144,156
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing 218,115 243,630 454,430 476,044
Research and development 139,439 144,641 285,267 293,000
General and administrative 45,615 50,515 103,158 104,508
Amortization of goodwill and
acquired intangibles 11,252 4,974 18,745 9,948
Purchased in-process technology 8,258 -- 37,664 --
Merger-related credits, net (113) -- (325) (2,105)
Business realignment costs 9,695 2,104 19,596 2,104
----------- ----------- ----------- -----------
Total operating expenses 432,261 445,864 918,535 883,499
----------- ----------- ----------- -----------
Operating income (loss) (140,864) 123,196 (286,410) 260,657
Gain on sale of land, net 174,369 -- 174,369 --
Gain (loss) on investments, net (16,938) 71,322 (202) 94,873
Litigation settlement (250,000) -- (250,000) --
Interest and other income, net 43,558 19,929 89,188 35,906
----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes
and equity interests (189,875) 214,447 (273,055) 391,436
Income tax provision (benefit) (47,469) 57,095 (68,264) 106,755
Other interests in loss of
consolidated joint venture -- (53) -- (1,028)
Equity interest in loss of
unconsolidated investee -- 946 1,352 946
----------- ----------- ----------- -----------
Net income (loss) from
continuing operations (142,406) 156,459 (206,143) 284,763
Net income from
discontinued operations -- 20,866 4,537 30,053
----------- ----------- ----------- -----------
Net income (loss) $ (142,406) $ 177,325 $ (201,606) $ 314,816
=========== =========== =========== ===========
Net income (loss) per share:
Basic:
Continuing operations $ (0.41) $ 0.46 $ (0.59) $ 0.82
Discontinued operations -- 0.06 0.01 0.08
----------- ----------- ----------- -----------
$ (0.41) $ 0.52 $ (0.58) $ 0.90
=========== =========== =========== ===========
Diluted:
Continuing operations $ (0.41) $ 0.45 $ (0.59) $ 0.81
Discontinued operations -- 0.06 0.01 0.08
----------- ----------- ----------- -----------
$ (0.41) $ 0.51 $ (0.58) $ 0.89
=========== =========== =========== ===========
Shares used in computing per share amounts:
Basic 345,656 342,889 349,716 348,066
Diluted 345,656 348,988 349,716 353,346
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
3COM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
December 1, June 2,
2000 2000
------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 928,880 $ 1,700,420
Short-term investments 1,506,435 1,369,520
Accounts receivable, net 430,583 355,540
Inventories, net 217,505 234,812
Deferred income taxes 90,923 -
Investments and other 490,009 655,772
Net assets of discontinued operations - 1,058,237
------------- --------------
Total current assets 3,664,335 5,374,301
Property and equipment, net 693,713 756,954
Goodwill, intangibles, deposits and other assets 361,807 361,699
------------- --------------
Total assets $4,719,855 $6,492,954
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 408,471 $ 319,739
Accrued liabilities and other 525,632 651,074
Income taxes payable 33,478 169,887
Deferred income taxes - 27,317
Current portion of long-term debt 2,254 14,459
------------- --------------
Total current liabilities 969,835 1,182,476
Long-term debt 2,595 14,740
Deferred income taxes 72,840 71,336
Other long-term obligations 8,056 7,377
Equity interest in consolidated entity - 1,173,961
Stockholders' equity:
Preferred stock, $.01 par value, 10,000 shares
authorized; none outstanding - -
Common stock, $.01 par value, 990,000 shares
authorized; shares issued: 365,771 and 365,825,
respectively 2,348,152 2,101,242
Treasury stock, at cost, 16,990 and 12,371 shares,
respectively (329,765) (312,428)
Unamortized stock-based compensation (29,956) (6,450)
Retained earnings 1,578,116 1,982,079
Accumulated other comprehensive income 99,982 278,621
------------- --------------
Total stockholders' equity 3,666,529 4,043,064
------------- --------------
Total liabilities and stockholders' equity $4,719,855 $6,492,954
============= ==============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
3COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
--------------------------
December 1, November 26,
2000 1999
----------- -----------
Cash flows from operating activities:
Net income (loss) from continuing operations $ (206,143) $ 284,763
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 130,611 153,192
(Gain) loss on disposal of fixed assets (164,479) 6,561
(Gain) loss on investments, net 202 (94,873)
Deferred income taxes 1,043 39,614
Merger-related credits, net (325) (2,105)
Purchased in-process technology 37,664 --
Other interests in loss of consolidated joint venture -- (1,028)
Equity in loss of unconsolidated investee 1,352 946
Changes in current assets and liabilities,
net of effects of acquisitions:
Accounts receivable (73,560) 223,413
Inventories 18,858 45,259
Investments and other assets (112,058) 8,228
Accounts payable 86,793 106,238
Accrued liabilities and other (126,705) (56,857)
Income taxes payable (37,633) 49,029
----------- -----------
Net cash provided by (used in) operating activities (444,380) 762,380
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments (604,883) (413,992)
Purchase of equity investments (89,038) (25,197)
Proceeds from maturities of short-term investments 478,239 200,261
Proceeds from sales of equity investments 69,057 118,853
Purchase of property and equipment (112,384) (87,430)
Proceeds from sale of property and equipment 238,966 6,790
Businesses acquired in purchase transactions,
net of cash received (74,603) --
Other, net 4,304 2,214
----------- -----------
Net cash used in investing activities (90,342) (198,501)
----------- -----------
Cash flows from financing activities:
Issuance of common stock 207,030 71,822
Repurchase of common stock (449,522) (540,780)
Repayments of long-term borrowings (24,349) (12,000)
Other, net (268) 2,460
----------- -----------
Net cash used in financing activities (267,109) (478,498)
----------- -----------
Net cash provided by discontinued operations 30,291 28,891
Increase (decrease) in cash and equivalents (771,540) 114,272
Cash and equivalents, beginning of period 1,700,420 951,771
----------- -----------
Cash and equivalents, end of period $ 928,880 $ 1,066,043
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
3COM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared by 3Com Corporation ("3Com"), pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion
of management, these unaudited condensed consolidated financial
statements include all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of 3Com's
financial position as of December 1, 2000, results of operations for
the three and six months ended December 1, 2000 and November 26, 1999,
and cash flows for the six months ended December 1, 2000 and November
26, 1999. Certain amounts from the prior period have been reclassified
to conform to the current period presentation. Such reclassifications
had no effect on net income as previously reported.
3Com uses a 52 or 53 week fiscal year ending on the Friday nearest to
May 31. Accordingly, fiscal 2001 will end on June 1, 2001, resulting in
a 52-week fiscal year, compared to 53 weeks in fiscal 2000. The results
of operations for the three and six months ended December 1, 2000 may
not be indicative of the results to be expected for the fiscal year
ending June 1, 2001. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes thereto included in 3Com's Annual Report
on Form 10-K for the fiscal year ended June 2, 2000.
REVENUE RECOGNITION
3Com generally recognizes a sale when the product has been shipped,
risk of loss has passed to the customer, and collection of the
resulting receivable is probable. 3Com accrues related product return
reserves, warranty, other post-contract support obligations, and
royalty expenses at the time of sale. A limited warranty is provided on
3Com products for periods ranging from 90 days to the lifetime of the
product, depending upon the product. Service and maintenance sales are
recognized over the contract term. 3Com provides limited product return
and price protection rights to certain distributors and resellers.
Product return rights are generally limited to a percentage of sales
over a one to three month period.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 and June 1999, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, which 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 our fiscal year ending May 31, 2002. 3Com is in the
process of determining the impact that adoption will have on its
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The guidance in SAB 101 must be adopted during our fourth
quarter of fiscal 2001 and the effects, if any, are required to be
recorded through a retroactive, cumulative-effect adjustment as of the
beginning of the fiscal year, with a restatement of all prior interim
quarters in the year. Management has not completed its evaluation of
the effects, if any, that SAB 101 will have on 3Com's income statement
presentation, operating results, or financial position.
6
2. Discontinued Operations
On September 13, 1999, 3Com announced a plan to conduct an initial
public offering ("IPO") of its Palm, Inc. ("Palm") subsidiary. On March
2, 2000, 3Com sold 4.7% of Palm's stock to the public and 1.0% of
Palm's stock in private placements, resulting in net proceeds of $1.2
billion, which were retained by Palm. On May 8, 2000, 3Com's Board of
Directors declared a special dividend of 3Com's remaining interest in
Palm to 3Com's shareholders of record on July 27, 2000. On July 27,
2000, 3Com distributed its Palm common stock to 3Com shareholders. The
distribution ratio was 1.4832 shares of Palm for each outstanding share
of 3Com common stock. No gain was recorded as a result of these
transactions. The decrease in the intrinsic value of 3Com's employee
stock plans attributable to the distribution of Palm was restored in
accordance with the methodology set forth in FASB Emerging Issues Task
Force Issue 90-9, "Changes to Fixed Employee Stock Option Plans as a
Result of Equity Restructuring." Prior to the Palm distribution, there
were approximately 35 million employee options outstanding. As a result
of the Palm distribution, these converted to approximately 169 million
employee options outstanding, of which approximately 60 million were
vested and immediately exercisable. As of December 1, 2000 161.8
million employee options were outstanding.
The historical consolidated financial statements of 3Com have been
restated to account for Palm as a discontinued operation for all
periods presented. The financial data of Palm reflects the historical
results of operations and cash flows of the businesses that comprised
the handheld computing business segment of 3Com during each respective
period; they do not reflect many significant changes that will occur
and have occurred in the operations and funding of Palm as a result of
the separation from 3Com and the IPO. The Palm financial data restated
as a discontinued operation reflects the assets and liabilities
transferred to Palm in accordance with the terms of a master separation
agreement to which Palm and 3Com are parties.
3. Business Realignment Costs
During fiscal 2000 and continuing through the six months ended December
1, 2000, 3Com realigned its strategy to focus on high-growth markets,
technologies, and products. Operations were realigned around two
distinct business models: 1) Commercial and Consumer Networks Business
and 2) CommWorks. In support of this new strategy, 3Com exited its
analog-only modem and high-end Local Area Network (LAN) and Wide Area
Network (WAN) chassis product lines and completed the separation of
Palm, Inc. (Palm). For the three months ended December 1, 2000, 3Com
incurred $10.1 million in realignment charges related to implementing
its change in strategic focus, partially offset by a credit of $0.4
million related to the separation of Palm. Components of accrued
business realignment costs and changes in accrued amounts related to
the realignment program as of December 1, 2000 were as follows (in
thousands):
Facilities Long-term Severance Other
Lease Asset and Restructuring
Terminations Writedowns Outplacement Costs Total
-------------- ------------- ------------ ---------- ----------
BALANCE AT JUNE 2, 2000 $ 8,300 $ 16,494 $ 34,212 $ 5,673 $ 64,679
Provision (benefit) (3,115) 12,359 (2,847) 3,324 9,721
Deductions (125) (15,381) (15,200) (6,017) (36,723)
-------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 1, 2000 5,060 13,472 16,165 2,980 37,677
Provision (benefit) (1,587) (1,026) 1,364 11,345 10,096
Deductions (1,666) (9,165) (11,927) (10,106) (32,864)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 1, 2000 $ 1,807 $ 3,281 $ 5,602 $ 4,219 $ 14,909
======== ======== ======== ======== ========
7
Severance and outplacement costs related to the termination of
approximately 2,800 employees. Employee separation costs include
severance, medical, and other benefits. Employee groups impacted by the
realignment include personnel involved in duplicate corporate services,
manufacturing and logistics, product organizations, sales, and customer
support. From March 20, 2000 through December 1, 2000, approximately
2,600 employees have completed or were currently in the separation
process, resulting in $52.8 million of employee separation payments.
Remaining cash expenditures associated with employee separations are
estimated to be approximately $5.6 million. Employee separations
associated with our announcements made on March 20, 2000 have been
substantially completed.
Other restructuring charges for the three months ended December 1, 2000
include the $11.7 million loss on the sale of 3Com's manufacturing and
distribution operations to Manufacturers' Services Ltd., ("MSL") on
September 30, 2000, partially offset by credits relating to revisions
in estimates.
3Com has substantially completed its realignment initiatives in
conjunction with the announcements made on March 20, 2000. There can be
no assurance that the estimated costs of 3Com's business realignment
activities will not change. Remaining cash expenditures relating to the
realignment are estimated to be $11.6 million, related primarily to
employee severance, facility closure, and payments to suppliers.
Remaining non-cash items to be charged to the business realignment
accrual are estimated to be $3.3 million, primarily related to the
impairment of capital assets associated with the business activities
that have been exited.
4. Business Combinations
KERBANGO, INC.
During the first quarter of fiscal 2001, 3Com acquired Kerbango, Inc.
("Kerbango"), developer of the Kerbango(TM) Internet radio, radio
tuning system, and radio web site. The total purchase consideration,
including $0.3 million of direct transaction costs, was $73.5 million,
consisting of cash paid to Kerbango of $52.2 million, issuance of
restricted stock with a fair value of $17.2 million and stock options
assumed with a fair value of $3.8 million. In addition, deferred cash
payments to founders and certain former employees totaling $7.7 million
are contingent upon certain events through July 2002. Accordingly, the
effect of the deferred cash payments will be recorded as the contingent
events have been satisfied.
For financial reporting purposes, the aggregate purchase price,
excluding deferred cash payments, was reduced by the intrinsic value of
unvested stock options and restricted stock totaling $20.2 million
which was recorded as deferred stock-based compensation and is being
amortized over the respective vesting periods. Approximately $29.4
million of the aggregate purchase price represented purchased
in-process technology that had not yet reached technological
feasibility and had no alternative future use, and accordingly, was
charged to operations in the first quarter of fiscal 2001. Net tangible
liabilities acquired, including cash of $0.4 million, were
approximately $1.7 million at the acquisition date. This purchase
resulted in $25.6 million of goodwill and other intangible assets that
are being amortized over estimated useful lives of three to five years.
NOMADIC TECHNOLOGIES, INC.
During the second quarter of fiscal 2001, 3Com acquired Nomadic
Technologies, Inc. ("Nomadic"), a developer of wireless networking
products that 3Com will incorporate into solutions for both home and
small business customers. The total purchase consideration, including
$0.2 million of direct transaction costs, was $31.8 million, consisting
of cash paid to Nomadic of $23.5 million, issuance of restricted stock
with a fair value of $3.8 million and stock options assumed with a fair
value of $4.3 million.
