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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 1, 2001 Commission File No. 0-12867
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
3Com Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2605794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 Bayfront Plaza
Santa Clara, California 95052
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 326-5000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Preferred Stock Purchase Rights
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 [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates, based upon the closing price of the Common Stock on August 1,
2001, as reported by the Nasdaq National Market, was approximately
$1,718,622,845. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock,
based on Schedule 13G filings, have been excluded since such persons may be
deemed affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of August 1, 2001, 345,640,449 shares of the Registrant's Common Stock were
outstanding.
The Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on September 20, 2001 is incorporated by reference in
Part III of this Form 10-K to the extent stated herein.
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3Com Corporation
Form 10-K
For the Fiscal Year Ended June 1, 2001
Table of Contents
Part I Page
Item 1. Business.........................................................1
Item 2. Properties.......................................................11
Item 3. Legal Proceedings................................................13
Item 4. Submission of Matters to a Vote of Security Holders..............14
Executive Officers of 3Com Corporation ..........................14
Part II
Item 5. Market for 3Com Corporation's Common Stock and Related
Stockholder Matters...........................................17
Item 6. Selected Financial Data..........................................17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......45
Item 8. Financial Statements and Supplementary Data......................47
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................89
Part III
Item 10. Directors and Executive Officers of 3Com Corporation.............89
Item 11. Executive Compensation...........................................89
Item 12. Security Ownership of Certain Beneficial Owners and Management...89
Item 13. Certain Relationships and Related Transactions...................89
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K..
Exhibit Index....................................................91
Signatures.......................................................95
Financial Statement Schedule.....................................96
3Com, CommWorks, Megahertz, NBX, OfficeConnect, Parallel Tasking, SuperStack,
Total Control and XJACK are registered trademarks of 3Com Corporation or its
subsidiaries. Kerbango is a trademark of 3Com Corporation or its subsidiaries.
Graffiti is a registered trademark and Palm is a trademark of Palm, Inc. U.S.
Robotics is a registered trademark of U.S. Robotics Corporation. Courier is a
trademark of U.S. Robotics Corporation. Other product and brand names may be
trademarks or registered trademarks of their respective owners.
This annual report, including the following sections, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, particularly statements regarding our expectations on capital spending,
our products and services gross margins expectations for fiscal year 2002, our
expectations regarding the competitiveness of our product and service offerings,
our expectations relating to our future investments and expenses relating to
research and development, statements regarding our liquidity and capital
resources, our expectation that we will incur more charges related to our
restructuring efforts during fiscal 2002, our expectation that we will
substantially complete our restructuring activities related to the global cost
reduction to improve operational efficiencies, our expectation that gross
margins will improve in future periods as a result of our restructuring efforts,
our intention to reduce operating expenses in future periods, our plan to reduce
fixed costs by completing our reduction in force plans, our expectation that
emerging product lines will account for a higher percentage of our future sales
over time, our expectation that our Total Control 2000 product will be available
before the end of the calendar year, our plans to invest a significant portion
of financial resources in developing products for emerging growth markets, our
intention to consolidate our real estate portfolio and liquidate certain
facilities associated with our manufacturing facilities in fiscal 2002, our
intention to transition our Singapore facility into a regional distribution
center and sales and support office, our intention to enter into a contract
manufacturing relationship with Flextronics and outsource the manufacturing of
our high volume server, desktop and mobile products, our plans to exit the
consumer broadband cable and DSL modem business, our belief that we have
sufficient flexibility in the monetization of surplus real estate and other
financial resources to retire certain leases, our expectations that our
acquisitions of businesses or product lines will decrease in comparison to
historical levels, our expectation that international markets will continue to
account for a significant percentage of our sales, our plans to make investments
through 3Com Ventures and expectations related to payments that may be made over
the next twelve months with respect to capital calls, our 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, our belief that our cash
and 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 adoption of SFAS 133 and SFAS 141 will not have
a material effect on our results of operations or financial position, our
intention to hold our fixed income investments until maturity, our expectations
regarding the number of positions that will be affected by the reduction in
force undertaken as part of our current restructuring initiatives, our
expectation that employee separations related to our current restructuring
activities will be substantially complete by May 2002, our expectations
regarding future expenses associated with our current restructuring activities,
our expectation that we will not reach minimum purchase commitments associated
with a supply agreement as a result of our intended exit from consumer product
lines, our belief that audits being conducted by certain domestic and foreign
taxing jurisdictions of our income tax returns will not have a material adverse
effect on our consolidated financial condition or results of operations and our
expectations regarding the continuing volatility of our stock price. These
statements are subject to certain risks and uncertainties that could cause
actual results and events to differ materially. For a detailed discussion of
these risks and uncertainties, see the "Business Environment and Industry
Trends" section of this Form 10-K. 3Com undertakes no obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of this Form 10-K.
PRESENTATION OF DISCONTINUED OPERATIONS--PALM, INC.
The following information relates to the continuing operations of 3Com
Corporation and our consolidated subsidiaries (3Com). Palm, Inc. (Palm) is
accounted for as a discontinued operation, as a result of our decision to
distribute the Palm common stock we owned to 3Com shareholders in the form of a
stock dividend. Subsequent to the distribution to our shareholders on July 27,
2000, Palm's operations ceased to be part of our operations and reported
results.
PART I
ITEM 1. Business
GENERAL
3Com Corporation was founded on June 4, 1979. A pioneer in the computer
networking industry, our heritage is in providing robust networking solutions
that are functionally rich, cost-effective and simple to use. Our competitive
advantages include our industry-leading intellectual property portfolio,
distributor and customer relationships, and brand identity. During fiscal year
2001, we won market share in emerging-growth product categories, established new
levels of innovation, drove changes to benefit customers and delivered new
products that validated our brand promise to our business customers - rich
connectivity and radical simplicity.
We target sectors of the enterprise and service provider markets. Beginning in
fiscal year 2002, we have structured our operations around three businesses that
are leveraging our core strengths and focusing upon specific market
opportunities that offer long-term, profitable growth. These businesses are:
o Business Networks Company (BNC), which provides network infrastructure
solutions for the enterprise and small business markets;
o Business Connectivity Company (BCC), which provides products that
enable computing devices to access computer networks; and
o CommWorks Corporation (CommWorks), which provides Internet Protocol
(IP)-based access and infrastructure and services platforms for the
telecommunications service provider market.
Each of these businesses has a unique business model tuned for the dynamics of
its target market. This simplified structure allows greater focus, faster
responsiveness, and increased accountability.
In fiscal 2001, we operated in two segments, 1) Commercial and Consumer Networks
Business (CCB) and 2) Carrier Networks Business (CNB). CCB comprised the BNC and
BCC businesses described above and the consumer product lines which were exited
during fiscal 2001, as discussed further in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
1
INDUSTRY SEGMENTS
Business Networks Company
Our Business Networks Company develops technologies and products to build and
manage networks supporting local area network (LAN) switching, web technologies,
networked telephony and wireless LANs. BNC's solutions are feature rich so they
can support the increasingly complex and demanding application environments in
today's businesses but they are also easy to install, use and operate and are
very affordable to own. BNC's network solutions help IT and business teams to
run their businesses rather than spend time focusing on getting the technology
to work.
Building upon our historical success in the networking infrastructure market,
BNC continues to be a leader in key technologies that represent future growth
opportunities. BNC achieves this leadership position through design innovation
that makes feature-rich network technology simple to use. Recent innovations
include modular, application-aware (Layer 3+) and Gigabit-over-copper networking
switches; new application-specific integrated circuit (ASIC) designs that make
our products more affordable; LAN telephony products that reliably handle voice
traffic; and wireless LANs that offer robust security, ease of use and easy
integration.
Markets and Customers
BNC provides network infrastructures to enterprises and small businesses,
targeting in particular enterprises who value innovative, feature-rich networks
that are easy to use and affordable to own. BNC distributes its solutions
primarily through its worldwide channel of value-added resellers, system
integrators and more recently, telecommunications service providers. BNC is
fully committed to its Focus Partner Program and sees its resellers and channel
partners as a vital extension of its sales force. It works extensively with its
resellers and channel partners to ensure they are able to meet their business
goals.
Competition
Principal competitors in the enterprise networking market include Avaya, Inc.,
Cisco Systems, Inc., Enterasys (Cabletron System, Inc.), Hewlett Packard
Company, Lucent Technologies, Inc., and Nortel Networks, Corp.
Current Product Offerings
BNC delivers network infrastructure solutions for enterprises and small
businesses worldwide. BNC develops three categories of products, 1) LAN
infrastructure, composed of hubs, switches and web solutions, 2) networked
telephony systems for voice over existing network connections and 3) wireless
access points and adapters based on Wi-Fi technology.
LAN Infrastructure solutions:
o Stackable SuperStack(R) 3 and Modular Switch 4000 Series family of
Ethernet, Fast Ethernet and Gigabit Ethernet switches is a new
generation of essential networking components that form the foundation
of any business network.
o The SuperStack 3 Web solutions, including firewall, Webcache and
server load balancer, allow customers to access the Web faster, more
securely and at a lower cost, as well as ensure network availability.
o An affordable family of hubs and switches for cost-sensitive
networking users that require reliable and powerful stackable LAN
solutions.
2
o OfficeConnect (R) family of switches, hubs and firewalls are designed
specially for small businesses to obtain all the benefits of rich
networking and the Internet while enjoying all the ease of the
plug-and-play products. Also available is 3Com's 800 Series of
OfficeConnect digital subscriber line (DSL) routers for high-speed
Internet access for businesses.
Networked Telephony solutions:
o SuperStack 3 NBX(R) and NBX 100 networked telephony solutions offer
enterprise and small business customers significant telephony cost
savings, flexibility and voice/data application integration over
existing wiring.
o NBX 25 networked telephony solution gives small offices of up to 20
users a cost-effective voice product that can be deployed over
existing LAN infrastructure.
Wireless LAN solutions:
o Reliable, easy-to-use wireless solutions are based on the industry
standard Wi-Fi (802.11b). The range of these wireless LANs allow them
to be used effectively in small businesses, large enterprises and even
public access areas such as airports and hotels.
New Products in Fiscal Year 2001
On June 26, 2000, we announced new solutions that enable small business
customers to reap the benefits of networked telephony with the NBX 25 business
telephone system, and to advance network security to improve Internet access
with our OfficeConnect access products. We also announced our Ethernet power
source to create a single, continuous source of power for our networked
telephony and wireless systems.
On July 17, 2000, we announced a new version of Network Supervisor, our network
management solution that enables businesses to easily manage their 3Com LAN
networks. This version offered new automation built into the software, removing
the complexity for the user, yet offering sophisticated features, such as
proactive alarm systems to avoid network downtime.
On August 1, 2000, we announced new easy-to-use 10/100 Megabits per second
(Mbps) LAN switches at an aggressive price, leveraging product cost reductions.
On October 23, 2000, we announced new OfficeConnect products that help small
business customers do business on the web while keeping secure their
business-critical information.
On November 6, 2000, we announced a new series of products designed to address
the new fundamental needs of modern business: how to make the network run
faster, keep people constantly connected and do it all more securely and at the
best possible price. This announcement was a significant commitment to the
enterprise and small business market. This announcement addressed four key
areas: Gigabit Ethernet with SuperStack 3, Web-enablement, wireless LANs and
networked telephony.
On February 12, 2001, we announced the newest addition to our networked
telephony product family, the SuperStack 3 NBX Networked Telephony Solution. The
SuperStack 3 NBX was an expansion of our existing networked telephony product
family (NBX 25, NBX 100, Ethernet Power Source) and became available in 45
countries worldwide in April 2001. Our IP private branch exchange (PBX) solution
gives customers more capacity, increased reliability, enhanced functionality and
10/100-infrastructure support. The product enhancements and integration with the
SuperStack product family positioned us to further advance our lead in this
market by winning larger enterprise installations.
3
On March 6, 2001, we announced NBX Call Center, which is a software solution
that gives businesses advanced call center capabilities, such as intelligent
call routing, graphical alarms, drag and drop queuing, real-time monitoring and
reporting.
On March 14, 2001, we announced new modules for the award-winning SuperStack 3
Switch 4900 family. We established ourselves as the only vendor able to offer
both network interface cards (NICs) and switches in an end-to-end Gigabit
Ethernet solution. According to Cahners In-Stat first quarter 2001 report, we
increased our leadership position in the Gigabit Ethernet-over-Copper switch
market by almost 8 percentage points and now hold a 35.7 percent market share.
On March 20, 2001, we announced the 3Com 11 Mbps Wireless LAN solution. This new
Wi-Fi-certified offering comes with unique features that make set-up, use, and
configuration simple without compromising the rich functionality, reliability
and security that small business networks require.
On May 8, 2001, we announced new OfficeConnect Dual Speed Switches that
eliminate cabling issues and offer network traffic prioritization for small
business customers. This announcement reinforced our commitment to delivering
best-in-breed Ethernet switches that are easier to own, install, and manage for
small businesses.
On June 11, 2001 we announced the SuperStack(R) 3 Switch 4400, an
application-aware, stackable, wirespeed 10/100 Fast Ethernet switch; the
SuperStack 3 Switch 4300, a 48-port high-density 10/100 Ethernet switch and; the
3Com(R) Switch 4005, a 10/100/1000 Ethernet modular Layer 3 switch. Our latest
version of network management software adds an extra level of management support
for all new switches that enable intuitive setup and operation.
Business Connectivity Company
Our Business Connectivity Company is a leading provider of reliable,
high-performance access products for the enterprise market. In today's networked
world, it is important for people to stay connected while on the move. In order
for people to realize the full potential of networked computing, secure and
reliable network access must become simple.
BCC is advancing the concept of Universal Connectivity for the enterprise
market. The ability to deliver Universal Connectivity hinges on three
capabilities: Anytime, Anywhere Access, Reliable Performance and Secure
Connections. BCC focuses on solutions delivering this promise of Universal
Connectivity for users in networked environments - furthering our long-standing
vision of pervasive networking.
Anytime, Anywhere Access
BCC delivers the breadth of technology forms and types for people to connect to
information and each other anytime, anywhere. These forms include personal
computer (PC) Card Type II and Type III, Mini-PCI, Modem Daughter Card (MDC),
Compact Flash, Internal and External universal serial bus (USB), PCI and PCI-X
NIC and LAN-on-Motherboard (LOM). Its wide range of connectivity technologies
include Ethernet, Fast Ethernet, Gigabit Ethernet, Analog Modem, Wireless LAN
and Bluetooth. Innovative software such as Mobile Connection Manager, Wireless
Connection Manager and GSM Connection manager deliver one-step mobile
configurations and connectivity for multiple LAN and WAN locations.
Reliable Performance
BCC's products have a long-standing reputation for reliable performance.
Technologies and features such as Gigabit, Link Aggregation, Self Healing
Drivers, Traffic Prioritization, Failover, Exclusive Line Probing, Parallel
Tasking(R) and Digital line guard insure a reliable, high-performance
connection. Our reputation for reliability is evidenced by our partnerships with
PC original equipment manufacturers (OEMs) and our large installed base in
corporate enterprises.
4
Secure Connections
Network technologies and mobile computing have made global partnerships and
e-business initiatives achievable for many companies. With advances in network
technologies increasing the ability for users to access networks anytime
anywhere, the risks to network security have also increased. 3Com secure NICs
and embedded firewall protect enterprise networks from attacks and provide
tamper-resistant data protection. Furthermore, with IPSec encryption offloads,
IT managers can secure the LAN without sacrificing performance.
Markets and Customers
BCC solutions are targeted for worldwide distribution to enterprise and small
business customers via PC OEMs, such as Dell Computer Corp., Gateway Inc.,
Hewlett-Packard Company, and International Business Machines Corp., and
resellers and systems integrators. Increasingly, BCC is selling directly to PC
manufacturers, who integrate our connectivity products into their product
offerings. BCC's branded products are sold primarily through our two-tier
distribution channel, which leverages the capabilities of our resellers and
channel partners.
Competition
BCC's principal competitor is Intel Corp. Recently, Taiwanese manufacturers have
entered the low-end market, which is particularly price-competitive. These
companies include Accton Technology Corp., D-Link Systems, Inc., and NetGear
Inc.
Current Product Offerings
BCC offers a comprehensive product portfolio that allows users to connect to
computer networks easily and reliably. BCC products include:
o 3Com 10, 10/100 and 100 Mbps Ethernet desktop NICs for businesses of all
sizes
o 3Com 10/100, 10/100/1000 and 1000 Mbps Ethernet server NICs for businesses
of all sizes
o 3Com 10, 10/100, and 10/100LAN+56K Modem PC cards for businesses of all
sizes
o 3Com 10 Mbps LAN CompactFlash Cards for Windows CE environments
o 3Com Bluetooth PC Cards
o 3Com Management Software and Embedded Firewall
New Products in Fiscal Year 2001
On September 28, 2000, we announced our entry into the Gigabit
Ethernet-over-copper NIC market with new network connections designed for the
high-performance, reliability and manageability required in mission critical
server applications. The new 3Com 10/100/1000 PCI-X Server NIC gives customers a
feature-rich yet simple way to broaden their bandwidth and increase network
performance - by as much as 100 times - over existing unshielded twisted pair
(UTP) Category 5 copper wiring.
On November 28, 2000, we announced we would be teaming with Symantec Corporation
of Cupertino, Calif., to develop a `best-in-breed' software solution for quick
workstation deployment within a Wired for Management framework. Via integrated
components from Symantec, our boot services with Symantec Ghost Enterprise
software is the industry's premier tool for PC rollout, software and hardware
migration, and disaster recovery.
5
On December 4, 2000, we announced Dual Port server NICs to deliver network
availability in space-constrained servers. The new dual port card gives
customers instant scalability from a single NIC upgrade using one PCI slot to
support two network connections.
On December 11, 2000, we announced the formation of a strategic alliance with
Broadcom Corporation relating to deployment of Gigabit Ethernet NIC and LOM
solutions. Broadcom is a leading provider of integrated circuits enabling
broadband communications.
On May 29, 2001, we announced our Wireless Bluetooth PC Card as one of the first
network PC adapters based on the newly ratified 1.1 industry standard for
Bluetooth. We are one of nine organizations actively participating in the
Bluetooth Special Interest Group (SIG) which helps to drive the standardization
and adoption of this important wireless technology designed for quick bursts of
low-bandwidth information in a cable replacement application environment. Our
Bluetooth PC Card with 3Com Connection Manager for Bluetooth software package
and innovative XJACK (R) antenna design connects with Bluetooth-enabled personal
devices including notebooks, desktop PCs, cell phones and hand-helds.
CommWorks
CommWorks Corporation, a wholly owned subsidiary of 3Com Corporation, designs,
develops and deploys IP-based access infrastructures and service platforms for
many of the largest telecommunications service providers in the world.
CommWorks' products allow telecommunications service providers to offer new
services with the same high availability as the traditional telecommunications
network at a much lower cost. CommWorks combines expertise in network
integration with experience in custom development to deliver highly specialized
solutions that address the specific challenges telecommunications service
providers face, such as:
o cutting operating costs,
o developing new revenue-generating services,
o attracting additional network traffic,
o differentiating product offerings, and
o improving communications for end-users.
CommWorks builds networks that deliver greater functionality, at significantly
reduced cost and with the ability to offer multiple services over a single
platform. A CommWorks IP network features the following characteristics:
o Scalability. Carriers need the ability to start small and grow the
network as demand increases. CommWorks gives carriers the ability to
take their existing network and add new applications without major
additions of hardware;
o Reliability. The benchmark for network reliability is still the public
switched telephone network (PSTN). CommWorks networks deployed today
by some of the world's largest telecommunications service providers
are delivering quality and reliability on a par with - and often
better than - the traditional PSTN;
o Multiple services, common hardware. We offer carriers an IP platform
based on common hardware that allows them to deliver multiple
services. Regardless of the transport medium (wired, wireless,
broadband) or the type of traffic (voice, data, fax, video) we allow
the carrier to turn the traffic into revenue-generating services; and
o Open architecture. Our networks feature open, standards-based
interfaces for multi-vendor connectivity. This encourages
telecommunications service providers to deploy best-of-breed
components and allows them to introduce new services in less time than
for a traditional network infrastructure. Commitment to standards and
open interfaces allows telecommunications service providers to
customize solutions independently at each tier to address individual
customer needs.
6
Markets and Customers
CommWorks' exclusive focus is on the telecommunications service provider market.
Of the world's 20 largest telecommunications service providers - representing 71
percent of the world's public telecommunications service revenue - 16 are
CommWorks customers.
CommWorks customers in the carrier market include:
o Incumbent local exchange carriers (ILECs);
o Interexchange carriers (IXCs);
o Post, telephone, and telegraph administrations (PTTs);
o Competitive Local Exchange Carriers (CLECs); and
o Internet Service Providers (ISPs).
Top accounts worldwide include:
o North America: AT&T, AT&T Canada, Bell Mobility, Quest, MCI/Worldcom,
Motorola, SaskTel, Sprint, Sprint PCS, Telus Mobility, Verizon, SBC;
o Asia: Bharti, China Telecom, China Unicom, Clearcom, Communications
Authority of Thailand, Commverge, CTI (Hong Kong), Gosun, Hitachi,
Japan Telecom, KDDI, Korea Telecom, New C&C, NTT, Orange, Samsung,
Satyam, Siemens (Taiwan), SingTel, SK Telecom, Telecom New Zealand,
Telstra, VSNL;
o Europe: Airtel, Austria Telekom, Blixer, Carrier 1, Cegetel, KPN,
Marconi Communications, MediaWays, Portugal Telecom, Prodigios / AOL,
Telefonica, Telia;
o Latin America: Avantel / MCI, Embratel / MCI, Iusacell, Telefonica
(Peru), Vesper, VTR (Chile); and
o Middle East: Bezeq, Internet Gold, Turk Telecom
Competition
Principal competitors in the telecommunications service provider market include
Cisco Systems, Ericsson, Lucent Technologies, Nortel Networks, Siemens and
Sonus.
Current Product Offerings
CommWorks is able to migrate telecommunications service providers to IP, with
network solutions based on the CommWorks(R) architecture. Introduced more than
two years ago, this three-tier, carrier-class solution architecture allows
telecommunications service providers to scale their infrastructure and to
rapidly deploy next-generation, enhanced services. The architecture includes:
o media processing;
o softswitch; and
o service creation layers.
7
The first layer, featuring the Total Control(R) 1000 and Total Control 2000
platforms, performs media gateway functions to integrate multiple traffic types
and accommodate disparate networks. Layer Two, the control and network and
service management layer, features the CommWorks Softswitch to bridge different
signaling and call control protocols, enabling multimedia traffic to traverse
disparate networks. Layer Three is the service creation layer, an environment
that leverages open interfaces and strategic partners to enable rapid
application and service deployment.
The softswitch is an integral component of the CommWorks architecture. It works
with multi-service access platforms at layer one to provide end-to-end,
carrier-grade IP-based communications. At layer two, it provides media control
and management, session control functions and multi-protocol PSTN/IP signaling.
At layer three, the softswitch is responsible for critical network services,
including accounting, authentication and rating, billing support, directory
mapping, and Web provisioning. The back-end services component of the softswitch
includes modules that provide network-centric services. The CommWorks softswitch
framework also includes feature servers to deliver IP Centrex, Interactive Voice
Response, prepaid calling card, and presence management applications in addition
to offerings in the area of unified messaging and fax-over-IP.
New Products in Fiscal Year 2001
In June 2000, we unveiled our next-generation Total Control(R) 2000 multiservice
access platform. The Total Control 2000 platform is a carrier-class,
high-density multiservice platform that will support both wireline and wireless
solutions. The platform will address the requirements of telecommunications
service providers for a high-density platform as they evolve from
circuit-switched networks to more intelligent and efficient IP-based networks.
Customer trials of the platform began in mid-2001, with product availability
anticipated before the end of the calendar year.
Also in June 2000, we announced the availability of the CommWorks(R) 8210
unified messaging system, which bridges the circuit and packet networks to
deliver a robust set of features. The CommWorks 8210 unified messaging system is
a network-independent open service platform that gives end-users the freedom to
communicate the way they choose with the communication device they prefer. Users
can access all their e-mail, voice mail and fax messages from the PSTN,
Internet, broadband or wireless network using an array of client devices,
including telephones, personal and laptop computers, e-mail clients, Web
browsers, wireless handsets, and personal digital assistants.
In November 2000, the new Total Control(R) 1000 Enhanced Data System was
introduced. This system delivers higher port densities, enhanced performance and
expanded service capabilities on CommWorks' Total Control 1000 multi-service
access platform. Two new carrier-class solutions for delivering virtual private
network (VPN) services were also unveiled. These VPN solutions are media access
independent and can be delivered via cable, DSL, Code Division Multiple Access
(CDMA) wireless or remote access networks.
Also in November 2000, we introduced an end-to-end solution that enables DSL
providers to cost-effectively deliver secure VPNs over DSL. The carrier-class
VPN over DSL solution integrates the advanced IP service intelligence of the
Total Control(R) 500 192-port DSL concentrator with the VPN tunnel-switching
capabilities of the Total Control 1000 multi-service access platform.
In December 2000, we announced the availability of an intelligent service
provisioning solution for our carrier-class VPN services. The CommWorks(R) 5020
Intelligent Activation System is an end-to-end service activation solution that
offers timely and accurate provisioning for numerous service opportunities and
networking options; from inexpensive public Internet services to managed,
secure, high-speed private network services. This integration eliminates the
need for time-consuming, on-site, manual configuration of multiple network
elements, enabling telecommunications service providers to drastically reduce
the time between the customer's request for service and the actual service
activation.
8
In March 2001, we demonstrated an IP Centrex solution delivered via the Session
Initiation Protocol (SIP). IP Centrex delivers the same basic services as
traditional Centrex - such as call hold, call transfer, last number look-up and
redial, call forward, and three-way calling - via a packet-based, or IP network.
At the same time, IP Centrex enables a wide range of creative new IP-based
services. IP Centrex brings the creativity of the Internet to the telephony
system, allowing rapid service creation, customization and personalization.
On April 4, 2001, we announced we would be developing "universal port"
technology that will allow telecommunications service providers to terminate
voice, data and fax calls using a "universal" dial access port.
Telecommunications service providers using the Total Control 1000 Enhanced Data
System from CommWorks can upgrade their systems to universal port status through
a software upgrade. The CommWorks Universal Port System will merge current
remote access functionality with specific voice-over-IP (VoIP) offerings.
Applications supported in the initial product release will include typical dial
access; phone-to-phone voice support; real time and store-and-forward fax;
support for SIP for call control; and various back-end servers for critical
functions like directory mapping and billing. Early field trials of the
CommWorks Universal Port System began in mid-year 2001, with general
availability of the product expected before the end of the calendar year.
Also on April 4, 2001, we announced that our Total Control 1000 Enhanced Data
System will support V.92, the latest industry standard for dial-up modem
technology. CommWorks will support the V.92 standard in its next software
upgrade for the Total Control 1000 Enhanced Data System, scheduled for the third
quarter of calendar year 2001. For current customers, the V.92 features may be
added through a simple software upgrade; no hardware changes are required. For
end users, the V.92 modem specification offers a significantly improved Internet
connection experience with the ability to switch between voice and data
sessions. Telecommunications service providers who upgrade to V.92 can offer
their subscribers more features for their dial-up connection, thus enhancing
opportunities to retain and grow their customer base.
