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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|X| EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 2, 2000 Commission File No. 0-12867
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|_| EXCHANGE ACT OF 1934
For the transition period from _________ to _________
3Com Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2605794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 Bayfront Plaza
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.
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 9,
2000, as reported by the Nasdaq National Market, was approximately
$5,992,729,438. 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 9, 2000, 348,973,617 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 28, 2000 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 2, 2000
Table of Contents
Part I Page
----
Item 1. Business..........................................................1
Item 2. Properties........................................................11
Item 3. Legal Proceedings.................................................12
Item 4. Submission of Matters to a Vote of Security Holders...............13
Executive Officers of 3Com Corporation ...........................13
Part II
Item 5. Market for 3Com Corporation's Common Stock and Related
Stockholder Matters.............................................16
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........39
Item 8. Financial Statements and Supplementary Data.......................40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................69
Part III
Item 10. Directors and Executive Officers of 3Com Corporation..............69
Item 11. Executive Compensation............................................69
Item 12. Security Ownership of Certain Beneficial Owners and Management....69
Item 13. Certain Relationships and Related Transactions....................69
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K...70
Exhibit Index.....................................................71
Signatures........................................................74
Financial Statement Schedule.....................................S-1
3Com, AirConnect, CoreBuilder, DynamicAccess, EtherLink, Megahertz, NBX,
NETBuilder, OfficeConnect, Parallel Tasking, SuperStack, Total Control,
Transcend, and XJACK are registered trademarks of 3Com Corporation or its
subsidiaries. HomeConnect, Kerbango, and PathBuilder are trademarks of 3Com
Corporation or its subsidiaries. Graffiti, Palm Computing, Palm OS and Palm.Net
are registered trademarks and Palm is a trademark of Palm, Inc. U.S. Robotics is
a registered trademark of U.S. Robotics Corporation. Courier and x2 are
trademarks of U.S. Robotics Corporation. Other product and brand names may be
trademarks or registered trademarks of their respective owners.
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of the federal securities laws. These statements include those
concerning the following: our plan to invest nearly half of our total research
and development expenditures in broadband, wireless, and IP telephony
technologies, increases in our advertising and promotional expenditures for
fiscal 2001 as we redefine our brand, our expectation that our principal
operating segments beginning in fiscal 2001 will be Commercial and Consumer
Networks Business and Carrier Networks Business, our expectation that we will
substantially complete our business realignment initiatives during calendar year
2000, our expectation that we will sell or transfer our manufacturing and
distribution operations based in Chicago, Illinois and our Mount Prospect,
Illinois manufacturing facility, expected improved gross margins as a percentage
of sales, our expectation of reaching our long-term target for gross margins of
44 to 46 percent during fiscal year 2002, expected decreases in operating
expenses as a percentage of sales, our expectation of reaching our long-term
target for operating expenses of 31 to 33 percent of sales during fiscal year
2002, our intention to enter strategic partnerships, acquire companies, and make
strategic investments, our estimate of expenses in connection with the
completion of research and development projects, our belief that our cash and
cash equivalents, short-term investments, and cash generated from operations
will be sufficient to satisfy our anticipated cash requirements for at least the
next twelve months, and our expectation that U.S. Robotics Corporation will
commence operations during the second quarter of fiscal 2001. These statements
are subject to 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, we have evolved from a supplier of discrete products to a
leading provider of networking products and solutions. In fiscal 2000 we
transformed our company and our network offerings to focus on targeted sectors
of the commercial, consumer, and carrier and network service provider markets.
We specialize in products and services that provide straightforward solutions to
complex networking challenges, particularly in the areas of broadband
connections, wireless network access, and Internet Protocol (IP) telephony.
We are structuring our operations around two distinct business models: 1)
Commercial and Consumer Networks Business and 2) Carrier Networks Business. The
commercial and consumer networks business uses a highly leveraged, web-enabled
business model to deliver functionally rich but radically simple networking
solutions to millions of customers. The carrier networks business uses a
targeted, direct business model to create high-value service delivery solutions
for our carrier and network service provider customers.
We serve three primary customer markets: commercial enterprises with small- to
mid-sized locations, consumers, and carriers and network service providers. We
sell a variety of products and associated services to these markets. Our
commercial products include traditional access products (e.g. 10/100 Network
Interface Cards (NICs)), advanced access products (e.g. Gigabit NICs, server
NICs, mobile NICs, and wireless NICs), Local Area Network (LAN)/Wide Area
Network (WAN) infrastructure products (e.g. switches, hubs, Internet access
products, and network management software), LAN telephony products, and
services. Our consumer products include broadband connections, home networking
products (e.g. LAN kits and Internet gateways) and Internet appliances (e.g. web
cameras and Internet radios). Our carrier products include enhanced data
services and new technologies (e.g. IP telephony, wireless, cable access, and
Digital Subscriber Line (DSL) access).
1
We believe the future direction of the markets we address is being driven
primarily by four trends that are creating significant opportunities for us:
o an increasing demand for information delivered through the Internet and
the use of web-based technologies;
o a shift of emphasis from parallel networks--separate data, voice, and
video infrastructures running side by side--to converged networks that
integrate all communications onto a single IP data infrastructure;
o the accelerating acceptance and rapid deployment of broadband technologies
for use in the home and small- to mid- sized locations; and
o the need for information to be accessible wherever people are--at work, in
the home, while on the move--making technologies such as wireless access
more important.
To capitalize on these opportunities, our strategy is based on five key elements
that support these trends and help deliver our value proposition to our
customers. All of our customers require rich network functionality including
faster speeds, higher availability, and unquestioned security, but they want it
to be easy to buy, install, use, and maintain. Our value proposition is the idea
of rich, yet simple, products and solutions.
The five key elements of our strategy include:
o Technology Leadership and Innovation. We have a history of technology
leadership and innovation in the networking industry and we will continue
to build on that heritage by leveraging our strong intellectual property
portfolio. In addition, we are investing proportionately more in
high-growth emerging technologies across all of our marketplaces to drive
our growth. In fiscal 2001, we plan to invest nearly half of our total
research and development expenditures in broadband, wireless, and IP
telephony technologies to accelerate the introduction of new products to
market.
o Rich Products and Solutions. In addition to having innovative new
products, it has become increasingly important to offer complete
solutions. One approach is to incorporate technologies from other
companies. For example, we have a strategic relationship with marchFIRST,
Inc. ("marchFIRST," formerly US Web/CKS) to build three solutions that we
will jointly sell. One of them is Distance Learning, targeted to the
education environment. The second is Enterprise Mobility, targeted at the
retail environment. The third is a Call Center, which brings together
advanced telephony and the Internet into an integrated environment. These
are three high-growth markets where customers want turnkey, drop-in
solutions.
o Innovative Use of the Web. We have initiatives across all of our major
functions to develop Web-based competencies and to incorporate Web
technologies throughout our offerings. This has involved substantial
investment in some of our core business processes such as forecasting,
supply chain management, and order fulfillment. Our goal is to increase
the predictability of our operations, lower operating expenses, increase
quality and customer satisfaction, and improve asset utilization. For
example, e-Supply chain allows us to directly link into our suppliers, and
has been a critical element in our ability to dramatically increase
inventory turnover. We are using e-Marketing which allows us to target
specific classes of customers and develop relationship marketing programs
with these customers. e-Service has had a tangible impact on the quality
and cost of our service offering. By adding artificial intelligence to the
front end of our online service site, our customers have their question
answered on the first try over 45 percent of the time. Finally, we are
building in-house capabilities to sell directly to consumers (B2C) and
distribution partners (B2B) over the Internet (e-Business).
o Supply Chain Management. Our business is very volume intensive. We ship
millions of units a year, worth billions of dollars, to thousands of
customers. Thus, the degree to which we can optimize our supply chain is a
competitive advantage. We have established several key metrics which best
reflect our supply chain performance. These include On-time Delivery,
Channel Inventory, Inventory Turns, and Cash-to-Cash Cycle. Over the past
12 months, our on-time delivery has doubled. Improvements in our supply
chain management have enabled us to reduce our channel inventory model by
two weeks on average. Below is a summary of some of the other important
supply chain metrics for fiscal 2000.
- --------------------------------------------------------------------------------
Q1'00 Q2'00 Q3'00 Q4'00
- --------------------------------------------------------------------------------
Inventory Turns 7.9 8.7 8.8 8.0
- --------------------------------------------------------------------------------
Cash-to-Cash Cycle 44 28 22 30
- --------------------------------------------------------------------------------
2
o Building our Brand. We are committed to building a definable and exciting
brand. We have a strong position from which to build. Today, commercial
and consumer customers view us as a well-established network leader that
has innovative, user-friendly technology. These customers value simplicity
and they believe that we are well positioned in the networking industry to
provide a rich, yet simple network experience. This is the base on which
we are building our brand. We have announced a new brand identity and
branding campaign in support of our branding initiatives. Our advertising
and promotional expenditures for fiscal 2001 will increase significantly
as we redefine the 3Com(R) brand.
Our principal competitive advantages include the depth and breadth of our
technology and product lines, our focus on making networking easier for users,
our efficient supply chain operations, strong brand recognition, and broad
channels of distribution. Our strong brand recognition in key markets such as
NICs, switches, hubs, and remote access concentrators is transferable to other
product and technology markets, such as home networking, wireless access
products, broadband cable and DSL modems, and Internet appliances.
Since the early 1990s, we have pursued a course of strategic acquisitions and
alliances to expand our technologies, product offerings, and distribution
capabilities. In fiscal 2000, we acquired three companies to further our
position in key markets and technologies:
o The acquisition of Call Technologies, Inc. adds Unified Messaging (UM) and
carrier-class Operational Systems and Support (OSS) software solutions for
service providers. Unified Messaging gives people access to any
message--voice, fax, or email--across any network while utilizing any
client device: traditional telephone, wireless handset, personal computer
(PC), or wireless personal digital assistant. Operational Systems and
Support gives carriers custom automated management of service delivery and
back-office processes.
o The acquisition of Interactive Web Concepts, Inc. expands our capabilities
to provide total, turnkey e-Business solutions for customers worldwide.
o The acquisition of LANSource Technologies, Inc. adds data- and fax-over-IP
software applications for the multibillion dollar worldwide IP fax and
unified messaging services markets.
During fiscal 2000, we formed a global alliance with marchFIRST to develop,
market, and deliver wireless applications for the mobile workplace and converged
voice, video, and data solutions. We also formed a strategic partnership with
Samsung Electronics Co., Ltd. ("Samsung") to integrate our solutions for the
delivery of high-speed wireless data and voice networks capable of reliably
delivering Internet, intranet, and multimedia services to mobile subscribers.
The initial third-generation, or 3G, networks from 3Com and Samsung are
scheduled for deployment in commercial service by the end of calendar year 2000.
In addition, we formed a strategic relationship with Hitachi, Ltd. ("Hitachi"),
our preferred partner in the Japanese market, who will provide us with unique
access to this market. As part of this strategic relationship, we will sell the
Hitachi line of gigabit routers on an Original Equipment Manufacturer (OEM)
basis as the Total Control(R) 100. These routers provide us with a key
networking element that strengthens our overall product line. During fiscal
2000, we also formed a strategic relationship with CAIS Internet, Inc. ("CAIS"),
a world-leading broadband solutions company providing application services to
the visitor-based networking (VBN) market. Together with CAIS, we will develop
VBN solutions and will work to further drive the deployment of high-speed
Internet access at hotels, airports, other public locations, and
service-oriented businesses.
INDUSTRY SEGMENT INFORMATION
We operate primarily in the networking industry. Through the end of fiscal 2000,
our principal operating segments within this industry were Network Systems and
Personal Connectivity. Beginning in fiscal 2001, we expect our principal
operating segments to be: 1) Commercial and Consumer Networks Business and 2)
Carrier Networks Business as described in the Products and Services section
below.
3
PRODUCTS AND SERVICES
We offer a broad range of products that are organized under two distinct
businesses: 1) Commercial and Consumer Networks Business and 2) Carrier Networks
Business. We enhance the value of these products through our customer service
and support offerings.
Commercial and Consumer Networks Business
Our commercial and consumer network products comprise the key components of a
LAN and provide access capabilities across a WAN. Our products can be
categorized in the following areas:
o Traditional Access Products
o Advanced Access Products
o LAN/WAN Infrastructure Products
o LAN Telephony Products
o Services
o Broadband Connections
o Home Networking Products
o Internet Appliances
Traditional Access Products. Our traditional access products, comprised
primarily of desktop NICs, enable an individual user to connect his or her
computer to a LAN, such as a corporate network, or to the Internet. NICs, also
known as network adapters, are small printed circuit boards that allow network
servers, personal computers, and workstations to connect to the LAN. Our NICs
provide complete solutions for a full range of network applications and
environments. We offer NICs for Ethernet, Fast Ethernet, Gigabit Ethernet, and
Token Ring, as well as NICs with combined connectivity to support the networking
industry's migration from Ethernet to Fast Ethernet to Gigabit Ethernet. We also
offer chipsets with this functionality to PC OEMs.
Advanced Access Products. Advanced Access Products are comprised of high speed
Gigabit Ethernet NICs, server NICs, mobile NICs, and wireless LAN Products.
o Gigabit NICs. Gigabit Ethernet NICs operate on fiber or copper media. They
provide up to a ten-fold increase in performance over traditional access
products and are suitable for high-speed LAN applications.
o Server NICs. The EtherLink(R) Server 10/100 Peripheral Component
Interconnect (PCI) NIC with 3XP processor has an on-board
application-specific integrated circuit (ASIC) processor and encryption
chip. This NIC offloads Transmission Control Protocol (TCP)/IP and
Internet Protocol Security (IPSec) processing, providing lower central
processing unit (CPU) utilization and end-to-end network security for
Windows 2000-based networked PCs.
o Mobile NICs. Today, portable laptop computers have the processing power,
storage, and displays that make them the primary computer for many users.
For these devices, we offer PC Cards which provide connectivity
specifically for mobile computers. PC Cards are available in
configurations for LAN access (NICs) and combined LAN+WAN access (NIC and
modem), as well as for wireless and Integrated Services Digital Network
(ISDN) connectivity.
o Wireless LAN Products. Our wireless LAN systems deliver simple, reliable
connections at full Ethernet speed. The AirConnect(R) 11 Megabits per
second (Mbps) wireless LAN system delivers seamless wireless connectivity
to conference rooms and office space across an entire campus, enabling
real-time access to shared information.
4
LAN/WAN Infrastructure Products. LAN/WAN network infrastructures are typically
comprised of LAN switches, hubs, Internet access products, and network
management software.
o LAN Switches. In business environments where the network connects hundreds
or thousands of users, switches create direct connections to the server or
desktop PC, enabling cost-effective, high-speed links between multiple
network segments. Switches also provide additional bandwidth to help
businesses maximize productivity and support growing organizations. Our
switches support high-speed switching technologies such as Fast Ethernet
and Gigabit Ethernet. We offer a variety of switches for the requirements
of any organization. Our OfficeConnect(R)Ethernet and Fast Ethernet
switches combine simplicity of design, installation, and operation with
advanced functionality and outstanding speed at a low cost. Our
SuperStack(R)II switches include multiple products, each with appropriate
port, media, and connectivity specifications to meet the needs of networks
supporting small- to mid-sized business locations.
o LAN Hubs. Hubs act as concentrators of network traffic generated from the
desktop PC and define specific network segments, relaying the traffic
either within the workgroup or onto the network backbone. Unlike switches,
each desktop connected through a hub shares the total available bandwidth
of the hub with other users. Hubs are a popular choice for workgroup
connectivity in enterprise environments because of their relatively low
cost per port, manageability, and ease of use. Multiple hubs are
frequently connected to a switch to segment the network and improve
overall performance. We offer a full range of hubs for customers of all
sizes. For the small office or branch office, OfficeConnect Ethernet and
Fast Ethernet hubs offer simple, plug and play connectivity. Our
SuperStack hubs offer a range of options for small, medium, and large
enterprises, including systems for Ethernet, Fast Ethernet, Gigabit
Ethernet, and Token Ring technologies.
o Internet Access Products. Our Internet access products route network
traffic between the Internet and the customer's premises. They leverage
today's access technologies--dial-up 56 Kilobits per second (Kbps) V.90,
ISDN, and DSL--to give users the most cost-effective array of connectivity
and security choices. OfficeConnect firewalls and filters provide Internet
security and filtering functions for up to 100 users. OfficeConnect remote
access routers and SuperStack II remote access servers offer
high-performance remote access support in a stackable form factor that
provides scalable and economical remote access connectivity with full
functionality.
o Network Management Products. To augment our product offerings, we offer
network management applications which deliver complete, end-to-end
management of 3Com network systems for ease of configuration, efficient
troubleshooting, and superior performance. These products are marketed
under the Transcend(R) and DynamicAccess(R) brand names and include tools
to monitor and manage network traffic performance and security.
LAN Telephony Products. Our LAN telephony products give businesses the
combination of simple, single-network economy and administration, and powerful,
standards-based feature sets that make network convergence a reality. Our NBX(R)
100 communication system looks and acts like a traditional business telephone
system, yet it is an integrated, Ethernet/IP-based product that sends voice
packets through the LAN or across the WAN with excellent audio quality and the
sturdy reliability of a self-contained, non-PC-based unit.
Services. Services complement our product offerings to provide a more complete
solution to consumers and commercial users. Our service offerings range from
traditional repair and warranty services to consulting services, and are
designed to help companies succeed by making their networks more efficient,
reliable, and responsive to fast-changing business conditions. We also provide
comprehensive support services.
o Small- to mid-sized network installations. We provide consulting and other
professional services to assist users in planning, building, and managing
their networks, so that their networks will run at peak performance.
o 3Com e-Business solutions. Our e-Business solutions help with network
design, Internet strategies, and software engineering that growing
businesses require to stay competitive.
Broadband Connections. Our standards-based cable and DSL modems connect to the
Internet easily at high speeds. HomeConnect(TM) cable modems offer superior
reliability, high performance, and simple installation and operation. They
function on both traditional one-way cable networks and newer hybrid fiber
coaxial (HFC) two-way cable networks. Our HomeConnect DSL modems are ideal for
the home or small office and offer dedicated, always-on Asymmetric Digital
Subscriber Line (ADSL) service for data, voice, and video. Users can talk on the
phone and be on-line at the same time.
5
Home Networking Products. Our HomeConnect Home Network Kits enable users to
share high-speed Internet access, share printers and modem resources, and play
multi-user games--all for a price that's affordable for home or home office
budgets. The HomeConnect Internet gateway takes the complexity out of connecting
and managing multiple home computers for shared Internet access. It also
provides an easy way to network home computers for sharing of files and
peripheral devices. The home network gateway gives users a reliable, secure
Internet connection, and manages attached equipment such as computers and
modems.
Internet Appliances. Internet appliances are purpose-built devices which deliver
information-based lifestyle enhancements to consumers. Our HomeConnect PC
Digital WebCam makes it simple to send high-quality still and moving images over
the Internet or intranet. The software included with our web camera enables
image capture for video conferencing and video chat. Internet radios such as the
Kerbango radio and other Internet-based information appliances also fall in this
category.
Carrier Networks Business
We offer network service providers a comprehensive set of IP-based networking
products that cover the entire range of network access options. As a part of a
comprehensive architectural definition called CommWorks(R), our product line
enables network service providers to build high performance, scalable, and
highly reliable packet-based networks in multi-service environments.
The CommWorks Multi-Service Architecture. The CommWorks architecture encompasses
all areas of our carrier networks business' portfolio, reflecting the
multi-service nature of our offerings in enhanced data services, IP telephony,
wireless data access, and broadband access. The CommWorks architecture gives
service providers a structured migration path as they shift from circuit-based
networks to feature-rich and efficient packet-based IP networks. The CommWorks
architecture includes a full line of products and services to support complete
IP-based infrastructures. With open interfaces throughout, the CommWorks
architecture allows service providers worldwide to quickly develop
differentiated enhanced services and stake out leadership positions in their
markets. We developed the CommWorks architecture in a standards-based
environment designed to drive the evolution of IP offerings through
relationships that will provide the building blocks for the next generation of
telecommunication service providers.
Within our Carrier Network Business, products and services fall into two major
groupings: enhanced data services, and new technologies. Both are structured
along the definitions set forth in the CommWorks architecture. Both include
complete professional services for carriers and network service providers.
Enhanced Data Services. As a pioneer in remote access service (RAS), we
currently hold a leading position in this market. The Total Control 1000
platform is currently used by many major carriers worldwide, and has an
installed base of eight million ports. The Total Control 1000 platform
incorporates leading edge technologies in digital signal processing (DSP),
access routing, call control, and network management. In addition to basic RAS
functionality, our solution offers software capability that adds additional
functionality to carrier networks.
New Technologies. New technologies are comprised of emerging products and
services and are structured along the definitions set forth in the CommWorks
architecture.
o IP Telephony. As an early participant in the market of IP Telephony, our
IP Telephony program covers a wide range of options and capabilities. The
Transparent Trunking product line allows network service providers to
deploy packet technologies in their core time division multiplexed
(TDM)/voice networks and run IP-based trunks in a cost-effective solution.
We also offer a rich set of retail services that includes multi-stage
dialing, fax, unified messaging, and Internet call waiting.
o Wireless. Our wireless solution set includes three different product
lines. The first one is targeted at existing Code Division Multiple Access
(CDMA) networks and enables these networks to offer data services. This
solution works with most of the CDMA switches in the world. A higher
speed, packet-based version of this product is also available.
Additionally, we have announced our next generation wireless solution for
carriers.
o Cable Access. We were a pioneer in enabling data services over cable
infrastructures and we currently have two Cable Modem Termination Systems
(CMTS) that are both Data Over Cable Service Interface Specification
(DOCSIS) qualified. These scalable, high performance platforms provide
cable operators with a cost-effective and reliable mechanism to offer a
rich set of data services over their cable plants.
