-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, TMdeE1ed9r1GrlSrxHK8jrrZ6ZCYeda+AwBTGXzjoeBOyllG92Q5UoY6I1xG2HdG ZwvkSucHTlsm0OjnjxWNhw== 0000738076-94-000022.txt : 19940928 0000738076-94-000022.hdr.sgml : 19940928 ACCESSION NUMBER: 0000738076-94-000022 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19940531 FILED AS OF DATE: 19940826 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3COM CORP CENTRAL INDEX KEY: 0000738076 STANDARD INDUSTRIAL CLASSIFICATION: 3577 IRS NUMBER: 942605794 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12867 FILM NUMBER: 94546545 BUSINESS ADDRESS: STREET 1: 5400 BAYFRONT PLZ CITY: SANTA CLARA STATE: CA ZIP: 95052 BUSINESS PHONE: 4087645000 10-K 1 10KBODY FIRST TRY SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended May 31, 1994 Commission File No. 0-12867 3Com Corporation (Exact name of registrant as specified in its charter) California 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) 764-5000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, no 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 XX 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 on July 31, 1994 (based upon the average of the high and low sale prices of such stock as of such date) was $1,668,633,772. As of July 31, 1994, 32,289,110 shares of the Registrant's Common Stock were outstanding. The Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on September 29, 1994 is incorporated by reference in Part III of this Form 10-K to the extent stated herein. 3Com Corporation Form 10-K For the Fiscal Year Ended May 31, 1994 Table of Contents PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Executive Officers of the Registrant PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of 3Com Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Exhibit Index Signatures Financial Statement Schedules 3Com, LANplex, TokenLink, EtherLink, LinkBuilder, NETBuilder, NETBuilder II and CardBoard are registered trademarks of 3Com Corporation. Transcend, AccessBuilder, FDDILink, SuperStack, Parallel Tasking, FMS, MSH, LinkSwitch, and 3ComFacts are trademarks of 3Com Corporation. MicroChannel is a registered trademark of International Business Machines Corporation. TROPIC is a trademark of National Semiconductor Corporation. All other trademarks belong to their respective organizations. PART I ITEM 1. Business 3Com Corporation (referred to herein as "3Com," "Registrant" or the "Company") was founded on June 4, 1979 and pioneered the networking industry. The Company evolved from a supplier of discrete networking products to a supplier of networking systems for five types of connectivity environments: building/campus backbone, wide-area backbone, workgroup, remote office and personal office. Today, 3Com is a Fortune 500 company offering customers a broad range of ISO 9000-compliant global data networking solutions that includes routers, hubs, remote access servers, switches and adapters for Ethernet, Token Ring, fiber distributed data interface (FDDI) and other high speed networks. The Company's products are distributed and serviced worldwide through 3Com and its partners: principally systems integrators, value-added resellers, national resellers and dealers, distributors and original equipment manufacturers. 3Com's name is derived from its focus on computer communication compatibility. With its long-standing commitment to multi-vendor interoperability, the Company has been a leader in defining, shaping and promoting the growth of networking infrastructures that transmit data to all parts of the world quickly and efficiently. Underlying this commitment is a focus on simplicity in the way we design and manufacture products, as well as in the way we work with customers; scalability of products to allow customers to purchase networking components that meet their requirements today, with the assurance that 3Com has cost-effective migration and upgrade paths as customers' networking needs change; and value by providing high-performance products, managed through a single, powerful network management application, that lower the overall cost of the network ownership. During fiscal 1992 and 1993, 3Com focused on rebuilding its product portfolio with the introduction of new adapter, hub and internetworking platforms, retraining its sales force to sell connectivity systems and solutions, and expanding its global presence with new sales offices, service centers, and "parts banks" worldwide. The acquisition of the data networking products business of U.K.-based BICC Group, plc (BICC) in January 1992 strengthened the Company's position in the structured wiring hub market and expanded 3Com's position in the Europe. In January 1993, the Company enhanced its Token Ring technology base with the acquisition of Star-Tek, Inc., a Massachusetts-based Token Ring hub manufacturer. Further, in September 1993, the Company began full-scale operations at its 60,000 square foot manufacturing facility in Blanchardstown, Ireland. During fiscal 1994, 3Com introduced its High Performance Scalable Networking (HPSN) architecture with Transcend network management, demonstrating the Company's ability to deliver complete connectivity systems with a full breadth of products, and providing customers with a framework for building and managing scalable, high-performance networking infrastructures. During the year, the Company enhanced its product offerings under HPSN with two strategic acquisitions: o In January 1994, 3Com acquired Synernetics, Inc. (Synernetics), the Company's long-term development partner and the revenue leader in the local area network (LAN) switching market. The switching products of Synernetics are marketed under the LANplex name and include the LANplex 5000/3GH and LANplex 6000 switches. o In February 1994, 3Com completed the purchase of Centrum Communications, Inc. (Centrum), an innovator in remote access internetworking technology. The Centrum remote access servers for Ethernet and Token Ring networks are marketed under the 3Com trade name AccessBuilder. The aggregate purchase price of the two acquisitions consisted of $140.0 million plus $3.3 million of costs attributed to the exchange of Synernetics options for 3Com options and $13.1 million of costs directly attributable to the completion of the acquisitions. Approximately $132.1 million of the aggregate purchase price represented in-process technology and was charged to the Company's operations during the third fiscal quarter of 1994. Additionally, in December 1993, the Company entered into a technology licensing agreement with Pacific Monolithics, Inc., a wireless communications developer, that will allow the Company to offer 10 megabits-per second (Mbps) wireless products for local area networks. The cost of the license was $2.5 million, substantially all of which was charged to the Company's operations during the third fiscal quarter as purchased in- process technology. Fiscal 1994 results included a $134.5 million pre-tax charge to operations for the combined effect of purchased in-process technology related to the acquisitions and licensing agreement. Also during the year, 3Com expanded the breadth and depth of its product offerings with new and enhanced adapter, internetworking and stackable hub products, extended its worldwide presence with sales offices in five additional countries, expanded its major accounts sales force and added new production lines at its manufacturing facilities in both the U.S. and Ireland. 3Com believes that its principal competitive advantages lie primarily in the depth and breadth of technologically innovative, industry-leading product it offers and a strong yet flexible business infrastructure. The Company has strong brand recognition in Ethernet adapters, which we believe is transferable to other product and technology areas, as well as a leadership position in stackable networking systems, LAN switching, remote office and personal office internetworking platforms. Additionaloly, 3Com believes its low-cost manufacturing, worldwide presence, flexible distribution strategy, and comprehensive service and support capabilities are allowing the Company to take advantage of market trends that are extending the reach, scope and performance of today's data networks. INDUSTRY SEGMENT INFORMATION 3Com operates in one industry segment as described above. PRODUCTS 3Com's High Performance Scalable Networking architecture with Transcend network management provides customers with a blueprint for building and managing networking infrastructures using both current and emerging technologies, and for cost- effectively migrating to higher performance networks using existing platforms. HPSN defines five connectivity environments and delivers cost-effective, scalable systems solutions for each, using the full breadth of 3Com products. HPSN encourages customers to build networks to meet their current business objectives, while offering the assurance that their networks will scale as they add more users and new applications and migrate to emerging high performance technologies such as 100 (Mbps) Ethernet and Asynchronous Transfer Mode (ATM). The five types of connectivity environments defined by HPSN are: o Workgroup. Early data networks were installed as a means of connecting individual members of a workgroup to share files and other computing resources, such as printers, using Ethernet or Token Ring technology. While this remains true today, the trend toward mission-critical applications and client/server topologies has created a need for more sophisticated workgroup connectivity with higher bandwidth capabilities, enhanced resilience, and a more powerful and flexible feature set. 3Com's industry-leading EtherLink, TokenLink and FDDILink adapters provide the desktop connection to the LAN, while 3Com LinkBuilder stackable and chassis-based hubs concentrate and redirect network traffic PCs, workstations and servers. The SuperStack network system, which includes hubs, bridge/routers, switches and an SDLC converter for IBM SNA connectivity, allows network administrators to add functionality as needed and build in fault tolerance with an optional redundany power system. o Building/Campus backbone. As the number and complexity of workgroup networks has increased, the need for sophisticated inter- and intranetworking has led to the creation of building- and campus-wide "collapsed backbone" networks to transmit data quickly and efficiently within a single site. Collapsed backbone networks condense network traffic from workgroup and floor-based hubs along the backplane of a single powerful device. Working as collapsed backbone devices, 3Com's LANplex family of intelligent switches and NETBuilder II routers simplify wiring complexity, centralize management, boost performance and lower costs. Furthermore, the HPSN framework provides for an economical, step- by-step migration to even greater performance through 100 Mbps Ethernet and ATM using existing routing and switching platforms. o WAN backbone. The WAN backbone is the nerve center for wide- area data communications. 3Com's high-performance NETBuilder II routers connect to wide-area resources ranging from leased lines and dial-up connections to packet-switched and digital telephone services. Transcend applications deliver self-managing intelligence, putting wide-area bridge/router administration within the power of a centrally located manager. o Remote Office. The remote office is a specialized type of workgroup environment, one with all the connectivity needs of a workgroup located at the corporate headquarters, but because networking experts are scarce in the remote office, all products must have plug-and-play simplicity. 3Com's SuperStack system provides hubbing, switching, and routing in a single stackable system that meets the special needs of the remote office for simple, easy to maintain high-performance connectivity. 3Com's innovative Boundary Routing software, running on the NETBuilder Remote Office router "slice" of the SuperStack system, simplifies remote access to the corporate network and allows managers to maximize their resources and reduce expenses by consolidating complex operations at headquarters. Further, the Transcend network management software centralizes the network management function as well. o Personal Office. The current trend toward "virtual" corporations has resulted in widely dispersed teleworkers at home and in small offices. There are also millions of business travelers and nomadic users with computers but no fixed network connections. 3Com's AccessBuilder remote access servers give these peripheral users simplified dial-up access to the network. Available for Ethernet and Token Ring networks, AccessBuilder offers higher performance and more flexibility than less sophisticated connection devices, and includes a superior suite of security measures to block unauthorized access. 3Com offers a broad range of connectivity products for the five environments, which can be grouped into two major categories: Network Adapters: Network adapters, also known as network interface cards, are add-in printed circuit boards that allow personal computers, laptop computers, workstations and personal digital assistance (PDAs) to connect to the local area network. 3Com is the world's largest supplier of Ethernet adapters, with more than 11 million adapters installed worldwide. In fiscal 1994, adapters accounted for 57 percent of total sales and increased 31 percent from fiscal 1993 sales. The increase in network adapter sales represented an increase in unit volume, partially offset by continuation of the industry-wide trend toward decreasing average selling prices. In fiscal 1993, the Company began shipping its family of EtherLink III Parallel Tasking adapters, based on a 3Com-designed custom application-specific integrated circuit (ASIC). Parallel Tasking is an innovative architecture that speeds data transfers by allowing separate tasks to be performed in parallel, resulting in higher overall adapter efficiency and performance than would otherwise be possible. The Company has applied for patents on this technology. In fiscal 1994, the Company introduced Ethernet PCMCIA adapters for laptop and other portable computers, further extending the EtherLink III family. 3Com's EtherLink III adapters include 16-bit ISA, 32-bit EISA, MicroChannel and Combo adapters as well as the recently introduced PCMCIA adapter. All are designed around 3Com's custom ASIC, which results in products that are inherently more reliable, easier to install and configure, and less expensive to manufacture. In addition to Ethernet adapters, 3Com offers Token Ring and FDDI adapters. Based on the IBM-designed TROPIC chipset, 3Com's TokenLink III 16/4 family of ISA, EISA and MicroChannel adapters is designed to work seamlessly with IBM drivers and applications while offering enhanced installation and network management features. In calendar 1993, its first full year of shipments, the TokenLink III adapters garnered 4.5 market share points. 3Com's FDDILink family of adapters connects devices to the network via copper wiring and fiber at 100 Mbps. When combined with the Company's FDDI Concentrator (hub), FDDILink adapters offer workstation and high-end PC users a cost-effective solution for high-bandwidth applications. All 3Com adapters carry 3Com's standard adapter limited lifetime warranty. Network Systems Products: 3Com's network systems products include hubs, internetworking bridge/routers, LAN switches and remote access servers. When combined within the HPSN framework, they create a network infrastructure that delivers scalable, cost- effective solutions for each of the five connectivity environments. Network systems sales represented 37 percent of total sales and increased 49 percent from fiscal 1993. The increase was led primarily by LinkBuilder FMS stackable hubs, the high-performance NETBuilder II bridge/router and the LANplex family of switching products. Similar to network adapters, the increase in systems product sales represented an increase in unit volume which was partially offset by a decrease in average selling prices. Internetworking Products: 3Com's internetworking products include the high-performance NETBuilder II bridge/router for collapsed backbone and wide-area network environments and the NETBuilder Remote Office family of remote and access routers. Additionally, the AccessBuilder remote access server provides Ethernet and Token Ring dial-up connectivity for individual remote users. The NETBuilder Remote Office family of bridge/routers supports Ethernet, Token Ring and Integrated Services Digital Network (ISDN) network technologies and can be operated as either conventional stand-alone routers or using 3Com's Boundary Routing system. Additionally, both the NETBuilder Remote Office family and the AccessBuilder remote access server are available as part of the SuperStack network system. Shortly after the end of fiscal 1994, 3Com introduced the NETBuilder II MultiProcessor (MP) bridge/router, a high-density, high-performance router using a RISC multiprocessor design, which offers performance improvements. The MP modules are backward compatible with earlier NETBuilder II 4- and 8-slot chassis, demonstrating 3Com's commitment to scalability and value through continued product enhancements that protect customers' investments in networking hardware. LAN Switches: LAN switches provide cost-effective, high- speed links between multiple network segments, simplifying network design and reducing network latency in client/server networks. 