On April 9, 2001, we announced with TCSI Corporation, a leading provider of
innovative network solutions for the telecommunications industry, the launch of
a product that offers carrier-class network and service management solutions
designed to reduce network operating costs for telecommunications service
providers while allowing them to generate more revenue by offering new enhanced
services. The CommWorks 5000 Network and Service Management System, a
Web-enabled product, is a key component in the CommWorks' three-tiered
architecture for IP-based service creation and delivery.
On April 30, 2001, we announced the CommWorks 5025 Unified Messaging System
Provisioning Manager which combines the functionality of several software
modules to provide a comprehensive solution for the activation and provisioning
of new unified messaging services.
On May 21, 2001, we announced the availability of enhanced routing, accounting
and reporting features on the Total Control 1000 transaction gateway. The Total
Control 1000 transaction gateway is our solution for providing transaction
processing services. The gateway is designed to handle hundreds of millions of
quick, secure transactions involving the transfer of small amounts of data in a
single dial access session. These transactions include credit card
authorizations, debit card fund transfers, health benefit authorizations,
electronic fund transfers, and other transactions. The Total Control 1000
transaction gateway is used by many of the largest transaction carriers in the
United States, and many other telecommunications service providers, enterprises,
health care networks, and financial institutions around the world.
On May 30, 2001, we announced we would be adding support for Internet Protocol
Version 6 (IPv6) to our Total Control 100 enhanced gigabit routers. The Total
Control 100 enhanced gigabit routers will support native IPv6 over a 2.4Gbit/s
(OC-48c) line interface, the fastest interface available on any IPv6 router
product.
9
PRODUCT DEVELOPMENT
Our research and development expenditures in fiscal years 2001, 2000, and 1999
were $535.7 million, $597.8 million, and $586.1 million, respectively. Our
research and development expenditures span efforts to create new types of
products and classes of service as well as to expand and improve our current
product lines.
We are now focusing a higher percentage of our research and development
investments in several high-growth or emerging areas. In fiscal 2002, we plan to
invest a significant amount of our total research and development in Gigabit
Ethernet-Over-Copper technology, Voice over IP and Wireless CDMA services,
wireless networking products, Layer 3+ switching and IP telephony technologies
to accelerate the introduction of new products to market.
Historically, we have incorporated proprietary ASICs into our products to
provide key functions, cost efficiency, and the capacity for future upgrades.
Customers can benefit from new technologies and enhanced capabilities through
inexpensive, simple software upgrades rather than expensive, disruptive hardware
replacements. In addition, ASICs facilitate higher density platforms--critical
in certain applications, such as high-speed Layer 3 switching--and are less
costly to manufacture. We incorporate ASIC technology into many of our products,
including NICs, switches, hubs, and remote access equipment.
SIGNIFICANT CUSTOMERS
For the fiscal year ended June 1, 2001, Ingram Micro Inc. (Ingram Micro)
accounted for 15 percent of our total sales. For the fiscal year ended June 2,
2000, Ingram Micro and Tech Data Corporation (Tech Data) accounted for 15
percent and 13 percent of our total sales, respectively. For the fiscal year
ended May 28, 1999, Ingram Micro and Tech Data accounted for 16 percent and 12
percent of our total sales, respectively.
INTERNATIONAL OPERATIONS
We market our products globally, primarily through subsidiaries, sales offices,
and relationships with OEMs and distributors with local presence in all
significant global markets. Outside the U.S., we have significant research and
development groups in the UK and Ireland. We have manufacturing facilities in
Ireland and Singapore. We will continue manufacturing products in our Singapore
facility until September 30, 2001, after which time the facility will be
utilized as a distribution center. We maintain sales offices in 49 countries
outside the U.S.
BACKLOG
In many cases we manufacture our products in advance of receiving firm product
orders from our customers based upon our forecasts of worldwide customer demand.
Generally, orders are placed by the customer on an as-needed basis and may be
canceled or rescheduled by the customer without significant penalty.
Accordingly, backlog as of any particular date is not indicative of our future
sales. As of June 1, 2001, we do not have backlog orders that cannot be filled
within the next fiscal year.
MANUFACTURING
We use a combination of in-house manufacturing and independent contract
manufacturers to produce our products. We operate manufacturing facilities in
Santa Clara, California; Mount Prospect, Illinois; Blanchardstown, Ireland; and
Changi, Republic of Singapore. Purchasing, assembly, burn-in, testing, final
assembly, and quality assurance functions are performed at all of these
facilities. On June 19, 2001, we announced a contract manufacturing arrangement
with Flextronics International (Flextronics) for our high volume server, desktop
and mobile products, and our intention to liquidate certain facilities
associated with manufacturing operations in fiscal 2002. Those facilities are
located in Marlborough, Massachusetts; Mount Prospect, Illinois; and Santa
Clara, California. In addition, the Singapore manufacturing facility will
transition to become 3Com's Asia-Pacific regional distribution center and
regional sales and support office.
10
INTELLECTUAL PROPERTY AND RELATED MATTERS
The quality of our innovation is reflected in a substantial portfolio of patents
covering a wide variety of networking technologies. This ownership of core
networking technologies creates opportunities to leverage our engineering
investments and develop more integrated, powerful, and innovative networking
solutions for customers.
We rely on U.S. and foreign patents, copyrights, trademarks, and trade secrets
to establish and maintain proprietary rights in our technology and products. We
have an active program to file applications for and obtain patents in the U.S.
and in selected foreign countries where a potential market for our products
exists. Our general policy has been to seek patent protection for those
inventions and improvements likely to be incorporated in our products or that we
otherwise expect to be valuable. As of June 1, 2001, we had 578 U.S. patents
(including 557 utility patents and 21 design patents) and 103 foreign patents.
During fiscal 2001, we filed 349 patent applications in the U.S. Numerous patent
applications are currently pending in the U.S. and other countries that relate
to our research and development. We also have patent cross license agreements
with other companies.
We have registered 95 trademarks in the U.S. and have registered 101 trademarks
in one or more of 72 foreign countries. Numerous applications for registration
of domestic and foreign trademarks are currently pending.
EMPLOYEES
As of June 1, 2001, we had 8,165 full time employees, of whom 1,994 were
employed in engineering, 2,648 in sales, marketing, and customer service, 1,698
in manufacturing, and 1,825 in finance and administration. Our employees are not
represented by a labor organization, and we consider our employee relations to
be satisfactory.
PALM SEPARATION
On September 13, 1999, we announced a plan to conduct an initial public offering
(IPO) of our Palm subsidiary. On March 2, 2000, we sold 4.7% of Palm's stock to
the public in an IPO and sold 1.0% of Palm's stock in private placements. On
July 27, 2000, we completed the Palm spin-off by distributing to our
shareholders all of the remaining Palm common stock that we owned. The
distribution ratio was 1.4832 shares of Palm for each outstanding share of 3Com
common stock.
RESTRUCTURING CHARGES
During fiscal 2001 and fiscal 2000, we undertook several initiatives aimed at
both changing business strategy as well as improving operational efficiencies.
Restructuring charges in fiscal 2001 were $163.7 million and related to the
realignment of our business strategy and reduction in force and cost containment
efforts. Restructuring charges in fiscal 2000 were $68.9 million, of which $9.9
million related to the separation of Palm from 3Com and $59.0 million related to
implementing our change in strategic focus. These charges are discussed further
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 2. Properties
We operate in a number of locations worldwide. In fiscal 2001, we had several
significant real estate activities.
11
During the third quarter of fiscal 2001, we leased a new building totaling
78,000 square feet in West Valley City, Utah. The lease will expire in 2007. The
facility will be used primarily for office space and research and development
activities.
During the third quarter of fiscal 2001, we sold a vacated 296,000 square foot
manufacturing and office facility in Morton Grove, Illinois.
We completed an expansion project at the existing Dublin, Ireland manufacturing
facility. The construction was completed and fully operational in October 2000.
This expansion added 177,000 square feet to the existing 307,000 square feet.
In the first quarter of fiscal 2001, we sold approximately 39 acres of
undeveloped land in the San Francisco Bay Area.
We lease and sublease to third-party tenants approximately 317,000 square feet
of office and research and development space on our Santa Clara, California
headquarters site and approximately 15,000 square feet at our Winnersh site in
the UK. The terms of these agreements expire in 2002 and 2003. We also sublease
approximately 404,000 square feet of owned manufacturing and office space in the
Chicago area, 137,000 square feet of leased office and research and development
space in the Boston area, and approximately 132,000 square feet of leased office
space in the San Francisco Bay area to third-party tenants. The terms of these
agreements expire in 2003, 2002 and 2006, respectively. These locations, as well
as other subleased locations, are included in the table below.
Our primary locations include the following:
Location Sq. Ft. Owned/Leased Primary Use
-------- ------- ------------ -----------
United States - 1,374,000 Leased Corporate headquarters, office, customer service,
San Francisco research and development, manufacturing,
Bay Area distribution, and computer center
120,000 Owned Office, research and development leased to third-party
tenant
United States - 1,149,000 Owned Office, research and development, customer service,
Chicago Area and manufacturing
United States - 566,000 Leased Office, research and development, customer service
Boston Area
United States - 185,000 Owned Property vacant; held for sale
Salt Lake City Area
78,000 Leased Office, research and development
Asia Pacific - 333,000 Owned Office, manufacturing, and distribution
Singapore
Europe - 484,000 Owned Office, research and development, and manufacturing
Ireland
Europe - 283,000 Owned/Leased Office, research and development, and customer
UK service
12
As part of our initiatives to maximize the efficiency of our facilities, we will
be consolidating and liquidating excess real estate in several locations
globally over the next 12 to 18 months. We intend to liquidate certain
facilities associated with research and development and manufacturing operations
located in Marlborough, Massachusetts; Mount Prospect, Illinois; and Santa
Clara, California. In addition, the Singapore manufacturing facility will
transition to become 3Com's Asia-Pacific regional distribution center and
regional sales and support office.
ITEM 3. 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
In December 1997, a securities class action lawsuit 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 alleged violations of
the federal securities laws, specifically Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934, and which sought 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 May 2000, 3Com answered the
amended complaint. In October 2000, the parties agreed to settle this action and
all other related actions, including Adler v. 3Com Corporation, which is
discussed below. On February 23, 2001, the Court entered a final judgment
approving the settlement.
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 alleged violations of Sections 25400 and 25500
of the California Corporations Code and sought unspecified damages. The parties
agreed to stay this case to allow the Reiver case to proceed. Along with Reiver,
this case was settled in October 2000. As part of the settlement, the plaintiffs
have agreed to dismiss this action with prejudice. The settlement amount was
$259.0 million, of which $9.0 million was recovered from insurance. Accordingly,
3Com recorded a litigation charge of $250.0 million in October 2000.
In November 2000, a shareholder derivative and class action lawsuit captioned
Shaev v. Claflin, et al., No. CV794039, was filed in California Superior Court.
The complaint alleges that the Company's directors and officers made
misrepresentations and/or omissions and breached their fiduciary duties to the
Company in connection with the adjustment of employee and director stock options
in connection with the separation of the Company and Palm, Inc. It is unclear
whether the plaintiff is seeking recovery from 3Com or if the Company is named
solely as a nominal defendant, against whom the plaintiff seeks no recovery. The
Company and the individual defendants have removed this action to the United
States District Court for the Northern District of California, where the action
is captioned Shaev v. Claflin, et al., No. CV-01-0009-MJJ. The case was later
remanded back to the California Superior Court. Defendants have not responded to
the complaint. No trial date has been set.
13
Intellectual Property
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. Currently pending
before the Court is 3Com's motion for a preliminary injunction on the '209
patent. The Company intends to vigorously pursue this action.
On September 21, 2000, Xircom, Inc. filed an action against 3Com Corporation 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(R) 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 the claims of the 5,940,275 patent are unenforceable.
This case is in the discovery phase. 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 was heard on March 26, 2001 and was denied
by the Court. Currently pending before the Court is 3Com's Motion for Summary
Judgment of Non-infringement of the '332 patent. The Company intends to
vigorously pursue this action.
On July 6, 2001, Xircom, Inc. filed an action against the Company in the United
States District Court for the Central District of California, Civil Action No.
01-5902 GAF (JTLX). Xircom's complaint accuses 3Com of infringement of U.S.
Patent No. 6,241,550 by reason of the manufacture, sale, and use of the 3COM
10/100 LAN+Modem CardBus Type III PC Card and the 3COM 10/100 LAN CardBus Type
III PC Card. 3Com has not yet answered the Complaint, but an answer and
counterclaim will be filed and served in the near future. This action has only
recently been filed, but Xircom has threatened to file a motion for preliminary
injunction on the '550 patent. That motion has not yet been filed. The Company
intends to vigorously pursue this action.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of 3Com Corporation
The following table lists the names, ages and positions held by all executive
officers of 3Com. There are no family relationships between any director or
executive officer and any other director or executive officer of 3Com. Executive
officers serve at the discretion of the Board of Directors.
14
Name Age Position
---- --- --------
Bruce L. Claflin 49 Chief Executive Officer
Irfan Ali 37 President, CommWorks Corporation
Dennis Connors 47 President, 3Com Business Connectivity
Company
John McClelland 56 President, 3Com Business Networks Company
Gwen McDonald 46 Interim Senior Vice President, Corporate
Services
Mark D. Michael 50 Senior Vice President, Legal and Government
Relations, and Secretary
Michael Rescoe 48 Senior Vice President, Finance and Planning,
and Chief Financial Officer
Janet L. Soderstrom 54 Senior Vice President, Worldwide Marketing
and Brand Management
BRUCE L. CLAFLIN has been 3Com's Chief Executive Officer since January 2001 and
President and Chief Operating Officer since August 1998. Prior to joining 3Com,
Mr. Claflin worked for Digital Equipment Corporation (DEC) from October 1995 to
June 1998. From July 1997 to June 1998, he was Senior Vice President and General
Manager, Sales and Marketing at DEC and prior to that he served as Vice
President and General Manager of DEC's Personal Computer Business Unit from
October 1995 to June 1997. From April 1973 to October 1995, Mr. Claflin held a
number of senior management and executive positions at International Business
Machines Corporation (IBM). Mr. Claflin serves as a director of Time Warner
Telecom.
IRFAN ALI has been President of CommWorks Corporation since December 2000 and,
prior to that, he was the Senior Vice President and General Manager of 3Com's
Carrier Systems Business Unit, the predecessor to CommWorks Corporation, since
March 1999. From October 1997 to March 1999 he was Vice President, Worldwide
Marketing of 3Com's Carrier Systems. Prior to joining 3Com, Mr. Ali worked for
Newbridge Networks, Inc., where he was Vice President, Marketing from July 1995
to October 1997 and Assistant Vice President, Fast Packet Networks from July
1993 to June 1995. Prior to working at Newbridge Networks, Inc., Mr. Ali was
Senior Manager, Market Development for Strategic Technology at Northern Telecom,
Inc. from July 1991 to July 1993.
DENNIS CONNORS has been President of 3Com Business Connectivity Company since
June 2001. Prior to that, he was 3Com's Senior Vice President of e-Commerce
Group from June 2000 to June 2001 and Senior Vice President of Global Customer
Service from November 1999 to June 2001. Prior to joining 3Com, Mr. Connors was
the Executive Vice President and General Manager of Business Operations and
Services for Ericsson, Inc. He also served as Ericsson's Vice President and
Global Business Manager for WorldCom in 1997. During his tenure in Private Radio
Systems in the Ericsson/General Electric joint venture, Mr. Connors was the Vice
President of Global Product Development and Operations from 1995 through 1997,
and between 1993 and 1995 Mr. Connors was the Vice President of Marketing and
Research and Development.
15
JOHN MCCLELLAND has been the President of 3Com Business Networks Company since
June 2001. Prior to that, he was 3Com's Senior Vice President, Operations from
December 2000 to June 2001 and Senior Vice President, Supply Chain Operations
from April 1999 to December 2000. Prior to joining 3Com, Mr. McClelland was
Chief Industrial Officer for the Philips Consumer Electronics division of
Philips International, B.V. from November 1998 to March 1999. Mr. McClelland was
Vice President of Manufacturing and Distribution at Digital Equipment
Corporation from February 1995 to October 1998. From October 1968 to January
1995, Mr. McClelland held various management positions at IBM. Most recently at
IBM, he held the position of Vice President Manufacturing and Distribution, IBM
PC Co. from April 1994 to January 1995.
GWEN MCDONALD has been 3Com's Interim Senior Vice President of Corporate
Services since May 2001. Prior to that, Ms. McDonald served in various
capacities in Human Resources within 3Com for the past 12 years, including vice
president of worldwide Human Resources for Staffing and Operations and vice
president of worldwide Supply Operations. Prior to joining 3Com, Ms. McDonald
was the HR manager for LSI Logic's Santa Clara operations in 1988 and served
Fairchild Semiconductor for the 12 years prior to that, holding numerous key HR
positions within Fairchild.
MARK D. MICHAEL has been 3Com's Senior Vice President, Legal and Government
Relations, and Secretary since May 1999. Mr. Michael served as Senior Vice
President, Legal, General Counsel and Secretary since September 1997. Mr.
Michael joined 3Com in 1984 as Counsel, was named Assistant Secretary in 1985,
and General Counsel in 1986. Prior to joining 3Com, Mr. Michael was engaged in
the private practice of law with law firms in Honolulu, Hawaii from 1977 to 1981
and in San Francisco from 1981 to 1984.
MICHAEL RESCOE has been 3Com's Senior Vice President, Finance and Planning, and
Chief Financial Officer since May 2000. Prior to joining 3Com, Mr. Rescoe was
the Chief Financial Officer for Intelisys Electronic Commerce in New York in
1999. He also served as the Chief Financial Officer for PG&E Corporation in San
Francisco from 1997 through 1999. Before holding that position, Mr. Rescoe was
the Chief Financial Officer of Enserch Corporation in Dallas between 1995 and
1997. Previous to his Enserch position, he was the Senior Managing Director
(Partner) at Bear Sterns in New York beginning in 1992 through 1995. Prior to
1992, Mr. Rescoe was the Senior Vice President of Corporate Finance at Kidder,
Peabody, also in New York.
JANET L. SODERSTROM has been 3Com's Senior Vice President, Worldwide Marketing
and Brand Management since October 1999. Prior to joining 3Com, Ms. Soderstrom
joined Visa USA in 1985 as Director of Advertising and Marketing. She served as
Visa USA's Senior Vice President of Advertising and Marketing, before being
appointed as the Executive Vice President of Marketing for Visa International
from 1996 through 1999. In the past, Ms. Soderstrom has served on the boards of
Winkler Advertising, Decker Communications, the Ad Council and the Association
of National Advertisers where she served as Chairman from 1994 through 1996.
16
PART II
ITEM 5. Market for 3Com Corporation's Common Stock and Related Stockholder
Matters
Fiscal 2001 High Low Fiscal 2000 High Low
----------- ---- --- ----------- ---- ---
First Quarter $ 17.94 $ 9.65 First Quarter $ 6.53 $ 4.75
Second Quarter 20.69 12.25 Second Quarter 9.13 5.13
Third Quarter 13.38 7.13 Third Quarter 17.19 8.25
Fourth Quarter 7.16 4.55 Fourth Quarter 21.57 7.69
Our common stock has been traded in the Nasdaq stock market under the symbol
COMS since our initial public offering on March 21, 1984. The preceding table
sets forth the high and low closing sales prices as reported on the Nasdaq stock
market during the last two years. As of June 1, 2001 we had approximately 5,488
stockholders of record. We have not paid and do not anticipate that we will pay
cash dividends on our common stock.
On July 27, 2000, we distributed to our shareholders in the form of a stock
dividend 1.4832 shares of Palm for each outstanding share of 3Com common stock.
The stock prices presented above are restated stock prices and reflect the
distribution of our ownership in Palm to our shareholders.
ITEM 6. Selected Financial Data
The following selected financial information has been derived from the audited
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-K.
Years ended
------------------------------------------------------------------------------------------
(In thousands, except June 1, June 2, May 28, May 31, May 31,
per share and employee data) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Sales $2,820,881 $4,333,942 $5,202,253 $5,156,016 $5,481,681
Net income (loss) (965,376) 674,303 403,874 30,214 500,533
Income (loss) from
continuing operations (969,913) 615,563 364,945 23,046 496,881
Income (loss) per share,
continuing operations:
Basic ($2.81) $1.77 $1.01 $0.07 $1.50
Diluted (2.81) 1.72 0.99 0.06 1.41
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $3,452,802 $6,603,077 $4,239,159 $3,871,275 $3,504,984
Assets, net of discontinued
operations 3,452,802 5,544,840 4,158,879 3,776,901 3,471,766
Working capital, net of
discontinued operations 1,397,977 3,181,420 2,111,909 1,839,527 1,527,101
Long-term obligations 10,536 141,285 94,268 92,135 170,652
Retained earnings 771,639 1,982,079 1,403,709 1,079,775 1,049,561
Stockholders' equity 2,505,421 4,043,064 3,196,455 2,807,495 2,228,344
Number of employees 8,165 10,597 12,543 12,610 13,477
- ------------------------------------------------------------------------------------------------------------------------------
17
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
Our consolidated financial statements for all periods account for Palm as a
discontinued operation, as a result of our decision to distribute the Palm
common stock we owned to 3Com shareholders in the form of a stock dividend.
Unless otherwise indicated, the following discussion relates to our continuing
operations. Subsequent to the distribution to shareholders on July 27, 2000,
Palm's operations ceased to be part of our operations and reported results.
RESTRUCTURING ACTIVITIES
During fiscal 2001 and fiscal 2000, we undertook several initiatives aimed at
both changing business strategy as well as improving operational efficiencies.
We recorded restructuring charges of $163.7 million and $68.9 million in the
fiscal years ended June 1, 2001 and June 2, 2000, respectively.
Exit of Analog-Only Modem and High-End LAN/WAN Chassis Product Lines and
Separation of Palm
We realigned our strategy in the fourth quarter of fiscal 2000 to focus on
high-growth markets, technologies, and products. Operations were restructured
around two distinct business models: 1) Commercial and Consumer Networks
Business and 2) CommWorks. In support of this new strategy, we exited our
analog-only modem and high-end LAN and WAN chassis product lines and completed
the separation of Palm. For the fiscal year ended June 1, 2001, we recorded
restructuring charges of $13.2 million relating to these activities. For the
fiscal year ended June 2, 2000, we recorded net restructuring charges of $59.0
million, consisting of restructuring charges of approximately $125.4 million,
partially offset by a gain recognized upon receipt of a warrant to purchase
common stock in Extreme Networks, Inc., valued at $66.4 million. We also
recorded a credit of $0.2 million and charges of $9.9 million for the fiscal
years ended June 1, 2001 and June 2, 2000, respectively, related to the
separation of Palm. We completed our restructuring activities associated with
the exit of the analog-only modem and high-end LAN and WAN chassis product lines
during fiscal 2001.
Global Cost Reduction to Improve Operational Efficiencies
On December 21, 2000, we announced further restructuring activities. The
Commercial and Consumer Networks Business and CommWorks operations were
restructured to enhance the focus and cost effectiveness in serving their
respective markets. Effective for fiscal 2002, three independent businesses -
Business Connectivity Company, Business Networks Company and CommWorks
Corporation - were formed through this restructuring effort, with each business
utilizing central shared corporate services. Additionally, we implemented
reduction in force and cost containment actions and exited our consumer Internet
Appliance product line to lower the cost structure of the Company and return it
to profitability. For the fiscal year ended June 1, 2001, we recorded charges of
approximately $150.7 million related to these restructuring initiatives.
Subsequent to June 1, 2001, we announced further cost reduction and cash flow
generating initiatives. We plan to exit the consumer broadband cable and DSL
modem product lines and outsource the manufacturing of high volume server,
desktop and mobile connectivity products to Flextronics under a contract
manufacturing arrangement. Concurrent with such outsourcing, we intend to
consolidate our real estate portfolio including the disposition of excess
facilities. We expect to incur more charges related to these restructuring
efforts during fiscal 2002. We expect to substantially complete our
restructuring activities related to the global cost reduction to improve
operational efficiencies by May 2002.
18
BUSINESS COMBINATIONS AND JOINT VENTURES
We completed the following transactions during the fiscal year ended June 1,
2001:
o During the third quarter of fiscal 2001, we acquired the Gigabit Ethernet
NIC business of Alteon WebSystems (Alteon), a wholly-owned subsidiary of
Nortel Networks Corporation (Nortel) for an aggregate purchase price of
$123.0 million, consisting of cash paid to Nortel of $122.0 million, and
$1.0 million of costs directly attributable to the completion of the
acquisition. We purchased the Alteon NIC business and are licensing certain
Gigabit Ethernet-related technology and intellectual property from Alteon.
Approximately $22.5 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 third quarter of fiscal 2001. A risk adjusted
after-tax discount rate of 25 percent was applied to the in-process
project's cash flows. This purchase resulted in $86.0 million of goodwill
and other intangible assets that are being amortized over an estimated
useful life of four years.
o During the second quarter of fiscal 2001, we acquired Nomadic Technologies,
Inc. (Nomadic), a developer of wireless networking products that we will
incorporate into solutions for both small business and enterprise customers
for an aggregate purchase price of $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, stock options assumed with a fair value of $4.3 million,
and $0.2 million of costs directly attributable to the completion of the
acquisition.
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. A risk adjusted
after-tax discount rate of 30 percent was applied to the in-process
projects' cash flows. 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.
o During the first quarter of fiscal 2001, we acquired Kerbango, Inc.
(Kerbango), developer of the Kerbango(TM) Internet radio, radio tuning
system, and radio web site, for an aggregate purchase price of $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, stock options assumed
with a fair value of $3.8 million, and $0.3 million of costs directly
attributable to the completion of the acquisition. In addition, deferred
cash payments to founders and certain former employees totaling $7.7
million were contingent upon certain events through July 2002.
19
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 was 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. A risk adjusted after-tax discount rate of 35 percent was
applied to the in-process project's cash flows. This purchase resulted in
$33.7 million of goodwill and other intangible assets that were being
amortized over estimated useful lives of three to five years.
As part of our efforts to improve profitability, we announced that we would
exit the Internet Appliance product line during fiscal year 2001. As a
result, we determined that the net unamortized assets had no remaining
future value and consequently wrote off the net remaining amounts of
deferred stock-based compensation, goodwill, and intangible assets. This
included $15.5 million of accelerated amortization of deferred stock-based
compensation for qualified terminated Kerbango employees and $21.1 million
of net goodwill and intangible assets related to the Kerbango acquisition.
These charges were included as part of restructuring charges in fiscal
2001.
o During the first quarter of fiscal 2001, we completed the transfer of our
analog-only modem product lines to U.S. Robotics Corporation (New USR), the
new joint venture formed with Accton Technology and NatSteel Electronics.
We contributed $3.1 million of assets to New USR, for an 18.7 percent
investment in the joint venture. U.S. Robotics Corporation has assumed the
analog-only modem product line, including U.S. Robotics and U.S. Robotics
Courier branded modems.
During fiscal 2001, we wrote off our $3.1 million investment in New USR as
the value of this investment was determined to be other-than-temporarily
impaired. The amount was charged to gains (losses) on investments, net.
We completed the following transactions during the fiscal year ended June 2,
2000:
o On April 3, 2000, we acquired Call Technologies, Inc. (Call Technologies),
a leading developer of Unified Messaging (UM) and carrier-class Operational
Systems and Support (OSS) software solutions for telecommunications service
providers, for an aggregate purchase price of $86.0 million, consisting of
cash of approximately $73.4 million, assumption of stock options with a
fair value of approximately $8.6 million, the assumption of $1.4 million in
debt and $2.6 million of costs directly attributable to the completion of
the acquisition. Approximately $10.6 million of the total purchase price
represented purchased in-process technology that had not yet reached
technological feasibility, had no alternative future use, and was charged
to operations in the fourth quarter of fiscal 2000. This purchase resulted
in approximately $86.7 million of goodwill and other intangible assets that
are being amortized over estimated useful lives of three to seven years.