6
o DSL Access. We recently announced an OEM relationship with Copper Mountain
Networks, Inc. ("Copper Mountain"). As a part of this relationship, we
offer the Copper Mountain Digital Subscriber Line Access Multiplier
(DSLAM) product line as the Total Control 500. This product adds DSL as an
important element to our solution set and addresses a key requirement for
carrier customers.
NEW PRODUCTS
In fiscal 2000, we announced or delivered a range of new products and
enhancements to refresh our traditional product lines and to enter new markets.
These include:
Commercial and Consumer Networks Business
o Switch 4007 Layer 2 and 3 support for Gigabit Ethernet and Fast
Ethernet aggregation
o SuperStack II Switch 9100 Copper Gigabit Ethernet switching for
workgroup and server aggregation
o SuperStack II Switch 1000BASE-LX and 1000BASE-T Modules
cost-effectively add a fiber Fast Ethernet backbone link to a
switched workgroup
o SuperStack II Switch 3300 XM Fast Ethernet switching for workgroups
and backbone networks
o SuperStack II Remote Access System 1500 enterprise class remote
access server
o NBX 25 Communications System, an Ethernet LAN-based telephony and
data solution that offers small businesses a single network for
voice and data communications
o AirConnect 11 Mbps wireless LAN Access Point, Starter Pack, PC Card,
and NIC
o Megahertz(R)56K Global GSM and Cellular Modem PC Card
o Megahertz 10/100 LAN+56K Global Modem CardBus PC Card with
autosensing XJACK(R)connector
o OfficeConnect ADSL Router for high-speed broadband access over phone
lines
o OfficeConnect Internet Firewall provides affordable, effective
Internet security for the small business
o OfficeConnect Web Site Filter extends Internet access filtering of
3Com's OfficeConnect Internet Firewall
o OfficeConnect Dual 56K LAN Modem
o HomeConnect ADSL Modem Dual Link lets two or more computers share
one ADSL connection
o HomeConnect Cable Modem External connects one computer or as many as
15 computers over a 10BASE-T LAN in a small office or home
o HomeConnect IDSL Modem connects one computer in a home or small
personal office to the Internet over a hybrid of ISDN and DSL
o HomeConnect ADSL Modem with Universal Serial Bus (USB) and
Ethernet ports delivers always-on ADSL service for data, voice, and
video
o HomeConnect 10 Megabit Phoneline Network products create a two-PC
home or home office network quickly and easily over existing phone
wiring
o HomeConnect Home Network Gateway gives users reliable, secure
Internet connectivity, and manages attached equipment such as
computers and modems
Carrier Networks Business
o Total Control 2000 multi-service access platform that will support a
variety of access media, including narrowband data services, IP
telephony, wireless data, and broadband services
o New DSP card set options for Total Control 1000 multi-service access
platform
o CommWorks 8210 unified messaging system
o CommWorks 5000 Network and Service Management System, which migrates
analog networks to next-generation, packet-based converged
e-Networks
o CommWorks 4000 SoftSwitch enables next-generation IP-based
multimedia services
o Virtual Private Network (VPN) Gateway for Enhanced Data Services
offers the same levels of availability, performance, and security as
private WAN links, with the additional benefits of scalability and
manageability
o Total Control 1000 Platform Interworking Function (IWF) high density
gateway
o Expanded CommWorks architecture, including remote access, IP
telephony, wireless, and cable access
o CommWorks IP telephony platform-CommWorks Enhanced Services Phase 1,
including retail IP telephony applications, fax-over-IP, and
interactive voice response
7
PRODUCT DEVELOPMENT
Our research and development expenditures in fiscal years 2000, 1999, and 1998
were $610.9 million, $589.2 million, and $554.9 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 2001, we plan to
invest nearly half of our total research and development expenditures in
broadband, wireless, and IP telephony technologies to accelerate the
introduction of new products to market.
Historically, we have incorporated proprietary application-specific integrated
circuits (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.
MARKETS AND CUSTOMERS
Our commercial and consumer networks business uses a highly leveraged,
web-enabled business model to deliver the benefits of radical simplicity to
millions of customers. Our carrier networks business uses a targeted, direct
business model to create high-value service delivery solutions for our carrier
and network service provider customers.
We serve three key markets: commercial enterprises with small- to mid-sized
locations, consumers, and carriers and network service providers.
Commercial. For commercial enterprises with small to mid-sized locations, we
deliver high-performance, cost-effective, easy-to-use network solutions that
make it simple for employees to communicate with co-workers, set up efficient
business relationships and supply chains with partners, and reach out to
customers on a one-to-one basis. We offer secure, universal connectivity for
workgroups in organizations of any size, with a focus on access products such as
high speed LANs, web e-Network appliances, business LAN telephony, and broadband
Internet access.
Consumer. We offer home network users, telecommuters, and mobile users rich,
simple networking products that provide information, entertainment, and
increased personal productivity. We offer economical home networks that give
consumers quick, dependable, and secure Web access and allow the sharing of
files and peripheral devices.
Carrier. The carrier and network service provider market ranges from traditional
phone companies to new entrants specializing in high-speed data, wireless, and
cable communications. We supply these companies with network solutions that
allow them to create new service offerings and help them to establish unique
positions in a competitive marketplace. Our versatile, scalable architecture
makes it possible for carriers to integrate their existing infrastructures with
innovative technologies that deliver an array of converged IP-based services to
their customers, including enhanced data services, IP telephony, DSL access
systems, cable access systems, and wireless access systems.
For the fiscal year ended June 2, 2000, Ingram Micro Inc. ("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. For the fiscal year ended May 31, 1998, Ingram Micro accounted for
14 percent of our total sales.
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 maintain sales offices in 44 countries outside the
U.S.
8
BACKLOG
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 2,
2000, 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.
COMPETITION
Our competitors range from large telecommunications equipment companies and
well-capitalized computer systems and communications companies, to start-up
companies focused on certain niches of the networking market.
The commercial network market is characterized by a few broad-based suppliers
offering multiple product lines as well as several companies with specialized
product offerings. Principal competitors in the commercial market include Cisco
Systems, Hewlett-Packard, Intel, Lucent Technologies, Motorola, Nortel Networks,
and Xircom.
Competitors in the consumer market include Alcatel, Com21, Efficient Networks,
Intel, Motorola, NETGEAR, and Nortel Networks.
Competitors in the carrier network market include Alcatel, Cisco Systems,
Clarent, Lucent Technologies, Nortel Networks, Redback Networks, Siemens, and
Sonus Networks.
In addition, we expect increasing competition from companies who could
potentially incorporate networking, communications, and other computer
processing functions onto a single chip.
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 2, 2000, we had 356 U.S. patents
(including 342 utility patents and 14 design patents) and 83 foreign patents.
During fiscal 2000, we filed 362 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 107 trademarks in the U.S. and have registered 82 trademarks
in one or more of 73 foreign countries. Numerous applications for registration
of domestic and foreign trademarks are currently pending.
9
EMPLOYEES
As of June 2, 2000, we had 10,597 full time employees, of whom 2,654 were
employed in engineering, 3,094 in sales, marketing, and customer service, 2,819
in manufacturing, and 2,030 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. Our consolidated financial statements set forth in Item 8 have
been restated to account for Palm as a discontinued operation. Palm's business
consists of the Palm(TM) branded line of handheld devices, the Palm OS(R)
operating system platform, and the Palm.Net(R) service offering. Palm develops,
designs, and markets Palm-branded handheld devices, which include the Palm III,
Palm V, and Internet-enabled Palm VII product families. In addition, Palm
licenses the Palm platform and provides the Palm.Net wireless Internet access
service to support Internet-enabled handheld devices. Palm employs approximately
1,000 people worldwide.
BUSINESS REALIGNMENT
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.
In connection with the separation of Palm, we incurred business realignment
costs, which consisted primarily of incremental third party costs related to
legal and accounting services, strategic business planning, information systems
separation, development of compensation and benefits strategies, and costs to
recruit certain key Palm management. As of June 2, 2000, we had incurred $9.9
million in realignment costs resulting from the Palm separation. Direct costs of
the IPO, such as the underwriters' commissions and legal and accounting fees,
were deducted from the proceeds of the offering.
We also announced plans to realign our strategy to focus on high-growth markets,
technologies, and products. We are structuring our operations around two
distinct business models: 1) Commercial and Consumer Networks Business and 2)
Carrier Networks Business. In support of our new strategy, we announced a number
of investments in new technologies and relationships with other companies. We
are also exiting three major product lines that are no longer strategic to our
future. During the fourth quarter of fiscal 2000, we exited our high-end LAN and
WAN chassis product lines. We are currently in the process of exiting our
analog-only modem product line. As of June 2, 2000, we have recognized $59.0
million in realignment charges related to implementing our change in strategic
focus, as follows:
o $59.9 million charge for severance and outplacement costs related to
the termination of approximately 2,900 employees;
o $27.2 million charge related to payments to suppliers and vendors to
terminate agreements;
o $20.2 million charge for realignment costs related to the
disposition of long-term assets, primarily hardware and software;
o $8.9 million charge for costs associated with the closure of
approximately 300,000 square feet of office space through lease
terminations;
o $9.2 million charge related to other restructuring costs, primarily
associated with professional fees and other direct costs of
realignment; partially offset by a
o $66.4 million gain that arose from a warrant to purchase common
stock in Extreme Networks, Inc., received in exchange for
implementation of a migration path for our customers of
CoreBuilder(R) products.
We expect to substantially complete our business realignment initiatives during
calendar year 2000.
10
ITEM 2. Properties
We operate in a number of locations worldwide. In fiscal 2000, we had several
significant real estate activities.
During the first quarter of fiscal 2000, we sold a 133,000 square foot office
building in Skokie, IL. The employees from this facility and others were
consolidated into a larger campus in the Chicago area.
During the third quarter of fiscal 2000, we sold a 153,840 square foot
manufacturing and office facility in Salt Lake City, Utah. The property was sold
to an outsource manufacturer that continues to manufacture products for us in
the facility.
We began an expansion project at the existing Dublin, Ireland manufacturing
facility. This expansion will add 170,000 square feet to the existing 307,000
square feet. The construction is in progress and is due to be completed and
fully operational by October 2000.
We lease and sublease to Palm approximately 195,000 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, respectively. These locations, as
well as other subleased locations, are included in the table below.
We also own approximately 39 acres of undeveloped land in the San Francisco Bay
Area, which is currently under contract for sale to Palm. The transaction is
scheduled to close in fiscal 2001.
Our primary locations include the following:
Location Sq. Ft. Owned/Leased Primary Use
- -------- ------- ------------ -----------
United States - 1,487,000 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
United States - 1,149,000 Owned Office, research and development, customer service,
Chicago Area and manufacturing
310,000 Owned Property vacant; held for sale
United States - 571,000 Leased Office, research and development, customer service,
Boston Area and manufacturing
United States - 185,000 Owned Office, research and development
Salt Lake City
Asia Pacific - 333,000 Owned Office, manufacturing, and distribution
Singapore
Europe - 307,000 Owned Office, research and development, and manufacturing
Ireland
Europe - 275,000 Owned/Leased Office, research and development, and customer
UK service
11
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
On March 24 and May 5, 1997, securities class action lawsuits, captioned Hirsch
v. 3Com Corporation, et al., Civil Action No. CV764977 (Hirsch), and Kravitz v.
3Com Corporation, et al., Civil Action No. CV765962 (Kravitz), respectively,
were filed against 3Com and certain of its officers and directors in the
California Superior Court, Santa Clara County. The complaints allege violations
of Sections 25400 and 25500 of the California Corporations Code and seek
unspecified damages on behalf of a class of purchasers of 3Com common stock
during the period from September 24, 1996 through February 10, 1997. In late
1999, these cases were stayed by the Court, pending resolution of proceedings in
the Euredjian v. 3Com Corporation matter, discussed below. Because the Euredjian
case has been dismissed, the Hirsch and Kravitz cases are no longer stayed. They
are in discovery. No trial date has been scheduled.
On February 10, 1998, a securities class action, captioned Euredjian v. 3Com
Corporation, et al., Civil Action No. C-98-00508CRB (Euredjian), was filed
against 3Com and several of its present and former officers and directors in
United States District Court for the Northern District of California asserting
the same class period and factual allegations as the Hirsch and Kravitz actions.
The complaint alleges violations of the federal securities laws, specifically
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks
unspecified damages. In May 2000, at the request of plaintiffs, the Court
dismissed the Euredjian case with prejudice.
In December 1997, a securities class action, captioned Reiver v. 3Com
Corporation, et al., Civil Action No. C-97-21083JW (Reiver), was filed in the
United States District Court for the Northern District of California. Several
similar actions have been consolidated into this action, including Florida State
Board of Administration and Teachers Retirement System of Louisiana v. 3Com
Corporation, et al., Civil Action No. C-98-1355. On August 17, 1998, the
plaintiffs filed a consolidated amended complaint which alleges violations of
the federal securities laws, specifically Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934, and which seeks unspecified damages on
behalf of a purported class of purchasers of 3Com common stock during the period
from April 23, 1997 through November 5, 1997. 3Com has answered an amended
complaint and the case is now in discovery. No trial date has been scheduled.
In October 1998, a securities class action lawsuit, captioned Adler v. 3Com
Corporation, et al., Civil Action No. CV777368 (Adler), was filed against 3Com
and certain of its officers and directors in the California Superior Court,
Santa Clara County, asserting the same class period and factual allegations as
the Reiver action. The complaint alleges violations of Sections 25400 and 25500
of the California Corporations Code and seeks unspecified damages. By agreement
of the parties, this case will be stayed to allow the Reiver case to proceed.
On May 11, 1999, a securities class action, captioned Gaylinn v. 3Com
Corporation, et al., Civil Action No. C-99-2185 MMC (Gaylinn), was filed against
3Com and several of its present and former officers and directors in United
States District Court for the Northern District of California. Several similar
actions have been consolidated into the Gaylinn action. On September 10, 1999,
the plaintiffs filed a consolidated complaint which alleges violations of the
federal securities laws, specifically Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and seeks unspecified damages on behalf of a purported
class of purchasers of 3Com common stock during the period from September 22,
1998 through March 2, 1999. In January 2000, the Court dismissed the complaint.
In February 2000, plaintiffs filed an amended complaint. In June 2000, the Court
dismissed the amended complaint without prejudice. Plaintiffs filed another
amended complaint. On July 24, 2000, the Company filed a motion to dismiss the
latest amended complaint.
12
Intellectual Property
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case is now captioned Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm
Computing, Inc. and 3Com Corporation (Civil Action Number 97-CV-6182T). The
Complaint alleged willful infringement of United States Patent Number 5,596,656,
entitled "Unistrokes for Computerized Interpretation of Handwriting." The
Complaint sought to permanently enjoin the defendants from infringing the patent
in the future. In an Order entered by the Court on June 6, 2000, the Court
granted the defendants' motion for summary judgment of non-infringement, and the
case was dismissed in its entirety. Xerox has appealed the dismissal to the U.S.
Court of Appeals for the Federal Circuit.
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.
Name Age Position
---- --- --------
Eric A. Benhamou 44 Chairman and Chief Executive Officer
Bruce L. Claflin 48 President and Chief Operating Officer
Irfan Ali 36 Senior Vice President and General Manager, Carrier Networks
Business
Dennis Connors 46 Senior Vice President, e-Commerce
George Everhart 53 Senior Vice President, Worldwide Sales
Jef Graham 44 Senior Vice President and General Manager, Commercial and
Consumer Networks Business
John H. Hart 54 Senior Vice President and Chief Technical Officer
Randy R. Heffner 50 Senior Vice President, Manufacturing Operations
Edgar Masri 42 Senior Vice President, Business Development and
President, 3Com Ventures
John McClelland 55 Senior Vice President, Supply Chain Operations
Mark D. Michael 49 Senior Vice President, Legal and Government Relations, and
Secretary
Eileen Nelson 53 Senior Vice President, Corporate Services
Michael Rescoe 47 Senior Vice President, Finance, and Chief Financial Officer
13
Name Age Position
---- --- --------
Steve Rowley 41 Senior Vice President, Americas Sales
Paul Sherer 41 Senior Vice President, Technology
Jan Soderstrom 53 Senior Vice President, Marketing and Brand Management
David H. Starr 49 Senior Vice President and Chief Information Officer
ERIC A. BENHAMOU has been Chief Executive Officer since September 1990 and
served as President from April 1990 through August 1998. Mr. Benhamou became
Chairman of the Board of Directors in July 1994. Mr. Benhamou served as 3Com's
Chief Operating Officer from April 1990 through September 1990. From October
1987 through April 1990, Mr. Benhamou held various general management positions
within 3Com. Mr. Benhamou serves as Chairman of the Board of Directors of Palm,
Inc., Chairman of the Board of Directors of Cypress Semiconductor, Inc. and as a
member of the Board of Directors of Legato Systems, Inc. Mr. Benhamou is a
member of President Clinton's Information Technology Advisory Council.
BRUCE L. CLAFLIN has been 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 member of the Board of Directors of Time Warner Telecom.
IRFAN ALI has been the Senior Vice President and General Manager of the Carrier
Networks Business since March 1999. From October 1997 to March 1999 he was Vice
President, Worldwide Marketing--Carrier Systems Business Unit. 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. From August
1987 to July 1991, Mr. Ali was a Senior Member of the Scientific Staff at
Bell-Northern Research.
DENNIS CONNORS has been Senior Vice President of the e-Commerce Group since June
2000 and Senior Vice President of Global Customer Service since November 1999.
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 at General Electric and 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.
GEORGE EVERHART has been Senior Vice President of Worldwide Sales since July
2000. From May 1997 through November 1999, Mr. Everhart was the President and
Chief Executive Officer for Fujitsu PC Corporation. He served as the President
and Chief Operating Officer for Fujitsu from April 1996 through May 1997. Before
joining Fujitsu, Mr. Everhart held various sales, marketing and general
management positions at Apple Computer, Inc. In 1993, he served as the Vice
President and General Manager of Apple's Business Markets Division. From 1993
through 1994, Mr. Everhart served as the Vice President and General Manager of
Apple's PC Business Division. He served as Apple's Vice President of U.S. Sales
from 1994 through 1995. From 1995 through 1996, Mr. Everhart served as Apple's
Vice President of Business and Government Sales. Mr. Everhart is currently an
Advisory Board Member for Sevant.com. He also sits on the Board of the Computing
Technology Industry Association (CompTIA), as well as the Board of Fellows for
the University of Santa Clara.
JEF GRAHAM has been Senior Vice President and General Manager of the Commercial
and Consumer Networks Business since April 2000 and Senior Vice President and
General Manager of the Personal Connectivity Business Unit from April 1999
through March 2000. Mr. Graham joined 3Com in August 1995 as Vice President and
General Manager of the Mobile Communications Division. Prior to joining 3Com, he
was President and Chief Executive Officer of Trident Systems, Inc. from May 1993
to July 1995. From July 1978 to April 1993, Mr. Graham held various general
management, sales and marketing positions around the world for Hewlett-Packard
Company.
14
JOHN H. HART has been Senior Vice President and Chief Technical Officer since
August 1996. From the time Mr. Hart joined 3Com in September 1990 until July
1996, he was Vice President and Chief Technical Officer. Prior to joining 3Com,
Mr. Hart worked for Vitalink Communications Corporation from June 1983 to August
1990, where his most recent position was Vice President of Network Products.
RANDY R. HEFFNER has been Senior Vice President, Manufacturing Operations since
June 1997. From July 1992 through May 1997, Mr. Heffner was the Vice President
of Manufacturing for Personal Connectivity Operations. Prior to joining 3Com,
Mr. Heffner worked for NeXT Computer, Inc. as Vice President of Manufacturing
from March 1987 to January 1992. Mr. Heffner worked for Hewlett-Packard Company
from August 1974 to February 1987 in a variety of materials management and
production control positions.
EDGAR MASRI has been Senior Vice President of Business Development and
President, 3Com Ventures since April 2000. Mr. Masri served as Senior Vice
President and General Manager, Network Systems Business Unit, from January 1999
through April 2000. From May 1998 through January 1999, he was Vice President
and General Manager of the Small and Medium Sized Enterprise Business Unit. From
September 1995 to May 1998, Mr. Masri served as Vice President and General
Manager, Premises Distribution Division. Prior to becoming General Manager of
the Premises Distribution Division, Mr. Masri was Director of Marketing,
Premises Distribution Division from July 1992 to September 1995. He has held
several marketing director positions for 3Com product lines and management roles
in the fields of business development, engineering and project management. Mr.
Masri joined 3Com in December 1985.
JOHN MCCLELLAND has been Senior Vice President, Supply Chain Operations since
April 1999. 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. His last position at IBM was Vice President
Manufacturing and Distribution, IBM PC Co. from April 1994 to January 1995.
MARK D. MICHAEL has been 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. In 1989, Mr. Michael was named Corporate Secretary, and became
a Vice President in 1991. 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.
EILEEN NELSON has been Senior Vice President, Corporate Services since July
1998. From April 1997 to July 1998, Ms. Nelson served as Vice President,
Enterprise Systems and Corporate Functions, Human Resources. From 1988 to April
1997, Ms. Nelson held various Human Resources Director level roles at the
Company. Prior to joining 3Com, Ms. Nelson served as Director, Human Resources
for Tandon Corporation from 1985 to 1988. From 1983 to 1985, Ms. Nelson was the
Vice President, Human Resources and Administration at Davong Systems. Ms. Nelson
is currently a member of the Board of Directors of Junior Achievement and the
San Jose Cleveland Ballet.
MICHAEL RESCOE has been Senior Vice President, Finance, and Chief Financial
Officer since May 2000. Prior to joining 3Com, Mr. Rescoe was the Chief
Financial Officer for Intelisys Electronic Commerce. He also served as the Chief
Financial Officer for PG&E Corporation from 1997 through 1999. Mr. Rescoe was
the Chief Financial Officer of Enserch Corporation between 1995 and 1997. From
1992 through 1995, he was a Senior Managing Director (Partner) at Bear Stearns.