8
For financial reporting purposes, the aggregate purchase price was
reduced by the intrinsic value of unvested stock options and restricted
stock totaling $6.9 million which was recorded as deferred stock-based
compensation and is being amortized over the respective vesting
periods. Approximately $8.3 million of the aggregate purchase price
represented purchased in-process technology that had not yet reached
technological feasibility and had no alternative future use, and
accordingly, was charged to operations in the second quarter of fiscal
2001. Net tangible liabilities acquired, including cash of $0.7
million, were approximately $1.9 million at the acquisition date. This
purchase resulted in $18.6 million of goodwill and other intangible
assets that are being amortized over estimated useful lives of three to
five years.
5. Sale of Land to Palm
On September 5, 2000, 3Com finalized the sale of a 39-acre parcel of
undeveloped land in San Jose, California to Palm, Inc. ("Palm") for
approximately $216 million. 3Com recorded a net gain of $174.4 million
related to this sale.
6. Sale of Manufacturing and Distribution Operations
On September 30, 2000, 3Com finalized the sale of its manufacturing and
distribution operations located in Mount Prospect, Illinois to
Manufacturers' Services Ltd. ("MSL"). In this transaction, 3Com
received approximately $59 million in cash and 1.5 million shares of
common stock of MSL valued at approximately $18 million as of the
transaction date. For the next two years, 3Com has committed to
purchase a minimum level of manufacturing volume from MSL. On September
30, 2000, the manufacturing and distribution operations, including
approximately 1,200 3Com employees, were transferred to MSL. 3Com
incurred a loss of approximately $11.7 million in connection with this
sale, which was charged to business realignment costs.
7. Comprehensive Income
The components of comprehensive income (loss), net of tax, are as
follows (in thousands):
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December 1, November 26, December 1, November 26,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income (loss) $ (142,406) $ 177,325 $ (201,606) $ 314,816
Other comprehensive income (loss):
Change in net unrealized gain (loss)
on investments (238,546) 202,133 (178,370) 453,876
Change in accumulated
translation adjustments 74 (344) (269) (200)
----------- ------------ ------------ -----------
Total comprehensive income (loss) $ (380,878) $ 379,114 $ (380,245) $ 768,492
============ =========== ============ ===========
9
8. Net Income (Loss) Per Share
The following table presents the calculation of basic and diluted
earnings (loss) per share (in thousands, except per share data):
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December 1, November 26, December 1, November 26,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income (loss) from continuing operations $ (142,406) $ 156,459 $ (206,143) $ 284,763
Net income from discontinued operations - 20,866 4,537 30,053
----------- ----------- ----------- -----------
$ (142,406) $ 177,325 $ (201,606) $ 314,816
=========== =========== =========== ===========
Weighted average shares-Basic 345,656 342,889 349,716 348,066
Effect of dilutive securities:
Employee stock options - 5,768 - 5,024
Restricted stock - 331 - 256
----------- ----------- ----------- -----------
Weighted average shares-Diluted 345,656 348,988 349,716 353,346
=========== =========== =========== ===========
Net income (loss) per share-Basic:
Continuing operations $ (0.41) $ 0.46 $ (0.59) $ 0.82
Discontinued operations - 0.06 0.01 0.08
----------- ----------- ----------- -----------
$ (0.41) $ 0.52 $ (0.58) $ 0.90
========== =========== =========== ===========
Net income (loss) per share-Diluted:
Continuing operations $ (0.41) $ 0.45 $ (0.59) $ 0.81
Discontinued operations - 0.06 0.01 0.08
----------- ----------- ------------ -----------
$ (0.41) $ 0.51 $ (0.58) $ 0.89
========== =========== ============ ===========
Employee stock options and restricted stock totaling 27.0 million
shares and 50.6 million shares for the three and six months ended
December 1, 2000, respectively, were not included in the
diluted weighted average shares calculation as the effects of these
securities were antidilutive.
9. Inventories
Inventories, net, consist of (in thousands):
December 1, June 2,
2000 2000
----------- -----------
Finished goods $ 94,641 $ 123,290
Work-in-process 35,806 31,863
Raw materials 87,058 79,659
----------- -----------
Total inventory $ 217,505 $ 234,812
=========== ===========
10
10. Commitments and Contingencies
3Com has purchase commitments pertaining to a patent license agreement.
These purchase commitments extend through the end of calendar 2005 and
increase from $135 million for calendar 2001 to $180 million for
calendar 2005. In the event that 3Com does not meet a calendar year
purchase commitment, penalties due increase from approximately one
percent to three percent of the annual commitment.
In July 2000, 3Com committed to purchase certain components from a
vendor through December 2002. The purchase agreement provides for
cash penalties to the vendor in the event that minimum purchases are
not met on a calendar quarter basis. The agreement included a
warrant issued to 3Com to purchase common stock of the vendor, which
vests as purchases are made. Since the vendor was subsequently
acquired by Broadcom Corporation ("Broadcom"), the warrants to
purchase shares of common stock of the vendor were replaced by
warrants to purchase 992,000 shares of common stock of Broadcom
under the warrant agreement. The fair value of the warrant at the
inception of the agreement was fixed at approximately $244 million,
since the agreement contains significant disincentives for
nonperformance. The effects of such warrants are recorded as a
credit to cost of sales as purchases are made, based on the fixed
valuation of the warrant of $244 million. Once vested, the warrants
will be accounted for in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Under SFAS
No. 115, the warrants or stock received on exercise of the warrant
will be recorded at fair market value, with the resulting investment
gain or loss recorded either directly to stockholders' equity or to
the statement of operations, depending on facts and circumstances in
the future. Future minimum purchase commitments, excluding the
effect of warrants, are as follows (in thousands):
Purchase
Fiscal Year Commitment
----------- ----------
2001 $ 117,307
2002 158,288
2003 84,975
-------------
Total $ 360,570
=============
In conjunction with the sale of the manufacturing and distribution
operations to MSL on September 30, 2000, 3Com has committed to purchase
a minimum manufacturing volume, excluding the cost of materials, of $31
million per quarter during the first year of the agreement, and $30
million per quarter during the second year of the agreement.
11. Stock Repurchase and Option Programs
During the fourth quarter of fiscal 2000, the Board of Directors
authorized a stock repurchase program in the amount of up to one
billion dollars. Such repurchases may be used to partially offset the
issuance of additional shares resulting from employee stock option
exercises and the sale of shares under the employee stock purchase
plan. The Board has authorized a two-year time limit on the repurchase
authorizations. This new program replaces previous authorizations
totaling 45 million shares between June 1998 and September 1999. During
the three months ended December 1, 2000, 10.4 million shares of common
stock were repurchased for a cumulative purchase price of $199.3
million. During the six months ended December 1, 2000, 26.6 million
shares of common stock were repurchased for a cumulative purchase price
of $449.5 million.
In July 2000, 3Com initiated a program of selling put options and
purchasing call options on its common stock. These are "European" style
options which, in the case of put options, entitle the holders to sell
shares of 3Com common stock to 3Com on the expiration dates at
specified prices and, in the case of call options, entitle 3Com to
purchase its common stock on the expiration dates at specified prices.
As of December 1, 2000, 16.5 million put options were outstanding, at
an average price of $15.48 per share, and 13.0 million call options
were outstanding, at an
11
average price of $18.28 per share. The put options and call options have
expiration dates between January 2001 and August 2002. The option contracts
give 3Com the choice of net cash settlement or physical settlement or net
settlement in its own shares of common stock. These options are accounted for
as permanent equity instruments. The option contracts also contain per share
price floors, with a range of 50 percent to 55 percent of the put option
prices, whereby a drop in the price of 3Com common stock below such price
floor could require accelerated settlement of the put option by 3Com. If
accelerated settlement of the put options is required and 3Com elected either
net cash settlement or net settlement in its own shares, 3Com would pay an
amount in cash or deliver 3Com shares, based on the difference between the
put prices and the market price of 3Com's common stock at the settlement
dates, or if 3Com elected physical settlement, 3Com would pay an amount in
cash equal to the exercise prices for the put options and accordingly would
receive the number of 3Com shares subject to the put options. Certain of the
agreements supporting the option contracts include a financial covenant which
must be maintained by 3Com.
12. Business Segment Information
The following tables display information on our reportable segments (in
thousands):
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December 1, November 26, December 1, November 26,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Sales:
Commercial and Consumer Networks $ 671,329 $ 761,696 $ 1,310,435 $ 1,551,704
CommWorks 95,361 140,455 262,604 270,069
Exited Product Lines 22,808 311,946 150,223 605,520
----------- ----------- ----------- -----------
$ 789,498 $ 1,214,097 $ 1,723,262 $ 2,427,293
=========== =========== =========== ===========
Contribution Margin:
Commercial and Consumer Networks $ 95,925 $ 253,538 $ 196,709 $ 542,815
CommWorks (21,585) 25,871 4,649 47,337
Exited Product Lines (6,850) 38,865 (19,500) 70,407
------------ ----------- ------------ -----------
$ 67,490 $ 318,274 $ 181,858 $ 660,559
=========== =========== =========== ===========
A reconciliation of the totals reported for the operating segments to
the applicable line items in the consolidated financial statements is
set forth below (in thousands):
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December 1, November 26, December 1, November 26,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Total contribution margin from
operating segments $ 67,490 $ 318,274 $ 181,858 $ 660,559
Indirect operating expenses (1) 190,514 192,974 411,333 399,903
Purchased in-process technology 8,258 - 37,664 -
Merger-related credits, net (113) - (325) (2,105)
Business realignment costs 9,695 2,104 19,596 2,104
----------- ----------- ----------- -----------
Total operating income (loss) (140,864) 123,196 (286,410) 260,657
Gain on sale of land, net 174,369 - 174,369 -
Gain (loss) on investments, net (16,938) 71,322 (202) 94,873
Litigation settlement (250,000) - (250,000) -
Interest and other income, net 43,558 19,929 89,188 35,906
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and equity interests $ (189,875) $ 214,447 $ (273,055) $ 391,436
============ =========== ============ ===========
(1) Indirect operating expenses include expenses that are not
directly attributable to an operating segment, such as field
sales, corporate marketing, and general and administrative
expenses.
12
13. Litigation
We are a party to lawsuits in the normal course of our business.
Litigation in general, and intellectual property and securities
litigation in particular, can be expensive and disruptive to normal
business operations. Moreover, the results of complex legal proceedings
are difficult to predict. We believe that we have defenses in each of
the cases set forth below and are vigorously contesting each of these
matters. An unfavorable resolution of one or more of the following
lawsuits could adversely affect our business, results of operations, or
financial condition.
SECURITIES LITIGATION
On March 24 and May 5, 1997, securities class action lawsuits,
captioned HIRSCH V. 3COM CORPORATION, ET AL., Civil Action No. CV764977
(HIRSCH), and KRAVITZ V. 3COM CORPORATION, ET AL., Civil Action No.
CV765962 (KRAVITZ), respectively, were filed against 3Com and certain
of its officers and directors in the California Superior Court, Santa
Clara County. The complaints allege violations of Sections 25400 and
25500 of the California Corporations Code and seek unspecified damages
on behalf of a class of purchasers of 3Com common stock during the
period from September 24, 1996 through February 10, 1997. In late 1999,
these cases were stayed by the Court, pending resolution of proceedings
in the EUREDJIAN V. 3COM CORPORATION matter, discussed below. Because
the EUREDJIAN case has been dismissed, the HIRSCH and KRAVITZ cases are
no longer stayed. They are in discovery. The trial is scheduled to
begin February 26, 2001. In recent court filings, plaintiffs have
stated that they will seek hundreds of millions of dollars in damages.
On February 10, 1998, a securities class action, captioned EUREDJIAN V.
3COM CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN),
was filed against 3Com and several of its present and former officers
and directors in United States District Court for the Northern District
of California asserting the same class period and factual allegations
as the HIRSCH and KRAVITZ actions. The complaint alleges violations of
the federal securities laws, specifically Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and seeks unspecified damages. In
May 2000, at the request of plaintiffs, the Court dismissed the
EUREDJIAN case with prejudice.
In December 1997, a securities class action, captioned REIVER V. 3COM
CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed
in the United States District Court for the Northern District of
California. Several similar actions have been consolidated into this
action, including FLORIDA STATE BOARD OF ADMINISTRATION AND TEACHERS
RETIREMENT SYSTEM OF LOUISIANA V. 3COM CORPORATION, ET AL., Civil
Action No. C-98-1355. On August 17, 1998, the plaintiffs filed a
consolidated amended complaint which alleges violations of the federal
securities laws, specifically Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934, and which seeks unspecified
damages on behalf of a purported class of purchasers of 3Com common
stock during the period from April 23, 1997 through November 5, 1997.
In October 1998, a securities class action lawsuit, captioned ADLER V.
3COM CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed
against 3Com and certain of its officers and directors in the
California Superior Court, Santa Clara County, asserting the same class
period and factual allegations as the REIVER action. The complaint
alleges violations of Sections 25400 and 25500 of the California
Corporations Code and seeks unspecified damages.
On November 3, 2000, 3Com announced that it had reached a settlement of
the REIVER and ADLER cases. The settlement amount is $259,000,000, of
which $9,000,000 will be recovered from insurance. Accordingly, 3Com
recorded a litigation charge of $250,000,000 during the three months
ended December 1, 2000. The Court has preliminarily approved the
settlement and scheduled a hearing for final approval on February 23,
2001.
13
On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM
CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (GAYLINN), was
filed against 3Com and several of its present and former officers and
directors in United States District Court for the Northern District of
California. Several similar actions have been consolidated into the
GAYLINN action. On September 10, 1999, the plaintiffs filed a
consolidated complaint which alleges violations of the federal
securities laws, specifically Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and seeks unspecified damages on
behalf of a purported class of purchasers of 3Com common stock during
the period from September 22, 1998 through March 2, 1999. In January
2000, the Court dismissed the complaint. In February 2000, plaintiffs
filed an amended complaint. In June 2000, the Court dismissed the
amended complaint without prejudice. Plaintiffs filed another amended
complaint. On July 24, 2000, the Company filed a motion to dismiss the
latest amended complaint. In September 2000, the Court dismissed the
amended complaint with prejudice. Plaintiffs have appealed.
