-----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, Pc8RMZ20TZKQRmMJ4PeWUxgEbQyRf3YKVmSY/m0BlqpabAfYYTQhvG18ZKbQgkFT PKMNY0+hVO/LNwNDtKQVyQ== 0001047469-99-038279.txt : 19991018 0001047469-99-038279.hdr.sgml : 19991018 ACCESSION NUMBER: 0001047469-99-038279 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990827 FILED AS OF DATE: 19991008 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: 002-92053 FILM NUMBER: 99725675 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 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 27, 1999 COMMISSION FILE NO. 0-12867 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ------------ 3COM CORPORATION ------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2605794 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5400 BAYFRONT PLAZA SANTA CLARA, CALIFORNIA 95052 ----------------------- ----- (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 326-5000 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 SEPTEMBER 24, 1999, 345,029,440 SHARES OF THE REGISTRANT'S COMMON STOCK WERE OUTSTANDING. THIS REPORT CONTAINS A TOTAL OF 31 PAGES OF WHICH THIS PAGE IS NUMBER 1. =============================================================================== 3COM CORPORATION TABLE OF CONTENTS
Page PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Statements of Operations QUARTERS ENDED AUGUST 27, 1999 AND AUGUST 28, 1998 3 Condensed Consolidated Balance Sheets AUGUST 27, 1999 AND MAY 28, 1999 4 Condensed Consolidated Statements of Cash Flows QUARTERS ENDED AUGUST 27, 1999 AND AUGUST 28, 1998 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 27 ITEM 2. Changes in Securities and Use of Proceeds 28 ITEM 3. Defaults Upon Senior Securities 28 ITEM 4. Submission of Matters to a Vote of Security Holders 28 ITEM 5. Other Information 28 ITEM 6. Exhibits and Reports on Form 8-K 28 Signatures 31
3Com, U.S. Robotics, Palm Computing, Graffiti, Total Control, CoreBuilder, NBX, and Palm OS are registered trademarks of 3Com Corporation or its subsidiaries. Palm, Palm IIIx, Palm V, Palm VII, and Palm.Net are trademarks of 3Com Corporation or its subsidiaries. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3COM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Quarter Ended ------------------------------- August 27, August 28, 1999 1998 ---- ---- Sales $ 1,387,409 $ 1,405,511 Cost of sales 739,078 802,039 --------- --------- Gross margin 648,331 603,472 --------- --------- Operating expenses: Sales and marketing 272,825 278,651 Research and development 162,844 147,497 General and administrative 61,240 59,406 Merger-related credits (2,105) (10,218) --------- --------- Total operating expenses 494,804 475,336 --------- --------- Operating income 153,527 128,136 Gains on sales of investments 23,551 - Interest and other income, net 15,914 9,645 --------- --------- Income before income taxes 192,992 137,781 Income tax provision 56,476 44,090 Equity interest in loss of consolidated joint venture (975) - --------- --------- Net income $ 137,491 $ 93,691 ========= ========= Net income per share: Basic $ 0.39 $ 0.26 Diluted $ 0.38 $ 0.26 Shares used in computing per share amounts: Basic 353,243 358,533 Diluted 357,703 366,425
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 3COM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value)
August 27, May 28, 1999 1999 --------- --------- (Unaudited) ASSETS Current assets: Cash and equivalents $ 1,003,263 $ 952,249 Short-term investments 702,262 709,365 Accounts receivable, net 757,092 925,598 Inventories, net 350,526 354,272 Deferred income taxes 110,387 312,011 Investments and other 578,989 166,357 --------- --------- Total current assets 3,502,519 3,419,852 Property and equipment, net 796,255 831,557 Goodwill, intangibles, deposits and other assets 233,289 243,980 --------- --------- Total assets $ 4,532,063 $ 4,495,389 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 401,434 $ 336,503 Accrued liabilities and other 620,898 674,375 Income taxes payable 182,966 173,116 Current portion of long-term debt 14,337 14,568 --------- --------- Total current liabilities 1,219,635 1,198,562 Long-term debt 19,413 30,405 Deferred income taxes and other long-term obligations 55,952 64,492 Equity interest in consolidated joint venture 4,500 5,475 Stockholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized; none outstanding - - Common stock, $.01 par value, 990,000 shares authorized; shares outstanding: August 27, 1999, 365,827; May 28, 1999, 365,805 1,968,131 1,954,204 Treasury stock at cost, August 27, 1999, 21,091 shares; May 28, 1999, 8,190 shares (527,656) (197,064) Unamortized restricted stock grants (4,995) (5,303) Retained earnings 1,504,287 1,403,709 Accumulated other comprehensive income 292,796 40,909 --------- --------- Total stockholders' equity 3,232,563 3,196,455 --------- --------- Total liabilities and stockholders' equity $ 4,532,063 $ 4,495,389 ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 3COM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Quarter Ended --------------------------------- August 27, August 28, 1999 1998 ---- ---- Cash flows from operating activities: Net income $ 137,491 $ 93,691 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 81,802 66,131 Gains on sales of investments (23,551) - Deferred income taxes 25,292 29,872 Merger-related credits (2,105) (10,218) Equity interest in loss of consolidated joint venture (975) - Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable 168,506 (130,614) Inventories 1,252 141,621 Investments and other assets 18,759 33,330 Accounts payable 64,931 (922) Accrued liabilities and other (53,223) (19,405) Income taxes payable 24,412 18,121 --------- --------- Net cash provided by operating activities 442,591 221,607 --------- --------- Cash flows from investing activities: Purchase of investments (168,461) (123,230) Proceeds from maturities and sales of investments 180,373 55,747 Purchase of property and equipment (39,156) (45,417) Proceeds from sale of property and equipment 6,790 14,746 Other, net 8,100 18,660 --------- --------- Net cash used for investing activities (12,354) (79,494) --------- --------- Cash flows from financing activities: Issuance of common stock 23,436 6,293 Repurchase of common stock (391,744) (29,481) Repayments of long-term borrowings (12,000) (12,000) Other, net 1,085 (6,397) --------- --------- Net cash used for financing activities (379,223) (41,585) --------- --------- Increase in cash and equivalents 51,014 100,528 Cash and equivalents, beginning of period 952,249 528,981 --------- --------- Cash and equivalents, end of period $ 1,003,263 $ 629,509 ========= =======
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 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 ("3Com" or "us", "we", "our") and include the accounts of 3Com, its wholly-owned subsidiaries and joint venture. 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 3Com's financial position as of August 27, 1999, results of operations for the quarters ended August 27, 1999 and August 28, 1998, and cash flows for the quarters ended August 27, 1999 and August 28, 1998. Certain amounts from the prior year have been reclassified to conform to the current year presentation. Effective June 1, 1998, 3Com adopted a 52-53 week fiscal year ending on the Friday nearest to May 31. Accordingly, fiscal 2000 will end on June 2, 2000, resulting in a 53 week fiscal 2000, rather than 52 weeks as reported in fiscal 1999. For fiscal year 2000, the first three quarters will contain 13 weeks, whereas the fourth quarter will contain 14 weeks. This change did not have a significant effect on 3Com's condensed consolidated financial statements for the quarter ended August 27, 1999 as compared to the quarter ended August 28, 1998. The results of operations for the quarter ended August 27, 1999 may not be indicative of the results to be expected for the fiscal year ending June 2, 2000. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in 3Com's Annual Report on Form 10-K for the fiscal year ended May 28, 1999. 2. Merger-Related Charges On June 12, 1997, 3Com completed a merger with U.S. Robotics, which was accounted for as a pooling-of-interests. As a result of this merger, 3Com has recorded aggregate merger-related charges of $240.1 million through August 27, 1999, which included $196.3 million of integration expenses and $43.8 million of direct transaction costs (consisting primarily of investment banking and other professional fees). Of the aggregate merger-related charges recorded to date, $10.2 million was recorded as a revision in estimate in the first quarter of fiscal 1999. The following table displays a rollforward of the activity and balances of the U.S. Robotics merger reserve from May 29, 1999 through August 27, 1999 (in thousands):
-------------------------------------------------------------------------------------------------- First Quarter 2000 ---------------------------- Revisions in Type of cost May 28, 1999 Estimates Deductions Aug 27, 1999 -------------------------------------------------------------------------------------------------- Facilities $ 13,935 $ (2,091) $ 10,257 $ 1,587 Long-term assets and other 1,338 (14) 759 565 -------------------------------------------------------------------------------------------------- Total $ 15,273 $ (2,105) $ 11,016 $ 2,152 --------------------------------------------------------------------------------------------------
Remaining cash expenditures relating to the U.S. Robotics merger charge are estimated to be approximately $1.1 million. As of August 27, 1999, substantially all benefits had been paid to terminated employees. 6 3. Comprehensive Income The components of comprehensive income, net of tax, are as follows (in thousands):
Quarter Ended ----------------------------- August 27, August 28, 1999 1998 ---------- ---------- Net income $ 137,491 $ 93,691 Other comprehensive income: Change in net unrealized gain on investments 251,743 1,096 Change in accumulated translation adjustments 144 (8,094) --------- ---------- Total comprehensive income $ 389,378 $ 86,693 ========= ==========
4. Net Income Per Share The following table presents the calculation of basic and diluted earnings per share (in thousands, except per share data):
Quarter Ended ----------------------------- August 27, August 28, 1999 1998 ---------- ---------- Net income $ 137,491 $ 93,691 ========== ========== Weighted average shares-Basic 353,243 358,533 Effect of dilutive securities: Employee stock options 4,279 7,671 Restricted stock 181 221 ---------- ---------- Weighted average shares-Diluted 357,703 366,425 ========== ========== Net income per share-Basic $ 0.39 $ 0.26 Net income per share-Diluted $ 0.38 $ 0.26
5 Inventories Inventories, net, consist of (in thousands):
August 27, May 28, 1999 1999 ---------- ---------- Finished goods $ 217,613 $ 237,515 Work-in-process 58,975 49,452 Raw materials 73,938 67,305 ---------- ---------- Total $ 350,526 $ 354,272 ========== ==========
7 6. Business Segment Information In fiscal 1999, we adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information about operating segments and related disclosures about products, geographic information, and major customers. Information on reportable segments for the quarters ended August 27, 1999 and August 28, 1998 is as follows (in thousands): Quarter ended August 27, 1999:
Network Personal Handheld Corporate Systems Connectivity Computing and Other (1) Total - ---------------------------------------------------------------------------------------------------------------------------- Sales $ 674,207 $ 538,989 $ 174,213 $ - $1,387,409 Segment income 72,325 87,488 12,396 (34,718) 137,491 Inventory 165,545 144,802 40,179 - 350,526
Quarter ended August 28, 1998:
Network Personal Handheld Corporate Systems Connectivity Computing and Other (1) Total - ---------------------------------------------------------------------------------------------------------------------------- Sales $ 620,811 $ 668,855 $ 115,845 $ - $1,405,511 Segment income 20,804 111,433 6,180 (44,726) 93,691 Inventory 245,232 237,846 18,200 - 501,278
(1) Included in the corporate and other category are the following: bonuses based on 3Com results; unallocated corporate expenses; unallocated merger credits; gains on sales of investments; interest and other income, net; income tax provision; and equity interest in loss of consolidated joint venture. 7. Subsequent Events On September 13, 1999, we announced our plans to conduct an initial public offering of our Palm Computing subsidiary in early calendar 2000. The initial public offering will be for less than 20 percent of the shares of the Palm Computing subsidiary. We intend to subsequently distribute the balance of the shares of the Palm Computing company to our shareholders, contingent upon receiving certain tax and regulatory approvals. Under this plan, 3Com shareholders will ultimately own shares in both companies. We intend to complete these actions in calendar 2000 subject to market conditions. In the second quarter of fiscal 1999, 3Com entered in to a joint venture named ADMTek, Inc. In September 1999, we sold a portion of our shares in the joint venture, and we intend to relinquish our ability to exercise significant influence over operating and financial policies of the joint venture. Accordingly, in future periods, the results of the joint venture will not be consolidated into our results of operations. We do not expect these actions to have a significant impact on our financial statements. In September 1999, the board of directors authorized the repurchase of an additional 10 million shares of 3Com's common stock, bringing the total number of authorized shares remaining for repurchase to 14.8 million shares. The share authorization will be used for purchases made in the open market from time to time or the sale of put warrants on 3Com's common stock. 8 Also during September 1999, the board of directors approved a revised employee stock purchase plan which extends the offering period to 24 months, allowing for four six-month purchase periods. Price declines, if any, will be reflected at the beginning of each six-month purchase period and remain in effect for the next 24-month offering period. 8. Litigation We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We believe that we have defenses in each of the cases set forth below and are vigorously contesting each of these matters. An unfavorable resolution of one or more of the following lawsuits could adversely affect our business, results of operations, or financial condition. SECURITIES LITIGATION On March 24 and May 5, 1997, securities class action lawsuits, captioned HIRSCH V. 3COM CORPORATION, ET AL., Civil Action No. CV764977 (HIRSCH), and KRAVITZ V. 3COM CORPORATION, ET AL., Civil Action No. CV765962 (KRAVITZ), respectively, were filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County. The complaints allege violations of Sections 25400 and 25500 of the California Corporations Code and seek unspecified damages on behalf of a class of purchasers of 3Com common stock during the period from September 24, 1996 through February 10, 1997. The actions are in discovery. No trial date has been set. On February 10, 1998, a securities class action, captioned EUREDJIAN V. 3COM CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California asserting the same class period and factual allegations as the HIRSCH and KRAVITZ actions. The complaint alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages. The plaintiffs have filed an amended complaint. 