-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MC1cBSTRjnwLl1q+kELk8z5PZTy6bIWLffvNX32galKV9LQ3JYpZyLbMPMZZ4uH7 qCylIZpjUTNNmzuaQd++Ug== 0000738076-98-000008.txt : 19980323 0000738076-98-000008.hdr.sgml : 19980323 ACCESSION NUMBER: 0000738076-98-000008 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980319 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3COM CORP CENTRAL INDEX KEY: 0000738076 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 942605794 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-12867 FILM NUMBER: 98568646 BUSINESS ADDRESS: STREET 1: 5400 BAYFRONT PLZ CITY: SANTA CLARA STATE: CA ZIP: 95052-8145 BUSINESS PHONE: 4087645000 MAIL ADDRESS: STREET 1: 5400 BAYFRONT PLAZA CITY: SANTA CLARA STATE: CA ZIP: 95052-8145 10-Q/A 1 ______________________________________________________________ United States Securities and Exchange Commission Washington, D. C. 20549 FORM 10-Q/A X Quarterly report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the Quarterly Period Ended November 30, 1997 Commission File No. 0-12867 or Transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the transition period from to ____________ 3Com Corporation (Exact name of registrant as specified in its charter) Delaware 94-2605794 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5400 Bayfront Plaza 95052 Santa Clara, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (408)764-5000 Former name, former address and former fiscal year, if changed since last report: N/A Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ....XX.... No ................ As of November 30, 1997, 354,562,107 shares of the Registrant's Common Stock were outstanding. _______________________________________________________________ 3Com Corporation Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations Three and Six Months Ended November 30, 1997 and 1996 Consolidated Balance Sheets November 30, 1997 and May 31, 1997 Consolidated Statements of Cash Flows Six Months Ended November 30, 1997 and 1996 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures 3Com, AccessBuilder and U.S. Robotics are registered trademarks of 3Com Corporation or its subsidiaries. CoreBuilder, HiPer, Palm, PalmPilot, Total Control, and x2 are trademarks of 3Com Corporation or its subsidiaries. PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3Com Corporation Consolidated Statements of Operations (As restated, see Note 2) (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended November 30, November 30, ------------------ ---------------- 1997 1996 1997 1996 ---- ---- ---- ---- Sales $1,197,189 $1,459,939 $2,794,705 $2,771,443 Cost of sales 645,344 756,916 1,476,773 1,450,509 --------- --------- --------- --------- Gross margin 551,845 703,023 1,317,932 1,320,934 --------- --------- --------- --------- Operating expenses: Sales and marketing 338,334 253,160 640,712 475,637 Research and development 144,978 113,328 287,776 211,381 General and administrative 71,265 56,417 134,130 106,153 Purchased in-process technology - - - 54,000 Merger-related charges (1,229) 6,600 268,558 6,600 --------- --------- --------- --------- Total operating expenses 553,348 429,505 1,331,176 853,771 --------- --------- --------- --------- Operating income (loss) (1,503) 273,518 (13,244) 467,163 Interest and other income, net 7,637 3,532 10,598 5,810 --------- --------- --------- --------- Income (loss) before income taxes 6,134 277,050 (2,646) 472,973 Income tax provision 2,113 102,452 44,566 193,331 --------- --------- --------- --------- Net income (loss) $ 4,021 $ 174,598 $ (47,212) $ 279,642 ========= ========= ========= ========= Net income (loss) per common and equivalent share: Primary $ 0.01 $ 0.49 $ (0.13) $ 0.79 Fully diluted $ 0.01 $ 0.49 $ (0.13) $ 0.79 Shares used in computing per share amounts: Primary 365,085 354,787 353,529 352,563 Fully diluted 365,105 355,979 353,529 353,586 See notes to consolidated financial statements. 3Com Corporation Consolidated Balance Sheets (As restated, see Note 2) (In thousands, except par value) (Unaudited) November 30, May 31, 1997 1997 ---- ---- ASSETS Current assets: Cash and equivalents $ 539,748 $ 351,237 Short-term investments 596,062 538,706 Accounts receivable, net 908,401 996,080 Inventories, net 635,972 513,740 Deferred income taxes 296,337 196,875 Other 111,289 93,040 --------- --------- Total current assets 3,087,809 2,689,678 Property and equipment, net 773,137 731,301 Deposits and other assets 105,116 118,804 --------- --------- Total assets $3,966,062 $3,539,783 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 110,000 $ 134,700 Accounts payable 327,862 308,581 Other accrued liabilities 786,656 503,232 Income taxes payable 73,156 168,942 --------- --------- Total current liabilities 1,297,674 1,115,455 Long-term obligations 46,717 170,652 Deferred income taxes 60,685 25,332 Stockholders' equity: Preferred stock, no par value, 10,000 shares authorized; none outstanding - - Common stock, $.01 par value, 990,000 shares authorized; shares outstanding: November 30, 1997: 354,562; May 31, 1997: 334,944 1,564,586 1,183,926 Retained earnings 1,002,280 1,049,561 Unrealized gain on investments, net 536 2,320 Unamortized restricted stock grants (4,912) (5,165) Accumulated translation adjustments (1,504) (2,298) --------- --------- Total stockholders' equity 2,560,986 2,228,344 --------- --------- Total liabilities and stockholders' equity $3,966,062 $3,539,783 ========= ========= See notes to consolidated financial statements. 3Com Corporation Consolidated Statements of Cash Flows (As restated, see Note 2) (Dollars in thousands) (Unaudited) Six Months Ended November 30, 1997 1996 ---- ---- Cash flows from operating activities: Net income (loss) $ (47,212) $ 279,642 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 128,201 95,790 Deferred income taxes (81,971) 8,471 Pooling of interests: OnStream - 4,850 U.S. Robotics 15,052 29,195 Purchased in-process technology - 54,000 Merger-related charges 268,558 (6,600) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable 87,679 (405,581) Inventories (173,432) 85,919 Other current assets (22,010) (24,894) Accounts payable 19,281 95,609 Other accrued liabilities 145,227 38,788 Income taxes payable 54,572 128,884 --------- --------- Net cash provided by operating activities 393,945 384,073 Cash flows from investing activities: Purchase of short-term investments (269,631) (211,257) Proceeds from short-term investments 209,603 171,362 Purchase of property and equipment (211,222) (213,624) Business acquired in purchase transaction - (66,547) Other, net (25,418) (28,658) --------- --------- Net cash used for investing activities (296,668) (348,724) --------- --------- Cash flows from financing activities: Issuance of common stock 234,110 53,782 Repayments of short-term debt, notes payable and capital lease obligations (168,066) (1,386) Repayments of long-term obligations (12,397) (177) Net proceeds from issuance of debt 33,300 50,000 Other, net 4,287 (2,274) --------- --------- Net cash provided by financing activities 91,234 99,945 --------- --------- Increase in cash and equivalents 188,511 135,294 Cash and equivalents, beginning of period 351,237 233,573 --------- --------- Cash and equivalents, end of period $ 539,748 $ 368,867 ========= ========= Non-cash financing and investing activities: Tax benefit on stock option transactions $ 131,351 $ 70,104 Unrealized gain (loss) on investments, net $ (1,784) $ 1,923 See notes to consolidated financial statements. 3Com Corporation Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation On June 12, 1997, 3Com Corporation (the Company) completed the merger with U.S. Robotics Corporation (U.S. Robotics), the leading supplier of products and systems for accessing information across the wide area network, including modems and remote access products. This merger was accounted for as a pooling-of-interests. The Company issued approximately 158 million shares of its common stock in exchange for all outstanding common stock of U.S. Robotics. The Company also assumed and exchanged all options to purchase U.S. Robotics' stock for options to purchase approximately 31 million shares of the Company's common stock. All financial data of the Company presented in this Form 10-Q/A have been restated to include the historical financial information of U.S. Robotics in accordance with generally accepted accounting principles and pursuant to Regulation S-X. The unaudited consolidated financial statements have been prepared by the Company and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In the opinion of management, these unaudited consolidated financial statements include all adjustments necessary for a fair presentation of the Company's financial position as of November 30, 1997, and the results of operations for the three and six months ended November 30, 1997 and 1996 and cash flows for the six months ended November 30, 1997 and 1996. On June 1, 1997, the Company adopted a 52-53 week fiscal year ending on the Sunday nearest to May 31, which for fiscal 1998 will be May 31, 1998. The Company does not expect this change to have a material impact on the Company's financial statements. The results of operations for the three and six months ended November 30, 1997 may not necessarily be indicative of the results to be expected for the fiscal year ending May 31, 1998. These financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1997. 2. Restatements In response to a review by the staff of the Securities and Exchange Commission of the Company's Form 10-Q filings for the quarterly periods ended August 31, 1997 and November 30, 1997, the Company is revising previously reported financial statements. Specifically, and as discussed in detail below, the consolidated financial statements as of and for the year ended May 31, 1997, and as of and for the three and six months ended November 30, 1997 and 1996 have been restated to (1) recombine the periods presented for fiscal 1997, (2) adjust the merger- related charge recorded in the quarter ended August 31, 1997, and (3) exclude the effect of conforming the two companies' fixed asset capitalization policies. Recombination of Fiscal 1997 - ---------------------------- The Company is revising the methodology for presenting the combined historical financial results of 3Com and U.S. Robotics for fiscal 1997. The Company had previously combined the 12-month period ended May 31, 1997 for 3Com with the 12-month period ended March 30, 1997 for U.S. Robotics. This combining methodology resulted in U.S. Robotics' April and May 1997 operating results, a net loss of $160.3 million, being recorded as a decrease to the Company's retained earnings as of June 1, 1997 rather than as a component of the fiscal 1997 statement of operations. The Company is now combining the fiscal year ended May 31, 1997 for 3Com with the period from July 1, 1996 through May 25, 1997 for U.S. Robotics. This combining methodology includes the last three reported quarters of U.S. Robotics, ended September 29, 1996, December 29, 1996, and March 30, 1997, and the months of April and May 1997. To reflect a complete 12-month year and a 3-month fourth quarter and thereby enhance comparability of periodic reported results, U.S. Robotics' results of operations for the month ended March 30, 1997 are included in both the three-month period ended March 30, 1997 and the three-month period ended May 25, 1997. Consistent with U.S. Robotics' non-linear quarterly sales pattern, sales were relatively low in the first two months of each quarter and significantly higher in the third month of each quarter, which March 1997 represents. By using this method, the last month of a quarter is included in each of the four quarters for fiscal 1997. The Company believes that there is no preferable practical alternative to this combining method. Nevertheless, this method does double-count March 1997 results. As discussed more fully below, product returns in April and May 1997 were higher than anticipated and resulted in an increase in the provision for estimated product returns at May 25, 1997. An indeterminate amount of these returns were related to March 1997 sales; however, the Company believes that this amount is not significant to the combined results and that inclusion of March 1997 in both the third and fourth quarters of fiscal 1997 is appropriate. 