During fiscal year 2001, we determined that the downturn in the
telecommunications industry resulted in an impairment of the developed OSS
technology and related goodwill that arose from the Call Technologies
acquisition. These assets were written down $18.2 million to fair value,
which was estimated using discounted future cash flows. The impairment
charge was included in amortization and write down of intangibles, and is a
component of contribution margin for CommWorks as reported in Note 19 of
the consolidated financial statements. Remaining net goodwill and
intangible assets continue to be amortized over their original useful
lives.
20
o On December 22, 1999, we acquired LANSource Technologies, Inc. (LANSource),
a leading developer of Internet and LAN fax software and modem sharing
software, for an aggregate purchase price of $15.8 million in cash
including $0.2 million of costs directly attributable to the completion of
the acquisition. Approximately $2.9 million of the total purchase price
represented purchased in-process technology that had not yet reached
technological feasibility, had no alternative future use, and was charged
to operations in the third quarter of fiscal 2000. This purchase resulted
in approximately $13.3 million of goodwill and other intangible assets that
are being amortized over estimated useful lives of two to five years.
As part of our efforts to improve profitability, we decided that we would
exit certain LANSource product lines and license the technology to a former
competitor in that market. As a result of this decision, we determined that
an impairment of developed technology and related goodwill that arose from
the LANSource acquisition had occurred. These assets were written down $1.1
million to their estimated realizable fair value. This amount was included
in restructuring charges in fiscal 2001. In addition, we determined that a
customer's product line discontinuation resulted in an impairment of a
license agreement and related goodwill that arose from the LANSource
acquisition. Those assets were determined to have no future value, and
accordingly $1.0 million was written off. The impairment charge was
recorded in amortization and write down of intangibles, and is a component
of contribution margin for CommWorks as reported in Note 19 of the
consolidated financial statements. Remaining net intangible assets continue
to be amortized over their original useful lives.
o On December 2, 1999, we acquired Interactive Web Concepts, Inc. (IWC), an
Internet business consulting, creative design, and software engineering
firm, for an aggregate purchase price of $3.5 million in cash including
$0.1 million of costs directly attributable to the completion of the
acquisition. This purchase resulted in approximately $4.1 million of
goodwill and other intangible assets that were being amortized over an
estimated useful life of three years.
As part of our efforts to improve profitability, we decided that we would
discontinue providing IWC services during fiscal year 2001. As a result, we
determined that the net unamortized assets had no remaining future value
and consequently wrote off $2.1 million, which was the net remaining amount
of goodwill and intangible assets. This amount was included in
restructuring charges in fiscal 2001.
We completed the following transactions during the fiscal year ended May 28,
1999:
o On March 5, 1999, we acquired NBX Corporation (NBX), a developer of
IP-based telephony systems that integrate voice and data communications
over small business LANs and WANs. The aggregate purchase price of $87.8
million consisted of cash of approximately $75.4 million, assumption of
stock options with a fair value of approximately $11.9 million, and $0.5
million of costs directly attributable to the completion of the
acquisition. Approximately $5.6 million of the total purchase price
represented purchased in-process technology that had not yet reached
technological feasibility, had no alternative future use, and was charged
to operations in the fourth quarter of fiscal 1999. This purchase resulted
in approximately $94.4 million of goodwill and other intangible assets that
are being amortized over estimated useful lives of two to seven years.
21
o On February 18, 1999, we acquired certain assets of ICS Networking, Inc.
(ICS), a wholly-owned subsidiary of Integrated Circuit Systems, Inc. and
manufacturer of integrated circuit products focused on the design and
marketing of mixed signal integrated circuits for frequency timing,
multimedia, and data communications applications, for an aggregate purchase
price of $16.1 million in cash including $0.1 million of costs directly
attributable to the completion of the acquisition. Approximately $5.0
million of the total purchase price represented purchased in-process
technology that had not yet reached technological feasibility, had no
alternative future use, and was charged to operations in the third quarter
of fiscal 1999. This purchase resulted in approximately $6.9 million of
goodwill and other intangible assets that are being amortized over
estimated useful lives of three to seven years.
o On January 25, 1999, we entered into a joint venture named ADMTek, Inc.
(ADMtek). We contributed approximately $5.3 million in cash for a 44
percent interest in the joint venture and began consolidating the joint
venture with our results, due to our ability to exercise control over the
operating and financial policies of the joint venture. In September 1999,
we sold a portion of our existing interest in ADMTek to our joint venture
partner. As a result of this sale, our ownership interest was reduced and
we no longer exercised control over the joint venture. Therefore, during
the second fiscal quarter of fiscal 2000, we began accounting for this
investment using the cost method.
o On November 6, 1998, we acquired EuPhonics, Inc. (EuPhonics), a developer
of digital signal processor (DSP)-based audio software that drives
integrated circuits, sound cards, consumer electronics, and other hardware.
The aggregate purchase price of $8.3 million consisted of cash of
approximately $6.6 million, assumption of stock options with a fair value
of approximately $1.5 million, and $0.2 million of costs directly
attributable to the completion of the acquisition. The charge for purchased
in-process technology associated with the acquisition was not material, and
was included in research and development expenses in the second quarter of
fiscal 1999. This purchase resulted in approximately $10.8 million of
goodwill and other intangible assets that were being amortized over
estimated useful lives of four years.
As part of our efforts to change strategic focus in fiscal 2001, we decided
that we would exit the products and technology that arose from the
EuPhonics acquisition. As a result, we determined that the net unamortized
assets had no remaining future value and consequently wrote off $5.8
million, which was the net remaining amount of goodwill and intangible
assets. This amount was included in restructuring charges in fiscal 2001.
22
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the percentage
of total sales represented by the line items reflected in our consolidated
statements of operations:
Fiscal Years Ended
---------------------------------
June 1, June 2, May 28,
2001 2000 1999
---------------------------------
Sales 100.0% 100.0% 100.0%
Cost of sales 81.1 57.1 55.7
----- ----- -----
Gross margin 18.9 42.9 44.3
----- ----- -----
Operating expenses:
Sales and marketing 28.4 22.0 19.5
Research and development 19.0 13.8 11.3
General and administrative 6.5 4.9 4.3
Amortization and write-down of intangibles 2.5 0.6 0.4
Purchased in-process technology 2.1 0.3 0.2
Merger-related credits, net -- (0.1) (0.3)
Restructuring charges 5.8 1.6 --
----- ----- -----
Total operating expenses 64.3 43.1 35.4
----- ----- -----
Operating income (loss) (45.4) (0.2) 8.9
Net gains on land and facilities 6.3 0.6 0.1
Gains (losses) on investments, net (0.7) 19.4 (0.1)
Litigation settlement (8.8) -- --
Interest and other income, net 5.1 2.4 1.1
----- ----- -----
Income (loss) from continuing operations before income
taxes and equity interests (43.5) 22.2 10.0
Income tax provision (benefit) (9.1) 7.9 3.0
Other interests in loss of consolidated joint venture -- -- --
Equity interest in loss of unconsolidated investee -- 0.1 --
----- ----- -----
Income (loss) from continuing operations (34.4) 14.2 7.0
Income from discontinued operations 0.2 1.4 0.8
----- ----- -----
Net income (loss) (34.2)% 15.6% 7.8%
===== ===== =====
Comparison of fiscal years ended June 1, 2001 and June 2, 2000
Sales
Fiscal 2001 sales totaled $2.82 billion, a decrease of 35 percent from fiscal
2000 sales of $4.33 billion. During fiscal 2001, our principal operating
segments were: 1) Commercial and Consumer Networks and 2) CommWorks.
23
Commercial and Consumer Networks. Sales of commercial and consumer network
products (e.g., switches, desktop NICs, PC cards, LAN telephony, broadband cable
and DSL modems, hubs, wireless LANs, and customer service and support) in fiscal
2001 were $2.27 billion, a decrease of 19 percent from fiscal 2000 sales of
$2.80 billion. The decrease in sales of commercial and consumer network products
when compared to fiscal 2000 was due to significant competitive pressures in our
LAN infrastructure, NIC and PC Card product lines, resulting in lower pricing
and loss of market share. The market growth for these mature technologies also
slowed with the economic downturn in fiscal 2001. The exiting of our large,
complex chassis products at the end of fiscal 2000 and cost reduction efforts in
fiscal 2001 also resulted in disruptions in sales of our ongoing products. The
decrease in sales was partially offset by growth in new product and market
segments such as Layer 3+ switching, LAN telephony, wireless LANs and
Gigabit-over-copper NICs. We also experienced revenue growth in our consumer
cable and DSL modem products, although we announced on June 7, 2001 that we have
discontinued these products due to an inability to sustain a profitable business
model. Sales of commercial and consumer network products represented 81 percent
of total sales in fiscal 2001 compared to 65 percent of total sales in fiscal
2000.
CommWorks. Sales of CommWorks products (e.g., access infrastructures and IP
services platforms for network service providers, enhanced data, IP telephony,
wireless, cable, and DSL access systems, remote access concentrators) in fiscal
2001 were $0.40 billion, a decrease of 31 percent from fiscal 2000 sales of
$0.58 billion. The decrease in sales of CommWorks products when compared to
fiscal 2000 was due primarily to the slowdown in the U.S. telecommunications
industry, which resulted in a significant decline in revenues from our enhanced
data products, partially offset by growth of our wireless CDMA access
infrastructure products. Sales of CommWorks products represented 14 percent of
total sales in fiscal 2001 compared to 13 percent of total sales in fiscal 2000.
Exited Product Lines. Sales of exited product lines (analog-only modems and
high-end LAN and WAN chassis products) in fiscal 2001 were $0.15 billion, a
decrease of 84 percent from fiscal 2000 sales of $0.95 billion. The decrease in
sales of exited product lines when compared to fiscal 2000 was due primarily to
the impact of our business restructuring and change in strategic focus. Sales of
exited products represented 5 percent of total sales in fiscal 2001 compared to
22 percent of total sales in fiscal 2000.
Geographic. U.S. sales represented 45 percent of total sales in fiscal 2001
compared to 49 percent in fiscal 2000 and decreased 40 percent when compared to
fiscal 2000. International sales in fiscal 2001 decreased 30 percent when
compared to fiscal 2000. The overall decline in both U.S. and international
sales is largely attributable to the worldwide deteriorating economic
conditions, especially the U.S. telecommunications market.
New Operating Segments. Beginning in fiscal 2002, we have implemented a new
organizational structure to refine our strategic focus. As a result, the
principal operating segments for fiscal 2002 will be: 1) Business Connectivity
Company, 2) Business Networks Company and 3) CommWorks. Revenues related to
product lines we have exited in fiscal 2001 or have announced discontinuation in
fiscal 2002, such as our consumer cable and DSL modems, will be aggregated with
other exited products and will be presented separately from our three operating
segments beginning in the first quarter of fiscal 2002.
24
Gross Margin
Gross margin as a percentage of sales was 18.9 percent in fiscal 2001, compared
to 42.9 percent in fiscal 2000. Gross margin declined ten percentage points in
fiscal 2001 due to reductions in standard margin. The decline in standard margin
was primarily caused by a mix shift to lower-margin commercial access and
consumer broadband modem products and eroding prices on LAN infrastructure, NIC
and PC Card products. Gross margin declined eight percentage points in fiscal
2001 resulting from higher provisions for excess and obsolete inventory due to
reduced demand and the discontinuation of our consumer product lines. Gross
margin declined six percentage points in fiscal 2001 due to underutilized
capacity in our manufacturing plants and commitment shortfalls with subcontract
manufacturers. We also recorded a liability related to future contractual
commitments with a subcontract manufacturer as a result of our intention to exit
our consumer product lines and the reduction in sales demand. We are taking
actions to address manufacturing capacity and other supply chain utilization
issues through our restructuring efforts. As these efforts are successfully
completed, we expect gross margins to improve over fiscal 2001 levels.
Operating Expenses
Operating expenses in fiscal 2001 were $1.81 billion, or 64.3 percent of sales,
compared to $1.86 billion, or 43.1 percent of sales in fiscal 2000. Excluding
amortization and write down of intangibles charges of $69.7 million, purchased
in-process technology charges of $60.2 million, net merger-related credits of
$0.7 million, and restructuring charges of $163.7 million, operating expenses
would have been $1.52 billion, or 53.9 percent of sales for fiscal 2001.
Excluding amortization and write down of intangibles charges of $24.5 million,
purchased in-process technology charges of $13.5 million, net merger-related
credits of $2.3 million, and restructuring charges of $68.9 million, operating
expenses would have been $1.76 billion, or 40.6 percent of sales for fiscal
2000. We are taking actions that are intended to reduce operating expenses in
future periods.
Sales and Marketing. Sales and marketing expenses in fiscal 2001 decreased
$145.2 million or 15.3 percent from fiscal 2000. Sales and marketing expenses as
a percentage of sales increased to 28.4 percent of sales in fiscal 2001 compared
to 22.0 percent of sales in fiscal 2000. The year-over-year decrease in sales
and marketing expenses in absolute dollars was attributable to lower selling
expenses resulting from the decease in sales, the exit of product lines
associated with our restructuring activities, reduced headcount, and other
cost-containment efforts. These decreases were partially offset by increased
spending on corporate advertising and brand recognition programs. The
year-over-year increase as a percentage of sales was affected by the decline in
sales greater than the decrease in sales force and related expenses as described
above.
Research and Development. Research and development expenses in fiscal 2001
decreased $62.1 million, or 10.4 percent, compared to fiscal 2000. Research and
development expenses as a percentage of sales increased to 19.0 percent of sales
in fiscal 2001 compared to 13.8 percent of sales in fiscal 2000. The
year-over-year decrease in research and development expenses in absolute dollars
was primarily due to headcount reductions and cost containment efforts,
especially in our discontinued and mature product lines. These cost savings were
partially offset by additional investments in emerging growth technologies, such
as LAN telephony, wireless LANs and next generation wireless access
infrastructure carrier products. The year-over-year increase as a percentage of
sales was affected by the decline in sales in fiscal 2001, as described above.
25
General and Administrative. General and administrative expenses in fiscal 2001
decreased $31.0 million or 14.5 percent from fiscal 2000. As a percentage of
sales, general and administrative expenses increased to 6.5 percent of sales in
fiscal 2001 compared to 4.9 percent of sales in fiscal 2000. The year-over-year
decrease in general and administrative expenses in absolute dollars was
primarily due to decreased headcount, cost containment efforts, and lower
consulting costs associated with our restructuring activities. In addition,
provisions for bad debts were significantly lower than fiscal 2000 due to the
drop in sales volume. The year-over-year increase as a percentage of sales was
affected by the decline in sales in fiscal 2001, as described above, partially
offset by the decrease in expenses.
Purchased In-Process Technology. During fiscal 2001, we recorded a charge for
purchased in-process technology of approximately $60.2 million associated with
the acquisitions of certain assets of Alteon WebSystems (Alteon), Nomadic
Technologies (Nomadic) and Kerbango. We continued to develop technologies that
were in process at Alteon, Nomadic and Kerbango, as of the dates of the
acquisitions. The fair values of the existing products and technology currently
under development were determined using the income approach, which discounts
expected future cash flows to present value. The discount rates used in the
present value calculations were typically derived from a weighted-average cost
of capital analysis, adjusted upward to reflect additional risks inherent in the
development life cycle. The costs to be incurred for the projects in process are
primarily labor costs for design, prototype development, and testing. As of the
acquisition dates, purchased in-process technology was approximately 70 percent
complete for Alteon projects and 75 percent complete for both Kerbango and
Nomadic projects. We continued development of nine projects, and spent
approximately $0.5 million, $4.8 million and $0.6 million on Alteon, Kerbango
and Nomadic projects, respectively, as of June 1, 2001. At the end of fiscal
2001, all purchased in-process technology projects were completed or terminated.
Merger-Related Credits, Net. During fiscal 2001, we recorded net pre-tax
merger-related credits of approximately $0.7 million. This net amount reflects
adjustments to previously recorded merger and restructuring charges.
Restructuring Charges. During fiscal 2001 and fiscal 2000, we undertook several
initiatives aimed at both changing business strategy as well as improving
operational efficiencies. Restructuring charges in fiscal 2001 were $163.7
million and related to the realignment of our business strategy and reduction in
force and cost containment efforts. Restructuring charges in fiscal 2000 were
$68.9 million, of which $9.9 million related to the separation of Palm from 3Com
and $59.0 million related to implementing our change in strategic focus.
Net Gains on Land and Facilities.
During fiscal 2001, 3Com finalized the sale of a 39-acre parcel of undeveloped
land in San Jose, California to a financial institution, as directed by Palm,
for total net proceeds of approximately $215.6 million. 3Com recorded a net gain
of $174.4 million related to this sale. In February 2001, 3Com sold a vacated
office and manufacturing building in Morton Grove, Illinois for total net
proceeds of $12.4 million, resulting in a gain of approximately $4.4 million.
During fiscal 2000, we sold our manufacturing facility and related assets in
Salt Lake City, Utah and recognized an impairment charge for our remaining Salt
Lake City facility held for sale, which together resulted in a net gain of $25.5
million.
26
Gains (Losses) on Investments, Net
Net losses on investments of $18.6 million were recorded during fiscal 2001,
comprised of $117.1 million of net gains realized on sales of publicly traded
equity securities and $135.7 million of net losses recognized due to fair value
adjustments of investments in limited partnership venture capital funds and
write downs for other-than-temporary declines in value of both publicly traded
securities and investments in private companies. During fiscal 2000, gains on
investments were $838.8 million, comprised of $792.7 million of net gains
realized on sales of publicly traded equity securities and $46.1 million of net
gains recognized due to fair value adjustments of investments in limited
partnership venture capital funds and in private companies acquired by public
companies.
Litigation Settlement
We recorded a charge of $250.0 million during fiscal 2001 for the settlement of
the Reiver and Adler cases, as discussed in Note 21 to the consolidated
financial statements.
Interest and Other Income, Net
Interest and other income, net was $144.6 million in fiscal 2001, compared to
$104.3 million in fiscal 2000. The increase of $40.3 million compared to fiscal
2000 was primarily due to higher interest income, attributable to higher average
cash and short-term investment balances, as well as higher interest rates.
Income Tax Provision
Our effective income tax benefit rate was 21.0 percent in fiscal 2001 compared
to an effective income tax expense rate of 35.5 percent in fiscal 2000. The
fiscal 2001 benefit rate was comprised of a tax benefit on the United States
federal tax loss, offset by tax provisions in certain foreign countries, a
valuation allowance on deferred taxes, and non-deductible expenses related to
acquisitions. The valuation allowance reduces deferred tax assets to estimated
realizable value. The valuation allowance relates to a portion of the credit and
net operating loss carryforwards and other temporary differences for which we
believe that realization is uncertain due to various limitations on their use
and our operating loss in the current year.
Equity Interest in Loss of Unconsolidated Investee
In fiscal 2000, we invested $7.0 million in OmniSky Corporation (OmniSky). This
investment was accounted for using the equity method, resulting in losses of
$1.4 million and $5.6 million in fiscal 2001 and 2000, respectively.
Income from Discontinued Operations
Income from discontinued operations includes the results of operations of Palm.
Income from discontinued operations for the fiscal year ended June 1, 2001 was
$4.5 million, or $0.01 per share, compared to $58.7 million, or $0.16 per share
for fiscal 2000.
27
Comparison of fiscal years ended June 2, 2000 and May 28, 1999
Sales
Fiscal 2000 sales totaled $4.33 billion, a decrease of 16.7 percent from fiscal
1999 sales of $5.20 billion.
Commercial and Consumer Networks. Sales of commercial and consumer network
products in fiscal 2000 were $2.80 billion, a decrease of 9 percent from fiscal
1999 sales of $3.09 billion. The decrease in sales of commercial and consumer
network products when compared to fiscal 1999 was due to price declines in NICs,
price competition and loss of market share in LAN workgroup hubs and switches,
and disruption to the sales of on-going products that resulted from our March
20, 2000 announcement to exit certain product lines. Sales of commercial and
consumer networks products represented 65 percent of total sales in fiscal 2000
compared to 59 percent of total sales in fiscal 1999.
CommWorks. Sales of CommWorks products in fiscal 2000 were $0.58 billion, an
increase of 27 percent from fiscal 1999 sales of $0.46 billion. The increase in
sales of CommWorks products when compared to fiscal 1999 was due to strong
demand for our CMDA wireless products. Sales of CommWorks products represented
13 percent of total sales in fiscal 2000 compared to 9 percent of total sales in
fiscal 1999.
Exited Product Lines. Sales of exited product lines (analog-only modems and
high-end LAN and WAN chassis products) in fiscal 2000 were $0.95 billion, a
decrease of 42 percent from fiscal 1999 sales of $1.66 billion. The decrease in
sales of exited product lines when compared to fiscal 1999 was due to increased
price competition and the loss of market share in these markets. In addition, as
a result of our March 20, 2000 announcement that we would be exiting these
product lines, we experienced a significant decrease in sales related to these
products in the fourth quarter of fiscal 2000. Sales of exited products
represented 22 percent of total sales in fiscal 2000 compared to 32 percent of
total sales in fiscal 1999.
Geographic. U.S. sales represented 49 percent of total sales in fiscal 2000
compared to 51 percent in fiscal 1999 and decreased 21 percent when compared to
fiscal 1999. International sales in fiscal 2000 decreased 12 percent when
compared to fiscal 1999. The overall decline in both U.S and international sales
was largely attributable to our decision to exit our high-end LAN and WAN
chassis and analog-only modem product lines as part of our restructuring
initiative. International sales reflected strong growth in the Asia Pacific
region, offset by lower sales in Europe.
Gross Margin
Gross margin as a percentage of sales was 42.9 percent in fiscal 2000, compared
to 44.3 percent in fiscal 1999. The decline in gross margins in fiscal 2000 was
due to the impact of our business realignment on our fourth quarter results,
partially offset by higher gross margin performance during our first three
fiscal quarters. For the first three quarters of fiscal 2000, the gross margin
percentage was 46.5 percent. The higher gross margin performance during the
first three quarters of fiscal 2000 was primarily due to improvements in our
inventory management, which resulted in reduced manufacturing period costs,
partially offset by higher costs for certain product components. During the
fourth quarter of fiscal 2000, gross margins were lower due to reduced sales
volumes associated with our restructuring activities. In addition, we incurred
one-time charges of $55.5 million within cost of sales primarily related to
excess and obsolete inventory, warranty reserves, and return and rebate programs
in connection with the exiting of certain product lines. The gross margin
percentage in the fourth quarter of fiscal 2000 was 25.8 percent. For fiscal
2000 in total, the decline in the gross margin percentage was relatively small
because the fourth quarter impact was moderated by higher gross margins during
our first three fiscal quarters.
28
Operating Expenses
Operating expenses in fiscal 2000 were $1.86 billion, or 43.1 percent of sales,
compared to $1.84 billion, or 35.4 percent of sales in fiscal 1999. Excluding
amortization and write down of intangibles of $24.5 million, purchased
in-process technology charges of $13.5 million, net merger-related credits of
$2.3 million and restructuring charges of $68.9 million, operating expenses
would have been $1.76 billion, or 40.6 percent of sales for fiscal 2000.
Excluding amortization and write-down of intangibles of $19.6 million, a
purchased in-process technology charge of $10.6 million, and net merger-related
credits of $17.6 million, operating expenses would have been $1.83 billion, or
35.2 percent of sales for fiscal 1999.
Sales and Marketing. Sales and marketing expenses in fiscal 2000 decreased $66.5
million, or 6.6 percent from fiscal 1999. Sales and marketing expenses as a
percentage of sales increased to 22.0 percent of sales in fiscal 2000 compared
to 19.5 percent of sales in fiscal 1999. The year-over-year decrease in sales
and marketing expenses in absolute dollars was attributable to lower sales force
expenses and reduced spending on marketing programs related to non-strategic
product lines. The year-over-year increase as a percentage of sales was affected
by the sharp decline in sales in the fourth quarter of fiscal 2000, as described
above, partially offset by the lower sales force expenses and reduced spending
on marketing programs related to non-strategic product lines.
Research and Development. Research and development expenses in fiscal 2000
increased $11.7 million or 2.0 percent compared to fiscal 1999. Research and
development expenses as a percentage of sales increased to 13.8 percent of sales
in fiscal 2000 compared to 11.3 percent of sales in fiscal 1999. The
year-over-year increase in research and development expenses in absolute dollars
was primarily due to increased investments in our then-targeted high-growth,
emerging product lines: multi-services access to carrier networks, LAN
telephony, broadband access (primarily cable and DSL), wireless access, home
networking, and internet appliances, partially offset by decreased spending
related to mature product lines such as analog modems. The year-over-year
increase as a percentage of sales was affected by the sharp decline in sales in
the fourth quarter of fiscal 2000, as described above, as well as the increased
investments in our then-targeted emerging growth product lines.
General and Administrative. General and administrative expenses in fiscal 2000
decreased $14.5 million or 6.4 percent from fiscal 1999. As a percentage of
sales, general and administrative expenses increased to 4.9 percent of sales in
fiscal 2000 compared to 4.3 percent of sales in fiscal 1999. The year-over-year
decrease in general and administrative expenses in absolute dollars was
primarily due to lower bad debt expenses, which resulted from an increased rate
of collection of past-due accounts, partially offset by higher spending on
employee incentive programs and higher consulting costs. The year-over-year
increase as a percentage of sales was affected by the sharp decline in sales in
the fourth quarter of fiscal 2000, as described above, as well as the increase
in spending on employee incentive programs and consulting, partially offset by
decreased bad debt expenses.
Purchased In-Process Technology. During fiscal 2000, we recorded a charge for
purchased in-process technology of approximately $13.5 million associated with
the acquisitions of certain assets of Call Technologies and LANSource. We
continued to develop technologies that were in process at Call Technologies and
LANSource, as of the dates of the acquisitions.
29
Merger-Related Credits, Net. During fiscal 2000, we recorded net pre-tax
merger-related credits of approximately $2.3 million. This net amount reflects
adjustments to estimates for previously recorded merger and restructuring
charges.
Restructuring Charges. During fiscal 2000, we took steps to refocus our business
strategy, change our growth profile, and streamline our operations. This
included the separation and IPO of Palm and the realignment of our strategy to
focus on high-growth markets, technologies, and products. Restructuring charges
in fiscal 2000 were $68.9 million, of which $9.9 million related to the
separation of Palm from 3Com and $59.0 million related to implementing our
change in strategic focus.
Net Gains on Land and Facilities
During fiscal 2000, we sold our manufacturing facility and related assets in
Salt Lake City, Utah and recognized an impairment charge for our remaining Salt
Lake City facility held for sale, which together resulted in a net gain of $25.5
million. During fiscal 1999, we recorded a $4.2 million net gain on the sale of
land in California.
Gains (Losses) on Investments, Net
Net gains on investments of $838.8 million were recorded during fiscal 2000,
comprised of $792.7 million of net gains realized on sales of publicly traded
equity securities and $46.1 million of net gains recognized due to fair value
adjustments of investments in limited partnership venture capital funds and in
private companies acquired by public companies. During fiscal 1999, losses on
investments were $2.6 million.