3Com has filed an answer to the amended complaint. No trial date has been set. In December 1997, a securities class action, captioned REIVER V. 3COM CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed in the United States District Court for the Northern District of California. Several similar actions have been consolidated into this action, including FLORIDA STATE BOARD OF ADMINISTRATION AND TEACHERS RETIREMENT SYSTEM OF LOUISIANA V. 3COM CORPORATION, ET AL., Civil Action No. C-98-1355. On August 17, 1998, the plaintiffs filed a consolidated amended complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and which seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from April 23, 1997 through November 5, 1997. In July 1999, the court dismissed the complaint and granted the plaintiffs the right to file an amended complaint. Plaintiffs have filed an amended complaint and defendants have filed a motion to dismiss. In October 1998, a securities class action lawsuit, captioned ADLER V. 3COM CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County, asserting the same class period and factual allegations as the REIVER action. The complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages. The action is in discovery. No trial date has been set. 9 In October 1998, two shareholder derivative actions purportedly on behalf of 3Com, 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 3Com's directors breached their fiduciary duties to 3Com through the issuance of and disclosures concerning director stock options. 3Com is named solely as a nominal defendant, against whom the plaintiffs seek no recovery. 3Com and the individual defendants have filed a motion to dismiss these actions. On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (GAYLINN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California. Several similar actions have been consolidated into the GAYLINN action. On September 10, 1999, the plaintiffs filed a consolidated complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from September 22, 1998 through March 2, 1999. 3Com has not responded to the complaint. 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 captioned: 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. On June 25, 1999, the Court stayed the action pending reexamination of the patent by the U.S. Patent and Trademark Office. 9. Effects of Recent Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that entities capitalize certain costs related to internal-use software if certain criteria are met. 3Com adopted SOP 98-1 for our fiscal year ending June 2, 2000. The adoption of SOP 98-1 did not have a significant impact on our financial results for the quarter ended August 27, 1999. In June 1998 and June 1999, the Financial Accounting Standards Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." These statements require 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. These statements will be effective for 3Com's fiscal year ending May 31, 2002. We believe that the adoption of these statements will not have a significant impact on our financial results. 10 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 3Com's condensed consolidated statements of operations:
Quarter Ended ------------- August 27, May 28, August 28, 1999 1999 1998 ---- ---- ---- Sales ................................................. 100.0% 100.0% 100.0% Cost of sales ......................................... 53.3 55.3 57.1 ---- ---- ---- Gross margin .......................................... 46.7 44.7 42.9 ---- ---- ---- Operating expenses: Sales and marketing ............................... 19.7 20.5 19.8 Research and development .......................... 11.7 11.7 10.5 General and administrative ........................ 4.4 4.5 4.2 Non-recurring charges (credits): Purchased in-process technology ................. - 0.4 - Merger-related credits .......................... (0.2) (0.3) (0.7) ---- ---- ---- Total operating expenses ..................... 35.6 36.8 33.8 ---- ---- ---- Operating income ...................................... 11.1 7.9 9.1 Gains (losses) on sales of investments ................ 1.7 (0.2) - Interest and other income, net ........................ 1.1 1.2 0.7 ---- ---- ---- Income before income taxes ............................ 13.9 8.9 9.8 Income tax provision .................................. 4.1 2.8 3.1 Equity interest in loss of consolidated joint venture ........................................... (0.1) (0.1) - ------- ------- ------- Net income ............................................ 9.9% 6.2% 6.7% ==== ==== ==== Excluding non-recurring credits and other: Total operating expenses .......................... 35.8% 36.7% 34.5% Operating income .................................. 10.9 8.0 8.4 Net income ........................................ 8.6 6.4 6.2
SALES Sales in the first quarter of fiscal 2000 totaled $1.39 billion, a decrease of $28 million or two percent from the fourth quarter of fiscal 1999, and a decrease of $18 million or one percent from the corresponding quarter a year ago. Sales for the first quarter of fiscal 2000 were impacted by the seasonality of our business. The first quarter of each of our fiscal years has traditionally been a slow sales quarter, as it includes the three summer months of June, July, and August. NETWORK SYSTEMS. Sales of network systems products (E.G., switches, hubs, remote access concentrators, routers, and customer service and support) in the first quarter of fiscal 2000 increased nine percent compared to the same quarter a year ago. The increase was primarily due to growth in our workgroup systems product lines as well as growth of the Total Control-Registered Trademark- and CoreBuilder-Registered Trademark- platforms. Sales of network systems products in the first quarter of fiscal 2000 represented 48 percent of total sales compared to 44 percent in the first quarter of fiscal 1999. 11 PERSONAL CONNECTIVITY. Sales of personal connectivity products (E.G., desktop network interface cards (NICs), desktop modems, and personal computers (PC) cards for mobile computers) in the first quarter of fiscal 2000 decreased 19 percent compared to the same quarter one year ago. The decrease compared to the first quarter of fiscal 1999 was primarily due to average selling price declines in both analog modems and network interface cards. Sales of personal connectivity products in the first quarter of fiscal 2000 represented 39 percent of total sales compared to 48 percent in the first quarter of fiscal 1999. Historically, a significant portion of our sales has been derived from desktop NICs and analog modems, which have entered the mature phase of their product life cycles. Sales in these product lines are declining because they are particularly sensitive to price competition and are beginning to be replaced by newer technologies. Further, our NICs and modems are increasingly being distributed through the PC original equipment manufacturer (OEM) channel which carries lower average selling prices. Sales of NICs and modems are also highly correlated with sales in the PC market. While the overall PC market continues to grow, sales of low-end PCs are growing faster than high-end PCs. Lower priced PCs are not typically sold with high performance NICs and modems such as those offered by 3Com. HANDHELD COMPUTING. Sales of handheld computing products in the first quarter of fiscal 2000 increased 50 percent compared to the same quarter one year ago. The increase was primarily due to increased market acceptance of our new products including the Palm IIIx-TM- and Palm V-TM- handheld computing products as well as expansion of the market for handheld computing. Sales of handheld computing products in the first quarter of fiscal 2000 represented 13 percent of total sales compared to eight percent in the first quarter of fiscal 1999. GEOGRAPHIC. U.S. sales represented 55 percent of total sales in the first quarter of fiscal 2000 and decreased five percent over the same period a year ago. International sales increased four percent over the same period a year ago. International sales reflected strong growth in Asia Pacific and Canada, partially offset by lower sales in Europe. GROSS MARGIN Gross margin as a percentage of sales was 46.7 percent in the first quarter of fiscal 2000, compared to 44.7 percent in the fourth quarter of fiscal 1999 and 42.9 percent in the first quarter of fiscal 1999. The sequential gross margin improvement was due primarily to the following two items, which occurred in the fourth quarter of fiscal 1999: 1) the signing of a broad long-term cross licensing agreement, and 2) changes in our service delivery programs. Both of these items had an adverse impact on our fourth quarter of fiscal 1999 gross margins and did not have a material impact in the first quarter of fiscal 2000. Additionally, our gross margins improved sequentially and year-over-year due to the favorable impact of continued improvements in inventory management, which resulted in reduced manufacturing period costs, and improvements in our operational management. An increased mix of certain higher margin network systems products also contributed to the gross margin improvement compared to the first quarter of fiscal 1999. OPERATING EXPENSES Operating expenses in the first quarter of fiscal 2000 were $494.8 million, or 35.6 percent of sales, compared to $519.8 million, or 36.8 percent of sales in the fourth quarter of fiscal 1999 and $475.3 million, or 33.8 percent of sales in the first quarter of fiscal 1999. Excluding non-recurring items, operating expenses for the first quarter of fiscal 2000 were $496.9 million, or 35.8 percent of sales, compared to $519.1 million, or 36.7 percent of sales in the fourth quarter of fiscal 1999 and $485.6 million, or 34.5 percent of sales in the first quarter of fiscal 1999. 12 SALES AND MARKETING. Sales and marketing expenses in the first quarter of fiscal 2000 decreased $18.0 million or six percent from the fourth quarter of fiscal 1999, and decreased to 19.7 percent of sales in the first quarter of fiscal 2000 compared to 20.5 percent in the fourth quarter of fiscal 1999. This decrease was due primarily to seasonality in our marketing spending. Sales and marketing expenses in the first quarter of fiscal 2000 decreased $5.8 million or two percent from the first quarter of fiscal 1999, and decreased to 19.7 percent of sales in the first quarter of fiscal 2000 compared to 19.8 percent in the first quarter of fiscal 1999. This decrease was due primarily to reduced international expenses as well as lower employee-related expenses, partially offset by increased selling and marketing costs for our handheld computing products. RESEARCH AND DEVELOPMENT. Research and development expenses in the first quarter of fiscal 2000 decreased $2.3 million or one percent from the fourth quarter of fiscal 1999, and were 11.7 percent of sales in both the first quarter of fiscal 2000 and the fourth quarter of fiscal 1999. Research and development expenses in the first quarter of fiscal 2000 increased $15.3 million or 10.4 percent from the first quarter of fiscal 1999, and increased to 11.7 percent of sales in the first quarter of fiscal 2000 compared to 10.5 percent in the first quarter of fiscal 1999. This year-over-year increase was primarily due to increased investments in new and emerging technologies and markets including voice over the internet protocol (VoIP) and local area network (LAN) telephony, wireless access, handheld computing, broadband access (primarily cable and digital subscriber line (DSL)), and home networking, partially offset by decreased spending related to mature product lines such as analog modems. GENERAL AND ADMINISTRATIVE. General and administrative expenses in the first quarter of fiscal 2000 decreased $1.9 million or three percent from the fourth quarter of fiscal 1999, and decreased to 4.4 percent of sales in the first quarter of fiscal 2000 compared to 4.5 percent in the fourth quarter of fiscal 1999. General and administrative expenses in the first quarter of fiscal 2000 increased $1.8 million or three percent from the first quarter of fiscal 1999, and increased to 4.4 percent of sales in the first quarter of fiscal 2000 compared to 4.2 percent in the first quarter of fiscal 1999. MERGER-RELATED CREDITS. During the first quarter of fiscal 2000, 3Com reversed approximately $2.1 million of previously recorded merger charges primarily related to reductions in the estimates for remaining charges associated with the sale of a facility in Chicago. During the first quarter of fiscal 1999, we reversed approximately $10.2 million of previously recorded merger charges primarily related to reductions in the estimates for remaining charges associated with duplicate facilities and employee termination benefits. GAINS ON SALES OF INVESTMENTS Gains on sales of investments in the first quarter of fiscal 2000 of $23.6 million reflected gains realized from sales of several investments in equity securities. INTEREST AND OTHER INCOME, NET Interest and other income, net in the first quarter of fiscal 2000 decreased $0.7 million compared to the fourth quarter of fiscal 1999. Interest and other income, net in the first quarter of fiscal 2000 increased $6.3 million compared to the first quarter of fiscal 1999, primarily due to higher interest income due to higher cash and investment balances, and improved foreign currency results. INCOME TAX PROVISION 3Com's effective income tax rate was 29.3 percent in the first quarter of fiscal 2000 compared to 31.4 percent in the fourth quarter of fiscal 1999 and 32.0 percent in the first quarter of fiscal 1999. This rate reduction is primarily attributable to increased offshore manufacturing in countries with tax rates significantly below the U.S. statutory rate. 13 EQUITY INTEREST IN LOSS OF CONSOLIDATED JOINT VENTURE Equity interest in loss of consolidated joint venture was $1.0 million for the first quarter of fiscal 2000. This amount represents the pro-rata share of the joint venture's loss allocated to the other investors for the first quarter of fiscal 2000. NET INCOME AND NET INCOME PER SHARE Net income for the first quarter of fiscal 2000 was $137.5 million, or $0.38 per share, compared to net income of $87.5 million, or $0.24 per share for the fourth quarter of fiscal 1999 and net income of $93.7 million, or $0.26 per share, for the first quarter of fiscal 1999. Excluding the pre-tax merger-related credits and the gains on sales of investments, net income was $119.3 million, or $0.33 per share for the first quarter of fiscal 2000. Excluding the pre-tax charge for purchased in-process technology and the pre-tax credit for merger-related activities, net income was $88.0 million, or $0.24 per share for the fourth quarter of fiscal 1999. Excluding the pre-tax merger-related credit, net income was $86.7 million, or $0.24 per share for the first quarter of fiscal 1999. BUSINESS ENVIRONMENT AND RISK FACTORS This Report on Form 10-Q contains forward-looking statements, including statements concerning the growth of new markets within networking, the planned initial public offering and stock distribution of Palm Computing, future sales of certain products and in certain markets (including NICs, analog modems, stackable hubs, LAN switching, remote access concentrators and wide area network (WAN) access), expected sales in the first half of fiscal 2000, expected reduction in operating expenses as a percentage of sales, expectations concerning our long-term financial model, expectations concerning the pattern of quarterly sales during fiscal 2000, and our Year 2000 readiness and expectations of the impact of Year 2000 issues. These statements are subject to certain risks and uncertainties. Some of the factors that could cause future events or results to materially differ from those projected in the forward-looking statements are discussed below. TRANSITIONING OF SALES BASE TO HIGH-GROWTH MARKETS We participate in many markets that are growing at varying rates. Historically, a significant portion of our sales has been derived from desktop NICs, analog modems, and stackable hubs, which have entered the mature phase of their product life cycles. Sales in these product