3Com's balance sheet as of May 31, 1997 was recombined with U.S. Robotics' balance sheet as of May 25, 1997. The U.S. Robotics' March 1997 net income of $112.9 million was reflected once in the Company's retained earnings at May 31, 1997. The previously reported and revised combining periods are as follows: Fiscal 1997 Quarterly Periods ------------------------------------------------- Q1'97 Q2'97 Q3'97 Q4'97 ----- ----- ----- ----- 3Com August`96 November`96 February`97 May`97 U.S. Robotics Previously reported June`96 September`96 December`96 March`97 As recombined September`96 December`96 March`97 May`97* *Three-month period which includes March, April, and May. Supplemental Operating Information for U.S. Robotics - ---------------------------------------------------- Following is supplemental information regarding U.S. Robotics' results of operations for the three-month period ended May 25, 1997 (in thousands). Results for these periods exclude reclassifications made to conform to the Company's financial statement presentation. Three March April/May Months Ended 1997 1997 May 25, 1997 ---- ---- ------------ Sales $ 541,662 $ 15,277 $ 556,939 Gross margin 279,411 (49,204) 230,207 Total operating expenses 97,457 187,557 285,014 --------- --------- --------- Operating income (loss) 181,954 (236,761) (54,807) Income (loss) before income taxes 179,647 (242,929) (63,282) Income tax provision (benefit) 66,720 (82,625) (15,905) --------- --------- --------- Net income (loss) $ 112,927 $ (160,304) $ (47,377) ========= ========= ========= U.S. Robotics' sales for the month ended March 30, 1997 (March 1997) were approximately $541.7 million, reflecting strong market demand worldwide for information access devices including the introduction and initial high volume shipments of products incorporating x2TM technology (x2 products). x2 technology increases the potential speed for downloading data from 28.8 or 33.6 Kilobits per second (Kbps) for standard V.34 modems to 56 Kbps. Consistent with U.S. Robotics' non-linear quarterly sales pattern, sales in the first two months of the quarter were relatively low and in the third month of the quarter, which March 1997 represents, were significantly higher. Gross margin for March 1997 was approximately $279.4 million, or 51.6 percent of sales. The overall gross margin reflected the initial high volume shipments of x2 products, which generated higher gross margins due to U. S. Robotics' temporary "first to market" advantage over competitors in the 56 Kbps modem market. Also, to a lesser extent, the overall gross margin reflected higher margins on the initial sales of newer generation handheld organizer products introduced during the month. Total operating expenses for March 1997 were approximately $97.5 million, or 18.0 percent of sales. Sales and marketing expenses reflected significant spending related to the introduction of x2 products, other marketing programs designed to generate continuing growth in sales and expand market share, and continuing investments to increase the worldwide sales force with the intent of increasing sales of network systems products. General and administrative expenses and research and development expenses reflected continuing investments in personnel and systems necessary to support U.S. Robotics' expanded level of business activity and its commitment to new product and technology development. As a percentage of sales, total operating expenses for March 1997 were low due to the non-linear sales pattern described above. Gross sales for the two months ended May 25, 1997 were approximately $200.3 million. Net sales after provisions, primarily for product returns of $143 million and price protection of $33 million, were approximately $15.3 million. These results principally reflect the following factors: U.S. Robotics' non-linear sales pattern, as described above; lower than anticipated sales out of the channel, due in part to confusion about the new 56 Kbps technologies and concerns regarding the absence of an industry standard for 56 Kbps modems; efforts to reduce levels of channel inventory, including increased emphasis on sales out of the channel via price reductions and other promotions; and product returns from channel partners whose sales out had been lower than anticipated. Returns during the two months ended May 25, 1997 totaled $82.3 million, reflecting primarily desktop modems and remote access concentrators. The majority of the desktop modem returns consisted of older generation products which were heavily impacted by the March 1997 introduction of U.S. Robotics' 56 Kbps modem with x2 technology. Returns of remote access concentrators were due primarily to lower than anticipated sales out of the distribution channel. Based on negotiations with individual customers, U.S. Robotics allowed returns during this period in excess of customers' contractual rights due to the 56 Kbps technology transition and the desire to reduce channel inventory. Returns during this period exceeded the March 30, 1997 balance in the allowance for sales returns of $48.9 million by $33.4 million. The price protection provision of $33 million related primarily to price reductions effective subsequent to March 30, 1997 for desktop modems and remote access concentrator product lines. Gross margin for this period was affected adversely by the provision for price protection described above, a provision for potentially excess and obsolete inventory of approximately $15.4 million, and unabsorbed manufacturing costs. Operating expenses for the two months ended May 25, 1997 were approximately $187.6 million. Sales and marketing expenses reflected significant spending related to the introduction of x2 products and newer generation handheld organizer products, other marketing programs designed to generate continuing growth in sales and expand market share, and continuing investments to increase the worldwide sales force with the intent of increasing sales of network systems products. General and administrative expenses and research and development expenses reflected continuing investments in personnel and systems necessary to support U.S. Robotics' anticipated growth and its commitment to new product and technology development. As a percentage of sales, total operating expenses for the two months ended May 25, 1997 were high due to the non- linear sales pattern described above. Other expenses, net, for the two months ended May 25, 1997 were approximately $6.2 million. Such expenses reflected higher interest expense due to increased short term borrowing. During these two months, U.S. Robotics increased its short-term borrowings from approximately $61 million to approximately $135 million, $10 million under an existing $90 million short-term borrowing arrangement and $125 million under an existing $300 million revolving credit facility. Such borrowings were primarily necessary to fund ongoing operating expenses, including costs associated with the launch of the new x2 technology, as well as capital expenditures. The Company repaid such short-term borrowing shortly after the closing of the merger in June 1997 between 3Com and U.S. Robotics and the use of these borrowing arrangements is no longer expected to be required. The provision for income taxes for the two months ended May 25, 1997 was a net benefit of approximately $82.6 million, resulting in an effective tax rate of 34.0 percent. Merger Related Charge - --------------------- During the Company's first fiscal quarter ended August 31, 1997, the Company recorded a merger-related charge of $426.0 million. As a result of a reassessment of this charge, the Company is reducing the merger-related charge by $156.2 million to $269.8 million, as follows (in millions): Total merger-related charge as previously reported $426.0 Less reductions: Product swap-out program (61.8) Duplicate facilities and real estate (25.4) Goodwill (20.8) Duplicate fixed assets (13.4) Severance and outplacement (8.9) Other assets and obligations (25.9) ----- Total merger-related charge, as revised $269.8 ===== The $61.8 million decrease in the charge reflects a change in the amount and timing of recording the product swap-out costs associated with certain discontinued products. The Company expects the total cost of the swap-out program will be significantly less than the amount originally accrued. As originally recorded, shipment of replacement products resulted in the recognition of sales and cost of sales. The revised accounting for the swap-out program records the net cost of the swap-out as a merger-related charge as the costs are incurred. Accordingly, sales and cost of sales were reduced in the second quarter by $23.1 million and $5.5 million, respectively. For the six months ended November 30, 1997, the reduction of sales and cost of sales totaled $26.4 million and $6.7 million, respectively. The $25.4 million decrease in the charge for the elimination of duplicate owned and leased facilities primarily reflects a refinement of costs based on detailed asset records rather than estimates. The $20.8 million decrease in the charge for goodwill reflects a reinstatement of the goodwill recorded by U.S. Robotics in conjunction with acquisitions of several international distributors prior to the merger with 3Com. Other reductions to the charge primarily reflect revisions to fixed asset write-offs, severance and outplacement costs, costs for a development contract which was not terminated, and a reduction in the amount of loss expected on discontinued product inventory and other assets. The Company expects there will be minimal impact on future operating results attributable to the aforementioned adjustments to the merger-related charge. In future quarters the Company estimates there will be a total of approximately $10 to $15 million of additional merger-related costs associated with the product swap-out program. The revised charge of $269.8 million includes approximately $227.9 million of integration expenses and $41.9 million of direct transaction costs (consisting primarily of investment banking and other professional fees). Integration expenses included: - - $76.1 million related to the closure and elimination of owned and leased facilities, primarily duplicate corporate headquarters and domestic and European sales offices; - - $63.0 million for severance and outplacement costs related to the merger, including amounts related to termination benefits associated with employment agreements. Employee groups impacted by the merger include personnel involved in duplicate corporate services, manufacturing and logistics, product organizations and sales; - - $49.1 million associated with certain long-term assets, primarily including duplicate finance, manufacturing, human resource and other management information systems, and capitalized purchased research and development costs related to a discontinued product; and - - $39.7 million primarily associated with the elimination and phase-out of duplicate wide area networking products (i.e., 3Com's AccessBuilder (registered trademark) 2000, 4000, 5000 and 8000 products and U.S. Robotics (registered trademark) TOTALswitch, ATM switch, LANLinker and related small office home office products), and the discontinuance of U.S. Robotics' telephony products. The charge primarily includes inventory write-offs and noncancelable purchase commitments. The remaining merger-related accrual at November 30, 1997 was approximately $162 million. Total expected cash expenditures relating to the merger charge are