In December 2000, an action entitled SHAEV V. CLAFLIN, ET AL., was
filed in the California Superior Court, Santa Clara County, Case No.
CV794039. The case purports to be a derivative and class action against
directors and officers of 3Com. The complaint alleges that the
Company's directors and officers breached duties by adjusting the
number of stock options held by 3Com employees at the time 3Com
distributed the Palm stock to shareholders in July 2000. No response
has been filed to the complaint to date.
INTELLECTUAL PROPERTY
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States
District Court for the Western District of New York. The case is now
captioned XEROX CORPORATION V. U.S. ROBOTICS CORPORATION, U.S. ROBOTICS
ACCESS CORP., PALM COMPUTING, INC. AND 3COM CORPORATION (Civil Action
Number 97-CV-6182T). The Complaint alleged willful infringement of
United States Patent Number 5,596,656, entitled "Unistrokes for
Computerized Interpretation of Handwriting." The Complaint sought to
permanently enjoin the defendants from infringing the patent in the
future. In an Order entered by the Court on June 6, 2000, the Court
granted the defendants' motion for summary judgment of
non-infringement, and the case was dismissed in its entirety. Xerox has
appealed the dismissal to the U.S. Court of Appeals for the Federal
Circuit.
On May 26, 2000, 3Com Corporation filed suit against Xircom, Inc. in
the United States District Court for the District of Utah, Civil Action
No. 2:00-CV-0436C alleging infringement of U.S. Patents Nos. 6,012,953,
5,532,898, 5,696,660, 5,777,836 and 6,146,209, accusing Xircom of
infringement of one or more of the claims of the patents-in-suit by
reason of the manufacture, sale, and use of the Real Port and Real Port
2 families of PC Cards, as well as a number of Xircom's Type II PC
Modem Cards. Xircom has counter-claimed for a declaratory judgment that
the asserted claims of the patents-in-suit are invalid and / or not
infringed. This case is currently in the discovery phase.
On September 21, 2000, Xircom, Inc. filed an action against 3Com
Corporation ("3Com") in the United States District Court for the
Central District of California, Civil Action No. Case No.: 00-10198
MRP, accusing 3Com of infringement of U.S. Patents Nos. 5,773,332,
5,940,275, 6,115,257 and 6,095,851, accusing 3Com of infringement by
reason of the manufacture, sale, and use of the 3COM 10/100 LAN+Modem
CardBus Type III PC Card, the 3COM 10/100 LAN CardBus Type III PC Card,
the 3COM Megahertz 10/100 LAN CardBus PC Card, the 3COM Megahertz
10/100 LAN+56K Global Modem CardBus PC Card and the 3COM Megahertz 56K
Global GSM and Cellular Modem PC Card. 3Com has counter-claimed for
declaratory judgment that the asserted claims of the patents-in-suit
are not infringed and/or invalid and that certain claims of the
5,940,275 patent are unenforceable. This case is in the discovery
phase. On December 22, 2000, Xircom filed a motion for preliminary
injunction seeking to enjoin 3Com from the continued manufacture and
sale of its Type III PC card products. The motion is currently
scheduled for hearing on January 29, 2001.
14
On September 25, 2000, Northrop Grumman Corporation filed suit against
Intel Corporation, 3Com Corporation, Xircom, Inc., D-Link Systems, Inc.
and The Linksys Group, Inc. in the United States District Court for the
Eastern District of Texas, Beaumont Division, Civil Action No.
1:00-CV-652, accusing 3Com and the other defendants of infringement of
U.S. Patent No. 4,453,229, issued on June 5, 1984. The complaint
asserts infringement by 3Com and the other defendants by reason of the
manufacture and sale of network interface cards and other devices
capable of interfacing an Ethernet bi-phase serial bus to a parallel
bus, such as may be found in personal computers or other devices. 3Com
has filed a motion to transfer the case from Texas to the Northern or
Central District of California. This case is in the discovery phase.
14. Subsequent Events
On December 11, 2000, 3Com announced a strategic alliance with Broadcom
Corporation ("Broadcom") to capitalize on each company's strengths and
accelerate the deployment of Gigabit Ethernet into business networks.
As part of the strategic alliance, 3Com has issued to Broadcom a
warrant to acquire up to 7.1 million shares of 3Com common stock,
representing approximately 2% of 3Com's current outstanding shares. The
term of the warrant is from January 1, 2001 through December 4, 2002.
The per share exercise price is $9.31 and the purchase price of the
warrant is $21,051,500. Broadcom paid for the warrant by issuance of a
full recourse promissory note in the principal amount of $21,051,500.
On December 15, 2000, 3Com acquired the Gigabit Ethernet network
interface card (NIC) business of Alteon WebSystems ("Alteon"), a
wholly-owned subsidiary of Nortel Networks Corporation, for an
aggregate purchase price of approximately $110 million in cash. 3Com
purchased the Alteon NIC business and is licensing certain Gigabit
Ethernet-related technology and intellectual property from Alteon. 3Com
will record a one-time charge of approximately $20 million to $30
million for in-process research and development related to the
acquisition during its third fiscal quarter.
On December 21, 2000, 3Com announced the creation of the CommWorks
Corporation ("CommWorks"), a wholly-owned subsidiary serving the
telecommunications service provider market. CommWorks, which will
contain 3Com's Carrier Network Business, builds Internet Protocol (IP)
networks for network service providers around the world. 3Com's
Commercial and Consumer Networks business will continue to provide
networking solutions for the commercial and consumer markets. The
Commercial and Consumer Networks business and CommWorks will be
realigning their respective operating structures to enhance the focus
and cost effectiveness in serving their respective markets. 3Com is
currently developing a restructuring plan to implement these changes.
It is anticipated that certain one-time charges will be recorded in
subsequent quarters to reflect, among other factors, severance and
write-offs associated with these restructurings.
15
3COM CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements, including
statements about plans to invest a significant portion of financial resources
in developing products for emerging growth markets, plans to make investments
through 3Com Ventures, the transfer of our Carrier Networks Business to
CommWorks and the associated realignment of the operating structures of the
Commercial and Consumer Networks Business and CommWorks, our intent to
increase shareholder value by creating two growth businesses and investing in
leadership products and services which will drive profitable growth, the
expectation that emerging product lines will grow at a significantly higher
rate than the networking industry average, our expectation that emerging
product lines will account for a higher percentage of our sales over time,
the impact and benefits of the acquisitions of Kerbango and the Gigabit
Ethernet NIC business from Alteon WebSystems, our belief that our cash and
cash equivalents, short term investments, and cash generated from operations
will be sufficient to satisfy our anticipated cash requirements for at least
the next 12 months, our expectation that we will increase our commitment to
and become increasingly reliant upon our two-tiered distribution model as
well as sales to OEMs, our estimate of expenses in connection with the
completion of acquired research and development projects, our belief that the
successful web-enablement of 3Com is critical to our long-term competitive
position, our intent to jointly develop new products, cross license
technologies, engage in joint sales and marketing and enter into a supply
chain agreement with Broadcom, and our expectation that gross margins for our
high-growth emerging product lines on a stand-alone basis may be
significantly lower than gross margins for networking products. These
statements are subject to certain risks and uncertainties. Some of the
factors that could cause future events or results to materially differ from
those projected in the forward-looking statements are discussed below.
STRATEGIC FOCUS
We have structured our operations around two distinct businesses: 1) our
Commercial and Consumer Networks Business and 2) our Carrier Networks
Business. In our fourth quarter of fiscal 2000, we began a transformation to
exit three product lines that were no longer strategic to our future and to
substantially increase our efforts in high-growth emerging markets. At the
same time, we have focused our research and development and strategic
business development efforts on high-growth and emerging technology markets
such as Gigabit network interface cards (NICs), wireless solutions, home
networking, and LAN telephony. During our second fiscal quarter of fiscal
2001, we introduced many new products and solutions including the Audrey-TM-
Internet Access Device and our new line of Superstack-Registered Trademark-
III products. We are continuing to invest heavily towards the development of
our next-generation carrier platform, the Total Control-Registered Trademark-
2000. In addition to our targeted investments in research and development,
during the second quarter of fiscal 2001 we announced the acquisition of
Alteon WebSystems and a strategic relationship with Broadcom. As a result, we
are now positioned as the market leader for Gigabit NIC products.
On December 21, 2000, we made two announcements that will result in further
sharpening of our strategic focus. We announced the creation of CommWorks
Corporation ("CommWorks"), a wholly-owned subsidiary serving the service
provider market. CommWorks, which will contain our Carrier Networks Business,
builds Internet Protocol (IP) networks for network service providers around the
world. These networks allow service providers to deliver enhanced data and voice
services to their end users through analog dial-up, wireless, cable, and digital
subscriber line (DSL) access. Our Carrier Networks Business will be referred
to hereafter as "CommWorks."
We also announced that both our Commercial and Consumer Networks Business and
CommWorks will be restructuring their respective operations to enhance the focus
and cost effectiveness in serving their respective markets. We are focused on
creating two growth businesses, each of which generates superior financial
returns. We are committed to obtaining the benefits of focus, while investing in
leadership products and services which drive profitable growth. All of these
actions are intended to create increased shareholder value.
16
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total sales represented by the line items reflected in 3Com's condensed
consolidated statements of operations:
Three months ended Six months ended
------------------ -------------------
December 1, November 26, December 1, November 26,
2000 1999 2000 1999
----- ----- ----- -----
Sales ................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ......................... 63.1 53.1 63.3 52.9
----- ----- ----- -----
Gross margin .......................... 36.9 46.9 36.7 47.1
Operating expenses:
Sales and marketing .............. 27.6 20.1 26.4 19.6
Research and development ......... 17.7 11.9 16.6 12.1
General and administrative ....... 5.8 4.1 6.0 4.3
Amortization of goodwill and
acquired intangibles .......... 1.4 0.4 1.1 0.4
Purchased in-process technology .. 1.0 - 2.1 -
Merger-related (credits), net .... - - - (0.1)
Business realignment costs ....... 1.2 0.2 1.1 0.1
----- ----- ----- -----
Total operating expenses ..... 54.7 36.7 53.3 36.4
----- ----- ----- -----
Operating income (loss) ............... (17.8) 10.2 (16.6) 10.7
Gain on sale of land, net ............. 22.1 - 10.1 -
Gains on investments, net ............. (2.2) 5.9 - 3.9
Litigation settlement ................. (31.7) - (14.5) -
Interest and other income, net ........ 5.5 1.6 5.2 1.5
----- ----- ----- -----
Income (loss) before income taxes ..... (24.1) 17.7 (15.8) 16.1
Income tax provision (benefit) ........ (6.1) 4.7 (4.0) 4.4
Other interests in loss of
consolidated joint venture ....... - - - -
Equity interest in loss of
unconsolidated investee .......... - 0.1 0.1 -
----- ----- ----- -----
Net income (loss) from continuing
operations ....................... (18.0) 12.9 (11.9) 11.7
Net income from discontinued operations - 1.7 0.2 1.3
Net income (loss) ..................... (18.0)% 14.6% (11.7)% 13.0%
===== ===== ===== =====
Pro forma:
Operating expenses ............... 51.1% 36.1% 48.9% 36.0%
Operating income (loss) .......... (14.2) 10.7 (12.2) 11.1
Net income (loss) ................ (6.5) 9.1 (5.4) 9.3
Pro forma results exclude the following, net of taxes: amortization of goodwill
and acquired intangibles, purchased in-process technology, merger-related
credits, net, business realignment costs, gain on sale of land, net, gains on
investments, net, litigation settlement and net income from discontinued
operations.
17
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
SALES
Sales in the second quarter of fiscal 2001 totaled $789.5 million, a decrease of
$424.6 million, or 35 percent, compared to the same quarter one year ago, and a
decrease of $144.3 million or 15 percent sequentially from the first quarter of
fiscal 2001. Sales in the first six months of fiscal 2001 were $1,723.3 million
and sales in the first six months of fiscal 2000 were $2,427.3 million.
COMMERCIAL AND CONSUMER NETWORKS.
Commercial and consumer networks products include traditional access products
(desktop network interface cards (NICs), advanced access products (gigabit
NICs, server NICs, mobile NICs, wireless local area network (LAN) products),
LAN/wide area network (WAN) infrastructure products (LAN switches, LAN hubs,
Internet access products, network management products)), LAN telephony
products, services, broadband connections, home networking products, Internet
appliances and customer service and support.
Sales of commercial and consumer networks products in the second quarter of
fiscal 2001 decreased 12 percent compared to the same quarter one year ago, and
increased five percent sequentially from the first quarter of fiscal 2001. Sales
of commercial and consumer network products in the first six months of fiscal
2001 decreased 15 percent compared to the first six months of fiscal 2000.
We do not believe that meaningful comparisons can be made to the same quarter
a year ago because of dramatic changes caused by our business realignment.
The decline in sales from the same period one year ago was due primarily to
disruptions caused by our exit from the core networking product lines, as
well as competitive pressures in the LAN Workgroup Systems market and lower
average selling prices for our desktop NIC products due to an increase in the
proportion of sales of these products to original equipment manufacturers
(OEMs). These declines were partially offset by increased sales of our
high-growth emerging technology products. The sequential sales increase from
the first quarter to the second quarter of fiscal 2001 was due to the
stabilization and recovery of the business, further design wins with our PC
OEM partners, as well as increased sales of our high-growth emerging
technology products. However, during our second fiscal quarter we experienced
intermittent component shortages, which impacted the timing and quantities of
shipments of our commercial and consumer network products across the board.
Sales of commercial and consumer network products in the second quarter of
fiscal 2001 represented 85 percent of total sales compared to 63 percent in
the second quarter of fiscal 2000 and 68 percent in the first quarter of
fiscal 2001. Sales of commercial and consumer network products in the first
six months of fiscal 2001 represented 76 percent of total sales compared to
64 percent in the first six months of fiscal 2000.
COMMWORKS.
CommWorks products include enhanced data services (dial-up access (RAS), Virtual
Private Networks (VPN), transaction processing, subscriber aggregation) and
newer solutions (IP telephony, wireless, cable access and digital subscriber
line (DSL) access) and customer service and support.