Starting in 1983 through 1992, Mr. Rescoe held various positions in Corporate
Finance at Kidder, Peabody, the last being Senior Vice President of Corporate
Finance.
STEVE ROWLEY has been Senior Vice President, Americas Sales since June 1999. Mr.
Rowley served as Vice President, 3Com Europe from April 1998 to June 1999. From
June 1997 to April 1998, Mr. Rowley served as Vice President, 3Com European
Enterprise Systems. From May 1996 to June 1997, Mr. Rowley served as Vice
President of Europe Sales. Before joining 3Com, Mr. Rowley was General Manager
and Marketing Director of Cellnet from 1994 to 1996. From 1984 to 1994, Mr.
Rowley held various positions at IBM. His last position at IBM was Director of
the Personal Computer Company.
PAUL SHERER has been Senior Vice President, Technology since November 1999. Mr.
Sherer joined 3Com in September 1984 in its New Business Unit, and was appointed
Vice President of Technology Development in November 1994. Mr. Sherer was a
founder of the Fast Ethernet Alliance Industry consortium and served as the
founding Chairman. As an inventor at 3Com, Mr. Sherer has been issued many
United States and international patents in the areas of Network Performance
Optimization, Network Security, Packet Switching, Network Management, Protocol
Optimization, Physical Signaling, Fast Ethernet, Software Optimization, Gigabit
Ethernet, and Multimedia on Data Networks.
15
JAN SODERSTROM has been Senior Vice President, 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. She also served as Senior Vice President of Marketing for The Gap Stores
from 1983 to 1984. 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.
Ms. Soderstrom is currently a member of the Board of Directors for the Women's
Tennis Association and Illuminations.
DAVID STARR has been Senior Vice President and Chief Information Officer since
August 1999. Prior to joining 3Com, Mr. Starr was the Chief Information Officer
at Knight-Ridder from June 1998 to June 1999. From June 1997 to June 1998, Mr.
Starr was the Chief Information Officer at Reader's Digest. Prior to Reader's
Digest, Mr. Starr was Chief Information Officer for ITT Corporation from 1994
through 1997.
PART II
ITEM 5. Market for 3Com Corporation's Common Stock and Related Stockholder
Matters
Fiscal 2000 High Low Fiscal 1999 High Low
- ----------- ---- --- ----------- ---- ---
First Quarter $32 3/8 $22 5/8 First Quarter $32 13/16 $22 15/16
Second Quarter 45 3/8 24 5/16 Second Quarter 42 1/8 23 1/8
Third Quarter 84 1/4 38 1/8 Third Quarter 51 1/8 30 1/16
Fourth Quarter 119 3/4 35 9/16 Fourth Quarter 31 1/4 20
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 sales prices as reported on the Nasdaq stock market
during the last two years. As of June 2, 2000 we had approximately 5,941
stockholders of record. Our credit agreement permits payment of cash dividends
subject to certain limitations based on our net income levels. However, 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 reflect historical stock prices during fiscal
2000 and 1999 and have not been restated to reflect the distribution of our
ownership in Palm to our shareholders.
16
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. The table below has been
restated to account for Palm as a discontinued operation.
Years ended
--------------------------------------------------------------------------
May 28, May 31, May 31, May 31,
(In thousands, except June 2, 1999 1998 1997 1996
per share and employee data) 2000 (Restated) (Restated) (Restated) (Restated)
- --------------------------------------------------------------------------------------------------------
Sales $4,333,942 $5,202,253 $5,156,016 $5,481,681 $4,249,897
Net income from operations 674,303 403,874 30,214 500,533 347,875
Net income from continuing
operations 615,563 364,945 23,046 496,881 349,642
Net income per share,
continuing operations:
Basic $1.77 $1.01 $0.07 $1.50 $1.11
Diluted 1.72 0.99 0.06 1.41 1.02
- --------------------------------------------------------------------------------------------------------
Total assets $6,492,954 $4,412,275 $4,048,887 $3,559,437 $2,590,000
Assets, net of discontinued
operations 5,434,717 4,331,995 3,954,513 3,526,219 2,585,194
Working capital, net of
discontinued operations 3,184,718 2,162,345 1,868,704 1,543,468 1,238,012
Long-term obligations 93,453 94,268 92,135 170,652 169,536
Retained earnings 1,982,079 1,403,709 1,079,775 1,049,561 691,850
Stockholders' equity 4,043,064 3,196,455 2,807,495 2,228,344 1,650,675
Number of employees 10,597 12,543 12,610 13,477 11,453
- --------------------------------------------------------------------------------------------------------
The per share amounts presented below are calculated net of taxes. For years
prior to fiscal year 2000, the per share amounts are calculated net of taxes,
using historical tax rates.
Net income for fiscal 2000 included a net pre-tax charge of approximately $13.5
million ($0.03 per share) for purchased in-process technology, a net pre-tax
credit of approximately $2.3 million (no per share effect) primarily associated
with past merger activities, a net pre-tax gain on the sale of land and
facilities of $25.5 million ($0.05 per share), a net pre-tax charge of $68.9
million ($0.14 per share) for business realignment costs associated with our
change in strategy and the Palm separation, and a net pre-tax gain on sale of
investments of $838.8 million ($1.49 per share). Net income for fiscal 1999
included a net pre-tax charge of approximately $10.6 million ($0.02 per share)
for purchased in-process technology, a net pre-tax credit of approximately $17.6
million ($0.03 per share) primarily associated with past merger activities, a
pre-tax gain on sale of land and facilities of $4.2 million ($0.01 per share)
and a pre-tax loss on investments of $2.6 million (no per share effect). Net
income for fiscal 1998 included a pre-tax charge of approximately $8.4 million
($0.02 per share) related to purchased in-process technology and a net pre-tax
charge of approximately $253.7 million ($0.58 per share) for merger-related
costs and disposition of real estate. Net income for fiscal 1997 included a
pre-tax charge of approximately $54.0 million ($0.15 per share) for purchased
in-process technology, a pre-tax charge of approximately $6.6 million ($0.02 per
share) for merger-related costs, and a tax benefit of approximately $17.9
million ($0.05 per share) related to an acquisition. Net income for fiscal 1996
included a net pre-tax charge of approximately $106.4 million ($0.31 per share)
for purchased in-process technology, a pre-tax charge of approximately $69.0
million ($0.14 per share) for merger-related costs, and a pre-tax charge of
approximately $1.0 million (no per share effect) for a litigation settlement.
See notes to the consolidated financial statements for additional information on
the above transactions for fiscal years 2000, 1999, and 1998.
17
Excluding the non-recurring items noted above, net income from continuing
operations and net income per share from continuing operations, on a diluted
basis would have been as follows:
Years ended
--------------------------------------------------------------------------
(In thousands, June 2, May 28, May 31, May 31, May 31,
except per share data) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Net income from continuing
operations excluding
non-recurring items $122,992 $359,227 $238,892 $539,544 $505,821
Net income per share from
continuing operations
excluding non-recurring items $0.34 $0.97 $0.65 $1.53 $1.48
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, Inc.
("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.
CHANGE IN STRATEGIC FOCUS
On March 20, 2000, we announced plans to realign our strategy to focus on
high-growth markets, technologies, and products. We are structuring our
operations around two distinct business models: 1) Commercial and Consumer
Networks Business and 2) Carrier Networks Business.
The commercial and consumer networks business uses a highly leveraged,
web-enabled business model to deliver the benefits of radical simplicity to
millions of customers. The focus of our commercial and consumer networks
business is on targeted sectors of the commercial and consumer markets.
The carrier networks business uses a targeted, direct business model to create
high-value service delivery solutions for our carrier and network service
provider customers. The focus of our carrier networks business is on
carrier-class access infrastructures and IP services platforms for the network
service provider market.
In support of our new strategy, we also announced a number of investments in new
technologies and relationships with other companies. We are also exiting three
major product lines that are no longer strategic to our future.
Commercial and Consumer Networks Business
We announced three alliances. We will be integrating Inktomi's web-caching
technology, SonicWALL's firewall technology, and F5 Networks' Layer 4 through
Layer 7 switching technology with our network solutions. These capabilities
enrich our commercial network solutions by making them more secure and more
application-ready.
We also announced two voice-technology strategic partnerships, one with Apropos
Technology and the other with Symbol Technologies, that will help us develop
IP-based call center and multimedia customer interaction centers layered upon
our NBX LAN telephony solutions.
18
We announced a strategic relationship with CAIS, the leading service provider in
the hospitality market. In the first quarter of fiscal 2001, we made a $20
million minority equity investment in CAIS. Hotel rooms and other such community
spaces are examples of small-to-mid-sized locations which are rapidly ramping-up
their networking capabilities for Internet, voice, and video service delivery.
CAIS is making purchase commitments to us for network infrastructure equipment
used to create these vertical solutions for hospitality environments.
During fiscal 2000, we also formed a global alliance with marchFIRST to develop,
market, and deliver wireless applications for the mobile workplace and converged
voice, video, and data solutions. We made a $40 million minority equity
investment in marchFIRST and we agreed to contribute up to $60 million to fund
the development of several solutions which we will jointly develop and sell. One
of these solutions is Distance Learning, targeted to the education environment.
The second is Enterprise Mobility, targeted at the retail environment. The third
is a Call Center, which brings together advanced telephony and the Internet into
an integrated environment. All three of these solutions represent potential
high-growth markets where customers want turnkey, drop-in solutions.
Carrier Networks Business
During our fourth fiscal quarter, we acquired Call Technologies, a
Virginia-based software leader in the field of Unified Messaging (UM) and
carrier-class Operational Support Systems (OSS) management. Unified messaging
gives people access to any message--voice, fax, or email--across any network.
The OSS product set from Call Technologies provides carriers with advanced
capabilities to deliver end-to-end services across the network.
We also announced an expansion of our strategic partnership with Copper
Mountain, which will now include Copper Mountain's Digital Subscriber Line
Access Multiplexer (DSLAM) product. This adds DSL as a key access infrastructure
to complement our existing access options over dial-up, cable, and wireless
infrastructures.
We made a $4 million minority equity investment in Atrica, a start-up in the
field of fiber-based Metropolitan Area Networking (MANs). We expect MANs to
become another important access infrastructure which will provide the framework
for the provisioning, management, and delivery of IP-based services.
Exiting Product Lines
In addition, we have exited or are in the process of exiting product lines that
are no longer strategic to our future. During the fourth quarter of fiscal 2000,
we exited our high-end LAN and WAN chassis product lines. We are currently in
the process of exiting our analog-only modem product line.
During the fourth quarter of fiscal 2000, we executed definitive agreements with
Extreme and Motorola, pertaining to our exit from high-end LAN and WAN chassis
product lines, respectively. We completed the transfer of assets and human
resources associated with these product lines and contacted all of our affected
strategic partners and customers. We also made available to them various
transition paths for their networks and dedicated resources from our Large
Account Program Office. We will continue to sell support contracts to customers
who have purchased our high-end LAN and WAN chassis products.
We signed separate agreements with our partners Accton Technology and NatSteel
Electronics pertaining to the transfer of our analog-only modem product line to
a joint venture. The new company is called U.S. Robotics Corporation ("New USR")
and we hold a minority equity position. New USR will research, design, market,
and sell Internet access products, including U.S. Robotics(R)-branded analog
modems. We have entered into non-binding agreements pertaining to the sale or
transfer of our manufacturing and distribution operations based in Chicago,
Illinois and our Mount Prospect, Illinois manufacturing facility.
19
BUSINESS COMBINATIONS AND JOINT VENTURES
We completed the following transactions during the fiscal year ended June 2,
2000:
o On April 3, 2000, we acquired certain assets of Call Technologies, Inc.
("Call Technologies"), a leading developer of Unified Messaging (UM) and
carrier-class Operational Systems and Support (OSS) software solutions for
service providers. The aggregate purchase price was $86.0 million,
consisting of cash paid to Call Technologies of $73.4 million, assumption
of stock options with a fair value of $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. $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 $86.7 million of goodwill and other intangible assets that are being
amortized over estimated useful lives of three to seven years.
o On December 22, 1999, we acquired certain assets of LANSource
Technologies, Inc. ("LANSource"), a leading developer of Internet and LAN
fax software and modem sharing software. The aggregate purchase price was
$15.8 million, consisting of cash paid to LANSource of $15.6 million and
$0.2 million of costs directly attributable to the completion of the
acquisition. $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 $13.3
million of goodwill and other intangible assets that are being amortized
over estimated useful lives of two to five years.
o On December 2, 1999, we acquired certain assets of Interactive Web
Concepts, Inc. ("IWC"), an Internet business consulting, creative design,
and software engineering firm. The aggregate purchase price was $3.5
million, consisting of cash paid to IWC of $3.4 million and $0.1 million
of costs directly attributable to the completion of the acquisition. This
purchase resulted in $4.1 million of goodwill and other intangible assets
that are being amortized over estimated useful lives of three years.
Subsequent to our fiscal year ended June 2, 2000, we acquired Kerbango, Inc.
("Kerbango"), the developer of the world's first standalone Internet radio,
radio tuning system, and radio web site. The aggregate purchase price was
approximately $80 million.
We completed the following transactions during the fiscal year ended May 28,
1999:
o On March 5, 1999, we acquired NBX Corporation ("NBX"). 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, we acquired certain assets of ICS Networking, Inc.
("ICS"), a wholly-owned subsidiary of Integrated Circuit Systems, Inc. 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 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.
20
o On November 6, 1998, we acquired EuPhonics, Inc. ("EuPhonics"). 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 are being
amortized over estimated useful lives of four years.
We completed the following acquisitions during the fiscal year ended May 31,
1998:
o On June 12, 1997, we completed a merger with U.S. Robotics Corporation
("U.S. Robotics"), the leading supplier of products and systems for
accessing information across the wide area network (WAN), including modems
and remote access products. This merger was accounted for as a
pooling-of-interests. We issued approximately 158 million shares of our
common stock in exchange for all outstanding common stock of U.S.
Robotics. We also assumed all options to purchase U.S. Robotics' stock,
which were converted into options to purchase approximately 31 million
shares of our common stock, pursuant to the terms of the merger.
o On March 2, 1998, we purchased Lanworks Technologies, Inc. ("Lanworks"),
for approximately $13.0 million in cash. Approximately $8.4 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 1998.
21
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 income (the table below has been restated to account for Palm as a
discontinued operation):
Fiscal Years Ended
---------------------------------
May 28, May 31,
June 2, 1999 1998
2000 (Restated) (Restated)
---------------------------------
Sales 100.0% 100.0% 100.0%
Cost of sales 57.3 55.7 56.4
----- ----- -----
Gross margin 42.7 44.3 43.6
----- ----- -----
Operating expenses:
Sales and marketing 22.0 19.8 21.1
Research and development 14.1 11.3 10.8
General and administrative 4.9 4.4 4.9
Purchased in-process technology 0.3 0.2 0.2
Merger-related (credits) charges, net (0.1) (0.3) 4.9
Net gains on land and facilities (0.5) (0.1) --
Business realignment costs 1.6 -- --
----- ----- -----
Total operating expenses 42.3 35.3 41.9
----- ----- -----
Operating income 0.4 9.0 1.7
Gains (losses) on investments, net 19.4 (0.1) --
Interest and other income, net 2.4 1.1 0.3
----- ----- -----
Income from continuing operations before income taxes and
equity interests 22.2 10.0 2.0
Income tax provision 7.9 3.0 1.6
Other interests in loss of consolidated joint venture -- -- --
Equity interest in loss of unconsolidated investee 0.1 -- --
----- ----- -----
Net income from continuing operations 14.2 7.0 0.4
Net income from discontinued operations 1.4 0.8 0.2
----- ----- -----
Net income 15.6% 7.8% 0.6%
===== ===== =====
Pro forma:
Operating expenses 41.0% 35.5% 36.8%
Operating income 1.7 8.8 6.8
Net income 2.8 6.9 4.6
Pro forma results. Pro forma results exclude the following, net of taxes:
purchased in-process technology, merger-related (credits) charges, gains on land
and facilities, business realignment costs, gains (losses) on investments, and
net income from discontinued operations.
Other non-recurring charges. In addition, during our fourth fiscal quarter, we
incurred certain non-recurring charges related to the exiting of our high-end
LAN and WAN chassis and analog-only modem product lines. These costs, which are
included in both actual and pro forma results, totaled $59.3 million, of which
$55.5 million is included in cost of sales, $2.4 million is included in sales
and marketing, $0.9 million is included in research and development, and $0.5
million is included in general and administrative.
22
Comparison of fiscal years ended June 2, 2000 and May 28, 1999
Sales
Through the end of fiscal 2000, our principal operating segments were Network
Systems and Personal Connectivity. As a result of our new strategic focus, our
principal operating segments beginning in fiscal 2001 are expected to be: 1)
Commercial and Consumer Networks Business and 2) Carrier Networks Business.
Fiscal 2000 sales totaled $4.33 billion, a decrease of 17 percent from fiscal
1999 sales of $5.20 billion.
Network Systems. Sales of network systems products (e.g., switches, hubs, remote
access concentrators, routers, and customer service and support) in fiscal 2000
were $2.21 billion, a decrease of 15 percent from fiscal 1999 sales of $2.61
billion. The decrease in sales of network systems products when compared to
fiscal 1999 was due to our business realignment activities as well as increased
price competition and loss of market share in the LAN workgroup hubs and
switches markets. On March 20, 2000, we announced that we would be exiting our
high-end LAN and WAN chassis product lines. This announcement caused us to
experience a significant decrease in sales related to these products in the
fourth quarter of fiscal 2000, as well as some disruption to the sales of
on-going products. Sales of network systems products represented 51 percent of
total sales in fiscal 2000 compared to 50 percent of total sales in fiscal 1999.
Personal Connectivity. Sales of personal connectivity products (e.g., desktop
NICs, desktop modems, and personal computer (PC) cards for mobile computers) in
fiscal 2000 were $2.12 billion, a decrease of 18 percent from fiscal 1999 sales
of $2.59 billion. The decrease in sales of personal connectivity products when
compared to fiscal 1999 was due to our business realignment activities as well
as industry-wide price declines within the markets for both analog modems and
NICs. We announced on March 20, 2000 that we would be exiting our analog-only
modem product line. As a result, we experienced a significant decrease in sales
related to these products in the fourth quarter of fiscal 2000. Sales of
personal connectivity products represented 49 percent of total sales in fiscal
2000 compared to 50 percent of total sales in fiscal 1999.
New Operating Segments. As a result of our new strategic focus, beginning in the
first quarter of fiscal 2001, we expect to report our financial results in two
principal operating segments: 1) Commercial and Consumer Networks Business and
2) Carrier Networks Business. We have exited our high-end LAN and WAN chassis
product lines and are in the process of exiting our analog-only modem product
line, and will present sales information for these product lines together,
separately from our two operating segments.
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
is largely attributable to our decision, announced on March 20, 2000, to exit
our high-end LAN and WAN chassis and analog-only modem product lines as part of
our business realignment 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 42.7 percent in fiscal 2000, compared
to 44.3 percent in fiscal 1999. The decline in gross margins 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 46.4 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 business realignment. 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 25.3 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. We expect gross margins as a percentage of
sales to improve from our fourth quarter levels, trending toward our long-term
target of 44 to 46 percent of sales, which we expect to reach during fiscal year
2002.
23
Operating Expenses
Operating expenses in fiscal 2000 were $1.83 billion, or 42.3 percent of sales,
compared to $1.84 billion, or 35.3 percent of sales in fiscal 1999. Excluding
purchased in-process technology charges of $13.5 million, net gains on land and
facilities of $25.5 million, net merger-related credits of $2.3 million,
business realignment costs of $68.9 million, and $3.8 million of non-recurring
charges embedded within sales and marketing, research and development, and
general and administrative expenses related to the exiting of our high-end LAN
and WAN chassis and analog-only modem product lines, operating expenses would
have been $1.77 billion, or 40.9 percent of sales for fiscal 2000. Excluding a
purchased in-process technology charge of $10.6 million, net gains on land and
facilities of $4.2 million, and net merger-related credits of $17.6 million,
operating expenses would have been $1.85 billion, or 35.5 percent of sales for
fiscal 1999. In the fourth quarter of fiscal 2000, operating expenses as a
percentage of sales were 69.8 percent, compared to 36.3 percent for the first
three quarters of fiscal 2000. We expect operating expenses as a percentage of
sales to decrease from our fourth quarter levels, trending toward our long-term
target of 31 to 33 percent of sales, which we expect to reach during fiscal year
2002.
Sales and Marketing. Sales and marketing expenses in fiscal 2000 decreased $78.6
million or 7.6 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 19.8 percent of sales in fiscal 1999. The year-over-year decrease in sales
and marketing expenses in absolute dollars was attributable to lower salesforce
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 salesforce expenses and reduced spending on
marketing programs related to non-strategic product lines. Sales and marketing
expenses as a percentage of sales in the fourth quarter of fiscal 2000 were 32.1
percent, compared to 19.8 percent for the first three quarters of fiscal 2000.
In association with our business realignment, we have announced a new 3Com brand
identity and branding campaign. We expect to incur significant expenses on
marketing and advertising programs to build consumer and market awareness of our
new brand.
Research and Development. Research and development expenses in fiscal 2000
increased $21.7 million or 3.7 percent compared to fiscal 1999. Research and
development expenses as a percentage of sales increased to 14.1 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 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 targeted emerging growth product lines. In the fourth quarter of fiscal
2000, research and development expenses as a percentage of sales were 20.9
percent, compared to 12.6 percent for the first three quarters of fiscal 2000.
As part of our business realignment strategy, we are placing a strong focus on
our targeted emerging growth markets. We plan to continue to invest a
significant proportion of our financial resources towards developing products
for these markets. In addition, we intend to continue to enter into strategic
partnerships, acquire companies with relevant intellectual property, and make
strategic investments where appropriate.
General and Administrative. General and administrative expenses in fiscal 2000
decreased $14.3 million or 6.3 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 4.4 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. In the fourth quarter of fiscal 2000, general and
administrative expenses as a percentage of sales were 7.0 percent, compared to
4.5 percent for the first three quarters of fiscal 2000.