estimated to be approximately $138 million, of which approximately $64 million was disbursed prior to November 30, 1997. Termination benefits paid to 561 employees terminated through November 30, 1997 (approximately 56 percent of the total planned severances) were approximately $30 million. The remaining severance and outplacement amounts are expected to be paid within the next nine months. Fixed Asset Capitalization Policies - ----------------------------------- The financial statements in the Company's Form 10-Q for the period ended August 31, 1997 included the effect of conforming the two companies' fixed asset capitalization policies, which reduced retained earnings by $41.4 million at May 31, 1997. The Company subsequently determined that this change was not appropriate. Eliminating this change did not have a material impact on the Company's consolidated financial statements. Effect of Restatements on Consolidated Financial Statements - ----------------------------------------------------------- The effect of the restatements described above on the consolidated balance sheets as of November 30, 1997 and May 31, 1997 and the consolidated statements of operations for the three and six months ended November 30, 1997 and 1996 is as follows (in thousands): November 30, 1997 May 31, 1997 ----------------- ------------ As As Previously As Previously As Reported Restated Reported Restated -------- -------- -------- -------- Total current assets $3,099,914 $3,087,809 $2,836,564 $2,689,678 Property and equipment, net 743,195 773,137 723,962 731,301 Total assets 3,923,202 3,966,062 3,673,170 3,539,783 Total current liabilities 1,339,339 1,297,674 1,095,813 1,115,455 Total stockholders' equity 2,476,461 2,560,986 2,381,042 2,228,344 Three Months Ended Three Months Ended November 30, 1997 November 30, 1996 ----------------- ----------------- As As Previously As Previously As Reported Restated Reported Restated -------- -------- -------- -------- Sales $1,220,253 $1,197,189 $1,421,660 $1,459,939 Cost of sales 651,094 645,344 738,252 756,916 --------- --------- --------- --------- Gross margin 569,159 551,845 683,408 703,023 --------- --------- --------- --------- Operating expenses: Sales and marketing 337,594 338,334 243,893 253,160 Research and development 145,491 144,978 107,388 113,328 General and administrative 70,507 71,265 55,256 56,417 Purchased in-process technology - - 54,000 - Merger-related charges - (1,229) 6,600 6,600 --------- --------- --------- --------- Total operating expenses 553,592 553,348 467,137 429,505 --------- --------- --------- --------- Operating income (loss) 15,567 (1,503) 216,271 273,518 Interest and other income, net 7,637 7,637 4,133 3,532 --------- --------- --------- --------- Income before income taxes 23,204 6,134 220,404 277,050 Income tax provision 8,121 2,113 101,363 102,452 --------- --------- --------- --------- Net income $ 15,083 $ 4,021 $ 119,041 $ 174,598 ========= ========= ========= ========= Net income per common and equivalent share: Primary $ 0.04 $ 0.01 $ 0.34 $ 0.49 Fully diluted $ 0.04 $ 0.01 $ 0.34 $ 0.49 Shares used in computing per share amounts: Primary 365,085 365,085 353,657 354,787 Fully diluted 365,105 365,105 355,158 355,979 Six Months Ended Six Months Ended November 30,1997 November 30, 1996 ---------------- ----------------- As As Previously As Previously As Reported Restated Reported Restated -------- -------- -------- -------- Sales $2,821,115 $2,794,705 $2,671,720 $2,771,443 Cost of sales 1,483,902 1,476,773 1,395,649 1,450,509 --------- --------- --------- --------- Gross margin 1,337,213 1,317,932 1,276,071 1,320,934 --------- --------- --------- --------- Operating expenses: Sales and marketing 638,901 640,712 449,350 475,637 Research and development 287,608 287,776 205,504 211,381 General and administrative 133,096 134,130 102,565 106,153 Purchased in-process technology - - 54,000 54,000 Merger-related charges 426,000 268,558 6,600 6,600 --------- --------- --------- --------- Total operating expenses 1,485,605 1,331,176 818,019 853,771 --------- --------- --------- --------- Operating income (loss) (148,392) (13,244) 458,052 467,163 Interest and other income, net 10,598 10,598 7,106 5,810 --------- --------- --------- --------- Income (loss) before income taxes (137,794) (2,646) 465,158 472,973 Income tax provision (benefit) (6,057) 44,566 191,247 193,331 --------- --------- --------- --------- Net income (loss) $ (131,737) $ (47,212) $ 273,911 $ 279,642 ========= ========= ========= ========= Net income (loss) per common and equivalent share: Primary $ (0.37) $ (0.13) $ 0.78 $ 0.79 Fully diluted $ (0.37) $ (0.13) $ 0.77 $ 0.79 Shares used in computing per share amounts: Primary 353,529 353,529 352,814 352,563 Fully diluted 353,539 353,529 353,772 353,586 Effect of Restatement on Pro Forma Information - ---------------------------------------------- The fiscal 1997 consolidated financial statements have been restated to include U.S. Robotics information on the basis described above. The consolidated statements of income for the fiscal years ended May 31, 1996 and 1995 include the U.S. Robotics statements of income for the fiscal years ended September 29, 1996 and October 1, 1995, respectively. This presentation has the effect of including U.S. Robotics' results of operations for the three month period ended September 29, 1996 in both the combined years ended May 31, 1997 and 1996, and reflects sales of $611.4 million and net income of $13.5 million, which has been reported as a decrease to the Company's fiscal 1997 retained earnings. The combined results below reflect reclassifications to conform financial statement presentation. Summarized proforma operating results as previously reported and as restated for the three and six months ended November 30, 1996 are as follows: Three Months Ended Six Months Ended November 30, November 30, 1996 1996 -------------------------------------------------- (In thousands, except per share amounts) As Previously As As Previously As Reported Restated Reported Restated -------- -------- -------- -------- Sales: 3Com $ 820,296 $ 820,296 $1,530,436 $1,530,436 U.S. Robotics 611,410 645,412 1,158,195 1,256,822 Reclassifications to conform financial statement presentation (10,046) (5,769) (16,911) (15,815) --------- --------- --------- --------- Combined $1,421,660 $1,459,939 $2,671,720 $2,771,443 ========= ========= ========= ========= Net income: 3Com $ 105,569 $ 105,569 $ 197,141 $ 197,141 U.S. Robotics 13,472 69,029 76,770 82,501 --------- --------- --------- --------- Combined $ 119,041 $ 174,598 $ 273,911 $ 279,642 ========= ========= ========= ========= Net income per common and equivalent share (on a fully diluted basis): 3Com $ 0.56 $ 0.56 $ 1.06 $ 0.53 U.S. Robotics (1) 0.08 0.41 0.45 0.49 --------- --------- --------- --------- Combined $ 0.34 $ 0.49 $ 0.77 $ 0.79 ========= ========= ========= ========= (1) Adjusted for effect of exchange ratio of 1.75 shares of 3Com Common Stock for each share of U.S. Robotics Common Stock. 3. Inventories consisted of (in thousands): November 30, 1997 May 31, 1997 ---------------------- ---------------------- As As Previously As Previously As Reported Restated Reported Restated -------- -------- -------- -------- Finished goods $ 459,692 $ 466,690 $ 262,023 $ 346,631 Work-in-process 53,620 53,620 35,462 31,606 Raw materials 115,662 115,662 104,871 135,503 --------- --------- --------- --------- Total $ 628,974 $ 635,972 $ 402,356 $ 513,740 ========= ========= ========= ========= 4. Net Income (Loss) Per Common and Equivalent Share Net income (loss) per common and equivalent share is computed based on the weighted average number of common shares and the dilutive effects of stock options outstanding during the period using the treasury stock method. Common equivalent shares were not included in the calculation of earnings per share for the six months ended November 30, 1997 as they were antidilutive. The effect of the assumed conversion of the 10.25 percent convertible subordinated notes was antidilutive for all periods presented. 5. Litigation The Company is a party to lawsuits in the normal course of its business. The Company notes that (i) litigation in general and patent litigation in particular can be expensive and disruptive to normal business operations and (ii) the results of complex legal proceedings can be very difficult to predict with any certainty. Securities Litigation In December 1997 and January 1998, several putative shareholder class action lawsuits were filed against the Company and certain of its officers and directors in the United States District Court for the Northern District of Illinois and in the United States District Court for the Northern District of California. The complaints allege violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934. The complaints allege class periods between May 19, 1997 and November 14, 1997 and do not specify the damages sought. The Company believes it has meritorious defenses to the claims and intends to contest the lawsuits vigorously. An unfavorable resolution of the actions could have a material adverse effect on the business, results of operations or financial condition of the Company. U.S. Robotics, certain of its directors, and the Company were named as defendants in shareholder class actions relating to the merger between the Company and U.S. Robotics. (In re: U.S. Robotics Corporation Shareholders Litigation, Delaware Chancery Court Consolidated Civil Action No. 15580). On October 7, 1997, all claims related to such suits were settled pursuant to a settlement approved by the Delaware Chancery Court. Results of the settlement did not have a material effect on the Company's results of operations or financial condition. On March 24, and May 5, 1997, putative shareholder class action lawsuits, entitled Hirsch v. 3Com Corporation, et al., Civil Action No. CV764977, and Kravitz v. 3Com Corporation, et al., Civil Action No. CV765962, respectively, were filed against the Company and certain of its officers and directors in the California Superior Court, Santa Clara County (the Superior Court). Following resolution of a demurrer filed by the Company, the remaining causes of action in the complaints allege violations of the state securities laws, specifically sections 25400 and 25500 of the California Corporations Code. The complaints, which cover a putative period of September 24, 1996 through February 10, 1997, do not specify the damages sought. The Company believes it has meritorious defenses to the claims and intends to contest the lawsuits vigorously. An unfavorable resolution of the actions could have a material adverse effect on the business, results of operations or financial condition of the Company. Intellectual Property Litigation In September 1997, Livingston Enterprises, Inc. (Livingston) filed suit against U.S. Robotics in the United States District Court for the Northern District of California (Livingston Enterprises, Inc. v. U.S. Robotics Access Corporation, Case No. C-97-3551(CRB)), claiming copyright infringement, misappropriation of trade secrets, breach of contract and unfair competition with respect to certain software code previously licensed to U.S. Robotics for incorporation in certain of its remote access server and concentrator products. Livingston seeks injunctive relief and damages that are not specified as to amount. The Company believes it has meritorious defenses to Livingston's claims and intends to contest the lawsuit vigorously. In September 1997, Livingston filed a separate action in the same federal court (Livingston Enterprises, Inc. v. U.S. Robotics Access Corporation, Case No. C-97-3487 (CRB)) seeking a declaratory judgment to the effect that one of U.S. Robotics' U.S. patent is invalid and not infringed by Livingston's products, as well as unspecified damages. U.S. Robotics has answered this complaint and filed counterclaims alleging infringement of such patent by