3Com offers a full range of LAN switches, from the high density LANplex 6000 to the floor-based LinkSwitch Ethernet- to-FDDI switch. The LinkSwitch can operate as a stand-alone switch, as a module for the LinkBuilder Multi-Service Hub (MSH) chassis-based hub, or as part of the SuperStack network system. In July 1994, 3Com announced its Intelligent Switching Engine (ISE) custom ASIC. Essentially a switch on a chip, ISE integrates field-proven hardware and software functions from today's LANplex products, which the Company believes will dramatically improve performance and reliability while reducing costs. The Company plans to incorporate ISE into both existing and new switching products. Hubs: 3Com designs, manufactures and markets a full range of Ethernet, Token Ring and FDDI hubs in either stackable or chassis-based configurations. The Company's stackable hubs, including the LinkBuilder FMS for Ethernet and Token Ring networks, provide users a highly reliable, cost effective solution for networking workgroups and remote offices. In fiscal 1994, 3Com expanded its hub offerings with the 24- port LinkBuilder FMS stackable hub, the LinkBuilder FDDI workgroup hub and a re-engineered 12-port LinkBuilder TP. In addition, the Company enriched its chassis hub, the LinkBuilder MSH, with Ethernet-to-FDDI switching, FDDI concentration and advanced Token Ring technology. The powerful backplane of the LinkBuilder MSH supports Ethernet, Token Ring and FDDI connectivity today and ATM connectivity in the future. Network Management: In September 1993, 3Com introduced Transcend, a family of network management applications that represents a significant advance in simplified and logical management of local and wide area networks. Using Transcend applications on the network management platform of their choice, network administrators are able to create logical groups of hubs, routers, servers and desktop devices, regardless of physical location, to obtain correlated management information and control. To keep network administration down, Transcend products also leverage administrative resources by consolidating repetitive tasks, such as downloading router software, into a single command. Other products include communication servers, which provide terminal-to-host connectivity for terminals and workstations over the network, protocol software and worldwide service and support programs. PRODUCT DEVELOPMENT The Company's product development efforts are focused exclusively on its strategic product lines: adapters and network systems, including internetworking platforms, switches, hubs and network management. 3Com's ownership of core networking technologies creates opportunities to leverage its engineering investments and develop more integrated products for simpler, more innovative networking solutions for customers. The Company plans to invest in emerging technologies for use in existing and future products, and as well as to improve and enhance existing products to extend their lifecycles, reduce manufacturing costs and increase functionality. In addition to the development of custom ASICs to improve performance, increase reliability and reduce manufacturing costs, 3Com is investing in the following areas: o 100 Mbps Ethernet o Wireless local area network communications o Asynchronous Transfer Mode (ATM) capabilities o LAN switching o Integrated Services Digital Network (ISDN) o Enhanced connectivity in IBM environments o Remote access for single and mobile users The industry in which the Company competes is subject to rapid technological developments, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. As a result, 3Com's success in part depends upon its ability, on a cost-effective and timely basis, to continue to enhance its existing products and to develop and introduce new products that take advantages of technological advances. There can be no assurance that the Company will be able to successfully develop new products to address new industry transmission standards and technological changes or to respond to new product announcements by others or that such products will achieve market acceptance. During fiscal 1992, 1993, and 1994, research and development expenses were $48.2 million, $64.3 million, and $76.5 million, respectively. MARKETS AND CUSTOMERS 3Com's customers are represented among the world's leading industries, including finance, health care, manufacturing, government, education, and service organizations. In fiscal 1994, the Company began targeting specific vertical markets, including health care, education, finance and government, through an expanded major accounts sales force. Around the world, 3Com serves its customers through a variety of sales channels including direct and indirect channels. Indirect channels include systems integrators, value-added resellers, distributors, national dealers and resellers, and original equipment manufacturers (OEMs). The Company's multi- channel sales strategy encourages broad market coverage, by allowing 3Com sales personnel to create demand for 3Com products while giving customers the flexibility to choose the most appropriate delivery option. International Operations: The Company distinguishes itself from many of its competitors with its dedicated research and development, manufacturing, sales and service organizations outside the United States. 3Com maintains sales offices in 21 countries, including new offices opened in fiscal 1994 in Japan, Brazil, Mexico, South Africa and China. Sales outside the United States continue to be the fastest growing segment of the Company's business and accounted for approximately 47 percent, 50 percent and 52 percent of the Company's sales in fiscal 1992, 1993 and 1994, respectively. The Company primarily markets its products internationally through subsidiaries, sales offices and partnerships with local distributors in Europe, Canada, Asia/Pacific and Latin America. (See Note 14 relating to geographic area information in the Notes to Consolidated Financial Statements in the Financial Statements Section (Item 8) of Part II.) Customer Service: Because global data networking infrastructures are becoming increasingly complex, customers require vendors to help them manage and support their networks as well as design and build them. Additionally, as customers' networking purchases transition from point product to connectivity systems, a more solutions-oriented approach to service and support is required. 3Com recognized these trends early and invested in a comprehensive worldwide service and support organization. Worldwide logistics include support and repair centers in the United States, dedicated service organizations at most subsidiaries, parts stock at more than 25 locations, and electronic bulletin boards throughout the world. In addition to on-site training, the Company also provides computer-based courses that allow customers to learn networking technologies at their own pace in their own environments. During fiscal 1994, the Company handled more than 300,000 direct support calls and more than 125,000 calls to the automated 3ComFacts fax-back systems and CardBoard electronic bulletin board. BACKLOG 3Com manufactures its products based upon its forecast of the demand of its customers worldwide and maintains inventories of finished products in advance of receipt of firm orders from its customers. Orders are generally placed by the customer on an as-needed basis and products are usually shipped within one to four weeks after receipt of an order. Such orders generally may be cancelled or rescheduled by the customer without significant penalty. Accordingly, 3Com does not maintain a substantial backlog, and backlog as of any particular date may not be indicative of 3Com's actual sales in any succeeding period. MANUFACTURING AND SUPPLIERS 3Com's primary production activities are conducted at its Santa Clara, California and Blanchardstown, Ireland facilities. Purchasing, mechanical assembly, burn-in, testing, final assembly, and quality assurance functions are performed at both of these facilities. The Company also manufactures certain produdts and subassemblies through subcontractors. Over the past several years, the Company has been investing in automating its manufacturing capabilities, decreasing the costs and increasing the quality of both manufacturing design and production. To meet increased demand for its global data networking products, in fiscal 1994 the Company added new automated production lines in both its California and Ireland plants. The Company is committed to being an environmentally conscious manufacturer and pioneered implementation of a chlorofluorocarbon (CFC)-free semi-aqueous cleaning process at its California plant with DuPont and Corpane Corporations. The same process is used at the Ireland facility and 3Com met its goal of being CFC-free by the end of calendar year 1993. Components purchased by 3Com are generally available from multiple suppliers. However, certain components may be available from sole sources. The inability of 3Com to obtain certain components could require the Company to redesign or delay shipments of several of its data networking products. The Company has sought to establish close relationships with sole- source suppliers and/or to build up inventory of such components; however, there can be no assurance that production will not be interrupted due to the unavailability of components. 3Com believes that its inventory levels of these components, combined with finished components held by the Company's suppliers, are adequate for its presently forecasted needs. COMPETITION Data networking is an emerging field within the information systems industry encompassing both on-premises (e.g., desktop connectivity devices, internetworking platforms and wiring hubs) and off-premises (e.g., wide-area networking) technologies. 3Com participates exclusively in designing, manufacturing and marketing on-premises equipment. The Company's primary competitors are often single product companies who typically compete in one segment of the on-premises sector of the data networking market. These companies are using their resources and technical expertise to improve and expand their product lines in an effort to gain market share. Several are extending their product offerings beyond a single market segment and pursue strategies more closely resembling 3Com's global data networking strategy. The industry recently has witnessed a wave of merger, acquisition and strategic partnering activity as many of these companies seek to provide broader networking solutions. Network Adapters: The market for network adapters is highly competitive, with companies offering products that support a range of Ethernet, Token Ring and FDDI media. Principal competitors in the adapter market include Intel Corporation, Standard Microsystems Corporation, IBM Corporation, Madge N.V., Olicom A/S, and Xircom. According to International Data Corporation (IDC), a leading market research firm, the Company gained seven market share points in calendar 1993 and is the worldwide leader in Ethernet network adapters with 29 percent market share. This gain reflects the strength of the Company's technology, strong distribution franchise and commitment to increasing manufacturing efficiencies. Nonetheless, competitors are likely to continue to use their resources and technical expertise to continue to improve products and drive down prices in an effort to gain market share. Network Systems Products: Competition in the network systems business, formerly characterized by niche-based competitors focused on a single industry segment, is shifting toward more broad-based suppliers offering multiple product lines. This has been achieved through mergers and acquistions, through joint marketing agreements, and through internally developed products. For example, Cisco Systems, which had focused exclusively on routers, is now offering customers both routers and switches and has formed alliances with both Cabletron Systems and Chipcom Corporation, two, a hub vendors. SynOptics, a hub vendor, and Wellfleet Communications, a router vendor, recently announced a merger agreement. Additionally, Cisco Systems, SynOptics Communications, Chipcom Corporation and others have announced acquisitions of smaller networking companies, Crescendo Communications, Coral Networks, and David Systems, respectively, in an effort to strengthen their positions in the emerging and fast-growing markets for LAN switching, remote access, and high-speed networking. This industry consolidation, and the convergence of hub, switching and routing technologies on single platforms, will likely continue, intensifying competition among a small group of companies with broad product offerings. The Company believes it competes favorably in the data networking market by providing customers with a full breadth of products based on leading technologies, which when combined under the HPSN framework, address connectivity needs for each of the connectivity environments and provide cost-effective migration paths to higher performance technologies. Additionally, 3Com products typically offer excellent price-performance and enjoy a reputation for both high quality and reliability. The Company also believes its multichannel sales strategy and comprehensive service and support programs will continue to enhance its success. PATENTS, LICENSES AND RELATED MATTERS The Company relies on U.S. and foreign patents, copyright, trademark and trade secrets to establish and maintain proprietary rights in its technology and products. The Company has an active program to file applications for and obtain patents in the United States and in selected foreign countries where a potential market for the Company's products exists. The Company's general policy has been to seek patent protection for those inventions and improvements likely to be incorporated in its products or otherwise expected to be of value. The Company has been issued 16 utility patents and one design patent in the U.S., and has been issued two foreign patents. Numerous other patent applications are currently pending which relate to the Company's research and development, including U.S. and foreign patent applications related to the Company's LAN Security Architecture, Boundary Routing internetworking technology, and Parallel Tasking Ethernet adapter inventions. There can be no assurance that any of these patents would be upheld as valid if litigated. While the Company believes that its patents and applications have value, it also believes that its competitive position depends primarily on the innovative skills, technological expertise and management abilities of its employees. The Company has been granted licenses by others, including a fully paid, perpetual, non-exclusive license to a patent held by Xerox covering a portion of the Ethernet technology. The Company has registered 36 trademarks in the United States and has registered 11 trademarks in one or more of 33 foreign countries. Numerous applications for registration of domestic and foreign trademarks are currently pending. Many of the Company's products are designed to include software or other intellectual property licensed from third parties. The Company actively seeks to license software that promotes the compatibility of its products with industry standards, including standard protocols and architectures. The loss of rights in software or other intellectual property licensed from a third party and designed into a particular product might disrupt or delay the Company's distribution of that product. While it may be necessary in the future to seek or renew licenses relating to various aspects of its products, the Company believes that, based upon past experience and standard industry practice, such licenses generally could be obtained on commercially reasonable terms. EMPLOYEES As of May 31, 1994, 3Com had 2,306 full-time employees, of whom 510 were employed in engineering, 738 in sales, marketing and customer service, 729 in manufacturing, and 329 in finance and administration. None of 3Com's employees is represented by a labor organization and 3Com considers its employee relations to be excellent. ITEM 2. Properties 3Com's headquarters facility consists of a 495,000 square foot office, manufacturing and research and development campus in Santa Clara, California. The facility is leased from a limited partnership in which a subsidiary of 3Com is a partner. The lease expires in January 2000 with options to renew for up to 15 years. 3Com also has an option to purchase the facility. 3Com leases approximately 50,000 square feet of office space near its headquarters site for its Customer Services Operations. The facility is scheduled to be occupied in September 1994. The lease expires in August 1997. 