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 have
continued to develop technologies that were in process at Call Technologies and
LANSource, as of the dates of the acquisitions. The costs to be incurred for the
projects in process are primarily labor costs for design, prototype development,
and testing. As of June 2, 2000, we estimate that approximately $4.0 million
will be spent to complete the acquired research and development projects.
24
Merger-Related (Credits) Charges, Net. During fiscal 2000, we recorded net
pre-tax merger-related credits of approximately $2.3 million. This net amount
reflects adjustments to previously recorded merger and restructuring charges.
Net Gains on Land and Facilities. During fiscal 2000, we sold our manufacturing
facility and related assets in Salt Lake City, Utah to Manufacturers' Services,
Ltd., 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.
Business Realignment Costs. 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. Business
realignment costs 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.
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.
Equity Interest in Loss of Unconsolidated Investee
In August 1999, we invested $7.5 million in OmniSky Corporation ("OmniSky").
This investment was accounted for using the equity method. For fiscal 2000,
equity interest in loss of unconsolidated investee was $5.6 million.
Net Income from Continuing Operations
Net income from continuing operations for fiscal 2000 was $615.6 million, or
$1.72 per share, compared to $364.9 million, or $0.99 per share for fiscal 1999.
Net Income from Discontinued Operations
Net income from discontinued operations includes the results of operations of
Palm. Net 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.
Net Income
Net income for fiscal 2000 was $674.3 million, or $1.88 per share, compared to
$403.9 million, or $1.09 per share for fiscal 1999. Excluding certain items
(purchased in-process technology, merger-related (credits) charges, gains on
land and facilities, business realignment costs, gains (losses) on investments,
and net income from discontinued operations), net of taxes, pro forma net income
was $123.0 million, or $0.34 per share for fiscal 2000, compared to $359.2
million, or $0.97 per share for fiscal 1999.
25
Comparison of fiscal years ended May 28, 1999 and May 31, 1998
Sales
Fiscal 1999 sales totaled $5.20 billion, an increase of one percent from fiscal
1998 sales of $5.16 billion.
Network Systems. Sales of network systems products (e.g., switches, hubs, remote
access concentrators, routers, and customer service and support) in fiscal 1999
were $2.61 billion, an increase of 11 percent from fiscal 1998 sales of $2.35
billion. The increase in network systems products sales when compared to fiscal
1998 was primarily due to growth in workgroup switching product sales, customer
service sales, and the introduction of our CoreBuilder 9000 enterprise switch,
partially offset by a decrease in certain other enterprise systems products.
Sales of network systems products represented 50 percent of total sales in
fiscal 1999 compared to 46 percent of total sales in fiscal 1998.
Personal Connectivity. Sales of personal connectivity products (e.g., desktop
NICs, desktop modems, and PC Cards for mobile computers) in fiscal 1999 were
$2.59 billion, a decrease of eight percent from fiscal 1998 sales of $2.81
billion. The decline in personal connectivity sales when compared to fiscal 1998
was primarily due to lower sales of desktop analog modems. Sales of personal
connectivity products represented 50 percent of total sales in fiscal 1999
compared to 54 percent of total sales in fiscal 1998.
Our sales in fiscal 1999 were primarily impacted by the transformation of our
business mix. Historically, a significant portion of our sales has been derived
from desktop NICs, analog modems, and stackable hubs, which have entered the
mature phase of their product life cycles. Sales in these product markets are
flat to declining, because these products are particularly sensitive to price
competition, are beginning to be replaced by newer technologies, and are
increasingly being distributed through the PC OEM channel which carries lower
average selling prices. Further, our sales of NICs and modems are highly
correlated with sales in the PC market. While the overall PC market continues to
grow, sales of low-end PCs are growing faster than high-end PCs. Lower priced
PCs are not typically sold with high performance NICs and modems such as those
we offer. Our aggregate sales increased on a year-over-year basis primarily
because of growth in workgroup switching.
U.S. sales represented 51 percent of total sales in fiscal 1999 compared to 54
percent in fiscal 1998 and decreased three percent when compared to fiscal 1998.
International sales in fiscal 1999 increased six percent when compared to fiscal
1998. Historically, the Asia Pacific and Latin American regions have been
high-growth regions for the networking industry and for us. We believe that
fiscal 1999 sales were impacted by the economic turmoil that occurred in these
markets. Fiscal 1999 sales in the Asia Pacific region remained flat when
compared to fiscal 1998. In addition, sales in the Latin American region
decreased by 12 percent when compared to fiscal 1998.
Gross Margin
Gross margin as a percentage of sales was 44.3 percent in fiscal 1999, compared
to 43.6 percent in fiscal 1998. The year-over-year gross margin improvement came
from virtually all product lines and was primarily the result of product cost
reductions, increased mix of certain higher margin network systems products,
improved inventory management, and improved manufacturing capacity utilization.
Operating Expenses
Operating expenses in fiscal 1999 were $1.84 billion, or 35.3 percent of sales,
compared to $2.16 billion, or 41.9 percent of sales in fiscal 1998. Excluding a
purchased in-process technology charge of $10.6 million and a merger-related
credit of $17.6 million, and net gains on land and facilities of $4.2 million,
operating expenses would have been $1.85 billion, or 35.5 percent of sales for
fiscal 1999. Excluding a purchased in-process technology charge of $8.4 million
and a merger-related charge of $253.7 million primarily associated with the U.S.
Robotics merger, operating expenses would have been $1.90 billion, or 36.8
percent of sales for fiscal 1998. The decline as a percentage of sales was
primarily due to cost reductions as a result of post-merger consolidation
activities.
Sales and Marketing. Sales and marketing expenses in fiscal 1999 decreased $58.4
million or five percent from fiscal 1998. Sales and marketing expenses as a
percentage of sales decreased to 19.8 percent of sales in fiscal 1999 compared
to 21.1 percent of sales in fiscal 1998. The year-over-year decrease in spending
related to mature product lines such as analog modems.
26
Research and Development. Research and development expenses in fiscal 1999
increased $34.3 million or six percent compared to fiscal 1998. Research and
development expenses as a percentage of sales increased to 11.3 percent of sales
in fiscal 1999 compared to 10.8 percent of sales in fiscal 1998. The
year-over-year increase in research and development expenses is primarily
attributable to the cost of developing new products and enhancements in the
areas of switching, VOIP and LAN telephony, wireless access, broadband access
(primarily cable and DSL), and NICs. The timely introduction of new technologies
and products is crucial to our success, and we plan to continue to make
acquisitions or strategic investments to accelerate time to market where
appropriate.
General and Administrative. General and administrative expenses in fiscal 1999
decreased $24.3 million or ten percent from fiscal 1998. As a percentage of
sales, general and administrative expenses decreased to 4.4 percent of sales in
fiscal 1999 compared to 4.9 percent of sales in fiscal 1998. The year-over-year
decrease in general and administrative expenses in absolute dollars is primarily
due to the elimination of duplicate infrastructure from the U.S. Robotics
merger, partially offset by an increase in the provision for bad debts,
primarily related to receivables in certain international regions.
Purchased In-Process Technology. During fiscal 1999, we recorded a charge for
purchased in-process technology of approximately $10.6 million associated with
the acquisitions of NBX, and certain assets of ICS.
Merger-Related (Credits) Charges, Net. During fiscal 1999, we recorded net
pre-tax merger-related credits of approximately $17.6 million. This net amount
reflects adjustments to previously recorded merger and restructuring charges,
composed of a net pre-tax credit of approximately $20.6 million and a $3.0
million charge reflecting a change in the estimated net realizable value of
closed manufacturing plants in Chicago.
Net Gains on Land and Facilities. During fiscal 1999, we recorded a $4.2 million
net gain on the sale of land in California.
Gains (Losses) on Investments, Net
During fiscal 1999, losses on investments from sales of publicly traded equity
securities were $2.6 million.
Interest and Other Income, Net
Interest and other income, net increased $40.0 million compared to fiscal 1998,
primarily as a result of higher interest income due to higher average cash and
investment balances, improved foreign currency results, and reduced interest
expense. Interest and other income, net for fiscal 1998 included foreign
currency losses of approximately $12.3 million, primarily related to Korean
operations, where foreign exchange hedges were not available, or were available
only to a limited extent. In addition, in fiscal 1998, we recorded a charge of
approximately $4.7 million related to an early call premium and write-off of
unamortized issuance fees associated with the redemption of convertible notes.
Income Tax Provision
Our effective income tax rate was 30.1 percent in fiscal 1999 compared to 78.1
percent in fiscal 1998. The tax rate in fiscal 1998 reflected certain
merger-related and other costs associated with the merger with U.S. Robotics
that were not deductible. In addition, the decrease in tax rate from 1998 to
1999 was also due to the increase in offshore manufacturing in countries with
tax rates significantly below the U.S. statutory rate.
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. The pro-rata share of the
joint venture's loss allocated to the other investors for the period between the
date of investment and the end of our fiscal year was $1.1 million in fiscal
1999.
Net Income from Continuing Operations
Net income from continuing operations for fiscal 1999 was $364.9 million, or
$0.99 per share, compared to $23.0 million, or $0.06 per share for fiscal 1998.
Net Income from Discontinued Operations
Net income from discontinued operations includes the results of operations of
Palm. Net income from discontinued operations for fiscal 1999 was $38.9 million,
or $0.10 per share, compared to $7.2 million, or $0.02 per share, for fiscal
1998.
27
Net Income
Net income for fiscal 1999 was $403.9 million, or $1.09 per share, compared to
$30.2 million, or $0.08 per share for fiscal 1998. Excluding certain items
(purchased in-process technology, merger-related (credits) charges, gains on
land and facilities, gains (losses) on investments, and net income from
discontinued operations), net of taxes, pro forma net income was $359.2 million,
or $0.97 per share for fiscal 1999, compared to $238.9 million, or $0.65 per
share for fiscal 1998.
BUSINESS ENVIRONMENT AND INDUSTRY TRENDS
Our future results may be affected by industry trends and specific risks in our
business. Some of the factors that could cause future results to materially
differ from past results or those described in forward-looking statements
include those discussed below.
Business Transition to New Strategic Focus
Since announcing our realignment plans on March 20, 2000, we began to execute
the steps which management believes are necessary to transition our business and
realign our strategic focus towards high-growth markets, technologies, and
products (see related discussion of new strategic focus below). We have exited
our high-end LAN and WAN chassis product lines and are transferring our
analog-only modem product line to a newly formed joint venture company in which
we hold a minority interest. These businesses, in the past, have generated
significant sales but limited profits for us.
Internal and external changes resulting from realignment and transition towards
our new strategic focus may disrupt our customers, partners, distributors, and
employees and create a prolonged period of uncertainty, which could have a
material adverse affect on our business. Our new strategy requires substantial
changes including exiting certain product lines and spinning-off our handheld
computing business, reducing employee headcount, investing in new technologies,
partnering with other companies, and establishing leadership positions in new
high-growth markets. Many factors may impact our ability to implement this
strategy, including our ability to finalize agreements with other companies,
manage the implementation internally, sustain the productivity of our workforce,
introduce innovative new products in a timely manner, reduce operating expenses,
and quickly respond to and recover from unforeseen events associated with the
transition and realignment.
As a result of the business transition and realignment that we announced on
March 20, 2000, it will be difficult to forecast our financial performance.
However, we expect that both sales and operating income may continue to be
negatively impacted, and we expect to report operating losses in fiscal 2001. In
addition, we expect that we will continue to incur business realignment charges
through at least the first quarter of fiscal 2001.
Transfer of Analog-only Modem Product Line
We have signed separate agreements with our partners Accton Technology and
NatSteel Electronics pertaining to the transfer of our analog-only modem product
line to a joint venture. The new company is called U.S. Robotics Corporation
("New USR") and we hold a minority equity position. Although New USR is
established and staffed, the actual transfer of the product line and customers
to New USR is not yet complete. We have entered into non-binding agreements
pertaining to the sale or transfer of our manufacturing and distribution
operations based in Chicago, Illinois and our Mount Prospect, Illinois
manufacturing facility. The companies continue to negotiate the terms of these
transactions, which may result in the sale, lease, or transfer of these
facilities. These transactions are subject to ongoing negotiations and there can
be no guarantee that we will reach final agreement. Furthermore, these
separation activities are very time consuming and resource intensive and may
dilute management focus.
In addition, we entered into transitional service agreements in the areas of
information technology systems, supply chain management, buildings and services,
and certain treasury/finance functions. We will begin such services prior to
transfer and for a period of up to one year afterwards. If we do not
satisfactorily perform our obligations under these agreements, including
specifically the successful set up of information technology systems, the
transfer of the product line and manufacturing operations could be delayed and
we may be held liable for any resulting losses.
28
New Product Lines and Markets
Our financial performance and future growth depend upon the rapid growth of new
markets, and our ability to establish a leadership position in those markets. We
are investing a significant proportion of our resources in several emerging
product lines in markets that are forecasted to grow at a significantly higher
rate than the networking industry average. We expect these product lines to
account for a higher percentage of our sales over time. We are focused on the
following high-growth and emerging product lines, leveraging our investments in
broadband, wireless, and IP telephony technologies:
o Multi-services Access to Carrier Networks
o LAN Telephony
o Broadband Access (primarily cable and DSL)
o Wireless Access
o Home Networking
o Internet Appliances
At the present time, the markets for these products and solutions are still
emerging. Industry standards for these technologies are yet to be widely adopted
and the market potential remains unproven. While these product lines are a
rapidly growing portion of our business, they currently generate a relatively
small amount of sales. 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.
Ability to Develop and Introduce New Products
Products in the markets in which we compete have short life cycles. Therefore,
our success depends on our ability to identify new market and product
opportunities, to develop and introduce new products in a timely manner, and to
gain market acceptance of new products, particularly in our targeted
high-growth, emerging markets. For example, the timely introduction of the
following products are important to our success:
o a next-generation carrier-class platform for certain applications in
IP Telephony and third-generation (3G) wireless solutions for our
carrier customers
o a new line of Gigabit-on-Copper LAN solutions primarily for
commercial enterprises
o a new line of broadband modems (both cable and DSL) that support
data and voice
o new standards-based wireless LAN solutions, including our AirConnect
wireless LAN, for both commercial and consumer markets
o a new generation of residential Internet appliances
o a next generation SuperStack workgroup solution for commercial
enterprises
Any delay in new product introductions or lower than anticipated demand for our
new products 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.
Concentration of Sales from Fewer Products
By realigning our business, spinning off Palm, and exiting certain product
lines, our NIC, LAN workgroup, and carrier access products will comprise the
majority of our sales. As a result, any adverse events in these three businesses
will have a more pronounced impact on our financial results as a whole.
Furthermore, sales of traditional NICs and hubs have been generally declining
over the past year and we believe that these declines represent long-term
trends. Consequently, we believe that sales derived from these products will
continue to decline. If sales of these products decline more rapidly than
expected, this would have a material adverse effect on our financial results.
Moderate growth markets in which we participate include LAN workgroup switching
and remote access. However, our sales of LAN workgroup switches have declined
over the recent past. We expect these products will resume growth and account
for a significant portion of our sales, but if sales of these products continue
to decline, our financial results would be adversely affected.
29
Reliance on Distributors, Resellers, and PC OEMs
We distribute many of our products through two-tiered distribution channels that
include distributors, systems integrators, value-added resellers, and retailers.
We also sell to PC OEMs and large enterprises and service providers. Under our
new strategic focus, we will increase our commitment to and become increasingly
reliant upon our two-tiered distribution model as well as sales to OEMs. We will
also be developing our Carrier channel through expanded partnerships with
Internet Service Providers (ISPs). Our future results and financial condition
are partially dependent on a number of factors relating to this distribution
model, including the impact of our business realignment, issues associated with
competition among and within our channels, selling to PC OEMs, and channel
inventory and customer concentration.
Business Realignment. The March 20 announcements and the activities surrounding
our business realignment may adversely impact our ongoing relationships with our
channel partners and the perception of us among end customers:
o We have exited our high-end LAN and WAN chassis product lines and
are in the process of exiting our analog-only modem product line. In
the past, through our channel partners, we have been able to present
end-to-end networking solutions and complementary products to end
customers, which we believe synergistically generated sales. As a
result of the business realignment, there may be a negative effect
on sales of ongoing products, since these products may not be
perceived to be part of a larger integrated or complementary
solution.
o As part of our business realignment, we reduced our direct, large
account sales resources, which were primarily dedicated to promoting
the now-discontinued high-end LAN and WAN chassis products. We will
still be targeting such customers for our continuing high-volume
products. However, the reduction in our large account salesforce may
result in our sales being adversely impacted.
o Customers and channel partners may attempt to return products they
have already purchased or cancel orders recently placed. Due to our
business realignment, we have experienced a higher level of such
returns and cancellations and expect that they will continue at
least into the first quarter of fiscal 2001.
Therefore, we may have declining levels of business through our traditional
distribution channels as a result of impaired relationships with partners and
end customers. There can be no guarantee that we can re-establish such
relationships or forge new channel and end customer relationships in a timely
manner to overcome any loss of business to existing customers or channel
disruptions for sell-through of our new products.
Inventory Levels in Channel. Our distributors and resellers maintain inventories
of our products. As part of our efforts to optimize our supply chain (see
related discussion in the Supply Chain Management risk factor), we have reduced
the number of our distributors and are currently reducing levels of inventory
held by the distributors through whom we sell our products. We work closely with
our distributors and resellers to monitor inventory levels and ensure that
appropriate levels of products are available to end-users. Notwithstanding such
efforts, if channel partners attempt to reduce their levels of inventory or if
they do not maintain sufficient levels to meet customer demand, our sales could
be negatively impacted.
Reliance on a Small Number of Distributors. A significant portion of our sales
are made to a few customers. In fiscal 2000, Ingram Micro represented
approximately 15 percent of our total sales and Tech Data represented
approximately 13 percent of our total sales. Ingram Micro and Tech Data are both
distributors of our products. We cannot be certain that these customers will
continue to purchase our products at current levels. Additionally, consolidation
among distributors is reducing the number of distributors in the North American
market. Because our sales are becoming more concentrated among a smaller number
of customers, our results of operations, financial condition, or market share
could be adversely affected if our customers:
o stop purchasing our products or focus more on selling our
competitors' products;
o reduce, delay, or cancel their orders;
o become unable to sell our products because we do not ship the
products to them in a timely manner; or
o experience competitive, operational, or financial difficulties,
impairing our ability to collect payments from them.
30
PC OEMs. PC-related networking products such as NICs and PC Cards are
increasingly being sold through the PC OEM channel rather than the distribution
channel. We derive a significant portion of our personal connectivity product
sales from PC OEMs such as Dell Computer, Toshiba, Gateway, Hewlett-Packard, and
IBM, manufacturers that incorporate our NICs, PC Cards, or chipsets into their
products. While sales to PC OEMs are important, products sold through the PC OEM
channel typically have a lower average selling price than those sold through
other channels. Therefore, our sales and margins may be adversely impacted if
sales to PC OEMs continue to become a larger percentage of our business.
e-Business/Web-Enablement Initiative
A key initiative for us is to drive broad web-enablement of sales, supply chain,
and internal processes. We are building in-house capabilities to sell directly
to end-user customers (B2C) and distribution partners (B2B) over the Internet
(e-Business). This e-Business initiative could cause conflict with our current
indirect channels of distribution. If we are unsuccessful in selling through our
e-Business channel, we could also lose market share to competitors who have more
successfully developed these capabilities. These changes in the pattern of
distribution of networking products could have a material adverse effect on our
sales and financial results.
We have also invested substantial time and resources into deploying the web as
the primary medium and platform for internal applications and processes across
3Com. This involves redesigning some of our core business processes, including
forecasting, supply chain operations, and order fulfillment. Implementing this
initiative will require enhanced information systems, substantial training, and
disciplined execution. We believe that the successful web-enablement of 3Com is
critical to our long-term competitive position. There can be no assurances,
however, that this initiative will be implemented successfully or that
disruptions in operations will not occur in the process.
Changes in Our Industry; Role of Acquisitions and Investments
The networking business is highly competitive, and as such, our growth is
dependent upon market growth and our ability to enhance existing products and
introduce new products on a timely basis. Our new strategic focus on emerging
and high-growth product lines mandates that we act quickly and effectively to
enter into new markets. One of the ways we will address this need is through
acquisitions of and minority equity investments in companies with promising
technology and products and/or proven market access and position. For example,
the acquisition of Call Technologies enhances the service capabilities for our
CommWorks architecture and our Total Control multi-service access platform. In
addition, our acquisition of Kerbango will allow us to offer consumers a rich
Internet experience by providing a complete Internet audio solution for the home
and office.
Acquisitions involve numerous risks, including the following:
o difficulties in integration of the operations, technologies, and
products of the acquired companies;
o the risk of diverting management's attention from normal daily
operations of the business;
o potential difficulties in completing projects associated with
purchased in-process research and development;
o risks of entering markets in which we have no or limited direct
prior experience and where competitors in such markets have stronger
market positions;
o the potential loss of key employees of the acquired company; and
o an uncertain sales and earnings stream from the acquired entity,
which may result in unexpected dilution to our earnings.
Mergers and acquisitions of high-technology companies are inherently risky, and
no assurance can be given that our previous or future acquisitions will be
successful and will not have a material adverse affect on our business,
operating results, or financial condition. We must also focus on our ability to
manage and integrate any such acquisition. Failure to manage growth effectively
and successfully integrate acquired companies could adversely affect our
business and operating results.
Our acquisition of technology, products, or market access through equity
investments is usually coupled with a strategic commercial relationship. Our
investments tend to be in very early stage technology companies with unproven
technology and products. There can be no assurances that we can successfully
form appropriate commercial relationships to gain and integrate such products or
technology into our technology or product lines or that such companies will not
be subsequently acquired by third parties, including competitors of ours.