Livingston. An unfavorable resolution of the action could have a material adverse effect on the business, results of operations or financial condition of the Company. On April 26, 1997, Xerox Corporation filed suit against U.S. Robotics in the United States District Court for the Western District of New York (Xerox Corporation v. U.S. Robotics Corporation and U.S. Robotics Access Corp., No. 97-CV-6182T), claiming infringement of one United States Patent. The complaint alleges willful infringement and prays for unspecified damages and injunctive relief. In a press release dated April 30, 1997, Xerox alleged that its patent, issued January 21, 1997, "covers the use and recognition of handwritten text using an alphabet system designed especially for reliable recognition in pen computers," and that Palm Computing Corporation's (Palm) PalmPilotTM hand-held computer and "Graffiti" software in its PalmTM operating system infringe the Xerox patent. Palm is a wholly-owned subsidiary of the Company. The Company believes it has meritorious defenses to Xerox's claims and intends to contest the lawsuit vigorously. An adverse resolution of the action could have a material adverse effect on the Company's results of operations and financial condition in the quarter in which such adverse resolution occurs. On February 13, 1997, Motorola, Inc. filed suit against U.S. Robotics in the United States District Court for the District of Massachusetts (Motorola, Inc. v. U.S. Robotics Corporation, et al., Civil Action No. 97- 10339RCL), claiming infringement of eight United States patents. The complaint alleges willful infringement and prays for unspecified damages and injunctive relief. U.S. Robotics has filed an answer to Motorola's claims setting forth its defenses and asserting counterclaims which allege infringement of a U.S. Robotics patent, violation of antitrust laws, promissory estoppel and unfair competition. The Company believes it has meritorious defenses to the claims and intends to contest the lawsuit vigorously. An unfavorable resolution of the action could have a material adverse effect on the business, results of operations or financial condition of the Company. Consumer Litigation During 1997, three putative class action lawsuits were filed against the Company or its subsidiary, U.S. Robotics in the state courts of California and Illinois. Each of the actions seeks damages as a result of alleged misrepresentations by the Company or U.S. Robotics in connection with the sale of its new x2TM products and products upgradeable to x2 under various California and Illinois consumer fraud statutes and under common law theories including fraud and negligent misrepresentation. Plaintiffs in Bendall, et al. v. U.S. Robotics Corporation, et al., (No. 170441, Superior Court of Marin County, California), Lippman, et al v. 3Com, (No. 97 CH 09773, Circuit Court of Cook County, Illinois), and Michaels, et al. v. U.S. Robotics Access Corporation et al., (No. 94 CH 14417, Circuit Court of Cook County, Illinois) seek certification respectively of nationwide classes of purchasers of x2 technology during the approximate period November 1996 through at least May 1997. U.S. Robotics' motion to dismiss the Bendall action is presently pending; the Lippman action presently is stayed, and a responsive pleading is not yet due in the Michaels action. The complaints seek injunctive relief and an unspecified amount of damages. Two other actions purporting to be brought in the public interest have also been filed against U.S. Robotics in state court in California under California statutes arising out of U.S. Robotics alleged misrepresentation in connection with the sale of the x2 products. Levy v. U.S. Robotics Corporation, (No. 170968, Superior Court of Marin County, California) and Intervention Inc. v. U.S. Robotics Corporation, (No. 984352, Superior Court of San Francisco, California) seek injunctive and unspecified monetary relief. The Company believes it has meritorious defenses to these lawsuits and intends to contest the lawsuits vigorously. An unfavorable resolution of the actions could have a material adverse effect on the business, results of operations or financial condition of the Company. 6. Effects of Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." This Statement establishes and simplifies standards for computing and presenting earnings per share. SFAS 128 will be effective for the Company's third quarter of fiscal 1998, and requires restatement of all previously reported earnings per share data that are presented. Early adoption of this Statement is not permitted. SFAS 128 replaces primary and fully diluted earnings per share with basic and diluted earnings per share. Under SFAS 128, the Company's reported earnings per share for the three and six months ended November 30, 1997 and 1996 would have been: Three Months Ended Six Months Ended November 30, November 30, 1997 1996 1997 1996 ---- ---- ---- ---- Basic $ 0.01 $ 0.53 $ (0.14) $ 0.85 Diluted $ 0.01 $ 0.49 $ (0.14) $ 0.79 In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components. SFAS 130 will be effective for the Company's fiscal year 1999 and requires reclassification of financial statements for earlier periods for comparative purposes. In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an Enterprise and Related Information." This statement requires that financial information be reported on the basis used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS 131 is effective for the Company's fiscal year 1999 and requires restatement of all previously reported information for comparative purposes. 7. Subsequent Events On December 17, 1997, the Company's Board of Directors approved the repricing of certain employee stock options with an exercise price in excess of the fair market value of the Company's common stock on January 12, 1998. The exercise price of such employee stock options was reset to the closing market price on January 12, 1998. All such options retain their original vesting schedules but are subject to a nine-month period in which exercises are prohibited. Stock options held by executive officers and directors were not eligible for such repricing. On December 23, 1997, the Company redeemed its convertible subordinated notes totaling $110 million. Under the terms of the note agreement, cash payments related to principal, accrued interest and prepayment penalties totaled approximately $115 million. 3Com Corporation Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company has restated its consolidated financial statements for the three and six months ended November 30, 1997 and 1996, and the fiscal year ended May 31, 1997. For a detailed description of the restatements, please see Notes 1 and 2 of Notes to Consolidated Financial Statements. The following Management's Discussion and Analysis of Financial Condition and Results of Operations pertains to the consolidated financial statements, as restated. Results of Operations - --------------------- The following table sets forth, for the periods indicated, the percentage of total sales represented by the line items reflected in the Company's consolidated statements of operations: Three Months Ended Six Months Ended November 30, November 30, ------------------ ---------------- 1997 1996 1997 1996 ---- ---- ---- ---- Sales.......................... 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales.................. 53.9 51.8 52.8 52.3 ----- ----- ----- ----- Gross margin................... 46.1 48.2 47.2 47.7 ----- ----- ----- ----- Operating expenses: Sales and marketing.......... 28.2 17.3 22.9 17.2 Research and development..... 12.1 7.8 10.3 7.6 General and administrative............. 6.0 3.9 4.8 3.8 Purchased in-process technology................. - - - 1.9 Merger-related charges....... (0.1) 0.5 9.7 0.3 ----- ----- ----- ----- Total operating expenses... 46.2 29.5 47.7 30.8 ----- ----- ----- ----- Operating income (loss)........ (0.1) 18.7 (0.5) 16.9 Interest and other income, net.......................... 0.6 0.3 0.4 0.2 ----- ----- ----- ----- Income (loss) before income taxes........................ 0.5 19.0 (0.1) 17.1 Income tax provision........... 0.2 7.0 1.6 7.0 ----- ----- ----- ----- Net income (loss).............. 0.3 % 12.0 % (1.7)% 10.1 % ===== ===== ===== ===== Excluding merger-related and purchased in-process technology charges: Total operating expenses.. 46.3 % 29.0 % 38.0 % 28.6 % Operating income (loss)... (0.2) 19.2 9.1 19.0 Net income................ 0.2 12.4 6.2 12.3 Sales in the second quarter of fiscal 1998 totaled $1.2 billion, a decrease of $262.8 million or 18 percent from the corresponding quarter a year ago. Sales of network systems products (e.g., switches, routers, hubs, and remote access concentrators) in the second quarter of fiscal 1998 decreased three percent from the same quarter one year ago and decreased 16 percent compared to the first quarter of fiscal 1998. Sales of network systems products represented 50 percent of total sales in the second quarter of fiscal 1998, compared to 42 percent in the year ago quarter. Sales of client access products (e.g., modems and network interface cards (NICs) in the second quarter of fiscal 1998 decreased 29 percent from the same quarter a year ago and 32 percent from the first quarter of fiscal 1998. Net sales of modem products during the second quarter were approximately $325 million. Sales of client access products in the second quarter of fiscal 1998 represented 50 percent of total sales compared to 58 percent in the second quarter of fiscal 1997. Domestic sales represented 58 percent of total sales for the second quarter of fiscal 1998. Domestic and international sales decreased 17 percent and 19 percent, respectively, when compared to the second quarter of fiscal 1997. The Company also experienced a sequential decline from the first quarter of fiscal 1998 in domestic and international sales of 22 percent and 29 percent, respectively. Sales in the first six months of fiscal 1998 totaled $2.8 billion, an increase of $23.3 million or one percent from the corresponding period a year ago. Sales of network systems products in the first six months of fiscal 1998 increased 8 percent from the same period one year ago, and represented 47 percent of total sales, compared to 44 percent in the year ago period. Sales of client access products in the first six months of fiscal 1998 decreased five percent from the same period one year ago, and represented 53 percent of total sales, compared to 56 percent in the first six months of fiscal 1997. Domestic sales for the first six months of fiscal 1998 comprised 56 percent of total sales compared to 60 percent in the same period a year ago. Domestic sales decreased five percent while international sales increased nine percent when compared to the first six months of fiscal 1997. During the quarter, the Company began transitioning to next generation platforms across several major product categories. For example, the Company introduced and began shipping new CoreBuilderTM High-Function Switches and began shipping the Total ControlTM HiPerTM Access System. In addition, the pricing environment continued to be very competitive, and although the Company experienced significant year-over-year unit growth in key products such as Fast Ethernet NICs and workgroup switches, these gains were partially offset by declines in average selling prices. The Company believes that the year-over-year decrease in second quarter sales and the sequential decrease in sales from the first quarter of fiscal 1998 is due to a variety of factors, including those discussed below. In light of information received late in the second quarter, the Company adopted a new inventory business model. The new model generally calls for fewer weeks supply of inventory in the channel. In order to begin implementing the new model, the Company constrained sales into its distribution channels. The Company made progress