-----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, Uu+Dzn8cGkc/SPYpAbDoaYUWLGqayCeCJx7disj8dc8Eti01yjhW8MfOQnL52dv2 5QwTx/PQRkJflpIslTjPbg== 0000738076-99-000001.txt : 19990112 0000738076-99-000001.hdr.sgml : 19990112 ACCESSION NUMBER: 0000738076-99-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981127 FILED AS OF DATE: 19990111 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 SEC ACT: SEC FILE NUMBER: 000-12867 FILM NUMBER: 99503962 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 1 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q Quarterly report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the Quarterly Period Ended November 27, 1998 Commission File No. 0-12867 or Transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the transition period from to ____________ 3Com Corporation (Exact name of registrant as specified in its charter) Delaware 94-2605794 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5400 Bayfront Plaza 95052 Santa Clara, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (408) 326-5000 Former name, former address and former fiscal year, if changed since last report: N/A Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ....XX.... No .......... As of December 25, 1998, 358,764,498 shares of the Registrant's Common Stock were outstanding. 3Com Corporation Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations Three and Six Months Ended November 27, 1998 and November 30, 1997 Condensed Consolidated Balance Sheets November 27, 1998 and May 31, 1998 Condensed Consolidated Statements of Cash Flows Six Months Ended November 27, 1998 and November 30, 1997 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities and Use of Proceeds 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, Graffiti, Palm Computing and U.S. Robotics are registered trademarks of 3Com Corporation or its subsidiaries. Palm III and x2 are trademarks of 3Com Corporation or its subsidiaries. PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3Com Corporation Condensed Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended -------------------------- -------------------------- November 27, November 30, November 27, November 30, 1998 1997 1998 1997 ---- ---- ---- ---- Sales $1,540,537 $1,197,189 $2,946,048 $2,794,705 Cost of sales 817,503 645,344 1,593,278 1,476,773 ---------- ---------- ---------- ---------- Gross margin 723,034 551,845 1,352,770 1,317,932 ---------- ---------- ---------- ---------- Operating expenses: Sales and marketing 321,693 338,334 625,271 640,712 Research and development 157,758 144,978 306,592 287,776 General and administrative 64,588 71,265 123,994 134,130 Merger-related charges (credits) and other 638 (1,229) (9,580) 268,558 ---------- ---------- ---------- ---------- Total operating expenses 544,677 553,348 1,046,277 1,331,176 ---------- ---------- ---------- ---------- Operating income (loss) 178,357 (1,503) 306,493 (13,244) Interest and other income, net 12,274 7,637 21,919 10,598 ---------- ---------- ---------- ---------- Income (loss) before income taxes 190,631 6,134 328,412 (2,646) Income tax provision 57,718 2,113 101,808 44,566 ---------- ---------- ---------- ---------- Net income (loss) $ 132,913 $ 4,021 $ 226,604 $ (47,212) ========== ========== ========== ========== Net income (loss) per share: Basic $ 0.37 $ 0.01 $ 0.63 $ (0.14) Diluted $ 0.36 $ 0.01 $ 0.62 $ (0.14) Shares used in computing per share amounts: Basic 358,302 350,600 358,418 346,159 Diluted 368,207 365,085 367,316 346,159 See Notes to Condensed Consolidated Financial Statements. 3Com Corporation Condensed Consolidated Balance Sheets (In thousands, except par value) November 27, May 31, 1998 1998 ------------ ------- (Unaudited) ASSETS Current assets: Cash and equivalents $ 607,106 $ 528,981 Short-term investments 743,749 547,097 Accounts receivable, net 1,117,449 849,640 Inventories, net 443,488 644,771 Deferred income taxes 368,772 430,182 Other 93,060 134,001 ---------- ---------- Total current assets 3,373,624 3,134,672 Property and equipment, net 839,945 858,779 Deposits and other assets 102,812 87,069 ---------- ---------- Total assets $4,316,381 $4,080,520 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 383,611 $ 332,992 Accrued liabilities and other 677,218 673,311 Income taxes payable 196,093 177,612 ---------- ---------- Total current liabilities 1,256,922 1,183,915 Long-term debt 24,000 35,878 Deferred income taxes and other long-term obligations 58,365 53,232 Stockholders' equity: Preferred stock, no par value, 10,000 shares authorized; none outstanding - - Common stock, $.01 par value, 990,000 shares authorized; shares issued: November 27, 1998, 359,129; May 31, 1998, 358,870 1,754,399 1,730,676 Treasury stock at cost: 912 shares at November 27, 1998 and none at May 31, 1998 (31,650) - Unamortized restricted stock grants (6,168) (4,157) Retained earnings 1,260,722 1,079,775 Unrealized gain on investments, net 1,710 827 Accumulated translation adjustments (1,919) 374 ---------- ---------- Total stockholders' equity 2,977,094 2,807,495 ---------- ---------- Total liabilities and stockholders' equity $4,316,381 $4,080,520 ========== ========== See Notes to Condensed Consolidated Financial Statements. 3Com Corporation Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six Months Ended --------------------------- November 27, November 30, 1998 1997 ---- ---- Cash flows from operating activities: Net income (loss) $ 226,604 $ (47,212) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 131,836 128,201 Deferred income taxes 60,830 (81,971) Adjustment to conform fiscal year of pooled entity-U.S. Robotics - 15,052 Merger-related charges (credits) and other (9,580) 268,558 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (267,809) 87,679 Inventories 198,770 (173,432) Other current assets 38,592 (22,010) Accounts payable 50,619 19,281 Accrued liabilities and other 11,429 145,227 Income taxes payable 37,568 54,572 ---------- ---------- Net cash provided by operating activities 478,859 393,945 ---------- ---------- Cash flows from investing activities: Purchase of short-term investments (318,999) (269,631) Proceeds from short-term investments 120,538 209,603 Purchase of property and equipment (118,201) (211,222) Proceeds from the sale of property and equipment 14,746 - Business acquired in purchase transaction (6,258) - Other, net (2,402) (25,418) ---------- ---------- Net cash used for investing activities (310,576) (296,668) ---------- ---------- Cash flows from financing activities: Issuance of common stock 53,147 234,110 Repurchase of common stock (130,398) - Repayments of short-term debt, notes payable and capital lease obligations - (168,066) Repayments of long-term borrowings (12,000) (12,397) Net proceeds from issuance of debt - 33,300 Other, net (907) 4,287 ---------- ---------- Net cash (used for) provided by financing activities (90,158) 91,234 ---------- ---------- Increase in cash and equivalents 78,125 188,511 Cash and equivalents, beginning of period 528,981 351,237 ---------- ---------- Cash and equivalents, end of period $ 607,106 $ 539,748 ========== ========== See Notes to Condensed Consolidated Financial Statements. 3Com Corporation Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The unaudited condensed consolidated financial statements have been prepared by 3Com Corporation (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 condensed consolidated financial statements include all adjustments necessary for a fair presentation of the Company's financial position as of November 27, 1998, and the results of operations for the three and six months ended November 27, 1998 and November 30, 1997 and cash flows for the six months ended November 27, 1998 and November 30, 1997. On June 1, 1998, the Company adopted a 52-53 week fiscal year ending on the Friday nearest to May 31, which for fiscal 1999 will be May 28, 1999. Previously, the Company operated on a 52-53 week fiscal year ending on the Sunday nearest to May 31. This change did not have a significant effect on the Company's condensed consolidated financial statements for the three and six months ended November 27, 1998 as compared to the three and six months ended November 30, 1997. The results of operations for the three and six months ended November 27, 1998 may not necessarily be indicative of the results to be expected for the fiscal year ending May 28, 1999. These condensed consolidated 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, 1998. 2. U.S. Robotics Merger-Related Charges (Credits) and Other On June 12, 1997, 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 (WAN), 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 all options to purchase U.S. Robotics' stock, which were converted into options to purchase approximately 31 million shares of the Company's common stock, pursuant to the terms of the merger. In connection with this merger, through November 27, 1998, the Company has recorded aggregate merger-related charges of $253.8 million, which included approximately $210.0 million of integration expenses and $43.8 million of direct transaction costs (consisting primarily of investment banking and other professional fees). Integration expenses included: - - $49.3 million related to the closure and elimination of owned and leased facilities, primarily duplicate corporate headquarters, distribution sites and sales offices; - - $57.6 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 included personnel involved in duplicate corporate services, manufacturing and logistics, product organizations and sales; - - $38.1 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 - - $65.0 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 included inventory write-offs, costs related to return of discontinued products, and noncancelable purchase commitments. During the second quarter of fiscal 1999, the Company recorded approximately $3.8 million of merger charges primarily related to an increase in the estimates for remaining charges associated with duplicate facilities which were included in merger-related charges (credits) and other. The remaining U.S. Robotics merger-related accrual at November 27, 1998 was approximately $25.3 million. Total expected cash expenditures relating to the U.S. Robotics merger charge are estimated to be approximately $116 million, of which approximately $104 million was disbursed prior to November 27, 1998. Benefits paid to approximately 900 employees terminated through November 27, 1998 were approximately $57 million. Substantially all benefits have been paid. Other charges (credits) includes a $4.2 million net gain on the sale of land, which had previously been deferred pending resolution of certain contingencies that were resolved during the quarter. Also included in other charges (credits) was a charge of $1.0 million related to a manufacturing plant in Chicago that was closed in the fourth quarter of fiscal 1998. The charge reflects a change in the estimated net realizable value of the plant, reflecting current market conditions. 3. Business Combinations During the second quarter of fiscal 1999, the Company acquired EuPhonics, Inc. (EuPhonics), a leading developer of DSP-based audio software that drives integrated circuits, sound cards, consumer electronics, and other hardware. The transaction, valued at $8.3 million, included cash for the outstanding shares, assumption of EuPhonics employee stock options, and direct transaction costs, and was accounted for as a purchase. The charge for purchased in-process technology associated with the acquisition was not material, and was included in research and development expenses in the second quarter of fiscal 1999. 