31
In general, there have been many mergers and acquisitions in the networking
industry in the past several years. There have also been mergers between
telecommunications equipment providers and networking companies, as well as
between networking companies and computer component suppliers. More recently,
several companies have announced divestitures and spin-offs. Examples over the
past 12 months include:
o We acquired Kerbango, Call Technologies, Interactive Web Concepts,
and LANSource;
o Lucent Technologies, a telecommunications company, acquired 11
companies, including networking equipment supplier Ascend
Communications. Lucent also announced it is spinning-off its Private
Branch Exchange (PBX) business;
o Cisco Systems, a networking equipment supplier, acquired 24
companies;
o Nortel Networks, a telecommunications company, acquired nine
companies and integrated the operations of previously acquired Bay
Networks, a networking equipment supplier. Nortel also announced it
is spinning-off its NETGEAR business;
o Alcatel, a telecommunications company, acquired four companies,
including Xylan, a networking equipment supplier;
o Siemens, a telecommunications company, acquired three networking
firms;
o Intel, a computer component manufacturer, acquired 11 companies with
networking technology.
o Cabletron Systems, a networking company, announced its plans to
split its company into four separate operating companies.
Future changes in the networking industry may result in more companies with
greater resources and stronger competitive positions and products than us.
Furthermore, companies may be created that are able to respond more rapidly to
market opportunities. Continued changes in our industry may adversely affect our
operating results or financial condition.
Management of Strategic Relationships and Investments
In addition to mergers and acquisitions, technology companies are continually
entering into strategic relationships. For example, over the past 12 months, we
announced or expanded strategic relationships with numerous companies including
the following:
o AT&T o Hewlett-Packard
o Accton Technology o Hitachi
o Apropos Technology o IBM
o Bell Atlantic o Inktomi
o Broadcom o marchFIRST (formerly USWeb/CKS)
o CAIS Internet o Microsoft
o Copper Mountain Networks o NatSteel Electronics
o Dell Computer o Samsung Electronics
o Extreme Networks o SonicWALL
o F5 Networks o Symbol Technologies
o Gateway
If successful, these relationships will be mutually beneficial and result in
industry and market growth. However, these alliances carry an element of risk
since, in most cases, we must compete in some business areas with companies with
which we have strategic alliances and, at the same time, cooperate with such
companies in other business areas. Also, 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. Also, our
results of operations or financial condition could be adversely impacted if we
experience difficulties managing relationships with our partners or if projects
with partners are unsuccessful. In addition, if our competitors enter into
successful strategic relationships, they could increase the competition that we
face.
We have also made strategic investments in several other technology companies.
Some of these investments have significantly appreciated in value since the
companies became publicly traded. Our results of operations or financial
condition could be adversely impacted if the market value of our investments
declines.
32
Competition for Key Personnel; Retention and Recruiting
Our success depends to a significant extent upon a number of key employees and
management. Over the past year, we have experienced an increased rate of
employee turnover compared to historical levels. The rate of voluntary attrition
may be further increased by specific events such as the separation and spin-off
of Palm and the business realignment announced on March 20, 2000. Some employees
may have experienced increased disruptions and decline in morale as a result of
the involuntary headcount reductions and other changes in corporate direction
required by our new focus. The loss of the services of key employees could
adversely affect our product introduction schedules, customer relationships,
operating results, or financial condition.
The ability to recruit employees, both to replace attrition and to grow our
emerging businesses, may be a significant challenge due to uncertainty caused by
our business realignment and due to the increasingly competitive marketplace for
needed skills. Recruiting and retaining skilled personnel, including engineers,
continues to be highly competitive. There has been a dramatic increase of
technology start-up companies recruiting for the same talent that we require. If
we cannot successfully recruit and retain skilled personnel, our ability to
compete may be adversely affected. In addition, we must carefully balance the
growth in our employee base commensurate with our anticipated sales growth. If
our sales growth or attrition levels vary significantly, our results of
operations or financial condition could be adversely affected. Further, our
common stock price has been, and may continue to be, extremely volatile. When
our common stock price is less than the exercise price of stock options granted
to employees, turnover is likely to increase, which could adversely affect our
results of operations or financial condition.
Palm Separation
On February 26, 2000, we separated the operations of our Palm subsidiary into an
independent company. Subsequently, Palm made an initial public offering of its
common stock on March 2, 2000 and we distributed our remaining ownership of
outstanding Palm common stock to 3Com shareholders on July 27, 2000. The
distribution ratio was 1.4832 shares of Palm for each outstanding share of 3Com
common stock. As part of the separation, we entered into certain transitional
service agreements with Palm to support ongoing Palm operations relating to
information technology systems, supply chain management, human resources
administration, product order administration, customer service, buildings and
facilities, treasury management, and legal, finance, and accounting. These
transitional service agreements generally have terms of less than two years
following the separation. If we do not satisfactorily perform our obligations
under these agreements, we may be held liable for any resulting losses allegedly
suffered by Palm.
Further, as each of these service agreements expire, the fees and cost
reimbursements currently being paid to us by Palm for the associated services
will also cease. Consequently, unless we are able to reduce certain of our costs
in line with the decreased fees and demand for services from Palm, our total
expenses will become a disproportionately higher percentage of sales, thereby
adversely impacting our financial results.
To enable our distribution of Palm common stock to our shareholders, we received
a ruling from the Internal Revenue Service that the distribution will be not be
taxable. Such ruling requires 3Com and Palm, for up to two years following the
distribution date, not to engage in certain business combinations that would
constitute a change of more than 50 percent of the equity interest in either
company. If either 3Com or Palm fail to conform to requirements set forth in the
ruling, there would be material adverse consequences, potentially including
making the distribution taxable.
Finally, at the time of the distribution of Palm shares to our shareholders, an
adjustment was made to stock options held by our employees to preserve the
intrinsic value of these options and the ratio of the exercise price to the
market price. As of July 27, 2000 there were approximately 35 million employee
options outstanding. Immediately after the Palm distribution, there were
approximately 169 million employee options outstanding, of which approximately
60 million were vested and immediately exercisable. The exercise of stock
options by employees may potentially result in a dilution in the ownership
interest of our current shareholders.
33
Competition and Pricing Pressure
We participate in a highly volatile industry characterized by vigorous
competition for market share as well as rapid product and technology development
and maturation. Our competition comes from start-up companies, well-capitalized
computer systems and communications companies, and other companies focusing on
networking. However, our industry is changing, resulting in new competitors who
have greater financial, marketing, and technical resources than we do. For
example, technology innovations are driving the convergence of voice, video, and
data traffic onto a single network infrastructure, and we now compete with much
larger telecommunications equipment companies such as Alcatel, Cisco Systems,
Hewlett-Packard, Intel, Lucent Technologies, Nortel Networks, and Siemens.
In addition, both we and our competitors sometimes lower product prices in order
to gain market share or create more demand. For example, in the third quarter of
fiscal 2000 we continued to experience price competition in our distribution
channel, particularly for price-sensitive products sold through catalogs and
certain workgroup systems products. Intense pricing competition in our industry
may adversely affect our business, operating results, or financial condition.
We are also selling products into new markets where we compete with different
companies than in the past. This is especially true in our high-growth emerging
markets. Our principal competitors in this area include Com21, Clarent,
Efficient Networks, Motorola, NETGEAR, Redback Networks, Sonus Networks, and
Xircom. These competitors, in part because of their more specific focus, may be
able to respond more rapidly than us to new or emerging technologies or changes
in customer requirements. Our failure to compete successfully against current or
future competitors could harm our business, operating results, or financial
condition.
Semiconductor manufacturers, such as Intel, are increasingly integrating more
NIC and modem functionality onto a single chip on the motherboard. This trend
may offer PC OEMs and other networking customers cheaper alternatives to our
solutions. If integration of networking and computer processing functionality on
a reduced number of components increases, our future sales growth and
profitability could be adversely affected. Furthermore, some of these
semiconductor manufacturers may be our current suppliers of components;
therefore, we may be competing directly with our vendors in certain future
situations.
Uncertainties of International Markets
We operate internationally and expect that international markets will continue
to account for a significant percentage of our sales. Some international markets
are characterized by economic and political instability and currency
fluctuations that can adversely affect our operating results or financial
condition. Our results of operations in the past have been adversely impacted by
economic instability in the Asia Pacific and Latin American regions. Today, Asia
Pacific represents our fastest growing geographic region. However, should this
region experience economic instability, our results of operations may be
adversely affected.
Industry Standards and Regulations
Our success also depends on:
o the timely adoption and market acceptance of industry standards;
o resolution of conflicting U.S. and international standards
requirements created by the convergence of technology such as voice
onto data networks;
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 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. For example, development of a new global
"third generation" standard for wireless Internet access is underway and
expected to be based on Code Division Multiple Access (CDMA). However, several
technologies including Global System for Mobile Communication (GSM), Personal
Digital Cellular (PDC), and Time Division Multiple Access (TDMA) are competing
for the standard, which will ultimately be determined by the International
Telecommunications Union (ITU).
34
Customer Order Fulfillment
The timing and amount of our sales depend on a number of factors that make
estimating operating results prior to the end of any period uncertain. For
example, we do not typically maintain a significant backlog and sales are
dependent on our ability to appropriately forecast product demand. In addition,
our customers historically request fulfillment of orders in a short period of
time, resulting in limited visibility to sales trends. Consequently, our
operating results depend on the volume and timing of orders and our ability to
fulfill orders in a timely manner. Historically, sales in the third month of the
quarter have been higher than sales in each of the first two months of the
quarter. Non-linear sales patterns make business planning difficult, and
increase the risk that our quarterly results will fluctuate due to disruptions
in functions such as manufacturing, order management, information systems, and
shipping.
Warranties and International Requirements
Because our products are often covered by warranties, we may be subject to
contractual and/or legal commitments to perform under such warranties. If our
products fail to perform as warranted and we do not resolve product quality or
performance issues in a timely manner, our operating results or financial
condition could be adversely affected. Likewise, if we fail to meet commitments
related to the installation of networks, we could be subject to claims for
business disruption or consequential damages if a network implementation is not
completed successfully or in a timely manner.
Our products are sold and marketed in many countries, and as such, our products
must function in and meet the requirements of many different telecommunications
environments and be compatible with various telecommunications systems and
products. If our products fail to meet the requirements of international
telecommunication environments, our sales could be negatively impacted.
Our business realignment actions announced on March 20, 2000 include transition
of certain business lines to third parties, such as analog-only modems, or
obsolescence of certain product lines such as high-end LAN and WAN chassis
products. To the extent that third parties do not assume or fulfill our warranty
obligations, we will remain obligated to provide warranty support, including
repair services and spare parts for the duration of contracts or statutory legal
requirements. Any failure to perform such commitments could subject us to
claims, which may have a material adverse impact on our business and financial
results.
Supply Chain Management
Some key components of our products and some services on which we rely are
currently available only from single or limited sources. In addition, some of
our suppliers are also our competitors. While we generally have been able to
obtain adequate supplies of components from existing sources, we cannot be
certain that in the future our suppliers will be able to meet our demand for
components in a timely and cost-effective manner. For example, due to strong
world-wide demand, the electronics industry is facing shortages on various
memory devices and passive components. Due to these shortages, our ability to
procure these components and meet our on-time delivery requirements in a
cost-effective manner could be impacted. Our operating results, financial
condition, or customer relationships could be adversely affected by these
shortages. These adverse effects could result from an inability to fulfill
customer demand or increased costs to acquire key components or services.
Increasingly, we have been sourcing a greater number of components from a select
number of vendors to obtain better pricing through higher volumes. Also, there
has recently been a trend toward consolidation of vendors of electronic
components. This greater reliance on a smaller number of suppliers increases our
risk of experiencing unfavorable price fluctuations or a disruption in supply.
Further, as a result of our business realignment activities, we may not have the
same degree of purchasing power as we have had in the past. This could result in
higher material costs.
Recently, we have made significant improvements to our supply chain processes.
However, we may not be able to achieve cost reductions at the same rate as
realized in prior quarters or at a rate fast enough to keep pace with any price
erosion across our product lines. Any failure to achieve cost reductions at a
comparable rate to average selling price declines will have a negative impact on
our gross margins and financial results.
35
The cost, quality, and availability of third party manufacturing operations are
essential to the successful production and sale of many of our products. The
inability of any third party manufacturer to meet our cost, quality, and
availability standards could adversely impact our financial condition or results
of operations.
In our continual effort to streamline our supply chain operations, we sold our
Salt Lake City, Utah manufacturing facility to Manufacturers' Services, Ltd.
("MSL") in November 1999. In connection with the recently announced strategic
realignment, we anticipate further changes to our supply chain operations. The
sale, transfer or consolidation of other manufacturing facilities, including our
Mt. Prospect, Illinois manufacturing facility, if not properly executed, could
lead to supply disruptions, an inability to satisfy demand, higher costs, or
quality issues across our various businesses which could be costly to remedy.
Any of these scenarios would have a significant negative impact on our financial
results.
Since we have improved our supply chain capabilities, we plan to reduce our
channel inventory model. Improvements in our supply chain management have
enabled us to reduce our channel inventory model by two weeks on average. We
have been operating within our existing channel inventory model of between five
to seven weeks of supply on hand for the past two fiscal years. If we are unable
to sustain the improvements in our supply chain capabilities or encounter
external supply chain disruptions, we may experience product stock-outs or
shortages, which could adversely impact our financial results.
Commercial Commitments
We enter into minimum quantity or other non-cancelable commitments as needed.
For example, we have committed to minimum purchases of product components from a
vendor through the end of calendar year 2003. These types of agreements subject
us to risk depending on future events. If, for example, sales volumes of certain
products fluctuate significantly, we may be unable to meet our commitments. This
may result in us incurring liabilities that adversely affect our financial
results.
Intellectual Property Rights
Many of our competitors, such as telecommunications and computer equipment
manufacturers, have large intellectual property portfolios, including patents
that may cover technologies that are relevant to our business. In addition, many
smaller companies, universities, and individual inventors have obtained or
applied for patents in areas of technology that may relate to our business. The
industry is moving towards aggressive assertion, licensing, and litigation of
patents and other intellectual property rights.
In the course of our business, we frequently receive claims of infringement or
otherwise become aware of potentially relevant patents or other intellectual
property rights held by other parties. We evaluate the validity and
applicability of these intellectual property rights, and determine in each case
whether we must negotiate licenses or cross-licenses to incorporate or use the
proprietary technologies, protocols, or specifications in our products. If we
are unable to obtain and maintain licenses on favorable terms for intellectual
property rights required for the manufacture, sale, and use of our products,
particularly those which must comply with industry standard protocols and
specifications to be commercially viable, our business, results of operations,
or financial condition could be adversely impacted.
In addition to disputes relating to the validity or alleged infringement of
other parties' rights, we may become involved in disputes relating to our
assertion of our intellectual property rights. Whether we are defending the
assertion of intellectual property rights against us or asserting our
intellectual property rights against others, intellectual property litigation
can be complex, costly, protracted, and highly disruptive to business operations
by diverting the attention and energies of management and key technical
personnel. Further, plaintiffs in intellectual property cases often seek
injunctive relief and the measures of damages in intellectual property
litigation are complex and often subjective or uncertain. Thus, the existence of
or any adverse determinations in this litigation could subject us to significant
liabilities and costs. In addition, if we are the alleged infringer, we could be
required to seek licenses from others or be prevented from manufacturing or
selling our products, which could cause disruptions to our operations or the
markets in which we compete. If we are asserting our intellectual property
rights, we could be prevented from stopping others from manufacturing or selling
competitive products. Any one of these factors could adversely affect our
results of operations or financial condition.
36
Fluctuations in Quarterly Results; Volatility of Stock Price
Our quarterly operating results are difficult to predict and may fluctuate
significantly. A wide variety of factors can cause these fluctuations,
including:
o seasonality;
o the introduction and acceptance of new products and technologies;
o price competition;
o general conditions and trends in the networking industry and technology
sector;
o internal reorganizations or realignments;
o disruption in international markets;
o general economic conditions;
o industry consolidations and acquisitions;
o disruption in the distribution channel; and
o timing of orders received within the quarter.
In recent years, we have experienced fluctuations in our quarterly results due
to some of the factors listed above. These factors, and accompanying
fluctuations in periodic operating results, could have a significant adverse
impact on the market price of our common stock.
Additionally, we anticipate that the activities surrounding our announced
business realignment and the transition to our new strategic focus will
contribute significantly to fluctuations in the quarterly operating results for
the next several quarters.
Our stock price has historically experienced substantial price volatility and we
expect that this will continue, particularly due to fluctuations in quarterly
operating results as outlined above, variations between our actual or
anticipated financial results and the published analysts' expectations, and as a
result of announcements by our competitors. In addition, the stock market has
experienced extreme price and volume fluctuations that have affected the market
price of many technology companies. These market price fluctuations have often
been unrelated to the operating performance of these companies. These factors,
as well as general economic and political conditions, may materially adversely
affect the market price of our stock in the future.
Proposed Changes in Accounting for Business Combinations and Intangible Assets
The Financial Accounting Standards Board ("FASB") began deliberation of
revisions to the rules for business combinations and intangible assets in 1996.
Some of these deliberations have included accounting rule-making bodies from
other nations as the financial communities attempt to develop global consistency
where possible. Business combination rules govern the accounting for mergers and
acquisitions used in either a purchase or a pooling-of-interests combination.
Business combinations may generate intangible assets (including goodwill) which
represent the excess purchase price of an acquired enterprise over net
identifiable assets.
Tentative conclusions of the FASB will prohibit the use of pooling-of-interests
and will establish new accounting standards and financial presentation for
intangible assets resulting from business combinations. The FASB expects to
issue a final standard by the end of calendar year 2000. The final standard is
not expected to address accounting for in-process research and development
costs. Changes to the current accounting rules for business combinations and
intangible assets will not preclude mergers or acquisitions but may increase the
earnings dilution associated with future transactions. In addition, if
pooling-of-interests accounting is no longer available, we may use cash more
often than our common stock to pay for acquisitions of other companies.
37
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents and short-term investments at June 2, 2000 were $3.1
billion, an increase of $1.4 billion from $1.7 billion at May 31, 1999.
For the fiscal year ended June 2, 2000, net cash generated from operating
activities was $961.4 million. Accounts receivable at June 2, 2000 decreased
$469.7 million from May 28, 1999 to $355.5 million. Days sales outstanding in
receivables decreased to 42 days at June 2, 2000, compared to 60 days at May 28,
1999. Inventory levels at June 2, 2000 decreased $49.6 million from the prior
fiscal year-end to $285.9 million. Annualized inventory turnover was 8.0 turns
for the quarter ended June 2, 2000, compared to 7.6 turns for the quarter ended
May 28, 1999.
As part of our 3Com Ventures initiative, we selectively make strategic
investments in the equity securities of privately held companies and limited
partnership venture capital funds. For the fiscal year ended June 2, 2000, cash
proceeds from the sale of investments were $818.0 million. We have established
3Com Ventures II, which plans to make strategic investments of an additional
$250 million.
During the fiscal year ended June 2, 2000, we made $275.3 million in capital
expenditures. Major capital expenditures included upgrades and expansion of our
facilities and purchases and upgrades of systems and equipment. As of June 2,
2000, we had approximately $23.9 million in capital expenditure commitments
outstanding primarily associated with facilities renovation and information
system projects. In addition, we have commitments relating to lease arrangements
in the U.S., under which we have an option to purchase the properties for an
aggregate of $322.2 million, or arrange for the sale of the properties to a
third party. If the properties are sold to a third party at less than the option
price, we retain an obligation for a portion of the shortfall, subject to
certain provisions of the lease.
Additionally, during fiscal 2000, we 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. We also acquired certain assets of three companies for a combined
total of $92.4 million in cash, net of cash acquired.
During the fourth quarter of fiscal 2000, our 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. This new program replaces previous authorizations
totaling 45 million shares between June 1998 and September 1999. During fiscal
2000, 20.5 million shares of common stock were repurchased for a total purchase
price of $540.8 million. During fiscal 2000, we received net cash of $330.4
million from the sale of our common stock to employees through our employee
stock purchase and option plans.
During fiscal 2000, we repaid $12.0 million of borrowings under the 7.52%
unsecured senior notes agreement. As of June 2, 2000, $24.0 million of this debt
remained outstanding, of which $12.0 million is due within one year.
Based on current plans and business conditions, we believe that our existing
cash and equivalents, short-term investments, and cash generated from operations
will be sufficient to satisfy anticipated cash requirements for at least the
next twelve months.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. We adopted SOP 98-1 for our fiscal year ending
June 2, 2000. The adoption of SOP 98-1 did not have a significant impact on our
financial results for the year ended June 2, 2000.
38
In June 1998 and June 1999, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, which requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 will be effective for our fiscal year ending May 31, 2002.
We are in the process of determining the impact that adoption will have on our
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The
guidance in SAB 101 must be adopted during our fourth quarter of fiscal 2001 and
the effects, if any, are required to be recorded through a retroactive,
cumulative-effect adjustment as of the beginning of the fiscal year, with a
restatement of all prior interim quarters in the year. Management has not
completed its evaluation of the effects, if any, that SAB 101 will have on our
income statement presentation, operating results, or financial position.
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 2,
2000 and May 28, 1999, the fair value of the portfolio would decline by an
immaterial amount. We have the ability 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 on our short-term investment portfolio.
At June 2, 2000 and May 28, 1999, we had approximately $316.8 million and $307.2
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 net income or cash flows. In addition, we also have a mixture of
fixed and floating rate long-term debt of approximately $29.9 million as of June
2, 2000 and $45.3 million as of May 28, 1999. 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.
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
from June 2, 2000 and May 28, 1999 market rates would increase the unrealized
value of our forward contracts by $0.7 million and $7.3 million, respectively.