Interest and Other Income, Net
Interest and other income, net was $104.3 million in fiscal 2000, compared to
$56.9 million in fiscal 1999. The increase of $47.4 million compared to fiscal
1999 was primarily due to higher interest income, attributable to higher cash
and short-term investment balances, as well as higher interest rates.
Income Tax Provision
Our effective income tax rate was 35.5 percent in fiscal 2000 compared to 30.1
percent in fiscal 1999. The increase in tax rate from 1999 to 2000 was primarily
attributable to our gains on investments during fiscal 2000. The effective tax
rate on all other income for fiscal 2000 was 29.1 percent.
Other Interests in Loss of Consolidated Joint Venture
In January 1999, we entered into a joint venture named ADMTek and began
consolidating the joint venture with our results, due to our ability to exercise
control over its operating and financial policies. In September 1999, we sold a
portion of our existing interest in ADMTek to our joint venture partner. As a
result of this sale, our ownership interest was reduced and we no longer
exercised control over the joint venture. Therefore, during our second fiscal
quarter, we began accounting for this investment using the cost method. The
pro-rata share of the joint venture's loss allocated to the other investors for
the period during which we had the ability to exercise control over the joint
venture was $1.0 million in fiscal 2000 and $1.1 million in fiscal 1999.
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Equity Interest in Loss of Unconsolidated Investee
In accordance with equity method accounting for our investment in OmniSky, we
recorded a $5.6 million charge for equity interest in loss of unconsolidated
investee in fiscal 2000.
Income from Discontinued Operations
Income from discontinued operations includes the results of operations of Palm.
Income from discontinued operations for the fiscal year ended June 2, 2000 was
$58.7 million, or $0.16 per share, compared to $38.9 million, or $0.10 per
share, for fiscal 1999.
BUSINESS ENVIRONMENT AND INDUSTRY TRENDS
Industry trends and specific risks may affect our future business and results 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 the matters discussed below.
Our business has been adversely impacted by the worldwide economic slowdown and
related uncertainties
Weaker economic conditions worldwide, particularly in the U.S. and Europe, have
contributed to the current technology industry slowdown and impacted our
business resulting in:
o reduced demand for most of our products;
o increased risk of excess and obsolete inventories;
o increased price competition for our products;
o excess manufacturing capacity under current market conditions; and
o higher overhead costs, as a percentage of revenues.
Additionally, these economic conditions are making it very difficult for 3Com,
our customers and our vendors to forecast and plan future business activities.
This level of uncertainty severely challenges our ability to operate profitably
or to grow our business. In particular, it is difficult to develop and implement
strategy, sustainable business models and efficient operations, and effectively
manage contract manufacturing and supply chain relationships. If the economic or
market conditions continue or further deteriorate, this will have a material
adverse impact on our financial position, results of operations and cash flow.
We are restructuring to operate as three independent businesses
We have recently restructured our commercial and carrier systems operations to
form three independent businesses -- 3Com Business Connectivity Company (BCC),
3Com Business Networks Company (BNC) and CommWorks Corporation (CommWorks) --
with each business using certain central shared corporate services. Each
business has a dedicated management team focusing on developing and executing
its own business strategies, assessing and meeting the needs of its customers
and implementing sustainable efficient operations.
31
We cannot be certain that we will be able to effectively implement and manage
the restructuring of the company into three independent businesses or that we
can properly manage these businesses or that each of the businesses can
successfully run its own independent operations. We previously operated as a
single integrated company and, therefore, may lack experience or operational
history in managing independently run businesses. Also, the management teams of
each of the businesses may lack the requisite expertise or experience to
successfully manage and operate independent businesses. There could be
additional changes in the management teams as the teams begin to operate
independently, thereby causing further disruption in both the specific business
and our combined operations. In addition, this restructuring may likely cause
significant diversion of management time and resources from other business
activities.
Failure to effectively implement and manage this restructuring or to properly
manage three independent business operations or failure of the three businesses
to sustain efficient operations or to successfully implement their business
strategies will likely cause further deterioration in revenues, significantly
compromise our on-going business prospects and materially impair our overall
financial performance.
Cost and expense reductions are critical to achieving positive cash flow and
profitability
We are continuing efforts to reduce our expense structure. In fiscal 2002, we
plan to reduce fixed costs by completing our previously announced
reduction-in-force plans, substantially increasing outsourcing of our
manufacturing, disposing of excess facilities and completing our exit from the
broadband cable and DSL consumer modem and Internet Appliance businesses. We
believe strict cost containment and expense reductions are essential to
achieving positive cash flow and profitability for the company, especially since
we have experienced a decline in revenues sequentially for the last three
quarters and the outlook on future quarters is unclear given the general
economic conditions. A number of factors could preclude us from successfully
bringing costs and expenses in line with our revenues, including unplanned-for
use of cash (see Business Environment and Industry Trends - "Future cash
requirements or restrictions on cash could have a negative impact on our
financial position"), inability to accurately forecast business activities and
further deterioration of our revenues. If we are not able to effectively reduce
our costs and achieve an expense structure commensurate with our business
activities and revenues, we may have inadequate levels of cash for operations or
for capital requirements, which could significantly harm the company's ability
to operate its business.
We have recently changed our manufacturing strategy to increase contract
manufacturing
We have recently changed our manufacturing strategy so that more of our products
will be sourced from contract manufacturers. On September 30, 2000 we sold our
Mt. Prospect, Illinois manufacturing and distribution operation to
Manufacturers' Services Ltd. (MSL) and entered into a supply agreement with MSL
to manufacture CommWorks products, broadband modems and certain mobile products
for us. On June 19, 2001 we announced a contract manufacturing arrangement with
Flextronics for our high volume server, desktop and mobile products, and the
intended sale of the facilities associated with those manufacturing operations.
The cost, quality, performance and availability of third-party manufacturing
operations are and will be essential to the successful production and sale of
many of our products. The inability of any contract manufacturer to meet our
cost, quality, performance and availability standards could adversely impact our
financial condition or results of operations. We may not be able to provide
32
contract manufacturers with product volumes that are high enough to achieve
sufficient cost savings. For example, because we have exited certain businesses
and the manufacturing volume we provide to MSL is below the contractual minimum
requirements, we may be subject to financial liabilities. Also, our ability to
control the quality of products produced by contract manufacturers may be
limited and quality issues may not be resolved in a timely manner which could
adversely impact our financial condition or results of operations.
The smooth transition from internal manufacturing to contract manufacturing by a
third party is critical to our success. Failure to implement and manage a
successful transition may cause severe disruptions in our supply chain that will
affect cost, quality and availability of products. Additionally, from time to
time we may change our arrangements with contract manufacturers, especially
where such arrangements are uneconomical. Such changes in arrangements with
contract manufacturers may also cause disruptions in our supply chain or result
in financial penalties if such transition is not managed properly.
Many factors may impact our ability to implement these changes, including our
ability to manage the implementation internally, sustain the productivity of our
workforce, quickly respond to and recover from unforeseen events associated with
these changes, such as the potential for a sustained economic downturn and
reduced demand for our products.
We face increased competition and our financial performance and future growth
depend upon sustaining leadership positions in our existing markets and
successfully targeting new markets
Competitive challenges faced by 3Com are likely to arise from a number of
factors, including: industry volatility resulting from rapid development and
maturation of technologies; industry consolidation resulting in companies with
greater financial, marketing and technical resources; increasing price
competition in the face of weakening economic conditions and excess inventories;
and continuing silicon integration of networking products. 3Com competes in
three specific markets that serve enterprise and service provider customers. Our
principal competitors in the enterprise networking market include Avaya, Cisco,
Enterasys (Cabletron), Hewlett-Packard, Lucent and Nortel. In the connectivity
market, our principal competitor is Intel; other competitors include Accton,
D-Link and NetGear. Principal competitors in the telecommunications service
provider market include Cisco, Ericsson, Lucent, Nortel, Siemens and Sonus. Our
competitors range from large, diversified telecommunications equipment and
networking companies to smaller companies with a more specialized focus. As
siliconization continues and networking functions become more embedded on the
motherboard, we are increasingly facing competition from parties who are also
our current suppliers of products. Our failure to compete successfully against
current or future competitors could harm our business, operating results or
financial condition. Likewise, integration of networking, communications, and
computer processing functionality on a reduced number of semiconductor
components may adversely affect our future sales growth and operating results.
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. These emerging product lines include
Gigabit Ethernet-Over-Copper technology, Voice over IP and CDMA services,
wireless networking products, Layer 3+ switching and IP telephony. We expect
these product lines to account for a higher percentage of our future sales over
time, although the markets for these products and solutions are still emerging
and may not develop to our expectations. Industry standards for some of 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 would be
adversely affected and we might need to change our business strategy.
33
Also, in the markets in which we compete, products 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 emerging
markets. 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.
Demand forecasting, increased contract manufacturing and historical components
shortages continue to pose major supply chain risks
Current business conditions and operational challenges in managing our supply
chain affect our business in a number of ways:
o certain key components, in the recent past, have had limited availability;
o there are a smaller number of suppliers and we have narrowed our supplier
base;
o our ability to accurately forecast demand is diminished;
o our significantly increased reliance on third-party manufacturing places
much of the supply chain process out of our direct control and heightens
the need for accurate forecasting;
o our present supply capabilities exceed our current needs.
Some key components of our products and some services that we rely on are
currently available only from single or limited sources. In addition, some of
our suppliers are also our competitors. 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.
Increasingly, we have been sourcing a greater number of components from a
smaller number of vendors. Also, there has recently been a trend toward
consolidation of vendors of electronic components. This greater reliance on a
smaller number of suppliers and the inability to quickly switch vendors increase
our risk of experiencing unfavorable price fluctuations or a disruption in
supply, particularly in a supply constrained environment.
Operation of the supply chain requires accurate forecasting of demand, which may
be more challenging in the case of weakening industry conditions, 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 result in buildup of inventory that cannot easily be sold, or
orders for products that could not be timely manufactured. This would adversely
affect our revenues, financial results and market share. If our demand forecasts
are too high, we may experience excess and obsolete inventories and excess
manufacturing capacity, which could adversely impact our financial results.
34
Excess manufacturing capacity and third-party commitments may negatively impact
our operations
Because we have outsourced significant manufacturing operations to contract
manufacturers and have exited a number of businesses, we now have excess
manufacturing capacity in existing facilities. We are currently restructuring
our operations and implementing cost containment activities to eliminate this
excess capacity, including the announced intention to consolidate our real
estate portfolio and facilities associated with our former manufacturing
operations such as the Mt. Prospect, Illinois and Marlborough, Massachusetts
campuses and parts of the Santa Clara, California campus. We will also be
transitioning our Singapore facility to become the Asia Pacific region
distribution center and office location for sales management, IT, training and
customer service and support operations. Our ability to reduce our excess
manufacturing capacity and to consolidate facilities may be made more difficult
by further weakening of the networking industry and worsening of general
economic conditions in the United States and globally. If we are unable to
reduce our excess manufacturing capacity and facilities, this may negatively
impact our operations, cost structure and financial performance.
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
subcontractor through September 2002. This type of agreement subjects 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 financial or other liabilities that
adversely affect our financial results.
Future cash requirements or restrictions on cash could have a negative impact on
our financial position
We incurred a loss in fiscal 2001 and failed to achieve positive cash flow from
operations. We do not expect to be profitable from operations for several
quarters and may continue to incur negative cash flow. If the negative cash flow
continues, our liquidity and ability to operate our business would be severely
adversely impacted. Additionally, our ability to raise financial capital may be
hindered due to our operational losses and negative cash flows, reducing our
operating flexibility.
The following items could require unexpected future cash payments or restrict
our use of cash:
o Acceleration of payment obligations or inability to refinance current
leasing arrangements;
o Inability to dispose of or mortgage real estate holdings in a timely manner
or at our anticipated price;
o Legal or contractual restrictions on or capital call obligations relating
to equity investments; and
o Taxes due upon the transfer of cash held in foreign locations or pledged as
collateral for financial instruments
We have commitments related to lease arrangements in the U.S., under which we
have an option to purchase the properties for an aggregate of $317 million, or
at the end of the lease, arrange for the sale of the properties to a third
party. These leases also contain financial covenants, including overall net
worth and "coverage ratio" covenants, that we must maintain. While we believe
that we are in compliance as of June 1, 2001, we have had discussions with the
lessors regarding the interpretation of certain covenants. If it were determined
that we were not in compliance, the leases could potentially be terminated,
resulting in an acceleration of the obligation to purchase or arrange for the
sale of the related properties (with recourse back to us if the sale is less
than the option price). We have the right to prepay these leases without penalty
or adverse consideration. We also maintain cash deposits with the lessors that
35
will be restricted as to transfer or withdrawal if we are in default on the
leases. If our financial performance does not sufficiently improve then we may
trigger a default by virtue of being in violation of one or more of the
financial covenants that, in turn, could lead to an acceleration of the lease
payments. The technology sector downturn and general economic conditions have
heavily impacted the current real estate market in the locations where our
properties are located. It is uncertain if we can timely consolidate the real
estate portfolio and liquidate holdings or if we can generate enough cash from
sales to third parties to fund the required payments under the operating leases.
In such event, we may be required to make unplanned-for expenditures of cash,
thereby lowering the cash of the company. We believe we have sufficient
financial resources, including cash and short term investments, to retire these
leases.
Further, as we engage in efforts to consolidate our real estate portfolio and
liquidate certain real estate holdings, we may enter into financial transactions
such as sale-leaseback or mortgage arrangements that may subject us to
additional financial covenants and restrictions; thereby reducing our operating
flexibility.
We maintain certain cash deposits in foreign locations, portions of which may be
subject to significant tax or tax withholding upon transfer or withdrawal.
The above cash requirements or restrictions could lead to an inadequate level of
cash for operations or for capital requirements, which could have a material
negative impact on our financial position and significantly harm the company's
ability to operate its business.
Retaining key management and employees are critical to our success
Our success depends upon retaining and recruiting highly qualified employees and
management personnel. This is especially important in the new structure of the
three independent businesses since each management team must possess the skills,
experience and talent to run its business on an independent basis. However, we
face severe challenges in attracting and retaining such employees and management
personnel. The significant downturn in our business environment had a negative
impact on our operations. We are currently restructuring our operations and have
taken actions to reduce our workforce and implement other cost containment
activities. These actions could lead to disruptions in our business, reduced
employee morale and productivity, increased attrition and problems with
retaining existing employees and recruiting future employees and increased
financial costs.
Recruiting and retaining skilled personnel, including engineers, to replace
attrition and grow emerging businesses continues to be highly competitive. 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 employees and management personnel at a reasonable cost. If we cannot
successfully recruit and retain such persons, product introduction schedules,
customer relationships, operating results and financial condition may become
impaired and our overall ability to compete may be adversely affected.
36
A significant portion of our revenues is derived from sales to a small number of
customers who may decide not to purchase our products in the future
We distribute many of our BCC and BNC products through two-tiered distribution
channels that include distributors, systems integrators and value-added
resellers. We also sell to PC Original Equipment Manufacturers (PC OEMs) and
telecommunications service providers. Significant portions of our sales are made
to a few customers. For fiscal 2001, Ingram Micro and Tech Data, both of whom
primarily sell our BCC and BNC products, represented approximately 15% and 7% of
our total sales, respectively. One PC OEM represented approximately 17% of our
overall PC OEM sales of BCC products for fiscal 2001. For CommWorks products, a
significant portion of sales is concentrated with the major telecom
infrastructure companies. 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 and, in an effort to streamline our operations, we may increase focus of
our resources on selected distributors. 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:
o stop purchasing our products or focus more on selling our competitors'
products;
o reduce, delay, or cancel their orders; or
o experience competitive, operational, or financial difficulties, impairing
our ability to collect payments from them.
Additionally, sales of our CommWorks products have in the past fluctuated more
dramatically based upon timing of individual transactions because of the smaller
number of customers and higher dollar amount of each sale. Therefore revenues in
any particular quarter from our CommWorks products may be more prone to and
adversely affected by operational decisions of individual customers.
BCC and BNC depend on distributors whose reductions in our inventory could
negatively impact our operations
Our distributors maintain inventories of our products. We work closely with our
distributors to monitor inventory levels and ensure that appropriate levels of
products are available to resellers and end users. Notwithstanding such efforts,
as channel partners reduce their levels of inventory or if they do not maintain
sufficient levels to meet customer demand, our sales could be negatively
impacted.
Changes in product mix to lower margin BCC products may negatively impact our
revenues and margins
We sell our network access products to PC OEMs as well as to distributors who,
in turn, sell to commercial enterprises. Sales to distributors typically
generate higher average selling prices (ASPs) and gross margins than sales to PC
OEMs. The trend over the past several years has shifted sales from two-tier
distribution to PC OEMs so that our revenue from PC OEM sales has increased as a
percentage of our total revenues while our revenue from distribution sales has
decreased as a percentage of our total revenues. This mix shift towards PC OEMs
has lowered the ASPs for our products. If this trend continues and we cannot
lower our costs of the products or transition customers to products with higher
ASPs, then our margins will be reduced and our financial results will be
adversely impacted.
37
We derive a significant portion of our commercial access sales from PC OEMs such
as Dell Computer, Gateway, Hewlett-Packard, and IBM, all of which are
manufacturers that incorporate our NICs, PC cards, Mini-PCI or chipsets into
their products. Ethernet connectivity to the corporate LAN is an established
technology and we are beginning to see the incorporation of 10/100 Mbps Ethernet
access product features into lower-priced form factors. For desktop computers,
we are seeing a migration from the NIC form factor to LOM. For laptop computers,
the transition is from PC cards to Mini-PCI and LOM. We expect that PC OEMs will
increasingly purchase the lower-priced form factors of established technology
products, as opposed to the higher-cost form factors unless we are able to add
innovative features at comparable cost. If this trend continues and we cannot
lower our costs of the products or transition customers to products with higher
ASPs, then our margins will be reduced and our financial results will be
adversely impacted.
Continued slowdown in the telecom industry capital expenditures may negatively
impact CommWorks revenues
CommWorks customers in our carrier market include incumbent local exchange
carriers (ILECs); interexchange carriers (IXCs); post, telephone and telegraph
administrations (PTTs); Internet service providers (ISPs) and other alternative
service providers. The recent economic and market slowdown, capital expenditure
restrictions and excess capacity in the telecom industry has adversely impacted
us, as most of our service provider customers have sharply reduced their
spending levels. Also, certain segments of the telecom industry have been
adversely impacted by large financial expenditures for wireless licenses. A
continued slowdown in the telecom industry and in capital expenditures could
have a material adverse effect on our sales and financial results.
Additionally, the recent economic and market slowdown has led to a number of
smaller ILECs and ISPs going out of business or consolidating. This may
adversely impact our financial performance due to increased competition for
CommWorks and further concentration of the CommWorks customer base (see Business
Environment and Industry Trends - "We face increased competition and our
financial performance and future growth depend upon sustaining leadership
positions in our existing markets and successfully targeting new markets" and "A
significant portion of our revenues is derived from sales to a small number of
customers who may decide not to purchase our products in the future").
Our current and future decisions to exit certain product lines may have
unforeseen negative impacts to our business
We announced on June 7, 2001 and March 21, 2001, respectively, that we are
exiting our broadband cable and consumer DSL modem and consumer Internet
Appliance businesses. The decision to exit these businesses may adversely impact
our ongoing relationships with our channel partners and end customers since many
of the channel partners and end customers for our on-going businesses also
purchased the products that we are discontinuing. These channel partners and
customers may perceive our remaining products as not being part of a larger
integrated or complementary solution. Also, they may question our commitment to
their markets and therefore shift to products from alternative vendors.
Customers and channel partners may also attempt to return products already
purchased by them or cancel orders recently placed. We have experienced a
certain level of such returns and cancellations and expect that they will
continue into the first quarter of our fiscal 2002. In certain cases, we
continue to be subject to certain long-term contractual commitments for sale or
maintenance of products. We may incur additional expenses into the first quarter
of our fiscal 2002 associated with resolving these contractual commitments.
38
Additionally, we may consider exiting other businesses that do not meet our goal
of delivering appropriate financial returns in a reasonable amount of time. Our
decision to exit future businesses could result in increased employee costs
(such as severance, outplacement and other benefits), contract breakage costs
and asset impairments. We may also experience delays in the execution of our
plan to exit a business that may create disruptions in our transactions with
suppliers and customers.
The role of acquisitions will be limited, which may negatively impact our growth
and increased reliance on strategic relationships could create competitive and
market risks
We are currently focusing on achieving positive cash flow and profitability from
our current operations. Accordingly, we expect that our acquisitions of
businesses or product lines will decrease in comparison to historical levels.
The networking business is highly competitive and our failure to pursue future
acquisitions could hamper our ability to enhance existing products and introduce
new products on a timely basis. Future consolidations in the networking industry
may result in new 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 consolidation in
our industry may adversely affect our operating results or financial condition.
We will increasingly rely on strategic relationships rather than acquisitions to
develop new technologies, enhance existing products and exploit market
potentials. These strategic relationships can present additional problems 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 the same
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 strategic partners
are acquired by third parties or if our competitors enter into successful
strategic relationships, the competition that we face may increase.
Certain of our international markets are risky and may negatively impact our
operating results
We operate internationally and expect that international markets will continue
to account for a significant percentage of our sales. The recent economic
slowdown in the United States and Europe has already had and is likely to
continue to have a negative effect on various international markets in which we
operate such as Asia and Latin America. Some international markets are
characterized by economic and political instability and currency fluctuations
that can adversely affect our operating results or financial condition.
Unforeseen conditions and events will positively or negatively impact the level
of international sales or our international operations in different regions. For
example, the recent strength of the U.S. dollar relative to other countries'
currencies has made our products more expensive than locally manufactured
products, thereby negatively impacting demand for our products. Also, our
contract manufacturers manufacture many of our products overseas, sometimes in
politically or economically unstable countries. Should international regions
experience economic or political instability, our results of operations may be
adversely affected, our ability to forecast demand for our products may also be
impeded and our supply of products may be interrupted.
39
Our reliance on industry standards, a favorable regulatory environment,
technological change in the marketplace and new product initiatives may cause
our revenues to fluctuate or decline
Our success also depends on:
o the timely adoption and market acceptance of industry standards;
o resolution of conflicting U.S. and international industry standards;
o requirements created by the convergence of technology such as Voice-over
Internet Protocol (VOIP);
o the timely introduction of new standards-compliant products; and
o 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 our technology is not included in the industry standard on a timely basis or
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.
Our customer order fulfillment fluctuates and may negatively impact our
operating results
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, BCC and BNC do not typically maintain a significant backlog and sales
are partially 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 and potential
pricing pressures. 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.
We face tax and equity dilution risks as a result of our spin-off of Palm
On July 27, 2000, 3Com completed the spin-off of Palm, our handheld computer
business, by distributing our remaining ownership of outstanding Palm common
stock to our shareholders. 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 could be revoked if either
we or Palm, for up to two years following the distribution date, engaged in
certain business combinations that would constitute a change of more than 50
percent of the equity interest in either company. If either we or Palm takes any
action that causes the ruling to be revoked, the distribution could be deemed
taxable and we could suffer other material adverse financial consequences.
40
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. As of June 1, 2001, there
were approximately 148.1 million employee options outstanding, of which 64.4
million are 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.
We may not always be able to adequately protect or maintain our 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 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.
41
Our future quarterly operating results are subject to factors that can cause
fluctuations in our stock price
Our quarterly operating results are difficult to predict and may fluctuate
significantly. In addition to factors discussed above, we anticipate that the
activities surrounding the restructuring of our business will contribute
significantly to fluctuations in our quarterly operating results for the next
several quarters. These factors, and accompanying fluctuations in periodic
operating results, could have a significant adverse impact on our sales and
financial results.
Accordingly, our stock price has historically experienced substantial price
volatility and we expect that this will continue, particularly due to
fluctuations in quarterly operating results, variations between our actual or
anticipated financial results and the published analysts' expectations and as a
result of announcements by our competitors. Our operating losses have caused a
significant depletion in our cash balances. Accordingly our stock price may be
based on the break-up value of the company or tangible assets. In addition, the
stock market has experienced extreme price and volume fluctuations that have
affected the market price of many technology companies. These factors, as well
as general economic and political conditions, may have a material adverse affect
on the market price of our stock in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents and short-term investments at June 1, 2001 were $1.6
billion, a decrease of approximately $1.5 billion from $3.1 billion at June 2,
2000.
For the fiscal year ended June 1, 2001, net cash used in operating activities
was $993.1 million. Cash flows used in operating activities resulted primarily
from the net loss from operations of $969.9 million and changes in working
capital components. Accounts receivable at June 1, 2001 decreased $68.7 million
from June 2, 2000 to $286.8 million due primarily to the decrease in sales from
the prior year. Days sales outstanding in receivables increased to 55 days at
June 1, 2001, compared to 42 days at June 2, 2000, due primarily to a higher
percentage of sales occurring during the last month of the fiscal year ended
June 1, 2001 compared to sales in the last month of the fiscal year ended June
2, 2000. Inventory levels at June 1, 2001 decreased $38.4 million from the prior
fiscal year-end to $200.1 million due to increased excess and obsolete inventory
provisions based on lowered sales demand forecasts and product discontinuation.
Investments and other assets at June 1, 2001 decreased $558.2 million from June
2, 2000 to $207.7 million, primarily due to decreases in the market values of
our investments. Accounts payable and accrued liabilities and other at June 1,
2001 decreased $114.8 million from June 2, 2000 to $856.0 million due primarily
to the decline in spending and lower salary accruals due to reduced headcount.
Net deferred tax assets at June 1, 2001 increased $461.5 million from June 2,
2000, primarily due to increases in the United States Federal net operating
loss.
For the fiscal years ended June 1, 2001 and June 2, 2000, we made investments
totaling $644.3 million and $1.2 billion, respectively, in municipal and
corporate bonds and government agency instruments, as well as investments
totaling $99.3 million and $41.2 million, respectively, in equity securities.
For the fiscal years ended June 1, 2001 and June 2, 2000, proceeds from
maturities and sales of municipal and corporate bonds and government agency
instruments were $1.3 billion and $439.0 million, respectively, and proceeds
from the sales of equity investments totaled $232.3 million and $808.6 million,
respectively.
42
As part of our 3Com Ventures initiative, we selectively make strategic
investments in the equity securities of privately held companies and 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 venture capital funds
totaling $7.4 million. We expect to pay $4.9 million over the next twelve months
as capital calls are made. We have established 3Com Ventures II, which has made
strategic investments of $59.8 million over the last nine months. Under 3Com
Ventures II, we have committed to make capital contributions to certain venture
capital funds totaling $44.7 million. We expect to pay $16.3 million over the
next twelve months as capital calls are made.
For the fiscal year ended June 1, 2001, 3Com made $191.1 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
June 1, 2001, we had approximately $1.8 million in capital expenditure
commitments outstanding primarily associated with facilities consolidation and
information system projects. 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 $316.8 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. The leases expire on two
dates. The first expiration with respect to $148.9 million occurs in November of
2001 and the second expiration on the remaining $167.9 million occurs in August
of 2002. These leases require us to maintain specified financial covenants.
While we believe that we are in compliance as of June 1, 2001, we have had
discussions with the lessors regarding the interpretation of certain covenants.
If it were determined that we were not in compliance, the leases could
potentially be terminated, resulting in an acceleration of the obligation to
purchase or arrange for the sale of the related properties. We have the right to
prepay these leases without penalty or adverse consideration. If required, we
believe we have sufficient financial flexibility in the monetization of surplus
real estate and other financial resources, including cash and short term
investments, to retire these leases.