Sales of CommWorks products in the second quarter of fiscal 2001 decreased 32
percent compared to the same quarter one year ago and 43 percent sequentially
from the first quarter of fiscal 2001. Sales of CommWorks products in the first
six months of fiscal 2001 decreased three percent compared to the first six
months of fiscal 2000. The decrease in sales compared to the same period one
year ago, was due primarily to a continuing shift in our product mix from RAS
products towards new technologies. The sequential decrease in sales from the
first quarter of fiscal 2001 to the second quarter of fiscal 2001 was due
primarily to the significant slowdown in the telecom industry. During the second
quarter of fiscal 2001, our top three Tier 1 customers reduced or deferred
purchases of our products. This resulted in a substantial decline in sales to
these three customers from the first quarter of fiscal 2001 to the second
quarter of fiscal 2001. Sales of CommWorks products during both the second
quarter of fiscal 2001 and the second quarter of fiscal 2000 represented 12
percent of total sales. Sales of CommWorks products represented 18 percent of
total sales in the first quarter of fiscal 2001. Sales of CommWorks products in
the first six months of fiscal 2001 represented 15 percent of total sales
compared to 11 percent of total sales in the first six months of fiscal 2000.
18
EXITED PRODUCT LINES. Sales of exited product lines (analog-only modems and
high-end LAN and WAN chassis products) in the second quarter of fiscal 2001
decreased 93 percent compared to the same quarter one year ago and decreased 82
percent sequentially from the first quarter of fiscal 2001. Sales of exited
product lines in the first six months of fiscal 2001 decreased 75 percent
compared to the first six months of fiscal 2000. The decrease in sales of exited
product lines compared to the same period one year ago was due to the impact of
our business realignment and change in strategic focus. The sequential decrease
was principally due to an increase in sales of our exited products in the first
quarter of fiscal 2001 as customers made final purchases.
GEOGRAPHIC. In the second quarter of fiscal 2001, U.S. sales decreased 38
percent and international sales decreased 32 percent compared to the same period
one year ago. The year-over-year decrease in international sales was primarily
due to weaker sales in Europe, which reflected a 39 percent decrease. U.S. sales
in the second quarter of fiscal 2001 represented 45 percent of total sales,
compared to 48 percent of total sales in the second quarter of fiscal 2000 and
50 percent of total sales in the first quarter of fiscal 2001. These decreases
were primarily due to exited product lines and the effects of business
realignment actions taken in our fourth quarter of fiscal 2000. U.S. sales and
international sales decreased by 24 percent and 7 percent, respectively,
sequentially from the first quarter of fiscal 2001. In the first six months of
fiscal 2001, U.S. sales and international sales decreased 32 percent and 25
percent, respectively, compared to the first six months of fiscal 2000. The
decrease in international sales was driven primarily by a 35 percent decrease in
European sales.
GROSS MARGIN
Gross margin as a percentage of sales was 37 percent in the second quarter of
fiscal 2001, compared to 47 percent in the second quarter of fiscal 2000 and
37 percent in the first quarter of fiscal 2001. Gross margin as a percentage
of sales was 37 percent and 47 percent for the first six months of fiscal
2001 and fiscal 2000, respectively. The year-over-year decrease in the gross
margin percentage was due primarily to a shift in product mix towards our
lower margin products. Reported gross margins for the second quarter and
first six months of fiscal 2001 include the benefit of the arrangement
described in Note 10 to the condensed consolidated financial statements.
OPERATING EXPENSES
Operating expenses in the second quarter of fiscal 2001 were $432.3 million, or
55 percent of sales, compared to $445.9 million, or 37 percent of sales in the
second quarter of fiscal 2000 and $486.3 million, or 52 percent of sales in the
first quarter of fiscal 2001. Operating expenses in the second quarter of fiscal
2001 included amortization of goodwill and acquired intangibles of $11.3
million, purchased in-process technology of $8.3 million, net merger-related
credits of $0.1 million, and business realignment costs of $9.7 million.
Operating expenses in the second quarter of fiscal 2000 included amortization of
goodwill and acquired intangibles of $5.0 million and business realignment costs
of $2.1 million. Operating expenses in the first quarter of fiscal 2001 included
amortization of goodwill and acquired intangibles of $7.5 million, purchased
in-process technology of $29.4 million, net merger-related credits of $0.2
million, and business realignment costs of $9.9 million. Excluding these unusual
items, operating expenses for the second quarter of fiscal 2001 were $403.2
million, or 51 percent of sales, compared to $438.8 million, or 36 percent of
sales in the second quarter of fiscal 2000 and $439.7 million, or 47 percent of
sales in the first quarter of fiscal 2001.
Operating expenses in the first six months of fiscal 2001 were $918.5 million or
53 percent of sales compared to $883.5 million or 36 percent of sales in the
first six months of fiscal 2000. Operating expenses in the first six months of
fiscal 2001 included amortization of goodwill and acquired intangibles of $18.7
million, purchased in-process technology of $37.7 million, net merger-related
credits of $0.3 million, and business realignment costs of $19.6 million.
Operating expenses in the first six months of fiscal 2000 included amortization
of goodwill and acquired intangibles of $9.9 million, net merger-related credits
of $2.1 million, and business realignment costs of $2.1 million. Excluding these
unusual items, operating expenses for the first six months of fiscal 2001 and
fiscal 2000 were $842.9 million and $873.6 million, corresponding to 49 percent
of sales in the first six months of fiscal 2001 and 36 percent of sales in the
first six months of fiscal 2000.
19
SALES AND MARKETING. Sales and marketing expenses in the second quarter of
fiscal 2001 decreased $25.5 million, or ten percent, compared to the second
quarter of fiscal 2000, and increased to 28 percent of total sales for the
second quarter of fiscal 2001, compared to 20 percent of total sales for the
second quarter of fiscal 2000. Sales and marketing expenses in the second
quarter of fiscal 2001 decreased $18.2 million, or eight percent sequentially,
from the first quarter of fiscal 2001, and increased to 28 percent of total
sales in the second quarter of fiscal 2001, compared to 25 percent of total
sales for the first quarter of fiscal 2001. Sales and marketing expenses in the
first six months of fiscal 2001 decreased $21.6 million, or five percent,
compared to the first six months of fiscal 2000. The year-over-year decrease was
due significantly to lower sales force expenses resulting from the decrease in
sales and the exit of product lines associated with our business realignment
activities. The sequential decrease from the first quarter to the second quarter
of fiscal 2001 was significantly attributable to lower sales force expenses that
were partially offset by increased spending on our new brand advertising and
marketing campaigns.
RESEARCH AND DEVELOPMENT. Research and development expenses in the second
quarter of fiscal 2001 decreased $5.2 million, or four percent, compared to the
second quarter of fiscal 2000, and increased to 18 percent of sales in the
second quarter of fiscal 2001 compared to 12 percent of total sales in the
second quarter of fiscal 2000. Research and development expenses in the second
quarter of fiscal 2001 decreased $6.4 million, or four percent, from the first
quarter of fiscal 2001, and increased to 18 percent of total sales in the second
quarter of fiscal 2001 compared to 16 percent of total sales in the first
quarter of fiscal 2001. Research and development expenses in the first six
months of fiscal 2001 decreased $7.7 million, or three percent, compared to the
first six months of fiscal 2000. As a result of our exit from our analog-only
modem and high-end LAN and WAN chassis product lines, we have continued to
substantially reduce our research and development activities for these products.
Nevertheless, we are continuing to invest heavily in research and development,
placing a strong focus on our targeted emerging growth markets. We plan to
continue to invest a significant proportion of our financial resources towards
developing products for these markets.
GENERAL AND ADMINISTRATIVE. General and administrative expenses in the second
quarter of fiscal 2001 decreased $4.9 million, or ten percent, compared to
the second quarter of fiscal 2000, and increased to six percent of total
sales in the second quarter of fiscal 2001 compared to four percent of total
sales for the second quarter of fiscal 2000. General and administrative
expenses in the second quarter of fiscal 2001 decreased $11.9 million, or 21
percent, from the first quarter of fiscal 2001, and remained at six percent
of total sales in the second quarter of fiscal 2001 compared to the first
quarter of fiscal 2001. General and administrative expenses in the first six
months of fiscal 2001 decreased $1.4 million, or one percent, compared to the
first six months of fiscal 2000. The decrease in general and administrative
expenses compared to the same period one year ago was due primarily to
decreased consulting costs associated with our business realignment
activities. The sequential decrease from the first quarter to the second
quarter of fiscal 2001 in general and administrative expenses was due
significantly to cost containment efforts and a decrease in the provision for
bad debts due to lower sales.
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLES. Amortization of goodwill and
acquired intangibles in the second quarter of fiscal 2001 increased $6.3
million, or 126 percent, compared to the second quarter of fiscal 2000 and
increased $3.8 million, or 50 percent, sequentially from the first quarter of
fiscal 2001. Amortization of goodwill and acquired intangibles in the first six
months of fiscal 2001 increased $8.8 million, or 88 percent, compared to the
first six months of fiscal 2000. Amortization of goodwill and acquired
intangibles includes the amortization of goodwill, assembled workforce, customer
relationships, OEM relationships, developed technology and licenses and
non-compete agreements acquired in purchase business combinations.
20
PURCHASED IN-PROCESS TECHNOLOGY. During the second quarter of fiscal 2001, 3Com
acquired Nomadic Technologies, Inc. ("Nomadic"), a developer of wireless
networking products that 3Com will incorporate into solutions for both home and
small business customers. In connection with this acquisition, 3Com recorded a
charge for purchased in-process technology of approximately $8.3 million. During
the first quarter of fiscal 2001, 3Com recorded a charge of $29.4 million for
purchased in-process technology related to the acquisition of Kerbango, Inc
("Kerbango"). There was no acquisition during the first six months of fiscal
year 2000. As of the acquisition dates, purchased in-process technology was
approximately 75% complete for both Kerbango and Nomadic projects. We are
continuing development of five projects, and have spent approximately $4.8
million and $0.1 million on Kerbango and Nomadic projects, respectively, as of
December 1, 2000. At the end of the second quarter of fiscal 2001, purchased
in-process technology was approximately 100% and 75% complete for Kerbango and
Nomadic projects, respectively. As of December 1, 2000, we estimate that
approximately $0.5 million will be spent to complete acquired research and
development projects related to Nomadic. We estimate that all projects currently
in process will be completed by May 2001.
MERGER-RELATED CREDITS, NET. In the second quarter of fiscal 2001, we recorded a
net pre-tax credit of $0.1 million, compared to no merger related charges or
credits in the second quarter of fiscal 2000, and a net pre-tax credit of $0.2
million in the first quarter of fiscal 2001. During the first six months of
fiscal 2001, we recorded a net pre-tax credit of approximately $0.3 million.
During the first six months of fiscal 2000, we recorded a net pre-tax credit of
approximately $2.1 million. The amounts related to reductions in the estimates
for remaining charges associated with the U.S. Robotics merger.
BUSINESS REALIGNMENT COSTS. Business realignment costs in the second quarter of
fiscal 2001 were $9.7 million and represented costs related to steps we took to
refocus our business strategy, change our growth profile and streamline our
operations. We incurred an $11.7 million loss on the sale of our Mt. Prospect
manufacturing and distribution operations to Manufacturers' Services Ltd.
("MSL"). These costs were offset by a reduction of estimates for remaining
charges. Expenses incurred during the first quarter of fiscal 2001 were $9.9
million. Business realignment costs in the first six months of fiscal 2001 were
$19.6 million. Business realignment costs in the second quarter of fiscal 2000
and for the first six months of fiscal 2000 amounted to $2.1 million and related
to our separation from Palm.
GAIN ON SALE OF LAND, NET
Net gain on sale of land in the second quarter of fiscal 2001 and the first six
months of fiscal 2001 was $174.4 million for the sale of land to Palm, Inc, as
discussed in Note 5 to the condensed consolidated financial statements.
GAIN (LOSS) ON INVESTMENTS, NET
Net loss on investments in the second quarter of fiscal 2001 was ($16.9)
million, due primarily to declines in the value of marketable equity securities,
which we determined to be other than temporary, and investments in limited
partnership venture capital funds. During the second quarter of fiscal 2000, net
gains on investments were $71.3 million due to the sale of marketable equity
securities. During the first quarter of fiscal 2001 net gains on investments
were $16.7 million due primarily to gains from investments in limited
partnership venture capital funds.
LITIGATION SETTLEMENT
During second quarter of fiscal 2001 we reached a settlement of the REIVER and
ADLER cases, as discussed in Note 13 to the condensed consolidated financial
statements. We recorded a charge of $250,000,000 for the settlement of these
cases during the second quarter and the first six months of fiscal 2001.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, in the second quarter of fiscal 2001 increased
$23.6 million compared to the second quarter of fiscal 2000. Interest and other
income, net, in the second quarter of fiscal 2001 decreased $2.1 million
compared to the first quarter of fiscal 2001. In the first six months of fiscal
2001, interest and other income, net increased $51.6 million compared to the
first six months of fiscal 2000. The increase in interest and other income, net
compared to the same period one year ago was due primarily to a shift in
investment mix from tax exempt to taxable agency instruments that provide higher
nominal yields, combined with the higher average cash balances, and reduction in
interest expense due to the repayment of long-term debt. The decrease in
interest and other income sequentially from the first quarter of fiscal 2001 was
primarily due to lower interest income as a result of lower cash and short-term
investment balances.
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INCOME TAX PROVISION
Our effective income tax rate was a 25.0 percent benefit in the second quarter
of fiscal 2001, compared to a 26.6 percent expense in the second quarter of
fiscal 2000, and a benefit of 25.0 percent in the first quarter of fiscal 2001.
Our effective income tax rate was a 25.0 percent benefit for the first six
months of fiscal 2001, compared to a 27.3 percent expense for the first six
months of fiscal 2000. The change in the tax rate compared to the same period
one year ago was primarily attributable to changes in our market focus and the
relative mix of income (or loss) in jurisdictions taxed at rates greater than
(or less than) the U.S. rate.
EQUITY INTEREST IN LOSS OF UNCONSOLIDATED INVESTEE
In August 1999, we invested $7.5 million in OmniSky Corporation ("OmniSky"). We
currently control approximately 22 percent of the equity interests in OmniSky.
We are accounting for this investment using the equity method. No additional
loss was recorded in the first and second quarters of fiscal 2001, as our
cumulative portion of OmniSky's losses surpassed our $7.5 million investment.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
Net loss from continuing operations for the second quarter of fiscal 2001 was
($142.4) million, or ($0.41) per share, compared to net income of $156.5 million
or $0.45 per diluted share for the second quarter of fiscal 2000 and a net loss
of ($63.7) million or ($0.18) per share for the first quarter of fiscal 2001.