during the second quarter in implementing the new model. The Company believes another factor affecting sales, in particular modem and remote access concentrator sales, was the failure of the International Telecommunications Union (ITU) to determine a standard for 56 Kbps technology. The Company believes that the delay in finalizing such standards resulted in customers postponing buying decisions. During the second quarter of fiscal 1998, sales in the Asia Pacific region compared to the second quarter of fiscal 1997 and the first quarter of fiscal 1998 decreased nine percent and 35 percent, respectively. Historically, the Asia Pacific region had been a high growth region for the networking industry and the Company. During the second quarter of fiscal 1998, however, several Asian countries experienced a weakening of their local currencies and turmoil in their financial markets and institutions, which the Company believes adversely affected financial results for the second quarter of fiscal 1998. An additional factor affecting second quarter results was an apparent slowdown in the growth of the networking industry. Recent reports by industry sources indicated that the networking industry worldwide grew by less than 20 percent during 1997, well below historical growth rates. Gross margin as a percentage of sales was 46.1 percent in the second quarter of fiscal 1998, compared to 48.2 percent in the second quarter of fiscal 1997 and 48.0 percent in the first quarter of fiscal 1998. The decline in margins during the second quarter of fiscal 1998 resulted, in part, from period costs being a higher percentage of sales. Margins also reflected higher sales of certain NICs and workgroup switching products which have lower margins than other NICs and workgroup switching products. These factors were partially offset by increased sales of higher margin modem products, such as the U.S. Robotics (registered trademark) brand 56 Kbps modem with x2TM technology. Gross margin as a percentage of sales was 47.2 percent in the first six months of fiscal 1998, compared to 47.7 percent for the first six months of fiscal 1997. Operating expenses in the second quarter of fiscal 1998 were $553.3 million or 46.2 percent of sales, compared to $429.5 million or 29.5 percent of sales in second quarter of fiscal 1997 and $777.8 million or 48.7 percent of sales in the first quarter of fiscal 1998. Operating expenses in the first six months of fiscal 1998 were $1,331.2 million or 47.7 percent of sales, compared to $853.8 million or 30.8 percent of sales in first six months of fiscal 1997. Operating expenses as a percentage of sales were higher than historical levels primarily due to the reduced level of sales for the second quarter of fiscal 1998, as discussed above. Excluding a charge of $6.6 million associated with 3Com's acquisition of OnStream Networks, Inc. (OnStream), operating expenses would have been $422.9 million, or 29.0 percent of sales for the second quarter of fiscal 1997. Excluding the merger-related charge of $268.6 million in the first six months of fiscal 1998, operating expenses would have been $1,062.6 million or 38.0 percent of sales. Sales and marketing expenses in the second quarter of fiscal 1998 increased $85.2 million or 34 percent from the second quarter of fiscal 1997 and $36.0 million or 12 percent from the first quarter of fiscal 1998. Sales and marketing expenses as a percentage of sales increased to 28.2 percent of sales in the second quarter of fiscal 1998, from 17.3 percent in the corresponding fiscal 1997 period and 18.9 percent in the first quarter of fiscal 1998. Sales and marketing expenses in the first six months of fiscal 1998 increased $165.1 million or 35 percent from the first six months of fiscal 1997. The increase in absolute dollars primarily reflected an increase in field sales, marketing and customer support. Research and development expenses in the second quarter of fiscal 1998 increased $31.7 million or 28 percent from the year-ago period, and $2.2 million or 2 percent from the first quarter of fiscal 1998. Research and development expenses increased to 12.1 percent of total sales in the second quarter of fiscal 1998, compared to 7.8 percent in second quarter of fiscal 1997 and 8.9 percent in the first quarter of fiscal 1998. Research and development expenses in the first six months of fiscal 1998 increased $76.4 million or 36 percent from the year-ago six-month period. The increase in research and development expenses in absolute dollars was primarily attributable to the cost of developing the Company's new products in the areas of client access, switching, and network management, and its expansion into new technologies and markets. The Company believes the timely introduction of new technologies and products is crucial to its success, and plans to continue to make acquisitions or strategic investments to accelerate time to market where appropriate. General and administrative expenses in the second quarter of fiscal 1998 increased $14.8 million or 26 percent from the same period a year ago, and $8.4 million or 13 percent from the first quarter of fiscal 1998. General and administrative expenses increased to 6.0 percent of total sales in the second quarter of fiscal 1998, compared to 3.9 percent in the second quarter of fiscal 1997 and 4.0 percent in the first quarter of fiscal 1998. General and administrative expenses in the first six months of fiscal 1998 increased $28.0 million or 26 percent from the same period a year ago. The increase in general and administrative expenses in absolute dollars primarily reflected an expansion of the Company's infrastructure. During the second quarter of fiscal 1998, merger-related charges were a net credit of $1.2 million. A $15.4 million reduction in previously recorded merger-related costs, primarily due to a reduction in the estimate of costs associated with duplicate facilities, was partially offset by $14.2 million of product swap-out costs incurred during the quarter. Interest and other income, net, increased $4.1 million or 116 percent compared to the second quarter of fiscal 1997 and $4.7 million compared to the first quarter of fiscal 1998. Interest and other income, net, increased approximately $4.8 million in the first six months of fiscal 1998 compared to the first six months of fiscal 1997. Such increases were due to higher interest income in the second quarter of fiscal 1998 and lower foreign currency losses. The majority of the Company's sales are denominated in U.S. Dollars. Where available, the Company enters into foreign exchange forward contracts to hedge certain balance sheet exposures and intercompany balances against future movements in foreign exchange rates. The Company's effective income tax rate was approximately 34.4 percent in the second quarter of fiscal 1998 compared to 37.0 percent in the second quarter of fiscal 1997. Excluding the merger-related charge associated with OnStream, the pro forma income tax rate was 36.1 percent for the second quarter of fiscal 1997. The Company recorded a tax provision of $44.6 million for the first six months of fiscal 1998, compared to $193.3 million for the first six months of fiscal 1997. The provision in the first six months of fiscal 1998 reflected the non-deductibility of certain costs associated with the U.S. Robotics merger. Excluding these costs, the pro forma effective income tax rate was 35.0 percent for the first six months of fiscal 1998. The provision for the first six months of fiscal 1997 reflected the non-deductibility of the purchased in-process technology charge associated with the acquisition of Scorpio and merger-related charge associated with OnStream. Excluding these charges, the pro forma income tax rate was 36.2 percent for the first six months of fiscal 1997. Net income for the second quarter of fiscal 1998 was $4.0 million, or $0.01 per share, compared to net income of $174.6 million, or $0.49 per share, for the second quarter of fiscal 1997. Excluding the merger-related charge associated with OnStream, net income was $181.2 million, or $0.51 per share for the second quarter of fiscal 1997. Net loss for the first six months of fiscal 1998 was $47.2 million, or $0.13 per share, compared to net income of $279.6 million, or $0.79 per share, for the first six months of fiscal 1997. Excluding the merger-related charges associated with U.S. Robotics, net income was $172.8 million, or $0.48 per share for the first six months of fiscal 1998. Excluding the purchased in-process technology and merger-related charges associated with Scorpio and OnStream, net income was $340.2 million, or $0.96 per share for the first six months of fiscal 1997. Business Environment and Risk Factors This report contains certain forward looking statements, including statements regarding future trends in market growth, sales, gross margins, and inventory levels. Actual results could vary materially based on a number of factors, including but not limited to those set forth below. The Company participates in a highly volatile industry which is characterized by vigorous competition for market share, rapid technological development, consolidations, and uncertainty over adoption of industry standards. This has in the past resulted and could in the future result in aggressive pricing practices and increased competition, both from start- up companies and from well-capitalized computer systems, communications and other major technology companies. For example, in the third quarter of fiscal 1997, a major competitor reduced its average selling prices on Fast Ethernet NIC products by approximately 40 percent. The Company immediately responded with similar price cuts. As a result, the Company experienced a significant downward pressure on this product's gross margin and an accelerated transition from 10 Mbps Ethernet to Fast Ethernet NICs. In addition, as new competitors enter the market and offer competing products, pricing may be affected. The Company believes there is a risk of downward pricing pressure on the Company's products, including products incorporating 56 Kbps modem technology. Pricing pressure intensified across a variety of the Company's products during the second quarter of fiscal 1998, and may intensify in coming quarters. Recently, market researchers have reported slower industry growth worldwide in calendar 1997 than in the past. Although market researchers generally forecast a small increase in networking growth rates in calendar 1998 from 1997 levels, there can be no assurance that this will occur. Similarly, there can be no assurances that the Company's results in any particular quarter will fall within market researchers' forecasted ranges. The Company sells a significant portion of its products to distributors and resellers. In turn, such distributors and resellers maintain significant levels of the Company's products in their inventories. The Company attempts to ensure appropriate levels of inventory are available to end users by working closely with these resellers and distributors. In light of information received late in the second quarter, the Company adopted a new inventory business model. The new model generally calls for fewer weeks supply of inventory in the channel. In order to begin implementing the new model, the Company constrained sales into its distribution channels. The Company made progress during the second quarter in implementing the new model. However, the Company anticipates that the full implementation of the new inventory business model will require additional reductions in channel inventory during the third quarter and possibly beyond. Such reductions could adversely affect the Company's sales and results of operations. The Company distributes a significant portion of its products through third party distributors and resellers. Due to consolidation in the distribution and reseller channels and the Company's increased volume of sales into these channels, the