During fiscal 2001, 3Com received net proceeds of $258.9 million from the sale
of property and equipment, comprised of net sales proceeds of $215.6 million
from the sale of undeveloped land in San Jose, California to Palm, net sales
proceeds of $12.4 million related to the sale of a vacated office and
manufacturing facility in Morton Grove, Illinois, net sales proceeds of $12.9
million related to the sale of a manufacturing and distribution operations in
Mount Prospect, Illinois, and net sales proceeds of $18.0 million related to
other fixed asset disposals. During fiscal 2001, we used cash of $197.7 million,
net of cash acquired, to acquire Alteon WebSystems, Nomadic Technologies and
Kerbango, Inc. as discussed in Note 5 to the consolidated financial statements.
During the fourth quarter of fiscal 2000, our Board of Directors authorized a
stock repurchase program of up to $1.0 billion. 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 authorized a two-year time limit on the repurchase authorizations. During
fiscal 2001, we repurchased 39.5 million shares of our common stock at a total
purchase price of $577.8 million.
43
In July 2000, we initiated a program of selling put options and purchasing call
options on our common stock. These were "European" style options which, in the
case of put options, entitle the holders to sell shares of 3Com common stock to
us on the expiration dates at specified prices and, in the case of call options,
entitle us to purchase our common stock on the expiration dates at specified
prices. The option contracts gave us the choice of net cash settlement or
physical settlement or net settlement in shares of our common stock. These
options were accounted for as permanent equity instruments. During fiscal 2001,
1.2 million shares of common stock were repurchased through exercised puts for a
cumulative purchase price of $19.9 million. In addition, we elected net cash
settlement for the remaining 15.3 million put options outstanding, and related
call options, which was recorded as a reduction of common stock in the amount of
$140.7 million. As of June 1, 2001, there were no put options or call options
outstanding.
During the year ended June 1, 2001, we received net cash of $247.1 million from
the sale of our common stock to employees through our employee stock purchase
and option plans and repaid the remaining debt balance of $24.0 million under
the 7.52% Unsecured Senior Notes agreement.
There are no assurances that we can reduce losses from operations and negative
cash flow or raise financial capital as needed to fund the operations of the
Company. However, based on current plans and business conditions, but subject to
the discussion in the Business Environment and Industry Trends, 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
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. We will
adopt SFAS 133 effective June 2, 2001. We do not expect the adoption of SFAS 133
to have a significant impact on our results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." We
adopted the guidance in SAB 101 during our fourth quarter of fiscal year 2001.
The adoption of SAB 101 did not have a material effect on our results of
operations or financial position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" which
addresses the financial accounting and reporting for business combinations and
supersedes Accounting Principles Board (APB) Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." SFAS No. 141 requires that all business combinations be
accounted for by a single method, the purchase method, modifies the criteria for
recognizing intangible assets, and expands disclosure requirements. The
provisions of SFAS No. 141 apply to all business combinations initiated after
June 30, 2001. We do not expect the adoption of SFAS No. 141 will have a
material effect on our results of operations or statements of financial
position.
44
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition and after they have been initially
recognized in the financial statements. SFAS No. 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but rather
tested at least annually for impairment, and intangible assets that have finite
useful lives be amortized over their useful lives. SFAS No. 142 provides
specific guidance for testing goodwill and intangible assets that will not be
amortized for impairment. In addition, SFAS No. 142 expands the disclosure
requirements about goodwill and other intangible assets in the years subsequent
to their acquisition. SFAS No. 142 is effective for our fiscal year 2003, with
early adoption permitted at the beginning of our fiscal year 2002. Impairment
losses for goodwill and indefinite-life intangible assets that arise due to the
initial application of SFAS No. 142 are to be reported as resulting from a
change in accounting principle. However, goodwill and intangible assets acquired
after June 30, 2001 will be subject immediately to provisions of SFAS 142. We
are in the process of determining the impact that adoption will have on our
consolidated financial statements.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures. The following discussion about our market risk
disclosures involves forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements. We are
exposed to market risk related to changes in interest rates, foreign currency
exchange rates, and equity security price risk. We do not use derivative
financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. We maintain a short-term investment portfolio
consisting mainly of income securities with an average maturity of less than two
years. These available-for-sale securities are subject to interest rate risk and
will fall in value if market interest rates increase. If market interest rates
were to increase immediately and uniformly by 10 percent from levels at June 1,
2001 and June 2, 2000, the fair value of the portfolio would decline by an
immaterial amount. It is our current intention to hold our fixed income
investments until maturity, and therefore we would not expect our operating
results or cash flows to be affected to any significant degree by a sudden
change in market interest rates. If necessary, we may sell short-term
investments prior to maturity to meet the liquidity needs of the Company which
would expose the Company to potential breakage costs.
At June 1, 2001 and June 2, 2000, we had approximately $316.8 million of
outstanding obligations under certain real estate lease arrangements with
monthly payments tied to short-term interest rates and lease residual
guarantees. If short-term interest rates were to increase 10 percent, the
increased payments associated with these arrangements would not have a material
impact on our operating results or cash flows. In addition, we also have a
mixture of fixed and floating rate long-term debt of approximately $2.7 million
as of June 1, 2001 and $29.9 million as of June 2, 2000. A hypothetical 10
percent decrease in interest rates would not have a material impact on the fair
market value or cash flows associated with this debt. We do not hedge any
interest rate exposures.
45
Foreign Currency Exchange Risk. We enter into foreign exchange forward and
option contracts to hedge certain balance sheet exposures and intercompany
balances against future movements in foreign exchange rates. Gains and losses on
the forward and option contracts are largely offset by gains and losses on the
underlying exposure. A hypothetical 10 percent appreciation of the U.S. Dollar
to June 1, 2001 and June 2, 2000 market rates would increase the unrealized
value of our forward contracts by $1.8 million and $0.7 million, respectively.
Conversely, a hypothetical 10 percent depreciation of the U.S. Dollar to June 1,
2001 and June 2, 2000 market rates would decrease the unrealized value of our
forward contracts by $1.8 million and $0.7 million, respectively. There were no
outstanding foreign exchange option contracts as of June 1, 2001 and June 2,
2000. The gains or losses on the forward and option contracts are largely offset
by the gains or losses on the underlying transactions and consequently a sudden
or significant change in foreign exchange rates would not have a material impact
on future net income or cash flows.
Equity Security Price Risk. We hold a portfolio of publicly traded equity
securities that are subject to market price volatility. Equity security price
fluctuations of plus or minus 15 percent would have had a $3.7 million impact on
the value of these securities held at June 1, 2001. Equity security price
fluctuations of plus or minus 50 percent would have had a $12.2 million impact
on the value of these securities held at June 1, 2001. Equity security price
fluctuations of plus or minus 15 percent would have had an $85.5 million impact
on the value of these securities at June 2, 2000. Equity security price
fluctuations of plus or minus 50 percent would have had a $285.0 million impact
on the value of these securities at June 2, 2000.
46
ITEM 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statement Schedule
Page
----
Financial Statements:
Independent Auditors' Report..................................... 48
Consolidated Statements of Operations for the years ended
June 1, 2001, June 2, 2000, and May 28, 1999................... 49
Consolidated Balance Sheets at June 1, 2001 and June 2, 2000..... 50
Consolidated Statements of Stockholders' Equity for the
years ended June 1, 2001, June 2, 2000, and May 28, 1999...... 51
Consolidated Statements of Cash Flows for the years ended
June 1, 2001, June 2, 2000, and May 28, 1999.................. 52
Notes to Consolidated Financial Statements....................... 53
Quarterly Results of Operations (Unaudited)...................... 88
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts and Reserves..... 96
All other schedules are omitted, because they are not required, are not
applicable, or the information is included in the consolidated financial
statements and notes thereto.
47
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of 3Com Corporation:
We have audited the accompanying consolidated balance sheets of 3Com Corporation
and subsidiaries (3Com) as of June 1, 2001 and June 2, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 1, 2001. Our audits also
included the financial statement schedule listed in the Index at Item 8. These
financial statements and financial statement schedule are the responsibility of
3Com's management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of 3Com Corporation and
subsidiaries at June 1, 2001 and June 2, 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
June 1, 2001 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
June 25, 2001
48
Consolidated Statements of Operations
Years ended
-------------------------------------------------
(In thousands, except per share data) June 1, June 2, May 28,
2001 2000 1999
----------- ----------- -----------
Sales $ 2,820,881 $ 4,333,942 $ 5,202,253
Cost of sales 2,287,250 2,475,934 2,898,038
----------- ----------- -----------
Gross margin 533,631 1,858,008 2,304,215
----------- ----------- -----------
Operating expenses:
Sales and marketing 803,994 949,228 1,015,763
Research and development 535,718 597,816 586,079
General and administrative 182,090 213,085 227,558
Amortization and write down of intangibles 69,707 24,535 19,620
Purchased in-process technology 60,221 13,456 10,590
Merger-related credits, net (728) (2,297) (17,551)
Restructuring charges 163,657 68,867 --
----------- ----------- -----------
Total operating expenses 1,814,659 1,864,690 1,842,059
----------- ----------- -----------
Operating income (loss) (1,281,028) (6,682) 462,156
Net gains on land and facilities 178,844 25,483 4,200
Gains (losses) on investments, net (18,614) 838,795 (2,643)
Litigation settlement (250,000) -- --
Interest and other income, net 144,596 104,258 56,922
----------- ----------- -----------
Income (loss) from continuing operations before income taxes
and equity interests (1,226,202) 961,854 520,635
Income tax provision (benefit) (257,641) 341,672 156,791
Other interests in loss of consolidated joint venture -- (1,028) (1,101)
Equity interest in loss of unconsolidated investee 1,352 5,647 --
----------- ----------- -----------
Income (loss) from continuing operations (969,913) 615,563 364,945
Income from discontinued operations 4,537 58,740 38,929
----------- ----------- -----------
Net income (loss) $ (965,376) $ 674,303 $ 403,874
=========== =========== ===========
Net income (loss) per share:
Basic:
Continuing operations $ (2.81) $ 1.77 $ 1.01
Discontinued operations $ 0.01 $ 0.17 $ 0.11
----------- ----------- -----------
$ (2.80) $ 1.94 $ 1.12
=========== =========== ===========
Diluted:
Continuing operations $ (2.81) $ 1.72 $ 0.99
Discontinued operations $ 0.01 $ 0.16 $ 0.10
----------- ----------- -----------
$ (2.80) $ 1.88 $ 1.09
=========== =========== ===========
Shares used in computing per share amounts:
Basic 345,027 348,314 360,424
Diluted 345,027 357,883 369,361
See notes to consolidated financial statements.
49
Consolidated Balance Sheets
June 1, June 2,
(In thousands, except par value) 2001 2000
----------- -----------
ASSETS
Current assets:
Cash and equivalents $ 897,797 $ 1,700,420
Short-term investments 742,414 1,369,520
Accounts receivable, less allowance for doubtful accounts
($47,309 and $76,468 in 2001 and 2000, respectively) 286,813 355,540
Inventories, net 200,146 234,812
Investments and other 207,652 765,895
Net assets of discontinued operations -- 1,058,237
----------- -----------
Total current assets 2,334,822 5,484,424
Property and equipment, net 609,679 756,954
Deferred income taxes 163,349 --
Goodwill, intangibles, deposits, and other assets 344,952 361,699
----------- -----------
Total assets $ 3,452,802 $ 6,603,077
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 279,181 $ 319,739
Other accrued liabilities 576,851 651,074
Deferred income taxes 80,485 259,495
Current portion of long-term debt 328 14,459
----------- -----------
Total current liabilities 936,845 1,244,767
Long-term debt 2,385 14,740
Deferred income taxes -- 119,168
Other long-term obligations 8,151 7,377
Commitments and contingencies (Note 10) -- --
Equity interests in consolidated entities -- 1,173,961
Stockholders' equity:
Preferred stock, no par value, 10,000 shares authorized;
none outstanding -- --
Common stock, $0.01 par value, 990,000 shares authorized;
shares outstanding: 2001--365,711; 2000--365,825 2,127,803 2,101,242
Treasury stock, at cost: 2001--21,412 shares;
2000--12,371 shares (373,661) (312,428)
Note receivable from sale of warrants (21,052) --
Unamortized restricted stock grants (9,820) (6,450)
Retained earnings 771,639 1,982,079
Accumulated other comprehensive income 10,512 278,621
----------- -----------
Total stockholders' equity 2,505,421 4,043,064
----------- -----------
Total liabilities and stockholders' equity $ 3,452,802 $ 6,603,077
=========== ===========
See notes to consolidated financial statements.
50
Consolidated Statements of Stockholders' Equity
(In thousands) Common Stock Treasury Stock Note
Shares Amount Shares Amount Receivable
----------- ----------- ----------- ----------- -----------
Balances, May 31, 1998 358,870 $ 1,730,676
Components of comprehensive income:
Net income
Change in unrealized gain on
available-for-sale securities
Accumulated translation adjustments
Total comprehensive income
Repurchase of common stock (14,805) (378,565)
Common stock issued under stock plans 6,935 123,850 6,615 181,501
Tax benefit from employee stock
transactions 86,312
Amortization of restricted stock grants
Stock options assumed in connection with
acquisitions 13,366
----------- ----------- ----------- ----------- -----------
Balances, May 28, 1999 365,805 1,954,204 (8,190) (197,064) --
Components of comprehensive income:
Net income
Change in unrealized gain on
available-for-sale securities
Accumulated translation adjustments
Total comprehensive income
Repurchase of common stock (20,515) (540,780)
Common stock issued under stock plans 20 4,398 16,334 425,416
Tax benefit from employee stock
transactions 133,990
Amortization of restricted stock grants
Stock options assumed in connection with
acquisitions 8,650
----------- ----------- ----------- ----------- -----------
Balances, June 2, 2000 365,825 2,101,242 (12,371) (312,428) --
Components of comprehensive income:
Net loss
Change in unrealized gain on
available-for-sale securities
Accumulated translation adjustments
Total comprehensive income
Repurchase of common stock (39,455) (577,759)
Common stock issued under stock plans,
net of cancellations (114) (3,421) 28,926 494,657
Amortization of restricted stock grants
Put option settlements (140,700)
Effect of distribution of Palm, Inc. shares 141,478
Issuance of warrant for note receivable 21,052 (21,052)
Stock and stock options assumed in
connection with acquisitions 8,152 1,488 21,869
----------- ----------- ----------- ----------- -----------
Balances, June 1, 2001 365,711 $ 2,127,803 (21,412) $ (373,661) $ (21,052)
=========== =========== =========== =========== ===========
Unamortized Accumulated Other
(In thousands) Restricted Retained Comprehensive
Stock Grants Earnings Income Total
----------- ----------- ----------- -----------
Balances, May 31, 1998 $ (4,157) $ 1,079,775 $ 1,201 $ 2,807,495
Components of comprehensive income:
Net income 403,874 403,874
Change in unrealized gain on
available-for-sale securities 43,538 43,538
Accumulated translation adjustments (3,830) (3,830)
----------
Total comprehensive income 443,582
Repurchase of common stock (378,565)
Common stock issued under stock plans (3,234) (79,940) 222,177
Tax benefit from employee stock
transactions 86,312
Amortization of restricted stock grants 2,088 2,088
Stock options assumed in connection with
acquisitions 13,366
----------- ----------- ----------- -----------
Balances, May 28, 1999 (5,303) 1,403,709 40,909 3,196,455
Components of comprehensive income:
Net income 674,303 674,303
Change in unrealized gain on
available-for-sale securities 239,053 239,053
Accumulated translation adjustments (1,341) (1,341)
-----------
Total comprehensive income 912,015
Repurchase of common stock (540,780)
Common stock issued under stock plans (3,526) (95,933) 330,355
Tax benefit from employee stock
transactions 133,990
Amortization of restricted stock grants 2,379 2,379
Stock options assumed in connection with
acquisitions 8,650
----------- ----------- ----------- -----------
Balances, June 2, 2000 (6,450) 1,982,079 278,621 4,043,064
Components of comprehensive income:
Net loss (965,376) (965,376)
Change in unrealized gain on
available-for-sale securities (268,041) (268,041)
Accumulated translation adjustments (68) (68)
-----------
Total comprehensive income (1,233,485)
Repurchase of common stock (577,759)
Common stock issued under stock plans,
net of cancellations 139 (244,222) 247,153
Amortization of restricted stock grants 23,583 23,583
Put option settlements (140,700)
Effect of distribution of Palm, Inc. shares 141,478
Issuance of warrant for note receivable --
Stock and stock options assumed in
connection with acquisitions (27,092) (842) 2,087
----------- ----------- ----------- -----------
Balances, June 1, 2001 $ (9,820) $ 771,639 $ 10,512 $ 2,505,421
=========== =========== =========== ===========
See notes to consolidated financial statements.
51
Consolidated Statements of Cash Flows
Years ended
-----------------------------------------
(In thousands) June 1, June 2, May 28,
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Income (loss) from continuing operations $ (969,913) $ 615,563 $ 364,945
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 277,415 304,415 271,076
Loss (gain) on disposal of property and equipment (121,159) 37,149 27,091
Write-down of intangibles 59,738 -- 13,748
(Gains) losses on investments, net 18,614 (838,795) 2,643
Deferred income taxes (284,585) 202,319 113,927
Purchased in-process technology 60,221 13,456 10,590
Merger-related credits, net (728) (2,297) (17,551)
Other interests in loss of consolidated joint venture -- (1,028) (1,101)
Equity interest in loss of unconsolidated investee 1,352 5,647 --
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable 82,425 469,426 (50,500)
Inventories 38,431 43,389 263,179
Other assets (79,503) (43,187) 39,091
Accounts payable (42,497) 51,860 (34,777)
Accrued liabilities and other (75,563) (14,738) 14,961
Income taxes payable 42,657 (16,472) (33,023)
----------- ----------- -----------
Net cash provided by (used in) operating activities (993,095) 826,707 984,299
----------- ----------- -----------
Cash flows from investing activities:
Purchase of investments (743,655) (1,201,169) (512,275)
Proceeds from maturities and sales of investments 1,527,249 1,247,537 303,582
Purchase of property and equipment (191,101) (274,568) (249,383)
Proceeds from sale of property and equipment 258,930 93,169 29,347
Businesses acquired in purchase transactions, net of cash acquired (197,712) (92,432) (97,764)
Other, net 4,304 (300) (19,156)
----------- ----------- -----------
Net cash provided by (used in) investing activities 658,015 (227,763) (545,649)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock 247,153 464,345 308,489
Repurchase of common stock (577,759) (540,780) (378,565)
Repayments of short-term debt, notes payable,
and capital lease obligations (2,109) (2,357) (2,561)
Repayments of long-term borrowings (24,349) (12,000) (12,216)
Net proceeds from issuance of debt -- 2,499 9,521
Net cash settlement of put options (140,700) -- --
Other, net (70) (3,508) (635)
----------- ----------- -----------
Net cash used in financing activities (497,834) (91,801) (75,967)
----------- ----------- -----------
Net cash provided by discontinued operations 30,291 241,506 70,759
Increase (decrease) in cash and equivalents (802,623) 748,649 433,442
Cash and equivalents, beginning of period 1,700,420 951,771 518,329
----------- ----------- -----------
Cash and equivalents, end of period $ 897,797 $ 1,700,420 $ 951,771
=========== =========== ===========
Other cash flow information:
Interest paid $ 1,094 $ 2,256 $ 4,132
Income taxes paid (refunds received), net (20,151) 111,899 16,884
Non-cash investing and financing activities:
Unrealized gain (loss) on investments, net (268,041) 239,053 43,538
Fair value of stock issued and options assumed in business combinations 29,179 8,650 13,366
Issuance of warrants for note receivable 21,052 -- --
See notes to consolidated financial statements.
52
Notes to Consolidated Financial Statements
Note 1: Description of Business
Description of business. 3Com Corporation (3Com) was founded on June 4, 1979. A
pioneer in the computer networking industry, 3Com evolved from a supplier of
discrete products to a leading provider of networking products and solutions.
Its network offerings focus on targeted sectors of the commercial enterprise and
service provider markets. 3Com specializes in products and services that provide
straightforward solutions to complex networking challenges, particularly in the
areas of wireless network access and IP telephony. Headquartered in Santa Clara,
California, 3Com has worldwide research and development, manufacturing,
marketing, sales, and support capabilities.
Note 2: Significant Accounting Policies
Fiscal year. Effective June 1, 1998, 3Com adopted a 52-53 week fiscal year
ending on the Friday nearest to May 31. This change did not have a significant
effect on 3Com's consolidated financial statements. Fiscal year 2000 contained
53 weeks, whereas fiscal years 2001 and 1999 contained 52 weeks. For fiscal year
2000, the first three quarters contained 13 weeks, whereas the fourth quarter
contained 14 weeks.
Use of estimates in the preparation of consolidated financial statements. The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires 3Com to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
sales and expenses during the reporting periods. Actual results could differ
from those estimates.
Basis of presentation. The consolidated financial statements include the
accounts of 3Com and its wholly-owned subsidiaries. All significant intercompany
balances and transactions are eliminated in consolidation.
Certain prior year amounts in the consolidated financial statements and the
notes thereto have been reclassified to conform to the 2001 presentation.
Discontinued operations. The financial data related to Palm, Inc. (Palm) is
accounted for as a discontinued operation for all periods presented. See Note 3.
Cash equivalents. Cash equivalents consist of highly liquid debt investments
acquired with a remaining maturity of three months or less.
Short-term investments. Short-term investments consist of investments acquired
with maturities exceeding three months but less than three years. While 3Com's
intent is to hold debt securities to maturity, consistent with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," 3Com has classified all debt
securities and all investments in equity securities that have readily
determinable fair values as available-for-sale, as the sale of such securities
may be required prior to maturity to implement management strategies. Such
securities are reported at fair value, with unrealized gains or losses excluded
from earnings and included in other comprehensive income, net of applicable
taxes. The cost of securities sold is based on the specific identification
method.
53
Concentration of credit risk. Financial instruments which potentially subject
3Com to concentrations of credit risk consist principally of cash and
equivalents, short-term investments and accounts receivable. 3Com maintains a
minimum average short-term investment portfolio credit quality of AA and invests
in instruments with an investment credit rating of A and better. 3Com places its
investments for safekeeping with high-credit-quality financial institutions, and
by policy, limits the amount of credit exposure from any one institution or
issuer.
For the year ended and as of June 1, 2001, 3Com had one customer that accounted
for 15 percent of total sales, and two customers that accounted for 15 percent
and 11 percent of total accounts receivable. For the year ended and as of June
2, 2000, these same customers accounted for 15 percent and 13 percent of total
sales, respectively, and 12 percent and 12 percent of total accounts receivable,
respectively. For the year ended and as of May 28, 1999, these same customers
accounted for 16 percent and 12 percent of total sales, respectively.
Inventories. Inventories are stated at the lower of standard cost (which
approximates first-in, first-out cost) or market.
Property and equipment. Property and equipment is stated at cost. Equipment
under capital leases is stated at the lower of fair market value or the present
value of the minimum lease payments at the inception of the lease.
Long-lived assets. The carrying value of long-lived assets, including goodwill,
is evaluated whenever events or changes in circumstances indicate that the
carrying value of the asset may be impaired. An impairment loss is recognized
when estimated undiscounted future cash flows expected to result from the use of
the asset including disposition are less than the carrying value of the asset.
An impairment is measured as the amount by which the carrying amount exceeds the
fair value. Impairments of long-lived assets are discussed in the related notes
included herein.
Depreciation and amortization. Depreciation and amortization are computed over
the shorter of the estimated useful lives, lease, or license terms on a
straight-line basis--generally 2-15 years, except for buildings which are
depreciated over 25 years. Purchased technology, other intangibles, and goodwill
are included in other assets and are amortized over their estimated useful
lives, generally two to seven years.
Revenue recognition. 3Com generally recognizes a sale when the product has been
delivered and risk of loss has passed to the customer, collection of the
resulting receivable is probable, persuasive evidence of an arrangement exists,
and the fee is fixed or determinable. 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.
Advertising. Cooperative advertising obligations are expensed at the time the
related sales are recognized. All other advertising costs are expensed as
incurred.
Foreign currency translation. The majority of 3Com's sales are denominated in
U.S. Dollars. For foreign operations with the local currency as the functional
currency, assets and liabilities are translated at year-end exchange rates, and
statements of operations are translated at the average exchange rates during the
year. Gains or losses resulting from foreign currency translation are included
as a component of other comprehensive income.
54
For 3Com entities with the U.S. Dollar as the functional currency, foreign
currency denominated assets and liabilities are translated at the year-end
exchange rates except for inventories, prepaid expenses, and property and
equipment, which are translated at historical exchange rates. Statements of
income are translated at the average exchange rates during the year except for
those expenses related to balance sheet amounts that are translated using
historical exchange rates. Gains or losses resulting from foreign currency
translation are included in interest and other income, net, in the consolidated
statements of operations. Foreign currency losses were $0.8 million for the year
ended June 1, 2001, and foreign currency gains were $1.2 million and $2.0
million for the years ended June 2, 2000 and May 28, 1999, respectively.
Where available, 3Com enters into foreign exchange forward and option contracts
to hedge certain balance sheet exposures and intercompany balances against
future movements in foreign exchange rates. Option premiums, if any, are
expensed in the current period in interest and other income, net.
Stock-based compensation. Employee stock plans are accounted for using the
intrinsic value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees."
Net income per share. Basic earnings per share is computed using the weighted
average number of common shares outstanding. Diluted earnings per share is
computed using the weighted average number of common shares and potentially
dilutive common shares outstanding during the period. Potentially dilutive
common shares consist of employee stock options, warrants and restricted stock,
and are excluded from the diluted earnings per share computation in loss
periods.
Effects of recent accounting pronouncements. In June 1998 and June 1999, the
Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS 133, certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. 3Com will adopt SFAS 133 effective
June 2, 2001. 3Com does not expect the adoption of SFAS 133 to have a
significant impact on the financial position, results of operations, or cash
flows of the Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." 3Com
adopted the guidance in SAB 101 during its fourth quarter of fiscal year 2001.
The adoption of SAB 101 did not have a material effect on 3Com's results of
operations or financial position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" which
addresses the financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, "Business Combinations," and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No.
141 requires that all business combinations be accounted for by a single method,
the purchase method, modifies the criteria for recognizing intangible assets,
and expands disclosure requirements. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001. 3Com does not expect the
adoption of SFAS No. 141 to have a material effect on the results of operations
or statements of financial position of the Company.
55
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition and after they have been initially
recognized in the financial statements. SFAS No. 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but rather
tested at least annually for impairment, and intangible assets that have finite
useful lives be amortized over their useful lives. SFAS No. 142 provides
specific guidance for testing goodwill and intangible assets that will not be
amortized for impairment. In addition, SFAS No. 142 expands the disclosure
requirements about goodwill and other intangible assets in the years subsequent
to their acquisition. SFAS No. 142 is effective for our fiscal year 2003, with
early adoption permitted at the beginning of our fiscal year 2002. Impairment
losses for goodwill and indefinite-life intangible assets that arise due to the
initial application of SFAS No. 142 are to be reported as resulting from a
change in accounting principle. However, goodwill and intangible assets acquired
after June 30, 2001 will be subject immediately to provisions of SFAS 142. 3Com
is in the process of determining the impact that adoption will have on the
consolidated financial statements.