Net loss from continuing operations for the first six months of fiscal 2001 was
($206.1) million, or ($0.59) per share, compared to net income of $284.8 million
or $0.81 per share for the first six months of fiscal 2000.
NET INCOME FROM DISCONTINUED OPERATIONS
Net income from discontinued operations for the second quarter of fiscal 2001
was zero, due to our separation from Palm on July 27, 2000, as compared to net
income from discontinued operations of $20.9 million, or $0.06 per share, in the
second quarter of fiscal 2000 and $4.5 million, or $0.01 per share, in the first
quarter of fiscal 2001. Net income from discontinued operations for the first
six months of fiscal 2001 was $4.5 million, or $0.01 per share, and includes the
results of operations of Palm for the period from June 3, 2000 to the date of
separation. Net income from discontinued operations for the first six months of
fiscal 2000 was $30.1 million, or $0.08 per share.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
Net loss for the second quarter of fiscal 2001 was ($142.4) million, or ($0.41)
per share, compared to net income of $177.3 million, or $0.51 per diluted share
for the second quarter of fiscal 2000 and a net loss of ($59.2) million, or
($0.17) per share, for the first quarter of fiscal 2001. Excluding amortization
of goodwill and acquired intangibles, purchased in-process technology, net
merger-related credits, business realignment costs, net gain (loss) on
investments, net gain on land and facilities, litigation settlement and net
income from discontinued operations, pro forma net income (loss) was ($51.2)
million, or ($0.15) per share for the second quarter of fiscal 2001; $111.0
million, or $0.32 per share for the second quarter of fiscal 2000; and ($41.3)
million, or ($0.12) per share for the first quarter of fiscal 2001.
Net loss for the first six months of fiscal 2001 was ($201.6) million, or
($0.58) per share, compared to net income of $314.8 million, or $0.89 per
diluted share for the first six months of fiscal 2000. Excluding amortization of
goodwill and acquired intangibles, purchased in-process technology, net
merger-related credits, business realignment costs, net gain (loss) on
investments, net gain on land and facilities, litigation settlement and net
income from discontinued operations, pro forma net income (loss) was ($92.5)
million, or ($0.26) per share for the first six months of fiscal 2001, and
$224.7 million, or $0.64 per share for the first six months of fiscal 2000.
22
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents and short-term investments at December 1, 2000 were $2.4
billion, a decrease of $634.6 million or 21 percent compared to the balance of
$3.1 billion at June 2, 2000.
For the six months ended December 1, 2000, net cash used in operating
activities was $444.4 million. Net cash used in operating activities for the
six months ended December 1, 2000 was primarily the result of the net loss
and less favorable changes in working capital components. Accounts receivable
at December 1, 2000 increased $75.0 million from June 2, 2000 to $430.6
million. Days sales outstanding in receivables increased to 49 days at
December 1, 2000, compared to 42 days at June 2, 2000 primarily due to a
higher percentage of sales in the last month of the November quarter compared
to the last month of the May quarter. Inventory levels at December 1, 2000
decreased $17.3 million from June 2, 2000 to $217.5 million, and include the
impact of the sale of our manufacturing operations to MSL. Annualized
inventory turnover was 9.2 turns for the quarter ended December 1, 2000,
compared to 8.7 turns for the quarter ended June 2, 2000. Investments and
other assets at December 1, 2000 decreased $165.8 million from June 2, 2000
to $490.0 million, primarily due to decreases in the market value of our
publicly traded equity securities. Accounts payable and accrued liabilities
and other at December 1, 2000 decreased $36.7 million from June 2, 2000 to
$934.1 million. Income taxes payable at December 1, 2000 decreased $136.4
million from June 2, 2000 to $33.5 million, and includes the impact of the
tax benefit on employee stock option exercises.
During the six months ended December 1, 2000 and November 26, 1999, we made
investments totaling $604.9 million and $414.0 million, respectively, in
municipal and corporate bonds and government agency instruments, as well as
investments totaling $89.0 million and $25.2 million, respectively, in equity
securities. During the six months ended December 1, 2000 and November 26, 1999,
proceeds from maturities and sales of municipal and corporate bonds and
government agency instruments were $478.2 million and $200.3 million,
respectively, and proceeds from the sales of equity investments totaled $69.1
million and $118.9 million, respectively.
As part of our 3Com Ventures initiative, we selectively make strategic
investments in the equity securities of privately held companies and limited
partnership venture capital funds. We believe these investments will complement
our business opportunities and research and development activities. Under 3Com
Ventures I, we have committed to make capital contributions to certain limited
partnership venture capital funds totaling $10.1 million which will be paid as
capital calls are made. We have established 3Com Ventures II, which has made
strategic investments of $53 million over the last six months and may make
additional investments of up to $197 million in the future. Under 3Com Ventures
II, we have committed to make capital contributions to certain limited
partnership venture capital funds totaling $52.4 million which will be paid as
capital calls are made.
During the six months ended December 1, 2000, 3Com made $112.4 million in
capital expenditures. Major capital expenditures included upgrades and expansion
of our facilities and purchases and upgrades of software and computer equipment.
As of December 1, 2000, we had approximately $8.3 million in capital expenditure
commitments outstanding primarily associated with the expansion of our
facilities and purchases and upgrades of software and computer equipment. In
addition, we have commitments related to operating lease arrangements in the
U.S., under which we have an option to purchase the properties for an aggregate
of $322.2 million, or arrange for the sale of the properties to a third-party.
If the properties are sold to a third-party at less than the option price, 3Com
retains an obligation for the shortfall, subject to certain provisions of the
lease. These leases also contain financial covenants which must be maintained by
3Com.
During the six months ended December 1, 2000, we used cash of $51.7 million, net
of cash acquired, to acquire Kerbango, Inc., and $22.9 million, net of cash
acquired, to purchase Nomadic Technologies.
During the fourth quarter of fiscal 2000, our Board of Directors authorized a
stock repurchase program of up to one billion dollars. Such repurchases could be
used to offset the issuance of additional shares resulting from employee stock
option exercises and the sale of shares under the employee stock purchase plan.
The Board has authorized a two-year time limit on the repurchase authorizations.
This new program replaces previous authorizations totaling 45 million shares
between June 1998 and September 1999. During the six months ended December 1,
2000, we repurchased 26.6 million shares of our common stock at a total purchase
price of $449.5 million.
23
In July 2000, 3Com initiated a program of selling put options and purchasing
call options on its common stock. These are "European" style options which,
in the case of put options, entitle the holders to sell shares of 3Com common
stock to 3Com on the expiration dates at specified prices and, in the case of
call options, entitle 3Com to purchase its common stock on the expiration
dates at specified prices. As of December 1, 2000, 16.5 million put options
were outstanding, at an average price of $15.48 per share, and 13.0 million
call options were outstanding, at an average price of $18.28 per share. The
put options and call options have expiration dates between January 2001 and
August 2002. The option contracts give 3Com the choice of net cash settlement
or physical settlement or net settlement in its own shares of common stock.
These options are accounted for as permanent equity instruments. The option
contracts also contain per share price floors, with a range of 50 percent to
55 percent of the put option prices, whereby a drop in the price of 3Com
common stock below such price floor could require accelerated settlement of
the put option by 3Com. If accelerated settlement of the put options is
required and 3Com elected either net cash settlement or net settlement in its
own shares, 3Com would pay an amount in cash or deliver 3Com shares, based on
the difference between the put prices and the market price of 3Com's common
stock at the settlement dates, or if 3Com elected physical settlement, 3Com
would pay an amount in cash equal to the exercise prices for the put options
and accordingly would receive the number of 3Com shares subject to the put
options. Certain of the agreements supporting the option contracts include a
financial covenant which must be maintained by 3Com.
During the six months ended December 1, 2000, we received net cash of $207.0
million from the sale of our common stock to employees through our employee
stock purchase and option plans. During the same six month period one year ago,
we received net cash of $71.8 million from the sale of our common stock to
employees through our employee stock purchase and option plans.
During the six months ended December 1, 2000, we repaid the remaining debt
balance of $24.0 million under the 7.52% Unsecured Senior Notes agreement.
During the first six months of fiscal 2001, we recorded a tax benefit on stock
option transactions of $98.9 million. During the same six month period one year
ago, we recorded a tax benefit on stock option transactions totaling $76.1
million.
Based on current plans and business conditions, we believe that our existing
cash and equivalents, short-term investments, and cash generated from operations
will be sufficient to satisfy anticipated cash requirements for at least the
next twelve months.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 and June 1999, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended, which 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
3Com's fiscal year ending May 31, 2002. 3Com is in the process of determining
the impact that adoption will have on its consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The
guidance in SAB 101 must be adopted during 3Com's fourth quarter of fiscal 2001
and the effects, if any, are required to be recorded through a retroactive,
cumulative-effect adjustment as of the beginning of the fiscal year, with a
restatement of all prior interim quarters in the year. Management has not
completed its evaluation of the effects, if any, that SAB 101 will have on
3Com's income statement presentation, operating results, or financial position.
24
BUSINESS ENVIRONMENT AND RISK FACTORS
Our future business and results may be affected by industry trends and specific
risks in our business. Some of the factors that could cause future results to
materially differ from past results or those described in forward-looking
statements include those discussed below.
STRATEGIC FOCUS AND COMPLETION OF BUSINESS TRANSITION
We have transitioned our business and realigned our strategic focus towards
high-growth markets, technologies and products in accordance with our
announcement of March 20, 2000. Internal and external changes resulting from our
business transformation are largely complete, but many factors may negatively
impact our ability to implement our strategic focus, including our ability to
introduce innovative new products in a timely manner, to successfully adopt a
business model appropriate for these high-growth and emerging product lines, to
adequately secure component supply for these high-growth and emerging product
lines and to quickly respond to and recover from unforeseen events associated
with our business transformation. Further, as a result of our business
transition and realignment, it continues to be difficult to forecast our
financial performance.
The next steps in furthering our business transformation are to adopt business
structures that optimize operations and control expenses to allow rapid return
to profitability and leadership in key markets. We are have announced that the
Commercial and Consumer Networks Business and CommWorks will be realigning their
respective operating structures to enhance focus and cost effectiveness in
serving their respective markets. Many factors may impact our ability to
implement this restructuring, including our ability to manage the implementation
internally, sustain the productivity of our workforce, reduce operating expenses
and quickly respond to and recover from unforeseen events associated with the
restructuring.
NEW PRODUCT LINES AND MARKETS
Our financial performance and future growth depend upon the rapid growth of new
markets, and our ability to establish a leadership position in those markets. We
are investing a significant proportion of our resources in several emerging
product lines in markets that are expected to grow at a significantly higher
rate than the networking industry average. We expect these product lines to
account for a higher percentage of our sales over time. We are focused on the
following products and solutions, leveraging our investments in broadband,
wireless, IP telephony and digital home technologies:
- LAN Telephony and Voice over IP (VOIP) Services
- Broadband (cable and DSL) modems and headend equipment
- Wireless LAN and Code Division Multiple Access (CDMA) Solutions
- Home Networking
- Internet Appliances
At the present time, the markets for these products and solutions are still
emerging. Industry standards for these technologies are yet to be widely adopted
and the market potential remains unproven. If these markets do not grow at a
significant rate or if we do not increase our sales in these product lines, our
financial results could be adversely affected.
25
Additionally, we expect that the business models for these high-growth and
emerging product lines, especially product lines which are more consumer and
retail-oriented, may be different from the business model for our traditional
networking products. We anticipate that gross margins for such products on a
standalone basis may be significantly lower than gross margins for networking
products traditionally sold to larger businesses. Therefore, 3Com must
successfully adopt business models for such product lines that incorporate
additional revenue generators, such as selling or bundling other higher margin
services or products along with sales of these products, and that incorporate
continued improvement in the margins for these products. If we are not able to
adopt or implement successful business models for these product lines, our
overall gross margins may be negatively impacted which could adversely affect
our financial results.
ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS
Products in the markets in which we compete have short life cycles. Therefore,
our success depends on our ability to identify new market and product
opportunities, to develop and introduce new products in a timely manner, and to
gain market acceptance of new products, particularly in our targeted
high-growth, emerging markets. For example, the timely introductions of the
following products are important to our success:
- a next-generation carrier-class platform for certain applications in
IP Telephony and third-generation (3G) wireless solutions for our
carrier customers
- a new line of Gigabit-on-Copper LAN solutions primarily for commercial
enterprises
- new standards-based wireless LAN solutions, including our
AirConnect-Registered Trademark- wireless LAN, for both
commercial and consumer markets
- a new generation of residential Internet appliances
- a next generation SuperStack-Registered Trademark- workgroup solution
for commercial enterprises
Any delay in new product introductions, lower than anticipated demand for our
new products or higher manufacturing costs could have an adverse affect on our
operating results or financial condition, particularly in those product markets
we have identified as emerging high-growth opportunities.
SUPPLY CHAIN MANAGEMENT
3Com has a long-term objective to become best-in-class at managing its supply
chain. Significant progress has been made in balancing the resources and
operations required to achieve the highest levels of customer satisfaction and
on-time delivery. The balancing of customer requirements and financial metrics
reflects an equilibrium between dynamic elements. Factors affecting this balance
include external conditions such as component shortages, fluctuations in
worldwide demand, and industry consolidation.
Some key components of our products and some services, which we rely on, are
currently available only from single or limited sources. In addition, some of
our suppliers are also our competitors. While we generally have been able to
obtain adequate supplies of components from existing sources, we cannot be
certain that in the future our suppliers will be able to meet our demand for
components in a timely and cost-effective manner. For example, due to strong
worldwide demand, the electronics industry is facing shortages on electronic
components such as various memory devices and passive components. Due to these
shortages, our ability to procure these components and meet our on-time delivery
requirements in a cost-effective manner could be impacted. Our operating
results, financial condition, or customer relationships could be adversely
affected by these shortages. These adverse effects could result from an
inability to fulfill customer demand or increased costs to acquire key
components or services.
Increasingly, we have been sourcing a greater number of components from a select
number of vendors to obtain better pricing through higher volumes. Also, there
has recently been a trend toward consolidation of vendors of electronic
components. This greater reliance on a smaller number of suppliers increases our
risk of experiencing unfavorable price fluctuations or a disruption in supply,
particularly in a supply constrained environment.