Conversely, a hypothetical 10 percent depreciation of the U.S. Dollar from June
2, 2000 and May 28, 1999 market rates would decrease the unrealized value of our
forward contracts by $0.7 million and $7.3 million, respectively. There were no
outstanding foreign exchange option contracts as of June 2, 2000. A hypothetical
10 percent appreciation or depreciation of the U.S. dollar from May 28, 1999
market rates would have increased or decreased the unrealized value of our
foreign currency option contracts by an immaterial amount. 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 an $85.5 million impact
on the value of these securities in fiscal 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 in fiscal 2000. Equity security price
fluctuations of plus or minus 15 percent would have had a $12.5 million impact
on the value of these securities held in fiscal 1999. Equity security price
fluctuations of plus or minus 50 percent would have had a $41.6 million impact
on the value of these securities held in fiscal 1999.
39
ITEM 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statement Schedule
Page
----
Financial Statements:
Independent Auditors' Report............................................. 41
Consolidated Statements of Income for the years ended June 2, 2000,
May 28, 1999, and May 31, 1998..........................................42
Consolidated Balance Sheets at June 2, 2000, and May 28, 1999............ 43
Consolidated Statements of Stockholders' Equity for the years ended
June 2, 2000, May 28, 1999, and May 31, 1998........................... 44
Consolidated Statements of Cash Flows for the years ended
June 2, 2000, May 28, 1999, and May 31, 1998............................45
Notes to Consolidated Financial Statements............................... 46
Quarterly Results of Operations (Unaudited).............................. 68
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts and Reserves.............S-1
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.
40
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 2, 2000 and May 28, 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 2, 2000. 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 2, 2000 and May 28, 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
June 2, 2000 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.
As discussed in Note 3, 3Com has restated its consolidated financial statements
for fiscal 1999 and fiscal 1998 to account for Palm, Inc. as a discontinued
operation.
DELOITTE & TOUCHE LLP
San Jose, California
June 26, 2000
(August 11, 2000 as to Note 21)
41
Consolidated Statements of Income
Years ended
-----------------------------------------------
(In thousands, except per share data) June 2, May 28, May 31,
2000 1999 1998
----------- ----------- -----------
(As restated--see Note 3)
Sales $ 4,333,942 $ 5,202,253 $ 5,156,016
Cost of sales 2,484,883 2,900,169 2,910,267
----------- ----------- -----------
Gross margin 1,849,059 2,302,084 2,245,749
----------- ----------- -----------
Operating expenses:
Sales and marketing 951,494 1,030,068 1,088,427
Research and development 610,931 589,219 554,896
General and administrative 213,290 227,602 251,937
Purchased in-process technology 13,456 10,590 8,433
Merger-related (credits) charges, net (2,297) (17,551) 253,722
Net gains on land and facilities (25,483) (4,200) --
Business realignment costs 68,867 -- --
----------- ----------- -----------
Total operating expenses 1,830,258 1,835,728 2,157,415
----------- ----------- -----------
Operating income 18,801 466,356 88,334
Gains (losses) on investments, net 838,795 (2,643) --
Interest and other income, net 104,258 56,922 16,964
----------- ----------- -----------
Income from continuing operations before income taxes
and equity interests 961,854 520,635 105,298
Income tax provision 341,672 156,791 82,252
Other interests in loss of consolidated joint venture (1,028) (1,101) --
Equity interest in loss of unconsolidated investee 5,647 -- --
----------- ----------- -----------
Net income from continuing operations 615,563 364,945 23,046
Net income from discontinued operations 58,740 38,929 7,168
----------- ----------- -----------
Net income $ 674,303 $ 403,874 $ 30,214
=========== =========== ===========
Net income per share:
Basic:
Continuing operations $ 1.77 $ 1.01 $ 0.07
Discontinued operations $ 0.17 $ 0.11 $ 0.02
----------- ----------- -----------
$ 1.94 $ 1.12 $ 0.09
=========== =========== ===========
Diluted:
Continuing operations $ 1.72 $ 0.99 $ 0.06
Discontinued operations $ 0.16 $ 0.10 $ 0.02
----------- ----------- -----------
$ 1.88 $ 1.09 $ 0.08
=========== =========== ===========
Shares used in computing per share amounts:
Basic 348,314 360,424 351,154
Diluted 357,883 369,361 365,093
See notes to consolidated financial statements.
42
Consolidated Balance Sheets
June 2, May 28,
(In thousands, except par value) 2000 1999
----------- -----------
(As restated--
see Note 3)
ASSETS
Current assets:
Cash and equivalents $ 1,700,420 $ 951,771
Short-term investments 1,369,520 709,365
Accounts receivable, less allowance for doubtful accounts
($76,468 and $105,080 in 2000 and 1999, respectively) 355,540 825,218
Inventories, net 285,942 335,500
Deferred income taxes -- 291,323
Investments and other 655,772 165,245
Net assets of discontinued operations 1,058,237 80,280
----------- -----------
Total current assets 5,425,431 3,358,702
Property and equipment, net 705,824 823,421
Goodwill, intangibles, deposits and other assets 361,699 230,152
----------- -----------
Total assets $ 6,492,954 $ 4,412,275
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 363,497 $ 300,905
Other accrued liabilities 607,316 628,540
Income taxes payable 169,887 172,732
Deferred income taxes 27,317 --
Current portion of long-term debt 14,459 13,900
----------- -----------
Total current liabilities 1,182,476 1,116,077
Long-term debt 14,740 29,723
Deferred income taxes 71,336 57,243
Other long-term obligations 7,377 7,302
Equity interests in consolidated entities 1,173,961 5,475
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: 2000--365,825;
1999--365,805 2,101,242 1,954,204
Treasury stock, at cost: 2000--12,371 shares;
1999--8,190 shares (312,428) (197,064)
Unamortized restricted stock grants (6,450) (5,303)
Retained earnings 1,982,079 1,403,709
Accumulated other comprehensive income 278,621 40,909
----------- -----------
Total stockholders' equity 4,043,064 3,196,455
----------- -----------
Total liabilities and stockholders' equity $ 6,492,954 $ 4,412,275
=========== ===========
See notes to consolidated financial statements.
43
Consolidated Statements of Stockholders' Equity
(In thousands) Common Stock Treasury Stock Unamortized
------------ -------------- Restricted Retained
Shares Amount Shares Amount Stock Grants Earnings
--------------------------------------------------------------------------
Balances, June 1, 1997 334,944 $1,183,926 $ (5,165) $1,049,561
Components of comprehensive income:
Net income 30,214
Change in unrealized gain on
available-for-sale securities
Accumulated translation adjustments
Total comprehensive income
Common stock issued under stock plans 23,926 297,693 (445)
Tax benefit from employee stock
transactions 249,057
Amortization of restricted stock grants 1,453
--------- ---------- ------- ----------
Balances, May 31, 1998 358,870 1,730,676 (4,157) 1,079,775
Components of comprehensive income:
Net income 403,874
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 (3,234) (79,940)
Tax benefit from employee stock
transactions 86,312
Amortization of restricted stock grants 2,088
Stock options assumed in connection with
acquisitions 13,366
--------- ---------- ------- ---------- -------- ----------
Balances, May 28, 1999 365,805 1,954,204 (8,190) (197,064) (5,303) 1,403,709
Components of comprehensive income:
Net income 674,303
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 (3,526) (95,933)
Tax benefit from employee stock
transactions 133,990
Amortization of restricted stock grants 2,379
Stock options assumed in connection with
acquisition 8,650
--------- ---------- ------- ---------- -------- ----------
Balances, June 2, 2000 365,825 $2,101,242 (12,371) $ (312,428) $ (6,450) $1,982,079
========= ========== ======= ========== ======== ==========
(In thousands) Accumulated Other
Comprehensive
Income Total
---------------------------
Balances, June 1, 1997 $ 22 $ 2,228,344
Components of comprehensive income:
Net income 30,214
Change in unrealized gain on
available-for-sale securities (1,493) (1,493)
Accumulated translation adjustments 2,672 2,672
----------
Total comprehensive income 31,393
----------
Common stock issued under stock plans 297,248
Tax benefit from employee stock
transactions 249,057
Amortization of restricted stock grants 1,453
------- -----------
Balances, May 31, 1998 1,201 2,807,495
Components of comprehensive income:
Net income 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 222,177
Tax benefit from employee stock
transactions 86,312
Amortization of restricted stock grants 2,088
Stock options assumed in connection with
acquisitions 13,366
---------- -----------
Balances, May 28, 1999 40,909 3,196,455
Components of comprehensive income:
Net income 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 330,355
Tax benefit from employee stock
transactions 133,990
Amortization of restricted stock grants 2,379
Stock options assumed in connection with
acquisition 8,650
---------- -----------
Balances, June 2, 2000 $ 278,621 $ 4,043,064
========== ===========
See notes to consolidated financial statements.
44
Consolidated Statements of Cash Flows
Years ended
-----------------------------------------------
(In thousands) June 2, May 28, May 31
2000 1999 1998
----------- ----------- -----------
(As restated--see Note 3)
Cash flows from operating activities:
Net income from continuing operations $ 615,563 $ 364,945 $ 23,046
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 304,415 271,076 298,225
Loss (gain) on disposal of property and equipment 37,149 27,091 (145)
Write-down of goodwill and intangibles -- 13,748 1,545
(Gains) losses on investments, net (838,795) 2,643 --
Deferred income taxes 188,692 86,084 (239,271)
Purchased in-process technology 13,456 10,590 8,433
Merger-related (credits) charges, net (2,297) (17,551) 253,722
Other interests in loss of consolidated joint venture (1,028) (1,101) --
Equity interest in loss of unconsolidated investee 5,647 -- --
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable 469,426 (50,500) 161,941
Inventories 44,083 284,438 (148,773)
Investments and other assets (43,187) 39,091 (22,625)
Accounts payable 60,232 (32,160) 23,636
Accrued liabilities and other (23,110) 12,344 2,623
Income taxes payable 131,145 81,132 276,735
----------- ----------- -----------
Net cash provided by operating activities 961,391 1,091,870 639,092
----------- ----------- -----------
Cash flows from investing activities:
Purchase of investments (1,201,169) (512,275) (376,307)
Proceeds from maturities and sales of investments 1,247,537 303,582 352,854
Purchase of property and equipment (275,262) (270,642) (499,495)
Proceeds from sale of property and equipment 93,169 29,347 49,566
Businesses acquired in purchase transactions, net of cash acquired (92,432) (97,764) --
Other, net (300) (19,156) (2,490)
----------- ----------- -----------
Net cash used for investing activities (228,457) (566,908) (475,872)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock 330,355 222,177 297,248
Repurchase of common stock (540,780) (378,565) --
Repayments of short-term debt, notes payable,
and capital lease obligations (2,357) (2,561) (168,230)
Repayments of long-term borrowings (12,000) (12,216) (128,067)
Net proceeds from issuance of debt 2,499 9,521 33,300
Other, net (3,508) (635) 470
----------- ----------- -----------
Net cash (used for) provided by financing activities (225,791) (162,279) 34,721
----------- ----------- -----------
Net cash provided by (used for) discontinued operations 241,506 70,759 (31,755)
Increase in cash and equivalents 748,649 433,442 166,186
Cash and equivalents, beginning of period 951,771 518,329 352,143
----------- ----------- -----------
Cash and equivalents, end of period $ 1,700,420 $ 951,771 $ 518,329
=========== =========== ===========
Other cash flow information:
Interest paid $ 2,256 $ 4,132 $ 18,293
Income taxes paid, net 111,899 16,884 5,135
Non-cash investing and financing activities:
Tax benefit on stock option transactions 133,990 86,312 249,057
Unrealized gain (loss) on investments, net 239,053 43,538 (1,493)
Fair value of stock issued and options assumed in business combinations 8,650 13,366 --
See notes to consolidated financial statements.
45
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, consumer, and
carrier and network service provider markets. 3Com specializes in products and
services that provide straightforward solutions to complex networking
challenges, particularly in the areas of broadband connections, 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 year 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.
Principles of consolidation. The consolidated financial statements include the
accounts of 3Com and its wholly-owned subsidiaries. All significant intercompany
balances and transactions are eliminated in consolidation.
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 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. Realized gains or losses
and declines in value, if any, judged to be other than temporary are reported in
interest and other income, net in the consolidated statements of income.
Concentration of credit risk. Financial instruments which potentially subject
3Com to concentrations of credit risk consist principally of short-term
investments and accounts receivable. 3Com maintains a minimum average 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 2, 2000, 3Com had two customers that 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, and 21 percent and 11 percent of total accounts
receivable, respectively. For the year ended May 31, 1998, 3Com had one customer
that accounted for 14 percent of total sales.
46
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, is less than the carrying value of the asset.
During fiscal 2000, $13.2 million was charged to operations related to the
write-down of a facility held for sale and several long-term equity investments,
the values of which were determined to be permanently impaired. During fiscal
1999, $13.7 million of goodwill was charged to operations as the goodwill was
determined to be impaired. Impairments of long-lived assets associated with
3Com's business realignment or mergers 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
shipped, risk of loss has passed to the customer, and collection of the
resulting receivable is probable. 3Com accrues related product return reserves,
warranty, other post-contract support obligations, and royalty expenses at the
time of sale. A limited warranty is provided on 3Com products for periods
ranging from 90 days to the lifetime of the product, depending upon the product.
Service and maintenance sales are recognized over the contract term. 3Com
provides limited product return and price protection rights to certain
distributors and resellers. Product return rights are generally limited to a
percentage of sales over a one to three month period.
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 income 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.
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 income. Foreign currency gains were $1.2 million and $2.0 million
for the years ended June 2, 2000 and May 28, 1999, respectively, and foreign
currency losses were $12.3 million for the year ended May 31, 1998.
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 and restricted stock.
47
Effects of recent accounting pronouncements. In March 1998, the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP No. 98-1 requires that entities capitalize
certain costs related to internal-use software once certain criteria have been
met. 3Com adopted SOP 98-1 in the fiscal year ended June 2, 2000. The adoption
of SOP 98-1 did not have a significant impact on financial results for the year
ended June 2, 2000.
In June 1998 and June 1999, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended, which requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS 133 will be effective for
3Com's fiscal year ending May 31, 2002. 3Com is in the process of determining
the impact that adoption will have on its consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The
guidance in SAB 101 must be adopted during 3Com's fourth quarter of fiscal 2001
and the effects, if any, are required to be recorded through a retroactive,
cumulative-effect adjustment as of the beginning of the fiscal year, with a
restatement of all prior interim quarters in the year. Management has not
completed its evaluation of the effects, if any, that SAB 101 will have on
3Com's income statement presentation, operating results, or financial position.
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 historical consolidated financial statements of 3Com have been restated to
account for Palm as a discontinued operation for all periods presented. The
financial data of Palm reflects the historical results of operations and cash
flows of the businesses that comprised the handheld computing business segment
of 3Com during each respective period; they do not reflect many significant
changes that will occur and have occurred in the operations and funding of Palm
as a result of the separation from 3Com and the IPO. The Palm financial data
restated as a discontinued operation reflects the assets and liabilities
transferred to Palm in accordance with the terms of a master separation
agreement to which Palm and 3Com are parties.
Discontinued operations include Palm net sales which totaled $1,057.6 million,
$569.9 million and $264.4 million for fiscal years 2000, 1999 and 1998,
respectively. Net income from Palm discontinued operations was reported net of
income tax expense of $44.8 million, $24.9 million, and $4.0 million for the
fiscal years 2000, 1999 and 1998, respectively. Allocated corporate expenses
that will cease after the Palm spin-off are included in net income from
discontinued operations.
The net assets of Palm included within discontinued operations were as follows
(in millions):
June 2, May 28,
2000 1999
------- -------
Current assets $ 1,259 $ 141
Property and equipment, net 13 8
Deferred income taxes and other assets 17 14
Current liabilities (230) (82)
Long-term debt -- (1)
Other liabilities (1) --
------- -------
Net assets of discontinued operations $ 1,058 $ 80
======= =======
48
Note 4: Business Realignment
During fiscal 2000, 3Com refocused its business strategy, changed its growth
profile, and streamlined its operations. The first phase of 3Com's business
realignment was to separate the operations of Palm and to make Palm an
independent company. The second phase was to realign 3Com's strategy to focus on
high-growth markets, technologies, and products.
In connection with the separation of Palm, 3Com incurred business realignment
costs, which consisted primarily of incremental third party costs related to
legal and accounting services, strategic business planning, information systems
separation, development of compensation and benefits strategies, and costs to
recruit certain key Palm management. As of June 2, 2000, 3Com had incurred $9.9
million in realignment charges resulting from the separation of Palm. Direct
costs of the IPO, such as the underwriters' commissions and legal and accounting
fees, were deducted from the proceeds of the offering.
3Com also announced plans to realign its strategy 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)
Carrier Networks Business. In support of this new strategy, 3Com announced a
number of investments in new technologies and relationships with other
companies. In addition, 3Com is exiting three major product lines that are no
longer strategic to its future. During the fourth quarter of fiscal 2000, 3Com
exited its high-end LAN and WAN chassis product lines and completed the transfer
of assets and human resources associated with these product lines. 3Com is
currently in the process of exiting its analog-only modem product line and has
signed separate definitive agreements with Accton Technology and NatSteel
Electronics pertaining to the transfer of this product line to a joint venture.
As of June 2, 2000, 3Com had incurred $59.0 million in net realignment charges
related to implementing its change in strategic focus, comprised of business
realignment charges of approximately $125.4 million, offset by a gain recognized
upon receipt of a warrant to purchase common stock in Extreme Networks, Inc.,
valued at $66.4 million. Components of net business realignment costs as of June
2, 2000 were as follows:
o $59.9 million for severance and outplacement costs related to the
termination of approximately 2,900 employees. Employee separation costs
include severance, medical, and other benefits. Employee groups impacted
by the realignment include personnel involved in duplicate corporate
services, manufacturing and logistics, product organizations, sales, and
customer support. As of June 2, 2000, approximately 900 employees had
begun the separation process, resulting in $25.7 million of employee
separation payments. Remaining cash expenditures associated with employee
separation are estimated to be approximately $34.2 million and were
accrued as of June 2, 2000. Employee separations are expected to be
substantially completed by May 2001.
o $27.2 million related to payments to suppliers and vendors to terminate
agreements. As of June 2, 2000, $25.0 million of this expense had been
paid for contract breakage costs and $2.2 million was accrued for amounts
expected to be paid during fiscal 2001.
o $20.2 million for disposal of long-term assets, primarily related to
hardware and software. As of June 2, 2000, charges of $3.7 million had
been incurred related to the write-off of sales related hardware and
software applications that are no longer needed. Approximately $16.5
million was accrued to cover remaining capital asset write-offs.
o $8.9 million 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 and $8.3 million was accrued for future expenditures,
including $3.8 million for non-cash charges for the write-off of assets
associated with these leased properties.
o $9.2 million related to other restructuring costs, primarily associated
with professional fees and other direct costs. As of June 2, 2000,
expenses of $5.7 million had been paid and approximately $3.5 million was
accrued for amounts expected to be paid during fiscal 2001.
o As part of the realignment strategy, 3Com formed a strategic alliance with
Extreme Networks, Inc. to provide a migration path for customers of 3Com's
CoreBuilder 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 is
two years and expires on April 3, 2002. This warrant had a fair value of
$66.4 million at the time of receipt. The gain recognized on the receipt
of this warrant partially offsets the business realignment charges above.
49
3Com expects to substantially complete its realignment initiatives during
calendar year 2000. There can be no assurance that the estimated costs of 3Com's
business realignment activities will not change. Remaining cash expenditures
relating to the realignment are estimated to be $44.4 million, related primarily
to employee severance, facility closure, and payments to suppliers. Remaining
non-cash charges relating to the realignment are estimated to be $20.3 million,
primarily related to the impairment of capital assets associated with the
business activities that have been exited.
Note 5: Business Combinations and Joint Venture
For acquisitions accounted for as purchases, 3Com's consolidated statements of
income 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. Unless otherwise
stated, for acquisitions accounted for under the pooling-of-interests method,
all financial data of 3Com has been restated to include the historical financial
data of these acquired companies. No significant adjustments were required to
conform the accounting policies of the acquired companies.
3Com completed the following transactions during the fiscal year ended June 2,
2000:
o On April 3, 2000, 3Com acquired certain assets of Call Technologies, Inc.
(Call Technologies), a leading developer of Unified Messaging (UM) and
carrier-class Operational Systems and Support (OSS) software solutions for
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.
o On December 22, 1999, 3Com acquired certain assets of 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.
o On December 2, 1999, 3Com acquired certain assets of 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 are being
amortized over estimated useful lives of three years.
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.
50
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.
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, 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 are being
amortized over estimated useful lives of four years.
3Com completed the following acquisitions during the fiscal year ended May 31,
1998:
o On June 12, 1997, 3Com completed a merger with U.S. Robotics Corporation
(U.S. Robotics), the leading supplier of products and systems for
accessing information across the WAN, including modems and remote access
products. This merger was accounted for as a pooling-of-interests. 3Com
issued approximately 158 million shares of 3Com common stock in exchange
for all outstanding common stock of U.S. Robotics. 3Com also assumed all
options to purchase U.S. Robotics' stock, which were converted into
options to purchase approximately 31 million shares of 3Com's common
stock, pursuant to the terms of the merger.
o On March 2, 1998, 3Com purchased Lanworks Technologies, Inc. (Lanworks), a
developer, manufacturer, and marketer of PC network boot technologies and
products, which are critical components of a complete desktop management
environment, for approximately $13.0 million in cash. Approximately $8.4
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 1998.
51
Note 6: Investments
Available-for-sale securities consist of:
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
========== ========== ========== ==========
May 28, 1999
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
--------------------------------------------------
State and municipal securities $ 469,621 $ 1,203 $ (195) $ 470,629
Corporate debt securities 239,873 35 (1,172) 238,736
---------- ---------- ---------- ----------
Short-term investments 709,494 1,238 (1,367) 709,365
Publicly traded corporate equity securities 10,487 72,792 -- 83,279
---------- ---------- ---------- ----------
Total $ 719,981 $ 74,030 $ (1,367) $ 792,644
========== ========== ========== ==========
Publicly traded corporate equity securities are included in other current
assets.