markets are declining, because they are particularly sensitive to price competition or are beginning to be replaced by newer technologies. Consequently, we believe that sales derived from these products will decline as a percent of our total sales. Moderate growth markets in which we participate include LAN switching, remote access concentrators, and WAN access. We expect these segments will continue to account for a significant portion of our sales. In addition, we are increasing our investments in several high-growth and emerging markets that are forecasted to grow significantly higher than the networking industry average. We expect these businesses to account for a higher percentage of our sales over time. In particular, we are focused on the following high-growth and emerging markets: - Handheld Computing - VoIP and LAN Telephony - Broadband Access (primarily cable and DSL) - Wireless Access - Home Networking 14 The transition of our sales base to these new markets may cause disruption in our sales, research and development efforts, and manufacturing operations. We cannot be certain that these emerging markets will materialize in the timeframes that we expect, that we will introduce products for these markets in a timely manner, that the market will accept these products, or that we will successfully generate significant sales and profitability from these markets. In addition, sales from our mature product lines may decline more rapidly than growth in emerging product lines, and therefore, our results could be materially impacted. Due to the transition of our sales base, we expect sales in the first half of fiscal year 2000 will be lower than sales in the first half of fiscal 1999. CONSOLIDATION IN OUR INDUSTRY There have been many mergers and acquisitions in the networking industry in the past several years. More recently, there have also been mergers between telecommunications equipment providers and networking companies, as well as between networking companies and computer component suppliers. Examples from January 1999 through August 1999 include: - 3Com acquired Smartcode, NBX-R- and certain assets of ICS; - Lucent Technologies, a telecommunications company, acquired 11 companies, including networking equipment supplier Ascend Communications; - Cisco Systems, a networking equipment supplier, acquired 12 companies; - Nortel Networks, a telecommunications company, acquired three companies and integrated the operations of previously acquired Bay Networks, a networking equipment supplier; - Alcatel, a telecommunications company, acquired four companies, including Xylan, a networking equipment supplier; - Siemens A.G., a telecommunications company, acquired three networking firms; - General Electric Company, an engineering firm, acquired Fore, a networking equipment supplier; - Intel Corporation, a computer components manufacturer, acquired four companies with networking technology. Future business combinations in the networking industry may result in more companies with greater resources and stronger competitive positions and products than 3Com. Continued industry consolidation may adversely affect our operating results or financial condition. COMPETITION AND PRICING PRESSURE We participate in a highly volatile industry characterized by vigorous competition for market share as well as rapid product and technology development and maturation. In addition, both 3Com and our competitors sometimes lower product prices in order to gain market share or create more demand for our products. For example, we experienced pricing competition for analog modems, cable modems, and DSL modems in the first quarter of 2000. Intense pricing competition in our industry may adversely affect our business, operating results, or financial condition. Our competition historically has come from start-up companies, well-capitalized computer systems and communications companies, and other technology companies focusing on data networking. However, our industry is changing, resulting in new and other potential competitors who have greater financial, marketing, and technical resources than 3Com. For example, technology innovations are driving the convergence of voice, video, and data traffic onto a single network infrastructure, and we now compete with much larger telecommunications equipment companies such as Lucent Technologies Inc. and Nortel Networks. 15 We are also selling products into new markets where we compete with different companies than in the past. Our Palm-TM- handheld computing products compete with product offerings from other handheld device manufacturers and other companies who license competing operating systems to device manufacturers. For example, our Palm Computing-Registered Trademark- products compete with products from companies such as Compaq, Hewlett-Packard, Sharp, Casio, and Phillips that are based on the Microsoft Windows CE operating system. Due to the rapid growth of the handheld computing market and our leadership position, we expect intensified competition from start-up companies, well-capitalized computer software and hardware companies, and consumer electronics companies. Our competitors may develop products and technologies that render our products obsolete or noncompetitive, which could adversely affect our business, operating results, or financial condition. In response to product introductions by new and existing competitors as well as price reductions by resellers of our competitors' products to reduce their inventories, Palm Computing may have to reduce prices and increase marketing expenditures, which could adversely affect revenue and profitability. Price reductions may not be sufficient to protect market share, thus resulting in revenue and profit declines. In addition, by licensing our Palm OS-Registered Trademark- operating system, we will enable new competitors to enter the handheld device market. These new licensees, while important to driving the growth and pervasiveness of our Palm OS operating system, may create competitive and pricing threats to our Palm handheld device business. MARKET GROWTH RATES Our financial success is dependent on the overall growth rate of the networking industry as well the mix of our business coming from various markets within it. In calendar 1998 and early 1999, the networking industry in aggregate grew more slowly than in the past, particularly in the segments that currently comprise a large portion of 3Com's sales. Over the last year, several new, high-growth networking markets have begun to emerge, while other traditional networking markets have reached maturity and are declining. For example, analog modems, once a market with significant growth rates, has become a declining market, while newer broadband access technologies such as cable and DSL are high-growth and emerging markets. Industry reports indicate that the segments of the industry in which we participate grew in aggregate by 14 percent during calendar 1998 and is expected to grow by approximately 15 percent in calendar 1999. Independent market analysis indicates that aggregate growth rates in our markets may decline over the next year, both because the industry as a whole is maturing and because many companies may delay equipment purchases through at least the end of the calendar year due to costs associated with Year 2000 date conversion. Over time, declines in mature markets may be offset by the high-growth of newer markets within networking. However, the high-growth, emerging markets in which we participate, such as broadband access (primarily cable and DSL), are very small today and as such do not yet comprise a significant source of revenues for us. The growth of related industries such as the PC market also affects 3Com's growth. Recent industry reports indicate that the PC market grew by 12 percent in calendar 1998 and is projected to grow by 16 percent in calendar 1999. Much of the growth in this sector is occurring in the low-end of the market. These inexpensive PCs typically do not include high performance NICs and modems such as those offered by 3Com. Our business, operating results, or financial condition may be adversely affected by any decreases in growth rates of networking or PC markets. In addition, we cannot be certain that our results in any particular period will be consistent with the future growth rate of the industry. 16 PALM COMPUTING SEPARATION On September 13, 1999, we announced our plans to conduct an initial public offering of our Palm Computing subsidiary in early calendar 2000. The initial public offering will be for less than 20 percent of the shares of the Palm Computing subsidiary. We intend to subsequently distribute the balance of the shares of the Palm Computing company to our shareholders, contingent upon receiving certain tax and regulatory approvals. Under this plan, 3Com shareholders will ultimately own shares in both companies. We intend to complete these actions in calendar 2000 subject to market conditions. Planning and implementing the separation of Palm Computing from 3Com will require the dedication of management resources, and we expect to incur certain incremental expenses in future periods related to the separation. Efforts required to separate the operations of Palm Computing may disrupt our ongoing business activities. These factors could have an adverse affect on our results of operations or financial condition. MANAGEMENT OF STRATEGIC RELATIONSHIPS AND INVESTMENTS In addition to mergers and acquisitions, technology companies are continually entering into strategic relationships. For example, during calendar 1999, we announced or expanded strategic relationships with several companies including the following: - Microsoft Corporation - Siemens A.G. - Dell Computer - IBM - Hewlett-Packard - Sun Microsystems - Motorola - Symbol Our results of operations or financial condition could be adversely impacted if we experience difficulties managing relationships with our partners or if projects with partners are unsuccessful. In addition, if our competitors enter into successful strategic relationships, they could increase the competition that we face. We have also made strategic investments in several other networking companies. Some of these investments have significantly appreciated in value since the companies became publicly-traded. Our results of operations or financial condition could be adversely impacted if the market value of our investments declines. RELIANCE ON DISTRIBUTORS, RESELLERS, AND PC OEMS We distribute many of our products through indirect distribution channels that include distributors, systems integrators, value-added resellers, and retailers. We also sell our products through the PC OEM channel. Our future results and financial condition are partially dependent on a number of factors relating to this distribution model, including issues associated with competition among and within our channels, selling to PC OEMs, and inventory and customer concentration. We believe our indirect distribution channels are experiencing heightened competition from Internet-based suppliers and PC OEMs that distribute directly to end user customers. We are reducing the number of distributors in the United States through whom we sell our products. Further, 3Com is building in-house capabilities to sell directly to end-user customers over the Internet (e-business). If this initiative is successful, it could cause conflict with our current indirect channels of distribution. If we are unsuccessful in selling through our e-business channel, we could lose market share to competitors who have more successfully developed these capabilities. These changes in the pattern of distribution of networking products could have a material adverse affect on our sales and financial results. 17 Our distributors and resellers maintain significant levels of our products in their inventories. We attempt to ensure that appropriate levels of products are available to end-users by working closely with distributors and resellers to monitor inventory levels. If channel partners attempt to reduce their levels of inventory or if they do not maintain sufficient levels to meet customer demand, our sales could be negatively impacted. PC related networking products such as modems and NICs are increasingly being sold through the PC OEM channel rather than the distribution channel. We derive a significant portion of our personal connectivity product sales from PC OEMs such as Dell Computer, Toshiba, Gateway, Hewlett-Packard, and IBM, who incorporate our NICs, analog modems, or chipsets into their products. While sales to PC OEMs are important, products sold through the PC OEM channel typically have a lower average selling price than those sold through other channels. Therefore, our sales and margins may be adversely impacted if sales to PC OEMs continue to become a larger percentage of our business. In addition, PC OEMs sometimes choose to integrate NIC and modem functions onto the PC motherboard. For example, we currently sell networking chipsets to Dell Computer that are integrated directly onto the PC motherboard of Dell's high-end Optiplex line of PCs. Competitors such as large semiconductor companies who can integrate networking and other computer processing functions onto a single chip might offer PC OEMs a cheaper alternative to our solutions. If the integration of networking and computer processing functionality on a reduced number of components increases, our future sales growth and profitability could be adversely affected. Moreover, in the first quarter of fiscal 2000, there were two customers who individually accounted for 10% or more of our total sales. We cannot be certain that these customers will continue to purchase our products at current levels. We typically do not enter into contracts with our customers that require them to purchase minimum quantities of our products, and our customers have some rights to extend or delay the shipment of their orders. Because our sales are becoming more concentrated among a smaller number of customers, our results of operations, financial condition, or market share could be adversely affected if our customers: - stopped purchasing our products or focused more on selling our competitors' products; - reduced, delayed, or canceled their orders; - were unable to sell our products because we did not timely ship the products to them; or - experienced competitive or financial difficulties resulting in less demand from them for our products or impairing our ability to collect payments from them. OUR FINANCIAL MODEL In managing our business, we periodically establish and revise a long-term financial model (LTFM) 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. Instead, our management uses it in making decisions about the allocation of resources and investments. The current model is as follows: Gross margin 44.5 - 46.0% Operating expenses 28.0 - 29.5% Operating income 15.0 - 18.0% In the first quarter of fiscal 2000, we operated slightly above the LTFM gross margin range due to improvements in our inventory management and our operating management. We expect to perform near or within the current LTFM gross margin range in the near term. In the first quarter of fiscal 2000, our operating expense and operating income percentages were unfavorable compared to the LTFM range. We do not expect to reach the current LTFM operating expense or operating income ranges in the current fiscal year. We intend to establish and communicate an updated model in the second or third quarter of fiscal 2000. 