Company has experienced an increased concentration of credit risk. While the Company continually monitors and manages this risk, financial difficulties on the part of one or more of the Company's resellers may have a material adverse effect on the Company's results of operations. The Company's operations in certain markets, which are characterized by economic and political instability and currency fluctuations, may subject the Company's resellers to financial difficulties which may have an adverse impact on the Company. For example, the recent instability in the Asian financial markets appears to have negatively impacted sales, and may continue to negatively impact sales in those markets in a number of ways, including: increasing competition from local competitors that offer sales terms in local currencies, reducing access to sources of capital needed by customers to make purchases, and slowing end user purchases. Should the Asian economic environment fail to improve, the Company would consider continuing to expand its exposure to foreign currencies to preserve long-term customer relationships. A significant fluctuation in foreign currency could have an adverse impact on the Company. Finally, the aforementioned instability may increase credit risks as the recent weakening of certain Asian currencies may result in insolvencies or otherwise impair customers' ability to repay existing obligations. Depending on the situation in Asia in coming quarters, any or all of these factors could adversely impact the Company's financial results in future quarters. Typically, quarterly sales and results of operations depend on the volume and timing of orders, and the ability to fulfill them within the quarter. The Company's customers historically request fulfillment of orders in a short period of time, resulting in a minimal backlog and limited visibility to future sales trends. Should incoming order rates decline, if ordered products are not readily available, or if the Company does not immediately fill orders in an attempt to further reduce channel inventory levels, the Company's results of operations could be adversely affected. The Company historically has sold a large percentage of its products in the third month of each quarter. This subjects the Company to additional business risks due to unexpected disruptions in functions, including but not limited to manufacturing, order management, information systems and shipping, which could have an adverse affect on the Company's results of operations. The Company's success depends, in substantial part, on the timely and successful introduction of new products. An unexpected change in one or more of the technologies affecting network communications, or in market demand for products based on a particular technology, or entry by new competitors, could lead to a slowdown in sales of certain products, and could have a material adverse effect on the Company's operating results if the Company does not respond timely and effectively to such changes. The Company is engaged in research and development activities in certain emerging LAN and WAN high- speed standards and high-speed technologies, such as: Fast Ethernet, Gigabit Ethernet, ATM, 56 Kbps, ISDN, xDSL and data- over-cable. As the industry standardizes on high-speed technologies, there can be no assurance that the Company will be able to respond promptly and cost-effectively to compete in the marketplace. The Company's success depends, in substantial part, on the adoption of industry standards, the timely and successful introduction of products that are compliant with new industry standards, and the Company's ability to address competing technological and product developments. Delays in adoption of industry standards or adoption of standards incorporating competing technologies or competitors' intellectual property could adversely affect the Company's sales or operating margins. In December, a technical compromise was reached among ITU members that may result in the determination of a standard for 56 Kbps technology in January 1998 with official adoption in September. While the Company believes that it will be able to comply quickly with this proposed standard and offer its customers software upgrades to the new standard, there can be no assurances that the development of this standard and the Company's compliance with it will proceed as rapidly or smoothly as expected or that these events will result in increased demand for the Company's 56 Kbps products. Any benefits which the Company may derive from the expected adoption of this proposed standard will continue to be dependent upon the timing and extent to which the standard 56 Kbps technology is deployed by Internet Service Providers and accepted by Internet users. Moreover, consumer confusion regarding 56 Kbps technology, which has negatively impacted sales to date, may persist notwithstanding final determination of the ITU standard. The Company operates in an industry in which the ability to compete is dependent on the development or acquisition and protection of proprietary technology, which must be protected both to secure the benefits of the Company's innovations in its own products and to better enable the Company to license proprietary technology from others on acceptable terms. The Company attempts to perfect and preserve intellectual property rights in the technologies it develops through a combination of trade secrets, patents, copyrights and trademarks. There can be no assurance that the steps taken by the Company will be sufficient to prevent misappropriation or infringement of its intellectual property or that competitors will not independently develop technologies or procure intellectual property rights that are equivalent or superior to those of the Company. The Company, from time to time, must negotiate licenses with third parties in order to obtain rights to incorporate proprietary technologies, including de facto and official standard networking and communications protocols and specifications, into its products. In most instances, the owners of intellectual property rights covering technologies required to implement official standards have undertaken to license such rights on reasonable and non-discriminatory terms, and as a general rule the Company has no reason to believe that these parties will fail to honor their undertakings and the Company anticipates that it will be able to enter into licenses with such parties on reasonable terms that will be comparable to those available to its competitors. There can be no assurances in this regard, however, and there is always the potential for disputes and litigation, even where a third party owner of intellectual property rights has undertaken to make licenses generally available or has actually entered into licenses upon which the Company has relied in designing and making its products. By way of example, the Company is currently involved in disputes with Motorola, Inc. over patents related to certain modem standards and with Livingston Enterprises, Inc. over certain software previously licensed by U.S. Robotics. See Part II. Item 1. Legal Proceedings. The Company's failure to obtain and maintain licenses for all of the third party intellectual property rights required for the manufacture, sale and use of its products, particularly those which must comply with industry standard protocols and specifications in order to be commercially viable, could have a material adverse effect on the Company's business, results of operation, and financial condition. The Company derives a portion of its sales from original equipment manufacture (OEM) partners including PC companies who bundle 3Com network interface cards and modems, and incorporate chip-sets into their products. The Company believes that future sales growth of these products is dependent, in part, on the Company's ability to strengthen relationships and increase business with OEM partners. OEM sales are characterized as having lower average selling prices and gross margins. Consequently, the Company's overall gross margin percentage may be adversely impacted if OEM sales become a larger percentage of the Company's business. Certain OEMs in the PC industry are integrating communication subsystems on the PC motherboard. If such integration becomes a trend, the Company's future sales growth may be adversely impacted. Acquisitions of complementary businesses and technologies, including technologies and products under development, are an active part of the Company's overall business strategy. Certain of the Company's major competitors have also been engaged in merger and acquisition transactions. Such consolidations by competitors are creating entities with increased market share, customer base, technology and marketing expertise, sales force size, or proprietary technology in segments in which the Company competes. These developments may adversely affect the Company's ability to compete in such segments. In June 1997, the Company merged with U.S. Robotics, the largest acquisition in the history of the networking industry. Large acquisitions are challenging, in general, and there can be no assurance that products, technologies, distribution channels, customer support operations, management information systems, key personnel and businesses of U.S. Robotics or other acquired companies will be effectively assimilated into the Company's business or product offerings, or that such integration will not adversely affect the Company's business, financial condition or results of operations. The inability of management to successfully integrate the operations of the two companies in a timely manner could have a material adverse effect on the business, results of operations, and financial condition of the Company. The high-growth nature of the computer networking industry, coupled with critical time-to-market factors, has caused increased competition and consolidation. As a result, there has been a significant increase in the cost of acquiring computer networking companies. There can be no assurance that the Company will continue to be able to identify and consummate suitable acquisition transactions in the future. However, should the Company consummate acquisitions in the future, the impact may result in increased dilution of the Company's future earnings. The Company's products are covered by warranties and the Company is subject to contractual commitments. If unexpected circumstances arise such that the product does not perform as intended and the Company is not successful in resolving product quality or performance issues, there could be an adverse impact on the financial results of the Company. 