3Com has two one-year renewals to extend the lease. As a result of its acquisition of Synernetics, Inc., 3Com leases 30,000 square feet of office, manufacturing and distribution space in North Billerica, Massachusetts. The lease expires in March 1995 with an option to renew for an additional 3 years. 3Com also leases a 30,000 square foot office, manufacturing and distribution facility in Northboro, Massachusetts for its Star-Tek Division. The lease expires in March 1996 with an option to renew for an additional 3 years. 3Com leases several facilities in England including a 47,000 foot manufacturing and research and development facility in Hemel- Hempstead, Hertfordshire. The lease expires in December 1996. The Company also leases 13,000 square feet of office space in Bourne End, Buckinghamshire. The lease expires in December 1996. 3Com's European headquarters consists of 17,000 square feet of office space in Marlow-on-Thames, Buckinghamshire. The lease expires in December 2013. In July 1992, 3Com Ireland, a wholly owned subsidiary of the Company, completed, occupied and began operations in its Blanchardstown, Ireland manufacturing facility. The 60,000 square foot facility, including approximately 9.5 acres of land, is owned by 3Com Ireland which also has an option to purchase an additional 3.5 acres of land adjoining the facility. 3Com also leases various sales and service offices throughout the United States, Canada, Europe, Australia, Latin America, and Asia. All of 3Com's facilities are well maintained and are adequate to conduct 3Com's current business. In July 1994, the Company signed a five-year lease for 225,000 square feet of office and manufacturing space to be built on land adjacent to its existing headquarters in Santa Clara. The Company estimates that it will commence occupancy of portions of the facility in early fiscal 1996 but lease payments are required to begin no later than April 1996. ITEM 3. Legal Proceedings None. ITEM 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Registrant The following table lists the names, ages and positions held with the Registrant of all executive officers of the Registrant. There are no family relationships between any director or executive officer and any other director or executive officer of the Registrant. Executive officers serve at the discretion of the Board of Directors. Name Age Position Eric A. Benhamou 39 Chairman, President and Chief Executive Officer Debra J. Engel 42 Vice President, Corporate Services Robert J. Finocchio, Jr. 43 Executive Vice President and General Manager,Network Systems Operations Ralph B. Godfrey 54 Vice President, Channel Sales-Americas John H. Hart 48 Vice President and Chief Technical Officer Richard W. Joyce 38 Vice President, Sales Europe and Asia/Pacific Rim Alan J. Kessler 37 Vice President, Systems Sales-Americas Christopher B. Paisley 42 Vice President, Finance and Chief Financial Officer Janice M. Roberts 38 Vice President, Marketing Douglas C. Spreng 50 Vice President and General Manager, Network Adapter Division Eric A. Benhamou has been the Company's President and Chief Executive Officer since April 1990 and September 1990, respectively. Mr. Benhamou became Chairman of the Board of Directors of the Company in July 1994. Mr. Benhamou served as the Company's Chief Operating Officer from April 1990 through September 1990. From October 1987 through April 1990, Mr. Benhamou held various general management positions within the Company. Prior to that, Mr. Benhamou was one of the founders of Bridge Communications, Inc., in September 1981, and held various executive positions in that company in the field of engineering and product development, most recently as Vice President of Engineering, until that company merged with 3Com in September 1987. Mr. Benhamou serves as a Director of Cypress Semiconductor, Inc. Mr. Benhamou is also a member of the Board of Directors of Smart Valley, Inc., and serves as a member of the Board of Trustees of the Leavy School of Business, Santa Clara University. Debra J. Engel has been Vice President, Corporate Services since March 1990. From the time Ms. Engel joined the Company in November 1983 until March 1990, she was Vice President, Human Resources. Prior to that, she was with Hewlett-Packard Company for seven years, most recently as Corporate Staffing Manager at Hewlett-Packard's Corporate Headquarters. Robert J. Finocchio, Jr. has been Executive Vice President and General Manager, Network Systems Operations since June 1993. From January 1990 through May 1993, Mr. Finocchio served as Executive Vice President, Field Operations. Mr. Finocchio joined the Company in December 1988 as Vice President of Sales, Marketing and Services, a position he held through January 1990. Prior to joining the Company, Mr. Finocchio was with Rolm, Inc. for nine years, where he held various executive positions in sales and service. Most recently he was Vice President of Rolm Systems Marketing. Ralph B. Godfrey has been Vice President, Channel Sales- Americas since June 1993. Mr. Godfrey joined the Company in June 1990 as Vice President of 3Com USA, a position he held through May 1993. Prior to joining the Company, Mr. Godfrey was with Unisys, Inc. for two years, where he held several executive positions in sales, most recently as President of the Value-Added Marketing Division. Prior to Unisys, Mr. Godfrey was with Hewlett-Packard Company for 20 years where he held several field sales management positions, the most recent as National Sales Manager for Business Systems. John H. Hart has been Vice President and Chief Technical Officer since joining the Company in September 1990. Prior to joining the Company, Mr. Hart worked for Vitalink Communications Corporation for seven years, where he held various executive positions in product engineering and development. Mr. Hart's final position with Vitalink was Vice President of Network Products. Richard W. Joyce has been Vice President, Sales Europe and Asia/Pacific Rim (APR) since June 1993. Since January 1990, Mr. Joyce has also served as President, 3Com Europe Limited. Mr. Joyce joined the Company in November 1987 as Sales Manager of 3Com (UK) Limited, a position he held until September 1988. From September 1988 until January 1990, Mr. Joyce served as Managing Director of 3Com (UK) Limited. Most recently prior to joining the Company, Mr. Joyce held the position of Managing Director Europe for State Street Trade Development Corporation from 1985 through 1987. Prior to this, Mr. Joyce held several different positions with a variety of data networking and communications companies. Alan J. Kessler has been Vice President, Systems Sales- Americas since June 1993. From May 1991 through May 1993, Mr. Kessler served as Vice President and General Manager, Network Systems Division. From April 1990 until May 1991, Mr. Kessler served as Vice President and General Manager, Distributed Systems Division. Previously, he served as Product Marketing Manager of the Distributed Systems Division from November 1988 through April 1990 and as Product Line Manager from October 1985 through November 1988. Christopher B. Paisley has served as the Company's Vice President, Finance and Chief Financial Officer since September 1985. Prior to joining the Company, Mr. Paisley was Vice President, Finance of Ridge Computers from May 1982 to September 1985. Previously, Mr. Paisley was employed by Hewlett-Packard Company for five years in a variety of accounting and finance positions. Janice M. Roberts has been Vice President, Marketing since June 1992, and has also served as General Manager, Personal Office Division since February 1994. From February 1992 until June 1992, Ms. Roberts was Vice President and General Manager of the Premises Distribution Division. During the period January 1989 to February 1992, Ms. Roberts served as Director of BICC Technologies Limited and President of BICC Technologies, Inc. and BICC Communications, Inc. She was also Chairman and Managing Director of BICC Data Networks Limited. From December 1986 through January 1989, Ms. Roberts was Manager of Sales and Marketing of STC Components Ltd. located in Harlowe, United Kingdom. Douglas C. Spreng has been Vice President and General Manager of the Company's Network Adapter Division since March 1992. Prior to joining the Company, Mr. Spreng was President and Chief Operations Officer of Domestic Automation Company, a private communications system start-up company based in San Carlos, California. Previously, Mr. Spreng spent 23 years with Hewlett-Packard Company (H-P) in a variety of key marketing, manufacturing and general management positions, including General Manager of H-P's Commercial Systems Group. Most recently he served as General Manager of H-P's Manufacturing Applications Group. PART II ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters Fiscal 1994 High Low Fiscal 1993 High Low First Quarter $29 1/4 $19 5/8 First Quarter $13 3/8 $ 9 5/8 Second Quarter 37 24 1/8 Second Quarter 24 11 1/4 Third Quarter 63 1/4 35 3/8 Third Quarter 34 5/8 21 3/8 Fourth Quarter 63 3/4 46 7/16 Fourth Quarter 40 25 7/8 3Com Corporation common stock has been traded in the over- the-counter market under the symbol COMS since the company's initial public offering on March 21, 1984. The preceding table sets forth the high and low sales prices as reported on the over- the-counter Nasdaq Stock Market System during the last two years. As of May 31, 1994, the company had approximately 1,240 shareholders of record. 3Com has not paid and does not anticipate it will pay cash dividends on its common stock. Also see Note 10 of Notes to Consolidated Financial Statements. The current financial information does not reflect a two-for- one split of its common stock that was effective as of close of business on August 16, 1994. The common stock will begin trading at the split value on September 1, 1994. ITEM 6. Selected Financial Data The following selected financial information has been derived from the Consolidated Financial Statements that have been audited by Deloitte & Touche LLP, independent auditors. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included elsewhere in this Form 10-K. Years ended May 31, (Dollars in thousands, except per share and employee data) 1994 1993 1992 1991 1990 Sales $826,995 $617,168 $423,801 $413,239 $430,283 Net income (loss) (28,694) 38,561 7,958 (23,831) 23,229 Net income (loss) per share: Primary (0.92) 1.22 0.27 (0.79) 0.75 Fully-diluted (0.92) 1.20 0.26 (0.79) 0.75 Total assets $444,343 $367,578 $298,306 $275,056 $298,002 Working capital 198,543 196,231 144,564 149,930 173,376 Long-term obligations 1,058 1,134 7,807 8,128 834 Retained earnings 61,326 103,163 71,354 73,206 113,525 Shareholders' equity 280,756 258,263 202,425 193,667 235,412 Number of employees 2,306 1,971 1,963 1,731 2,008 Notes: Net loss for fiscal 1994 included a charge of approximately $134.5 million ($3.84 per share) for purchased in- process technology (see Notes 3 and 4 to the consolidated financial statements) and a gain of $17.7 million ($.34 per share) on the sale of an investment. Net income for fiscal 1993 included a charge of approximately $1.3 million ($.04 per share) for non-recurring items (see Note 5 to the consolidated financial statements). Net income for fiscal 1992 included a charge of approximately $10.4 million ($.30 per share) for purchased in- process technology (see Note 3 to the consolidated financial statements). Net loss for fiscal 1991 included a charge of approximately $67.0 million ($1.43 per share) for restructuring costs. Net income for fiscal 1990 included a charge of approximately $2.5 million ($.05 per share) accrued for the relocation in fiscal 1991 of the Company's corporate facilities. 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. Acquisitions During the fiscal year ended May 31, 1994, 3Com Corporation enhanced its High Performance Scalable Networking architecture with two strategic acquisitions (see Note 3 of Notes to Consolidated Financial Statements). The Company completed the acquisitions of Synernetics, Inc. ("Synernetics"), a market leader in LAN switching products, on January 14, 1994, and Centrum Communications, Inc. ("Centrum"), an innovator of remote access products, on February 2, 1994. Both acquisitions were accounted for as purchases. The aggregate purchase price consisted of $140.0 million plus $3.3 million of costs attributed to the exchange of Synernetics options for 3Com options and $13.1 million of costs directly attributable to the completion of the acquisitions. Approximately $132.1 million of the aggregate purchase price represented in-process technology and was charged to the Company's operations during the third fiscal quarter of 1994. In December 1993, the Company also entered into a technology licensing agreement with Pacific Monolithics, Inc., a developer of wireless communications (see Note 4 of Notes to Consolidated Financial Statements). The cost of the license agreement was $2.5 million, substantially all of which was charged to the Company's operations during the third fiscal quarter as purchased in-process technology. Fiscal 1994 results included a $134.5 million pre-tax charge to operations for the combined effect of purchased in-process technology related to the acquisitions and the license agreement. The Company's consolidated results of operations for the fiscal year ended May 31, 1994 include the operating results of Synernetics and Centrum from the respective dates of acquisition. In fiscal 1993, 3Com acquired Star-Tek, Inc. ("Star-Tek"), a company specializing in Token Ring technology (see Note 3 of Notes to Consolidated Financial Statements), in a pooling-of- interests transaction. References to the Company herein refer to 3Com Corporation and its subsidiaries. Results of Operations Orders for the Company's products totaled $819.5 million in fiscal 1994, an increase of 31 percent from $626.4 million in fiscal 1993. Fiscal 1992 orders were $422.3 million. Fiscal 1994 sales increased 34 percent to $827.0 million from $617.2 million in fiscal 1993. This followed a 46 percent increase in sales in fiscal 1993 from fiscal 1992 sales of $423.8 million. The Company believes that the increase in fiscal 1994 orders and sales from those of fiscal years 1993 and 1992 reflects the actions the Company has taken during the past years to establish itself as a leader in the emerging global data networking environment. In addition to the acquisitions of Synernetics and Centrum in fiscal 1994 and Star-Tek in fiscal 1993, significant actions taken by the Company included acquiring the data networking products business of U.K.-based BICC Group, plc ("BICC") in fiscal 1992, formulating the Company's High Performance Scalable Networking architecture to meet the demands of growing networks and advanced network applications, and opening new markets in Latin America, Asia and Europe. Furthermore, general market strength in the data networking market, rapid growth in sales outside the U.S., revenues from sales of key data networking products such as the EtherLink III Parallel Tasking network adapter, the NETBuilder II bridge/router and the LinkBuilder FMS stackable hub, and the Company's ability to deliver complete data networking solutions for different connectivity environments also contributed to increased sales. Revenue from businesses acquired during the year did not account for a material portion of the year-over-year increase. Sales from products introduced in the last 12 months represented 32 percent of sales in fiscal 1994, compared to 48 percent of total sales in fiscal 1993 as several high volume products such as the EtherLink III network adapter and LinkBuilder FMS stackable hub met their one-year anniversary in the first half of fiscal 1994. Sales of network adapters in fiscal 1994 represented 57 percent of total sales and increased 31 percent from fiscal 1993 sales. Sales of network adapters in fiscal years 1993 and 1992 represented 58 percent and 57 percent of total sales, respectively. The increase in network adapter sales represented an increase in unit volume partially offset by continuation of the industry-wide trend toward decreasing average selling prices and a shift in demand towards the lower-priced EtherLink III network adapter. The increase in unit volume resulted from sales of the EtherLink III and the TokenLink III network adapters. Sales of systems products (internetworking, hub and switching products) in fiscal 1994 represented 37 percent of total sales and increased 49 percent from fiscal 1993. This followed an 84 percent increase in system sales in fiscal 1993 from fiscal 1992. The increase was led primarily by the LinkBuilder FMS stackable hub, the high-performance NETBuilder II bridge/router and the LANplex family of switching products. Similar to network adapters, the increase in systems products sales represented an increase in unit volume which was partially offset by a decrease in average selling prices. During the year, the industry has experienced a trend towards demand for fully functional, lower cost, lower price hubs and routers, such as 3Com's family of LinkBuilder stackable hubs and NETBuilder remote office products. Sales of other products (terminal servers, customer service, protocols, operating systems, file servers and other products) represented six percent of fiscal 1994 sales and continued to decrease from levels in fiscal 1993 and fiscal 1992. Sales outside of the United States comprised 52 percent of total sales in fiscal 1994 compared to 50 percent in fiscal 1993 and 47 percent in fiscal 1992. The growth of international sales was particularly strong in Europe and the Latin America region in fiscal 1994. The Company believes that the increase in international sales reflected the same factors that affect the Company as a whole, including the results of the Company's continued expansion globally, continued increases in revenue from the data networking products acquired from U.K.