18 UNCERTAINTIES OF INTERNATIONAL MARKETS We operate internationally and expect that international markets will continue to account for a significant percentage of our sales. Some international markets are characterized by economic and political instability and currency fluctuations that can adversely affect our operating results or financial condition. Historically, the Asia Pacific and Latin American regions have been high-growth regions for the networking industry and 3Com. Local economic turmoil has limited growth in these regions during the last several years. Recently, however, there have been some indications that economic growth is returning to the Asia Pacific region. As strength returns to the Asia Pacific region and as our sales to this region increase, we may be exposed to additional credit risk, particularly if there is another economic downturn. The continued instability in the Latin American financial market negatively affected our sales in this market by, among other things, increasing competition from local competitors and reducing access to sources of capital needed by customers to make purchases. The prolonged economic difficulties in the Latin American region subject our resellers to financial hardships, which may increase our credit risk if our customers become insolvent or their ability to meet obligations is otherwise impaired. ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS Products in the networking and handheld computing industries have short life cycles. Therefore, our success depends on our ability to identify new market and product opportunities, to timely develop and introduce new products, and to gain market acceptance of new products, particularly in the emerging markets described above. For example, the introduction of the Palm VII-TM- handheld computing product creates risks involving our ability to successfully support the Palm.Net-TM- service on a large scale and price the service at a level that produces expected returns. Also, the timely introduction and delivery of a next generation multi-service access platform will be important for our long-term success in the Carrier/Network Service Provider market. INDUSTRY STANDARDS AND REGULATIONS Our success also depends 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 - a favorable regulatory environment. Slow market acceptance of new technologies and industry standards could adversely affect our results of operations or financial condition. For example, the Wireless Access Protocol (WAP) used by companies such as Nokia, Motorola, Ericsson, Symbian, and Phone.Com competes with our web clipping protocol. If the WAP protocol becomes the industry standard, this could affect our sales of products which incorporate the web clipping protocol, such as the Palm VII product, which in turn could adversely impact our results of operations or financial condition. In addition, if we fail to achieve timely certification of compliance to industry standards for our products, our sales of such products and our results of operations or financial condition could be adversely affected. Further, a number of new product initiatives, particularly in the area of VoIP and LAN Telephony, could be impacted by new or revised regulations, which in turn could adversely affect our results of operations or financial condition. 19 CUSTOMER ORDER FULFILLMENT The timing and amount of our sales depend on a number of factors that make estimating operating results prior to the end of any period uncertain. For example, we do not typically maintain a significant backlog. Consequently, product sales in any quarter depend on orders booked and shipped in that quarter. In addition, our customers historically request fulfillment of orders in a short period of time, resulting in limited visibility to sales trends. As a result, our operating results depend on the volume and timing of orders and our ability to fulfill the orders in a timely manner. Historically, our sales in the third month of the quarter have been higher than sales in each of the first two months of the quarter. Non-linear sales patterns make business planning difficult, and increase the risk that our quarterly results will fluctuate due to disruptions in functions such as manufacturing, order management, information systems, and shipping. WARRANTIES AND INTERNATIONAL REQUIREMENTS Because our products are often covered by warranties, we may be subject to contractual and/or legal commitments to perform under such warranties. If our products fail to perform as warranted and we do not resolve product quality or performance issues in a timely manner, our operating results or financial condition could be adversely affected. Likewise, if we fail to meet commitments related to the installation of networks, we could be subject to claims for business disruption or consequential damages if a network implementation is not successfully or timely completed. In addition, because our products are sold and marketed in many countries, our products must function in and meet the requirements of many different telecommunications environments and be compatible with various telecommunications systems and products. If our products fail to meet the requirements of international telecommunication environments, our sales could be negatively impacted. SUPPLY CHAIN MANAGEMENT Some key components of our products are currently available only from single or limited sources. Likewise, some services on which we rely are furnished from single or limited service providers. In addition, some of our suppliers are also our competitors. While we generally have been able to obtain adequate supplies of components from existing sources, we cannot be certain that in the future our suppliers will be able to meet our demand for components in a timely and cost-effective manner. For example, the earthquake in Taiwan in September 1999 could cause temporary global shortages in supplies of certain components and/or result in price increases for these components. Our 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. We are working to significantly reduce our supply chain cycle time, from ordering raw materials, to manufacturing products and delivering the products to customers. Should these changes temporarily disrupt our ability to ship product to our customers, our financial condition or results of operations could be negatively impacted. COMMERCIAL COMMITMENTS We sometimes enter into minimum quantity or other non-cancelable commitments. If sales volumes fluctuate significantly, our obligation to meet commitments could adversely affect our results of operations or financial condition. 20 INTELLECTUAL PROPERTY RIGHTS Many of our competitors, such as telecommunications and computer equipment manufacturers, have large intellectual property portfolios, including patents that may cover technologies that are relevant to our business. In addition, many smaller companies, universities, and individual inventors have obtained or applied for patents in areas of technology that may relate to our business. The industry is moving towards aggressive assertion, licensing, and litigation of patents and other intellectual property rights. In the course of our business, we frequently receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses or cross-licenses to incorporate or use the proprietary technologies, protocols, or specifications in our products. If we are unable to obtain and maintain licenses on favorable terms for intellectual property rights required for the manufacture, sale, and use of our products, particularly those which must comply with industry standard protocols and specifications to be commercially viable, our business, results of operations, or financial condition could be adversely impacted. In addition to disputes relating to the validity or alleged infringement of other parties' rights, we may become involved in disputes relating to our assertion of our intellectual property rights. Whether we are defending the assertion of intellectual property rights against us or asserting our intellectual property rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive to business operations by diverting the attention and energies of management and key technical personnel. Further, plaintiffs in intellectual property cases often seek injunctive relief and the measures of damages in intellectual property litigation are complex and often subjective or uncertain. Thus, the existence of or any adverse determinations in this litigation could subject us to significant liabilities and costs. In addition, if we are the alleged infringer, we could be required to seek licenses from others or be prevented from manufacturing or selling our products, which could cause disruptions to our operations or the markets in which we compete. If we are asserting our intellectual property rights, we could be prevented from stopping others from manufacturing or selling competitive products. Any one of these factors could adversely affect our results of operations or financial condition. PROPOSED CHANGES IN ACCOUNTING FOR BUSINESS COMBINATIONS AND INTANGIBLE ASSETS The Financial Accounting Standards Board (FASB) began deliberation of revisions to the rules for business combinations and intangible assets in 1996. Some of these deliberations have included accounting rule-making bodies from other nations as the financial communities attempt to develop global consistency where possible. Business combination rules govern the accounting for mergers and acquisitions used in either a purchase or a pooling-of-interests combination. Business combinations may generate intangible assets (including goodwill) which represent the excess purchase price of an acquired enterprise over net identifiable assets. Tentative conclusions of the FASB will prohibit the use of pooling-of-interests and will establish new accounting standards and financial presentation for intangible assets. The FASB expects to issue a final standard by the end of calendar year 2000. Changes to the current accounting rules for business combinations and intangible assets will not preclude mergers or acquisitions but may increase the earnings dilution associated with future transactions. In addition, if pooling-of-interests accounting is no longer available, we may use cash more often than our common stock to pay for acquisitions of other companies. During this period of deliberation and rule change, the Securities and Exchange Commission has heightened its review of transactions intended to qualify for pooling-of-interests accounting, transactions in which a large percentage of the purchase price is associated with purchased in-process technology, and restructuring and impairment charges recorded at the time of a business combination. If the Commission issues new guidance or interpretation of existing rules as proposed, our future results may be adversely impacted. 21 FLUCTUATIONS IN QUARTERLY RESULTS Our quarterly operating results are difficult to predict and may fluctuate significantly. A wide variety of factors can cause these fluctuations, including: - seasonality with respect to the volume and timing of orders; - 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; - industry consolidation, acquisitions, or litigation; - disruption in the distribution channel; and - timing of orders received within the quarter. In recent years, as the consumer mix of our business has grown, our third fiscal quarter has been a seasonally weaker period characterized by sequentially lower sales. We expect this pattern to continue in fiscal 2000. These factors, and accompanying fluctuations in periodic operating results, could have a significant adverse impact on the market price of our common stock. COMPETITION FOR KEY PERSONNEL Our success depends to a significant extent upon a number of key employees and management. Over the last six months, we have experienced an increasing rate of employee turnover. The loss of the services of key employees could adversely affect our business, operating results, or financial condition. Recruiting and retaining skilled personnel, including engineers, is highly competitive. If we cannot successfully recruit and retain skilled personnel, our ability to compete may be adversely affected. In addition, we must carefully balance the growth of our employees commensurate with our anticipated sales growth. If our sales growth or attrition levels vary significantly, our results of operations or financial condition could be adversely affected. Further, 3Com's common stock price has been, and may continue to be, extremely volatile. When the 3Com common stock price is less than the exercise price of stock options granted to employees, turnover is likely to increase, which could adversely affect our results of operations or financial condition. YEAR 2000 READINESS DISCLOSURE As is true for most companies, 3Com faces a risk from the Year 2000 issue. 3Com's operations could be adversely affected if systems do not correctly recognize date information when the year changes to 2000. The Year 2000 issue affects us at the end of the calendar year 1999. 3Com faces risk primarily in the following areas: - systems used by 3Com to run our business including information systems, equipment and facilities - systems used by 3Com's suppliers - potential warranty or other claims from 3Com customers - potential for reduced spending by other companies on networking solutions as a result of significant information systems spending on Year 2000 remediation 3Com continues to evaluate and mitigate our exposure in these areas where appropriate. We intend for some of our disclosures and announcements concerning our products and Year 2000 programs, including those in this report on Form 10-K, to constitute "Year 2000 Readiness Disclosures" as defined in the recently enacted Year 2000 Information and Readiness Disclosure Act. We cannot be certain that Year 2000 issues will not have a material adverse impact on us. 22 RISK SUMMARY. Based on currently available information, management believes that Year 2000-related disruptions affecting the above-noted components of business operations, or in products sold to customers, will not have a significant adverse impact on our operational results or financial condition. As with many companies, 3Com is dependent on third parties, both public and commercial, for provision of power, telecommunications, water, transportation, and key raw materials, and on the accuracy of Year 2000 readiness statements made by those parties to us. Although contingency plans will be in place to address interruptions in the availability to 3Com of goods and services, failure to ensure Year 2000 readiness by a supplier, customer, or other third party may have a significant adverse impact on our operational results or financial condition. STATE OF READINESS AND RISKS. 3Com has identified four key exposure areas within 3Com 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 3Com's business, such as finance, manufacturing, order processing, and distribution. We have completed our evaluation of these applications for Year 2000 readiness and have been fixing or replacing systems, where necessary. We have successfully completed integration testing of all of our applications as of the end of August 1999. If we identify significant new non-compliance issues or encounter unexpected difficulties in areas previously considered to be Year 2000 ready, our ability to conduct our business or record transactions could be disrupted, which could adversely affect our results of operations or financial condition. EQUIPMENT AND FACILITIES. 3Com is evaluating Year 2000 readiness of its equipment and facilities. As of the end of September 1999, we have completed contacting our key suppliers to ascertain Year 2000 compliance of our critical equipment. If we are delayed in upgrading or replacing any non-Year 2000 ready equipment, or if we encounter any unexpected difficulties in areas previously considered to be Year 2000 ready, our design, production, and shipping capabilities could be disrupted, which could adversely affect our results of operations or financial condition. 