4. Comprehensive Income On June 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which requires that an enterprise report, by major components and as a single total, the change in net assets during the period from non-owner sources. The reconciliation of net income (loss) to comprehensive income (loss) is as follows (in thousands): Three Months Ended Six Months Ended ------------------------- ------------------------- November 27, November 30, November 27, November 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net income (loss) $ 132,913 $ 4,021 $ 226,604 $ (47,212) Other comprehensive gain (loss): Unrealized gain (loss) on investments, net (213) (1,868) 883 (1,784) Accumulated translation adjustments 5,801 (2,675) (2,293) 794 ---------- ---------- ---------- ---------- Total comprehensive income (loss) $ 138,501 $ (522) $ 225,194 $ (48,202) ========== ========== ========== ========== 5. Net Income (Loss) Per Share The following table presents the calculation of basic and diluted earnings per share (in thousands, except per share data): Three Months Ended Six Months Ended ------------------------- ------------------------- November 27, November 30, November 27, November 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net income (loss) $ 132,913 $ 4,021 $ 226,604 $ (47,212) ========== ========== ========== ========== Weighted average shares-Basic 358,302 350,600 358,418 346,159 Effect of dilutive securities: Employee stock options 9,721 14,246 8,696 - Restricted stock 184 239 202 - ---------- ---------- ---------- ---------- Weighted average shares- Diluted 368,207 365,085 367,316 346,159 ========== ========== ========== ========== Net income (loss) per share-Basic $ 0.37 $ 0.01 $ 0.63 $ (0.14) Net income (loss) per share-Diluted $ 0.36 $ 0.01 $ 0.62 $ (0.14) 6. Inventories Inventories, net consisted of (in thousands): November 27, May 31, 1998 1998 ---- ---- Finished goods $ 291,732 $ 457,726 Work-in-process 53,961 51,510 Raw materials 97,795 135,535 ---------- ---------- Total $ 443,488 $ 644,771 ========== ========== 7. Litigation The Company is a party to lawsuits in the normal course of its business. The Company notes that (i) litigation in general, and intellectual property and securities 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. The Company believes that it has defenses in each of the cases set forth below and is vigorously contesting each of these matters. An unfavorable resolution of one or more of the following lawsuits could have a material adverse affect on the business, results of operations or financial condition of the Company. Securities Litigation On March 24 and May 5, 1997, putative securities class action lawsuits, captioned Hirsch v. 3Com Corporation, et al., Civil Action No. CV764977 (Hirsch), and Kravitz v. 3Com Corporation, et al., Civil Action No. CV765962 (Kravitz), respectively, were filed against the Company and certain of its officers and directors in the California Superior Court, Santa Clara County. The complaints allege violations of Sections 25400 and 25500 of the California Corporations Code and seek unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from September 24, 1996 through February 10, 1997. The actions are in discovery. No trial date has been set. On February 10, 1998, a putative securities class action, captioned Euredjian v. 3Com Corporation, et al., Civil Action No. C-98-00508CRB (Euredjian), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California asserting the same class period and factual allegations as the Hirsch and Kravitz actions. The complaint alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages. The Company has filed a motion to dismiss the complaint. In December 1997, a putative securities class action, captioned Reiver v. 3Com Corporation, et al., Civil Action No. C-97-21083JW (Reiver), was filed in the United States District Court for the Northern District of California. Several similar actions have been consolidated into this action, including Florida State Board of Administration and Teachers Retirement System of Louisiana v. 3Com Corporation, et al., Civil Action No. C-98-1355. On August 17, 1998, plaintiffs filed a consolidated amended complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and which seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from April 23, 1997 through November 5, 1997. The Company has filed a motion to dismiss the complaint. In October 1998, a putative securities class action lawsuit, captioned Adler v. 3Com Corporation, et al., Civil Action No. CV777368 (Adler), was filed against the Company and certain of its officers and directors in the California Superior Court, Santa Clara County, asserting the same class period and factual allegations as the Reiver action. The complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages. The Company has not responded to the complaint. In January 1998, two purported shareholder complaints relating to the Company's June 1997 merger with U.S. Robotics, captioned Stanley Grossman v. 3Com Corporation, et al., Civil Action No. CV771335, and Jason v. 3Com Corporation, et al., Civil Action No. CV771713, were filed in California Superior Court, Santa Clara County. The actions allege that 3Com, several of its officers and directors, and several former U.S. Robotics officers violated Sections 11 and 15 of the Securities Act of 1933 by making alleged misrepresentations and omissions in a May 8, 1997 registration statement. The complaints seek damages in an unspecified amount on behalf of a purported class of persons who received the Company's stock during the merger pursuant to the registration statement. On September 25, 1998, the Delaware Chancery Court issued an injunction preventing plaintiffs from proceeding with these actions, finding that plaintiffs' claims are barred by a settlement in a prior action. Plaintiffs have filed a motion seeking to set aside that settlement. In February 1998, a shareholder derivative action purportedly on behalf of the Company, captioned, Wasserman v. Benhamou, et al., Civil Action No. 16200-NC, was filed in Delaware Chancery Court. The complaint alleges that the Company's directors breached their fiduciary duties to the Company by engaging in alleged wrongful conduct from mid-1996 through November 1997, including the conduct complained of in the securities litigation described above. The Company is named solely as a nominal defendant, against whom the plaintiff seeks no recovery. The Company and the individual defendants have filed a motion to dismiss the complaint. In October 1998, two shareholder derivative actions purportedly on behalf of the Company, captioned Shaev v. Barksdale, et al., Civil Action No. 16721-NC, and Blum v. Barksdale, et al., Civil Action No. 16733-NC, were filed in Delaware Chancery Court. The complaints allege that the Company's directors breached their fiduciary duties to the Company through the issuance of and disclosures concerning stock options. The Company is named solely as a nominal defendant, against whom the plaintiffs seek no recovery. The Company and the individual defendants have filed a motion to dismiss. Intellectual Property Litigation On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics Corporation and U.S. Robotics Access Corp. in the United States District Court for the Western District of New York. The case is now entitled: Xerox Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The complaint alleges willful infringement of a United States patent relating to computerized interpretation of handwriting. The complaint further prays for unspecified damages and injunctive relief. Xerox has asserted that Graffiti (registered trademark) software and certain products of Palm Computing, Inc. infringe the patent. Consumer Litigation A putative consumer class action pending against the Company and U.S. Robotics in the California Superior Court, Marin County, Bendall, et al. v. U.S. Robotics Corporation, et al., Civil Action No. 170441, arising out of the purchase of x2(trademark) products and products upgradeable to x2, was coordinated with a previously filed individual action in the California Superior Court, San Francisco County, Intervention Inc. v. U.S. Robotics Corporation, Civil Action No. 984352. Two putative consumer class action lawsuits pending against the Company and U.S. Robotics in state court of Illinois arising out of the same facts as those alleged in the California cases are stayed, Lippman, et al. v. 3Com, Civil Action No. 97 CH 09773, and Michaels, et al. v. U.S. Robotics Access Corporation, et al., Civil Action No. 97 CH 14417. A class has not been certified, and discovery is under way. 8. Effects of Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (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 will be effective for the Company's fiscal year ended May 28, 1999 and requires disclosure of historical information for comparative purposes. Management of the Company is currently evaluating the effects of this Statement on its reporting of segment information. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 will be effective for the Company's fiscal year 2001. Management believes that this Statement will not have a significant impact on the Company. 3Com Corporation Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 condensed consolidated statements of operations: Three months ended Six months ended ------------------------- ------------------------- November 27, November 30, November 27, November 30, 1998 1997 1998 1997 ---- ---- ---- ---- Sales ..................... 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales ............. 53.1 53.9 54.1 52.8 ---- ---- ---- ---- Gross margin .............. 46.9 46.1 45.9 47.2 Operating expenses: Sales and marketing ....... 20.9 28.2 21.2 22.9 Research and development .. 10.2 12.1 10.4 10.3 General and administrative 4.2 6.0 4.2 4.8 Merger-related charges (credits) and other .. - (0.1) (0.3) 9.7 ---- ---- ---- ---- Total operating expenses .. 35.3 46.2 35.5 47.7 ---- ---- ---- ---- Operating income (loss) ... 11.6 (0.1) 10.4 (0.5) Interest and other income, net...................... 0.8 0.6 0.7 0.4 ---- ---- ---- ---- Income (loss) before income taxes............. 12.4 0.5 11.1 (0.1) Income tax provision ...... 3.8 0.2 3.4 1.6 ---- ---- ---- ---- Net income (loss) ......... 8.6 % 0.3 % 7.7 % (1.7)% ==== ==== ==== ==== Excluding merger-related charges (credits) and other: Total operating expenses. 35.3 % 46.3 % 35.8 % 38.0 % Operating income (loss).. 11.6 (0.2) 10.1 9.1 Net income............... 8.7 0.3 7.5 6.2 Sales - ----- Sales in the second quarter of fiscal 1999 totaled $1.54 billion, an increase of $135.0 million or ten percent from the first quarter of fiscal 1999, and an increase of $343.3 million or 29 percent from the corresponding quarter a year ago. Sales in the first six months of fiscal 1999 totaled $2.9 billion, an increase of $151.3 million or five percent compared to the first six months of fiscal 1998. Client Access. Sales of client access products (e.g., modems, network interface cards (NICs) and a pro-rata allocation of handheld connected organizer products) in the second quarter of fiscal 1999 increased ten percent from the first quarter of fiscal 1999, and increased 33 percent from the same quarter a year ago. Sales of client access products in the second quarter of fiscal 1999 and the first quarter of fiscal 1999 represented 52 percent and 51 percent of total sales, respectively, compared to 50 percent in the second quarter of fiscal 1998. Sales of client access products in the first six months of fiscal 1999 increased two percent from the first six months of fiscal 1998. Sales of client access products in the first six months of fiscal 1999 represented 52 percent of total sales compared to 53 percent in the first six months of fiscal 1998. Excluding sales of handheld connected organizer products, sales for client access products declined three percent in the first six months of fiscal 1999 when compared to the first six months of fiscal 1998. Systems. Sales of network systems products (e.g., switches, routers, hubs, remote access concentrators and a pro-rata allocation of handheld connected organizer products) in the second quarter of fiscal 1999 increased nine percent compared to the first quarter of fiscal 1999 and increased 25 percent compared to the same quarter a year ago. Sales of network systems products in the second quarter of fiscal 1999 and first quarter of fiscal 1999 represented 48 percent and 49 percent of total sales, respectively, compared to 50 percent in the second quarter of fiscal 1998. Sales of network systems products in the first six months of fiscal 1999 increased nine percent from the first six months of fiscal 1998. Sales of network systems products in the first six months of fiscal 1999 represented 48 percent of total sales compared to 47 percent in the first six months of fiscal 1998. Excluding sales of handheld connected organizer products, sales of network systems products increased four percent in the first six months of fiscal 1999 when compared to the first six months of fiscal 1998. Geographic. Sales in the U.S. represented 55 percent of total sales for the second quarter of fiscal 1999. U.S. sales increased four percent sequentially and increased 22 percent compared to the same period a year ago. International sales increased 17 percent sequentially and 38 percent over the same period a year ago. Sales in the U.S. represented 56 percent of total sales for the first six months of fiscal 1999. U.S. sales increased five percent when compared to the first six months of fiscal 1998. International sales increased six percent when compared to the first six months of fiscal 1998. Sales for the second quarter and the first six months of fiscal 1999 were affected by the following factors: Industry Growth Rates. Networking industry growth rates slowed in calendar year 1998. Industry reports indicate that the networking industry worldwide grew by less than 20 percent during 1997 and less than 15 percent during 1998. Global Economic Turmoil. Historically, the Asia Pacific and Latin America regions have been high growth regions for the networking industry and the Company. During the first quarter of fiscal 1999, the Asia Pacific and Latin America regions experienced a weakening of their local currencies and turmoil in their financial markets and institutions. In the second quarter of fiscal 1999, sales in the Latin America and Asia Pacific regions improved sequentially. However, sales in the Asia Pacific region decreased 14 percent during the first six months of fiscal 1999 compared to the first six months of fiscal 1998. Pricing and Competition. Price decreases for networking products in the first half of fiscal 1999 were less than those experienced in previous periods. However, the industry remains highly competitive, and therefore the Company believes that networking prices will be subject to further decreases at a high rate. Handheld Connected Organizers, NICs, Modems and Switching Products. Sales of handheld connected organizer products in the second quarter and first six months of fiscal 1999 more than doubled compared to the same periods in the prior year. In addition, sales of handheld connected organizer products grew significantly from the first quarter of fiscal 1999. The Company's workgroup switching and NIC products also experienced significant unit volume and sales growth in the second quarter and first six months of fiscal 1999 compared to the same periods in fiscal 1998, despite declines in average