26
Optimal performance of the supply chain requires accurate forecasting of demand,
which may be more challenging in the case of emerging technologies and products
and developing markets. If overall demand for our products, product mix and
growth of these markets are significantly different from our forecasting and
planning, we may face inadequate, or excess, component supply. This would
adversely affect our revenues and financial results. If we are unable to achieve
the goals we have set for our supply chain capabilities or encounter external
supply chain disruptions, we may experience product stock-outs or shortages,
which could adversely impact our financial results.
The cost, quality, and availability of third-party manufacturing operations are
essential to the successful production and sale of many of our products. The
inability of any third-party manufacturer to meet our cost, quality, and
availability standards could adversely impact our financial condition or results
of operations. From time to time we may change our arrangements with third-party
manufacturing contractors, which may cause transitional disruption in our supply
chain if such transition is not managed properly. In addition we have entered
into outsourcing arrangements for manufacturing services. For example, on
September 30, 2000 we sold our Mt. Prospect, Illinois manufacturing and
distribution operation to Manufacturers' Services Ltd. ("MSL"). MSL now
manufactures broadband access, LAN telephony and CommWorks products for us.
COMMERCIAL COMMITMENTS
We enter into minimum quantity or other non-cancelable commitments as needed.
For example, we have committed to minimum purchases of product components from a
vendor and subcontractor through calendar year 2002. These types of agreements
subject us to risk depending on future events. If, for example, sales volumes of
certain products fluctuate significantly or we shift our production elsewhere,
we may be unable to meet our commitments. This may result in us incurring
liabilities that adversely affect our financial results.
COMPETITION FOR KEY PERSONNEL; RETENTION AND RECRUITING
Our success depends to a significant extent upon retention and recruitment of a
number of key employees and management. Changes associated with realignment of
our business operations and strategy may impact retention of existing employees.
While our employee turnover was lower in our second fiscal quarter than was
typical during the past fiscal year, competition for technical and other skills
remains very high, and the loss of the services of key employees and management
could adversely affect our product introduction schedules, customer
relationships, operating results, or financial condition.
The ability to recruit employees, both to replace attrition and to grow our
emerging businesses, may be a significant challenge due to the increasingly
competitive marketplace for needed skills. Recruiting and retaining skilled
personnel, including engineers, continues to be highly competitive. There has
been a dramatic increase of technology start-up companies recruiting for the
same talent that we require. In addition, at certain locations where we operate,
including the Silicon Valley area, the cost of living is extremely high and it
may be difficult to attract and retain quality people at a reasonable cost. If
we cannot successfully recruit and retain skilled personnel, our ability to
compete may be adversely affected. In addition, we must carefully balance the
growth in our employee base commensurate with our anticipated sales growth. If
our sales growth or attrition levels vary significantly, our results of
operations or financial condition could be adversely affected.
RELIANCE ON DISTRIBUTORS, RESELLERS, PC OEMS AND SERVICE PROVIDERS
We distribute many of our products through two-tiered distribution channels that
include distributors, systems integrators, value-added resellers, and retailers.
We also sell to PC Original Equipment Manufacturers (OEMs), large enterprises
and service providers. Under our new strategic focus, we will increase our
commitment to and become increasingly reliant upon our two-tiered distribution
model as well as sales to OEMs. Our future results and financial condition are
partially dependent on a number of factors relating to this distribution model,
including the impact of our business realignment, issues associated with
competition among and within our channels, selling to PC OEMs, and channel
inventory and customer concentration.
27
INVENTORY LEVELS IN CHANNEL. Our distributors and resellers maintain inventories
of our products. As part of our efforts to optimize our supply chain, we have
reduced the number of our distributors through whom we sell our products as well
as the levels of inventory held by those distributors. We work closely with our
distributors and resellers to monitor inventory levels and ensure that
appropriate levels of products are available to end-users. Notwithstanding such
efforts, if channel partners attempt to reduce their levels of inventory or if
they do not maintain sufficient levels to meet customer demand, our sales could
be negatively impacted.
RELIANCE ON A SMALL NUMBER OF DISTRIBUTORS. Significant portions of our sales
are made to a few customers. For the first quarter of fiscal year 2001,
Ingram Micro represented approximately 17 percent of our total sales and Tech
Data represented approximately 11 percent of our total sales. Ingram Micro
and Tech Data are both distributors primarily of our commercial and consumer
networking products. We cannot be certain that these customers will continue
to purchase our products at current levels. Additionally, consolidation among
distributors is reducing the number of distributors in the North American
market. Because our sales are becoming more concentrated among a smaller
number of customers, our results of operations, financial condition, or
market share could be adversely affected if our customers:
- stop purchasing our products or focus more on selling our competitors'
products;
- reduce, delay, or cancel their orders;
- become unable to sell our products because we do not ship the products
to them in a timely manner; or
- experience competitive, operational, or financial difficulties,
impairing our ability to collect payments from them.
PC OEMS. PC-related networking products such as Network Interface Cards (NICs)
and PC cards are increasingly being sold through the PC OEM channel rather than
the distribution channel. We derive a significant portion of our personal
connectivity product sales from PC OEMs such as Dell Computer, Toshiba, Gateway,
Hewlett-Packard, and IBM, all of whom are manufacturers that incorporate our
NICs, PC cards, or chipsets into their products. While sales to PC OEMs are
important, products sold through the PC OEM channel typically have lower average
selling prices than those sold through other channels. Therefore, our sales and
margins may be adversely impacted if sales to PC OEMs continue to become a
larger percentage of our business.
SERVICE PROVIDERS. Customers in our carrier market include incumbent local
exchange carriers (ILECs); interexchange carriers (IXCs); post, telephone and
telegraph administrations (PTTs); competitive local exchange carriers (CLECs);
Internet service providers (ISPs) and other alternative service providers. The
recent market slowdown in the telecom industry has adversely impacted us. For
example, during the quarter ended December 1, 2000, several Tier 1 service
providers announced reorganizations which we believe created disruptions in our
purchasing cycles. A continued slowdown could have a material adverse effect on
our sales and financial results. In addition, our Tier 2 and Tier 3 service
providers have recently experienced limited access to capital markets, which we
believe has had an adverse impact on the demand for our products. These market
changes may sharply impact the implementation rollout plans of our service
provider customers, and create unpredictable demand changes for the customer
premises equipment (CPE) which we sell to end-users through service provider
channels.
E-BUSINESS/WEB-ENABLEMENT INITIATIVE
A key initiative for us is to drive broad web-enablement of sales, supply chain,
and internal processes. We are continuing to build in-house capabilities to sell
directly to end-user customers (B2C) and distribution partners (B2B) over the
Internet (e-Business). This e-Business initiative could cause conflict with our
current indirect channels of distribution. If we are unsuccessful in selling
through our e-Business channel, we could also lose market share to competitors
who have more successfully developed these capabilities. These changes in the
pattern of distribution of networking products could have a material adverse
effect on our sales and financial results.
28
We have also invested substantial time and resources into deploying the web as
the primary medium and platform for internal applications and processes across
3Com. This involves redesigning some of our core business processes, including
forecasting, supply chain operations, and order fulfillment. Implementing this
initiative will require enhanced information systems, substantial training and
disciplined execution. We believe that the successful web-enablement of 3Com is
critical to our long-term competitive position. There can be no assurances,
however, that this initiative will be implemented successfully or that
disruptions in operations will not occur in the process.
CHANGES IN OUR INDUSTRY; ROLE OF ACQUISITIONS
The networking business is highly competitive, and as such, our growth is
dependent upon market growth and our ability to enhance existing products and
introduce new products on a timely basis. Our new strategic focus on emerging
and high-growth product lines mandates that we act quickly and effectively to
enter into new markets. One of the ways we will address this need is through
acquisitions of and minority equity investments in companies with promising
technology and products and/or proven market access and position. For example,
the acquisitions of Call Technologies and Nomadic Technologies complement and
deepen existing products and technology in the carrier and wireless areas,
respectively. The Call Technologies acquisition enhances the service
capabilities for our CommWorks-Registered Trademark- architecture and our Total
Control-Registered Trademark- multi-service access platform and the Nomadic
acquisition extends the wireless solutions for the small office and home office.
Our acquisition of Kerbango will allow us to offer consumers a rich Internet
experience by providing a complete Internet audio solution for the home and
office. In addition, our recently announced acquisition of the Gigabit Ethernet
NIC business from Alteon WebSystems (a subsidiary of Nortel Networks) which was
completed in December 2000, will provide 3Com with leading Gigabit Ethernet
technology and access to an established customer base for such products.
Acquisitions involve numerous risks, including the following:
- difficulties in integration of the operations, technologies, and
products of the acquired companies;
- the risk of diverting management's attention from normal daily
operations of the business;
- potential difficulties in completing projects associated with
purchased in-process research and development;
- risks of entering markets in which we have limited or no direct prior
experience and where competitors in such markets have stronger market
positions;
- the potential loss of key employees of the acquired company; and
- an uncertain sales and earnings stream from the acquired entity, which
may result in unexpected dilution to our earnings.
Mergers and acquisitions of high-technology companies are inherently risky, and
no assurance can be given that our previous or future acquisitions will be
successful and will not have a material adverse affect on our business,
operating results, or financial condition. We must also focus on our ability to
manage and integrate any such acquisition. Failure to successfully integrate
acquired companies could adversely affect our business and operating results.
In general, there have been many mergers and acquisitions in the networking
industry in the past several years. There have been mergers between
telecommunications equipment providers and networking companies, as well as
between networking companies and computer component suppliers. In the last 12
months, we completed a number of acquisitions and our competitors, including
Lucent Technologies, Cisco Systems, Nortel Networks, Alcatel, Siemens, and Intel
have also engaged in numerous transactions. Future changes in the networking
industry may result in more companies with greater resources and stronger
competitive positions and products than us. Furthermore, companies may be
created that are able to respond more rapidly to market opportunities. Continued
changes in our industry may adversely affect our operating results or financial
condition.
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MANAGEMENT OF STRATEGIC RELATIONSHIPS AND INVESTMENTS
In addition to mergers and acquisitions, technology companies are continually
entering into strategic relationships. We currently have strategic relationships
with numerous companies including but not limited to the following:
- AT&T
- Accton Technology
- Apropos Technology
- Bell Atlantic
- Broadcom
- CAIS Internet
- Copper Mountain Networks
- Dell Computer
- Extreme Networks
- Gateway
- Hewlett-Packard
- Hitachi
- IBM
- Inktomi
- MSL
- marchFIRST (formerly USWeb/CKS)
- Microsoft
- NatSteel Electronics
- Samsung Electronics
- SonicWALL
- Symbol Technologies
For example, we recently formed a strategic alliance with Broadcom Corporation
("Broadcom") to capitalize on the strengths of each company and accelerate the
deployment of Gigabit Ethernet into business networks. We intend to jointly
develop new products, cross license technologies, engage in joint sales and
marketing activities and enter into a supply chain agreement with Broadcom.
If successful, our strategic relationships with other companies will be mutually
beneficial and will result in industry and market growth. However, these
alliances carry an element of risk since, in most cases, we must compete in some
business areas with companies with which we have strategic alliances and, at the
same time, cooperate with such companies in other business areas. If these
companies fail to perform, or if these relationships fail to materialize as
expected, we could suffer delays in product or market development or other
operational difficulties. Furthermore, our results of operations or financial
condition could be adversely impacted if we experience difficulties managing
relationships with our partners or if projects with partners are unsuccessful.
In addition, if our competitors enter into successful strategic relationships,
the competition that we face may increase.
In support of our business operations and overall strategy, we have made direct
and indirect strategic investments in other technology companies and component
suppliers. These investments may drive industry and market growth, strengthen
supplier relationships, enhance our internal research and development efforts,
accelerate the time to market of our new products, and complement our
acquisition strategy. Some of these investments have significantly appreciated
in value. If there is a substantial decline in the value of these investments,
our financial condition could be adversely impacted.
Our acquisition of technology, products, or market access through equity
investments is usually coupled with a strategic commercial relationship. Our
investments tend to be in very early stage technology companies with unproven
technology and products. There can be no assurances that we can successfully
form appropriate commercial relationships to gain and integrate such products or
technology into our technology or product lines or that such companies will not
be subsequently acquired by third parties, including competitors of ours.
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COMPETITION AND PRICING PRESSURE
We participate in a highly volatile industry characterized by vigorous
competition for market share as well as rapid product and technology development
and maturation. Our competition comes from both small to medium sized companies
and start-up companies that have a narrow product or technology focus, and from
well-capitalized computer systems, data communications and telecommunications
companies that compete across a broad spectrum of networking technologies. The
larger, well-established competitors include Intel, Lucent, Nortel, Cisco,
Alcatel, Siemens, and Hewlett-Packard. Some of the smaller or more narrowly
focused competitors in our industry, along with new start-ups include Com21,
Clarent, Efficient Networks, NETGEAR, Redback Networks, Juniper Networks, Sonus
Networks, Terayon, VocalTec, Xircom and D-Link Systems.
Our industry continues to undergo rapid change resulting in new competitors who
may have greater financial, marketing, and technical resources than we do or who
may have a greater competitive edge due to technology innovation. For example,
technology innovations are driving the convergence of voice, video, and data
traffic onto a single network infrastructure, resulting in new entrants into the
market with whom we may compete.
In addition, both we and our competitors sometimes lower sales prices in order
to gain market share or create more demand. For example, we have recently
experienced pricing pressure in the market for our broadband modem products, our
workgroup systems products, and our more mature carrier products. With the
recent disruption in the telecom sector coupled with more broad macro-economic
factors, both we and our competitors may pursue more aggressive pricing
strategies in an effort to maintain sales levels. Intense pricing competition in
our industry may adversely affect our business, operating results, or financial
condition.
We are also selling products into new markets where we may compete with
different companies than in the past. This is especially true in our high-growth
emerging markets such as the wireless, IP telephony, home networking and
broadband markets. Our principal competitors in these emerging markets include
both traditional competitors such as Intel, Xircom, Cisco, Lucent, Alcatel and
Motorola, as well as new competitors such as Com21, Clarent, Efficient Networks,
NETGEAR, Redback Networks, Juniper Networks, Sonus Networks, Terayon, Toshiba,
and VocalTec. Internationally, we may experience more localized competition
where penetration into emerging markets has been high and presents attractive
opportunities for local ventures.