3Com is also assessing the Year 2000 readiness of our owned and leased facilities worldwide. We are giving priority to critical facilities that house large numbers of employees or significant operations. We have completed these assessment activities as of the end of August 1999. We have also completed remediation efforts identified in our assessment activities. Any unexpected problems with respect to these facilities could adversely affect our results of operations or financial condition. PRODUCTS. 3Com has conducted an extensive evaluation of our currently available and installed base of products. We believe that the products on our current price list are Year 2000 ready. We have identified some obsolete products that are not Year 2000 ready. While we still support some of these obsolete products, all can be upgraded or replaced with a 3Com Year 2000 ready product. We cannot be certain that older releases of our products will be Year 2000 ready with customers' systems or within existing networks. To assist our customers in evaluating the Year 2000 readiness of 3Com's products, we have developed a list that indicates the capability of our products. We have published the list on our website (www.3Com.com) and periodically update it as we complete our assessment of additional products. If any of our products do not operate properly in the Year 2000, we could have increased warranty costs, customer satisfaction issues, litigation, or other material costs and liabilities, which could adversely affect our results of operations or financial condition. KEY SUPPLIERS. 3Com has contacted our critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are Year 2000 ready. Confirmation of the continued Year 2000 readiness of these key suppliers will continue throughout the remainder of 1999. If key suppliers fail to adequately address the Year 2000 issue for the products or services they provide to 3Com, critical materials, products, and services may not be delivered in a timely manner, which could adversely affect our results of operations or financial condition. 23 MOST REASONABLY LIKELY WORST-CASE SCENARIO. We believe that our most reasonably likely worst-case Year 2000 scenario would relate to problems with the systems and services of third parties rather than with 3Com's internal systems or products. 3Com's operations are conducted in a variety of domestic and international facilities. We believe the risks are greatest with infrastructure (e.g., electricity, water, and sewer service), telecommunications, transportation and distribution channels, and critical suppliers of materials and services. Each location relies on local private and governmental suppliers for utilities, telephone, and other necessary services and supplies. 3Com cannot identify all possible disruption scenarios. We are preparing contingency plans specifying our actions if failures occur in key internal systems and/or critical third party systems and services. The process includes identifying and prioritizing risks, assessing the business impact of those risks, evaluating risk mitigation alternatives, and preparing written contingency plans for those failures with the greatest business risk to 3Com. Contingency plans for critical business operations are expected to be in place by mid-November 1999. Throughout the remainder of the calendar year these plans will be validated and modified as needed, and as we learn more about the preparations and potential exposure of third parties to Year 2000 disruptions. COSTS TO ADDRESS YEAR 2000 ISSUES. We currently estimate that the total cost of our Year 2000 related programs will range between approximately $22 million and $31 million. Through August 27, 1999, we have spent $8.6 million on the program. In order to adequately prepare ourselves for the Year 2000 changeover, we expect to spend approximately $2.5 million between August 28, 1999 and January 1, 2000, primarily for computer equipment, consultant and contractor fees, and costs to ramp up our customer service organization for the expected increase in support calls during the Year 2000 transition. Excluding contingencies, we expect to spend approximately $5.2 million in calendar 2000, primarily for increased staffing in our customer service organization to address potential Year 2000 issues, premium pay and bonuses for employees working during the Year 2000 date rollover period, and remediation of non-critical applications, equipment and facilities, and products and services. All expected costs are based on our current evaluation of the Year 2000 programs and may change as the program progresses. Our estimate includes amounts for contingencies of approximately $6 million to $15 million related to the following items: - hardware and software upgrades or replacements related to desktop systems and telephone equipment - consultant and contractor fees to assist in remediation efforts - further increased staffing in our customer service area to address the expected increase in support calls during the Year 2000 transition - a contingency for potential disruption in supplier product or service delivery or in manufacturing operations - a contingency for potential product upgrades or replacements - a contingency for potential unexpected costs associated with replacing or repairing consumer products previously considered to be Year 2000 ready We have not included in the total cost estimate any costs associated with potential Year 2000 litigation exposure since these costs are not estimable. We have adequate funds to pay for the expected costs of Year 2000 programs. As of August 27, 1999, we have not deferred any significant internal information technology projects due to our Year 2000 efforts. 24 SALES IMPACT. Year 2000 readiness 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. In addition, companies may defer spending on networking solutions while they test and ensure the stability of their current network configurations. Such changes in customers' spending patterns could adversely affect our sales, operating results, or financial condition. LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents and short-term investments at August 27, 1999 were $1.7 billion, consistent with the balance of $1.7 billion at May 28, 1999. For the quarter ended August 27, 1999, net cash generated from operating activities was $442.6 million. Accounts receivable at August 27, 1999 decreased $168.5 million from May 28, 1999 to $757.1 million. Days sales outstanding in receivables decreased to 49 days at August 27, 1999, compared to 59 days at May 28, 1999 primarily due to a lower percentage of sales in the last month of the August quarter compared to the last month of the May quarter. Inventory levels at August 27, 1999 decreased $3.7 million from May 28, 1999 to $350.5 million. Annualized inventory turnover was 8.3 turns for the quarter ended August 27, 1999, compared to 8.2 turns for the quarter ended May 28, 1999. As part of our 3Com Ventures initiative, we selectively make strategic investments in the equity securities of privately-held companies. For those securities which have become publicly-traded, we have marked the cost basis to market. During the quarter ended August 27, 1999, 3Com's investments in the equity securities of privately-held and publicly-traded companies increased by $423.6 million, primarily due to market value appreciation of our investments in publicly-traded companies. During the quarter ended August 27, 1999, 3Com made $39.2 million in capital expenditures. Major capital expenditures included upgrades and expansion of our facilities and purchases and upgrades of software and computer equipment. Additionally, in the first quarter of fiscal 2000, 3Com sold one building in the Chicago area and machinery and equipment for total net proceeds of $6.8 million. As of August 27, 1999, we had approximately $11.6 million in capital expenditure commitments outstanding primarily associated with the expansion of our facilities and purchases and upgrades of software and computer equipment. In addition, we have commitments related to operating lease arrangements in the U.S., under which we have an option to purchase the properties for an aggregate of $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, 3Com retains an obligation for the shortfall, subject to certain provisions of the lease. In September 1999, the board of directors authorized the repurchase of an additional 10 million shares of 3Com's common stock, bringing the total number of authorized shares remaining for repurchase to 14.8 million shares. The share authorization will be used for purchases made in the open market from time to time or the sale of put warrants on 3Com's common stock. During the first quarter of fiscal 2000, we repurchased 15.4 million shares of common stock at a total purchase price of $391.7 million. During the first quarter of fiscal 2000, we received net cash of $23.4 million from the sale of our common stock to employees through our employee stock purchase and option plans. 3Com has a $100 million revolving bank credit agreement, which expires December 20, 1999. Payment of cash dividends is permitted under the credit agreement, subject to certain limitations based on our net income levels. We have not paid and do not anticipate we will pay cash dividends on our common stock. The credit agreement requires us to maintain specified financial covenants. As of August 27, 1999, there were no outstanding borrowings under the credit agreement, and we were in compliance with all required covenants. 25 During the quarter ended August 27, 1999, we repaid $12 million of borrowings under the 7.52% Unsecured Senior Notes agreement. As of August 27, 1999, $24 million of this debt remained outstanding, of which $12 million is classified as current. During the first quarter of fiscal 2000, we recorded a tax benefit on stock option transactions of $14.6 million. During the same quarter a year ago, we recorded a similar benefit totaling $2.7 million. Based on current plans and business conditions, we believe that our existing cash and equivalents, short-term investments, and cash generated from operations will be sufficient to satisfy anticipated cash requirements for at least the next twelve months. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that entities capitalize certain costs related to internal-use software if certain criteria are met. 3Com adopted SOP 98-1 for our fiscal year ending June 2, 2000. The adoption of SOP 98-1 did not have a significant impact on our financial results for the quarter ended August 27, 1999. In June 1998 and June 1999, the Financial Accounting Standards Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." These statements require 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. These statements will be effective for 3Com's fiscal year ending May 31, 2002. We believe that the adoption of these statements will not have a significant impact on our financial results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 3Com holds a small portfolio of marketable-equity traded securities that are subject to market price volatility. Equity security price fluctuations of plus or minus 15 percent would have a $76.3 million impact on the value of these securities in the first quarter of fiscal 2000. For interest rate sensitivity and foreign currency exchange risk, reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended May 28, 1999. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We believe that we have defenses in each of the cases set forth below and are vigorously contesting each of these matters. An unfavorable resolution of one or more of the following lawsuits could adversely affect our business, results of operations, or financial condition. SECURITIES LITIGATION On March 24 and May 5, 1997, securities class action lawsuits, captioned HIRSCH V. 3COM CORPORATION, ET AL., Civil Action No. CV764977 (HIRSCH), and KRAVITZ V. 3COM CORPORATION, ET AL., Civil Action No. CV765962 (KRAVITZ), respectively, were filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County. The complaints allege violations of Sections 25400 and 25500 of the California Corporations Code and seek unspecified damages on behalf of a class of purchasers of 3Com common stock during the period from September 24, 1996 through February 10, 1997. The actions are in discovery. No trial date has been set. On February 10, 1998, a securities class action, captioned EUREDJIAN V. 3COM CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California asserting the same class period and factual allegations as the HIRSCH and KRAVITZ actions. The complaint alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages. The plaintiffs have filed an amended complaint. 3Com has filed an answer to the amended complaint. No trial date has been set. In December 1997, a securities class action, captioned REIVER V. 3COM CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed in the United States District Court for the Northern District of California. Several similar actions have been consolidated into this action, including FLORIDA STATE BOARD OF ADMINISTRATION AND TEACHERS RETIREMENT SYSTEM OF LOUISIANA V. 3COM CORPORATION, ET AL., Civil Action No. C-98-1355. On August 17, 1998, the plaintiffs filed a consolidated amended complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and which seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from April 23, 1997 through November 5, 1997. In July 1999, the court dismissed the complaint and granted the plaintiffs the right to file an amended complaint. Plaintiffs have filed an amended complaint and defendants have filed a motion to dismiss. In October 1998, a securities class action lawsuit, captioned ADLER V. 3COM CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County, asserting the same class period and factual allegations as the REIVER action. The complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages. The action is in discovery. No trial date has been set. In October 1998, two shareholder derivative actions purportedly on behalf of 3Com, 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 3Com's directors breached their fiduciary duties to 3Com through the issuance of and disclosures concerning director stock options. 3Com is named solely as a nominal defendant, against whom the plaintiffs seek no recovery. 3Com and the individual defendants have filed a motion to dismiss these actions. 27 On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (GAYLINN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California. Several similar actions have been consolidated into the GAYLINN action. On September 10, 1999, the plaintiffs filed a consolidated complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from September 22, 1998 through March 2, 1999. 3Com has not responded to the complaint. 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 captioned: 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 software and certain products of Palm Computing, Inc. infringe the patent. On June 25, 1999, the Court stayed the action pending reexamination of the patent by the U.S. Patent and Trademark Office. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description ------- ----------- 3.1 Certificate of Incorporation (11) 3.2 Certificate of Correction Filed to Correct a Certain Error in the Certificate of Incorporation (11) 3.3 Certificate of Merger (11) 3.4 Corrected Certificate of Merger 3.5 Bylaws of 3Com Corporation, As Amended (12) 4.1 Amended and Restated Rights Agreement dated December 31, 1994 (Exhibit 10.27 to Form 10-Q) (4) 4.2 Amended and Restated Senior Notes Agreement between U.S. Robotics Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (5) 28 4.3 Amendment to amended and restated note agreements between 3Com Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (13) 4.4 Second amendment to amended and restated note agreements between 3Com Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company 10.1 1983 Stock Option Plan, as amended* 10.2 Amended and Restated Incentive Stock Option Plan (2)* 10.3 License Agreement dated March 19, 1981 (1) 10.4 Second Amended and Restated 1984 Employee Stock Purchase Plan (Exhibit 10.5 to Form 10-Q) (6)* 10.5 3Com Corporation Director Stock Option Plan, as amended (Exhibit 19.3 to Form 10-Q) (3)* 10.6 Amended 3Com Corporation Director Stock Option Plan (Exhibit 10.8 to Form 10-Q) (6)* 10.7 3Com Corporation Restricted Stock Plan, as amended (Exhibit 10.17 to Form 10-Q) (6)* 10.8 1994 Stock Option Plan, as amended* 10.9 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of November 20, 1996 (Exhibit 10.37 to Form 10-Q) (8) 10.10 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of November 20, 1996 (Exhibit 10.38 to Form 10-Q) (8) 10.11 Agreement and Plan of Reorganization among 3Com Corporation, OnStream Acquisition Corporation and OnStream Networks, Inc. dated as of October 5, 1996 (Exhibit 2.1 to Form S-4) (7) 10.12 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.19 to Form 10-Q) (10) 10.13 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.20 to Form 10-Q) (10) 10.14 Credit Agreement dated as of December 20, 1996 among 3Com Corporation, Bank of America National Trust and Savings Association, as Agent, and the Other Financial Institutions Party Hereto Arranged by BA Securities, Inc. (Exhibit 10.21 to Form 10-Q) (10) 10.15 Amended and Restated Agreement and Plan of Merger by and among 3Com Corporation, TR Acquisitions Corporation, 3Com (Delaware) Corporation, and U.S. Robotics Corporation, dated as of February 26, 1997 and amended as of March 14, 1997 (9) 10.16 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 25, 1997 for the Great America Phase III (PAL) site (11) 10.17 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 25, 1997 for the Great America Phase III (PAL) site (11) 10.18 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 29, 1997 for the Marlborough site (11) 10.19 Purchase agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 29, 1997 for the Marlborough site (11) 29 10.20 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of August 11, 1997 for the Rolling Meadows site (11) 10.21 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of August 11, 1997 for the Rolling Meadows site (11) 10.22 First Amendment to Credit Agreement (11) 27.1 Financial Data Schedule - ------------------------------------------------------------------------------- * Indicates a management contract or compensatory plan. (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant's Registration Statement on Form S-1 filed on January 25, 1984 (File No. 2-89045) (2) Incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-4 filed on August 31, 1987 (File No. 33-16850) (3) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 10, 1992 (File No. 0-12867) (4) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 13, 1995 (File No. 0-12867) (5) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on May 16, 1995 (File No. 0-19550) (6) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 15, 1996 (File No. 0-12867) (7) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-4 filed on October 11, 1996 (File No. 333-13993) (8) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 13, 1997 (File No. 0-12867) (9) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-4 filed on March 17, 1997 (File No. 333-23465) (10) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on April 11, 1997 (File No. 0-12867) (11) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on October 14, 1997 (File No. 0-12867) (12) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 11, 1999 (File No. 0-12867) (13) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 17, 1999 (File No. 0-12867) (b) Reports on Form 8-K None. 30 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: October 8, 1999 By: /s/ Christopher B. Paisley ------------------------- -------------------------------------- Christopher B. Paisley Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 31 EX-3.4 2 EXHIBIT 3.4 EXHIBIT A CERTIFICATE OF MERGER OF 3COM CORPORATION (A CALIFORNIA CORPORATION) INTO 3COM (DELAWARE) CORPORATION. (A DELAWARE CORPORATION) (UNDER SECTION 252 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE) The undersigned corporation, a Delaware corporation, does hereby certify: First: That the name and state of incorporation of each of the constituent corporations of the merger is as follows: Name State of Incorporation ---------------------------- ------------------------------- 3Com Corporation California 3Com (Delaware) Corporation Delaware Second: That an Agreement and Plan of Merger and Reincorporation dated as of March 14, 1997 by and between 3Com Corporation and 3Com (Delaware) Corporation has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the provisions of Section 252 of the General Corporation Law of the State of Delaware. Third: That the name of the surviving corporation of the merger is 3Com (Delaware) Corporation, a Delaware corporation (the "Surviving Corporation"). Fourth: That the Certificate of Incorporation of 3Com (Delaware) Corporation in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation, and that the Certificate of Incorporation is hereby amended to read in full as follows: "FIRST: The name of the Corporation is 3Com Corporation (hereinafter sometimes referred to as the "Corporation"). 1 SECOND: The address of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of Newcastle. The name of the registered agent at that address is Corporation Service Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. FOURTH: A. The total number of shares of all classes of stock which the Corporation shall have authority to issue is One Billion Shares (1,000,000,000) consisting of: 1. Nine Hundred Ninety Million (990,000,000) shares of Common Stock, par value one cent ($.01) per share (the "Common Stock"); and 2. Ten Million (10,000,000) shares of Preferred Stock, par value one cent ($.01) per share (the "Preferred Stock"). B. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of shares of Preferred Stock in one or more series and, by filing a certificate pursuant to the applicable law of the State of Delaware, from time to time to determine the designation of any series, to fix the number of shares of any series, to determine or alter the rights, preferences, privileges and powers granted to any wholly unissued series of Preferred Stock and any qualifications, limitations or restrictions imposed thereon, and, within the limits of restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. FIFTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: A. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Certificate of Incorporation or the Bylaws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. B. The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide. 2 C. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. D. Special meetings of stockholders of the Corporation may be called only by either the Board of Directors, the Chairman of the Board of Directors or the President. SIXTH: A. The number of directors shall initially be eleven (11) 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 (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). As of the effective time of the merger of 3Com Corporation, a California corporation, with and into the Corporation (the "Effective Time") the directors shall be divided into two classes with the term of office of the first class to expire at the first annual meeting of the stockholders following the Effective Time and the term of office of the second class to expire at the second annual meeting of stockholders held following the Effective Time, and thereafter for each such term to expire at each second succeeding annual meeting of stockholders after such election. All directors shall hold office until the expiration of the term for which elected, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. B. 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 or other cause (including 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, or by a sole remaining director, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. C. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any directors, or the entire Board of Directors, may be removed from office at any duly called annual or special meeting, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. 3 SEVENTH: The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the Corporation. The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the stockholders shall require, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. EIGHTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. Any repeal or modification of the foregoing provisions of this Article EIGHTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. NINTH: The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; PROVIDED, HOWEVER, that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal this Article NINTH, Article FIFTH, Article SIXTH, Article SEVENTH or Article EIGHTH." Fifth: That the Bylaws, as amended, of 3Com (Delaware) Corporation as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation. 4 Sixth: That the directors (including their respective denomination as Class I or Class II directors) and officers of 3Com Corporation immediately prior to the Effective Time shall be the initial directors and officers of the Surviving Corporation, until their respective successors are duly elected or appointed. Seventh: That the executed Agreement and Plan of Merger and Reincorporation is on file at the principal place of business of the Surviving Corporation. The address of said principal place of business is 5400 Bayfront Plaza, Santa Clara, California 95052. Eighth: That a copy of the Agreement and Plan of Merger and Reincorporation will be furnished by the Surviving Corporation upon request and without charge to any stockholder of any constituent corporation. Ninth: The authorized capital Stock of 3Com Corporation is 400,000,000 shares of Common Stock, $0.01 par value, and 3,000,000 shares of Preferred Stock, without par value. Tenth: That this Certificate of Merger shall be effective on June 12, 1997 at 5:00 p.m. (Eastern Time). IN WITNESS WHEREOF, the undersigned has caused this Certificate to be executed by its President and attested by its Secretary this 11th day of June, 1997. 3COM (DELAWARE) CORPORATION (a Delaware corporation) By: Mark D. Michael ---------------------------- Mark D. Michael, President Dated: June 11, 1997 ATTESTED TO BY: Mark D. Michael - ------------------------------ Mark D. Michael, Secretary 5 CORRECTED CERTIFICATE OF MERGER OF 3COM CORPORATION The undersigned hereby certifies: 1. The name of the corporation is 3Com Corporation. 2. The corporation was incorporated in the State of Delaware on March 10, 1997. 3. The Certificate of Merger which was filed in the Office of the Delaware Secretary of State on June 12, 1997 requires correction as permitted by Section 103 of the Delaware General Corporation Law, in that the restated Certificate of Incorporation as set forth therein failed to include Articles SECOND, THIRD, and FIFTH through NINTH. 4. The document in corrected form is attached hereto as Exhibit A. IN WITNESS WHEREOF, the undersigned has executed this Corrected Certificate of Merger this 24th day of March, 1999. /s/ Mark D. Michael ------------------------------ Mark D. Michael, Secretary STATE OF DELAWARE PAGE 1 OFFICE OF THE SECRETARY OF STATE ------------------------------ I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF CORRECTED CERTIFICATE OF MERGER OF "3COM CORPORATION", FILED IN THIS OFFICE ON THE TWENTY-SIXTH DAY OF MARCH, A.D. 1999, AT 9 O'CLOCK A.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. [SEAL] /s/ Edward J. Freel ------------------------------------ EDWARD J. FREEL, SECRETARY OF STATE AUTHENTICATION: 9654630 DATE: 03-26-99 EX-4.4 3 EXHIBIT 4.4 ================================================================================ 3COM CORPORATION, as successor to U.S. Robotics Corporation --------------------------------------- SECOND AMENDMENT TO AMENDED AND RESTATED NOTE AGREEMENTS Dated as of July 31, 1999 to Amended and Restated Note Agreements Dated as of March 1, 1995 --------------------------------------- Re: $60,000,000 7.52% Senior Notes Due June 30, 2001 ================================================================================ SECOND AMENDMENT TO AMENDED AND RESTATED NOTE AGREEMENTS THIS SECOND AMENDMENT TO AMENDED AND RESTATED NOTE AGREEMENTS dated as of July 31, 1999 (the or this "AMENDMENT") to the Amended and Restated Note Agreements dated as of March 1, 1995 (the "NOTE AGREEMENT") is among 3Com Corporation, a Delaware corporation (the "COMPANY"), The Northwestern Mutual Life Insurance Company ("NORTHWESTERN MUTUAL"), Metropolitan Life Insurance Company ("METLIFE") and Metropolitan Property and Casualty Insurance Company ("MET PROPERTY") (Northwestern Mutual, MetLife and Met Property are hereinafter collectively referred to as the "NOTEHOLDERS"). RECITALS: WHEREAS, U.S. Robotics Corporation, a Delaware corporation ("USR") entered into those separate Amended and Restated Note Agreements, each dated as of March 1, 1995 (the "NOTE AGREEMENTS"), with each of the Purchasers, respectively, pursuant to which USR issued to such Purchasers its Amended and Restated 7.52% Senior Notes, due June 30, 2001, in the aggregate principal amount of $60,000,000 (the "NOTES"); and WHEREAS, the Company became the successor by merger to USR on June 12, 1997; and WHEREAS, pursuant to an Assignment and Assumption Agreement (the "ASSUMPTION AGREEMENT") dated as of June 12, 1997, the parties effected the assignment by USR to the Company and the assumption by the Company of all the right, title, obligations and interest of USR in, to and under the Note Agreements and the Notes; and WHEREAS, the Company and the Noteholders executed the Amendment (the "FIRST AMENDMENT") to Amended and Restated Note Agreements dated as of May 28, 1999, which amended Section 5.10(a) of the Note Agreements (the Note Agreements, as amended by the First Amendment, is hereinafter referred to as the "AMENDED NOTE AGREEMENTS"); and WHEREAS, the Company and the Noteholders now wish to further amend the Note Agreements as hereinafter set forth; and WHEREAS, capitalized terms used herein which are not defined herein shall have the meanings given to them in the Amended Note Agreements; and NOW, THEREFORE, upon the full and complete satisfaction of the conditions precedent to the effectiveness of the Amendment set forth in Section 3.1 hereof, and in 2 consideration of good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company and the Noteholders do hereby agree as follows: SECTION 1. AMENDMENTS. 1.1. Section 5.6 of the Amended Note Agreements shall be and is hereby amended in its entirety to read as follows: "The Company will at all times keep and maintain Consolidated Tangible Net Worth at an amount not less than the sum of (a) $1,713,559,000 PLUS (b) the aggregate of 50% of positive Consolidated Net Income computed on a cumulative basis from and after March 1, 1999 to the end of the most recently completed fiscal quarter (PROVIDED that for purposes of the foregoing calculation, Consolidated Net Income shall be deemed to be zero for any period for which Consolidated Net Income is less than or equal to zero) LESS (c) (without duplication) 100% of restructuring and acquisition charges related to Acquisitions permitted hereunder (if they are expensed in the same fiscal quarter as such Acquisition is completed) on and after February 26, 1999." 