selling prices, primarily in workgroup switching products. Sales of modem products for the second quarter of fiscal 1999 increased compared to the second quarter of fiscal 1998 and the first quarter of fiscal 1999, but decreased for the six months of fiscal 1999 compared with the same period a year ago. Seasonality. Sales in the second quarter of fiscal 1999 increased ten percent compared to the first quarter of fiscal 1999, due primarily to strength in international regions and consumer products. The Company's sales are typically subject to seasonal patterns. Historically, sales in the first quarter, which includes the summer months of June, July and August, have exhibited little or no growth sequentially, in part due to slower sales in the European region. The second quarter of the fiscal year has historically been the strongest sales quarter due to seasonal strength in international regions. Third quarter sales have historically had either sequentially lower sales, or only slightly increased sales from the prior quarter. These historical patterns are likely to become more pronounced due to the increasing mix of consumer-related products, such as handheld connected organizers and modems, which tend to have strong growth in the second quarter and decline sequentially in the third quarter. Gross Margin - ------------ Gross margin as a percentage of sales was 46.9 percent in the second quarter of fiscal 1999, compared to 44.8 percent in the first quarter of fiscal 1999 and 46.1 percent in the second quarter of fiscal 1998. The gross margin improvement from the first quarter of fiscal 1999 reflected a relatively stable pricing environment and continued improvement in the Company's inventory levels and turns. The gross margin increase from the same quarter a year ago is primarily due to a significant increase in unit volume in workgroup switching and NICs with little change in average selling prices for NICs. Gross margin as a percentage of sales was 45.9 percent in the first six months of fiscal 1999, compared to 47.2 percent in the first six months of fiscal 1998. Operating Expenses - ------------------ Operating expenses in the second quarter of fiscal 1999 were $544.7 million, or 35.3 percent of sales, compared to $501.6 million, or 35.7 percent of sales in the first quarter of fiscal 1999 and $553.3 million, or 46.2 percent of sales in the second quarter of fiscal 1998. Excluding the net pre-tax merger-related charges (credits) and other, operating expenses for the second quarter of fiscal 1999 were $544.0 million, or 35.3 percent of sales, compared to $511.8 million, or 36.4 percent of sales for the first quarter and $554.6 million, or 46.3 percent of sales in the second quarter of fiscal 1998. Operating expenses for the first six months of fiscal 1999 were $1.0 billion, or 35.5 percent of sales, compared to $1.3 billion, or 47.7 percent in the first six months of fiscal 1998. Excluding the net pre-tax merger-related charges (credits) and other, operating expenses for the first six months of fiscal 1999 were $1.1 billion, or 35.8 percent of sales compared to $1.1 billion, or 38.0 percent of sales for the first six months of fiscal 1998. Sales and Marketing. Sales and marketing expenses in the second quarter of fiscal 1999 increased $18.1 million or six percent from the first quarter of fiscal 1999 and decreased as a percentage of sales to 20.9 percent in the second quarter of fiscal 1999, from 21.6 percent in the first quarter of fiscal 1999. The sequential increase in absolute dollars in sales and marketing expenses was related, in part, to higher spending on handheld connected organizer products and customer service consistent with sales growth, and increased holiday advertising costs associated with modem products and handheld connected organizer products. Sales and marketing expenses in the second quarter of fiscal 1999 decreased $16.6 million or five percent from the second quarter a year ago and decreased as a percentage of sales to 20.9 percent in the second quarter of fiscal 1999, from 28.2 percent in the second quarter of fiscal 1998. The decrease was primarily a result of a significant marketing promotion and higher product advertising on certain modem products that occurred in the second quarter of fiscal 1998. In addition, the Company reduced its worldwide sales spending as it worked to combine the 3Com and U.S. Robotics sales forces. Partially offsetting the decreased sales and marketing expenses in the second quarter of fiscal 1999 compared to the second quarter of fiscal 1998 were increases in handheld connected organizer sales and marketing costs as well as global customer support costs. Sales and marketing expenses for the first six months of fiscal 1999 decreased $15.4 million compared to the first six months of fiscal 1998. Research and Development. Research and development expenses in the second quarter of fiscal 1999 increased $8.9 million, or six percent when compared to the first quarter of fiscal 1999 and decreased to 10.2 percent of sales in the second quarter of fiscal 1999 from 10.6 percent of sales in the first quarter of fiscal 1999. Research and development expenses increased $12.8 million or nine percent from the year-ago period, and decreased to 10.2 percent of total sales in the second quarter of fiscal 1999, compared to 12.1 percent in the second quarter of fiscal 1998. The decrease as a percentage of sales both sequentially and year- over-year was a result of research and development spending growing slower than sales. Research and development expenses for the first six months of fiscal 1999 increased $18.8 million compared to the first six months of fiscal 1998, but as a percentage of sales, remained relatively flat. General and Administrative. General and administrative expenses in the second quarter of fiscal 1999 increased $5.2 million or nine percent from the first quarter of fiscal 1999 but remained flat as a percentage of sales at 4.2 percent. General and administrative expenses in the second quarter of fiscal 1999 decreased $6.7 million or nine percent from the same period a year ago, and decreased to 4.2 percent of total sales in the second quarter of fiscal 1999, compared to 6.0 percent in the second quarter of fiscal 1998. The decrease in dollars and as a percentage of sales in the second quarter of fiscal 1999 compared to the second quarter of fiscal 1998 resulted from lower spending in corporate administration expenses, reflecting elimination of duplicate infrastructure resulting from the merger with U.S. Robotics. This decrease was partially offset by an increase in provisions for bad debt. General and administrative expenses for the first six months of fiscal 1999 decreased $10.1 million compared to the first six months of fiscal 1998. Merger-Related Charges (Credits) and Other. During the second quarter of fiscal 1999, the Company recorded a charge of approximately $0.6 million. This charge represented $4.8 million of expenses primarily related to the U.S. Robotics merger, net of a $4.2 million gain on the sale of land, which had previously been deferred pending resolution of certain contingencies that were resolved during the quarter. The $4.8 million charge was primarily due to revisions in the estimated sales prices for duplicate facilities, reflecting current market conditions. During the first quarter of fiscal 1999, the Company reversed approximately $10.2 million of previously recorded merger charges related to reductions in estimates for remaining charges associated with duplicate facilities and employee termination benefits. During the second quarter of fiscal 1998, merger-related charges associated with the merger with U.S. Robotics were a net credit of $1.2 million. The net credit of $1.2 million consisted of 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, which was partially offset by $14.2 million of product swap-out costs incurred during the quarter. Interest and Other Income, Net - ------------------------------ Interest and other income, net in the second quarter of fiscal 1999 increased $2.6 million compared to the first quarter of fiscal 1999 primarily due to increased interest income as a result of higher cash and investment balances. Interest and other income, net in the second quarter of fiscal 1999 increased $4.6 million compared to the second quarter of fiscal 1998, primarily due to reduced interest expense due to lower debt balances and increased interest income due to higher cash and investment balances. Interest and other income, net increased $11.3 million in the first six months of fiscal 1999 compared to the first six months of fiscal 1998. This increase was attributable to reduced interest expense, increased interest income, and improved foreign currency results. 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 significant balance sheet exposures and intercompany balances against future movements in foreign exchange rates. Income Tax Provision - -------------------- The Company's effective income tax rate was 30.3 percent in the second quarter of fiscal 1999 compared to 32.0 percent in the first quarter of fiscal 1999 and 34.4 percent in the second quarter of fiscal 1998. The decrease in the tax rate from the first quarter of fiscal 1999 was attributable to the Tax and Trade Relief Extension Act of 1998 which retroactively extended the research and development tax credit. The decrease in the tax rate from the second quarter of fiscal 1998 relates to increased offshore manufacturing in countries with tax rates significantly below the U.S. statutory rate. The effective tax rate for the first six months of fiscal 1999 was 31.0 percent. The Company recorded a tax provision of $101.8 million for the first six months of fiscal 1999 compared to $44.6 million for the first six months of fiscal 1998. The provision in the first six months of 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. Net Income (Loss) and Net Income (Loss) Per Share - ------------------------------------------------- Net income for the second quarter of fiscal 1999 was $132.9 million, or $0.36 per share, compared to net income of $93.7 million, or $0.26 per share for the first quarter of fiscal 1999 and net income of $4.0 million, or $0.01 per share, for the second quarter of fiscal 1998. Excluding the net pre-tax merger-related charges (credits) and other, net income was $133.4 million, or $0.36 per share for the second quarter of fiscal 1999 compared to $86.7 million, or $0.24 per share for the first quarter of fiscal 1999 and $3.2 million, or $0.01 per share for the second quarter of fiscal 1998. Net income for the first six months of fiscal 1999 was $226.6 million, or $0.62 per share compared to a net loss of $47.2 million, or ($0.14) per share for the first six months of fiscal 1998. Excluding the net pre-tax merger-related charges (credits) and other, net income was $220.1 million, or $0.60 per share for the first six months of fiscal 1999 compared to $172.8 million, or $0.48 per share for the first six months of fiscal 1998. Business Environment and Industry Trends The forward-looking statements of 3Com Corporation, including those in this report on Form 10-Q, are subject to risks and uncertainties. Some of the factors that could cause future results to materially differ from the Company's recent results or those projected in the forward-looking statements include, but are not limited to, the factors set forth below. Industry Growth Rates. The Company's success is dependent, in part, on the overall growth rate of the networking industry. In 1997 and 1998, industry growth was below historical rates. Industry reports indicate that the networking industry worldwide grew by less than 20 percent during calendar year 1997 and less than 15 percent during calendar year 1998. There can be no assurance that the networking industry will continue to grow or that it will achieve higher growth rates. The Company's business, operating results or financial condition may be adversely affected by any further decrease in industry growth rates. In addition, there can be no assurance that the Company's results in any particular period will fall within the ranges for growth forecast by market researchers. Industry Consolidation and Strategic Relationships. The networking industry continues to be in a period of significant consolidation. For example, during calendar year 1998, the Company acquired Lanworks Technologies, Inc. and EuPhonics, Inc.; Lucent Technologies acquired nine companies; Cisco Systems acquired nine companies; and Northern Telecom acquired four companies, including Bay Networks. The Company expects that networking industry consolidation will continue, including combinations between traditional telecommunications suppliers and networking companies. Future business combinations may result in companies with strong competitive positions and products. Continued consolidation may have a material adverse effect on the Company's operating results or financial condition. In addition to mergers and acquisitions, companies are continually entering into strategic relationships. For example, in the second quarter of fiscal 1999, the Company announced strategic relationships with IBM, Hewlett-Packard and Toshiba America. In December, the Company announced plans to form a joint venture with Siemens AG and expanded its relationship with Dell Computer. If the Company experiences difficulties managing relationships with its partners or if the partners' projects are unsuccessful, there could be an adverse impact on the Company's results of operations or financial condition. Competition and Pricing. The Company