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 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. Recruiting and retaining skilled personnel, especially in certain locations in which the Company operates, is highly competitive. Recently, for example, recruiting of qualified engineers has been extremely competitive. If the Company cannot successfully recruit and retain such skilled personnel, the Company's financial results may be adversely affected. The Company is in the process of transitioning its manufacturing requirements planning, accounts payable, purchasing and intercompany accounting systems to a new set of applications which operate on a client server based platform. The third quarter of fiscal 1998 will be the first quarter in which some of the Company's major manufacturing sites utilize the new system. As a result of the planned transition to the new client server platform, the Company may experience production, development, sales processing, financial system, or other disruptions, which may have an adverse financial effect on the Company. Many computer systems were not designed with the year 2000 issues in mind, and may require significant hardware and software modifications. During the next few years, companies owning and operating such systems may plan to devote a substantial portion of their information systems' spending to make such modifications and divert spending away from networking solutions. This could have an adverse impact on the Company's sales and results of operations. The Company believes the majority of its major systems are currently Year 2000 compliant, and costs to transition the Company's remaining systems to Year 2000 compliance are not anticipated to be material. The market price of the Company's common stock has been, and may continue to be, extremely volatile. Factors such as new product, pricing or acquisition announcements by the Company or its competitors, quarterly fluctuations in the Company's operating results, challenges associated with integration of businesses and general conditions in the data networking market, such as a decline in industry growth rates, 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. Because of the foregoing factors, as well as other factors affecting the Company's operating results, past trends and performance should not be presumed by investors to be an accurate indicator of future results or trends. Liquidity and Capital Resources Cash, equivalents and short-term investments at November 30, 1997 were $1.1 billion, increasing $245.9 million from May 31, 1997. For the six months ended November 30, 1997, net cash generated from operating activities was $393.9 million. Accounts receivable at November 30, 1997 decreased $87.7 million from May 31, 1997 to $908.4 million. Days sales outstanding in receivables increased to 68 days at November 30, 1997, compared to 65 days at May 31, 1997 due primarily to a higher concentration of sales in the third month of the quarter ended November 30, 1997, compared to the third month of the quarter ended May 31, 1997. Inventory levels at November 30, 1997 increased $122.2 million, of which $120.1 million was finished goods, from the prior fiscal year-end to $636.0 million. Inventory turnover was 4.9 turns at November 30, 1997, compared to 6.4 turns at May 31, 1997, primarily as a result of the increase in the Company's inventory due to reduced sales levels, as previously discussed. During the six months ended November 30, 1997, the Company made $211.2 million in capital expenditures. Major capital expenditures included upgrades and expansion of the Company's facilities in the U.K., Santa Clara, California and Illinois and the continuing development of the Company's worldwide information systems. As of November 30, 1997, the Company had approximately $170 million in capital expenditure commitments outstanding primarily associated with the construction and expansion of office and manufacturing space in Santa Clara, Illinois, the U.K., and Singapore. During the first six months of fiscal 1998, the Company received cash of $234.1 million from the sale of approximately 20 million shares of its common stock to employees through its employee stock purchase and option plans. These cash inflows related primarily to the exercise of stock options by employees of U.S. Robotics. Pursuant to a change-in-control feature of the U.S. Robotics' employee stock option plans, substantially all outstanding options held by employees of U.S. Robotics became fully vestedand exercisable upon closing of the merger in June 1997. In addition, the Section 16(b) affiliates of both U.S. Robotics and 3Com were subject to restrictions on the sale of their shares because of the rules applicable to a pooling-of- interests and such affiliate restrictions lapsed in September 1997. During the first quarter of fiscal 1998, the Company signed a lease, which replaces a previous land lease, for 300,000 square feet of office and research and development space and a data center to be built on land adjacent to the Company's headquarters site. The lease expires in August 2002, with an option to extend the lease term for two successive periods of five years each. The Company has an option to purchase the property for $83.6 million, or at the end of the lease arrange for the sale of the property to a third party with the Company retaining an obligation to the owner for the difference between the sale price and $83.6 million, subject to certain provisions of the lease. Construction of the buildings began in July 1997, and the Company anticipates that it will occupy and begin lease payments in the second quarter of fiscal 1999. During the first quarter of fiscal 1998, the Company signed a lease, which replaces a previous land lease, for 525,000 square feet of office, research and development and manufacturing space to be built on land in Marlborough, Massachusetts. The lease expires in August 2002, with an option to extend the lease term for two successive periods of five years each. The Company has an option to purchase the property for $86.0 million, or at the end of the lease arrange for the sale of the property to a third party with the Company retaining an obligation to the owner for the difference between the sale price and $86.0 million, subject to certain provisions of the lease. Construction of the buildings began in the first quarter of fiscal 1998, and the Company anticipates that it will occupy and begin lease payments in the third quarter of fiscal 1999. During the first quarter of fiscal 1998, the Company signed a lease for an existing 400,000 square foot building and for 100,000 square feet to be built on adjacent land in Rolling Meadows, Illinois. The new and renovated facility will be used for research and development and office space. The lease expires in September 2002, with an option to extend the lease term for two successive periods of five years each. The Company has an option to purchase the property for $95.0 million, or at the end of the lease arrange for the sale of the property to a third party with the Company retaining an obligation to the owner for the difference between the sale price and $95.0 million, subject to certain provisions of the lease. The lessor began construction of the buildings in the second quarter of fiscal 1998, and the Company anticipates it will occupy and begin lease payments in the first quarter of fiscal 1999. The three aforementioned leases require the Company to maintain specified financial covenants, all of which the Company was in compliance with as of November 30, 1997. The Company has a $100 million revolving bank credit agreement which expires December 20, 1999. Payment of cash dividends are permitted under the credit agreement, subject to certain limitations based on net income levels of the Company. The Company has not paid and does not anticipate it will pay cash dividends on its common stock. The credit agreement requires the Company to maintain specified financial covenants. As of November 30, 1997, there were no outstanding borrowings under the credit agreement and the Company was in compliance with all required covenants. During the quarter ended August 31, 1997, the Company repaid $168.1 million of short-term borrowings incurred by U.S. Robotics, which included $33.3 million of borrowings that occurred between May 25 and June 12, 1997. On December 23, 1997, the Company redeemed convertible subordinated notes totaling $110 million. Under the terms of the agreement, the Company paid cash of approximately $115 million for principal, accrued interest and early payment penalties. During the quarter ended August 31, 1997, the Company completed the merger transaction with U.S. Robotics. As a result, the Company recorded merger-related charges of $269.8 million. The remaining merger-related accrual at November 30, 1997 was approximately $162 million. Total expected cash expenditures relating to the merger charge are estimated to be approximately $138 million, of which approximately $64 million was disbursed prior to November 30, 1997. Termination benefits paid to 561 employees terminated through November 30, 1997 (approximately 56 percent of the total planned severances) were approximately $30 million. The remaining severance and outplacement amounts are expected to be paid within the next nine months. Based on current plans and business conditions, the Company believes that its existing cash and equivalents, temporary cash investments, cash generated from operations and the available revolving credit agreement will be sufficient to satisfy anticipated operating cash requirements for at least the next twelve months. Effects of Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." This Statement establishes and simplifies standards for computing and presenting earnings per share. SFAS 128 will be effective for the Company's third quarter of fiscal 1998, and requires restatement of all previously reported earnings per share data that are presented. Early adoption of this Statement is not permitted. SFAS 128 replaces primary and fully diluted earnings per share with basic and diluted earnings per share. Under SFAS 128, the Company's reported earnings per share for the three and six months ended November 30, 1997 and 1996 would have been: Three Months Ended Six Months Ended November 30, November 30, 1997 1996 1997 1996 ---- ---- ---- ---- Basic $ 0.01 $ 0.53 $ (0.14) $ 0.85 Diluted $ 0.01 $ 0.49 $ (0.14) $ 0.79 In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components. SFAS 130 will be effective for the Company's fiscal year 1999 and requires reclassification of financial statements for earlier periods for comparative purposes. In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an Enterprise and Related Information." This statement requires that financial information be reported on the basis used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS 131 is effective for the Company's fiscal year 1999 and requires restatement of all previously reported information for comparative purposes. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to lawsuits in the normal course of its business. The Company notes that (i) litigation in general and patent litigation in particular can be expensive and disruptive to normal business operations and (ii) the results of complex legal proceedings can be very difficult to predict with any certainty. Securities Litigation In December 1997 and January 1998, several putative shareholder class action lawsuits were filed against the Company and certain of its officers and directors in the United States District Court for the Northern District of Illinois and in the United States District Court for the Northern District of California. The complaints allege violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934. The complaints allege class periods between May 19, 1997 and November 14, 1997 and do not specify the damages sought. The Company believes it has meritorious defenses to the claims and intends to contest the lawsuits vigorously. An unfavorable resolution of the actions could have a material adverse effect on the business, results of operations or financial condition of the Company. U.S. Robotics, certain of its directors, and the Company were named as defendants in shareholder class actions relating to the merger between the Company and U.S. Robotics. (In re: U.S. Robotics Corporation Shareholders Litigation, Delaware Chancery Court Consolidated Civil Action No. 15580). On October 7, 1997, all claims related to such suits were settled pursuant to a settlement approved by the Delaware Chancery Court. Results of the settlement did not have a material effect on the Company's results of operations or financial condition. On March 24, and May 5, 1997, putative shareholder class action lawsuits, entitled Hirsch v. 3Com Corporation, et al., Civil Action No. CV764977, and Kravitz v. 3Com Corporation, et al., Civil Action No. CV765962, respectively, were filed against the Company and certain of its officers and directors in the California Superior Court, Santa Clara County (the Superior Court). Following resolution of a demurrer filed by the Company, the remaining causes of action in the complaints