1.2. Section 5.7 of the Amended Note Agreements shall be and is hereby amended in its entirety to read as follows: "INTEREST COVERAGE RATIO AND QUICK RATIO. The Company will at all times keep and maintain (a) the ratio of EBIT to Interest Expense determined at the end of each fiscal quarter for the period of the most recently completed four consecutive fiscal quarters at not less than 3.25 to 1.0 and (b) the ratio of Quick Assets of the Company and its Subsidiaries (determined on a consolidated basis) to the sum of Current Liabilities of the Company and its Subsidiaries (determined on a consolidated basis) at not less than 1.00 to 1.00. As used in Section 5.7(b): "Current Liabilities" means all liabilities of the Company and its Subsidiaries treated as current liabilities in accordance with GAAP, including without limitation (a) all obligations payable on demand or within one year after the date in which the determination is made and (b) installment and 3 sinking fund payments required to be made within one year after the date on which determination is made, but excluding all such liabilities or obligations which are renewable or extendable at the option of such entity to a date more than one year from the date of determination. "Long-Term Investments" means those investments described below (to the extent that they are not classified as short term investments in accordance with GAAP), provided that such investments shall have maturities of not longer than two years, and are rated not less than A- by Standard & Poor's Corporation or less than A by Moody's Investors Service, Inc.: (1) securities issued or fully guaranteed or fully insured by the United States government or any agency thereof and backed by the full faith and credit of the United States; (2) certificates of deposit, time deposits, eurodollar time deposits, repurchase agreements, or banker's acceptances that are issued by either one of the 50 largest (in assets) banks in the United States or by one of the 100 largest (in assets) banks in the world; and (3) municipal notes and bonds. "Quick Assets" means the sum (without duplication of any item) of unencumbered cash plus other unencumbered marketable securities which are classified as short term investments according to GAAP, plus the fair market value of unencumbered Long-Term Investments, plus unencumbered current net accounts receivable. For purposes of determining Quick Assets, assets will be deemed to be "unencumbered" if they are actually unencumbered or if they are encumbered only by Liens, from which, at the time of the applicable determination of Quick Assets, the Company or its Subsidiary, as applicable, is entitled to a release of such assets upon no more than ninety days' notice, without any payment (other than the payment of ministerial fees and costs), without subjecting other assets to any Lien and without otherwise satisfying any condition that is beyond such entity's control and ability. 4 1.3. Section 5.8, subclause (b), of the Amended Note Agreements shall be and is hereby amended in its entirety to read as follows: "The Company will not at any time permit the aggregate of (1) Consolidated Funded Debt and (2) all obligations, contingent or otherwise, under Puts and Calls, to exceed an amount equal to 35% of Consolidated Total Capitalization." 1.4. Section 5.10, subclause (a)(2), of the Amended Note Agreements shall be and is hereby amended by deleting the following phrase therefrom: "any shares of its capital stock of any class or". 1.5. Section 5.10, subclause (a)(3), of the Amended Note Agreements shall be and is hereby amended by the addition of the following parenthetical phrase after the word "stock": "(it being understood that, subject to Section 5.8(b) hereof with respect to Puts and Calls, nothing in this Section 5.10 is intended to prevent the purchase, redemption or retirement by the Company, directly or indirectly, or through any Subsidiary, or through any Affiliate of the Company, of its capital stock of any class, so long as no Default or Event of Default hereunder shall be in existence hereunder or result therefrom)." 1.6. The penultimate parenthetical phrase in Section 5.10, subclause (a) of the Amended Notes Agreements shall be and is hereby amended by the deletion of the words "capital stock and" therefrom. 1.7. Section 5.11, subclause (d), of the Amended Note Agreements shall be and is hereby amended by deleting the number "10%" and replacing it with the number "15%". 1.8. Section 5.12, subclause (b)(2)(i), of the Amended Note Agreements shall be and is hereby amended by deleting the number "10%" and replacing it with the number "20%". 1.9. Section 8.1 of the Amended Note Agreement shall be and hereby is amended by the addition of the following definitions: "ACQUISITION" means any transaction or series of related transactions for the purpose of or resulting directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests, membership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that the Company or the Subsidiary is the surviving entity. 5 "PERMITTED INVESTMENTS" shall mean any investment by the Company or any Subsidiary complying with the Cash Investment Policy established and approved by the board of directors of the Company on September 24, 1998, a copy of which is set forth on Schedule IV hereto, or any other Cash Investment Policy which has been provided to the Noteholders accompanied by a certificate with respect thereto of a Responsible Officer that said replacement policy has been established and approved by the board of directors of the Company to replace such policy. "PUTS AND CALLS" shall mean arrangements whereby (i) a holder of the Company's capital stock may require the Company or any of its Subsidiaries or Affiliates to purchase from such holder the Company's stock at the option of such holder and/or (ii) the Company or any of its Subsidiaries or Affiliates may require a holder of its capital stock to sell such stock to the Company or any of its Subsidiaries or Affiliates at its option. 1.10. The contents of Schedule IV to the Amended Note Agreements shall be and hereby is replaced in its entirety by the contents of Schedule 1 hereto. SECTION 2. REPRESENTATIONS AND WARRANTIES. 2.1. To induce the Noteholders to execute and deliver this Amendment, the Company represents and warrants to the Noteholders (which representations shall survive the execution and delivery of this Amendment) that: (a) this Amendment has been duly authorized, executed and delivered by it and this Amendment constitutes the legal, valid and binding obligation, contract and agreement of the Company enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (b) the Amended Note Agreements, as amended by this Amendment, constitute the legal, valid and binding obligation, contract and agreement of the Company enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; 6 (c) the execution, delivery and performance by the Company of this Amendment (i) have been duly authorized by all requisite corporate action and, if required, shareholder action, (ii) do not require the consent or approval of any governmental or regulatory body or agency, and (iii) will not (A) violate (1) any provision of law, statute, rule or regulation or its certificate of incorporation or bylaws, (2) any order of any court or any rule, regulation or order of any other agency or government binding upon it, (B) violate or require any consent under or with respect to any provision of any material indenture, agreement or other instrument to which it is a party or by which its properties or assets are or may be bound, including, without limitation, the Credit Agreement dated as of December 20, 1996, as amended, among the Company, Bank of America National Trust and Savings Association, and the other financial institutions party thereto (the "Bank Agreement"), or (C) result in a breach or constitute (alone or with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, including the Bank Agreement; (d) as of the date hereof and after giving effect to this Amendment, no Default or Event of Default (as defined in the Amended Note Agreements) has occurred which is continuing; (e) since February 26, 1999, there has been no material adverse change in the financial condition, operations, business, properties or prospects of the Company or any Subsidiary; and (f) all the representations, warranties and covenants contained in Section 3 of the Assumption Agreement are true and correct in all material respects with the same force and effect as if made by the Company on and as of the date hereof. SECTION 3. CONDITIONS PRECEDENT; MISCELLANEOUS. 3.1. This Amendment shall not become effective until each and every one of the following conditions shall have been satisfied: (a) executed counterparts of this Amendment, duly executed by the Company and the holders of at least 51%% of the outstanding principal of the Notes, shall have been delivered to the Noteholders; (b) the Noteholders shall have received a copy of the resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance by the Company of this Amendment, certified by its Secretary or an Assistant Secretary; and 7 (c) each of the Noteholders shall have received payment in full of their pro rata portion of the $30,000 aggregate fee due and payable upon execution hereof pursuant to the Fee Schedule dated May 28, 1999 among the Company and the Noteholders. Upon receipt of all of the foregoing, this Amendment shall become effective as of July 31, 1999. 3.2. This Amendment shall be construed in connection with and as part of the Amended Note Agreements, and except as modified and expressly amended by this Amendment, all terms, conditions and covenants contained in the Amended Note Agreements and the Notes are hereby ratified and shall be and remain in full force and effect. 3.3. Any and all notices, requests, certificates and other instruments executed and delivered after the execution and delivery of this Amendment may refer to the Amended Note Agreements without making specific reference to this Amendment but nevertheless all such references shall include this Amendment unless the context otherwise requires. 3.4. The descriptive headings of the various Sections or parts of this Amendment are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. 3.5. This Amendment shall be governed by and construed in accordance with Illinois law. 3.6. This Amendment may be executed in any number of counterparts, each executed counterpart constituting an original, but all together only one agreement. 3COM CORPORATION By:____________________________________ Its ___________________________________ 8 Accepted and Agreed to as of July 31, 1999. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By:____________________________________ Its ___________________________________ 9 Accepted and Agreed to as of July 31, 1999. METROPOLITAN LIFE INSURANCE COMPANY By:____________________________________ Its ___________________________________ 10 Accepted and Agreed to as of July 31, 1999. METROPOLITAN PROPERTY AND CASUALTY INSURANCE COMPANY By:____________________________________ Its ___________________________________ 11 EX-10.1 4 EXHIBIT 10.1 3COM CORPORATION 1983 STOCK OPTION PLAN 1. PURPOSE. The 3Com Corporation 1983 Stock Option Plan (the Plan) is established to create additional incentive for key employees of 3Com Corporation and any present or future parent and/or subsidiary corporation of such corporation (collectively referred to as the Company) to promote the financial success and progress of the Company. For purposes of the Plan, a parent corporation and a subsidiary corporation shall be defined in sections 425(e) and 425(f) of the Internal Revenue Code of 1954, as amended (the Code). 2. ADMINISTRATION. The Plan shall be administered by the Board of Directors (the Board) and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references to the Board shall also mean the committee if it has been appointed. All questions of interpretation of the Plan or of any options granted under the Plan (an Option) shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan and/or any Option. Options may be either incentive stock options as defined in Section 422A of the Code or nonqualified stock options. All incentive stock options and nonqualified stock options granted to an Optionee shall be set forth in separate Options. 3. ELIGIBILITY. (a) ELIGIBLE PERSONS. The Options may be granted only to employees (including officers) of the Company. The Board shall, in its sole discretion, determine which persons shall be granted Options (an Optionee). A director of the of the Company shall not be granted an Option unless the director is also an employee of the Company. An Optionee may, if he is otherwise eligible, be granted additional Options. (b) FAIR MARKET VALUE LIMITATION. Notwithstanding any other provisions in the Plan to the contrary, any Option which is designated as an incentive stock option and is granted pursuant to the Plan on or after January 1, 1987 shall comply with the limitations set forth in section 422A(b)(7) of the Internal Revenue Code of 1986 (the 1986 Code) (i.e., shall not become exercisable at a rate faster than $100,000 per calendar year). In the event an Option is subsequently determined to have exceeded the foregoing limitation, the Option shall be amended, if necessary, in accordance with applicable Treasury Regulations and rulings to preserve, as the first priority, to the maximum possible extent, the status of the Option as an incentive stock option and to preserve, as a second priority, to the maximum possible extent, the total number of shares subject to the Option. Notwithstanding the above, the Board of Directors shall have the authority, in its sole discretion, to amend the Plan to eliminate the limitation set forth in the first sentence of this paragraph or any limitation set forth in the Plan setting forth or otherwise designed to comply with the provisions of section 441A(b)(8) of the Internal Revenue Code of 1954, as amended prior to the Tax Reform Act of 1986 (the 1954 Code), and/or to grant Options which comply with either limitation referred to above but which do not comply with both such limitations. 4. SHARES SUBJECT TO OPTION. The maximum number of share which may be issued under the Plan shall be 59,800,000 shares of the Company's authorized but unissued common stock, subject to adjustment as provided in paragraph 7. In the event that any outstanding Option for any reason expires or is terminated and/or shares subject to repurchase are repurchased by the Company, the shares of common stock allocable to the unexercised portion of such Option or so repurchased may again be subjected to an Option. 5. TIME FOR GRANTING OPTIONS. All options shall be granted, if at all, on or before July 8, 2002. 