participates in a highly volatile industry characterized by vigorous competition for market share, rapid product and technology development, uncertainty over adoption of industry standards and declining prices. The Company's competition comes from start-up companies, well-capitalized computer systems and communications companies, and other technology companies. Many of the Company's current and potential competitors have greater financial, marketing and technical resources than the Company. In addition, with the highly competitive nature of the Company's industry, new products are routinely introduced by competitors. For example, in recent months several competitors have emerged in the handheld connected organizer market space with products based upon the Microsoft Windows CE platform. The Company's business may be adversely impacted by the development by competitors of products and technologies that render certain of the Company's products obsolete or noncompetitive. In particular, growth rates in the handheld connected organizer market may not be sustainable in the face of increasing competition. There can be no assurance that intense competition in the industry and particular actions of the Company's competitors will not have an adverse effect on the Company's business, operating results or financial condition. In particular, the Company expects that prices on many of its products will continue to decrease in the future and that the pace and magnitude of such price decreases may have an adverse impact on the results of operations or financial condition of the Company. Product Integration and Bundling. Certain OEMs in the PC industry have, from time to time, chosen to integrate NICs and modem functions on the PC motherboard. For example, the Company currently sells networking chipsets to Dell Computer that are integrated directly onto the PC motherboard of Dell's high-end Optiplex line of PCs. In addition, the Company has become a primary supplier of networking products for Hewlett-Packard's full family of PCs. Should the shift to product integration and bundling increase, the Company's ability to become and/or continue to be a supplier of the integrated components could impact future sales growth and profitability. Electronic Commerce and Electronic Data Interchange (EDI). Many vendors, distributors and resellers have been successful in the direct sale of products to customers who wish to order products on the Internet or through EDI. These trends have enabled manufacturers to increase business volume and lower their cost structures. There can be no assurance that the Company will successfully implement or continue to expand such systems in a timely manner, and a failure to do so could adversely affect results of operations or financial condition. In addition, as the industry and 3Com move to do more business over the Internet, it may become more difficult to sell product through the distributor channel, which could impact the Company's sales levels. International Markets. The Company operates internationally and expects that international markets will continue to account for a significant percentage of the Company's sales. Many international markets are characterized by economic and political instability and currency fluctuations that can adversely affect the Company's operating results or financial condition. For example, during the first six months of fiscal 1999, the Company experienced lower sales in the Asia Pacific region compared to the first six months of fiscal 1998, due in large part to economic and political instability and currency fluctuations. The instability in the Asian financial markets negatively impacted the Company's sales in those markets by, among other things, decreasing end-user purchases, increasing competition from local competitors, and reducing access to sources of capital needed by customers to make purchases. In addition to reducing sales, difficulties in the Asia Pacific region subject the Company's resellers to financial hardships, which may increase the Company's credit risk as customers become insolvent or otherwise have their ability to meet obligations impaired. There can be no assurance that other regions will not experience similar economic or political instability which would have an adverse effect on the Company's operating results or financial condition. Significant fluctuations in foreign currency could have an adverse impact on the Company's sales, collection of accounts receivable, and/or foreign currency exchange exposures. Euro-Currency. The Single European Currency (Euro) was introduced on January 1, 1999 with complete transition to this new currency required by January 2002. The Company has made and expects to continue to make changes to its internal systems in order to accommodate doing business in the Euro. The Company expects that introduction and use of the Euro will affect the Company's foreign exchange and hedging activities, and may result in increased fluctuations in foreign currency hedging results. Any delays in the Company's ability to be Euro-compliant could have an adverse impact on the Company's results of operations or financial condition. Telecommunication Deregulation and Public Policy. Significant changes in U.S. telecommunication regulations are anticipated in the near future, which could impact the rate of expansion of service providers' network infrastructures. Future changes by regulatory agencies or application of new requirements could affect sales of the Company's products for certain classes of customers. Additionally, the Company's products must comply with various Federal Communication Commission and local telecommunications requirements and regulations. Changes in regulations, or failure by the Company to obtain timely approval of products could have a material adverse effect on the Company's results of operations or financial condition. Certain of the Company's products are subject to export controls, import controls and/or use restrictions under the laws of the United States and other countries. For example, because of U.S. Government controls on the exportation of encryption products and technology, the Company is unable to freely export some of its products with the most powerful encryption technology. The continuing evolution of export and import laws and regulations could negatively impact the Company's sales and also increase the Company's cost of selling its products. In addition, there are currently few laws or regulations that apply directly to access or commerce on the Internet. Changes in laws or regulations governing the Internet and Internet commerce could have a material adverse impact on the Company's operating results or financial condition. Accounting For Business Combinations. Recent actions and comments from the Securities and Exchange Commission have indicated they are reviewing the current valuation methodology for determining the amount of the accounting charge for purchased in-process technology acquired in a business combination. There can be no assurance that the Commission will not seek to retroactively apply new guidance and change the amount of purchased in-process technology previously expensed by the Company. This could result in the restatement of previously filed financial statements of the Company and could have a material impact on future financial results. Company-Specific Trends and Risks Financial Model. In managing its business, the Company periodically establishes a long-term financial model based on observed and anticipated trends in technology and the marketplace. The model, which includes ranges for gross margin, operating expenses and operating income, is not intended to be a prediction of future financial results, rather, it is used to assist the Company's management in making decisions about the allocation of resources and investments. During the second quarter of fiscal 1999, the Company revised the model. As reflected below, the ranges for gross margin and operating expenses as a percentage of sales were increased and narrowed while the range for operating income as a percentage of sales was decreased and narrowed. Both the new and old models are as follows: New model Old model --------- --------- Gross margin 46.5 - 48.0% 45.5 - 47.5% Operating expenses 30.0 - 31.5% 27.5 - 29.5% Operating income 15.0 - 18.0% 16.0 - 20.0% The change in gross margin reflects a stronger new product cycle as well as improvements in supply chain management. The change in operating expenses reflects incremental investments that the Company intends to make in research and development and sales and marketing in certain emerging segments, such as LAN telephony, Voice over IP, handheld connected organizers, storage area networking, home networking, wireless connectivity, and broadband access. The Company currently is not operating within some ranges of the model and does not expect to achieve performance within all of the ranges in fiscal 1999. It will be difficult for the Company to make further progress toward these ranges in the third quarter of fiscal 1999, as the third quarter of the fiscal year has historically had either sequentially lower sales, or only slightly increased sales from the prior quarter. Fluctuations in Quarterly Results. The Company's operating results for any particular quarter are difficult to predict and may be subject to significant fluctuations. These fluctuations can be caused by a wide variety of factors, including seasonality with respect to the volume and timing of orders (see Seasonality in Results of Operations), the introduction and acceptance of new products and technologies, price competition, general conditions and trends in the networking industry and technology sector, disruption in international markets, general economic conditions, and extraordinary events such as industry consolidation, acquisitions, or litigation. In addition, as the portion of the Company's consumer-related business grows, for example with products such as the Palm III(trademark) handheld connected organizer, this seasonality will likely become more pronounced. These factors, and accompanying fluctuations in periodic operating results, could have a significant adverse impact on the market price of the Company's common stock. Ability to Satisfy Product Orders. The timing and amount of the Company's sales are dependent on a number of factors that make estimating operating results prior to the end of any period uncertain. For example, the Company does not typically maintain a significant backlog and, as a result, product sales in any quarter are dependent on orders booked and shipped in that quarter. In addition, the Company's customers historically request fulfillment of orders in a short period of time, resulting in limited visibility to sales trends. As a result, the Company's operating results depend on the volume and timing of orders and the Company's ability to fulfill the orders in a timely manner. The Company's results of operations or financial condition would be adversely affected if incoming order rates decline, if ordered products are not readily available, or if the Company is not able to immediately fill orders. Shipment Linearity. In the last two quarters, the Company recorded approximately half of its sales in the last five weeks of the fiscal quarter. This subjects the Company to risks such as unexpected disruptions in functions including manufacturing, order management, information systems and shipping. Should the percentage of sales in the last five weeks of a quarter escalate further, or should a significant disruption in the Company's internal business functions occur, there could be an adverse affect on the Company's results of operations or financial condition. Development and Introduction of New Products. The Company is actively engaged in the research and development of new technologies and products. The Company's success depends, in substantial part, on the identification of new market and product opportunities and the timely development and market acceptance of new products. This includes the Company's next generation products under development in the areas of LAN telephony, Voice over IP, handheld connected organizers, storage area networking, home networking, wireless connectivity, and broadband access. The Company's operating results or financial condition may be adversely affected by a change in one or more of the technologies affecting network communications, a change in market demand for products based on a particular technology, a failure to develop new products on a successful and timely basis, delays in manufacturing and shipment of new products, or technical problems with new products or critical components. The Company's success also depends, in part, on the timely adoption of industry standards, resolution of conflicting U.S. and international standards requirements created by the convergence of technology such as voice onto data networks, the timely introduction of new standards-compliant products, and market acceptance of these products. Slow market acceptance of new technologies and industry standards could have an adverse impact on the Company's results of operations or financial condition. Product Warranties and International Homologation. The Company's products are often covered by legal and contractual warranties, and the Company may be subject to contractual and/or legal commitments to perform under such warranties. In addition, as the Company's products are sold and marketed in many countries, the Company's products are required to function in many different telecommunications environments and in