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. During the fiscal
year ended May 31, 1998, securities were sold for proceeds of $36.2 million,
resulting in insignificant realized gains and losses.
The contractual maturities of available-for-sale debt securities at June 2, 2000
are as follows:
Amortized Estimated
(In thousands) Cost Fair Value
-----------------------------
Within one year $ 517,784 $ 516,613
Between one year and two years 855,703 852,907
----------- -----------
Short-term investments $ 1,373,487 $ 1,369,520
=========== ===========
52
Note 7: Inventories, Net
Inventories consist of:
June 2, May 28,
(In thousands) 2000 1999
-------- --------
Finished goods $174,420 $225,059
Work-in-process 31,863 45,441
Raw materials 79,659 65,000
-------- --------
Total $285,942 $335,500
======== ========
Note 8: Property and Equipment, Net
Property and equipment, net consists of:
June 2, May 28,
(In thousands) 2000 1999
----------- -----------
Land $ 46,412 $ 48,365
Land held for development -- 36,497
Land, property, and equipment
held for sale, net 45,452 11,825
Buildings and improvements 284,620 298,493
Machinery and equipment 912,472 918,552
Furniture and fixtures 107,300 100,193
Leasehold improvements 70,631 56,059
Construction in progress 66,614 77,192
----------- -----------
Total 1,533,501 1,547,176
Accumulated depreciation and
amortization (827,677) (723,755)
----------- -----------
Property and equipment, net $ 705,824 $ 823,421
=========== ===========
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.
For the Year Ended May 28, 1999. 3Com sold three facilities in the Chicago and
Boxborough areas and equipment in the Chicago area for total net proceeds of
$29.3 million. In addition, a gain of $4.2 million was recognized which was
previously deferred pending the resolution of certain contingencies associated
with the sale of a 33 acre parcel near 3Com's Santa Clara headquarters in fiscal
1998.
53
Note 9: Other Accrued Liabilities
Other accrued liabilities consist of:
June 2, May 28,
(In thousands) 2000 1999
-------- --------
Accrued payroll and related expenses $186,382 $105,844
Accrued product warranty 86,437 108,637
Deferred revenue 76,610 80,729
Accrued distributor rebates 35,077 47,343
Accrued promotion rebates 33,605 54,241
Other 189,205 231,746
-------- --------
Other accrued liabilities $607,316 $628,540
======== ========
Note 10: Borrowing Arrangements and Commitments
As of June 2, 2000, 3Com had borrowings related to a $5.2 million equipment
financing transaction. Also, as of June 2, 2000, 3Com had approximately $10.3
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 are payable in
five equal installments beginning in June 1997. As of June 2, 2000 and May 28,
1999, borrowings under these notes totaled approximately $24 million and $36
million, respectively. As of June 2, 2000 and May 28, 1999, $12 million of this
debt was classified as current portion of long-term debt.
As of June 2, 2000, the weighted average interest rate on outstanding debt was
approximately seven 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 $152.6 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 $152.6 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 $83.6 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 $83.6 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
to accommodate future growth. 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 $86.0 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 $86.0
million, subject to certain provisions of the lease.
The three aforementioned leases require 3Com to maintain specified financial
covenants, all of which 3Com was in compliance with as of June 2, 2000. Future
minimum lease payments are included in the table below.
54
3Com leases certain of its facilities under operating leases. Leases expire at
various dates from 2000 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.
Future operating lease commitments, net of sublease income are as follows:
Fiscal year (in thousands)
- --------------------------------------------------------------------------------
2001 $ 32,286
2002 21,664
2003 4,811
2004 7,426
2005 5,424
Thereafter 25,530
-----------
Total $ 97,141
===========
During fiscal 2000, 3Com entered into sublease agreements with Palm that expire
in 2002 and 2003. 3Com will record approximately $26.0 million of sublease
income over the lives of the subleases.
Rent expense was $51.5 million, $53.7 million, and $51.1 million for the fiscal
years ended June 2, 2000, May 28, 1999, and May 31, 1998.
As of June 2, 2000, 3Com had approximately $23.9 million in capital expenditure
commitments, primarily associated with facilities renovation and information
system projects.
3Com purchases product components from a vendor with which 3Com has agreed to
certain minimum purchase goals until the end of calendar year 2003. In the event
that 3Com fails to meet the calendar year purchase goals, the incremental
payment from 3Com to the vendor is calculated as 10 percent of the shortfall, up
to the following maximum amounts: $8 million for 2001, $11.5 million for 2002,
and $16 million for 2003.
As of June 2, 2000, 3Com had commitments pertaining to a patent license
agreement. The minimum and maximum amounts that 3Com will pay under the patent
license agreement are based on purchases made and are as follows (in thousands):
Fiscal year Minimum Payment Maximum Payment
- --------------------------------------------------------------------------------
2001 $ 2,000 $ 3,000
2002 2,500 4,513
2003 3,000 6,101
2004 3,500 7,771
2005 4,000 9,529
------------- -------------
Total $ 15,000 $ 30,914
============= =============
Note 11: Common Stock
Shareholder Rights Plan. In September 1989, the Board of Directors approved a
stock purchase rights plan and declared a dividend distribution of one common
stock purchase right for each outstanding share of common stock. The 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 to purchase for $250 a number of shares of 3Com common stock
(or any acquiring company) with a fair market value of $500. The rights are
redeemable at 3Com's option for $.01 per right and expire on December 13, 2004.
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.
55
On December 17, 1997, the Board of Directors approved the repricing of certain
employee stock options with an exercise price in excess of the fair market value
of 3Com's common stock on January 12, 1998. The exercise price for 20.9 million
shares of employee stock options was reset to $29.375, the closing market price
on January 12, 1998. All such options retained their original vesting schedules
but were subject to a nine-month period during which exercises were prohibited.
Stock options held by executive officers and directors were not eligible for
such repricing.
A summary of option transactions under the plans follows:
(Shares in thousands) Number Weighted average
of shares exercise price
--------- --------------
Outstanding, June 1, 1997 60,056 $ 20.82
Granted and assumed 15,701 50.37
Exercised (22,627) 12.07
Canceled (5,509) 39.37
-------- --------
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
======== ========
As of June 2, 2000, there were 14.8 million shares available for future grant.
Subsequent to the fiscal year ended June 2, 2000, the Board of Directors
authorized an increase in the share reserve for employee stock purchases by
9.2 million shares, subject to shareholder approval.
Outstanding options as of June 2, 2000 Exercisable at June 2, 2000
--------------------------------------------------------------- ---------------------------------
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)
$ 0.02 - $ 20.44 4,953 $12.04 5.0 4,134 $ 10.86
20.63 - 26.75 11,739 25.99 8.8 1,345 24.38
26.79 - 29.38 13,710 28.77 7.6 6,418 29.10
29.44 - 104.13 12,433 43.66 8.4 3,481 39.28
------ ------ --- ------- -------
Total 42,835 $30.39 7.9 15,378 $ 26.09
====== =======
There were 23.6 million and 29.7 million options exercisable as of May 28, 1999
and May 31, 1998 with weighted average exercise prices of $21.93 and $18.69 per
share, respectively.
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 which 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.
56
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. As of June 2, 2000,
there were 0.4 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.
Common Stock Reserved for Issuance. As of June 2, 2000, 3Com had common stock
reserved for issuance as follows:
(In thousands)
Shareholder Rights Plan 353,454
Stock Option Plans 57,631
Employee Stock Purchase Plan 2,741
Restricted Stock Plan 403
--------
Total shares reserved for issuance 414,229
========
Stock Repurchase Program. 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. This new program replaces
previous authorizations totaling 45 million shares between June 1998 and
September 1999. During fiscal 2000, 20.5 million shares of common stock were
repurchased for a total purchase price of $540.8 million.
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 2000, 1999,
and 1998 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
--------------------------- ----------------------------
2000 1999 1998 2000 1999 1998
--------------------------- ----------------------------
Risk-free interest rate 6.5% 5.3% 5.5% 6.4% 4.9% 5.5%
Volatility 78.4% 62.0% 56.0% 78.4% 62.0% 56.0%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
As of June 2, 2000, the expected lives of the 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 and one half years after the vesting date for directors and approximately
two years after the vesting date for non-directors. As of May 31, 1998, the
expected lives of options under the Employee Stock Option Plan were estimated at
approximately three years after the vesting date for directors and approximately
one year after the vesting date for non-directors. As of June 2, 2000, May 28,
1999, and May 31, 1998, the expected life of options under the Employee Stock
Purchase Plan was estimated at six months.
57
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 2000, 1999 and 1998 was $21.10, $14.95 and $17.97 per share,
respectively. The weighted average estimated fair value of shares granted under
the Employee Stock Purchase Plan during fiscal years 2000, 1999 and 1998 was
$10.26, $8.41 and $10.56, respectively. Because 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 2, May 28, May 31,
2000 1999 1998
---------- --------- ----------
Net income (loss): As reported $ 674,303 $ 403,874 $ 30,214
Pro forma 535,539 216,695 (140,351)
Earnings (loss) per share: As reported--basic $ 1.94 $ 1.12 $ 0.09
Pro forma--basic 1.54 0.60 (0.40)
As reported--diluted $ 1.88 $ 1.09 $ 0.08
Pro forma--diluted 1.50 0.59 (0.38)
The effects on pro forma disclosures of applying SFAS 123 are not likely to be
representative of the effects on pro forma disclosures of future years. Because
SFAS 123 is applicable only to options granted subsequent to May 31, 1995, the
full effect on pro forma net income and earnings per share was not reflected for
periods prior to fiscal 1999.
Note 12: 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, which is not 3Com's intent.
Because 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.
June 2, 2000 May 28, 1999
----------------------------- ----------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
----------------------------------------------------------------
Assets:
Cash and equivalents $ 1,700,420 $ 1,700,420 $ 951,771 $ 951,771
Short-term investments 1,369,520 1,369,520 709,365 709,365
Corporate equity securities 620,390 620,390 128,916 128,916
Liabilities:
Long-term debt $ 24,000 $ 24,675 $ 37,798 $ 38,243
58
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 2, 2000 and May 28, 1999, 3Com had outstanding foreign exchange
forward contracts with aggregate notional amounts of $52.9 million and $82.2
million that had remaining maturities of one month or less. 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
May 28, 1999, 3Com did not have any outstanding foreign exchange forward
contracts with maturities greater than one month. As of June 2, 2000 and May 28,
1999, 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.
The foreign exchange option contracts provide 3Com with the right to exchange
foreign currencies for U.S. Dollars or vice versa, and generally mature in one
month. As of June 2, 2000, 3Com did not have any outstanding foreign exchange
option contracts. As of May 28, 1999, 3Com had an outstanding foreign exchange
option contract with a notional amount of $2.8 million. The fair value of
foreign exchange option contracts is based on prevailing financial market
information.
Note 13: Purchased In-Process Technology, Merger-Related (Credits) Charges, Net,
and Net Gains on Land and Facilities
Purchased In-Process Technology
During fiscal 2000, 3Com purchased LANSource and Call Technologies. In each of
these acquisitions, a portion of the total purchase price represented purchased
in-process technology that had not yet reached technological feasibility and had
no alternative future use. The amounts charged to operations as purchased
in-process technology in fiscal 2000 were as follows: $2.9 million for LANSource
and $10.6 million for Call Technologies.
During fiscal 1999, 3Com purchased NBX and certain assets of ICS. In each of
these acquisitions, a portion of the total purchase price represented purchased
in-process technology that had not yet reached technological feasibility and had
no alternative future use. The amounts charged to operations as purchased
in-process technology in fiscal 1999 were as follows: $5.6 million for NBX and
$5.0 million for ICS.
59
During fiscal 1998, 3Com purchased Lanworks for approximately $13.0 million in
cash. Approximately $8.4 million of the total purchase price represented
purchased in-process technology that had not yet reached technological
feasibility and had no alternative future use. This amount was charged to
operations in the fourth quarter of fiscal 1998.
Merger-Related (Credits) Charges, 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 $240.0 million through June 2,
2000, which included $196.2 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 June 1, 1997 through June 2, 2000 (in thousands):
- ---------------------------------------------------------------------------------------------------------------------------
1998
----------------------------------------
May 31, 1997 Provision/ May 31, 1998
Type of cost Balance Revisions in Estimates Deductions Balance
- ---------------------------------------------------------------------------------------------------------------------------
Facilities -- $ 48,279 $ 11,695 $ 36,584
Severance and outplacement -- 61,760 55,550 6,210
Long-term assets -- 41,837 40,548 1,289
Inventory -- 65,181 58,752 6,429
- ---------------------------------------------------------------------------------------------------------------------------
Total -- $ 217,057 $ 166,545 $ 50,512
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
1999
----------------------------------------
May 31, 1998 Revisions in May 28, 1999
Type of cost Balance 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, 1998 Revisions in June 2, 2000
Type of cost Balance 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
- ---------------------------------------------------------------------------------------------------------------------------
No significant remaining cash expenditures relating to the U.S. Robotics merger
charge are anticipated. As of June 2, 2000, substantially all benefits had been
paid to terminated employees. 3Com expects to have completed all exit activities
by November 30, 2002.
As of June 2, 2000 and May 28, 1999, 3Com also had a remaining merger accrual of
$1.3 million and $2.1 million, respectively, related to the Chipcom Corporation
merger.
In addition, merger-related (credits) charges 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.
60
During fiscal 1998, 3Com recorded a net credit of $7.0 million associated with
past merger activities and disposition of real estate. This net credit was
comprised of the reversal of approximately $10.6 million of previously recorded
merger accruals based on revised estimates, the sale of land in Santa Clara near
its headquarters which resulted in a net gain of $15.8 million, and the decision
to close one of two manufacturing plants in Chicago which resulted in a one-time
charge of $19.4 million reflecting the difference between the estimated net
realizable value and the carrying value of the plant.
Net Gains on Land and Facilities
During fiscal 2000, 3Com sold a manufacturing facility and related assets in
Salt Lake City, Utah to Manufacturers' Services Ltd., and recognized the
impairment of a remaining Salt Lake facility held for sale, which resulted in a
combined net gain of $25.5 million.
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 14: Interest and Other Income, Net
Interest and other income, net consists of:
Years ended
-------------------------------------------
June 2, May 28, May 31,
(In thousands) 2000 1999 1998
--------- --------- ---------
Interest income $ 110,404 $ 63,245 $ 46,175
Interest expense (3,612) (3,756) (16,685)
Other (2,534) (2,567) (12,526)
--------- --------- ---------
Total $ 104,258 $ 56,922 $ 16,964
========= ========= =========
Note 15: Income Taxes
The provision for income taxes consists of:
Years ended
-------------------------------------------
June 2, May 28, May 31,
(In thousands) 2000 1999 1998
--------- --------- ---------
Current:
Federal $ 84,107 $ (7,689) $ 251,173
State 38,892 24,992 (1,093)
Foreign 39,361 49,805 37,641
--------- --------- ---------
Total current 162,360 67,108 287,721
--------- --------- ---------
Deferred:
Federal 171,315 104,510 (214,943)
State 8,182 (4,697) 2,726
Foreign (185) (10,130) 6,748
--------- --------- ---------
Total deferred 179,312 89,683 (205,469)
--------- --------- ---------
Total $ 341,672 $ 156,791 $ 82,252
========= ========= =========
61
The components of net deferred tax assets (liabilities) consist of:
June 2, May 31,
(In thousands) 2000 1999
--------- ---------
Deferred tax assets:
Reserves not recognized for tax purposes $ 164,811 $ 209,046
Net operating loss carry-forwards 2,781 157,351
Amortization and depreciation (9,218) 18,981
Other 16,065 10,599
Valuation allowance (11,482) (51,399)
--------- ---------
Total deferred tax assets 162,957 344,578
--------- ---------
Deferred tax liabilities:
Unremitted earnings (81,960) (81,960)
Unrealized gain on investments, net (179,240) (28,298)
Other (410) (240)
--------- ---------
Net deferred tax assets (liabilities) $ (98,653) $ 234,080
========= =========
The valuation allowance relates partially to net operating losses and is
required, as 3Com believes that it is more likely than not that such benefits
will not be realized due to various limitations on their use. The allowance also
relates to certain expenses, the realization of which is not assured on future
state income tax returns. The valuation allowance decreased $40 million in
fiscal 2000 and increased $5.6 million in fiscal 1999.
3Com's income taxes payable for federal, state, and foreign purposes has been
reduced by the tax benefits associated with the exercise of employee stock
options and with disqualifying dispositions of stock options. The amount of the
benefit is the tax effect of the difference between the market value of the
stock issued at the time of option exercise and the exercise price of the
option.
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 2, May 31, May 31,
2000 1999 1998
---- ---- ----
Tax computed at federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal effect 3.2 2.5 1.0
Tax exempt investment income (0.9) (1.4) (6.1)
Provision for combined foreign and U.S. taxes on
certain foreign income at rates greater than
(less than) U.S. rates (4.2) (6.5) 0.7
Research tax credits (0.3) (0.6) (5.2)
Non-deductible purchased in-process technology
and merger-related charges 1.0 0.5 48.8
Other 1.7 0.6 3.9
------ ------ ------
Total 35.5% 30.1% 78.1%
====== ====== ======
Income before income taxes for the fiscal years ended June 2, 2000, May 28,
1999, and May 31, 1998 includes income of $213.3 million, $227.1 million, and
$170.5 million, respectively from our foreign subsidiaries. Federal income taxes
have not been provided on approximately $656.5 million of undistributed earnings
of foreign subsidiaries since 3Com intends to reinvest in foreign subsidiary
operations indefinitely. It is not practicable to estimate the income tax
liability that might be incurred upon the remittance of such earnings.
3Com has approximately $70.9 million of operating loss carryforwards related to
various foreign taxing jurisdictions, $0.7 million of which expire through 2005
with the remaining balance having an unlimited carryforward.
62
Note 16: Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income.
The components of other comprehensive income and their related tax effects are
as follows (in thousands):
Years ended
-----------------------------------
June 2, May 28, May 31,
2000 1999 1998
--------- --------- ---------
Gains (losses) on investments during the year, net of
tax expense (benefit) of $(173,702), $28,577 and
$(816) in 2000, 1999, and 1998, respectively $(275,098) $ 45,157 $ (1,520)
Less: adjustment for gains (losses) included in net
income, net of tax expense (benefit) of $324,644,
$(1,024), and $15 in 2000, 1999, and 1998, respectively 514,151 (1,619) 27
Change in accumulated translation adjustments during
the year, net of tax of $0 in 2000, 1999, and 1998 (1,341) (3,830) 2,672
--------- --------- ---------
Other comprehensive income $ 237,712 $ 39,708 $ 1,179
========= ========= =========
Accumulated other comprehensive income 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.
Note 17: 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 2, May 28, May 31,
2000 1999 1998
-------- -------- --------
Net income from continuing operations $615,563 $364,945 $ 23,046
Net income from discontinued operations 58,740 38,929 7,168
-------- -------- --------
$674,303 $403,874 $ 30,214
======== ======== ========
Weighted average shares--Basic 348,314 360,424 351,154
Effect of dilutive securities:
Employee stock options 9,267 8,735 13,725
Restricted stock 302 202 214
-------- -------- --------
Weighted average shares--Diluted 357,883 369,361 365,093
======== ======== ========
Net income per share--Basic:
Continuing operations $ 1.77 $ 1.01 $ 0.07
Discontinued operations 0.17 0.11 0.02
-------- -------- --------
$ 1.94 $ 1.12 $ 0.09
======== ======== ========
Net income per share--Diluted:
Continuing operations $ 1.72 $ 0.99 $ 0.06
Discontinued operations 0.16 0.10 0.02
-------- -------- --------
$ 1.88 $ 1.09 $ 0.08
======== ======== ========
63
Note 18: Business Segment Information
3Com has evolved from a supplier of discrete products to a leading provider of
broad-based networking systems and services that connect people and
organizations to information across LANs and WANs, including the Internet. For
the majority of fiscal 2000, 3Com was organized around four separately managed
business units: Network Systems, Personal Connectivity, Handheld Computing, and
Customer Service. During the fourth fiscal quarter, 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. As Palm is no longer a part of continuing operations,
3Com is no longer presenting a Handheld Computing segment. 3Com's business
activities have been aggregated into two reportable segments: Personal
Connectivity and Network Systems. The Customer Service business unit has been
combined into Network Systems, as customer service operations are an integral
part of the Network Systems 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
Personal Connectivity segment manufactures and sells desktop network interface
cards, desktop modems, and mobile personal computer cards. The Network Systems
segment manufactures and sells switches, hubs, remote access concentrators,
routers, as well as services associated with sales of these products.
3Com's Chief Executive Officer and Chief Operating Officer have been identified
as the chief operating decision makers ("CODMs") as they assess the performance
of the business units and decide how to allocate resources to the business
units. Segment income is the measure of profit and loss that CODMs use to assess
performance and make decisions. Segment income represents the sales less the
cost of sales and direct expenses incurred within the operating segments. In
addition, 3Com's sales and corporate marketing, manufacturing, finance, and
administration groups are allocated to operating segments and are included in
the results below. Certain corporate level operating expenses (primarily bonuses
based on 3Com results, 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. Further, because interest
and other income, net is allocated to each of the business units as a simple
percentage of sales and the provision for income taxes is allocated to each
business unit as a percentage of pre-tax income, interest and other income, net
and the provision for income taxes are included in the corporate and other
column.
The two business segments do not sell to each other, and accordingly, there are
no intersegment sales. 3Com's CODMs do not review total assets or depreciation
and amortization by operating segment, but they do review inventory by operating
segment. The accounting policies for reported segments are the same as for 3Com
as a whole.