These competitors may be able to respond more rapidly than we may to new or
emerging technologies, changing market dynamics or changes in customer
requirements. In addition, we expect intense price competition in these new
markets since manufacturers may set low product prices to increase technology
and product acceptance and adoption. We expect that these products, especially
in the consumer and retail-oriented product lines such as home networking and
internet appliances, will be very price sensitive and therefore our sales of
these products and gross margins on these products may be adversely affected by
competitive pressures. Our failure to compete successfully against current or
future competitors could harm our business, operating results, or financial
condition.
Semiconductor manufacturers, such as Intel, are increasingly integrating more
NIC and modem functionality onto a single chip on the motherboard. This trend
may offer PC OEMs and other networking customers bundled solutions that, in
aggregate, are less costly alternatives to our solutions. If integration of
networking and computer processing functionality on a reduced number of
components increases, our future sales growth and profitability could be
adversely affected. Furthermore, some of these semiconductor manufacturers
may be our current suppliers of components; therefore, we may be competing
directly with our vendors in certain future situations.
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UNCERTAINTIES OF INTERNATIONAL MARKETS
We operate internationally and expect that international markets will continue
to account for a significant percentage of our sales. Some international markets
are characterized by economic and political instability and currency
fluctuations that can adversely affect our operating results or financial
condition. For example, the recent decline in the value of the Euro may reduce
end-user purchasing power in Europe, and may adversely affect our sales in
European countries. Unforeseen conditions and events will positively or
negatively impact the level of international sales in different regions. For
example, high oil prices and increased transportation costs may adversely impact
shipments to certain markets and the admission of China to the World Trade
Organization and granting of Permanent Normalized Trade Relations status may
stimulate sales to China. Should international regions experience economic or
political instability, our results of operations may be adversely affected.
INDUSTRY STANDARDS AND REGULATIONS
Our success also depends on:
- the timely adoption and market acceptance of industry standards;
- resolution of conflicting U.S. and international standards
requirements created by the convergence of technology such as voice
onto data networks;
- the timely introduction of new standards-compliant products; and
- a favorable regulatory environment.
Slow market acceptance of new technologies and industry standards could
adversely affect our results of operations or financial condition. In addition,
if we fail to achieve timely certification of compliance to industry standards
for our products, our sales of such products could be adversely affected. There
are a number of new product initiatives, particularly in the area of wireless
access, IP telephony, and broadband access that could be impacted by new or
revised regulations, which in turn could adversely affect our results of
operations or financial condition.
CUSTOMER ORDER FULFILLMENT
The timing and amount of our sales depend on a number of factors that make
estimating operating results prior to the end of any period uncertain. For
example, we do not typically maintain a significant backlog and sales are
dependent on our ability to appropriately forecast product demand. In addition,
our customers historically request fulfillment of orders in a short period of
time, resulting in limited visibility to sales trends. Consequently, our
operating results depend on the volume and timing of orders and our ability to
fulfill orders in a timely manner. Historically, sales in the third month of the
quarter have been higher than sales in each of the first two months of the
quarter. Recently this pattern has become more pronounced, which may increase
the risk of unforeseen events negatively impacting our financial results.
Non-linear sales patterns make business planning difficult, and increase the
risk that our quarterly results will fluctuate due to disruptions in functions
such as manufacturing, order management, information systems, and shipping.
WARRANTIES AND INTERNATIONAL REQUIREMENTS
Because our products are often covered by warranties, we may be subject to
contractual and/or legal commitments to perform under such warranties. If our
products fail to perform as warranted and we do not resolve product quality or
performance issues in a timely manner, our operating results or financial
condition could be adversely affected. Likewise, we could be subject to claims
for business disruption or consequential damages if a network implementation is
not completed successfully or in a timely manner.
32
Our products are sold and marketed in many countries, and as such, our products
must function in and meet the requirements of many different telecommunications
environments and be compatible with various telecommunications systems and
products. If our products fail to meet the requirements of international
telecommunication environments, our sales could be negatively impacted.
Our business realignment actions include transition of certain business lines to
third parties, such as analog-only modems, or obsolescence of certain product
lines such as high-end LAN and WAN chassis products. To the extent that third
parties do not assume or fulfill our warranty obligations, we will remain
obligated to provide warranty support, including repair services and spare parts
for the duration of contracts or statutory legal requirements. Any failure to
perform such commitments could subject us to claims, which may have a material
adverse impact on our business and financial results.
TRANSFER OF ANALOG-ONLY MODEM PRODUCT LINE
On September 2, 2000 we completed the transfer of our analog-only modem product
lines to U.S. Robotics Corporation ("New USR"), the corporation formed with our
partners Accton Technology and NatSteel Electronics. 3Com holds a minority
equity position in New USR. We entered into transitional service agreements with
New USR in the areas of information technology systems, supply chain management,
buildings and services, and certain treasury/finance functions. We began such
services prior to the transfer and will continue such services for a period of
up to one year afterwards. If we do not satisfactorily perform our obligations
under these agreements we may be held liable for any resulting losses.
PALM SEPARATION
On July 27, 2000 3Com completed the spin-off of Palm, Inc. ("Palm"), our
handheld computer business, by distributing our remaining ownership of
outstanding Palm common stock to 3Com shareholders. As part of the separation,
we entered into certain transitional service agreements with Palm to support
ongoing Palm operations relating to information technology systems, supply chain
management, human resources administration, product order administration,
customer service, buildings and facilities, treasury management, and legal,
finance, and accounting. These transitional service agreements generally have
terms of less than two years following the separation. If we do not
satisfactorily perform our obligations under these agreements, we may be held
liable for any resulting losses allegedly suffered by Palm.
To enable our distribution of Palm common stock to our shareholders, we received
a ruling from the Internal Revenue Service that the distribution will be not be
taxable. Such ruling requires 3Com and Palm, for up to two years following the
distribution date, not to engage in certain business combinations that would
constitute a change of more than 50 percent of the equity interest in either
company. If either 3Com or Palm fail to conform to requirements set forth in the
ruling, there would be material adverse consequences, potentially including
making the distribution taxable.
Finally, at the time of the distribution of Palm shares to our shareholders, an
adjustment was made to stock options held by our employees to preserve the
intrinsic value of these options and the ratio of the exercise price to the
market price. As of July 27, 2000 there were approximately 35 million employee
options outstanding. Immediately after the Palm distribution, there were
approximately 169 million employee options outstanding, of which approximately
60 million were vested and immediately exercisable. The exercise of stock
options by employees may potentially result in a dilution in the ownership
interest of our current shareholders.
33
INTELLECTUAL PROPERTY RIGHTS
Many of our competitors, such as telecommunications and computer equipment
manufacturers, have large intellectual property portfolios, including patents
that may cover technologies that are relevant to our business. In addition, many
smaller companies, universities, and individual inventors have obtained or
applied for patents in areas of technology that may relate to our business. The
industry is moving towards aggressive assertion, licensing, and litigation of
patents and other intellectual property rights.
In the course of our business, we frequently receive claims of infringement or
otherwise become aware of potentially relevant patents or other intellectual
property rights held by other parties. We evaluate the validity and
applicability of these intellectual property rights, and determine in each case
whether we must negotiate licenses or cross-licenses to incorporate or use the
proprietary technologies, protocols, or specifications in our products. If we
are unable to obtain and maintain licenses on favorable terms for intellectual
property rights required for the manufacture, sale, and use of our products,
particularly those which must comply with industry standard protocols and
specifications to be commercially viable, our business, results of operations,
or financial condition could be adversely impacted.
In addition to disputes relating to the validity or alleged infringement of
other parties' rights, we may become involved in disputes relating to our
assertion of our intellectual property rights. Whether we are defending the
assertion of intellectual property rights against us or asserting our
intellectual property rights against others, intellectual property litigation
can be complex, costly, protracted, and highly disruptive to business operations
by diverting the attention and energies of management and key technical
personnel. Further, plaintiffs in intellectual property cases often seek
injunctive relief and the measures of damages in intellectual property
litigation are complex and often subjective or uncertain. Thus, the existence of
or any adverse determinations in this litigation could subject us to significant
liabilities and costs. In addition, if we are the alleged infringer, we could be
required to seek licenses from others or be prevented from manufacturing or
selling our products, which could cause disruptions to our operations or the
markets in which we compete. If we are asserting our intellectual property
rights, we could be prevented from stopping others from manufacturing or selling
competitive products. Any one of these factors could adversely affect our
results of operations or financial condition.
FLUCTUATIONS IN QUARTERLY RESULTS; VOLATILITY OF STOCK PRICE
Our quarterly operating results are difficult to predict and may fluctuate
significantly. In addition to factors discussed above, a wide variety of factors
can cause these fluctuations, including:
- component shortages;
- seasonality;
- the introduction and acceptance of new products and technologies;
- price competition;
- general conditions and trends in the networking industry and
technology sector;
- internal reorganizations or realignments;
- disruption in international markets;
- general economic conditions;
- industry consolidations and acquisitions;
- disruption in the distribution channel;
- timing of orders received within the quarter; and
- non-linear sales within the quarter.
In recent years, we have experienced fluctuations in our quarterly results due
to some of the factors listed above. For example, the recent market slowdown in
the Telecom industry has adversely impacted us. These factors, and accompanying
fluctuations in periodic operating results, could have a significant adverse
impact on our sales and financial results as well as the market price of our
common stock.
Additionally, we anticipate that the activities surrounding our business
realignment and the transition to our new strategic focus will contribute
significantly to fluctuations in our quarterly operating results for the next
several quarters.
34
Our stock price has historically experienced substantial price volatility and we
expect that this will continue, particularly due to fluctuations in quarterly
operating results as outlined above, variations between our actual or
anticipated financial results and the published analysts' expectations, and as a
result of announcements by our competitors. In addition, the stock market has
experienced extreme price and volume fluctuations that have affected the market
price of many technology companies. These market price fluctuations have often
been unrelated to the operating performance of these companies. These factors,
as well as general economic and political conditions, may materially adversely
affect the market price of our stock in the future.
PROPOSED CHANGES IN ACCOUNTING FOR BUSINESS COMBINATIONS AND INTANGIBLE ASSETS
The Financial Accounting Standards Board ("FASB") began deliberation of
revisions to the rules for business combinations and intangible assets in 1996.
Some of these deliberations have included accounting rule-making bodies from
other nations as the financial communities attempt to develop global consistency
where possible. Business combination rules govern the accounting for mergers and
acquisitions used in either a purchase or a pooling-of-interests combination.
Business combinations may generate intangible assets (including goodwill) which
represent the excess purchase price of an acquired enterprise over net
identifiable assets.
Tentative conclusions of the FASB will prohibit the use of pooling-of-interests
and will establish new accounting standards and financial presentation for
intangible assets resulting from business combinations. The FASB expects to
issue a final standard by the first quarter of calendar year 2001. The final
standard is not expected to address accounting for in-process research and
development costs. Changes to the current accounting rules for business
combinations and intangible assets will not preclude mergers or acquisitions but
may increase the earnings dilution associated with future transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
3Com holds a substantial portfolio of marketable-equity traded securities that
have a short trading history and are highly subject to market price volatility.
Equity security price fluctuations of plus or minus 15 percent would have a
$46.2 million impact on the value of these securities as of the end of the
second quarter of fiscal 2000. Equity security price fluctuations of plus or
minus 50 percent would have a $153.9 million impact on the value of these
securities as of the end of the second quarter of fiscal 2000.
For interest rate sensitivity and foreign currency exchange risk, reference is
made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market
Risk, in our Annual Report on Form 10-K for the year ended June 2, 2000.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to lawsuits in the normal course of our business.
Litigation in general, and intellectual property and securities
litigation in particular, can be expensive and disruptive to normal
business operations. Moreover, the results of complex legal proceedings
are difficult to predict. We believe that we have defenses in each of
the cases set forth below and are vigorously contesting each of these
matters. An unfavorable resolution of one or more of the following
lawsuits could adversely affect our business, results of operations, or
financial condition.
SECURITIES LITIGATION
On March 24 and May 5, 1997, securities class action lawsuits,
captioned HIRSCH V. 3COM CORPORATION, ET AL., Civil Action No. CV764977
(HIRSCH), and KRAVITZ V. 3COM CORPORATION, ET AL., Civil Action No.
CV765962 (KRAVITZ), respectively, were filed against 3Com and certain
of its officers and directors in the California Superior Court, Santa
Clara County. The complaints allege violations of Sections 25400 and
25500 of the California Corporations Code and seek unspecified damages
on behalf of a class of purchasers of 3Com common stock during the
period from September 24, 1996 through February 10, 1997. In late 1999,
these cases were stayed by the Court, pending resolution of proceedings
in the EUREDJIAN V. 3COM CORPORATION matter, discussed below. Because
the EUREDJIAN case has been dismissed, the HIRSCH and KRAVITZ cases are
no longer stayed. They are in discovery. The trial is scheduled to
begin February 26, 2001. In recent court filings, plaintiffs have
stated that they will seek hundreds of millions of dollars in damages.
On February 10, 1998, a securities class action, captioned EUREDJIAN V.
3COM CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN),
was filed against 3Com and several of its present and former officers
and directors in United States District Court for the Northern District
of California asserting the same class period and factual allegations
as the HIRSCH and KRAVITZ actions. The complaint alleges violations of
the federal securities laws, specifically Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and seeks unspecified damages. In
May 2000, at the request of plaintiffs, the Court dismissed the
EUREDJIAN case with prejudice.
In December 1997, a securities class action, captioned REIVER V. 3COM
CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed
in the United States District Court for the Northern District of
California. Several similar actions have been consolidated into this
action, including FLORIDA STATE BOARD OF ADMINISTRATION AND TEACHERS
RETIREMENT SYSTEM OF LOUISIANA V. 3COM CORPORATION, ET AL., Civil
Action No. C-98-1355. On August 17, 1998, the plaintiffs filed a
consolidated amended complaint which alleges violations of the federal
securities laws, specifically Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934, and which seeks unspecified
damages on behalf of a purported class of purchasers of 3Com common
stock during the period from April 23, 1997 through November 5, 1997.
In October 1998, a securities class action lawsuit, captioned ADLER V.