connection with various telecommunications systems and products. If circumstances arise such that certain of the Company's products fail to perform as intended and the Company is not successful in timely resolution of such product quality or performance issues, such failure could have a material adverse impact on the operating results or financial condition of the Company. Likewise, failure to meet commitments related to installation of enterprise networks may subject the Company to claims for business disruption or consequential damages if a network cutover is not successfully or timely completed. Reliance on Distributors, Resellers and OEMs. The Company sells a significant portion of its products to distributors, resellers and OEMs. The Company's reliance on these channels subjects the Company to many risks, including inventory, credit and business concentration. The Company's distributors and resellers maintain significant levels of the Company's products in their inventories. The Company attempts to ensure that appropriate levels of products are available to end users by working closely with distributors and resellers to manage inventory levels. There can be no assurance that the Company will be successful in efforts to manage the inventory levels of its distributors and resellers or that the Company will be able to successfully operate its business within its desired channel inventory business model. Any failure by the Company to do so could adversely affect the Company's operating results or financial condition. The distribution and reseller channels utilized by the Company have undergone a significant level of consolidation. As a result, the Company has an increased concentration of credit risk. While the Company monitors and attempts to manage this risk, financial difficulties on the part of one or more of the Company's distributors or resellers may have a material adverse effect on the Company's results of operations or financial condition. The Company derives a significant portion of its sales from OEMs, including PC companies that bundle 3Com NICs and modems, and incorporate 3Com chipsets into their products. As a result, the Company's future operating results are dependent, in part, on the Company's ability to establish, maintain and strengthen relationships with OEMs. Because sales to OEMs are typically at lower prices and result in lower margins to the Company, the Company's sales and gross margins may be adversely impacted if OEMs become a larger percentage of the business. Reliance on Suppliers. Some key components of the Company's products are currently available only from single or limited sources. Likewise, certain services on which the Company relies are furnished from single or limited service providers. In addition, certain of the Company's suppliers are competitors of the Company. While the Company has generally been able to obtain adequate supplies of components from existing 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 business, operating results, financial condition or customer relationships could be adversely affected by either an increase in prices for, or an interruption or reduction in supply of, key components, or a similar disruption in the availability of key services. Commercial Commitments. The Company sometimes enters into minimum or other non-cancelable purchase commitments. Should sales volumes fluctuate significantly, the obligation to meet purchase commitments could adversely affect the Company's results of operations or financial condition. Intellectual Property Rights. Many of the Company's competitors, in particular, the large, well established telecommunications and computer equipment manufacturers, have large intellectual property portfolios, including patents which may cover technologies that are relevant to the Company's business. In addition, many smaller companies, universities and individual inventors are actively engaged in research and development and have obtained or applied for patents in areas of technology that may relate to the Company's business. The industry is trending toward aggressive assertion, licensing and litigation of patents and other intellectual property rights. In the course of its business, the Company frequently receives assertions of infringement and invitations to take licenses or otherwise becomes aware of potentially relevant patents or other intellectual property rights held by third parties. For example, in recent periods, the Company has received a significant increase in assertions of infringement and invitations to take licenses. The Company evaluates the validity and applicability of any such intellectual property rights and the merits of any such third party claims, and determines in each case whether it must negotiate licenses or cross-licenses to incorporate or use the subject proprietary technologies, protocols or specifications in the Company's products. Any failure by the Company to obtain and maintain licenses, on favorable terms, for intellectual property rights required for the manufacture, sale and use of its products, particularly those which must comply with industry standard protocols and specifications to be commercially viable, could have a material adverse effect on the Company's business, results of operations or financial condition. In connection with the enforcement of its own intellectual property rights or in connection with disputes relating to the validity or alleged infringement of third party rights, the Company may be subject to complex, protracted litigation. Intellectual property litigation is typically very costly and can be highly disruptive to business operations by diverting the attention and energies of management and key technical personnel. Further, plaintiffs in intellectual property cases often seek injunctive relief and the measures of damages in intellectual property litigation are complex and often subjective or uncertain. Thus, the existence of or any adverse determinations in such litigation could subject the Company to significant liabilities and costs, require the Company to seek licenses from others, prevent the Company from manufacturing or selling its products, or cause severe disruptions to the Company's operations or the markets in which it competes, any one of which could have a material adverse effect on the results of operations or financial condition of the Company. Information Systems. The Company is in the process of transitioning its manufacturing, distribution, order administration, and finance functions to the Company's primary transaction processing application systems. As a result of such transitions, the Company may experience system disruptions, which may have an adverse effect on the results of operations or financial condition. In particular, during the fourth quarter of fiscal 1999, the Company plans to convert a large number of U.S. and international locations to the Company's primary transaction processing systems. In addition, the Company is dependent on its information systems and software to capture, process and store data. Should the Company experience technical difficulties with any of its critical information systems or software applications, there could be an adverse effect on the Company's results of operations or financial condition. Key Personnel and Recruiting. The success of the Company will depend to a significant extent upon a number of key employees and management. The loss of the services of key employees could have a material adverse effect on the Company's business, operating results or financial condition. Recruiting and retaining skilled personnel, including engineers, is highly competitive. If the Company cannot successfully recruit and retain skilled personnel, the Company's financial results may be adversely affected. In addition, the Company must carefully manage the growth in employees commensurate with anticipated growth in the Company. Should the Company's revenue growth or attrition levels vary significantly, there could be an adverse effect on results of operations or financial condition. Year 2000 Readiness Disclosure As is true for most companies, the Year 2000 issue creates a risk for 3Com. If systems do not correctly recognize date information when the year changes to 2000, there could be an adverse impact on the Company's operations. The Year 2000 issue not only impacts the Company at the end of the calendar year 1999, but also, in certain instances, the Company's fiscal year 2000, which begins on May 29, 1999. The risk for 3Com exists primarily in the following areas: systems used by the Company to run its business including information systems, equipment and facilities; systems used by the Company's suppliers; potential warranty or other claims from 3Com customers; and the potential for reduced spending by other companies on networking solutions as a result of significant information systems spending on Year 2000 remediation. The Company is continuing to evaluate and mitigate its exposure in these areas where appropriate. State of Readiness and Risks. The Company has identified four key exposure areas within the Company with respect to the Year 2000 issue, namely: key transaction processing applications, equipment and facilities, 3Com products, and key suppliers. Key transaction processing applications - --------------------------------------- Key transaction processing applications include those used to run the Company's business, such as finance, manufacturing, order processing and distribution. The Company has completed its evaluation of most of these applications for Year 2000 compliance, and has begun remediation or replacement of systems, where necessary. The Company expects to achieve fiscal year 2000 readiness by the end of May 1999, and to achieve calendar year 2000 readiness by the end of September 1999. In the event that implementation of replacement systems is delayed, or if significant new non-compliance issues are identified, the Company's ability to conduct its business or record transactions could be disrupted, which could adversely affect results of operations or financial condition. Equipment and facilities - ------------------------ The Company is in the process of evaluating Year 2000 compliance of its equipment and facilities. Critical equipment, such as manufacturing equipment, has been identified, and the Company is currently in the process of contacting the suppliers to ascertain Year 2000 compliance. The Company expects to achieve Year 2000 readiness for critical equipment by the end of September 1999. In the event that identification of non-compliant equipment and any upgrade or replacement of equipment is delayed, the Company's design, production and shipping capabilities could be disrupted, which could adversely affect the Company's results of operations or financial condition. The Company is assessing the Year 2000 readiness of its owned and leased facilities worldwide. Priority is being placed on the 3Com owned facilities and other critical facilities that house large numbers of employees or significant operations. The Company expects to complete its assessment activities by March 1999 and expects to complete remediation efforts by September 1999. The function of these facilities is critical to operations, and as such, any delays in achieving Year 2000 compliance with respect to these facilities could adversely affect the Company's results of operations or financial condition. Products - -------- The Company has conducted extensive evaluation of its currently available and installed base of products. The Company believes that its current products are largely Year 2000 compliant. There can be no assurance that certain previous releases of the Company's products will prove to be Year 2000 compliant with customers' systems or within existing networks. To assist customers in evaluating Year 2000 readiness of 3Com's products, the Company has developed a list that indicates the capability of its products. The list is located on the Company's website (www.3Com.com) and is periodically updated as assessment of additional products is completed. Certain of the Company's disclosures and announcements concerning its products and Year 2000 programs, including those in this report on Form 10-Q, are intended to constitute "Year 2000 Readiness Disclosures" as defined in the recently enacted Year 2000 Information and Readiness Disclosure Act. The inability of any of the Company's products to operate properly in the year 2000 could result in increased warranty costs, customer satisfaction issues, litigation or other material costs and liabilities, which could adversely affect the Company's results of operations or financial condition. Key suppliers - ------------- The Company is currently in the process of contacting its critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are Year 2000 compliant. Follow-up efforts are underway to obtain feedback from these suppliers. The Company believes that critical non-compliant suppliers will be identified by the end of January 1999, and plans to work with such suppliers for assessment, remediation and testing of Year 2000 compliance. As needed, the Company will identify alternative sources of supply. The Company expects to complete confirmation of supplier Year 2000 readiness by the end of September 1999. If key suppliers fail to adequately address the Year 2000 issue for the products or services they provide to the Company, critical materials, products and services may not be delivered in a timely manner, which could adversely affect the Company's results of operations or financial condition. Contingency Plans. As