Reportable Operating Segments
Information on reportable segments for the three years ended June 2, 2000, May
28, 1999 and May 31, 1998, and as of June 2, 2000 and May 28, 1999, is as
follows (in thousands):
Network Personal Corporate
2000 Systems Connectivity and Other(1) Total
- --------------------------------------------------------------------------------
Sales $ 2,212,147 $ 2,121,795 $ -- $ 4,333,942
Segment income (loss) (77,880) 262,075 490,108 674,303
Inventory 141,687 144,255 -- 285,942
Network Personal Corporate
1999 Systems Connectivity and Other(1) Total
- --------------------------------------------------------------------------------
Sales $ 2,612,593 $ 2,589,660 $ -- $ 5,202,253
Segment income (loss) 139,698 365,005 (100,829) 403,874
Inventory 172,576 162,924 -- 335,500
64
Network Personal Corporate
1998 Systems Connectivity and Other(1) Total
- --------------------------------------------------------------------------------
Sales $ 2,347,082 $ 2,808,934 $ -- $ 5,156,016
Segment income (loss) 14,397 359,747 (343,930) 30,214
(1) Included in the corporate and other category are the following: employee
bonuses based on 3Com results; unallocated corporate expenses; purchased
in-process technology; merger-related (credits) charges, net; net gains on land
and facilities; business realignment costs; gains (losses) on investments, net;
interest and other income, net; income tax provision; other interests in losses
of consolidated joint venture; equity interest in loss of unconsolidated
investee; and certain amounts previously allocated to the discontinued handheld
computing segment.
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 2, May 28, May 31,
2000 1999 1998
---------- ---------- ----------
Sales
United States $2,114,650 $2,667,815 $2,761,260
United Kingdom 381,228 476,319 378,563
Other 1,838,064 2,058,119 2,016,193
---------- ---------- ----------
Total $4,333,942 $5,202,253 $5,156,016
========== ========== ==========
For the fiscal years ended June 2, 2000, May 28, 1999, and May 31, 1998, no
other individual country had sales exceeding 10 percent of total sales.
June 2, May 28, May 31,
2000 1999 1998
-------- -------- --------
Long-Lived Assets
United States $488,742 $589,084 $594,158
United Kingdom 76,315 84,839 88,089
Ireland 78,056 75,512 82,074
Other 62,711 73,986 85,337
-------- -------- --------
Total $705,824 $823,421 $849,658
======== ======== ========
As of June 2, 2000, May 28, 1999, and May 31, 1998, no other individual country
had long-lived assets exceeding 10 percent of total long-lived assets.
65
Note 19: 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 $12.9 million
in fiscal 2000, $13.6 million in fiscal 1999, and $11.9 million in fiscal 1998.
Note 20: 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
On March 24 and May 5, 1997, securities class action lawsuits, captioned Hirsch
v. 3Com Corporation, et al., Civil Action No. CV764977 (Hirsch), and Kravitz v.
3Com Corporation, et al., Civil Action No. CV765962 (Kravitz), respectively,
were filed against 3Com and certain of its officers and directors in the
California Superior Court, Santa Clara County. The complaints allege violations
of Sections 25400 and 25500 of the California Corporations Code and seek
unspecified damages on behalf of a class of purchasers of 3Com common stock
during the period from September 24, 1996 through February 10, 1997. In late
1999, these cases were stayed by the Court, pending resolution of proceedings in
the Euredjian v. 3Com Corporation matter, discussed below. Because the Euredjian
case has been dismissed, the Hirsch and Kravitz cases are no longer stayed. They
are in discovery. No trial date has been scheduled.
On February 10, 1998, a securities class action, captioned Euredjian v. 3Com
Corporation, et al., Civil Action No. C-98-00508CRB (Euredjian), was filed
against 3Com and several of its present and former officers and directors in
United States District Court for the Northern District of California asserting
the same class period and factual allegations as the Hirsch and Kravitz actions.
The complaint alleges violations of the federal securities laws, specifically
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks
unspecified damages. In May 2000, at the request of plaintiffs, the Court
dismissed the Euredjian case with prejudice.
In December 1997, a securities class action, captioned Reiver v. 3Com
Corporation, et al., Civil Action No. C-97-21083JW (Reiver), was filed in the
United States District Court for the Northern District of California. Several
similar actions have been consolidated into this action, including Florida State
Board of Administration and Teachers Retirement System of Louisiana v. 3Com
Corporation, et al., Civil Action No. C-98-1355. On August 17, 1998, the
plaintiffs filed a consolidated amended complaint which alleges violations of
the federal securities laws, specifically Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934, and which seeks unspecified damages on
behalf of a purported class of purchasers of 3Com common stock during the period
from April 23, 1997 through November 5, 1997. 3Com has answered an amended
complaint and the case is now in discovery. No trial date has been scheduled.
In October 1998, a securities class action lawsuit, captioned Adler v. 3Com
Corporation, et al., Civil Action No. CV777368 (Adler), was filed against 3Com
and certain of its officers and directors in the California Superior Court,
Santa Clara County, asserting the same class period and factual allegations as
the Reiver action. The complaint alleges violations of Sections 25400 and 25500
of the California Corporations Code and seeks unspecified damages. By agreement
of the parties, this case will be stayed to allow the Reiver case to proceed.
66
On May 11, 1999, a securities class action, captioned Gaylinn v. 3Com
Corporation, et al., Civil Action No. C-99-2185 MMC (Gaylinn), was filed against
3Com and several of its present and former officers and directors in United
States District Court for the Northern District of California. Several similar
actions have been consolidated into the Gaylinn action. On September 10, 1999,
the plaintiffs filed a consolidated complaint which alleges violations of the
federal securities laws, specifically Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and seeks unspecified damages on behalf of a purported
class of purchasers of 3Com common stock during the period from September 22,
1998 through March 2, 1999. In January 2000, the Court dismissed the complaint.
In February 2000, plaintiffs filed an amended complaint. In June 2000, the Court
dismissed the amended complaint without prejudice. Plaintiffs filed another
amended complaint. On July 24, 2000, the Company filed a motion to dismiss the
latest amended complaint.
Intellectual Property
On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics
Corporation and U.S. Robotics Access Corp. in the United States District Court
for the Western District of New York. The case is now captioned Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm
Computing, Inc. and 3Com Corporation (Civil Action Number 97-CV-6182T). The
Complaint alleged willful infringement of United States Patent Number 5,596,656,
entitled "Unistrokes for Computerized Interpretation of Handwriting." The
Complaint sought to permanently enjoin the defendants from infringing the patent
in the future. In an Order entered by the Court on June 6, 2000, the Court
granted the defendants' motion for summary judgment of non-infringement, and the
case was dismissed in its entirety. Xerox has appealed the dismissal to the U.S.
Court of Appeals for the Federal Circuit.
Note 21: Subsequent Events
In the first quarter of fiscal 2001, 3Com distributed its remaining ownership of
outstanding Palm common stock to 3Com shareholders. The distribution ratio was
1.4832 shares of Palm for each outstanding share of 3Com common stock. At the
time of the distribution of Palm shares to 3Com shareholders, an adjustment was
made to stock options held by 3Com 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.
In the first quarter of fiscal 2001, 3Com finalized the transfer of the
analog-only modem product line to a joint venture with NatSteel Electronics,
Ltd. and Accton Technology Corporation. The new company created through this
alliance is called U.S. Robotics Corporation and will assume the analog-only
modem product line, including U.S. Robotics and U.S. Robotics Courier(TM)
branded modems. U.S. Robotics Corporation is headquartered in Chicago, Illinois
and plans to commence operations during the second quarter of fiscal 2001.
In the first quarter of fiscal 2001, 3Com acquired Kerbango, Inc., the developer
of the world's first standalone Internet radio, radio tuning system, and radio
web site. The aggregate purchase price was approximately $80 million.
In the first quarter of fiscal 2001, 3Com made a $20 million minority equity
investment in CAIS Internet, Inc., the leading service provider in the
hospitality market. Hotel rooms and other such community spaces are examples of
small- to mid-sized locations which are rapidly ramping-up their networking
capabilities for Internet, voice, and video service delivery. CAIS has made
purchase commitments to 3Com for network infrastructure equipment used to create
these vertical solutions for hospitality environments.
67
Quarterly Results of Operations (Unaudited)
The table below has been restated to account for Palm as a discontinued
operation.
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 2000 Quarters Ended Fiscal 1999 Quarters Ended
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except Jun. 2, Feb. 25, Nov. 26, Aug. 27, May 28, Feb. 26, Nov. 27, Aug. 28,
per share data) 2000 2000 1999 1999 1999 1999 1998 1998
(Restated) (Restated) (Restated) (Restated) (Restated) (Restated) (Restated)
- -----------------------------------------------------------------------------------------------------------------------------------
Sales $ 763,684 $1,142,965 $1,214,097 $1,213,196 $1,234,643 $1,284,640 $1,393,303 $1,289,667
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin 193,326 514,653 567,522 573,558 549,373 574,182 627,615 550,914
Gross margin % 25.3% 45.0% 46.7% 47.3% 44.5% 44.7% 45.0% 42.7%
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) (340,047) 98,191 123,196 137,461 88,384 97,095 162,141 118,736
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) from
Continuing operations (159,359) 490,159 156,459 128,304 73,459 80,654 122,948 87,884
Net income (loss) from
Continuing operations % 20.9% 42.9% 12.9% 10.6% 5.9% 6.3% 8.8% 6.8%
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income from
Discontinued operations 12,532 16,155 20,866 9,187 14,074 9,083 9,965 5,807
Net income from
Discontinued operations % 1.6% 1.4% 1.7% 0.8% 1.1% 0.7% 0.7% 0.5%
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Diluted net income (loss)
per share - continuing
operations $ (0.45) $ 1.36 $ 0.45 $ 0.36 $ 0.20 $ 0.22 $ 0.33 $ 0.24
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Diluted net income per
share - discontinued
operations $ 0.04 $ 0.04 $ 0.06 $ 0.03 $ 0.04 $ 0.02 $ 0.03 $ 0.02
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
The per share amounts presented below are calculated net of taxes. For fiscal
year 1999, the per share amounts are calculated net of taxes, using historical
tax rates.
Net income for the quarter ended June 2, 2000 included a net pre-tax charge of
approximately $10.6 million ($0.02 per share) for purchased in-process
technology, a net pre-tax credit of approximately $0.2 million (no per share
effect) primarily associated with past merger activities, a net pre-tax charge
of $64.2 million ($0.13 per share) for business realignment costs associated
with the change in strategy and the Palm separation, and a net pre-tax gain on
sale of investments of $89.0 million ($0.19 per share). Net income for the
quarter ended February 25, 2000 included a net pre-tax charge of approximately
$2.9 million ($0.01 per share) for purchased in-process technology, a net
pre-tax credit of $25.5 million ($0.05 per share) associated with the
disposition of real estate, a net pre-tax charge of $2.6 million ($0.01 per
share) related to business realignment charges, and a net pre-tax credit of
approximately $654.9 million ($1.11 per share) associated with gains on
investments. Net income for the quarter ended November 26, 1999 included a net
pre-tax charge of approximately $2.1 million (no per share effect) associated
with business realignment charges, and a pre-tax credit of $71.3 million ($0.15
per share) related to gains on investments. Net income for the quarter ended
August 27, 1999 included a net pre-tax credit of approximately $2.1 million (no
per share effect) associated with the merger with U.S. Robotics and a net
pre-tax credit of $23.6 million ($0.05 per share) related to gains on
investments. Net income for the quarter ended May 28, 1999 included a net
pre-tax charge of approximately $5.6 million ($0.01 per share) associated with
the purchase of NBX, $4.9 million ($0.01 per share) related to the reduction in
the merger charges associated with U.S. Robotics and Chipcom, and a net pre-tax
charge of $2.6 million (no per share effect) associated with losses on
investments. Net income for the quarter ended February 26, 1999 included a net
pre-tax charge of approximately $5.0 million ($0.01 per share) associated with
the
68
purchase of certain assets of ICS, a net pre-tax credit of approximately $7.3
million ($0.01 per share) related to the reduction in the merger charge
associated with U.S. Robotics. Net income for the quarter ended November 27,
1998 included a net pre-tax charge of approximately $4.8 million ($0.01 per
share) associated with past merger activities and a net pre-tax credit of $4.2
million ($0.01 per share) related to the disposition of real estate. Net income
for the quarter ended August 28, 1998 included a net pre-tax credit of
approximately $10.2 million ($0.02 per share) associated with the merger with
U.S. Robotics.
Excluding the non-recurring items noted above, net income and net income per
share from continuing operations on a diluted basis would have been as follows:
- ------------------------------------------------------------------------------------------------------------------------
Fiscal 2000 Quarters Ended Fiscal 1999 Quarters Ended
------------------------------------------------------------------------------------------
(In thousands, except Jun. 2, Feb. 25, Nov. 26, Aug. 27, May 28, Feb. 26, Nov. 27, Aug. 28,
per share data) 2000 2000 1999 1999 1999 1999 1998 1998
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) from
continuing operations
excluding
non-recurring items $ (170,215) $ 75,805 $ 107,314 $ 110,088 $ 75,796 $ 79,050 $ 123,393 $ 80,936
Net income (loss) per
share from continuing
operations excluding
non-recurring items $ (0.48) $ 0.21 $ 0.31 $ 0.31 $ 0.21 $ 0.21 $ 0.34 $ 0.22
---------- -------- --------- --------- -------- -------- --------- --------
- ------------------------------------------------------------------------------------------------------------------------
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 28, 2000 (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.
69
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 40 of this
Form 10-K.
(2) Financial Statement Schedule - See Index to Consolidated
Financial Statements and Financial Statement Schedule at page
40 of this Form 10-K.
(3) Exhibits - See Exhibit Index at page 71 of this Form 10-K.
(b) 3Com filed four reports on Form 8-K during the fiscal year ended
June 2, 2000, as follows:
(1) A report on Form 8-K filed on May 8, 2000, reporting under
Item 5 the announcement that 3Com's Board of Directors has
declared a stock dividend on all 3Com's shares in Palm, Inc.
and that the shares will be distributed to 3Com shareholders
of record as of 5:00 PM Eastern Daylight Time on July 27,
2000.
(2) A report on Form 8-K filed on June 5, 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.
(3) 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.
(4) A report on Form 8-K filed on July 14, 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.
(c) See Exhibit Index at page 71 of this Form 10-K.
(d) See Index to Consolidated Financial Statements and Financial
Statement Schedule at page 40 of this Form 10-K.
70
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 a Certain Error in the
Certificate of Incorporation (11)
3.3 Certificate of Merger (11)
3.4 Corrected Certificate of Merger (14)
3.5 Bylaws of 3Com Corporation, As Amended (12)
4.1 Amended and Restated Rights Agreement dated December 31, 1994 (Exhibit
10.27 to Form 10-Q) (4)
4.2 Amended and Restated Senior Notes Agreement between U.S. Robotics
Corporation, Metropolitan Life Insurance Company, The Northwestern
Mutual Life Insurance Company, and Metropolitan Property and Casualty
Insurance Company (5)
4.3 Amendment to amended and restated note agreements between 3Com
Corporation, Metropolitan Life Insurance Company, The Northwestern
Mutual Life Insurance Company, and Metropolitan Property and Casualty
Insurance Company (13)
4.4 Second amendment to amended and restated note agreements between 3Com
Corporation, Metropolitan Life Insurance Company, The Northwestern
Mutual Life Insurance Company, and Metropolitan Property and Casualty
Insurance Company (14)
10.1 1983 Stock Option Plan, as amended (14)*
10.2 Amended and Restated Incentive Stock Option Plan (2)*
10.3 License Agreement dated March 19, 1981 (1)
10.4 Second Amended and Restated 1984 Employee Stock Purchase Plan (Exhibit
10.5 to Form 10-Q) (6)*
10.5 3Com Corporation Director Stock Option Plan, as amended (Exhibit 19.3
to Form 10-Q) (3)*
10.6 Amended 3Com Corporation Director Stock Option Plan (Exhibit 10.8 to
Form 10-Q) (6)*
10.7 3Com Corporation Restricted Stock Plan, as amended (Exhibit 10.17 to
Form 10-Q) (6)*
10.8 1994 Stock Option Plan, as amended (14)*
10.9 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com
Corporation, as Tenant, effective as of November 20, 1996 (Exhibit
10.37 to Form 10-Q) (8)
71
10.10 Purchase Agreement between BNP Leasing Corporation, and 3Com
Corporation, effective as of November 20, 1996 (Exhibit 10.38 to Form
10-Q) (8)
10.11 Agreement and Plan of Reorganization among 3Com Corporation, OnStream
Acquisition Corporation and OnStream Networks, Inc. dated as of
October 5, 1996 (Exhibit 2.1 to Form S-4) (7)
10.12 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com
Corporation, as Tenant, effective as of February 3, 1997 for the
Combined Great America Headquarters site (Exhibit 10.19 to Form 10-Q)
(10)
10.13 Purchase Agreement between BNP Leasing Corporation, and 3Com
Corporation, effective as of February 3, 1997 for the Combined Great
America Headquarters site (Exhibit 10.20 to Form 10-Q) (10)
10.14 Credit Agreement dated as of December 20, 1996 among 3Com Corporation,
Bank of America National Trust and Savings Association, as Agent, and
the Other Financial Institutions Party Hereto Arranged by BA
Securities, Inc. (Exhibit 10.21 to Form 10-Q) (10)
10.15 Amended and Restated Agreement and Plan of Merger by and among 3Com
Corporation, TR Acquisitions Corporation, 3Com (Delaware) Corporation,
and U.S. Robotics Corporation, dated as of February 26, 1997 and
amended as of March 14, 1997 (9)
10.16 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com
Corporation, as Tenant, effective as of July 25, 1997 for the Great
America Phase III (PAL) site (11)
10.17 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of July 25, 1997 for the Great America Phase
III (PAL) site (11)
10.18 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com
Corporation, as Tenant, effective as of July 29, 1997 for the
Marlborough site (11)
10.19 Purchase agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of July 29, 1997 for the Marlborough site
(11)
10.20 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com
Corporation, as Tenant, effective as of August 11, 1997 for the
Rolling Meadows site (11)
10.21 Purchase Agreement between BNP Leasing Corporation, and 3Com
Corporation, effective as of August 11, 1997 for the Rolling Meadows
site (11)
10.22 First Amendment to Credit Agreement (11)
10.23 Form of Management Retention Agreement, effective as of June 2, 1999,
with attached list of parties.*
10.24 Form of Management Retention Agreement, with attached list of parties
and effective dates.*
21.1 Subsidiaries of 3Com Corporation
23.1 Consent of Deloitte & Touche, LLP
27.1 Financial Data Schedule
- --------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan.
(1) Incorporated by reference to the corresponding Exhibit previously
filed as an Exhibit to Registrant's Registration Statement on Form S-1
filed on January 25, 1984 (File No. 2-89045)
(2) Incorporated by reference to Exhibit 10.2 to Registrant's Registration
Statement on Form S-4 filed on August 31, 1987 (File No. 33-16850)
(3) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 10, 1992 (File No. 0-12867)
(4) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 13, 1995 (File No. 0-12867)
(5) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on May
16, 1995 (File No. 0-19550)
72
(6) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 15, 1996 (File No. 0-12867)
(7) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Registration Statement
on Form S-4 filed on October 11, 1996 (File No. 333-13993)
(8) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 13, 1997 (File No. 0-12867)
(9) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Registration Statement
on Form S-4 filed on March 17, 1997 (File No. 333-23465)
(10) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
April 11, 1997 (File No. 0-12867)
(11) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
October 14, 1997 (File No. 0-12867)
(12) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
January 11, 1999 (File No. 0-12867)
(13) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-K filed on
August 17, 1999 (File No. 0-12867)
(14) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
October 8, 1999 (File No. 0-12867)
(15) Incorporated by reference to the Exhibit identified in parentheses
previously filed as an Exhibit to Registrant's Form 10-Q filed on
April 4, 2000 (File No. 0-12867)
73
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 17th day of
August, 2000.
3Com Corporation
(Registrant)
By /s/
--------------------------------------
Eric A. Benhamou
Chairman of the Board and 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 17th day of August, 2000.
Signature Title
--------- -----
/s/ Chairman of the Board and
- ------------------------------ Chief Executive Officer
(Eric A. Benhamou) (Principal Executive Officer)
Senior Vice President, Finance,
/s/ and Chief Financial Officer
- ------------------------------ (Principal Financial and Accounting Officer)
(Michael E. Rescoe)
/s/ Director
- ------------------------------
(Casey Cowell)
/s/ Director
- ------------------------------
(James E. Cowie)
/s/ Director
- ------------------------------
(David W. Dorman)
/s/ Director
- ------------------------------
(Jean-Louis Gassee)
/s/ Director
- ------------------------------
(Philip C. Kantz)
/s/ Director
- ------------------------------
(James Long)
/s/ Director
- ------------------------------
(Jan Peters)
/s/ Director
- ------------------------------
(Paul Yovovich)
/s/ Director
- ------------------------------
(William F. Zuendt)
74
SCHEDULE II
3Com Corporation
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended May 31, 1998, May 28, 1999 and June 2, 2000
(In thousands)
Additions
Balance at charged to Balance at
beginning costs and end of
Description of period expenses Reclassifications Deductions period
- ----------- --------- -------- ----------------- ---------- ------
Year ended May 31, 1998 * :
Allowance for doubtful accounts $ 58,478 $ 31,595 $ -- $ 19,921 (1) $ 70,152
Product return reserve 76,266 90,649 -- 82,957 83,958
Accrued product warranty 73,267 72,689 -- 59,821 86,135
Acquisition-related reserves:
Chipcom 16,966 -- -- 11,705 5,261
U.S. Robotics
Inventory reserve -- 65,181 -- 58,752 6,429
Facilities reserve -- 48,279 -- 11,695 36,584
Long-term asset reserve -- 41,837 -- 40,548 1,289
Severance and outplacement costs -- 61,760 -- 55,550 6,210
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
Long-term asset reserve 1,289 251 -- 797 743
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
Business realignment reserves:
Facilities reserve -- 8,932 -- 632 8,300
Long-term asset reserve -- 20,187 -- 3,693 16,494
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
Long-term asset reserve 743 (174) -- 277 292
Severance and outplacement costs 595 (57) -- 538 --
(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.
* Restated as described in Note 3.
S-1