-based BICC, the worldwide expansion of service and support programs, and the opening of new sales offices. Cost of sales as a percentage of sales was 49.1 percent in fiscal 1994, compared to 51.9 percent in fiscal 1993 and 52.9 percent in fiscal 1992. The 2.8 percentage point improvement in gross margin in fiscal 1994 primarily resulted from improved efficiency of manufacturing operations, a favorable shipment mix with higher volume shipments of the lower-cost and higher-margin EtherLink III network adapter, lower freight and duties which resulted from an increase in the volume of products manufactured in the Ireland plant, and reduction in product material costs. The 1.0 percentage point improvement in gross margin in fiscal 1993 from fiscal 1992 was due primarily to a favorable shipment mix of EtherLink III network adapters, as well as LinkBuilder FMS and LinkBuilder ECS hub products. The trend noted above towards demand for lower cost, lower price systems products allows the Company to further leverage its manufacturing infrastructure. Total operating expenses in fiscal 1994 were $418.1 million compared to $235.9 million in fiscal 1993 and $187.8 million in fiscal 1992. Excluding non-recurring charges, operating expenses increased $49.1 million or 21 percent from fiscal 1993 to fiscal 1994, but decreased as a percentage of sales from 38.0 percent of sales in fiscal 1993 to 34.3 percent of sales in fiscal 1994. The increase in operating expenses from fiscal 1993 reflected increased selling costs associated with higher sales, the cost of developing and promoting the Company's systems products, increased cooperative advertising expenses, and growth in the number of employees to support the higher volume of business. Research and development expenses as a percentage of sales in fiscal 1994 decreased from fiscal 1993 and 1992, but increased in absolute dollars. The increase in spending reflected the Company's continued commitment to develop and introduce high quality, innovative products. Operating expenses increased $57.1 million or 32 percent from fiscal 1992 to fiscal 1993, excluding non-recurring charges. The increase in operating expenses reflected the cost of developing and promoting new products, and growth in the number of employees and spending due to the acquisition of the data networking products business of BICC in January 1992. Summary of Operating Expenses Fiscal Percent Fiscal Percent Fiscal Percent (Dollars in thousands) 1994 of Sales 1993 of Sales 1992 of Sales Sales and marketing $171,799 20.8% $137,021 22.2% $97,997 23.1% Research and development 76,467 9.2 64,346 10.4 48,220 11.4 General and 35,379 4.3 33,176 5.4 31,190 7.4 administrative Non-recurring charges: Purchased in-process technology 134,481 16.3 - - 10,404 2.4 Non-recurring items - - 1,316 0.2 - - Total operating expenses 418,126 50.6 235,859 38.2 187,811 44.3 Total operating expenses excluding non- recurring charges $283,645 34.3% $234,543 38.0% $177,407 41.9% In the third quarter of fiscal 1994, the Company recorded a $134.5 million pre-tax charge to operations for the combined effect of purchased in-process technology related to the acquisitions of Synernetics and Centrum and the technology license agreement with Pacific Monolithics, Inc. Fiscal 1993 results included a non-recurring charge of $1.3 million which consisted of the net cost of a litigation settlement of $3.6 million, merger costs of $1.0 million related to the acquisition of Star-Tek, offset by a reduction in accrued restructuring costs of $3.3 million based on revised estimates of future costs. Fiscal 1992 results included a $10.4 million pre-tax charge to operations for purchased in-process technology related to the acquisition of the data networking products business of BICC. Other expenses (net) were $1.2 million in fiscal 1994, compared to $0.7 million in fiscal 1993 and $0.3 million in fiscal 1992. The increase in other expenses (net) in fiscal 1994 from fiscal 1993 resulted primarily from a higher provision for doubtful accounts partially offset by more favorable foreign exchange results and higher interest income. The increase in other expenses (net) in fiscal 1993 from fiscal 1992 resulted primarily from lower interest income and higher foreign exchange costs, partially offset by a lower provision for doubtful accounts. The Company provided $48.2 million for income taxes in fiscal 1994 on income before income taxes of $19.5 million because a significant portion of the purchased in-process technology charge was not tax deductible. Excluding the effect of the purchased in-process technology charge, the effective tax rate would have been 35.0 percent. The Company's effective tax rate in fiscal 1993 was 36.0 percent, as compared to 43.0 percent in fiscal 1992. In fiscal 1992, as in fiscal 1994, a portion of the purchased in-process technology charge was not tax deductible, which increased the effective tax rate. Net loss for fiscal 1994 was $28.7 million, or $0.92 per share, compared to net income for fiscal 1993 of $38.6 million, or $1.20 per share. Net loss for fiscal 1994 included the aforementioned $134.5 million pre-tax charge associated with purchased in-process technology, a $17.7 million pre-tax gain from the sale of the Company's investment in Madge N.V. and a $1.2 million tax benefit due to retroactive changes and the effect of changes in federal statutory rates of the Revenue Reconciliation Act of 1993. Excluding these one-time charges and gains, the Company would have realized net income of $86.9 million, or $2.54 per share in fiscal 1994. Excluding the effect of non-recurring items in fiscal 1993, the Company would have realized net income of $39.8 million, or $1.24 per share. Net income for fiscal 1992 was $8.0 million, or $0.26 per share. Excluding the effect of the purchased in-process technology charge in fiscal 1992, the Company would have realized net income of $17.1 million, or $0.56 per share. Business Environment and Risk Factors The Company's future operating results may be affected by various trends and factors which the Company must successfully manage in order to achieve favorable operating results. In addition, there are trends and factors beyond the Company's control which affect its operations. Such trends and factors include adverse changes in general economic conditions, governmental regulation or intervention affecting communications or data networking, fluctuations in foreign exchange rates, and other factors listed below. The data networking industry has become increasingly competitive, and the Company's results may be adversely affected by the actions of existing or future competitors. Such actions may include the development or acquisition of new technologies, the introduction of new products, the assertion by third parties of patent or similar intellectual property rights, and the reduction of prices by competitors to gain or retain market share. Industry consolidation or alliances may also affect the competitive environment. The market for the Company's products is characterized by rapidly changing technology. An unexpected change in one or more of the technologies affecting data networking could have a material adverse effect on the Company's operating results. For instance, a large portion of the Company's revenues is comprised of sales of products based on the Ethernet technology. The Company's operating results could be adversely affected if there is an unexpected change in such technology or if the Company does not respond timely and effectively to expected changes. The Company is engaged in research and development activities in certain emerging high-speed technologies, such as the 100 Mbps Ethernet, ATM and FDDI. If the industry standardizes on high- speed technologies which are different from the technology in which the Company has invested, this may have a material adverse effect on the Company's ability to compete in the marketplace. While the Company continues to introduce new products and technology to the marketplace, the success of the new products is dependent on many factors, including timely introduction and market acceptance, the Company's ability to manage the risks associated with product transitions, the Company's ability to manage future inventory levels in line with anticipated product demand and to manufacture its products in appropriate quantities to meet anticipated demand. Some key components of the Company's products are currently available only from single sources. There can be no assurance that in the future the Company's suppliers will be able to meet the Company's demand for such components in a timely and cost effective manner. The Company's operating results and customer relationships could be adversely affected by either an increase in prices for, or an interruption or reduction in supply of, any key components. The market price of the Company's common stock has been, and may continue to be, extremely volatile. Factors such as new product announcements by the Company or its competitors, quarterly fluctuations in the Company's operating results and general conditions in the data networking market may have a significant impact on the market price of the Company's common stock. These conditions, as well as factors which generally affect the market for stocks of high technology companies, could cause the price of the Company's stock to fluctuate substantially over short periods. The Company's corporate headquarters and a large portion of its research and development activities and other critical business operations are located near major earthquake faults. Operating results could be materially adversely affected in the event of a major earthquake. Because of the foregoing factors, as well as other factors affecting the Company's operating results, past trends should not be used by investors to anticipate future results or trends. Further, the Company's prior performance should not be presumed to be an accurate indicator of future performance. Liquidity and Capital Resources Cash, cash equivalents and temporary cash investments at May 31, 1994 were $129.7 million as compared to $117.2 million and $79.4 million at the end of fiscal 1993 and 1992, respectively. Net cash generated from operations was $127.9 million in fiscal 1994 and $51.7 million in fiscal 1993. Trade receivables at May 31, 1994 increased $35.2 million from May 31, 1993 due primarily to higher sales in the fourth quarter of fiscal 1994 as compared to the comparable prior-year period. Days sales outstanding decreased from 45 days in fiscal 1993 to 44 days in fiscal 1994. Inventory levels increased $3.3 million from May 31, 1993 and inventory turnover improved from 5.3 turns at May 31, 1993 to 6.5 turns at May 31, 1994. Investing activities for fiscal 1994 included $18.1 million of proceeds from the sale of the Company's investment in Madge N.V., offset by $36.5 million used for capital expenditures. Major capital expeditures in fiscal 1994 included the addition of a new line in the Ireland manufacturing plant, worldwide implementation of a new network operating system and electronic mail infrastruture, and upgrades of desktop systems and servers necessitated by the new network operating system. The Company spent $98.1 million in net cash for the acquisitions of Synernetics and Centrum which were funded through cash balances and the liquidation of temporary cash investments. As of May 31, 1994, the Company has an outstanding obligation of $14.3 million related to the Centrum acquisition which is payable in August 1994. During fiscal 1994, the Company repurchased 700,000 shares of its common stock at an average price of $23.78, for a total cash outlay of $16.6 million. The Company received cash of $22.7 million from sale of its common stock to employees through its employee stock purchase and option plans. As of May 31, 1994, the Board of Directors has authorized the Company to repurchase up to an additional 1.8 million shares of its common stock in the open market. In January 1994, the Company increased its revolving bank credit agreement from $20 million to $40 million and extended the expiration date to December 31, 1996. No amount is outstanding under the credit agreement. Based on current plans and business conditions, the Company believes that its existing cash balances, together with cash generated from operations, the established revolving credit agreement and other reasonable sources of capital, are sufficient to satisfy anticipated operating cash requirements through fiscal 1995. ITEM 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements and Financial Statement Schedules Financial Statements: Independent Auditors' Report - Deloitte & Touche LLP Independent Auditors' Report - Levine, Zeidman & Daitch, P.C. Consolidated Statements of Operations for the years ended May 31, 1994, 1993 and 1992 Consolidated Balance Sheets at May 31, 1994 and 1993 Consolidated Statements of Shareholders' Equity for the years ended May 31, 1994, 1993 and 1992 Consolidated Statements of Cash Flows for the years ended May 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements Quarterly Results of Operations (Unaudited) Financial Statement Schedules: Schedule I - Temporary Cash Investments S-1 Schedule II - Amounts Receivable from Related Parties and Underwriters, Promoters and Employees other than Related Parties Schedule VIII - Valuation and Qualifying Accounts and Reserves Schedule X - Supplementary Income Statement Information 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. Independent Auditors' Report To the Shareholders and Board of Directors of 3Com Corporation: We have audited the accompanying consolidated balance sheets of 3Com Corporation and its subsidiaries as of May 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended May 31, 1994. Our audits also included the financial statement schedules listed in the accompanying Index to Consolidated Financial Statements and Financial Statement Schedules at Item 8. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. The consolidated financial statements give retroactive effect to the fiscal 1993 merger of 3Com Corporation and Star-Tek, Inc., which has been accounted for as a pooling of interests as described in Note 3 to the consolidated financial statements. We did not audit the statements of income, shareholders' equity and cash flows of Star-Tek, Inc. for the year ended December 31, 1991, which statements reflect sales of $15,413,000 and net income of $5,914,000. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Star-Tek, Inc., is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. 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 and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of 3Com Corporation and its subsidiaries at May 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP San Jose, California June 15, 1994 Independent Auditors' Report To the Board of Directors Star-Tek, Inc. Northboro, Massachusetts We have audited the accompanying statements of income, and retained earning and of cash flows for the year ended December 31, 1991 of Star-Tek, Inc. (a Massachusetts corporation). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis of our opinion. In our opinion, the financial statements of Star-Tek, Inc. referred to above present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 1991 in conformity with generally accepted accounting principles. /s/ Levine, Zeidman & Daitch, P.C. LEVINE, ZEIDMAN & DAITCH, P.C. Wellesley Hills, Massachusetts February 24, 1992 Consolidated Statements of Operations Years Ended May 31, (In thousands, except per share data) 1994 1993 1992 Sales $826,995 $617,168 $423,801 Costs and Expenses: Cost of sales 405,927 320,386 224,309 Sales and marketing 171,799 137,021 97,997 Research and development 76,467 64,346 48,220 General and administrative 35,379 33,176 31,190 Purchased in-process technology 134,481 - 10,404 Non-recurring items - 1,316 - Total 824,053 556,245 412,120 Operating income 2,942 60,923 11,681 Gain on sale of investment 17,746 - - Other expense-net (1,150) (677) (347) Income before income taxes 19,538 60,246 11,334 Income tax provision 48,232 21,685 4,874 Income (loss) before minority interest (28,694) 38,561 6,460 Minority interest in net loss of consolidated subsidiary - - 1,498 Net income (loss) $(28,694) $ 38,561 $ 7,958 Net income (loss) per common and equivalent share: Primary $ (0.92) $ 1.22 $ 0.27 Fully-diluted $ (0.92) $ 1.20 $ 0.26 Common and equivalent shares used in computing per share amount: Primary 31,310 31,624 29,929 Fully-diluted 31,310 32,146 30,287 See notes to consolidated financial statements. Consolidated Balance Sheets Years Ended May 31, (Dollars in thousands) 1994 1993 ASSETS Current Assets: Cash and cash equivalents $ 66,284 $ 40,046 Temporary cash inves 63,413 77,184 Trade receivables, less allowance for doubtful accounts ($10,402 in 1994 and $6,498 in 1993) 118,653 83,481 Inventories 71,352 68,061 Deferred income taxes 31,236 19,805 Other 10,134 15,835 Total current assets 361,072 304,412 Property and equipment-net 67,001 55,248 Other assets 16,270 7,918 Total $444,343 $367,578 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 51,827 $ 40,212 Accrued and other liabilities 91,130 58,311 Income taxes payable 19,090 8,637 Current portion of long-term obligations 482 1,021 Total current liabilities 162,529 108,181 Long-term obligations 1,058 1,134 Shareholders' Equity: Preferred stock, no par value, 3,000,000 shares authorized; none outstanding - - Common stock, no par value, 100,000,000 shares authorized; shares outstanding: 1994--32,526,450; 1993--30,850,377 219,937 154,958 Unamortized restricted stock grants (202) - Retained earnings 61,326 103,163 Accumulated translation adjustments (305) 142 Total shareholders' equity 280,756 258,263 Total $444,343 $367,578 See notes to consolidated financial statements. Consolidated Statements of Shareholders' Equity Unamortized Restricted Stock Grants and Notes Receivable Accumulated Common Stock From Sale of Retained Transition (In thousands) Shares Amount Common Stock Earnings Adjustments Total Balances, June 1, 1991 27,203 $119,760 $(24) $73,206 $ 725 $193,667 Common stock issued under stock plans 1,393 10,876 (131) 10,745 Stock warrants issued 1,400 1,400 Repurchase of common stock (991) (4,477) (6,102) (10,579) Repayment of note receivable 21 21 Tax benefit from employee stock transactions 1,504 1,504 Amortization of restricted stock grants 11 11 Stock dividend pooled entity 1,733 - Pro forma tax provision of pooled entity 2,092 2,092 Equity distributions of pooled entity (5,800) (5,800) Interest accrued on notes receivable 3 3 Accumulated translation adjustments 1,403 1,403 Net income 7,958 7,958 Balances, June 1, 1992 29,338 129,063 (120) 71,354 2,128 202,425 Common stock issued under stock plans 2,382 19,413 19,413 Stock warrants buyback (1,300) (1,300) Repurchase of common stock (860) (4,042) (5,340) (9,382) Tax benefit from employee stock transactions 11,955 11,955 Cancellation of restricted stock grants (10) (131) 120 (11) Pro forma tax provision of pooled entity 1,604 1,604 Equity distributions of pooled entity (5,179) (5,179) Adjustment to conform fiscal year of pooled entity 2,163 2,163 Accumulated translation adjustments (1,986) (1,986) Net income 38,561 38,561 Balance, June 1, 1993 30,850 154,958 - 103,163 142 258,263 Common stock issued under stock plans 2,376 22,917 (255) 22,662 Repurchase of common stock (700) (3,501) (13,143) (16,644) Tax benefit from employee stock transactions 24,474 24,474 Amortization of restricted stock grants 53 53 Stock options assumed in connection with acquisitions 21,089 21,089 Accumulated translation adjustments (447) (447) Net loss (28,694) (28,694) Balances, May 31, 1994 32,526 $219,937 $(202) $61,326 $(305) $280,756 See notes to consolidated financial statements. Consolidated Statements of Cash Flows Years Ended May 31, (Dollars in thousands) 1994 1993 1992 Cash flows from operations: Net income (loss) $(28,694) $ 38,561 $ 7,958 Adjustments to reconcile net income (loss) to cash provided by operations: Depreciation and amortization 30,610 25,135 21,660 Gain on sale of investment (17,746) - - Deferred income taxes (9,865) (3,523) 1,581 Purchased in-process technology 134,481 - 10,404 Minority interest - - (1,498) Adjustment to conform fiscal year of pooled entity - 2,163 - Pro forma provision for income taxes - 1,604 2,092 Non-cash restructuring costs - (3,346) - Changes in assets and liabilities net of effects of acquisitions: Trade receivables (30,045) (20,991) (432) Inventories 1,637 (19,139) (9,982) Other current assets 6,190 (3,889) (1,480) Accounts payable 8,886 11,525 5,573 Accrued and other liabilities (2,461) 6,016 (11,140) Income taxes payable 34,927 17,618 3,487 Net cash provided by operations 127,920 51,734 28,223 Cash flows from investment activities: Proceeds from sale of investment 18,066 - - Purchase of property and equipment (36,474) (22,263) (21,783) Purchase of temporary cash investments (76,841) (72,962) (33,423) Proceeds from temporary cash investments 90,612 40,496 67,815 Acquisition of businesses and related purchase-price adjustment (98,128) 2,946 (25,000) Other-net (3,020) 908 528 Net cash used for investment activities (105,785) (50,875) (11,863) Cash flows from financing activities: Sale of stock 22,662 19,413 10,769 Repurchase of common stock (16,644) (9,382) (10,579) Repurchase of stock warrants - (1,300) - Notes payable - 3,326 4,795 Repayments of notes payable and capital lease obligations (1,462) (513) (429) Equity distributions of pooled entity - (5,179) (5,800) Other-net (453) (1,872) 268 Net cash provided by (used for) financing activities 4,103 4,493 (976) Increase in cash and cash equivalents 26,238 5,352 15,384 Cash and cash equivalents at beginning of year 40,046 34,694 19,310 Cash and cash equivalents at end of year $ 66,284 $ 40,046 $ 34,694 Other cash flow information: Interest paid $ 66 $ 254 $ 245 Income taxes paid (refunded) 21,614 5,910 (7,267) Non-cash investing and financing activities- Property and equipment acquired under capital leases - - 2,062 In connection with the acquisitions in fiscal 1994 (see Note 3), the Company paid cash, net of cash acquired, of $98.1 million plus $14.3 million payable in August 1994, and recorded non-cash value of options assumed of $21.1 million. The fair value of assets acquired, excluding the $132.1 million purchased in- process technology charged to operations, was $35.6 million, and liabilities of $11.3 million were assumed. In connection with the acquisition in fiscal 1992 (see Note 3), the Company paid cash of $25 million (subsequently adjusted to $22 million), issued stock warrants with an estimated value of $1.4 million (subsequently repurchased) and assumed liabilities of $13.9 million. See notes to consolidated financial statements. Notes to Consolidated Financial Statements Note 1: Description Of Business Founded in 1979, 3Com Corporation pioneered the data networking industry and is committed to providing customers global access to information. Today, 3Com offers a broad range of ISO 9000-compliant global data networking solutions that include routers, hubs, switches and adapters for Ethernet, Token Ring, FDDI and ATM networks. Headquartered in Santa Clara, California, 3Com is a Fortune 500 company with worldwide research and development, manufacturing, marketing, sales and support capabilities. Note 2: Significant Accounting Policies Principles of consolidation. The consolidated financial statements include the accounts of 3Com Corporation and its wholly- and majority-owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. Cash equivalents are highly liquid debt investments acquired with a maturity of three months or less. Temporary cash investments consist of short-term investments stated at cost. Financial instruments. The Company has not yet adopted Statement of Financial Accounting Standards No. 115, "Accounting for Investments: Debt and Equity Securities". The Company believes that the carrying values of its financial instruments approximate their fair value, and the adoption of this new standard in the first quarter of fiscal 1995 will not have a significant impact on the consolidated financial position or results of operations. Concentrations of credit risk. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of investments and trade receivables. The Company invests in instruments with an investment credit rating of AA and better. The Company also places its investments for safekeeping with a high-credit-quality financial institution. Credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries and geographies. The Company often sells its products through third-party distributors, and, as a result, may maintain individually significant receivable balances with major distributors. The Company believes that its credit evaluation, approval and monitoring processes substantially mitigate potential credit risks. Inventories are stated at the lower of standard cost (which approximates first-in, first-out cost) or market. 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. Purchased technology is included in other assets and is amortized over 2-4 years. Depreciation and amortization are computed over the shorter of the estimated useful lives, lease terms, or terms of license agreements of the respective assets, on a straight-line basis - generally 2-7 years with buildings at 25 years. Revenue recognition. The Company recognizes revenue and accrues related royalty and warranty expenses upon shipment. Revenue from variable royalties pursuant to license agreements is recognized upon receipt. Service and subscription revenue is recognized over the term of the related contractual period. Development costs. Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. The Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility; accordingly, software costs incurred after the establishment of technological feasibility have not been material and therefore have been expensed. Income taxes. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires an asset and liability approach to account for income taxes. Foreign currency translations. For foreign operations with the local currency as the functional currency, assets and liabilities are translated at year-end exchange rates, and statements of operations are translated at the average exchange rates during the year. Gains or losses resulting from foreign currency translation are accumulated as a separate component of shareholders' equity. For foreign operations with the U.S. dollar as the functional currency, 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 operations 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 other expense - net in the statements of operations. Net income (loss) per common and equivalent share is computed using the weighted average number of common shares outstanding and the dilutive effects of stock options, using the treasury stock method. Reclassifications. Certain prior year amounts have been reclassified to conform to the current year presentation. Note 3: Business Combinations On January 14, 1994, the Company acquired all of the outstanding shares of Synernetics, Inc. ("Synernetics") and assumed all outstanding Synernetics stock options. The purchase price consisted of approximately $104.0 million plus $3.3 million of stock options. A substantial portion of the purchase price was paid using funds from the Company's working capital. Synernetics is engaged in the development, manufacturing and marketing of LAN switching products. On February 2, 1994, the Company acquired all of the outstanding shares of Centrum Communications, Inc. ("Centrum") and assumed all outstanding Centrum stock options. The purchase price consisted of approximately $36.0 million of which $16.0 million was paid in cash and $14.3 million is payable in August 1994 and the remainder was associated with the value of the assumed stock options. Centrum is engaged in the development, manufacturing and marketing of remote access products and technology. The acquisitions were accounted for as purchases and, accordingly, the acquired assets and liabilities were recorded at their estimated fair values at the dates of acquisition. The aggregate purchase price of $143.3 million plus $13.1 million of costs directly attributable to the completion of the acquisitions has been allocated to the assets and liabilities acquired. Approximately $132.1 million of the total purchase price represented in-process technology that had not yet reached technological feasibility and was charged to the Company's operations. The Company's consolidated results of operations include the operating results of the acquired companies since their acquisition dates. The following table summarizes the unaudited pro forma combined results of operations for the years ended May 31, 1994 and 1993 as if the acquisitions had occurred at the beginning of each of the periods presented: (Unaudited) Years Ended May 31, (In thousands, except per share amounts) 1994 1993 Sales $838,953 $628,546 Net income $ 96,033 $ 33,623 Net income per share: Primary $ 2.85 $ 1.05 Fully-dilute $ 2.81 $ 1.04 Shares used in computing per share amounts: Primary 33,717 32,066 Fully-diluted 34,180 32,309 The above table includes, on a pro forma basis, the Company's consolidated financial information for the year ended May 31, 1994 combined with the financial information of Synernetics and Centrum for the same twelve months. The Company's consolidated financial information for the year ended May 31, 1993 is combined with the financial information of Synernetics and Centrum for the twelve months ended June 30, 1993. The above table excludes the one-time $132.1 million charge for purchased in-process technology arising from these acquisitions as it was a material non-recurring charge. This charge is included in the actual consolidated statement of operations for the year ended May 31, 1994. The unaudited pro forma combined results of operations are presented for illustrative purposes only and are not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of future operating results. On January 29, 1993, the Company acquired Star-Tek, Inc. ("Star-Tek") by issuing approximately 1.74 million shares of common stock for all of the outstanding shares of Star-Tek. Star-Tek designs, manufactures and markets a range of Token Ring products focused primarily on the connectivity needs of larger organizations with IBM mainframe, mid-range and Token Ring LAN-based information systems. The acquisition was accounted for by the pooling-of-interests method. Star-Tek maintained its financial records on a fiscal year ending December 31. The consolidated statements of operations and cash flows for the year ended May 31, 1992 include the Star-Tek statements of operations and cash flows for the year ended December 31, 1991. The results of operations of Star-Tek for the five-month period ended May 31, 1992 reflected net income of $1.6 million and pro-forma tax adjustment of $595,000, the sum of which has been reported as an increase in the Company's fiscal 1993 retained earnings. In January 1992, the Company acquired the data networking products business of U.K.-based BICC Group, plc. This acquisition has been accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded at their estimated fair values at the date of acquisition. The acquisition price consisted of approximately $22 million in cash and a warrant to purchase 500,000 shares of the Company's common stock. The stock warrant was subsequently repurchased by the Company. Approximately $10.4 million of the purchase price represented in-process technology that had not yet reached technological feasibility and was charged to the Company's operations. The Company's consolidated results of operations include the operating results of the acquired business from the January 31, 1992 date of acquisition. Note 4: License In the third quarter of fiscal 1994, the Company licensed certain in-process wireless technology from Pacific Monolithics, Inc. This technology is still under development and, accordingly, $2.4 million of the $2.5 million cost of obtaining this license represented in-process technology and was charged to operations in the third quarter of fiscal 1994. Note 5: Non-recurring Items Non-recurring items for the year ended May 31, 1993 consists of the net cost of a litigation settlement of $3.6 million (see Note 15), and merger costs of $1.0 million related to the acquisition of Star-Tek (see Note 3), offset by a reduction in accrued restructuring costs of $3.3 million in the fourth quarter of fiscal 1993 based on revised estimates of future costs. Note 6: Foreign Exchange Contracts The Company enters into foreign exchange contracts 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 other expense - net, which offset foreign exchange gains or losses from revaluation of foreign currency-denominated balance sheet items and intercompany balances. At May 31, 1994 and 1993, the Company had outstanding foreign exchange contracts of $14.6 million and $14.0 million, respectively. The contracts require the Company to exchange foreign currencies for U.S. dollars or vice versa, and generally mature in one month. Note 7: Inventories Inventories at May 31 consist of: (Dollars in thousands) 1994 1993 Finished goods $44,770 $41,331 Work-in-process 8,232 4,912 Raw materials 18,350 21,818 Total $71,352 $68,061 Note 8: Property And Equipment Property and equipment at May 31 consists of: (Dollars in thousands) 1994 1993 Land $ 1,303 $ 1,303 Building 7,372 7,372 Machinery and equipment 122,892 89,830 Furniture and fixtures 14,591 12,476 Leasehold improvements 15,446 14,604 Construction in progress - 756 Total 161,604 126,341 Accumulated depreciation and amortization (94,603) (71,093) Property and equipment - net $ 67,001 $55,248 Note 9: Accrued And Other Liabilities Accrued and other liabilities at May 31 consist of: (Dollars in thousands) 1994 1993 Accrued payroll and related expenses $ 21,387 $16,671 Accrued product warranty 13,686 10,553 Accrued cooperative advertising 11,544 7,885 Accrued payment to Centrum shareholders 14,267 - Other accrued liabilities 30,246 23,202 Accrued and other liabilities $ 91,130 $58,311 Note 10: Borrowing Arrangements And Commitments The Company has a $40 million revolving bank credit agreement which expires on December 31, 1996. Under the agreement, the Company may select among various interest rate options, including borrowing at the bank's prime rate. The agreement requires that the Company maintain certain financial ratios and minimum net worth and restricts payment of cash dividends. At May 31, 1994, all such requirements were met and there were no outstanding borrowings under the agreement. The Company has guaranteed borrowings of its former Japanese joint venture, 3Com K.K., of 450 million Yen or approximately $4.3 million as of May 31, 1994. 