3COM CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed
against 3Com and certain of its officers and directors in the
California Superior Court, Santa Clara County, asserting the same class
period and factual allegations as the REIVER action. The complaint
alleges violations of Sections 25400 and 25500 of the California
Corporations Code and seeks unspecified damages.
On November 3, 2000, 3Com announced that it had reached a settlement of
the REIVER and ADLER cases. The settlement amount is $259,000,000, of
which $9,000,000 will be recovered from insurance. Accordingly, 3Com
recorded a litigation charge of $250,000,000 during the three months
ended December 1, 2000. The Court has preliminarily approved the
settlement and scheduled a hearing for final approval on February 23,
2001.
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On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM
CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (GAYLINN), was
filed against 3Com and several of its present and former officers and
directors in United States District Court for the Northern District of
California. Several similar actions have been consolidated into the
GAYLINN action. On September 10, 1999, the plaintiffs filed a
consolidated complaint which alleges violations of the federal
securities laws, specifically Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and seeks unspecified damages on
behalf of a purported class of purchasers of 3Com common stock during
the period from September 22, 1998 through March 2, 1999. In January
2000, the Court dismissed the complaint. In February 2000, plaintiffs
filed an amended complaint. In June 2000, the Court dismissed the
amended complaint without prejudice. Plaintiffs filed another amended
complaint. On July 24, 2000, the Company filed a motion to dismiss the
latest amended complaint. In September 2000, the Court dismissed the
amended complaint with prejudice. Plaintiffs have appealed.
In December 2000, an action entitled SHAEV V. CLAFLIN, ET AL., was
filed in the California Superior Court, Santa Clara County, Case No.
CV794039. The case purports to be a derivative and class action against
directors and officers of 3Com. The complaint alleges that the
Company's directors and officers breached duties by adjusting the
number of stock options held by 3Com employees at the time 3Com
distributed the Palm stock to shareholders in July 2000. No response
has been filed to the complaint to date.
INTELLECTUAL PROPERTY
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States
District Court for the Western District of New York. The case is now
captioned XEROX CORPORATION V. U.S. ROBOTICS CORPORATION, U.S. ROBOTICS
ACCESS CORP., PALM COMPUTING, INC. AND 3COM CORPORATION (Civil Action
Number 97-CV-6182T). The Complaint alleged willful infringement of
United States Patent Number 5,596,656, entitled "Unistrokes for
Computerized Interpretation of Handwriting." The Complaint sought to
permanently enjoin the defendants from infringing the patent in the
future. In an Order entered by the Court on June 6, 2000, the Court
granted the defendants' motion for summary judgment of
non-infringement, and the case was dismissed in its entirety. Xerox has
appealed the dismissal to the U.S. Court of Appeals for the Federal
Circuit.
On May 26, 2000, 3Com Corporation filed suit against Xircom, Inc. in
the United States District Court for the District of Utah, Civil Action
No. 2:00-CV-0436C alleging infringement of U.S. Patents Nos. 6,012,953,
5,532,898, 5,696,660, 5,777,836 and 6,146,209, accusing Xircom of
infringement of one or more of the claims of the patents-in-suit by
reason of the manufacture, sale, and use of the Real Port and Real Port
2 families of PC Cards, as well as a number of Xircom's Type II PC
Modem Cards. Xircom has counter-claimed for a declaratory judgment that
the asserted claims of the patents-in-suit are invalid and / or not
infringed. This case is currently in the discovery phase.
On September 21, 2000, Xircom, Inc. filed an action against 3Com
Corporation ("3Com") in the United States District Court for the
Central District of California, Civil Action No. Case No.: 00-10198
MRP, accusing 3Com of infringement of U.S. Patents Nos. 5,773,332,
5,940,275, 6,115,257 and 6,095,851, accusing 3Com of infringement by
reason of the manufacture, sale, and use of the 3COM 10/100 LAN+Modem
CardBus Type III PC Card, the 3COM 10/100 LAN CardBus Type III PC Card,
the 3COM Megahertz 10/100 LAN CardBus PC Card, the 3COM Megahertz
10/100 LAN+56K Global Modem CardBus PC Card and the 3COM Megahertz 56K
Global GSM and Cellular Modem PC Card. 3Com has counter-claimed for
declaratory judgment that the asserted claims of the patents-in-suit
are not infringed and/or invalid and that certain claims of the
5,940,275 patent are unenforceable. This case is in the discovery
phase. On December 22, 2000, Xircom filed a motion for preliminary
injunction seeking to enjoin 3Com from the continued manufacture and
sale of its Type III PC card products. The motion is currently
scheduled for hearing on January 29, 2001.
37
On September 25, 2000, Northrop Grumman Corporation filed suit against
Intel Corporation, 3Com Corporation, Xircom, Inc., D-Link Systems, Inc.
and The Linksys Group, Inc. in the United States District Court for the
Eastern District of Texas, Beaumont Division, Civil Action No.
1:00-CV-652, accusing 3Com and the other defendants of infringement of
U.S. Patent No. 4,453,229, issued on June 5, 1984. The complaint
asserts infringement by 3Com and the other defendants by reason of the
manufacture and sale of network interface cards and other devices
capable of interfacing an Ethernet bi-phase serial bus to a parallel
bus, such as may be found in personal computers or other devices. 3Com
has filed a motion to transfer the case from Texas to the Northern or
Central District of California. This case is in the discovery phase.
38
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) On December 11, 2000, 3Com issued a warrant to purchase 7,100,000
shares of Common Stock at $9.31 per share (the "Warrant") in a
private transaction. Broadcom Corporation, the purchaser, paid
for the Warrant by issuance of a full recourse promissory note in
the principal amount of $21,051,500. The transaction was exempt
from registration under Section 4 (2) of the Securities Act of
1933, as amended.
(d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on September 28,
2000.
(b) Each of the persons named in the Proxy Statement as a nominee for
director was elected and the proposals listed below were approved
with the exception of proposal IV which was voted against. The
following are the voting results of the proposals:
Proposal I For Withheld Broker Non-Votes
---------- --- -------- ----------------
Election of Directors:
Eric Benhamou 309,232,413 1,930,775 0
James E. Cowie 309,416,464 1,746,723 0
Phillip Kantz 309,438,225 1,724,963 0
James Long 309,474,517 1,688,671 0
Jan Peters 309,452,290 1,710,898 0
Proposal II For Against Abstain Broker Non-Votes
----------- --- ------- ------- ----------------
To approve an increase in the share
Reserve under the Company's 1984
Employee Stock Purchase Plan by
9,200,000 shares: 302,831,005 7,486,543 845,640 0
Proposal III For Against Abstain Broker Non-Votes
------------ --- ------- ------- ----------------
To ratify the appointment of Deloitte
& Touche LLP as the Company's
independent public accountants for
the fiscal year ending June 1, 2001: 310,041,362 751,055 370,770 0
Proposal IV For Against Abstain Broker Non-Votes
----------- --- ------- ------- ----------------
To approve a stockholder proposal
Regarding US business practices
for human rights of workers in
China: 22,151,181 142,117,053 18,426,807 0
ITEM 5. OTHER INFORMATION
None.
39
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
2.1 Master Separation and Distribution Agreement between the
registrant and Palm, Inc. effective as of December 13, 1999,
as amended (15)
2.2 General Assignment and Assumption Agreement between the
registrant and Palm, Inc., as amended (15)
2.3 Master Technology Ownership and License Agreement between
the registrant and Palm, Inc. (15)
2.4 Master Patent Ownership and License Agreement between the
registrant and Palm, Inc. (15)
2.5 Master Trademark Ownership and License Agreement between the
registrant and Palm, Inc. (15)
2.6 Employee Matters Agreement between the registrant and Palm,
Inc. (15)
2.7 Tax Sharing Agreement between the registrant and Palm, Inc.
(15)
2.8 Master Transitional Services Agreement between the
registrant and Palm, Inc. (15)
2.9 Real Estate Matters Agreement between the registrant and
Palm, Inc. (15)
2.10 Master Confidential Disclosure Agreement between the
registrant and Palm, Inc. (15)
2.11 Indemnification and Insurance Matters Agreement between the
registrant and Palm, Inc. (15)
3.1 Certificate of Incorporation (11)
3.2 Certificate of Correction Filed to Correct a Certain Error
in the Certificate of Incorporation (11)
3.3 Certificate of Merger (11)
3.4 Corrected Certificate of Merger (14)
3.5 Bylaws of 3Com Corporation, As Amended (12)
4.1 Amended and Restated Rights Agreement dated December 31,
1994 (Exhibit 10.27 to Form 10-Q) (4)
4.2 Amended and Restated Senior Notes Agreement between U.S.
Robotics Corporation, Metropolitan Life Insurance Company,
The Northwestern Mutual Life Insurance Company, and
Metropolitan Property and Casualty Insurance Company (5)
4.3 Amendment to amended and restated note agreements between
3Com Corporation, Metropolitan Life Insurance Company, The
Northwestern Mutual Life Insurance Company, and Metropolitan
Property and Casualty Insurance Company (13)
4.4 Second amendment to amended and restated note agreements
between 3Com Corporation, Metropolitan Life Insurance
Company, The Northwestern Mutual Life Insurance Company, and
Metropolitan Property and Casualty Insurance Company (14)
10.1 1983 Stock Option Plan, as amended (14)*
10.2 Amended and Restated Incentive Stock Option Plan (2)*
10.3 License Agreement dated March 19, 1981 (1)
10.4 Second Amended and Restated 1984 Employee Stock Purchase
Plan (Exhibit 10.5 to Form 10-Q) (6)*
10.5 3Com Corporation Director Stock Option Plan, as amended
(Exhibit 19.3 to Form 10-Q) (3)*
10.6 Amended 3Com Corporation Director Stock Option Plan (Exhibit
10.8 to Form 10-Q) (6)*
10.7 3Com Corporation Restricted Stock Plan, as amended (Exhibit
10.17 to Form 10-Q) (6)*
40
10.8 1994 Stock Option Plan, as amended (14)*
10.9 Lease Agreement between BNP Leasing Corporation, as
Landlord, and 3Com Corporation, as Tenant, effective as of
November 20, 1996 (Exhibit 10.37 to Form 10-Q) (8)
10.10 Purchase Agreement between BNP Leasing Corporation, and 3Com
Corporation, effective as of November 20, 1996 (Exhibit
10.38 to Form 10-Q) (8)
10.11 Agreement and Plan of Reorganization among 3Com Corporation,
OnStream Acquisition Corporation and OnStream Networks, Inc.
dated as of October 5, 1996 (Exhibit 2.1 to Form S-4) (7)
10.12 Lease Agreement between BNP Leasing Corporation, as
Landlord, and 3Com Corporation, as Tenant, effective as of
February 3, 1997 for the Combined Great America Headquarters
site (Exhibit 10.19 to Form 10-Q) (10)
10.13 Purchase Agreement between BNP Leasing Corporation, and 3Com
Corporation, effective as of February 3, 1997 for the
Combined Great America Headquarters site (Exhibit 10.20 to
Form 10-Q) (10)
10.14 Credit Agreement dated as of December 20, 1996 among 3Com
Corporation, Bank of America National Trust and Savings
Association, as Agent, and the Other Financial Institutions
Party Hereto Arranged by BA Securities, Inc. (Exhibit 10.21
to Form 10-Q) (10)
10.15 Amended and Restated Agreement and Plan of Merger by and
among 3Com Corporation, TR Acquisitions Corporation, 3Com
(Delaware) Corporation, and U.S. Robotics Corporation, dated
as of February 26, 1997 and amended as of March 14, 1997 (9)
10.16 Lease Agreement between BNP Leasing Corporation, as
Landlord, and 3Com Corporation, as Tenant, effective as of
July 25, 1997 for the Great America Phase III (PAL) site
(11)
10.17 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of July 25, 1997 for the Great
America Phase III (PAL) site (11)
10.18 Lease Agreement between BNP Leasing Corporation, as
Landlord, and 3Com Corporation, as Tenant, effective as of
July 29, 1997 for the Marlborough site (11)
10.19 Purchase agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of July 29, 1997 for the
Marlborough site (11)
10.20 Lease Agreement between BNP Leasing Corporation, as
Landlord, and 3Com Corporation, as Tenant, effective as of
August 11, 1997 for the Rolling Meadows site (11)
10.21 Purchase Agreement between BNP Leasing Corporation, and 3Com
Corporation, effective as of August 11, 1997 for the Rolling
Meadows site (11)
10.22 First Amendment to Credit Agreement (11)
10.23 Form of Management Retention Agreement, effective as of June
2, 1999, with attached list of parties.* (16)
10.24 Form of Management Retention Agreement, with attached list of
parties and effective dates.* (16)
10.25 Agreement for Purchase and Sale of Land at Highway 237 and
North First Street, San Jose, California entered into as of
May 22, 2000 by and between the registrant and Palm, Inc. (17)
10.26 Employment Agreement with Bruce Claflin, effective as of
January 1, 2001.*
-------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan.
41
(1) Incorporated by reference to the corresponding Exhibit previously
filed as an Exhibit to Registrant's Registration Statement on Form S-1
filed on January 25, 1984 (File No. 2-89045)
(2) Incorporated by reference to Exhibit 10.2 to Registrant's Registration
Statement on Form S-4 filed on August 31, 1987 (File No. 33-16850)
(3) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 10, 1992 (File No. 0-12867)
(4) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 13, 1995 (File No. 0-12867)
(5) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on May
16, 1995 (File No. 0-19550)
(6) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 15, 1996 (File No. 0-12867)
(7) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Registration Statement
on Form S-4 filed on October 11, 1996 (File No. 333-13993)
(8) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 13, 1997 (File No. 0-12867)
(9) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Registration Statement
on Form S-4 filed on March 17, 1997 (File No. 333-23465)
(10) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
April 11, 1997 (File No. 0-12867)
(11) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
October 14, 1997 (File No. 0-12867)
(12) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 11, 1999 (File No. 0-12867)
(13) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-K filed on
August 17, 1999 (File No. 0-12867)
(14) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
October 8, 1999 (File No. 0-12867)
(15) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
April 4, 2000 (File No. 0-12867)
(16) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-K filed on
August 17, 2000 (File No. 0-12867)
(17) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
October 13, 2000 (File No. 0-12867)
(b) Reports on Form 8-K
None
42
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 16, 2001 By: /s/ Michael E. Rescoe
------------------------ --------------------------
Michael E. Rescoe
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
43