Note 3: Discontinued Operations
On September 13, 1999, 3Com announced a plan to conduct an initial public
offering (IPO) of its 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. On
July 27, 2000, 3Com distributed its remaining 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 stock options outstanding. As a result of the Palm
distribution, these converted to approximately 169 million employee stock
options outstanding as of July 27, 2000.
The historical consolidated financial statements of 3Com present 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 have
occurred in the operations and funding of Palm as a result of the separation
from 3Com and the IPO. The Palm financial data presented 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. Under the transitional services agreement, 3Com continues to provide
corporate and other infrastructure services to Palm, with specific service
functions ending at various dates during fiscal 2001 and fiscal 2002. From the
date of the distribution, the amounts charged to Palm for such services were not
material to 3Com's statement of operations.
Discontinued operations include Palm net sales, which totaled $188.9 million,
$1,057.6 million, and $569.9 million for fiscal years 2001, 2000, and 1999,
respectively. Income from Palm discontinued operations was reported net of
income tax expense of $2.7 million, $44.8 million, and $24.9 million for the
fiscal years 2001, 2000, and 1999, respectively. Allocated corporate expenses
that ceased after the Palm spin-off are included in income from discontinued
operations.
56
The net assets of Palm included within net assets of discontinued operations as
of June 2, 2000 were as follows (in millions):
Current assets $ 1,259
Property and equipment, net 13
Deferred income taxes and other assets 17
Current liabilities (230)
Other liabilities (1)
--------
Net assets of discontinued operations $ 1,058
=======
Note 4: Restructuring Charges
During fiscal 2001 and fiscal 2000, 3Com undertook several initiatives aimed at
both changing business strategy as well as improving operational efficiencies.
3Com recorded restructuring charges of $163.7 million and $68.9 million in the
fiscal years ended June 1, 2001 and June 2, 2000, respectively.
Exit of Analog-Only Modem and High-End LAN/WAN Chassis Product Lines and
Separation of Palm
3Com realigned its strategy in the fourth quarter of fiscal 2000 to focus on
high-growth markets, technologies, and products. Operations were restructured
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. For the fiscal
year ended June 1, 2001, 3Com recorded restructuring charges of $13.2 million
relating to these activities. For the fiscal year ended June 2, 2000, 3Com
recorded net restructuring charges of $59.0 million, consisting of restructuring
charges of approximately $125.4 million, partially offset by a gain recognized
upon receipt of a warrant to purchase common stock in Extreme Networks, Inc.,
valued at $66.4 million. 3Com also recorded a credit of $0.2 million and charges
of $9.9 million for the fiscal years ended June 1, 2001 and June 2, 2000,
respectively, related to the separation of Palm. 3Com completed its
restructuring activities associated with the exit of the analog-only modem and
high-end LAN and WAN chassis product lines during fiscal 2001. The net
restructuring benefits relate to revisions of previous estimates of
restructuring costs. Components of accrued restructuring charges and changes in
accrued amounts related to this restructuring program as of June 1, 2001 and
June 2, 2000 were as follows (in thousands):
Severance Long-term Facilities Other
and Asset Lease Restructuring
Outplacement Write-downs Terminations Costs Total
--------- --------- --------- --------- ---------
Balance at May 28, 1999 $ -- $ -- $ -- $ -- $ --
Charges (benefits) 59,890 20,187 8,932 36,404 125,413
Deductions (25,678) (20,187) (632) (30,731) (77,228)
--------- --------- --------- --------- ---------
Balance at June 2, 2000 34,212 -- 8,300 5,673 48,185
Charges (benefits) (4,637) 9,761 (6,149) 14,270 13,245
Deductions (29,214) (9,761) (2,151) (19,943) (61,069)
--------- --------- --------- --------- ---------
Balance at June 1, 2001 $ 361 $ -- $ -- $ -- $ 361
========= ========= ========= ========= =========
57
Severance and outplacement costs related to the termination of approximately
2,700 employees. Employee separation costs included severance, medical, and
other benefits. Employee groups impacted by the restructuring include personnel
involved in corporate services, manufacturing and logistics, product
organizations, sales, and customer support. As of June 2, 2000, approximately
900 employees had begun the separation process, resulting in payments of $25.7
million. The $4.6 million benefit during fiscal 2001 relates primarily to
approximately 200 employees who were originally forecasted to be terminated but
were subsequently retained by 3Com. As of June 1, 2001, all affected employees
were notified of termination and employee separations associated with
announcements made in the fourth quarter of fiscal 2000 have been substantially
completed, resulting in separation payments of $29.2 million for the fiscal year
2001, and $54.9 million since the inception of the restructuring. Remaining cash
expenditures associated with employee separations are estimated to be
approximately $0.4 million.
In fiscal 2000, 3Com wrote off $20.2 million for sales-related hardware and
software applications that were no longer needed. During fiscal year 2001, $9.8
million of capital assets were written off, for a total of $29.9 million in
capital asset write-offs since the inception of the restructuring. All
restructuring activities related to the disposal of long-term assets have been
completed as of June 1, 2001.
In fiscal 2000, $8.9 million was accrued for costs associated with the closure
of approximately 300,000 square feet of office space through lease terminations.
Space reductions included approximately 120,000 square feet in the Americas,
170,000 square feet in Europe, and 10,000 square feet in Asia Pacific. As of
June 2, 2000, $0.6 million of expenses had been paid related to lease
terminations. During fiscal year 2001, a benefit of $6.1 million was recorded
representing a revision in the estimate of costs associated with facilities
lease terminations due to subsequent decisions not to dispose of space in the
U.S., Europe and Latin America, as well as a thriving global real estate market,
which resulted in lower actual disposal costs as landlords could easily replace
tenants at a higher rent level, and $2.2 million of expenses had been paid
related to facilities closures as of June 1, 2001, for a total of $2.8 million
in facilities lease termination costs since the inception of the restructuring.
All restructuring activities associated with the closure of facilities through
lease terminations have been completed as of June 1, 2001.
In fiscal 2000, $36.4 million was accrued for other restructuring costs,
consisting of approximately $27.2 million related to payments to suppliers and
vendors to terminate agreements and $9.2 million for professional fees and other
direct costs. As of June 2, 2000, $25.0 million of this expense had been paid
for contract breakage costs and $5.7 million had been paid for professional fees
and other direct costs. During fiscal year 2001, $14.3 million was accrued to
cover remaining restructuring costs and included the $11.7 million loss on the
sale of 3Com's manufacturing and distribution operations during the second
quarter of fiscal 2001. As of June 1, 2001, $19.9 million had been paid related
to contract breakage costs, professional fees, costs associated with the sale of
3Com's manufacturing and distribution operations and other direct costs, for a
total of $50.6 million since the inception of the restructuring. All other
restructuring activities have been completed as of June 1, 2001.
During fiscal 2000, as part of the restructuring strategy, 3Com formed a
strategic alliance with Extreme Networks, Inc. to provide a migration path for
customers of 3Com's high-end LAN products. As part of the agreement, 3Com
received a vested warrant to purchase 1.5 million shares of Extreme Networks,
Inc. common stock at an exercise price of $79 per share. The term of the warrant
was two years, expiring on April 3, 2002. This warrant had a fair value of $66.4
million at the time of receipt. The gain recognized on receipt of this warrant
partially offset the business realignment charges for the year ended June 2,
2000. During fiscal 2001, we entered into a collar against the warrant to hedge
changes in the fair value of the warrant. This collar was settled during fiscal
2001 for a gain of approximately $56.6 million. This gain was recorded as an
adjustment of the cost basis in the warrant. The warrant was sold during fiscal
2001 for proceeds of $20.1 million, resulting in a gain of $8.7 million.
58
3Com has substantially completed its restructuring activities associated with
the exit of the analog-only modem and high-end LAN and WAN chassis product lines
and the separation of Palm. Remaining cash expenditures relating to the
restructuring activities are estimated to be $0.4 million, relating to employee
severance. These expenditures are expected to be paid by August 2001.
Global Cost Reduction to Improve Operational Efficiencies
In fiscal 2001, 3Com announced the restructuring of its Commercial and Consumer
Networks Business and CommWorks Corporation to enhance the focus and cost
effectiveness of these businesses in serving their respective markets. Three
independent businesses -- Business Connectivity Company (BCC), Business Networks
Company (BNC), and CommWorks Corporation (CommWorks) -- were formed through this
restructuring effort, with each business utilizing central shared corporate
services. 3Com implemented a reduction in force and cost containment actions
aimed at expense and asset reduction, and exited its consumer Internet Appliance
product line as part of this restructuring effort. For the fiscal year ended
June 1, 2001, 3Com recorded charges of approximately $150.7 million related to
these restructuring activities.
Subsequent to June 1, 2001, 3Com announced it will exit its consumer cable and
digital subscriber line (DSL) modem businesses, as well as its intent to
outsource the manufacturing of high volume server, desktop and mobile
connectivity products in a contract manufacturing arrangement. Concurrent with
such outsourcing, 3Com will consolidate its real estate portfolio and certain
facilities will be sold. As these announcements were made during fiscal 2002, no
charges are reflected in the table below for the exit of the consumer cable and
DSL modem businesses, the consolidation of 3Com's real estate portfolio and the
sale of certain facilities. Components of accrued restructuring charges and
changes in accrued amounts related to this restructuring program as of June 1,
2001 were as follows (in thousands):
Severance Long-term Facilities Other
and Asset Lease Restructuring
Outplacement Write-downs Terminations Costs Total
--------- --------- --------- --------- ---------
Charges $ 86,439 $ 59,601 $ 944 $ 3,761 $ 150,745
Deductions (46,537) (59,601) (944) (1,979) (109,061)
--------- --------- --------- --------- ---------
Balance at June 1, 2001 $ 39,902 $ -- $ -- $ 1,782 $ 41,684
========= ========= ========= ========= =========
59
Severance and outplacement costs relate to the termination of approximately
4,370 positions including full time regular employees and alternative workforce.
Employee separation expenses are comprised of severance pay, outplacement
services, medical and other related benefits. Employee groups impacted by the
restructuring include those in corporate services, manufacturing and logistics,
product organizations, sales, customer support and administrative positions. As
of June 1, 2001, 3Com communicated to all impacted employees regarding employee
separation benefits and the timing of separation. As of June 1, 2001
approximately 2,600 regular full time and alternative workforce positions have
been separated or were currently in the separation process, resulting in $46.5
million of employee separation payments. Remaining cash expenditures associated
with employee separation are estimated to be approximately $39.9 million.
Included in severance and outplacement costs above is approximately $15.5
million of accelerated amortization of deferred stock compensation for qualified
employees of Kerbango, Inc. (Kerbango) during the fourth fiscal quarter of 2001.
Employee separations are expected to be substantially complete by May 2002.
Long term asset write-downs include those assets identified that will not
support continuing operations for 3Com. For the fiscal year ended June 1, 2001,
3Com recorded a provision of $59.6 million for the write-down of long term
assets. This provision included discontinued software applications totaling
$30.1 million, as well as the write-off of net goodwill and intangibles
associated with certain acquisitions relating to product lines 3Com is exiting
totaling $24.3 million. Other asset write-downs amounted to $5.2 million for
assets related to exited product lines or separated employees.
3Com incurred and paid approximately $0.9 million for the period ended June 1,
2001 for facilities lease terminations. As the current restructuring activities
continue to develop and definitive plans are established, 3Com expects to incur
substantial further expenses during fiscal year 2002 related to facilities lease
terminations and the consolidation of 3Com's real estate portfolio.
Other restructuring costs include payments for professional services and to
suppliers. As of June 1, 2001, 3Com recorded a provision of approximately $3.8
million related to other restructuring costs. As of June 1, 2001, $2.0 million
was charged against this provision, related primarily to royalty payments for
discontinued products and professional fees. Remaining cash expenditures for
other restructuring costs are estimated to be approximately $1.8 million. As the
current restructuring activities continue to develop and definitive plans are
established, 3Com expects to incur further expenses during fiscal year 2002.
3Com expects to substantially complete its restructuring activities related to
the reduction in force and cost containment measures described above during
calendar year 2002. Remaining cash expenditures related to the restructuring are
estimated to be $41.7 million, related primarily to employee separation and
payments to suppliers.
Note 5: Business Combinations and Joint Ventures
For acquisitions accounted for as purchases, 3Com's consolidated statements of
operations include the operating results of the acquired companies from their
acquisition dates. Acquired assets and liabilities were recorded at their
estimated fair values at the dates of acquisition, and the aggregate purchase
price plus costs directly attributable to the completion of the acquisitions
have been allocated to the assets and liabilities acquired. No significant
adjustments were required to conform the accounting policies of the acquired
companies. Proforma results of operations have not been presented for any of
these acquisitions as the effects of these acquisitions were not material to the
company either individually or on an aggregate basis.
60
3Com completed the following transactions during the fiscal year ended June 1,
2001:
o During the third quarter of fiscal 2001, 3Com acquired the Gigabit Ethernet
network interface card (NIC) business of Alteon WebSystems (Alteon), a
wholly-owned subsidiary of Nortel Networks Corporation (Nortel) for an
aggregate purchase price of $123.0 million, consisting of cash paid to
Nortel of $122.0 million, and $1.0 million of costs directly attributable
to the completion of the acquisition. 3Com purchased the Alteon NIC
business and is licensing certain Gigabit Ethernet-related technology and
intellectual property from Alteon.
Approximately $22.5 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 third quarter of fiscal 2001. This purchase resulted
in $86.0 million of goodwill and other intangible assets that are being
amortized over an estimated useful life of four years.
o 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 small business and
enterprise customers for an aggregate purchase price of $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, stock options assumed with a fair
value of $4.3 million, and $0.2 million of costs directly attributable to
the completion of the acquisition.
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. 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.
o 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, for an aggregate purchase price of $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, stock options assumed
with a fair value of $3.8 million, and $0.3 million of costs directly
attributable to the completion of the acquisition. In addition, deferred
cash payments to founders and certain former employees totaling $7.7
million are contingent upon certain events through July 2002.
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 was 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. This purchase resulted in $33.7 million of goodwill and other
intangible assets that were being amortized over estimated useful lives of
three to five years.
61
As part of 3Com's efforts to improve profitability, the company announced
that it would exit the Internet Appliance product line during fiscal year
2001. As a result, 3Com determined that the net unamortized assets had no
remaining future value and consequently wrote off the net remaining amounts
of deferred stock-based compensation, goodwill, and intangible assets. This
included $15.5 million of accelerated amortization of deferred stock-based
compensation for qualified Kerbango employees and $21.1 million of net
goodwill and intangible assets related to the Kerbango acquisition. These
charges were included as part of restructuring charges in fiscal 2001.
o During the first quarter of fiscal 2001, 3Com completed the transfer of its
analog-only modem product lines to U.S. Robotics Corporation (New USR), the
new joint venture formed with Accton Technology and NatSteel Electronics.
3Com contributed $3.1 million of assets to New USR, for an 18.7 percent
investment in the joint venture. U.S. Robotics Corporation has assumed the
analog-only modem product line, including U.S. Robotics and U.S. Robotics
Courier branded modems.
During fiscal 2001, 3Com wrote off its $3.1 million investment in New USR
as the value of this investment was determined to be other-than-temporarily
impaired. The amount was charged to gains (losses) on investments, net.
3Com completed the following transactions during the fiscal year ended June 2,
2000:
o On April 3, 2000, 3Com acquired Call Technologies, Inc. (Call
Technologies), a leading developer of Unified Messaging (UM) and
carrier-class Operational Systems and Support (OSS) software solutions for
telecommunications service providers, for an aggregate purchase price of
$86.0 million, consisting of cash of approximately $73.4 million,
assumption of stock options with a fair value of approximately $8.6
million, the assumption of $1.4 million in debt and $2.6 million of costs
directly attributable to the completion of the acquisition. Approximately
$10.6 million of the total purchase price represented purchased in-process
technology that had not yet reached technological feasibility, had no
alternative future use, and was charged to operations in the fourth quarter
of fiscal 2000. This purchase resulted in approximately $86.7 million of
goodwill and other intangible assets that are being amortized over
estimated useful lives of three to seven years.
During fiscal year 2001, 3Com determined that the downturn in the
telecommunications industry resulted in an impairment of developed OSS
technology and related goodwill that arose from the Call Technologies
acquisition. These assets were written down $18.2 million to fair value,
which was estimated using discounted future cash flows. The impairment
charge was included in amortization and write down of intangibles, and is a
component of contribution margin for CommWorks as reported in Note 19.
Remaining net goodwill and intangible assets continue to be amortized over
their original useful lives.
o On December 22, 1999, 3Com acquired LANSource Technologies, Inc.
(LANSource), a leading developer of Internet and LAN fax software and modem
sharing software, for an aggregate purchase price of $15.8 million in cash
including $0.2 million of costs directly attributable to the completion of
the acquisition. Approximately $2.9 million of the total purchase price
represented purchased in-process technology that had not yet reached
technological feasibility, had no alternative future use, and was charged
to operations in the third quarter of fiscal 2000. This purchase resulted
in approximately $13.3 million of goodwill and other intangible assets that
are being amortized over estimated useful lives of two to five years.
62
As part of 3Com's efforts to improve profitability, the company decided
that it would exit certain LANSource product lines and license the
technology to a former competitor in that market. As a result of this
decision, 3Com determined that an impairment of developed technology and
related goodwill that arose from the LANSource acquisition had occurred.
These assets were written down $1.1 million to estimated realizable fair
value. This amount was included in restructuring charges in fiscal 2001. In
addition, 3Com determined that a customer's product line discontinuation
resulted in an impairment of a license agreement and related goodwill that
arose from the LANSource acquisition. Those assets were determined to have
no future value, and accordingly $1.0 million was written off. The
impairment charge was recorded in amortization and write down of
intangibles, and is a component of contribution margin for CommWorks as
reported in Note 19. Remaining net intangible assets continue to be
amortized over their original useful lives.
o On December 2, 1999, 3Com acquired Interactive Web Concepts, Inc. (IWC), an
Internet business consulting, creative design, and software engineering
firm, for an aggregate purchase price of $3.5 million in cash including
$0.1 million of costs directly attributable to the completion of the
acquisition. This purchase resulted in approximately $4.1 million of
goodwill and other intangible assets that were being amortized over an
estimated useful life of three years.
As part of 3Com's efforts to improve profitability, the company decided
that it would discontinue providing IWC services during fiscal year 2001.
As a result, 3Com determined that the net unamortized assets had no
remaining future value and consequently wrote off $2.1 million, which was
the net remaining amount of goodwill and intangible assets. This amount was
included in restructuring charges in fiscal 2001.
3Com completed the following transactions during the fiscal year ended May 28,
1999:
o On March 5, 1999, 3Com acquired NBX Corporation (NBX), a developer of
Internet Protocol (IP)-based telephony systems that integrate voice and
data communications over small business LANs and WANs. The aggregate
purchase price of $87.8 million consisted of cash of approximately $75.4
million, assumption of stock options with a fair value of approximately
$11.9 million, and $0.5 million of costs directly attributable to the
completion of the acquisition. Approximately $5.6 million of the total
purchase price represented purchased in-process technology that had not yet
reached technological feasibility, had no alternative future use, and was
charged to operations in the fourth quarter of fiscal 1999. This purchase
resulted in approximately $94.4 million of goodwill and other intangible
assets that are being amortized over estimated useful lives of two to seven
years.
o On February 18, 1999, 3Com acquired certain assets of ICS Networking, Inc.
(ICS), a wholly-owned subsidiary of Integrated Circuit Systems, Inc. and
manufacturer of integrated circuit products focused on the design and
marketing of mixed signal integrated circuits for frequency timing,
multimedia, and data communications applications, for an aggregate purchase
price of $16.1 million in cash including $0.1 million of costs directly
attributable to the completion of the acquisition. Approximately $5.0
million of the total purchase price represented purchased in-process
technology that had not yet reached technological feasibility, had no
alternative future use, and was charged to operations in the third quarter
of fiscal 1999. This purchase resulted in approximately $6.9 million of
goodwill and other intangible assets that are being amortized over
estimated useful lives of three to seven years.
63
o On January 25, 1999, 3Com entered into a joint venture named ADMTek, Inc.
(ADMtek). 3Com contributed approximately $5.3 million in cash for a 44
percent interest in the joint venture and began consolidating the joint
venture with its results due to its ability to exercise control over the
operating and financial policies of the joint venture. In September 1999,
3Com sold a portion of its existing interest in ADMTek to its joint venture
partner. As a result of this sale, 3Com's ownership interest was reduced
and it no longer exercised control over the joint venture. Therefore,
during the second fiscal quarter of fiscal 2000, 3Com began accounting for
this investment using the cost method.
o On November 6, 1998, 3Com acquired EuPhonics, Inc. (EuPhonics), a developer
of digital signal processor (DSP)-based audio software that drives
integrated circuits, sound cards, consumer electronics, and other hardware.
The aggregate purchase price of $8.3 million consisted of cash of
approximately $6.6 million, assumption of stock options with a fair value
of approximately $1.5 million, and $0.2 million of costs directly
attributable to the completion of the acquisition. The charge for purchased
in-process technology associated with the acquisition was not material, and
was included in research and development expenses in the second quarter of
fiscal 1999. This purchase resulted in approximately $10.8 million of
goodwill and other intangible assets that were being amortized over
estimated useful lives of four years.
As part of 3Com's efforts to change strategic focus in fiscal 2001, the
Company decided that it would exit the products and technology that arose
from the EuPhonics acquisition. As a result, 3Com determined that the net
unamortized assets had no remaining future value and consequently wrote off
$5.8 million, which was the net remaining amount of goodwill and intangible
assets. This amount was included in restructuring charges in fiscal 2001.
64
Note 6: Investments
Available-for-sale securities consist of:
June 1, 2001
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
-----------------------------------------------------------------
State and municipal securities $ 125,854 $ 1,133 $ -- $ 126,987
U.S. Government and agency securities 209,522 5,820 -- 215,342
Corporate debt securities 394,247 5,998 (160) 400,085
---------- ---------- ---------- ----------
Short-term investments 729,623 12,951 (160) 742,414
Publicly traded corporate equity securities 20,025 4,570 (220) 24,375
---------- ---------- ---------- ----------
Total $ 749,648 $ 17,521 $ (380) $ 766,789
========== ========== ========== ==========
June 2, 2000
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
-----------------------------------------------------------------
State and municipal securities $ 815,020 $ 1,709 $ (1,763) $ 814,966
Corporate debt securities 558,467 119 (4,032) 554,554
---------- ---------- ---------- ----------
Short-term investments 1,373,487 1,828 (5,795) 1,369,520
Publicly traded corporate equity securities 103,420 496,585 (30,014) 569,991
---------- ---------- ---------- ----------
Total $1,476,907 $ 498,413 $ (35,809) $1,939,511
========== ========== ========== ==========
Publicly traded corporate equity securities are included in other current
assets.
65
During the fiscal year ended June 1, 2001, publicly traded corporate equity
securities were sold for proceeds of $224.0 million. Net realized losses on
investments of $18.6 million were recorded during fiscal 2001, comprised of
$135.7 million of net losses recognized due to fair value adjustments of
investments in limited partnership venture capital funds and impairments of
investments in private companies and publicly traded securities whose declines
in value have been determined to be other than temporary. The losses were
partially offset by $117.1 million of net gains realized on sales of publicly
traded equity securities. During the fiscal year ended June 2, 2000, publicly
traded corporate equity securities were sold for proceeds of $818.0 million. Net
realized gains on investments of $838.8 million were recorded during fiscal
2000, comprised of $792.7 million of net gains realized on sales of publicly
traded equity securities and $46.1 million of net gains recognized due to fair
value adjustments of investments in limited partnership venture capital funds
and in private companies acquired by public companies. During the fiscal year
ended May 28, 1999, publicly traded corporate equity securities were sold for
proceeds of $0.4 million, resulting in realized losses of $2.6 million.
The contractual maturities of available-for-sale debt securities at June 1, 2001
are as follows:
Amortized Estimated
(In thousands) Cost Fair Value
-----------------------------
Within one year $ 555,816 $ 562,566
Between one year and two years 168,987 174,788
Between two years and three years 4,820 5,060
----------- -----------
Short-term investments $ 729,623 $ 742,414
=========== ===========
Note 7: Inventories, Net
Inventories, net, consist of:
June 1, June 2,
(In thousands) 2001 2000
----------- -----------
Finished goods $ 89,736 $ 123,290
Work-in-process 64,319 31,863
Raw materials 46,091 79,659
----------- -----------
Total $ 200,146 $ 234,812
=========== ===========
66
Note 8: Property and Equipment, Net
Property and equipment, net, consists of:
June 1, June 2,
(In thousands) 2001 2000
----------- -----------
Land $ 44,635 $ 46,412
Land, property, and equipment
held for sale, net 11,681 45,452
Buildings and improvements 297,335 284,620
Machinery and equipment 754,073 867,941
Software 163,592 134,148
Furniture and fixtures 96,988 107,300
Leasehold improvements 70,175 70,631
Construction in progress 42,637 66,614
----------- -----------
Total 1,481,116 1,623,118
Accumulated depreciation and
amortization (871,437) (866,164)
----------- -----------
Property and equipment, net $ 609,679 $ 756,954
=========== ===========
For the Year Ended June 1, 2001. In September 2000, 3Com sold a 39-acre parcel
of undeveloped land in San Jose, California to a financial institution, as
directed by Palm, for total net proceeds of approximately $215.6 million. 3Com
recorded a net gain of $174.4 related to this sale. In February 2001, 3Com sold
a vacated office and manufacturing building in Morton Grove, Illinois for total
net sales proceeds of $12.4 million, resulting in a gain of approximately $4.4
million.
For the Year Ended June 2, 2000. 3Com sold two facilities in the Chicago and
Salt Lake City areas and equipment in the Chicago area for total net proceeds of
$93.2 million. In addition, an impairment charge of approximately $4.0 million
was recognized related to the write down to fair value of the remaining facility
held for sale in Salt Lake City. A combined net gain of $25.5 million was
recognized related to these transactions.
Note 9: Other Accrued Liabilities
Other accrued liabilities consist of:
June 1, June 2,
(In thousands) 2001 2000
----------- -----------
Accrued purchase commitments (see Note 10) $ 178,942 $ 33,222
Accrued payroll and related expenses 123,092 186,382
Deferred revenue 76,496 76,610
Accrued product warranty 53,571 86,437
Accrued distributor rebates 25,595 35,077
Accrued promotion rebates 13,481 33,605
Bank overdraft liability 9,175 43,758
Other 96,499 155,983
----------- -----------
Other accrued liabilities $ 576,851 $ 651,074
=========== ===========
67
Note 10: Borrowing Arrangements and Commitments
As of June 1, 2001, 3Com had borrowings of $2.7 million related to an equipment
financing transaction. Also, as of June 1, 2001, 3Com had approximately $2.8
million in unused bank-issued standby letters of credit and bank guarantees.
During July 1994, 3Com arranged a private placement of $60 million in 7.52%
Unsecured Senior Notes with three insurance companies. The notes were payable in
five equal installments beginning in June 1997. During the first quarter of
fiscal 2001, 3Com repaid the remaining debt balance of $24 million under this
agreement. As of June 2, 2000, borrowings under these notes totaled
approximately $24 million and $12 million of this debt was classified as current
portion of long-term debt.
As of June 1, 2001, the weighted average interest rate on outstanding debt was
approximately six percent.
3Com leases buildings comprising approximately 870,000 square feet for its Santa
Clara, California headquarters site. The lease expires in November 2001, with an
option to extend the lease term for two successive periods of five years each.