3Com Development Corporation, a wholly-owned subsidiary of 3Com, is a limited partner in a lease/joint venture arrangement to acquire and develop the Company's corporate offices in Santa Clara, which were initially occupied in the first quarter of fiscal 1991. Future minimum lease payments are included in the table below. The Company has signed an agreement with a third party to lease the buildings to be built on land adjacent to the Company's existing corporate offices in Santa Clara. The estimated date of occupancy is April 1996. Future minimum lease payments are included in the table below. The Company leases its facilities and certain equipment under operating leases. Leases expire at various dates from 1995 to 2013 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 are as follows: (Dollars in thousands) Fiscal year 1995 $14,302 1996 13,471 1997 12,230 1998 10,261 1999 10,145 Thereafter 16,984 Total $77,393 Rent expense was $13.5 million, $13.4 million, and $13.8 million for fiscal 1994, 1993, and 1992, respectively. Note 11: Common Stock Shareholder Rights Plan. In September 1989, the Company's 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 its common stock. The rights become exercisable based on certain limited conditions related to acquisitions of stock, tender offers and certain business combination transactions of the Company. Initially, each right entitles the shareholder to buy one-half share of the Company's common stock at an exercise price of $50. The rights are redeemable at the Company's option for $.01 per right and expire on September 19, 1999. Stock Option Plans. The Company 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 over a four-year period, and expire ten years after the grant date. A summary of option transactions under the plans follows: Years ended May 31, (In thousands except price per share) 1994 1993 1992 Number of option shares: Granted and assumed 2,350 2,055 1,836 Exercised (1,859) (1,828) (912) Cancelled (211) (321) (673) Outstanding at end of year 6,150 5,870 5,964 Option price per share: Granted and assumed $0.87-61.75 $10.00-39.38 $7.00-14.38 Exercised 0.87-51.75 5.63-35.00 6.00-11.75 Cancelled 0.89-56.38 6.63-35.10 6.00-19.88 Outstanding at end of year $0.87-61.75 $ 5.63-39.38 $5.63-14.38 In connection with the Synernetics and Centrum acquisitions discussed in Note 3, the Company assumed certain outstanding options to purchase common stock of the acquired companies and exchanged them for options to acquire 429,000 shares of the Company's common stock at exercise prices of $0.87 to $23.26 per share. At May 31, 1994, options for 2.3 million shares were exercisable, 1.9 million shares were available for future grants, and 8.1 million shares were reserved for issuance under the stock option plans. Employee Stock Purchase Plan. The Company 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 equal to 85 percent of the lower of the fair market values as of the beginning or the end of the offering period. At May 31, 1994, 645,000 shares of common stock were reserved for issuance under this plan. Restricted Stock Plan. The Company has a Restricted Stock Plan, under which 100,000 shares of common stock were reserved for issuance at no cost to key employees. The shares are issued at the fair market value on the date of the grant. The fair market value of shares granted to an eligible participant cannot exceed 50 percent of the base salary of the eligible participant and any compensation expense is recognized as the granted shares vest over a one to four year period. In fiscal 1994, 5,000 shares of common stock were issued under this plan. At May 31, 1994, 95,000 shares were reserved for future issuance. Stock Repurchase Program. The Board of Directors has authorized the Company to repurchase up to 7.5 million shares of common stock. Under this authorization, 5.7 million shares have been repurchased and the Company may repurchase up to an additional 1.8 million shares of common stock. Note 12: Other Expense - Net Other Expense - net consists of: (Dollars in thousands) 1994 1993 1992 Interest income $ 3,954 $ 3,602 $ 5,080 Provision for doubtful accounts (4,459) (1,995) (3,683) Other (645) (2,284) (1,744) Total $(1,150) $ (677) $ (347) Other includes gains, losses and transaction costs from foreign exchange transactions and property and equipment dispositions. Note 13: Income Taxes The provision for income taxes consists of: (Dollars in thousands) 1994 1993 1992 Current: Federal $31,761 $13,786 $ 2,721 State 7,862 3,110 623 Foreign 16,771 8,293 (39) Total current 56,394 25,189 3,305 Deferred: Federal (9,266) (1,658) 3,109 Foreign 1,104 (1,846) (1,540) Total deferred (8,162) (3,504) 1,569 Total $48,232 $21,685 $ 4,874 Deferred and prepaid income taxes, which result from temporary differences in the recognition of revenue and expense for tax and financial reporting purposes, consist of: (Dollars in thousands) 1994 1993 1992 Tax depreciation and operating lease expenses $ (397) $(1,354) $(1,228) Reserves not recognized for tax purposes (8,538) (1,323) 4,132 DISC commission - (194) (209) Alternative minimum tax credits (363) 573 (936) Other 1,136 (1,206) (190) Total $(8,162) $(3,504) $ 1,569 The components of the net deferred tax asset consist of: (Dollars in thousands) 1994 1993 Deferred tax assets: Depreciation and amortization $ 5,686 $ 5,117 Reserves not recognized for tax purposes 31,483 21,699 Deferred tax assets of acquired businesses 1,703 - Other (87) 815 Alternative minimum tax credits - 363 Valuation allowance (6,097) (5,171) Total deferred tax asset $32,688 $22,823 Deferred tax liabilities-Other (25) (25) Net deferred tax asset $32,663 $22,798 Valuation allowance relates primarily to expenses, the deduction of which is not assured on future state income tax returns. The net increase in the valuation allowance in fiscal 1994, 1993, and 1992 was $926,000, $1.1 million and $408,000, respectively. Tax carryforwards of acquired businesses consist of $4.6 million and $739,000 of net operating loss and tax credit carryforwards, respectively, that expire in 2004 through 2008. The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to income before taxes as follows: 1994 1993 1992 Tax computed at federal statutory rate 35.0% 34.0% 34.0% State income taxes, net of federal effect 3.0 3.4 3.6 Foreign sales corporation (5.2) (1.3) (3.6) Tax exempt investment income (5.7) (1.5) (13.0) Foreign losses without benefits of carryovers or carrybacks - - 11.8 Difference between federal statutory rate and foreign effective rates (7.5) (0.4) (1.8) Research tax credits (8.7) (0.2) (6.9) Non-deductible purchased in-process technology 241.5 - 18.7 Effect of tax law changes (6.4) - - Other .9 2.0 0.2 Total 246.9% 36.0% 43.0% Income before income taxes for the years ended 1994, 1993, and 1992 include income (loss) of $58.2 million, $18.7 million and $(10.9 million) from the Company's foreign subsidiaries. The Company has not provided for federal income taxes on $27.9 million of undistributed earnings of foreign subsidiaries, which the Company intends to reinvest in subsidiary operations indefinitely. If such undistributed earnings were to be remitted, the related tax liability would be approximately $1.9 million. Note 14: Geographic Area Information The Company operates in a single industry segment: the design, manufacture, marketing, and support of data networking systems. The Company's foreign operations consist of central distribution and order administration, manufacturing and research and development facilities in Western Europe, and sales and marketing activities conducted through sales subsidiaries throughout the world. Sales, operating income and identifiable assets, classified by the major geographic areas in which the Company operates, are as follows: (Dollars in thousands) 1994 1993 1992 Revenues from unaffiliated customers: United States $399,836 $308,879 $223,947 Export sales from United States 103,127 69,237 94,305 Europe 324,032 224,891 98,650 Other - 14,161 6,899 Total $826,995 $617,168 $423,801 Transfers from geographic areas (eliminated in consolidation): United States $112,418 $101,570 $ 56,690 Europe 52,595 39,920 12,567 Other - 23,354 4,356 Total $165,013 $164,844 $ 73,613 Operating income (loss): United States $(57,025) $ 40,811 $ 22,736 Europe 55,890 17,370 2,255 Other 8,679 6,467 (12,396) Eliminations (4,602) (3,725) (914) Total $ 2,942 $ 60,923 $ 11,681 Identifiable assets: United States $332,651 $268,254 Europe 121,019 102,054 Other 4,623 4,492 Eliminations (13,950) (7,222) Total $444,343 $367,578 Transfers between geographic areas are accounted for at prices representative of unaffiliated party transactions. Note 15: Litigation In August 1989, four class action lawsuits were filed in the United States District Court for the Northern District of California naming the Company and certain of its directors and officers as defendants. The suits, which were consolidated into a single action, alleged that defendants misrepresented or failed to disclose material facts about the Company's operations and financial results, which plaintiffs contended artificially inflated the price of the Company's securities during the period December 6, 1988 to August 7, 1989. In April 1993, the Company and plaintiffs reached an agreement to settle the consolidated action in its entirety. Although the Company believed that the claims asserted in the class action were without merit, the Company believed it was in the best interest of its shareholders to settle the case due to the continuing costs of defense, the distraction of management's attention and the uncertainties inherent in any litigation. The principal terms of the agreement called for a settlement of $9.9 million, a substantial portion of which was paid by the Company's insurance carrier. Quarterly Results of Operations (Unaudited) (Dollars in thousands, except per share data)
Fiscal 1994 Quarters Ended Fiscal 1993 Quarters Ended May 31 Feb. 28 Nov. 30 Aug. 31 May 31 Feb. 28 Nov. 30 Aug.31 1994 1994 1993 1993 1993 1993 1992 1992 Sales $241,463 $218,166 $205,275 $162,091 $167,458 $161,396 $152,697 $135,617 Gross margin 124,605 113,183 102,865 80,415 83,093 78,396 73,809 61,484 Gross margin % 51.6% 51.9% 50.1% 49.6% 49.6% 48.6% 48.3% 45.3% Operating income (loss) 41,755 (93,203) 33,512 20,878 20,534 17,475 14,624 8,290 Net income (loss) 27,189 (103,460) 21,463 26,114 13,271 10,160 9,280 5,850 Net income (loss) % 11.3% (47.4%) 10.5% 16.1% 7.9% 6.3% 6.1% 4.3% Net income (loss) per share $0.78 $(3.28) $0.65 $0.80 $0.40 $0.31 $0.29 $0.20
Notes: Net loss for the quarter ended February 28, 1994 included a charge of approximately $134.5 million ($4.00 per share) for purchased in-process technology (see Notes 3 and 4 to the consolidated financial statements). Net income for the quarter ended August 31, 1993 included a gain of approximately $17.7 million ($.35 per share) related to the sale of an investment. Net income for the quarter ended February 28, 1993 included a charge of approximately $1.6 million ($.06 per share) for merger costs associated with the Company's acquisition of Star-Tek, Inc. (see Notes 3 and 5 to the consolidated financial statements). 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 The information required by Item 10 of Form 10-K with respect to identification of directors is incorporated by reference to the information contained in the section captioned "Election of Directors" in 3Com's definitive Proxy Statement for the Annual Meeting of Shareholders to be held September 29, 1994 (the "Proxy Statement"), a copy of which has been filed with the Securities and Exchange Commission. For information with respect to the executive officers of the Registrant, see "Executive Officers of the Registrant" 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 to 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 to 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 to the information contained in the section captioned "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement. PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) Financial Statements_See Index to Financial Statements and Financial Statement Schedules (2) Financial Statement Schedules-See Index to Financial Statements and Financial Statement Schedules (3) Exhibits-See Exhibit Index (b) The Registrant did not file any reports on Form 8-K during the last quarter of the fiscal year ended May 31, 1994. (c) See Exhibit Index at page 36 of this Form 10-K. (d) See Index to Financial Statements and Financial Statement Schedules EXHIBIT INDEX Exhibit Number Description 3.1 Amended and Restated Articles of Incorporation (Exhibit 19.1 to Form 10-Q) (8) 3.2 Certificate of Amendment of the Amended and Restated Articles of Incorporation 3.3 Bylaws, as amended and restated (Exhibit 3.2 to Form 10-K) (10) 4.1 Reference is made to Exhibit 3.1 10.1 1983 Stock Option Plan, as amended (Exhibit 10.1 to Form 10-K) (10) 10.2 Amended and Restated Incentive Stock Option Plan (4) 10.3 License Agreement dated March 19, 1981 (1) 10.4 First Amended and Restated 1984 Employee Stock Purchase Plan, as amended (Exhibit 19.1 to Form 10-Q) (11) 10.5 License Agreement dated as of June 1, 1986 (Exhibit 10.16 to Form 10-K) (3) 10.6 3Com Corporation Director Stock Option Plan, as amended (Exhibit 19.3 to Form 10-Q) (11) 10.7 Bridge Communications, Inc. 1983 Stock Option Plan, as amended (Exhibit 4.7 to Form S-8) (2) 10.8 3Com Headquarters Lease dated December 1, 1988, as amended (Exhibit 10.14 to Form 10-K) (10) 10.9 Ground Lease dated July 5, 1989 (Exhibit 10.19 to Form 10-K) (5) 10.10 Sublease Agreement dated February 9, 1989 (Exhibit 10.20 to Form 10-K) (5) 10.11 Credit Agreement dated April 21, 1993 10.12 Asset Purchase Agreement dated as of January 24, 1992 (Exhibit 2.1 to Form 8-K) (12) 10.13 3Com Corporation Restricted Stock Plan dated July 9, 1991 (Exhibit 19.2 to Form 10-Q) (11) 10.14 Agreement and Plan of Merger dated December 16, 1992 (Exhibit 3 to Form 8-K) (13) 10.15 Form of Indemnity Agreement for Directors and Officers (Exhibit 10.15 to Form 10-Q) (13) 10.16 Agreement and Plan of Reorganization dated December 16, 1993 among 3Com Corporation, 3Sub Corporation and Synernetics, Inc. (Exhibit 7.1 to Form 8-K) (14) 10.17 Side Agreement Regarding Agreement and Plan of Reorganization dated January 14, 1993 among 3Com Corporation, 3Sub Corporation and Synernetics, Inc. (Exhibit 7.2 to Form 8-K) (14) 10.18 Agreement and Plan of Reorganization dated January 18, 1994 (Exhibit 7.2 to Form 8-K) (15) 10.19 Indemnity and Escrow Agreement dated February 2, 1994. (Exhibit 7.3 to Form 8-K) (15) 10.20 Amendment to Credit Agreement 10.21 Second Amendment to Credit Agreement 10.22 1994 Stock Option Plan 21.1 Subsidiaries of the Registrant 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Levine, Zeidman & Daitch, P.C. 99.1 Descriptive List of Exhibits and Schedules to the Agreement and Plan of Reorganization dated December 16, 1993 by and among 3Com Corporation, 3Sub Corporation and Synernetics, Inc. 99.2 Descriptive List of Exhibits and Schedules to the Agreement and Plan of Reorganization dated January 18, 1994 by and among 3Com Corporation, 3Sub Acquisition Corporation and Centrum Communications, Inc. (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant's Registration Statement on Form S-1 filed January 25, 1984 (File No. 2-89045). (2) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-8 filed October 13, 1987 (File No. 33-17848). (3) Incorporated by reference to the corresponding Exhibit or the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed August 29, 1987 (File No. 0-12867). (4) 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). (5) Incorporated by reference to the corresponding Exhibit or the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 28, 1989 (File No. 0-12867). (6) Incorporated by reference to Exhibit 19.1 to