allege violations of the state securities laws, specifically sections 25400 and 25500 of the California Corporations Code. The complaints, which cover a putative period of September 24, 1996 through February 10, 1997, do not specify the damages sought. The Company believes it has meritorious defenses to the claims and intends to contest the lawsuits vigorously. An unfavorable resolution of the actions could have a material adverse effect on the business, results of operations or financial condition of the Company. Intellectual Property Litigation In September 1997, Livingston Enterprises, Inc. (Livingston) filed suit against U.S. Robotics in the United States District Court for the Northern District of California (Livingston Enterprises, Inc. v. U.S. Robotics Access Corporation, Case No. C-97-3551(CRB)), claiming copyright infringement, misappropriation of trade secrets, breach of contract and unfair competition with respect to certain software code previously licensed to U.S. Robotics for incorporation in certain of its remote access server and concentrator products. Livingston seeks injunctive relief and damages that are not specified as to amount. The Company believes it has meritorious defenses to Livingston's claims and intends to contest the lawsuit vigorously. In September 1997, Livingston filed a separate action in the same federal court (Livingston Enterprises, Inc. v. U.S. Robotics Access Corporation, Case No. C-97-3487 (CRB)) seeking a declaratory judgment to the effect that one of U.S. Robotics' U.S. patent is invalid and not infringed by Livingston's products, as well as unspecified damages. U.S. Robotics has answered this complaint and filed counterclaims alleging infringement of such patent by Livingston. An unfavorable resolution of the action could have a material adverse effect on the business, results of operations or financial condition of the Company. On April 26, 1997, Xerox Corporation filed suit against U.S. Robotics in the United States District Court for the Western District of New York (Xerox Corporation v. U.S. Robotics Corporation and U.S. Robotics Access Corp., No. 97-CV-6182T), claiming infringement of one United States Patent. The complaint alleges willful infringement and prays for unspecified damages and injunctive relief. In a press release dated April 30, 1997, Xerox alleged that its patent, issued January 21, 1997, "covers the use and recognition of handwritten text using an alphabet system designed especially for reliable recognition in pen computers," and that Palm Computing Corporation's (Palm) PalmPilotTM hand-held computer and "Graffiti" software in its PalmTM operating system infringe the Xerox patent. Palm is a wholly-owned subsidiary of the Company. The Company believes it has meritorious defenses to Xerox's claims and intends to contest the lawsuit vigorously. An adverse resolution of the action could have a material adverse effect on the Company's results of operations and financial condition in the quarter in which such adverse resolution occurs. On February 13, 1997, Motorola, Inc. filed suit against U.S. Robotics in the United States District Court for the District of Massachusetts (Motorola, Inc. v. U.S. Robotics Corporation, et al., Civil Action No. 97-10339RCL), claiming infringement of eight United States patents. The complaint alleges willful infringement and prays for unspecified damages and injunctive relief. U.S. Robotics has filed an answer to Motorola's claims setting forth its defenses and asserting counterclaims which allege infringement of a U.S. Robotics patent, violation of antitrust laws, promissory estoppel and unfair competition. The Company believes it has meritorious defenses to the claims and intends to contest the lawsuit vigorously. An unfavorable resolution of the action could have a material adverse effect on the business, results of operations or financial condition of the Company. Consumer Litigation During 1997, three putative class action lawsuits were filed against the Company or its subsidiary, U.S. Robotics in the state courts of California and Illinois. Each of the actions seeks damages as a result of alleged misrepresentations by the Company or U.S. Robotics in connection with the sale of its new x2TM products and products upgradeable to x2 under various California and Illinois consumer fraud statutes and under common law theories including fraud and negligent misrepresentation. Plaintiffs in Bendall, et al. v. U.S. Robotics Corporation, et al., (No. 170441, Superior Court of Marin County, California), Lippman, et al v. 3Com, (No. 97 CH 09773, Circuit Court of Cook County, Illinois), and Michaels, et al. v. U.S. Robotics Access Corporation et al., (No. 94 CH 14417, Circuit Court of Cook County, Illinois) seek certification respectively of nationwide classes of purchasers of x2 technology during the approximate period November 1996 through at least May 1997. U.S. Robotics' motion to dismiss the Bendall action is presently pending; the Lippman action presently is stayed, and a responsive pleading is not yet due in the Michaels action. The complaints seek injunctive relief and an unspecified amount of damages. Two other actions purporting to be brought in the public interest have also been filed against U.S. Robotics in state court in California under California statutes arising out of U.S. Robotics alleged misrepresentation in connection with the sale of the x2 products. Levy v. U.S. Robotics Corporation, (No. 170968, Superior Court of Marin County, California) and Intervention Inc. v. U.S. Robotics Corporation, (No. 984352, Superior Court of San Francisco, California) seek injunctive and unspecified monetary relief. The Company believes it has meritorious defenses to these lawsuits and intends to contest the lawsuits vigorously. An unfavorable resolution of the actions could have a material adverse effect on the business, results of operations or financial condition of the Company. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on October 7, 1997. (b) Each of the persons named in the Proxy Statement as a nominee for director was elected and the proposals listed below were approved. The following are the voting results of the proposals: Proposal I In Favor Instructed Withheld - ---------- -------- ---------- -------- Election of Directors 294,476,345 57,881 1,516,491 Proposal II In Favor Opposed Abstain - ----------- -------- ------- ------- To approve an increase in the share reserve under the Company's 1983 Stock Option Plan by 7,000,000 shares. 255,933,552 38,672,866 1,444,299 Proposal III In Favor Opposed Abstain - ------------ -------- ------- ------- To ratify the appointment of Deloitte & Touche LLP as the Company's independent public accountants for the fiscal year ending May 31, 1998 294,752,931 510,203 787,583 Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------ ----------- 3.1 Certificate of Incorporation (13) 3.2 Certificate of Correction Filed to Correct a Certain Error in the Certificate of Incorporation (13) 3.3 Certificate of Merger (13) 3.4 Bylaws of 3Com Corporation, As Amended (13) 4.1 Indenture Agreement between 3Com Corporation and The First National Bank of Boston for the private placement of convertible subordinated notes dated as of November 1, 1994 (Exhibit 5.2 to Form 8-K) (6) 4.2 Placement Agreement for the private placement of convertible subordinated notes dated November 8, 1994 (Exhibit 5.1 to Form 8-K) (6) 4.3 Amended and Restated Rights Agreement dated December 31, 1994 (Exhibit 10.27 to Form 10-Q) (7) 10.1 1983 Stock Option Plan, as amended (Exhibit 10.1 to Form 10-K) (3)* 10.2 Amended and Restated Incentive Stock Option Plan (2)* 10.3 License Agreement dated March 19, 1981 (1) 10.4 First Amended and Restated 1984 Employee Stock Purchase Plan, as amended (Exhibit 19.1 to Form 10-Q) (4)* 10.5 Second Amended and Restated 1984 Employee Stock Purchase Plan (Exhibit 10.5 to Form 10-Q)(8)* 10.6 3Com Corporation Director Stock Option Plan, as amended (Exhibit 19.3 to Form 10-Q) (4)* 10.7 Amended 3Com Corporation Director Stock Option Plan (Exhibit 10.8 to Form 10-Q)(8)* 10.8 3Com Corporation Restricted Stock Plan, as Amended (Exhibit 10.17 to Form 10-Q)(8)* 10.9 1994 Stock Option Plan (Exhibit 10.22 to Form 10-K) (5)* 10.10 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of November 20, 1996 (Exhibit 10.37 to Form 10-Q) (10) 10.11 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of November 20, 1996 (Exhibit 10.38 to Form 10-Q) (10) 10.12 Agreement and Plan of Reorganization among 3Com Corporation, OnStream Acquisition Corporation and OnStream Networks, Inc. dated as of October 5, 1996 (Exhibit 2.1 to Form S-4) (9) 10.13 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.19 to Form 10-Q) (12) 10.14 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.20 to Form 10-Q) (12) 10.15 Credit Agreement dated as of December 20, 1996 among 3Com Corporation, Bank of America National Trust and Savings Association, as Agent,and the Other Financial Institutions Party Hereto Arranged by BA Securities, Inc. (Exhibit 10.21 to Form 10-Q) (12) 10.16 Amended and Restated Agreement and Plan of Merger by and among 3Com Corporation, TR Acquisitions Corporation, 3Com (Delaware) Corporation, and U.S. Robotics Corporation, dated as of February 26, 1997 and amended as of March 14, 1997(11) 10.17 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 25, 1997 for the Great America Phase III (PAL) site (13) 10.18 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 25, 1997 for the Great America Phase III (PAL) site (13) 10.19 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 29, 1997 for the Marlborough site (13) 10.20 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 29, 1997 for the Marlborough site (13) 10.21 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of August 11, 1997 for the Rolling Meadows site (13) 10.22 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of August 11, 1997 for the Rolling Meadows site 10.23 First Amendment to Credit Agreement (13) * Indicates a management contract or compensatory plan. (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant's Registration Statement on Form S-1 filed January 25, 1984 (File No. 2-89045) (2) Incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-4 filed on August 31, 1987 (File No. 33-16850) (3) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 27, 1991 (File No. 0-12867) (4) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed January 10, 1992 (File No. 0-12867) (5) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 31, 1994 (File No. 0-12867) (6) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 8-K filed on November 16, 1994 (File No. 0-12867) (7) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 13, 1995 (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 15, 1996 (File No. 0-12867) (9) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-4, originally filed on October 11, 1996 (File No. 333-13993) (10) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 13, 1997 (File No. 0-12867) (11) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-4, filed on March 17, 1997 (File No. 333-23465) (12) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed on April 11, 1997 (File No. 0-12867) (13) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed on October 14, 1997 (File No. 0-12867) (b) Reports on Form 8-K None. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 3Com Corporation (Registrant) Dated: March 18, 1998 By: /s/ Christopher B. Paisley --------------------- -------------------------- Christopher B. Paisley Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) EX-27 2
5 1,000 6-MOS MAY-31-1998 NOV-30-1997 539,748 596,062 908,401 (70,930) 635,972 3,087,809 1,234,805 (461,669) 3,966,062 1,297,674 0 0 0 1,564,586 996,400 3,966,062 2,794,705 2,794,705 1,476,773 2,117,485 656,148 14,986 8,731 (2,646) 44,566 (47,212) 0 0 0 (47,212) (0.13) (0.13)
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