The lease contains an option to purchase the property for $148.9 million, or at
the end of the lease arrange for the sale of the property to a third party with
3Com retaining an obligation to the owner for the difference between the sale
price and $148.9 million, subject to certain provisions of the lease.
3Com also leases buildings comprising approximately 300,000 square feet at the
Santa Clara, California headquarters site. The lease expires in August 2002,
with an option to extend the lease term for two successive periods of five years
each. The lease contains an option to purchase the property for $82.6 million,
or at the end of the lease arrange for the sale of the property to a third party
with 3Com retaining an obligation to the owner for the difference between the
sale price and $82.6 million, subject to certain provisions of the lease.
Approximately 160,000 square feet of these buildings are subleased to Palm under
an agreement that expires in August 2002.
3Com leases a 540,000 square foot office complex in Marlborough, Massachusetts
for general administration, research and development, and manufacturing
operations. The site will support expansion of approximately 660,000 square
feet. The lease expires in August 2002, with an option to extend the lease term
for two successive periods of five years each. 3Com has an option to purchase
the property for $85.3 million, or at the end of the lease arrange for the sale
of the property to a third party with 3Com retaining an obligation to the owner
for the difference between the sale price and $85.3 million, subject to certain
provisions of the lease.
The three aforementioned leases require 3Com to maintain specified financial
covenants. While the Company believes that it is in compliance as of June 1,
2001, the Company has had discussions with the lessors regarding the
interpretation of certain covenants. If it were determined that the Company was
not in compliance, the leases could potentially be terminated, resulting in an
acceleration of the obligation to purchase or arrange for the sale of the
related properties. The Company has the right to prepay these leases without
penalty or adverse consideration. If required, the Company believes it has
sufficient financial resources to retire these leases. Future minimum lease
payments are included in the table below.
3Com leases certain of its facilities under operating leases. Leases expire at
various dates from 2001 to 2015, and certain facility leases have renewal
options with rentals based upon changes in the Consumer Price Index or the fair
market rental value of the property.
68
3Com subleases certain of its facilities to third party tenants. The subleases
expire at various dates from 2001 to 2007.
Future operating lease commitments and future sublease income are as follows:
Future Future
Lease Payments Sublease Income
Fiscal year (in thousands) (in thousands)
- ------------------------------------------------------------------------
2002 $ 34,607 $ 42,099
2003 19,359 30,877
2004 12,702 7,881
2005 10,953 5,353
2006 10,489 5,497
Thereafter 14,365 1,833
---------- ----------
Total $ 102,475 $ 93,540
========== ==========
Rent expense was $58.0 million, $51.5 million, and $53.7 million for the fiscal
years ended June 1, 2001, June 2, 2000 and May 28, 1999, respectively. Sublease
income was $32.6 million, $8.6 million, and $1.0 million for the fiscal years
ended June 1, 2001, June 2, 2000 and May 28, 1999, respectively. Included in
sublease income was sublease income from Palm of $16.7 million and $2.6 million
for the fiscal years ended June 1, 2001 and June 2, 2000, respectively.
As of June 1, 2001, 3Com had approximately $1.8 million in capital expenditure
commitments, primarily associated with facilities consolidation and information
system projects.
On September 30, 2000, 3Com entered into a supply agreement with a contract
manufacturer whereby 3Com has committed to a minimum dollar amount of
manufacturing value-added services, excluding the cost of materials, to be
performed by the contract manufacturer. These commitments are for $31 million
per quarter during the first year of the agreement, and $30 million per quarter
during the second year of the agreement. For any quarter in which there is a
deficit of more than ten percent, 3Com is obligated to pay the amount by which
the deficit exceeds ten percent, with the remaining deficit carried forward.
This contract allows termination subject to payment of certain exit costs. Due
to 3Com's announcement to exit its consumer product lines and the slowdown in
the telecommunications equipment market, 3Com does not expect to reach the
minimum purchase commitments in the future. 3Com has engaged in discussions
regarding termination of the supply agreement. Based on management's best
estimates, a charge was recorded to cost of goods sold in the fourth quarter of
fiscal 2001 for estimated future purchase commitment shortfalls and exit costs
related to such termination.
Note 11: Warrants to Purchase Broadcom Common Stock and Purchase Agreement
In fiscal 2001, 3Com entered into a Purchase and Warrant Agreement (purchase
agreement) with Altima Communications, Inc. (Altima) to purchase certain
components through December 2002. The purchase agreement provided for cash
penalties to Altima in the event that minimum purchases were not met on a
calendar quarter basis. The agreement included a performance warrant issued to
3Com to purchase common stock of Altima, which vested as product purchases were
made. Since Altima was subsequently acquired by Broadcom Corporation (Broadcom),
the warrant to purchase shares of common stock of Altima was replaced by a
warrant to purchase 992,000 shares of common stock of Broadcom (warrant shares).
The fair value of the warrant was fixed at approximately $244 million, since the
69
agreement contained significant disincentives for nonperformance. The effects of
warrant shares earned were recorded as a credit to cost of sales as purchases
were made, based on the fixed valuation of the warrant of $244 million. In
January 2001, 3Com exercised its vested portion of the warrant and received
126,940 shares of Broadcom common stock. The investment in Broadcom common stock
is accounted for in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Due to the significant decline in
the value of the Broadcom common stock, 3Com recorded an other-than-temporary
impairment charge of $25.3 million in fiscal 2001. As certain terms of the
purchase agreement were not met, 3Com terminated the purchase agreement in
February 2001 without penalty. 3Com continues to maintain an ongoing purchase
arrangement with Broadcom that does not include a performance warrant.
Note 12: Common Stock
Outstanding Options Adjustment for Palm Spin-Off. On July 27, 2000, 3Com
completed the distribution of Palm, Inc. common stock held by 3Com to 3Com
stockholders (the Palm distribution). As a result of the Palm distribution, to
preserve the intrinsic value of the stock options as discussed in Note 3, the
number of shares of 3Com common stock subject to an option grant were adjusted
by multiplying the pre-Palm distribution number by 4.827103 and the exercise
price per share was adjusted by dividing the pre-Palm distribution exercise
price by 4.827103 (the Palm distribution adjustment).
Common Stock and Stock Option Plan Reserve Adjustments for Palm Spin-Off. On
July 27, 2000, as a result of the Palm spin-off, an adjustment was made to the
reserves for the Company's 1983 stock option plan, 1994 stock option plan, 1984
employee stock purchase plan, restricted stock plan, director stock plan, and
all option plan reserves related to prior acquisitions. Such reserves were
multiplied by the Palm adjustment factor of 4.827103 pursuant to the terms of
such benefit plans.
Preferred Shares Rights Plan. In September 1989, the Board of Directors approved
a common stock purchase rights plan, which was amended and restated in December
1994 (the Prior Plan). In March 2001, the Board of Directors approved a Second
Amended and Restated Preferred Shares Rights Plan (the Preferred Shares Rights
Plan), which replaced the Prior Plan. The Preferred Shares Rights plan provides
that the preferred share rights become exercisable based on certain limited
conditions related to acquisitions of stock, tender offers, and certain business
combination transactions of 3Com. In the event one of the limited conditions is
triggered, each right entitles the registered holder of 3Com's common stock to
purchase for $55 one one-thousandth of a share of 3Com Series A Participating
Preferred Stock (or any acquiring company). The rights are redeemable at 3Com's
option for $.001 per right and expire on March 8, 2011.
Stock Option Plans. 3Com has stock option plans under which employees and
directors may be granted options to purchase common stock. Options are generally
granted at not less than the fair market value at grant date, vest immediately
or for periods ranging up to five years, and expire five to ten years after the
grant date.
70
A summary of option transactions under the plans follows:
(Shares in thousands) Number Weighted average
of shares exercise price
--------- --------------
Outstanding, May 31, 1998 47,621 $ 23.39
Granted and assumed 18,934 27.19
Exercised (11,820) 16.81
Canceled (5,489) 30.85
-------- --------
Outstanding, May 28, 1999 49,246 25.60
Granted and assumed 20,461 34.07
Exercised (14,726) 19.78
Canceled (12,146) 30.04
-------- --------
Outstanding, June 2, 2000 42,835 30.39
Granted and assumed 30,172 14.42
Additional options granted to
compensate for loss in intrinsic
value due to Palm spin-off 134,045 -
Exercised (23,674) 8.98
Canceled (35,237) 10.47
-------- --------
Outstanding, June 1, 2001 148,141 $ 7.80
======== ========
As of June 1, 2001, there were 84.0 million shares available for future grant.
Outstanding options as of June 1, 2001 Exercisable at June 1, 2001
---------------------------------------------------------------- ---------------------------------
Range of Number Weighted average Weighted average Number Weighted average
exercise prices of shares exercise price remaining contractual life of shares exercise price
- --------------- --------- -------------- -------------------------- --------- --------------
(in thousands) (in years) (in thousands)
$ 0.04 - $ 5.26 18,304 $ 3.52 5.5 14,375 $ 3.22
5.27 - 6.09 59,657 5.77 7.3 29,158 5.88
6.10 - 9.23 34,323 8.20 7.8 15,763 7.96
9.25 - 11.73 10,086 10.31 8.3 3,051 10.62
11.76 - 13.71 20,371 13.51 9.1 1,137 13.04
13.75 - 35.19 5,400 15.89 9.1 954 15.00
------- ------ ------- -------
Total 148,141 $ 7.80 7.6 64,438 $ 6.28
======= =======
There were 15.4 million and 23.6 million options exercisable as of June 2, 2000
and May 28, 1999 with weighted average exercise prices of $26.09 and $21.93 per
share, respectively.
71
Employee Stock Purchase Plan. 3Com has an employee stock purchase plan, under
which eligible employees may authorize payroll deductions of up to 10 percent of
their compensation, as defined, to purchase common stock at a price of 85
percent of the lower of the fair market value as of the beginning or the end of
the offering period. During September 1999, the Board of Directors approved a
revision to the terms of the employee stock purchase plan that extended the
offering period to 24 months, allowing for four six-month purchase periods.
Price declines, if any, will be reflected at the beginning of each six-month
purchase period and remain in effect for the next 24-month offering period.
Restricted Stock Plan. 3Com has a restricted stock plan, under which shares of
common stock are reserved for issuance at no cost to key employees. Compensation
expense, equal to the fair market value on the date of the grant, is recognized
as the granted shares vest over a one-to-four year period. Excluding accelerated
amortization for Kerbango employees as discussed in Note 4, compensation expense
recognized for the amortization of restricted stock was $8.1 million, $1.6
million, and $2.8 million for the years ended June 1, 2001, June 2, 2000, and
May 28, 1999, respectively. As of June 1, 2001, there were 2.0 million shares
available for future grant.
Director Stock Plan. 3Com has a director stock plan, under which shares of
common stock are issued to members of the Board of Directors at an exercise
price equal to the fair market value on the date of grant and vest immediately
or over 24 month increments. Following the vesting in full of an option
previously received, an additional option to purchase shares of 3Com common
stock is automatically granted to each eligible participant in accordance with
the option grant provisions.
Stock Reserved for Issuance. As of June 1, 2001, 3Com had common stock reserved
for issuance as follows:
(In thousands)
Stock Option Plans 232,091
Employee Stock Purchase Plan 15,806
Warrants 7,100
Restricted Stock Plan 1,975
--------
Total shares reserved for issuance 256,972
========
In addition, as of June 1, 2001, 3Com had 0.3 million shares of preferred stock
reserved for issuance under its Preferred Shares Rights plan.
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 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. During fiscal 2001, 39.5
million shares of common stock, including those purchased through the put option
program discussed below, were repurchased for a total purchase price of $577.8
million.
72
In fiscal 2001, 3Com initiated a program of selling put options and purchasing
call options on its common stock. These were "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. The option contracts gave 3Com the choice of net cash
settlement or physical settlement or net settlement in its own shares of common
stock. These options were accounted for as permanent equity instruments. During
fiscal 2001, 1.2 million shares of common stock were repurchased through
exercised puts for a cumulative purchase price of $19.9 million. The option
contracts contained per share price floors, whereby a drop in the price of 3Com
common stock below such price floor could require accelerated settlement of the
put options by 3Com. Due to a decline in the price of 3Com common stock,
accelerated settlement of the remaining put options was required. 3Com elected
net cash settlement of 15.3 million put options outstanding, and related call
options, which was recorded as a reduction of share capital in the amount of
$140.7 million. As of June 1, 2001, there were no put options or call options
outstanding.
Note Receivable from Broadcom for Sale of Warrants to Purchase 3Com Common
Stock. During fiscal 2001, 3Com announced a strategic alliance with Broadcom to
accelerate the deployment of Gigabit Ethernet into business networks. As part of
the strategic alliance, 3Com issued to Broadcom a warrant to acquire up to 7.1
million shares of 3Com common stock, representing approximately 2 percent 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 approximately $21 million. Broadcom paid for
the warrant by issuance of a full recourse promissory note in the principal
amount of approximately $21 million. The note bears interest at LIBOR plus one
percent. Payments of interest only are due quarterly beginning April 2001.
Principal payments of approximately $3.5 million plus interest are due quarterly
beginning October 2001 through December 2002. The note has optional and
mandatory prepayment provisions if certain conditions are met.
Accounting for Stock-Based Compensation. As permitted under SFAS 123, 3Com has
elected to follow APB 25 and related Interpretations in accounting for
stock-based awards to employees. Under APB 25, 3Com generally recognizes no
compensation expense with respect to such awards.
Pro forma information regarding net income and earnings per share is required by
SFAS 123. This information is required to be determined as if 3Com had accounted
for its stock-based awards to employees (including employee stock options and
shares issued under the Employee Stock Purchase Plan, collectively called
"options") granted subsequent to May 31, 1995 under the fair value method of
that Statement. The fair value of options granted in fiscal years 2001, 2000,
and 1999 reported below has been estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
Employee Stock Option Plans Employee Stock Purchase Plan
---------------------------- ------------------------------
2001 2000 1999 2001 2000 1999
---------------------------- ------------------------------
Risk-free interest rate 4.5% 6.5% 5.3% 3.7% 6.4% 4.9%
Volatility 79.4% 78.4% 62.0% 79.4% 78.4% 62.0%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
73
As of June 1, 2001, the expected lives of the options under the Employee Stock
Option Plan were estimated at approximately two years after the vesting date for
directors and approximately one and one half years after the vesting date for
non-directors. As of June 2, 2000, the expected lives of options under the
Employee Stock Option Plan were estimated at approximately two and one half
years after the vesting date for directors and approximately one and one half
years after the vesting date for non-directors. As of May 28, 1999, the expected
lives of options under the Employee Stock Option Plan were estimated at
approximately three years and one half years after the vesting date for
directors and approximately two years after the vesting date for non-directors.
As of June 1, 2001, June 2, 2000, and May 28, 1999, the expected life of options
under the Employee Stock Purchase Plan was estimated at six months.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
weighted average estimated fair value of employee stock options granted during
fiscal years 2001, 2000 and 1999 was $7.99, $21.10, and $14.95 per share,
respectively. The weighted average estimated fair value of shares granted under
the Employee Stock Purchase Plan during fiscal years 2001, 2000 and 1999 was
$5.16, $10.26, and $8.41, respectively. As 3Com's options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its options.
For purposes of pro forma disclosures, the estimated fair value of the options
is assumed to be amortized to expense over the options' vesting period. Pro
forma information follows (in thousands, except per share amounts):
Years ended
--------------------------------------------
June 1, June 2, May 28,
2001 2000 1999
----------- ---------- ----------
Net income (loss): As reported $ (965,376) $ 674,303 $ 403,874
Pro forma (1,148,416) 535,539 216,695
Earnings (loss) per share: As reported--basic $ (2.80) $ 1.94 $ 1.12
Pro forma--basic (3.33) 1.54 0.60
As reported--diluted $ (2.80) $ 1.88 $ 1.09
Pro forma--diluted (3.33) 1.50 0.59
Note 13: Financial Instruments
The following summary disclosures are made in accordance with the provisions of
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," which
requires the disclosure of fair value information about both on- and off-balance
sheet financial instruments where it is practicable to estimate the value. Fair
value is defined in SFAS 107 as the amount at which an instrument could be
exchanged in a current transaction between willing parties, rather than in a
forced or liquidation sale.
As SFAS 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements, any aggregation of the fair value
amounts presented would not represent the underlying value to 3Com.
74
June 1, 2001 June 2, 2000
------------------------- -------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
--------------------------------------------------------
Assets:
Cash and equivalents $ 897,797 $ 897,797 $1,700,420 $1,700,420
Short-term investments 742,414 742,414 1,369,520 1,369,520
Corporate equity securities 110,976 110,976 620,390 620,390
Liabilities:
Long-term debt $ -- $ -- $ 24,000 $ 24,675
The following methods and assumptions were used in estimating the fair values of
financial instruments:
Cash and equivalents. The carrying amounts reported in the consolidated balance
sheets for cash and equivalents approximate their estimated fair values.
Short-term investments and long-term debt. The fair values of short-term
investments and long-term debt are based on quoted market prices or pricing
models using current market rates.
Corporate equity securities. Publicly traded corporate equity securities are
included in other current assets. The fair value of publicly traded corporate
equity securities is based on quoted market prices. Privately held corporate
equity securities are included in goodwill, intangibles, deposits, and other
assets. Investments in privately held corporate equity securities are recorded
at the lower of cost or fair value. For these non-quoted investments, 3Com's
policy is to regularly review the assumptions underlying the financial
performance of the privately held companies in which the investments are
maintained. If and when a determination is made that a decline in fair value
below the cost basis is other than temporary, the related investment is written
down to its estimated fair value.
Foreign exchange contracts. 3Com does not use derivative financial instruments
for speculative or trading purposes. Where available, 3Com enters into foreign
exchange forward contracts to hedge certain balance sheet exposures and
intercompany balances against future movements in foreign exchange rates. The
premiums on long-term foreign exchange forward hedges of firm commitments are
capitalized as part of the underlying asset. Foreign exchange option contracts
are selectively entered into to hedge certain balance sheet exposures and
intercompany balances against future movements in foreign exchange rates. Gains
and losses on the foreign exchange contracts are included in interest and other
income, net, which offset foreign exchange gains or losses from revaluation of
foreign currency-denominated balance sheet items and intercompany balances.
The foreign exchange forward contracts require 3Com to exchange foreign
currencies for U.S. Dollars or vice versa, and generally mature in one month or
less. As of June 1, 2001 and June 2, 2000, 3Com had outstanding foreign exchange
forward contracts with aggregate notional amounts of $38.9 million and $52.9
million, respectively, that had remaining maturities of one month or less. As of
June 1, 2001, 3Com did not have any outstanding foreign exchange forward
contracts with maturities greater than one month. As of June 2, 2000, 3Com had
one outstanding foreign exchange forward contract with a notional amount of
$24.0 million with a remaining maturity greater than one month. As of June 1,
2001 and June 2, 2000, the carrying amounts and estimated fair values of foreign
exchange forward contracts were insignificant, and the difference between the
two values was insignificant. The fair value of foreign exchange forward
contracts is based on prevailing financial market information.
75
Note 14: Merger-Related Credits, Net, and Net Gains on Land and
Facilities
Merger-Related Credits, Net
On June 12, 1997, 3Com completed a merger with U.S. Robotics, which was
accounted for as a pooling of interests. As a result of this merger, 3Com has
recorded aggregate merger-related charges of $239.6 million through June 1,
2001, which included $195.8 million of integration expenses and $43.8 million of
direct transaction costs (consisting primarily of investment banking and other
professional fees). The following table displays a rollforward of the
integration expense activity and balances of the U.S. Robotics merger reserve
from May 31, 1998 through June 1, 2001 (in thousands):
- ---------------------------------------------------------------------------------------------------------------------
1999
-------------------------------------
May 31, 1998 Provision/ May 28, 1999
Type of cost Balance Revisions in Estimates Deductions Balance
- ---------------------------------------------------------------------------------------------------------------------
Facilities $ 36,584 $ (16,196) $ 6,453 $ 13,935
Severance and outplacement 6,210 (2,016) 3,599 595
Long-term assets 1,289 251 797 743
Inventory 6,429 (666) 5,763 -
- ---------------------------------------------------------------------------------------------------------------------
Total $ 50,512 $ (18,627) $ 16,612 $ 15,273
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
2000
-------------------------------------
May 28, 1999 Provision/ June 2, 2000
Type of cost Balance Revisions in Estimates Deductions Balance
- ---------------------------------------------------------------------------------------------------------------------
Facilities $ 13,935 $ (1,976) $ 11,713 $ 246
Severance and outplacement 595 (57) 538 --
Long-term assets 743 (174) 277 292
- ---------------------------------------------------------------------------------------------------------------------
Total $ 15,273 $ (2,207) $ 12,528 $ 538
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
2001
-------------------------------------
June 2, 2000 Provision/ June 1, 2001
Type of cost Balance Revisions in Estimates Deductions Balance
- ---------------------------------------------------------------------------------------------------------------------
Facilities $ 246 $ (246) $ -- $ --
Long-term assets 292 (112) 180 --
- ---------------------------------------------------------------------------------------------------------------------
Total $ 538 $ (358) $ 180 $ --
- ---------------------------------------------------------------------------------------------------------------------
76
As of June 1, 2001, 3Com has completed all exit activities associated with the
U.S. Robotics merger.
As of June 1, 2001 and June 2, 2000, 3Com also had a remaining merger accrual of
$0.8 million and $1.3 million, respectively, related to the Chipcom Corporation
merger.
In addition, merger-related credits, net, during fiscal 1999 included a $3.0
million charge reflecting a change in the estimated net realizable value of
closed manufacturing plants in Chicago. The charge reflects a change in the
estimated net realizable value of the plant, reflecting market conditions at the
time.
Net Gains on Land and Facilities
During fiscal 2001, 3Com sold a 39-acre parcel of undeveloped land in San Jose,
California to a financial institution, as directed by Palm, for total net
proceeds of approximately $215.6 million. 3Com recorded a net gain of $174.4
related to this sale. In February 2001, 3Com sold a vacated office and
manufacturing building in Morton Grove, Illinois for total net sales proceeds of
$12.4 million, resulting in a gain of approximately $4.4 million.
During fiscal 2000, 3Com sold two facilities in the Chicago and Salt Lake City
areas and equipment in the Chicago area for total net proceeds of $93.2 million.
In addition, an impairment charge of approximately $4.0 million was recognized
related to the write down to fair value of the remaining facility held for sale
in Salt Lake City. A combined net gain of $25.5 million was recognized related
to these transactions.
During fiscal 1999, 3Com recorded a $4.2 million net gain on the sale of land,
which had previously been deferred pending resolution of certain contingencies
that were resolved during the year.
Note 15: Interest and Other Income, Net
Interest and other income, net, consists of:
Years ended
-------------------------------------------
June 1, June 2, May 28,
(In thousands) 2001 2000 1999
--------- --------- ---------
Interest income $ 142,472 $ 110,404 $ 63,245
Interest expense (1,174) (3,612) (3,756)
Other 3,298 (2,534) (2,567)
--------- --------- ---------
Total $ 144,596 $ 104,258 $ 56,922
========= ========= =========
77
Note 16: Income Taxes
The provision (benefit) for income taxes consists of:
Years ended
-------------------------------------------
June 1, June 2, May 28,
(In thousands) 2001 2000 1999
--------- --------- ---------
Current:
Federal $ 16,172 $ 84,107 $ (7,689)
State (7,931) 38,892 24,992
Foreign 16,000 39,361 49,805
--------- --------- ---------
Total current 24,241 162,360 67,108
--------- --------- ---------
Deferred:
Federal (285,969) 171,315 104,510
State (6,549) 8,182 (4,697)
Foreign 10,636 (185) (10,130)
--------- --------- ---------
Total deferred (281,882) 179,312 89,683
--------- --------- ---------
Total $(257,641) $ 341,672 $ 156,791
========= ========= =========
The components of net deferred tax assets (liabilities) consist of:
June 1, June 2,
(In thousands) 2001 2000
--------- ---------
Deferred tax assets:
Operating loss carryforwards, net $ 409,380 $ 2,781
Amortization and depreciation 19,786 --
Tax credit carryforwards 49,010 14,822
Intercompany profit eliminations 10,554 17,575
Unrealized losses on private investments, net 29,099 --
Valuation allowance (194,085) (11,482)
--------- ---------
Unrealized losses on private investments, net
Total deferred tax assets 323,744 23,696
--------- ---------
Deferred tax liabilities:
Reserves recognized in different
periods for tax purposes (139,354) (115,199)
Unremitted earnings (87,500) (81,960)
Royalty and purchased research and development (8,965) --
Amortization and depreciation -- (9,218)
Unrealized gain on investments, net (1,740) (179,240)
Other (3,321) (16,742)
--------- ---------
Net deferred tax assets (liabilities) $ 82,864 $(378,663)
========= =========
78
3Com has operating losses related to the following tax jurisdictions and
expiration periods: U.S. federal income tax carryforward of approximately $1
billion expiring in fiscal 2021; various state income tax carryforwards of
approximately $798.4 million expiring between 2006 and 2021; and various foreign
taxing jurisdictions, $2.9 million expiring between 2004 and 2006, and $36.8
million with an unlimited carryforward period. 3Com also has U.S. federal
research credit carryforwards of $27.1 million expiring between 2010 and 2021.
U.S. federal alternative minimum tax credits of $21.9 million have an unlimited
carryforward period.
The valuation allowance reduces deferred tax assets to estimated realizable
value. The valuation allowance relates to a portion of the credit and net
operating loss carryforwards and temporary differences for which 3Com believes
that realization is uncertain due to various limitations on their use and the
Company's operating loss in the current year. The valuation allowance increased
$182.6 million in fiscal 2001, which includes $98.8 million attributable to
stock option deductions, which, if recognized, will be allocated directly to
paid-in-capital. For fiscal 2000, the valuation allowance decreased $40 million.
The provision for income taxes differs from the amount computed by applying the
federal statutory income tax rate to income before taxes as follows:
Years ended
-------------------------------------
June 1, June 2, May 28,
2001 2000 1999
--------- --------- ---------
Tax computed at federal statutory rate (35.0)% 35.0% 35.0%
State income taxes, net of federal effect (2.6) 3.2 2.5
Tax exempt investment income (0.7) (0.9) (1.4)
Provision for taxes on unremitted earnings 0.5 -- --
Provision for combined foreign and U.S. taxes on
certain foreign income at rates greater than
(less than) U.S. rates 6.9 (4.2) (6.5)
Research tax credits (0.1) (0.3) (0.6)
Valuation allowance 6.8 -- --
Non-deductible purchased in-process technology
and merger-related charges 3.5 1.0 0.5
Other (0.3) 1.7 0.6
---- ---- ----
Total (21.0)% 35.5% 30.1%
==== ==== ====
Income before income taxes for the fiscal years ended June 1, 2001, June 2,
2000, and May 28, 1999, includes foreign subsidiary income (loss) of ($152.5)
million, $213.3 million, and $227.1 million, respectively. 3Com has provided
$87.5 million for the potential repatriation of certain undistributed earnings
of its foreign subsidiaries. 3Com has not provided for federal income taxes on
approximately $383.6 million of undistributed earnings of its foreign
subsidiaries since 3Com considers these earnings to be indefinitely reinvested
in foreign subsidiary operations. It is not practicable to estimate the income
tax liability that might be incurred upon the remittance of such earnings.