Registrant's Form 10-Q filed on April 14, 1990 (File No. 0-12867). (7) Incorporated by reference to the corresponding Exhibit or the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 28, 1990 (File No. 0-12867). (8) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 2, 1991 (File No. 0-12867). (9) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on April 15, 1991 (File No. 0-12867). (10) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 27, 1991 (File No. 0-12867). (11) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed January 10, 1992 (File No. 0-12867). (12) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8- K filed on February 18, 1992 (File No. 0-12867). (13) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8- K filed on February 12, 1993 (File No. 0-12867). (14) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8- K filed on January 31, 1994 (File No. 0-12867). (15) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on February 11, 1994 (File No. 0-12867). (16) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10- K filed on August 27, 1993 (File No. 0-12867). (17) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10- Q filed on April 13, 1994 (File No. 0-12867). (18) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 14, 1994 (File No. 0-12867). DESCRIPTIVE LIST OF EXHIBITS AND SCHEDULES TO THE AGREEMENT AND PLAN OF REORGANIZATION Dated December 16, 1993 By and Among 3COM CORPORATION, 3SUB CORPORATION AND SYNERNETICS, INC. Exhibit A: The Agreement of Merger as filed with the Secretaries of State of Delaware and California setting forth the terms of the Merger (consistent with the terms in the Agreement) Exhibit B-1: Form of Key Employee Agreement Exhibit B-2: Scheduled Employees of Synernetics Exhibit C: Disclosure Schedule stating exceptions from representations Exhibit D: Disclosure Schedule stating exceptions from representations Exhibit F: Opinion of Gray Cary Ware & Freidenrich Exhibit G: Opinion of Testa, Hurwitz & Thibeault DESCRIPTIVE LIST OF EXHIBITS AND SCHEDULES TO THE AGREEMENT AND PLAN OF REORGANIZATION Dated January 18, 1994 By and Among 3COM CORPORATION, 3SUB ACQUISITION CORPORATION AND CENTRUM COMMUNICATIONS, INC. Exhibit A: The Agreement of Merger as filed with the Secretary of State of California setting forth the terms of the Merger (consistent with the terms in the Agreement) Exhibit B: Disclosure Schedule stating exceptions from representations Exhibit C: List of Option Holders Exhibit D: Disclosure Schedule stating exceptions from representations Exhibit F: Opinion of Counsel to 3Com Exhibit G: Opinion of Counsel to Centrum Exhibit H-1: Non-compete Agreement with Mr. Gilbert Hu Exhibit H-2: Employment and Non-competition Agreement with Vincent Liu Exhibit H-3: Employment and Non-competition Agreement with Ann Zeichner 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. 3Com Corporation (Registrant) Date: August 26, 1994 By /s/ Eric A. Benhamou Eric A. Bhamou Chairman, President 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 and on the dates indicated. Signature Title Date Chairman of the Board /s/ Eric A. Benhamou President, and August 26, 1994 Chief Executive Officer (Eric A. Benhamou) Principal Executive Officer) Vice President, Finance and /s/ Christopher B. Paisley Chief Financial Officer August 26, 1994 (Principal Financial and (Christopher B. Paisley) Accounting Officer) /s/ James L. Barksdale Director August 26, 1994 (James L. Barksdale) /s/ Gordon A. Campbell Director August 26, 1994 (Gordon A. Campbell) /s/ Jean-Louis Gassee Director August 26, 1994 (Jean-Louis Gassee) /s/ Stephen C. Johnson Director August 26, 1994 (Stephen C. Johnson) /s/ Philip C. Kantz Director August 26, 1994 (Philip C. Kantz) /s/ William F. Zuendt Director August 26, 1994 (William F. Zuendt) /s/ Jack L. Hancock Director August 26, 1994 (Jack L. Hancock) SCHEDULE I 3Com Corporation TEMPORARY CASH INVESTMENTS May 31, 1994 (in thousands) Amount at Which Carried Description Par Value Cost Market Value in Balance Sheet Various Tax Exempt municipal bonds(1) $59,860 $63,413 $63,208 $63,413 (1) Municipal obligations consist primarily of prerefunded general obligations and revenue bonds carried at cost. No individual issue exceeds 2% of total assets. SCHEDULE II 3Com Corporation AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES For the Years Ended May 31, 1992, 1993, and 1994 (in thousands) Year Balance Balance at ended beginning end of May 31 Name of debtor of period Additions Collections period- current 1992 J. Koch - $225 (1) - $225 1993 J. Koch $225 - $225 - 1994 M. Kapp - $567 (2) - $567 (1) Consists of a promissory note issued on May 28, 1992 and paid in full on July 7, 1992. The note bore interest at 5.5% and was interest free for the first 90 days. The note was paid within the 90-day interest free period. (2) Represents a one-year, interest-free bridge loan granted in November 1993. SCHEDULE VIII 3Com Corporation VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended May 31, 1992, 1993 and 1994 (in thousands)
Reclassi- Additions fications Balance at charged to and charges Pooled Balance beginning costs and to other Business at end of period expenses accounts Deductions -Net(1) of period DESCRIPTION Year ended May 31, 1992: Allowance for doubtful accounts $ 5,129 $ 3,683 $ 306(3) $ 2,019(2) - $ 7,099 Product return reserve 3,040 2,080 308(3) 1,421 - 4,007 Accrued product warranty 5,370 6,587 - 4,392 - 7,565 Restructuring reserves: Inventory reserve 2,974 - - 1,794 - 1,180 Property and equipment reserve 2,633 - 3,123 (4) 1,598 - 4,158 Accrued restruc- turing costs 29,915 - (3,123)(4) 14,219 - 12,573 Total restruc- turing reserves 35,522 - - 17,611 - 17,911 YEAR ENDED MAY 31, 1993: Allowance for doubtful accounts $ 7,099 $ 1,995 - $ 2,636(2) $40 $ 6,498 Product return reserve 4,007 2,088 - 2,716 53 3,432 Accrued product warranty 7,565 9,494 - 6,546 40 10,553 Restructuring reserves: Inventory reserve 1,180 - 1,834 (4) 1,315 - 1,699 Property and equipment reserve 4,158 (1,844)(5) 25 (4) 2,246 - 93 Accrued restructuring costs 12,573 (1,502)(5) (1,859)(4) 5,155 - 4,057 Total restructuring reserve 17,911 (3,346) - 8,716 - 5,849 YEAR ENDED MAY 31, 1994: Allowance for doubtful accounts $ 6,498 $ 4,459 $ 168 (3) 723(2) - $10,402 Product return reserve 3,432 1,759 - 1,422 - 3,769 Accrued product warranty 10,553 11,776 863 9,506 - 13,686 Restructuring reserves: Inventory reserve 1,699 - - 774 - 925 Property and equipment reserve 93 - - - - 93 Accrued restructuring costs 4,057 - - 1,321 - 2,736 Total restructuring reserves 5,849 - - 2,095 - 3,754
(1) Pooled business - net represents activity of Star-Tek for the period of January 1, 1992 through May 31, 1992 (see Note 3 to the Consolidated Financial Statements). (2) Accounts written off - net of recoveries. (3) Adjustments relating to purchased businesses. (4) Accrued restructuring costs reclassified to other restructuring reserves. (5) Reduction in restructuring reserves based on current estimates of future costs. SCHEDULE X 3Com Corporation SUPPLEMENTARY INCOME STATEMENT INFORMATION For the Years Ended May 31, 1992, 1993 and 1994 (in thousands) Charged to Costs and Expenses Item 1992 1993 1994 Advertising costs $15,918 $40,014 $53,288 The amounts for maintenance and repairs, depreciation and amortization of intangible assets, preoperating costs and similiar deferrals, taxes other than payroll and income taxes and royalties are not presented, as these items did not exceed 1% of total sales in each of the three periods presented. EX-3 2 FIRST EXHIBIT 3-2 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF 3COM CORPORATION The undersigned, Eric A. Benhamou and Mark D. Michael, hereby certify that: 1. They are the duly elected and acting President and Secretary, respectively, of 3Com Corporation, a California corporation (the "Corporation"). 2. Article III of the Amended and Restated Articles of Incorporation of the Corporation is hereby amended to read in full as follows: "ARTICLE III STOCK This corporation is authorized to issue two classes of shares, designated respectively "Common Stock" and "Preferred Stock." Upon amendment of this Article to read as herein set forth, the number of shares of Common Stock which this corporation is authorized to issue is 200,000,000, the number of shares of Preferred Stock, which this corporation is authorized to issue is 3,000,000, and each share of outstanding Common Stock is converted into and reconstituted as two (2) shares of Common Stock. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of this corporation is authorized to determine the designation of any series, to fix the number of shares of any series, to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and within the limits or restrictions stated in any resolution of resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series." 3. The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the Board of Directors of the Corporation in accordance with section 902(c) of the California Corporations Code. The Corporation has only one class of shares outstanding. Executed at Santa Clara, California on the 8th day of August 1994. /S/ Eric A. Benhamou Eric A. Benhamou, President /S/ Mark D. Michael Mark D. Michael, Secretary The undersigned declare under penalty of perjury that the matters setforth in the foregoing certificate are true and correct of their own knowledge. Executed at Santa Clara, California on the 8th day of August 1994. /S/ Eric A. Benhamou Eric A. Benhamou, President /S/ Mark D. Michael Mark D. Michael, Secretary EX-21 3 EXHIBIT 21-1 EXHIBIT 21.1 3COM CORPORATION SUBSIDIARIES 3Com Asia Limited (Hong Kong) 3Com Benelux B.V. (The Netherlands) 3Com Canada Inc. (Canada) 3Com Credit Corporation (California, U.S.A.) 3Com do Brasil Servicos Ltda. (Brazil) 3Com de Mexico, S.A. de C.V. (Mexico) 3Com Development Corporation (California, U.S.A.) 3Com Engineering Limited (United Kingdom) 3Com Europe Limited (United Kingdom) 3Com GmbH (Germany) 3Com Holdings Limited (Cayman Islands) 3Com International, Inc. (Delaware, U.S.A.) 3Com Ireland (Cayman Islands) 3Com Ireland Technologies Limited (Ireland) 3Com Limited (United Kingdom) 3Com Japan K.K. (Japan) 3Com Mediteraneo S.r.l. (Italy) 3Com Nordic AB (Sweden) 3Com S.A.R.L. (France) 3Com Technologies Limited (Cayman Islands) 3Com U.K. Holdings Limited (United Kingdom) 3Com (U.K.) Limited (United Kingdom) 3Com World Trade, Inc. (U.S. Virgin Islands) Synernetics, Inc. (Delaware, U.S.A.) EX-23 4 EXHIBIT 23-1 EXHIBIT 23.1 CONSENT OF DELOITE & TOUCHE LLP 3Com Corporation: We consent to the incorporation by reference in Registration Statements Nos. 2-92053, 33-2171, 33-17848, 33-33803, 33-33807, 33-36911, 33-45176, 33-45233, 33-56952, 33-58708 and 33-72158 on Form S-8 of our report dated June 15, 1994 appearing in this Annual Report on Form 10-K of 3Com Corporation for the year ended May 31, 1993. DELOITTE & TOUCHE LLP San Jose, California August 23, 1994 EX-23 5 EXHIBIT 23-2 EXHIBIT 23.2 CONSENT OF LEVINE, ZEIDMAN & DAITCH, P.C. 3Com Corporation We consent to the incorporation by reference in 3Com Corporation Registration Statements Nos. 2-92053, 33-2171, 33-17848, 33- 33803, 33-33807, 33-39323, 33-36911, 33-45176, 33-45231, 33- 45233, 33-56952, 33-58708 and 33-72158 on Form S-8 of our report dated February 24, 1992 relating to the financial statement of Star-Tek, Inc. for the year ended December 31, 1991 appearing in this Annual Report on Form 10-K of 3Com Corporation for the year ended May 31, 1993. LEVINE, ZEIDMAN & DAITCH, P.C. Wellesley Hills, Massachusetts August 23, 1994 EX-10 6 EXHIBIT 10-2 EXHIBIT 10.2.2 3COM CORPORATION 1994 STOCK OPTION PLAN 1. Purpose. The 3Com Corporation 1994 Stock Option Plan (the "Plan") is established to create additional incentive for eligible employees of 3Com Corporation and any successor corporation thereto (collectively referred to as the "Company"), and any present or future parent and/or subsidiary corporations of such corporation (all of whom along with the Company being individually referred to as a "Participating Company" and collectively referred to as the "Participating Company Group"), to promote the financial success and progress of the Participating Company Group. For purposes of the Plan, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Administration. (a) General. The Plan shall be administered by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted herein, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All questions of interpretation of the Plan or of any options granted under the Plan (an "Option") shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan and/or any Option. (b) Options Authorized. Options may be only nonqualified stock options, that is, options which are not incentive stock options as defined in section 422 of the Code. (c) Authority of Officers. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 3. Eligibility. The Options may be granted only to employees of the Participating Company Group; provided, however, that no Option may be granted to (i) a person who, at the time of such grant, is an officer or director of the Company or a beneficial owner of more than ten percent (10%) of any class of equity securities of the Company registered pursuant to section 12 of the Securities Exchange Act of 1934, as amended, or (ii) any person whose eligibility to participate in the Plan would require the Company to obtain shareholder approval of the Plan pursuant to the Bylaws of the National Association of Securities Dealers (and any schedules thereto) or the provisions contained in the New York Stock Exchange Listed Company Manual. For purposes of the foregoing sentence, "employees" shall include prospective employees to whom Options are granted in connection with written offers of employment with the Participating Company Group. The Board shall, in the Board's sole discretion, determine which eligible persons shall be granted Options (an "Optionee"). An Optionee may, if otherwise eligible, be granted additional Options. 4. Shares Subject to Option. Options shall be options for the purchase of the authorized but unissued common stock of the Company (the "Stock"), subject to adjustment as provided in paragraph 9 below. The maximum number of shares of Stock which may be issued under the Plan shall be One Million Nine Hundred Thousand (1,900,000) shares. In the event that any outstanding Option for any reason expires or is terminated or canceled and/or shares of Stock subject to repurchase are repurchased by the Company, the shares allocable to the unexercised portion of such Option, or such repurchased shares, may again be subjected to an Option. 5. Time for Granting Options. The Plan shall continue until terminated by the Board or until all of the shares of Stock reserved for issuance under the Plan have been issued, whichever shall first occur. 6. Terms, Conditions and Form of Options. Subject to the provisions of the Plan, the Board shall determine for each Option (which need not be identical) the number of shares of Stock for which the Option shall be granted, the exercise price of the Option, the exercisability of the Option, and all other terms and conditions of the Option not inconsistent with the Plan. Options granted pursuant to the Plan shall be evidenced by written agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish, and shall comply with and be subject to the following terms and conditions: (a) Exercise Price. The exercise price for each Option shall be established in the sole discretion of the Board; provided, however, that the exercise price per share shall not be less than the fair market value, as determined by the Board, of a share of Stock on the date of the granting of the Option. Notwithstanding the foregoing, an Option may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying with the provisions of section 424(a) of the Code. (b) Exercise Period of Options. The Board shall have the power to set the time or times within which each Option shall be exercisable or the event or events upon the occurrence of which all or a portion of each Option shall be exercisable and the term of each Option; provided, however, that no Option shall be exercisable after the expiration of ten (10) years after the date such Option is granted. (c) Payment of Exercise Price. Payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of the Company's stock owned by the Optionee having a value, as determined by the Board (but without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company), not less than the exercise price, (iii) by the assignment of the proceeds of a sale of some or all of the shares being acquired upon the exercise of an Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System), or (iv) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the form of Standard Option Agreement described in paragraph 7 below, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price and/or which otherwise restrict one (1) or more forms of consideration. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company of shares of the Company's stock to the extent such tender of stock would constitute a violation of the provisions of any law, regulation and/or agreement restricting the redemption of the Company's stock. (x) Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company of the Company's stock unless such shares of the Company's stock either have been owned by the Optionee for more than one (1) year or were not acquired, directly or indirectly, from the Company. (y) The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve and/or terminate any program and/or procedures for the exercise of Options by means of an assignment of the proceeds of a sale of some or all of the shares of Stock to be acquired upon such exercise. 7. Standard Form of Stock Option Agreement. (a) Nonqualified Stock Options. Unless otherwise provided for by the Board at the time an Option is granted, an Option shall comply with and be subject to the terms and conditions set forth in the form of nonqualified stock option agreement attached hereto as Exhibit A and incorporated herein by reference. (b) Standard Term for Options. Unless otherwise provided for by the Board in the grant of an Option, any Option granted hereunder shall be exercisable for a term of ten (10) years. 8. Authority to Vary Terms. The Board shall have the authority from time to time to vary the terms of the Standard Option Agreement described in paragraph 7 above either in connection with the grant of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of such revised or amended standard form or forms of stock option agreement shall be in accordance with the terms of the Plan. Such authority shall include, but not by way of limitation, the authority to grant Options which are immediately exercisable. 9. Effect of Change in Stock Subject to Plan. Appropriate adjustments shall be made in the number and class of shares of Stock subject to the Plan and to any outstanding Options and in the exercise price of any outstanding Options in the event of a stock dividend, stock split, reverse stock split, combination, reorganization, reclassification, or like change in the capital structure of the Company. 10. Transfer of Control. For purposes hereof, "Control Company" shall mean the Participating Company whose stock is subject to the Option. An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Control Company. (a) a direct or indirect sale or exchange by the shareholders of the Control Company of all or substantially all of the stock of the Control Company; (b) a merger in which the Control Company is a party; or (c) the sale, exchange, or transfer of all or substantially all of the Control Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the shareholders of the Control Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). A "Transfer of Control" shall mean an Ownership Change in which the shareholders of the Control Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company. In the event of a Transfer of Control, any unexercisable and/or unvested portion of the outstanding Options shall be immediately exercisable and vested as of 30 days prior to the Transfer of Control unless the surviving, continuing, successor, or purchasing corporation, as the case may be (the "Acquiring Corporation") assumes the Company's rights and obligations under outstanding stock option agreements or substitutes options for the Acquiring Corporation's stock for such outstanding Options. The exercise and/or vesting of any Option that was permissible solely by reason of this paragraph 10 shall be conditioned upon the consummation of the Transfer of Control. Any Options which are neither assumed by the Acquiring Corporation nor exercised as of the date of the Transfer of Control shall terminate effective as of the date of the Transfer of Control. 11. Provision of Information. Each Optionee shall be given access to information concerning the Company equivalent to that information generally made available to the Company's common shareholders. 12. Options Non-Transferable. Unless otherwise provided by the Board, during the lifetime of the Optionee, the Option shall be exercisable only by the Optionee, and no Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. 13. Termination or Amendment of Plan or Options. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan or any Option at any time. In any event, no amendment may adversely affect any then outstanding Option or any unexercised portion thereof, without the consent of the Optionee. IN WITNESS WHEREOF, the undersigned Assistant Secretary of the Company certifies that the foregoing 3Com Corporation 1994 Stock Option Plan was duly adopted by the Board of Directors of the Company on July 13, 1994. /S/ Ronald B. Friedman 3COM CORPORATION 1994 STOCK OPTION PLAN PLAN HISTORY July 13, 1994 1994 Stock Option Plan adopted by Board with share reserve of 1,900,000 shares. EXHIBIT A STANDARD FORM OF 3COM CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT 3COM CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT 3Com Corporation (the "Company"), granted to the individual named below an option to purchase certain shares of common stock of the Company, in the manner and subject to the provisions of this Option Agreement and the 3Com Corporation 1994 Stock Option Plan (the "Plan"), all of the terms of which are incorporated by reference herein. 1. Definitions: (a) "Notice" shall mean the "3Com Corporation NOTICE OF GRANT OF STOCK OPTIONS AND GRANT AGREEMENT" which is attached hereto. (b) "Optionee" shall mean the individual whose name is set forth in the Notice. (c) "Date of Option Grant" shall mean the "Date of Grant" set forth in the Notice. (d) "Number of Option Shares" shall mean the "Total Number of Shares Granted" as set forth in the Notice. Such number of shares of common stock of the Company may be adjusted from time to time pursuant to paragraph 9 below. (e) "Exercise Price" shall mean the "Option Price per Share" set forth in the Notice. Such price per share as adjusted from time to time pursuant to paragraph 9 below. (f) "Initial Exercise Date" shall be the Initial Vesting Date. (g) "Initial Vesting Date" shall be the latter of (i) the date occurring one (1) month after the Date of Option Grant, or (ii) the date occurring six (6) months after the date on which the employee commenced employment with the Company. (h) Determination of "Vested Ratio": Prior to Initial Vesting Date 0 On Initial Vesting Date, for each full 1/48 month of the Optionee's continuous employment by a Participating Company from the Date of Option Grant until the Initial Vesting Date Plus For each full month of the Optionee's 1/48 continuous employment by a Participating Company from the Initial Vesting Date In no event shall the Vested Ratio exceed 1/1. (i) "Option Term Date" shall mean the date ten (10) years after the Date of Option Grant. (j) "Code" shall mean the Internal Revenue Code of 1986, as amended. (k) "Company" shall mean 3Com Corporation, a California corporation, and any successor corporation thereto. (l) "Participating Company" shall mean (i) the Company and (ii) any present or future parent and/or subsidiary corporation of the Company while such corporation is a parent or subsidiary of the Company. For purposes of this Option Agreement, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Code. (m) "Participating Company Group" shall mean at any point in time all corporations collectively which are then a Participating Company. 2. Status of the Option. This Option is intended to be a nonqualified stock option and shall not be treated as an incentive stock option as described in Section 422 of the Code. 3. Administration. All questions of interpretation concerning this Option Agreement shall be determined by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. Exercise of the Option. (a) Right to Exercise. The Option shall first become exercisable on the Initial Exercise Date. The Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option in the amount equal to the Number of Option Shares multiplied by the Vested Ratio as set forth in paragraph 1 above less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. (b) Method of Exercise. The Option may be exercised by written notice to the Company which must state the election to exercise the Option, the number of shares for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person or by certified or registered mail, return receipt requested, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in paragraph 6 below, accompanied by full payment of the exercise price for the number of shares being purchased. (c) Form of Payment of Exercise Price. Such payment shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of the Company's common stock owned by the Optionee having a value not less than the exercise price, which either have been owned by the Optionee for more than one (1) year or were not acquired, directly or indirectly, from the Company, (iii) by Immediate Sales Proceeds, as defined below, or (iv) by any combination of the foregoing. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of the Company's common stock to the extent such tender of stock would constitute a violation of the provisions of any law, regulation and/or agreement restricting the redemption of the Company's common stock. "Immediate Sales Proceeds" shall mean the assignment in form acceptable to the Company of the proceeds of a sale of some or all of the shares acquired upon the exercise of the Option pursuant to a program and/or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve any such program and/or procedure. (d) Tax Withholding. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes payroll withholding and otherwise agrees to make adequate provision for foreign, federal and state tax withholding obligations of the Company, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired on exercise of the Option, or (iii) the lapsing of any restriction with respect to any shares acquired on exercise of the Option. (e) Certificate Registration. The certificate or certificates for the shares as to which the Option shall be exercised shall be registered in the name of the Optionee, or, if applicable, the heirs of the Optionee. (f) Restrictions on Grant of the Option and Issuance of Shares. The grant of the Option and the issuance of the shares upon exercise of the Option shall be subject to compliance with all applicable requirements of federal or state law with respect to such securities. The Option may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other law or regulations. In addition, no Option may be exercised unless (i) a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISABLE UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. (g) Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. Non-Transferability of the Option. The Option may be exercised during the lifetime of the Optionee only by the Optionee and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. 6. Termination of the Option. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Term Date as defined above, (b) the last date for exercising the Option following termination of employment as described in paragraph 7 below, or (c) upon a Transfer of Control as described in paragraph 8 below. 7. Termination of Employment. (a) Termination of the Option. If the Optionee ceases to be an employee of the Participating Company Group for any reason except death or disability within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee ceased to be an employee, may be exercised by the Optionee within three (3) months after the date on which the Optionee's employment terminates, but in any event no later than the Option Term Date. If the Optionee's employment with the Participating Company Group is terminated because of the death or disability of the Optionee within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee ceased to be an employee, may be exercised by the Optionee (or the Optionee's legal representative) at any time prior to the expiration of twelve (12) months from the date the Optionee's employment terminated, but in any event no later than the Option Term Date. The Optionee's employment shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of employment. (b) Termination of Employment Defined. For purposes of this paragraph 7, the Optionee's employment shall be deemed to have terminated either upon an actual termination of employment or upon the Optionee's employer ceasing to be a Participating Company. (c) Extension if Exercise Prevented by Law. Except as provided in this paragraph 7, the Option shall terminate and may not be exercised after the Optionee's employment with the Participating Company Group terminates unless the exercise of the Option in accordance with this paragraph 7 is prevented by the provisions of paragraph 4(f) above. If the exercise of the Option is so prevented, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Term Date. (d) Leave of Absence. For purposes hereof, the Optionee's employment with the Participating Company Group shall not be deemed to terminate if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. In the event of a leave in excess of ninety (90) days, the Optionee's employment shall be deemed to terminate on the ninety-first (91st) day of the leave unless the Optionee's right to reemployment with the Participating Company Group remains guaranteed by statute or contract. Notwithstanding the foregoing, however, a leave of absence shall be treated as employment for purposes of determining the Optionee's Vested Ratio if and only if the leave of absence is designated by the Company as (or required by law to be) a leave for which vesting credit is given. 8. Transfer of Control. For purposes hereof, "Control Company" shall mean the Participating Company whose stock is subject to the Option. An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Control Company. (a) a direct or indirect sale or exchange by the shareholders of the Control Company of all or substantially all of the stock of the Control Company; (b) a merger in which the Control Company is a party; or (c) the sale, exchange, or transfer of all or substantially all of the Control Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the shareholders of the Control Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). A "Transfer of Control" shall mean an Ownership Change in which the shareholders of the Control Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company. In the event of a Transfer of Control, any unexercisable and/or unvested portion of the Option shall be immediately exercisable and vested as of 30 days prior to the Transfer of Control unless the surviving, continuing, successor, or purchasing corporation, as the case may be (the "Acquiring Corporation") assumes the Company's rights and obligations under this Option Agreement or substitutes options for the Acquiring Corporation's stock for the Option. The exercise and/or vesting of any Option that was permissible solely by reason of this paragraph 8 shall be conditioned upon the consummation of the Transfer of Control. The Option shall terminate effective as of the date of the Transfer of Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation nor exercised as of the date of the Transfer of Control. 9. Effect of Change in Stock Subject to the Option. Appropriate adjustments shall be made in the number, exercise price and class of shares of stock subject to the Option in the event of a stock dividend, stock split, reverse stock split, combination, reorganization, reclassification, or like change in the capital structure of the Company. In the event a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become shares of another corporation (the "New Shares"), the Company may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the number of shares and the exercise price shall be adjusted in a fair and equitable manner. 10. Rights as a Shareholder or Employee. The Optionee shall have no rights as a shareholder with respect to any shares covered by the Option until the date of the issuance of a certificate or certificates for the shares for which the Option has been exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such certificate or certificates are issued, except as provided in paragraph 9 above. Nothing in the Option shall confer upon the Optionee any right to continue in the employ of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's employment at any time. 11. Legends. The Company may at any time place legends referencing any applicable federal or state securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to effectuate the provisions of this paragraph. 12. Binding Effect. This Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 13. Termination or Amendment. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan and/or the Option at any time; provided, however, that no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee. 14. Integrated Agreement. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Company other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 15. Applicable Law. This Option Agreement shall be governed by the laws of the State of California. 3COM CORPORATION By: Title: The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. Date: -----END PRIVACY-ENHANCED MESSAGE-----