the Company is still assessing its Year 2000 compliance in all areas, contingency plans have not yet been determined. As the assessments are completed, contingency plans will be developed as needed. For example, contingency plans for production facilities could include shifting production and distribution to other Company facilities or engaging subcontractors. Costs to Address Year 2000 Issues. Based on the Company's current assessments, it is expected that the total cost of these programs will range between $25 million and $35 million. Approximately $2 million has been spent on the programs to date. All expected costs are based on the Company's current evaluation of the Year 2000 programs and are subject to change as the programs progress. It is anticipated that the majority of the Year 2000 costs incurred will include consultant fees and internal hardware and software upgrades or replacements. The Company does not separately track the internal labor costs associated with the Year 2000 project unless it is an individual's primary focus. These costs, including employee efforts involved in assessing the Company's Year 2000 exposures, testing, and remediating non-compliant Year 2000 systems, communicating with customers, and various other employee-related tasks, have not been included in the total estimated costs. Any costs associated with potential Year 2000 litigation exposure are not estimable and are not included in the total cost estimate above. The majority of the Company's Year 2000 costs relate to the Company's key transaction processing applications and products. The Company has adequate funds to pay for the expected costs of Year 2000 programs. As of the end of the second quarter of fiscal 1999, no significant internal information technology projects have been deferred due to the Company's Year 2000 efforts. Future Sales Impact. Year 2000 compliance is an issue for virtually all businesses whose computer systems and applications may require significant hardware and software upgrades or modifications. Companies owning and operating such systems may plan to devote a substantial portion of their information systems' spending to fund such upgrades and modifications and divert spending away from networking solutions. Such changes in customers' spending patterns could have a material adverse impact on the Company's sales, operating results or financial condition. Liquidity and Capital Resources Cash and equivalents and short-term investments at November 27, 1998 were $1.4 billion, an increase of $274.8 million from May 31, 1998. For the six months ended November 27, 1998, net cash generated from operating activities was $478.9 million. Accounts receivable at November 27, 1998 increased $267.8 million from May 31, 1998 to $1.1 billion. Days sales outstanding in receivables increased to 65 days at November 27, 1998, compared to 56 days at May 31, 1998 primarily due to a higher concentration of sales in the third month of the quarter ended November 27, 1998, compared to the third month of the quarter ended May 31, 1998. Inventory levels at November 27, 1998 decreased $201.3 million, of which $166.0 million was finished goods, from the prior fiscal year-end to $443.5 million. Average inventory turnover was 6.9 turns for the quarter ended November 27, 1998, compared to 4.4 turns for the quarter ended May 31, 1998, primarily as a result of the decrease in inventory balances. During the six months ended November 27, 1998, the Company made $118.2 million in capital expenditures. Major capital expenditures included upgrades and expansion of the Company's facilities in the U.S. and purchases and upgrades of desktop systems and other equipment. Additionally, in the first six months of fiscal 1999, the Company sold two facilities and equipment in the Chicago area for total net proceeds of $14.7 million. As of November 27, 1998, the Company had approximately $34.2 million in capital expenditure commitments outstanding, primarily associated with the consolidation of facilities in the Chicago area. In addition, the Company has commitments related to operating lease arrangements in the U.S., under which the Company has an option to purchase the properties for an aggregate of $322.2 million, or arrange for the sale of the properties to a third party. If the properties are sold to a third party at less than the option price, the Company retains an obligation for the difference, subject to certain provisions of the lease. In June 1998, the Company's Board of Directors authorized the repurchase of up to 10 million shares of the Company's common stock. Such purchases are made in the open market from time to time. During the first six months of fiscal 1999, the Company repurchased 4.3 million shares of common stock at a total cost of $130.4 million. During the first six months of fiscal 1999, the Company received net cash of $53.1 million from the sale of shares of its common stock to employees through its employee stock purchase and option plans. 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 27, 1998, there were no outstanding borrowings under the credit agreement, and the Company was in compliance with all required covenants. During the first six months of fiscal 1999, the Company repaid $12.0 million of borrowings under the 7.52% Unsecured Senior Notes agreement. As of November 27, 1998, $36.0 million of this debt remained outstanding, of which $12.0 million is classified as current, and is included in accrued liabilities and other. The remaining U.S. Robotics merger-related accrual at November 27, 1998 was approximately $25.3 million. Total expected cash expenditures relating to the U.S. Robotics merger charge are estimated to be approximately $116 million, of which approximately $104 million was disbursed prior to November 27, 1998. Benefits paid to approximately 900 employees terminated through November 27, 1998 were approximately $57 million. Substantially all benefits have been paid. During the first six months of fiscal 1999, the Company recorded a tax benefit on stock option transactions of $19.1 million. During the same period a year ago, the Company recorded a tax benefit on stock option transactions totaling $131.4 million. Based on current plans and business conditions, the Company believes that its existing cash and equivalents, short-term investments, cash generated from operations and the available credit agreement will be sufficient to satisfy anticipated cash requirements for at least the next twelve months. Effects of Recent Accounting Pronouncements 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 will be effective for the Company's fiscal year ended May 28, 1999 and requires disclosure of historical information for comparative purposes. Management of the Company is currently evaluating the effects of this Statement on its reporting of segment information. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 will be effective for the Company's fiscal year 2001. Management believes that this Statement will not have a significant impact on the Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K for the year ended May 31, 1998. 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 intellectual property and securities 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. The Company believes that it has defenses in each of the cases set forth below and is vigorously contesting each of these matters. An unfavorable resolution of one or more of the following lawsuits could have a material adverse affect on the business, results of operations or financial condition of the Company. Securities Litigation On March 24 and May 5, 1997, putative securities class action lawsuits, captioned Hirsch v. 3Com Corporation, et al., Civil Action No. CV764977 (Hirsch), and Kravitz v. 3Com Corporation, et al., Civil Action No. CV765962 (Kravitz), respectively, were filed against the Company and certain of its officers and directors in the California Superior Court, Santa Clara County. The complaints allege violations of Sections 25400 and 25500 of the California Corporations Code and seek unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from September 24, 1996 through February 10, 1997. The actions are in discovery. No trial date has been set. On February 10, 1998, a putative securities class action, captioned Euredjian v. 3Com Corporation, et al., Civil Action No. C-98-00508CRB (Euredjian), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California asserting the same class period and factual allegations as the Hirsch and Kravitz actions. The complaint alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages. The Company has filed a motion to dismiss the complaint. In December 1997, a putative securities class action, captioned Reiver v. 3Com Corporation, et al., Civil Action No. C-97-21083JW (Reiver), was filed in the United States District Court for the Northern District of California. Several similar actions have been consolidated into this action, including Florida State Board of Administration and Teachers Retirement System of Louisiana v. 3Com Corporation, et al., Civil Action No. C-98-1355. On August 17, 1998, plaintiffs filed a consolidated amended complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and which seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from April 23, 1997 through November 5, 1997. The Company has filed a motion to dismiss the complaint. In October 1998, a putative securities class action lawsuit, captioned Adler v. 3Com Corporation, et al., Civil Action No. CV777368 (Adler), was filed against the Company and certain of its officers and directors in the California Superior Court, Santa Clara County, asserting the same class period and factual allegations as the Reiver action. The complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages. The Company has not responded to the complaint. In January 1998, two purported shareholder complaints relating to the Company's June 1997 merger with U.S. Robotics, captioned Stanley Grossman v. 3Com Corporation, et al., Civil Action No. CV771335, and Jason v. 3Com Corporation, et al., Civil Action No. CV771713, were filed in California Superior Court, Santa Clara County. The actions allege that 3Com, several of its officers and directors, and several former U.S. Robotics officers violated Sections 11 and 15 of the Securities Act of 1933 by making alleged misrepresentations and omissions in a May 8, 1997 registration statement. The complaints seek damages in an unspecified amount on behalf of a purported class of persons who received the Company's stock during the merger pursuant to the registration statement. On September 25, 1998, the Delaware Chancery Court issued an injunction preventing plaintiffs from proceeding with these actions, finding that plaintiffs' claims are barred by a settlement in a prior action. Plaintiffs have filed a motion seeking to set aside that settlement. In February 1998, a shareholder derivative action purportedly on behalf of the Company, captioned, Wasserman v. Benhamou, et al., Civil Action No. 16200-NC, was filed in Delaware Chancery Court. The complaint alleges that the Company's directors breached their fiduciary duties to the Company by engaging in alleged wrongful conduct from mid-1996 through November 1997, including the conduct complained of in the securities litigation described above. The Company is named solely as a nominal defendant, against whom the plaintiff seeks no recovery. The Company and the individual defendants have filed a motion to dismiss the complaint. In October 1998, two shareholder derivative actions purportedly on behalf of the Company, captioned Shaev v. Barksdale, et al., Civil Action No. 16721-NC, and Blum v. Barksdale, et al., Civil Action No. 16733-NC, were filed in Delaware Chancery Court. The complaints allege that the Company's directors breached their fiduciary duties to the Company through the issuance of and disclosures concerning stock options. The Company is named solely as a nominal defendant, against whom the plaintiffs seek no recovery. The Company and the individual defendants have filed a motion to dismiss. Intellectual Property Litigation On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics Corporation and U.S. Robotics Access Corp. in the United States District Court for the Western District of New York. The case is now entitled: Xerox Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV- 6182T. The complaint alleges willful infringement of a United States patent relating to computerized interpretation of handwriting. The complaint further prays for unspecified damages and injunctive relief. Xerox has asserted that Graffiti (registered trademark) software and certain products of Palm Computing, Inc. infringe the patent. Consumer Litigation A putative consumer class action pending against the Company and U.S. Robotics in the California Superior Court, Marin County, Bendall, et al. v. U.S. Robotics Corporation, et al., Civil Action No. 170441, arising out of the purchase of x2 (trademark) products and products upgradeable to x2, was coordinated with a previously filed individual action in the California Superior Court, San Francisco County, Intervention Inc. v. U.S. Robotics Corporation, Civil Action No. 984352. Two putative consumer class action lawsuits pending against the Company and U.S. Robotics in state court of Illinois arising out of the same facts as those alleged in the California cases are stayed, Lippman, et al. v. 3Com, Civil Action No. 97 CH 09773, and Michaels, et al. v. U.S. Robotics Access Corporation, et al., Civil Action No. 97 CH 14417. A class has not been certified, and discovery is under way. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities and Use of Proceeds None. Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on September 24, 1998. (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: Broker Proposal I For Withheld Non-Votes ---------- --- -------- --------- Election of Directors: James L. Barksdale 316,114,579 3,924,859 0 Eric A. Benhamou 315,810,612 4,228,826 0 Gordon A. Campbell 316,148,193 3,891,245 0 James E. Cowie 316,344,683 3,694,755 0 Phillip C. Kantz 316,339,152 3,700,286 0 Broker Proposal II For Against Abstain Non-Votes ----------- --- ------- ------- --------- To approve an increase in the share reserve under the Company's 1984 Employee Stock Purchase Plan by 2,000,000 shares of Common Stock. 308,490,622 10,283,030 1,265,786 0 Broker Proposal III For Against Abstain Non-Votes ------------ --- ------- ------- --------- To approve an increase in the share reserve under the Company's Director Stock Option Plan by 1,000,000 shares of Common Stock. 252,327,456 66,254,691 1,457,291 0 Broker Proposal IV For Against Abstain Non-Votes ----------- --- ------- ------- --------- To ratify the appointment of Deloitte & Touche LLP as the Company's independent public accountants for the fiscal year ending May 28, 1999. 317,855,653 1,473,968 709,817 0 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 4.1 Amended and Restated Rights Agreement dated December 31, 1994 (Exhibit 10.27 to Form 10-Q) (6) 4.2 Amended and Restated Senior Notes Agreement between U.S. Robotics Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (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 Second Amended and Restated 1984 Employee Stock Purchase Plan (Exhibit 10.5 to Form 10-Q) (8)* 10.5 3Com Corporation Director Stock Option Plan, as amended (Exhibit 19.3 to Form 10-Q) (4)* 10.6 Amended 3Com Corporation Director Stock Option Plan (Exhibit 10.8 to Form 10-Q) (8)* 10.7 3Com Corporation Restricted Stock Plan, as amended (Exhibit 10.17 to Form 10-Q) (8)* 10.8 1994 Stock Option Plan (Exhibit 10.22 to Form 10-K) (5)* 10.9 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of November 20, 1996 (Exhibit 10.37 to Form 10-Q) (10) 10.10 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of November 20, 1996 (Exhibit 10.38 to Form 10-Q) (10) 10.11 Agreement and Plan of Reorganization among 3Com Corporation, OnStream Acquisition Corporation and OnStream Networks, Inc. dated as of October 5, 1996 (Exhibit 2.1 to Form S-4) (9) 10.12 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.19 to Form 10-Q) (12) 10.13 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.20 to Form 10-Q) (12) 10.14 Credit Agreement dated as of December 20, 1996 among 3Com Corporation, Bank of America National Trust and Savings Association, as Agent, and the Other Financial Institutions Party Hereto Arranged by BA Securities, Inc. (Exhibit 10.21 to Form 10-Q) (12) 10.15 Amended and Restated Agreement and Plan of Merger by and among 3Com Corporation, TR Acquisitions Corporation, 3Com (Delaware) Corporation, and U.S. Robotics Corporation, dated as of February 26, 1997 and amended as of March 14, 1997 (11) 10.16 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 25, 1997 for the Great America Phase III (PAL) site (13) 10.17 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 25, 1997 for the Great America Phase III (PAL) site (13) 10.18 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 29, 1997 for the Marlborough site(13) 10.19 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 29, 1997 for the Marlborough site (13) 10.20 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of August 11, 1997 for the Rolling Meadowssite (13) 10.21 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of August 11, 1997 for the Rolling Meadows site (13) 10.22 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 on January 25, 1984 (File No. 2-89045) (2) Incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-4 filed on August 31, 1987 (File No. 33- 16850) (3) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-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 10-Q filed on January 13, 1995 (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 May 16, 1995 (File No. 0-19550) (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: January 8, 1999 By: /s/ Christopher B. Paisley ----------------- -------------------------- Christopher B. Paisley Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) EX-1 2 [ARTICLE] 5 [MULTIPLIER] 1000 [PERIOD-TYPE] 6-MOS [FISCAL-YEAR-END] MAY-28-1999 [PERIOD-END] NOV-27-1998 [CASH] 607,106 [SECURITIES] 743,749 [RECEIVABLES] 1,117,449 [ALLOWANCES] (85,232) [INVENTORY] 443,488 [CURRENT-ASSETS] 3,373,624 [PP&E] 1,570,096 [DEPRECIATION] (730,151) [TOTAL-ASSETS] 4,316,381 [CURRENT-LIABILITIES] 1,256,922 [BONDS] 0 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 1,754,399 [OTHER-SE] 1,222,695 [TOTAL-LIABILITY-AND-EQUITY] 4,316,381 [SALES] 2,946,048 [TOTAL-REVENUES] 2,946,048 [CGS] 1,593,278 [TOTAL-COSTS] 2,218,549 [OTHER-EXPENSES] 373,533 [LOSS-PROVISION] 23,763 [INTEREST-EXPENSE] 1,791 [INCOME-PRETAX] 328,412 [INCOME-TAX] 101,808 [INCOME-CONTINUING] 226,604 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 226,604 [EPS-PRIMARY] 0.63 [EPS-DILUTED] 0.62
EX-2 3 BYLAWS OF 3COM CORPORATION TABLE OF CONTENTS - ----------------- ARTICLE I STOCKHOLDERS Section 1.1 Annual Meeting Section 1.2 Special Meetings Section 1.3 Notice of Meetings Section 1.4 Quorum Section 1.5 Organization Section 1.6 Conduct of Business Section 1.7 Notice of Stockholder Business Section 1.8 Proxies and Voting Section 1.9 Stock List Section 1.10 Stockholder Action by Written Consent ARTICLE II BOARD OF DIRECTORS Section 2.1 Number and Term of Office Section 2.2 Vacancies and Newly Created Directorships Section 2.3 Removal Section 2.4 Regular Meetings Section 2.5 Special Meetings Section 2.6 Quorum Section 2.7 Participation in Meetings by Conference Telephone Section 2.8 Conduct of Business Section 2.9 Powers Section 2.10 Action Without Meeting Section 2.11 Compensation of Directors Section 2.12 Nomination of Director Candidates ARTICLE III COMMITTEES Section 3.1 Committees of the Board of Directors Section 3.2 Conduct of Business ARTICLE IV OFFICERS Section 4.1 Generally Section 4.2 Chairman of the Board Section 4.3 Chief Executive Officer Section 4.4 President Section 4.5 Chief Operating Officer Section 4.6 Vice President Section 4.7 Chief Financial Officer Section 4.8 Secretary Section 4.9 Delegation of Authority Section 4.10 Removal Section 4.11 Action With Respect to Securities of Other Corporations ARTICLE V STOCK Section 5.1 Certificates of Stock Section 5.2 Transfers of Stock Section 5.3 Record Date Section 5.4 Lost, Stolen or Destroyed Certificates Section 5.5 Regulations ARTICLE VI NOTICES Section 6.1 Notices Section 6.2 Waivers ARTICLE VII MISCELLANEOUS Section 7.1 Facsimile Signatures Section 7.2 Corporate Seal Section 7.3 Reliance Upon Books, Reports and Records Section 7.4 Fiscal Year Section 7.5 Time Periods ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 8.1 Right to Indemnification Section 8.2 Right of Claimant to Bring Suit Section 8.3 Indemnification of Employees and Agents Section 8.4 Non-Exclusivity of Rights Section 8.5 Indemnification Contracts Section 8.6 Insurance Section 8.7 Effect of Amendment Section 8.8 Savings Clause ARTICLE IX AMENDMENTS BYLAWS OF 3Com CORPORATION ARTICLE I STOCKHOLDERS Section 1.1. Annual Meeting. An annual meeting of the stockholders of 3Com Corporation (the "Corporation"), for the election of directors and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen months after the organization of the Corporation or after its last annual meeting of stockholders. Section 1.2. Special Meetings. Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of the meeting, may be called by (a) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption), (b) the Chairman of the Board, (c) the President or (d) the holders of shares entitled to cast not less than twenty percent (20%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as they shall fix. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice. Section 1.3. Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 1.4. Quorum. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law or by the Certificate of Incorporation. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 1.5. Organization. Such person as the Board of Directors may have designated or, in the absence of such a person, the President of the Corporation or, in his absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. The secretary of the meeting shall be such person as the chairman appoints. Section 1.6. Conduct of Business. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him in order. Section 1.7. Notice of Stockholder Business. At an annual or special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) properly brought before the meeting by or at the direction of the Board of Directors, or (c) properly brought before an annual meeting by a stockholder and if, and only if, the notice of a special meeting provides for business to be brought before the meeting by stockholders, properly brought before the special meeting by a stockholder. For business to be properly brought before a meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal offices of the Corporation no later than (i) in the case of an annual meeting, ninety (90) days before the anticipated date of the next annual meeting, under the assumption that the next annual meeting will occur on the same calendar day as the day of the most recent annual meeting, and (ii) in the case of a special meeting, ten (10) days prior to date of such meeting. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual or special meeting (1) a brief description of the business desired to be brought before the annual or special meeting and the reasons for conducting such business at the annual or special meeting, (2) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (3) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (4) any material interest of the stockholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at an annual or special meeting except in accordance with the procedures set forth in this Section 1.7. The chairman of an annual or special meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 1.7, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 1.8. Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing filed in accordance with the procedure established for the meeting. Each stockholder shall have one vote for every share of stock entitled to vote which is registered in his name on the record date for the meeting, except as otherwise provided herein or required by law. All voting, including on the election of directors, and except where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or by his proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or the Certificate of Incorporation or the Bylaws of this Corporation, all other matters shall be determined by a majority of the votes cast. Section 1.9. Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. Section 1.10. Stockholder Action by Written Consent. An action which may be taken at any annual or special meeting of stockholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the actions so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. All such consents shall be filed with the Secretary of the Corporation and shall be maintained in the corporate records. Prompt notice of the taking of a corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE II BOARD OF DIRECTORS Section 2.1. Number and Term of Office. The authorized number of directors shall initially be one (1) and thereafter shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors. The Board of Directors shall be comprised of ten (10) Directors. The number of Directors provided in this Section 2.1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote. Section 2.2. Vacancies and Newly Created Directorships. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, or other cause (other than removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 2.3. Removal. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of the holders of at least a majority of the voting power of the then outstanding shares of stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Vacancies in the Board of Directors resulting form such removal may be filled by (i) a majority of the directors then in office, though less than a quorum, or (ii) the stockholders at a special meeting of the stockholders properly called for that purpose, by the vote of the holders of a plurality of the shares entitled to vote at such special meeting. Directors so chosen shall hold office until the next annual meeting of stockholders. Section 2.4. Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. Section 2.5. Special Meetings. Special meetings of the Board of Directors may be called by a majority of the directors then in office (rounded up to the nearest whole number), by the Chairman of the Board or by the President and shall be held at such place, on such date, and at such time as they or he shall fix. Notice of the place, date, and time of each such special meeting shall be given to each director who does not waive the right to a notice by (i) mailing written notice not less than five (5) days before the meeting, (ii) sending notice one (1) day before the meeting by an overnight courier service and two (2) days before the meeting if by overseas courier service, or (iii) by telephoning, telecopying, telegraphing or personally delivering the same not less than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 2.6. Quorum. At any meeting of the Board of Directors, a majority of the total number of authorized directors shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 2.7. Participation in Meetings by Conference Telephone. Members of the Board of Directors, or of any committee of the Board of Directors, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 2.8. Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. Section 2.9. Powers. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any officer of the Corporation with or without cause, and from time to time to pass on the powers and duties of any officer upon any other person for the time being; (5) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and (8) To adopt from time to time regulations, not inconsistent with these Bylaws, for the management of the Corporation's business and affairs. Section 2.10. Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 2.11. Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. Section 2.12. Nomination of Director Candidates. Subject to any limitations stated in the Certificate of Incorporation of this Corporation, nominations for the election of directors may be made by the Board of Directors or a proxy committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors. ARTICLE III COMMITTEES Section 3.1. Committees of the Board of Directors. The Board of Directors, by a vote of a majority of the whole Board, may from time to time designate one or more committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 3.2. Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-half of the authorized members shall constitute a quorum unless the committee shall consist of one or two members, in which event all members of the committee shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing. Such written consent or consents shall be filed with the minutes of the proceedings of such committee. ARTICLE IV OFFICERS Section 4.1. Generally. The officers of the Corporation shall consist of a President, a Secretary and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, a Chief Executive Officer, a Chief Operating Officer, a President, one or more Vice Presidents, a Treasurer, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may from time to time be appointed by the Board of Directors. Officers shall be elected by the Board of Directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold office at the pleasure of the Board, until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any number of offices may be held by the same person. Section 4.2. Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him or her by the Board of Directors or as provided by these Bylaws. Section 4.3. Chief Executive Officer. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the Chief Executive Officer (the "CEO") shall perform the duties normally expected of a chief executive officer and shall, subject only to the higher authority and control of the Board of Directors, have primary responsibility for general supervision, direction and control of the business (including long-term strategy and policy) and of the other officers, employees and agents of the Corporation. The CEO shall preside at all meetings of the stockholders. He or she shall be an ex-officio member of all the standing committees including the executive committee, if any, shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. The CEO shall have power to sign all stock certificates, contracts and other instruments of the Corporation that are authorized by the Board of Directors. Section 4.4. President. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board and the CEO, if there be such officers, the President shall be the general manager of the Corporation and shall, subject to the control of the Board of Directors and the powers of the CEO, have general day-to-day supervision, direction and control of the business and other officers (other than the Chairman of the Board, the CEO and the CEO's staff), employees and agents of the Corporation. In the absence of the CEO, the President shall have all of the powers of the CEO (as enumerated in Section 4.3 hereof) and shall preside at all meetings of the stockholders. The President shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the CEO, the Board of Directors or these Bylaws. The President shall have power to sign all stock certificates, contracts and other instruments of the Corporation that are authorized by the Board of Directors. Section 4.5. Chief Operating Officer. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, the Chief Executive Officer and the President, if there be such officers, the Chief Operating Officer (the "COO") shall be responsible for implementing on an operational basis the strategy and policies of the Corporation (as set by the Board of Directors and the CEO) and shall, subject to the control of the Board of Directors and the powers of the CEO and the President, have general day-to-day supervision, direction and control of the business and other officers (other than the Chairman of the Board, the CEO and the President, and their respective staffs), employees and agents of the Corporation. The COO shall have the general powers and duties of management usually vested in the office of a chief operating officer or general manager of operations of a corporation, and shall have such other powers and duties as may be prescribed by the CEO, the President, the Board of Directors or these Bylaws. The COO shall have power to sign all stock certificates, contracts and other instruments of the Corporation that are authorized by the Board of Directors. Section 4.6. Vice President. In the absence or disability of the CEO, the President and the COO, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors, or, if not ranked, the Vice President designated by the Board of Directors, shall perform the duties of the CEO, President or COO, as the case may be, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the CEO, President or COO, as the case may be. The Vice Presidents, if any, shall have such other powers and perform such other duties as from time to time may be prescribed for them by the Board of Directors or these Bylaws. Section 4.7. Chief Financial Officer. The Chief Financial Officer (the "CFO") shall keep and maintain, or cause to be kept and maintained, adequate and correct financial books and records of account of the Corporation in written form or any other form capable of being converted into written form. The CFO shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. The CFO shall disburse all funds of the Corporation as may be ordered by the Board of Directors, shall render to the CEO, the President and the Board of Directors, whenever they or any of them request it, an account of all of his or her transactions as CFO and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. Section 4.8. Secretary. The Secretary shall keep, or cause to be kept, a book of minutes in written form of the proceedings of the Board of Directors, committees of the Board and stockholders. Such minutes shall include all waivers of notice, consents to the holding of meetings and approvals of the minutes of meetings executed pursuant to these Bylaws or the Delaware General Corporation Law. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation's transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of shares held by each. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required by these Bylaws or by law to be given, and shall keep the seal of the Corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws. Section 4.9. Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. Section 4.10. Removal. Any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors. Section 4.11. Action With Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, the CEO, the President, the COO and any officer of the Corporation authorized by the CEO shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers that this Corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE V STOCK Section 5.1. Certificates of Stock. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and the Secretary, an Assistant Secretary or the Chief Financial Officer, certifying the number of shares owned by him or her. Any or all the signatures on the certificate may be facsimile. Section 5.2. Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 5.4 of these Bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. Section 5.3. Record Date. The Board of Directors may fix a record date, which shall not be more than sixty (60) nor fewer than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for the other action hereinafter described, as of which there shall be determined the stockholders who are entitled: to notice of or to vote at any meeting of stockholders or any adjournment thereof; to express consent to corporate action in writing without a meeting; to receive payment of any dividend or other distribution or allotment of any rights; or to exercise any rights with respect to any change, conversion or exchange of stock or with respect to any other lawful action. Section 5.4. Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5.5. Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI NOTICES Section 6.1. Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram, mailgram or commercial courier service. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at this last known address as the same appears on the books of the Corporation. The time when such notice is received by such stockholder, director, officer, employee or agent, or by any person accepting such notice on behalf of such person, if hand delivered, or dispatched, if delivered through the mails or by telegram, courier or mailgram, shall be the time of the giving of the notice. Section 6.2. Waivers. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. Attendance of a person at a meeting shall constitute a waiver of notice for such meeting, except when the person attends a meeting for the express purpose of objecting, and does in fact object, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. ARTICLE VII MISCELLANEOUS Section 7.1. Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 7.2. Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Chief Financial Officer or by an Assistant Secretary or other officer designated by the Board of Directors. Section 7.3. Reliance Upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser. Section 7.4. Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors. Section 7.5. Time Periods. In applying any provision of these Bylaws which require that an act be done or not done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 8.1. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("Proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such Proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said Law permitted the Corporation to provide prior to such amendment) against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 8.2, the Corporation shall indemnify any such person seeking indemnity in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that, if required by the General Corporation Law of Delaware, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such Proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Section or otherwise. Any indemnification as provided herein (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of a director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in the General Corporation Law of Delaware. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Section 8.2. Right of Claimant to Bring Suit. If a claim under Section 8.1 is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of Delaware for the Corporation to indemnify the claimant for the amount claimed. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of Delaware, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. Section 8.3. Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and to the advancement of related expenses, to any employee or agent of the Corporation to the fullest extent of the provisions of this Article with respect to the indemnification of and advancement of expenses to directors and officers of the Corporation. Section 8.4 Non-Exclusivity of Rights. The rights conferred on any person by Sections 8.1, 8.2 and 8.3 shall not be exclusive of any other right which such persons may have or hereafter acquire under any statute, provisions of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 8.5. Indemnification Contracts. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to those provided for in this Article VIII. Section 8.6. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any such director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expenses, liability or loss under Delaware General Corporation Law. Section 8.7. Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VIII by the stockholders or the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. Section 8.8. Savings Clause. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director, officer, employee and agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article that shall not have been invalidated and to the fullest extent permitted by applicable law. ARTICLE IX AMENDMENTS The Board of Directors is expressly empowered to adopt, amend, alter or repeal Bylaws of the Corporation, subject to the right of the stockholders to adopt, amend, alter or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend, alter or repeal the Bylaws of the Corporation. -----END PRIVACY-ENHANCED MESSAGE-----