79
During fiscal years ended June 1, 2001 and June 2, 2000, certain domestic and
foreign taxing jurisdictions began audits of 3Com's income tax returns. While
the ultimate results of these examinations cannot be predicted with certainty,
3Com's management believes the examinations will not have a material adverse
effect on its consolidated financial condition or results of operations.
Note 17: Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income (loss) and other
comprehensive income (loss). The components of other comprehensive income (loss)
and their related tax effects are as follows (in thousands):
Years ended
-----------------------------------------------
June 1, June 2, May 28,
2001 2000 1999
--------- --------- ---------
Gains (losses) on investments during the year, net of
tax expense (benefit) of $(170,084), $(173,702), and
$28,577 in 2001, 2000, and 1999, respectively $(256,843) $(275,098) $ 45,157
Less: adjustment for gains (losses) included in net
income (loss), net of tax expense (benefit) of
$(7,416), $324,644, and $(1,024) in 2001, 2000,
and 1999, respectively (11,198) 514,151 (1,619)
Change in accumulated translation adjustments during
the year (68) (1,341) (3,830)
--------- --------- ---------
Other comprehensive income (loss) $(268,109) $ 237,712 $ 39,708
========= ========= =========
Accumulated other comprehensive income (loss) presented in the accompanying
consolidated balance sheets consists of the accumulated net unrealized gain on
available-for-sale investments and the accumulated foreign translation
adjustments.
80
Note 18: Net Income per Share
The following table presents the calculation of basic and diluted earnings per
share (in thousands, except per share data):
Years ended
------------------------------------------------
June 1, June 2, May 28,
2001 2000 1999
----------- ----------- -----------
Income from continuing operations $ (969,913) $ 615,563 $ 364,945
Income from discontinued operations 4,537 58,740 38,929
----------- ----------- -----------
$ (965,376) $ 674,303 $ 403,874
=========== =========== ===========
Weighted average shares--Basic 345,027 348,314 360,424
Effect of dilutive securities:
Employee stock options -- 9,267 8,735
Restricted stock -- 302 202
----------- ----------- -----------
Weighted average shares--Diluted 345,027 357,883 369,361
=========== =========== ===========
Net income per share--Basic:
Continuing operations $ (2.81) $ 1.77 $ 1.01
Discontinued operations 0.01 0.17 0.11
----------- ----------- -----------
$ (2.80) $ 1.94 $ 1.12
=========== =========== ===========
Net income per share--Diluted:
Continuing operations $ (2.81) $ 1.72 $ 0.99
Discontinued operations 0.01 0.16 0.10
----------- ----------- -----------
$ (2.80) $ 1.88 $ 1.09
=========== =========== ===========
Employee stock options and restricted stock totaling 30.3 million shares for the
year ended June 1, 2001, were not included in the diluted weighted average
shares calculation as the effects of these securities were antidilutive.
81
Note 19: Business Segment Information
3Com provides network connectivity products and solutions for people and
businesses, as well as access infrastructure and IP services platforms for
network service providers. For fiscal 2001, 3Com was organized around four
business units. Three of these units represented ongoing operations--Commercial
and Consumer Network Products, CommWorks Corporation, and Customer Service--and
the fourth unit included product lines that in the fourth quarter of fiscal 2000
3Com decided to exit. Also in the fourth quarter of fiscal 2000, a final
decision was made to spin-off Palm (the Handheld Computing business segment).
Accordingly, the financial data related to Palm is accounted for as a
discontinued operation for all periods presented. 3Com's business activities
have been aggregated into three reportable segments: Commercial and Consumer
Networks, CommWorks, and Exited Product Lines. The Customer Service business
unit has been combined into Commercial and Consumer Networks, as customer
service operations are an integral part of the Commerical and Consumer Networks
business unit and the two business units are regularly combined for internal
management reviews when assessing performance and making decisions regarding
allocation of resources and investments. The Commercial and Consumer Networks
segment manufactures and sells desktop NICs, PC cards, switches, hubs, broadband
cable and DSL modems as well as services associated with sales of these
products. The CommWorks segment manufactures and sells access infrastructure and
IP services platforms for network service providers. Exited Products include
analog-only modems and high-end LAN and WAN chassis products.
3Com's Chief Executive Officer has been identified as the chief operating
decision maker (CODM) as he assesses the performance of the business units and
decides how to allocate resources to the business units. Contribution margin is
the measure of profit and loss that the CODM uses to assess performance and make
decisions. Contribution margin represents the sales less the cost of sales and
direct expenses incurred within the operating segments. Certain corporate level
operating expenses (primarily bonuses based on 3Com results, 3Com's sales,
corporate marketing and administration groups, other unallocated corporate
expenses, and one-time charges or credits) are not allocated to operating
segments and are included in corporate and other in the reconciliation of
operating results.
The two business segments do not sell to each other, and accordingly, there are
no intersegment sales. 3Com's CODM does not review total assets or depreciation
and amortization by operating segment, but he does review inventory by operating
segment. The accounting policies for reported segments are the same as for 3Com
as a whole.
82
Reportable Operating Segments
Information on reportable operating segments for the three years ended June 1,
2001, June 2, 2000, and May 28, 1999, and as of June 1, 2001, and June 2, 2000,
is as follows (in thousands):
June 1, June 2, May 28,
2001 2000 1999
----------- ----------- -----------
Sales:
Commercial and Consumer Networks $ 2,270,942 $ 2,802,138 $ 3,089,281
CommWorks 399,716 577,767 456,410
Exited Product Lines 150,223 954,037 1,656,562
----------- ----------- -----------
$ 2,820,881 $ 4,333,942 $ 5,202,253
=========== =========== ===========
Contribution Margin:
Commercial and Consumer Networks $ (129,808) $ 757,596 $ 1,283,980
CommWorks (174,695) 97,404 24,863
Exited Product Lines (19,500) 28,565 96,263
----------- ----------- -----------
$ (324,003) $ 883,565 $ 1,405,106
=========== =========== ===========
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):
June 1, June 2, May 28,
2001 2000 1999
----------- ----------- -----------
Total contribution margin from
operating segments $ (324,003) $ 883,565 $ 1,405,106
Indirect operating expenses (1) 733,875 810,221 949,911
Purchased in-process technology 60,221 13,456 10,590
Merger-related credits, net (728) (2,297) (17,551)
Restructuring charges 163,657 68,867 --
----------- ----------- -----------
Total operating income (loss) (1,281,028) (6,682) 462,156
Gain on sale of land and facilities, net 178,844 25,483 4,200
Gain (loss) on investments, net (18,614) 838,795 (2,643)
Litigation settlement (250,000) -- --
Interest and other income, net 144,596 104,258 56,922
----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and equity interests $(1,226,202) $ 961,854 $ 520,635
=========== =========== ===========
(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.
83
June 1, June 2,
2001 2000
----------- -----------
Inventory:
Commercial and Consumer Networks $ 166,115 $ 123,564
CommWorks 29,284 26,719
Exited Product Lines 4,747 84,529
----------- -----------
$ 200,146 $ 234,812
=========== ===========
Geographic Information
3Com's foreign operations consist primarily of central distribution, order
administration, manufacturing, and research and development facilities in
Western Europe, Israel, and Singapore. Sales, marketing, and customer service
activities are conducted through sales subsidiaries throughout the world.
Geographic sales information for the last three fiscal years is based on the
location of the end customer. Geographic long-lived assets information is based
on the physical location of the assets at the end of each fiscal year. Sales to
unaffiliated customers and long-lived assets by geographic region are as follows
(in thousands):
Years ended
-----------------------------------------------
June 1, June 2, May 28,
2001 2000 1999
---------- ---------- ----------
Sales
Americas $1,523,863 $2,435,838 $2,982,902
Europe 856,127 1,354,567 1,740,826
Asia Pacific 440,891 543,537 478,525
---------- ---------- ----------
Total $2,820,881 $4,333,942 $5,202,253
========== ========== ==========
For the fiscal years ended June 1, 2001, June 2, 2000, and May 28, 1999, the
United States within the Americas region above had sales of $1,277.9 million, or
45 percent of total sales, $2,114.4 million, or 49 percent of sales, and
$2,667.8 million, or 51 percent of sales, respectively. No other individual
country within the regions above had sales exceeding ten percent of total sales.
June 1, June 2,
2001 2000
---------- ----------
Long-Lived Assets
United States $ 397,290 $ 522,549
Ireland 84,801 78,524
United Kingdom 71,741 86,586
Other 55,847 69,295
---------- ----------
Total $ 609,679 $ 756,954
========== ==========
As of June 1, 2001 and June 2, 2000 no other individual country had long-lived
assets exceeding 10 percent of total long-lived assets.
84
Note 20: Employee Benefit Plan
3Com has adopted a plan known as the 3Com 401(k) Plan (the Plan) to provide
retirement benefits to all of its employees. As allowed under Section 401(k) of
the Internal Revenue Code, the Plan provides tax-deferred salary deductions for
eligible employees. Participants may elect to contribute from one percent to 22
percent of their annual compensation to the Plan each calendar year, limited to
a maximum annual amount as set periodically by the Internal Revenue Service. In
addition, the Plan provides for contributions as determined by the Board of
Directors. 3Com will match 50 percent for each dollar on the first six percent
of target income contributed by the employee. Employees become vested in 3Com
matching contributions according to a three year vesting schedule based on
initial date of hire. Matching contributions to the Plan totaled $11.8 million
in fiscal 2001, $12.9 million in fiscal 2000, and $13.6 million in fiscal 1999.
Note 21: Litigation
3Com is a party to lawsuits in the normal course of 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. 3Com believes that it has
defenses in each of the cases set forth below and is vigorously contesting each
of these matters. An unfavorable resolution of one or more of the following
lawsuits could adversely affect its business, results of operations, or
financial condition.
Securities Litigation
In December 1997, a securities class action lawsuit, 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 alleged violations of
the federal securities laws, specifically Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934, and which sought 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 May 2000, 3Com answered the
amended complaint. In October 2000, the parties agreed to settle this action and
all other related actions, including Adler v. 3Com Corporation, which is
discussed below. On February 23, 2001, the Court entered a final judgment
approving the settlement.
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 alleged violations of Sections 25400 and 25500
of the California Corporations Code and sought unspecified damages. The parties
agreed to stay this case to allow the Reiver case to proceed. Along with Reiver,
this case was settled in October 2000. As part of the settlement, plaintiffs
have agreed to dismiss this action with prejudice. The settlement amount was
$259.0 million, of which $9.0 million was recovered from insurance. Accordingly,
3Com recorded a litigation charge of $250.0 million in October 2000.
85
In November 2000, a shareholder derivative and class action lawsuit, captioned
Shaev v. Claflin, et al., No. CV794039, was filed in California Superior Court.
The complaint alleges that the Company's directors and officers made
misrepresentations and/or omissions and breached their fiduciary duties to the
Company in connection with the adjustment of employee and director stock options
in connection with the separation of the Company and Palm, Inc. It is unclear
whether the plaintiff is seeking recovery from 3Com or if the Company is named
solely as a nominal defendant, against whom the plaintiff seeks no recovery. The
Company and the individual defendants have removed this action to the United
States District Court for the Northern District of California, where the action
is captioned Shaev v. Claflin, et al., No. CV-01-0009-MJJ. The case was later
remanded back to the California Superior Court. Defendants have not responded to
the complaint. No trial date has been set.
Intellectual Property
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. Currently pending
before the Court is 3Com's motion for a preliminary injunction on the 6,146,209
patent. The Company intends to vigorously pursue this action.
On September 21, 2000, Xircom, Inc. filed an action against 3Com Corporation 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 the claims of the 5,940,275 patent are unenforceable. This case is in the
discovery phase. 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 was heard on March 26, 2001 and was denied by the Court.
Currently pending before the Court is 3Com's Motion for Summary Judgment of
Non-infringement of the 5,773,332 patent. The Company intends to vigorously
pursue this action.
On July 6, 2001, Xircom, Inc. filed an action against the Company in the United
States District Court for the Central District of California, Civil Action No.
01-5902 GAF (JTLX). Xircom's complaint accuses 3Com of infringement of U.S.
Patent No. 6,241,550 by reason of the manufacture, sale, and use of the 3COM
10/100 LAN+Modem CardBus Type III PC Card and the 3COM 10/100 LAN CardBus Type
III PC Card. 3Com has not yet answered the Complaint, but an answer and
counterclaim will be filed and served in the near future. This action has only
recently been filed, but Xircom has threatened to file a motion for preliminary
injunction on the 6,241,550 patent. That motion has not yet been filed. The
Company intends to vigorously pursue this action.
86
Note 22: Subsequent Events
During the first quarter of fiscal 2002, 3Com announced a third party contract
manufacturing arrangement for its high-volume server, desktop and certain mobile
connectivity products. In conjunction with this announcement, 3Com announced the
intended consolidation and liquidation of several facilities associated with its
manufacturing operations. These facilities are located in Marlborough,
Massachusetts, Mount Prospect, Illinois, and Santa Clara, California. 3Com's
Singapore facility will transition to become the Asia Pacific region
distribution center and office location for sales management, IT, training and
customer service and support operations.
During the first quarter of fiscal 2002, 3Com announced it will discontinue its
consumer cable and DSL modem product lines as part of its restructuring
initiatives. 3Com has discontinued these products because it no longer views
these markets as profitable in the near term. Revenues of approximately $244.3
million, $98.9 million and $17.3 million associated with the discontinued
product lines above are included in the consolidated statements of operations
for the fiscal years ended June 1, 2001, June 2, 2000 and May 29, 1999,
respectively.
87
Quarterly Results of Operations (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal 2001 Quarters Ended Fiscal 2000 Quarters Ended
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per June 1, March 2, Dec. 1, Sept. 1, June 2, Feb. 25, Nov. 26, Aug. 27,
share data) 2001 2001 2000 2000 2000 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Sales $468,033 $629,586 $789,498 $933,764 $763,684 $1,142,965 $1,214,097 $1,213,196
-------- -------- -------- -------- -------- ---------- ---------- ----------
Gross margin (168,620) 70,126 291,397 340,728 196,804 517,048 569,060 575,096
Gross margin % (36.0%) 11.1% 36.9% 36.5% 25.8% 45.2% 46.9% 47.4%
------- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) (621,055) (373,563) (140,864) (145,546) (340,047) 72,708 123,196 137,461
--------- --------- --------- --------- --------- ------ ------- -------
Income (loss) from
continuing operations (517,727) (246,043) (142,406) (63,737) (159,359) 490,159 156,459 128,304
Income (loss) from
continuing operations % (110.6%) (39.1%) (18.0%) (6.8%) (20.9%) 42.9% 12.9% 10.6%
-------- ------- ------- ------ ------- ----- ----- -----
Income from
discontinued operations -- -- -- 4,537 12,532 16,155 20,866 9,187
Income from
discontinued operations % -- -- -- 0.5% 1.6% 1.4% 1.7% 0.8%
---- ---- ---- ---- ----
Diluted income (loss)
per share - continuing
operations ($1.52) ($0.72) ($0.41) ($0.18) ($0.45) $1.36 $0.45 $0.36
------- ------- ------- ------- ------- ----- ----- -----
Diluted income per
share - discontinued
operations -- -- -- $0.01 $0.04 $0.04 $0.06 $0.03
----- ----- ----- ----- -----
- ----------------------------------------------------------------------------------------------------------------------------------
Gross margin was significantly reduced in the fourth quarter of fiscal 2001
primarily from incremental charges of $215.1 million. These charges consisted of
excess and obsolete inventory provisions due to product discontinuation and
reduced demand, and a liability related to future contractual commitments with a
subcontract manufacturer as a result of 3Com's intention to exit its consumer
product lines and the reduction in sales demand.
88
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of 3Com Corporation
The information required by Item 10 of Form 10-K with respect to identification
of directors is incorporated by reference from the information contained in the
section captioned "Election of Directors" in 3Com's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held September 20, 2001 (the Proxy
Statement), a copy of which will be filed with the Securities and Exchange
Commission before the meeting date. For information with respect to the
executive officers of 3Com, see "Executive Officers of 3Com Corporation" at the
end of Part I of this report.
ITEM 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Executive Compensation
and Other Matters" in the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 of Form 10-K is incorporated by reference
from the information contained in the section captioned "General Information" in
the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement.
89
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) (1) Financial Statements - See Index to Consolidated Financial
Statements and Financial Statement Schedule at page 47 of this
Form 10-K.
(2) Financial Statement Schedule - See Index to Consolidated
Financial Statements and Financial Statement Schedule at page
47 of this Form 10-K.
(3) Exhibits - See Exhibit Index at page 91 of this Form 10-K.
(b) 3Com filed five reports on Form 8-K during the fiscal year ended June
1, 2001, as follows:
(1) A report on Form 8-K filed on June 19, 2000, reporting under Item
5 the announcement that 3Com, Accton Technology Corporation
(Accton), and NatSteel Electronics (NEL) have entered into an
agreement whereby pursuant to an Asset Contribution Agreement
between U.S. Robotics Corporation and 3Com, 3Com's analog-only
product lines and business will be contributed to a newly formed
corporation, "U.S. Robotics Corporation." US Robotics Corporation
is owned by 3Com, Accton, and NEL.
(2) A report on Form 8-K filed on July 14, 2000, reporting under Item
5 the announcement that the final distribution ratio for the
distribution of shares of Palm, Inc. common stock to 3Com
stockholders is 1.484 shares of Palm common stock for each share
of 3Com common stock that was outstanding on the record date,
July 11, 2000.
(3) A report on Form 8-K filed on July 17, 2000, reporting under Item
5 the announcement that 3Com issued an Information Statement
about its spin-off of Palm, Inc. The Information Statement
contains a description of the terms of the spin-off, Palm and
Palm's common stock, and is attached as an exhibit to this form
8-K.
(4) A report on Form 8-K filed on July 31, 2000, reporting under Item
5 the announcement that on July 28, 2000, 3Com Corporation
announced that it has completed the separation of Palm, Inc. from
3Com through the distribution of 3Com's 532,000,000 shares of
Palm, Inc. common stock.
(5) A report on Form 8-K filed on May 8, 2001, reporting under Item 5
the announcement that guidance provided by the Registrant on
March 21, 2001 on its financial analyst conference call included
forward-looking statements regarding the potential range of
revenue for the fourth fiscal quarter ending on June 1, 2001,
which was then indicated to be between $550-600 million. Given
the current difficult economic environment, together with the
operational restructuring and expense and headcount reductions
announced by the Registrant on March 7, 2001, the Registrant now
expects a wider range of outcomes than indicated by its earlier
guidance for the fourth quarter of fiscal 2001.
(c) See Exhibit Index at page 91 of this Form 10-K.
(d) See Index to Consolidated Financial Statements and Financial Statement
Schedule at page 47 of this Form 10-K.
90
EXHIBIT INDEX
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 an error in the
Certificate of Incorporation (11)
3.3 Certificate of Merger (11)
3.4 Corrected Certificate of Merger filed to correct an error in
the Certificate of Merger (14)
3.5 Registrant's Bylaws, as amended (12)
4.1 Amended and Restated Rights Agreement dated December 31,
1994 (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)
91
4.3 Amendment to Amended and Restated Note Agreements between
the Registrant, 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 the Registrant, Metropolitan Life Insurance Company,
The Northwestern Mutual Life Insurance Company, and
Metropolitan Property and Casualty Insurance Company (14)
4.5 Second Amended and Restated Preferred Share Rights
Agreement, dated as of March 8, 2001 (19)
10.1 3Com Corporation 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 3Com Corporation Amended and Restated 1984 Employee Stock
Purchase Plan (6)*
10.5 3Com Corporation Director Stock Option Plan (6)*
10.6 3Com Corporation Restricted Stock Plan, as amended (6)*
10.7 3Com Corporation 1994 Stock Option Plan, as amended (14)*
10.8 Lease Agreement between BNP Leasing Corporation, as
Landlord, and the Registrant, as Tenant, effective as of
November 20, 1996 (8)
10.9 Purchase Agreement between BNP Leasing Corporation and the
Registrant, effective as of November 20, 1996 (8)
10.10 Agreement and Plan of Reorganization among the Registrant,
OnStream Acquisition Corporation and OnStream Networks, Inc.
dated as of October 5, 1996 (7)
10.11 Lease Agreement between BNP Leasing Corporation, as
Landlord, and the Registrant, as Tenant, effective as of
February 3, 1997 for the Combined Great America Headquarters
site (10)
10.12 Purchase Agreement between BNP Leasing Corporation and the
Registrant, effective as of February 3, 1997 for the
Combined Great America Headquarters site (10)
10.13 Credit Agreement dated as of December 20, 1996 among the
Registrant, Bank of America National Trust and Savings
Association, as Agent, and the Other Financial Institutions
Party Hereto Arranged by BA Securities, Inc. (10)
10.14 Amended and Restated Agreement and Plan of Merger by and
among the Registrant, 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)
92
10.15 Lease Agreement between BNP Leasing Corporation, as
Landlord, and the Registrant, as Tenant, effective as of
July 25, 1997 for the Great America Phase III (PAL) site
(11)
10.16 Purchase Agreement between BNP Leasing Corporation and the
Registrant, effective as of July 25, 1997 for the Great
America Phase III (PAL) site (11)
10.17 Lease Agreement between BNP Leasing Corporation, as
Landlord, and the Registrant, as Tenant, effective as of
July 29, 1997 for the Marlborough site (11)
10.18 Purchase agreement between BNP Leasing Corporation and the
Registrant, effective as of July 29, 1997 for the
Marlborough site (11)
10.19 Lease Agreement between BNP Leasing Corporation, as
Landlord, and the Registrant, as Tenant, effective as of
August 11, 1997 for the Rolling Meadows site (11)
10.20 Purchase Agreement between BNP Leasing Corporation and the
Registrant, effective as of August 11, 1997 for the Rolling
Meadows site (11)
10.21 First Amendment to Credit Agreement (11)
10.22 Form of Management Retention Agreement, effective as of June
2, 1999, with attached list of parties (16)*
10.23 Form of Management Retention Agreement, with attached list
of parties and effective dates (16)*
10.24 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)
10.25 Employment Agreement with Bruce Claflin, effective as of
January 1, 2001 (18)*
10.26 Summary of Severance Plan for Section 16b Officers*
21.1 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP
- -----------------
* Indicates a management contract or compensatory plan.
(1) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Registration
Statement on Form S-1 filed on January 25, 1984 (File No.
2-89045)
(2) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Registration
Statement on Form S-4 filed on August 31, 1987 (File No.
33-16850)
93
(3) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on January 10, 1992 (File No. 000-12867)
(4) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on January 17, 1995 (File No. 000-12867)
(5) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on May 16, 1995 (File No. 000-19550)
(6) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on January 16, 1996 (File No. 000-12867)
(7) Incorporated by reference to the corresponding Exhibit
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 corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on January 13, 1997 (File No. 000-12867)
(9) Incorporated by reference to the corresponding Exhibit
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 corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on April 11, 1997 (File No. 000-12867)
(11) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on October 14, 1997 (File No. 000-12867)
(12) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on January 11, 1999 (File No. 000-12867)
(13) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-K
filed on August 17, 1999 (File No. 002-92053)
(14) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on October 8, 1999 (File No. 002-92053)
(15) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on April 9, 2000 (File No. 333-34726)
(16) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-K
filed on August 17, 2000 (File No. 000-12867)
(17) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on October 13, 2000 (File No. 000-12867)
(18) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed on January 16, 2001 (File No. 000-12867)
(19) Incorporated by reference to Registrant's Registration
Statement on Form 8-A 12G/A filed on June 15, 2001 (File No.
333-34726)
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 8th day of
August, 2001.
3Com Corporation
(Registrant)
By /s/ Bruce L. Claflin
--------------------------------
Bruce L. Claflin
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 8th day of August, 2001.
Signature Title
--------- -----
/s/ Bruce L. Claflin Chief Executive Officer
- -----------------------------
(Bruce L. Claflin) (Principal Executive Officer)
Senior Vice President, Finance and Planning,
/s/ Michael E. Rescoe and Chief Financial Officer
- -----------------------------
(Michael E. Rescoe) (Principal Financial and Accounting Officer)
/s/ Eric A. Benhamou Chairman of the Board
- -----------------------------
(Eric A. Benhamou)
/s/ Fred D. Anderson Director
- -----------------------------
(Fred D. Anderson)
/s/ James E. Cowie Director
- -----------------------------
(James E. Cowie)
/s/ Gary T. DiCamillo Director
- -----------------------------
(Gary T. DiCamillo)
/s/ David W. Dorman Director
- -----------------------------
(David W. Dorman)
/s/ Jean-Louis Gassee Director
- -----------------------------
(Jean-Louis Gassee)
/s/ Philip C. Kantz Director
- -----------------------------
(Philip C. Kantz)
/s/ James Long Director
- -----------------------------
(James Long)
/s/ Janice C. Peters Director
- -----------------------------
(Janice C. Peters)
/s/ Raj Reddy Director
- -----------------------------
(Raj Reddy)
/s/ Paul Yovovich Director
- -----------------------------
(Paul Yovovich)
/s/ William F. Zuendt Director
- -----------------------------
(William F. Zuendt)
95
SCHEDULE II
3Com Corporation
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended May 28, 1999, June 2, 2000 and June 1, 2001
(In thousands)
Additions
Balance at charged to Balance at
beginning costs and end of
Description of period expenses Reclassifications Deductions period
- ----------- --------- -------- ----------------- ---------- ------
Year ended May 28, 1999:
Allowance for doubtful accounts $ 70,152 $ 49,109 $ 2,033 (2) $ 16,214 (1) $ 105,080
Product return reserve 83,958 152,224 -- 169,820 66,362
Accrued product warranty 86,135 82,877 -- 60,375 108,637
Acquisition-related reserves:
Chipcom 5,261 (2,150) -- 1,007 2,104
U.S. Robotics
Inventory reserve 6,429 (666) -- 5,763 --
Facilities reserve 36,584 (16,196) -- 6,453 13,935
Severance and outplacement costs 6,210 (2,016) -- 3,599 595
Year ended June 2, 2000:
Allowance for doubtful accounts $ 105,080 $ 10,047 $ (4,500) (3) $ 34,159 (1) $ 76,468
Product return reserve 66,362 244,032 -- 245,732 64,662
Accrued product warranty 108,637 45,276 -- 67,476 86,437
Restructuring reserves:
Facilities reserve -- 8,932 -- 632 8,300
Severance and outplacement costs -- 59,890 -- 25,678 34,212
Other restructuring costs -- 36,404 -- 30,731 5,673
Acquisition-related reserves:
Chipcom 2,104 123 -- 888 1,339
U.S. Robotics
Facilities reserve 13,935 (1,976) -- 11,713 246
Severance and outplacement costs 595 (57) -- 538 --
Year ended June 1, 2001:
Allowance for doubtful accounts $ 76,468 $ (12,387) $ -- $ 16,772 (1) $ 47,309
Product return reserve 64,662 121,173 -- 156,702 29,133
Accrued product warranty 86,437 52,021 -- 84,887 53,571
Restructuring reserves:
Facilities reserve 8,300 (5,205) -- 3,095 --
Severance and outplacement costs 34,212 81,802 -- 75,751 40,263
Other restructuring costs 5,673 18,031 -- 21,922 1,782
Acquisition-related reserves:
Chipcom 1,339 (147) -- 354 838
U.S. Robotics
Facilities reserve 246 (246) -- -- --
(1) Accounts written off - net of recoveries.
(2) Reclassification from notes receivable reserve to allowance for doubtful
accounts.
(3) Reclassification from allowance for doubtful accounts to accrued
liabilities.
96