6. TERMS, CONDITIONS AND FORM OF OPTIONS. Subject to the provisions of the Plan, the Board shall determine for each Option (which need not be incidental) the number of shares for which the Option shall be granted, the option price of the Option, the exercisability of the Option, whether the Option is a nonqualified stock option or an incentive stock option, and all other terms and conditions of the Option not inconsistent with this paragraph 6. Options granted pursuant to the Plan shall be evidenced by written agreements specifying the number of shares covered thereby, in such form as the Board shall from time to time establish, and shall comply with and be subject to the following terms and conditions: (a) OPTION PRICE. (i) The option price for any incentive stock option shall be not less than the fair market value as determined by the Board of the shares of common stock of 3Com on the date of the granting of such Option, except that, as to an Optionee who at the time the Option is granted owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company within the meaning of section 422A(b)(6) of the Code (a Ten Percent Owner Optionee), the option price for any incentive stock option granted to the Ten Percent Owner Optionee shall not be less than 110% of the fair market value of the shares on the date the Option is granted. (ii) The option price for any nonqualified stock option shall be not less than 85% of the fair market value as determined by the Board of the shares of common stock of 3Com on the date of granting of such Option. (b) EXERCISE PERIOD OF OPTIONS. The Board shall have the power to set the time or times within which each Option shall be exercisable or the event or events upon the occurrence of which all or a portion of each Option shall be exercisable and the term of each Option; provided, however, that no Option shall be exercisable after the expiration of ten (10) years from the date such Option is granted, and provided further that no Option granted to a Ten Percent Owner Optionee which is extended to be an incentive stock option shall be exercisable after the expiration of five (5) years from the date such Option is granted. (c) STOCKHOLDER APPROVAL. An Option is not exercisable until such time as the Plan is duly approved by the stockholders of the Company. (d) PAYMENT OF OPTION PRICE. Payment of the option price for the number of shares being purchased shall be made (1) in cash, (2) by tender to the Company of shares of the Company's common stock which (a) either has been owned by the Optionee for more than one (1) year or was not acquired, directly or indirectly from the Company, and (b) has a fair market value not less than the option price, or (3) by such other consideration (including, without limitation, the Optionee's promissory note) as the Board may approve at the time the Option is granted. Notwithstanding the foregoing, the Option may not be exercised by the tender of the Company's common stock to the extent such tender of stock would constitute a violation of the provisions of section 500 ET SEQ. of the California Corporations Code, or the corresponding provisions of other applicable law. In the event the Board permits the exercise of an Option in whole or in part by means of the Optionee's promissory note, the Board shall determine the provisions of such note; provided, however, that the note shall not represent more than ninety-five (95%) of the option price, the principal shall be due and payable not more than four (4) years after the Option is exercised and interest shall be payable at least annually and be at least equal to the minimum interest rate to avoid imputed interest pursuant to section 483 of the Code. (e) SEQUENTIAL EXERCISE LIMITATION. Notwithstanding any other provision of the Plan to the contrary, the Board of Directors shall have the authority, in its sole discretion, to grant Options on or after January 1, 1987 designated as incentive stock options which are subject to any restrictions on exercise set forth in the Plan setting forth or otherwise designed to comply with the provisions of section 422A(b)(7) of the 1954 Code. (f) OPTIONS NON-TRANSFERABLE. During the lifetime of the Optionee, the Option shall be exercisable only by said Optionee. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. (g) STANDARD OPTION TERMS. (i) INCENTIVE STOCK OPTIONS. Unless otherwise provided for the Board in the grant of an Option, an Option designated by the Board as an incentive stock option shall comply with and be subject to terms and conditions set forth in the form of Incentive Stock Option Agreement attached hereto as Exhibit A and incorporated herein by reference. (ii) NONQUALIFIED STOCK OPTIONS. Unless otherwise provided for by the Board in the grant of an Option, an Option designated by the Board as a nonqualified stock option shall comply with and be subject to the terms and conditions set forth in the form of Nonqualified Stock Option Agreement attached hereto as Exhibit B and incorporated herein by reference. (iii) AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of the option agreements set forth as Exhibits A and/or B either in connection with the grant of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of such option agreements shall be in accordance with the terms of the Plan. Such authority shall include, but not by way of limitation, the authority to grant Options that are not immediately exercisable. 7. EFFECT OF CHANGE IN STOCK SUBJECT TO PLAN. Appropriate adjustments shall be made in the number and class of shares of stock subject to this Plan and to any outstanding Options and in the exercise price of any outstanding Options in the event of a stock dividend, stock split, reverse stock split or like change in the capital structure of the Company. 8. TERMINATION OR AMENDMENT OF PLAN. The Board may at any time terminate or amend the Plan, provided that without stockholder approval there shall be (i) no change in the maximum number of shares covered by the Plan (except by operation of the provisions of Paragraph 7 above); (ii) no change in the class of persons eligible to received Options; (iii) no reduction in the exercise price at which Options may be granted; and (iv) no extensions to the periods during which Options may be granted or exercised. 9. EFFECT OF PRIOR PLAN AS TO OUTSTANDING OPTIONS. The Company has heretofore adopted the 3Com Corporation Amended and Restated Incentive Stock Option Plan (the Earlier Plan). The Plan in all respects is independent of and not a continuation or amendment of the Earlier Plan. Accordingly, the terms of the Earlier Plan shall remain in effect and apply to Options granted pursuant to the Earlier Plan. 10. CERTAIN TERMINATIONS WITHIN TWELVE MONTHS FOLLOWING A TRANSFER OF CONTROL. In the event that, within twelve (12) months following a "Transfer of Control" (as such term is defined in the Option Agreement) an Optionee's employment with the "Participating Company Group" (as such term is defined in the Option Agreement) is terminated involuntarily by his or her employer other than for "Cause" (as defined herein), then such Optionee's Options shall become fifty percent (50%) vested and exercisable as of the date of such termination of employment. For this purpose, "Cause" means (i) an act of personal dishonesty taken by the Optionee in connection with his or her responsibilities as an employee and intended to result in substantial personal enrichment of the Optionee, (ii) Optionee being convicted of a felony, (iii) a willful act by the Optionee which constitutes gross misconduct and which is injurious to the Company, (iv) following delivery to the Optionee of a written demand for performance from the Company which describes the basis for the Company's reasonable belief that the Optionee has not substantially performed his or her duties, continued violations by the Optionee of the Optionee's obligations to the Company which are demonstrably willful and deliberate on the Optionee's part. Notwithstanding the foregoing, nothing in this Plan or in the Option Agreement modifies the "at-will" employment relationship of the Optionee, which may be terminated at any time, with or without cause or notice, at the option of either the Optionee or his or her employer. EX-10.8 5 EXHIBIT 10.8 3COM CORPORATION 1994 STOCK OPTION PLAN 1. PURPOSE. The 3Com Corporation 1994 Stock Option Plan (the "Plan") is established to create additional incentive for eligible employees of 3Com Corporation and any successor corporation thereto (collectively referred to as the "Company"), and any present or future parent and/or subsidiary corporations of such corporation (all of whom along with the Company being individually referred to as a "Participating Company" and collectively referred to as the "Participating Company Group"), to promote the financial success and progress of the Participating Company Group. For purposes of the Plan, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"). 2. ADMINISTRATION. (a) GENERAL. The Plan shall be administered by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted herein, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All questions of interpretation of the Plan or of any options granted under the Plan (an "Option") shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan and/or any Option. (b) OPTIONS AUTHORIZED. Options may be only nonqualified stock options, that is, options which are not incentive stock options as defined in section 422 of the Code. (c) AUTHORITY OF OFFICERS. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 3. ELIGIBILITY. The Options may be granted only to employees of the Participating Company Group; provided, however, that no Option may be granted to (i) a person who, at the time of such grant, is an officer or director of the Company or a beneficial owner of more than ten percent (10%) of any class of equity securities of the Company registered pursuant to section 12 of the Securities Exchange Act of 1934, as amended, or (ii) any person whose eligibility to participate in the Plan would require the Company to obtain shareholder approval of the Plan pursuant to the Bylaws of the National Association of Securities Dealers (and any schedules thereto) or the provisions contained in the New York Stock Exchange Listed Company Manual. For purposes of the foregoing sentence, "employees" shall include (i) prospective employees to whom Options are granted in connection with written offers of employment with the Participating Company Group and (ii) individuals to whom substituted options are granted under this Plan in connection with a "corporate reorganization" (within the meaning of Section 424(a) of the Code). The Board shall, in the Board's sole discretion, determine which eligible persons shall be granted Options (an "Optionee"). An Optionee may, if otherwise eligible, be granted additional Options. 4. SHARES SUBJECT TO OPTION. Options shall be options for the purchase of the authorized but unissued common stock of the Company (the "Stock"), subject to adjustment as provided in paragraph 9 below. The maximum number of shares of Stock which may be issued under the Plan shall be Twenty-Nine Million Seven Hundred Seventy Thousand (29,770,000) shares. In the event that any outstanding Option for any reason expires or is terminated or canceled and/or shares of Stock subject to repurchase are repurchased by the Company, the shares allocable to the unexercised portion of such Option, or such repurchased shares, may again be subjected to an Option. 5. TIME FOR GRANTING OPTIONS. The Plan shall continue until terminated by the Board or until all of the shares of Stock reserved for issuance under the Plan have been issued, whichever shall first occur. 6. TERMS, CONDITIONS AND FORM OF OPTIONS. Subject to the provisions of the Plan, the Board shall determine for each Option (which need not be identical) the number of shares of Stock for which the Option shall be granted, the exercise price of the Option, the exercisability of the Option, and all other terms and conditions of the Option not inconsistent with the Plan. Options granted pursuant to the Plan shall be evidenced by written agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish, and shall comply with and be subject to the following terms and conditions: (a) EXERCISE PRICE. The exercise price for each Option shall be established in the sole discretion of the Board; provided, however, that the exercise price per share shall not be less than the fair market value, as determined by the Board, of a share of Stock on the date of the granting of the Option. Notwithstanding the foregoing, an Option may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying with the provisions of section 424(a) of the Code. (b) EXERCISE PERIOD OF OPTIONS. The Board shall have the power to set the time or times within which each Option shall be exercisable or the event or events upon the occurrence of which all or a portion of each Option shall be exercisable and the term of each Option; provided, however, that no Option shall be exercisable after the expiration of ten (10) years after the date such Option is granted. (c) PAYMENT OF EXERCISE PRICE. Payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of the Company's stock owned by the Optionee having a value, as determined by the Board (but without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company), not less than the exercise price, (iii) by the assignment of the proceeds of a sale of some or all of the shares being acquired upon the exercise of an Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System), or (iv) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the form of Standard Option Agreement described in paragraph 7 below, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price and/or which otherwise restrict one (1) or more forms of consideration. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company of shares of the Company's stock to the extent such tender of stock would constitute a violation of the provisions of any law, regulation and/or agreement restricting the redemption of the Company's stock. (x) Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company of the Company's stock unless such shares of the Company's stock either have been owned by the Optionee for more than one (1) year or were not acquired, directly or indirectly, from the Company. (y) The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve and/or terminate any program and/or procedures for the exercise of Options by means of an assignment of the proceeds of a sale of some or all of the shares of Stock to be acquired upon such exercise. 7. STANDARD FORM OF STOCK OPTION AGREEMENT. (a) NONQUALIFIED STOCK OPTIONS. Unless otherwise provided for by the Board at the time an Option is granted, an Option shall comply with and be subject to the terms and conditions set forth in the form of nonqualified stock option agreement attached hereto as EXHIBIT A and incorporated herein by reference. (b) STANDARD TERM FOR OPTIONS. Unless otherwise provided for by the Board in the grant of an Option, any Option granted hereunder shall be exercisable for a term of ten (10) years. 8. AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of the Standard Option Agreement described in paragraph 7 above either in connection with the grant of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of such revised or amended standard form or forms of stock option agreement shall be in accordance with the terms of the Plan. Such authority shall include, but not by way of limitation, the authority to grant Options which are immediately exercisable. 9. EFFECT OF CHANGE IN STOCK SUBJECT TO PLAN. Appropriate adjustments shall be made in the number and class of shares of Stock subject to the Plan and to any outstanding Options and in the exercise price of any outstanding Options in the event of a stock dividend, stock split, reverse stock split, combination, reorganization, reclassification, or like change in the capital structure of the Company. 10. TRANSFER OF CONTROL. For purposes hereof, "Control Company" shall mean the Participating Company whose stock is subject to the Option. An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Control Company. (a) a direct or indirect sale or exchange by the shareholders of the Control Company of all or substantially all of the stock of the Control Company; (b) a merger in which the Control Company is a party; or (c) the sale, exchange, or transfer of all or substantially all of the Control Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the shareholders of the Control Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). A "Transfer of Control" shall mean an Ownership Change in which the shareholders of the Control Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company. In the event of a Transfer of Control, any unexercisable and/or unvested portion of the outstanding Options shall be immediately exercisable and vested as of 30 days prior to the Transfer of Control unless the surviving, continuing, successor, or purchasing corporation, as the case may be (the "Acquiring Corporation") assumes the Company's rights and obligations under outstanding stock option agreements or substitutes options for the Acquiring Corporation's stock for such outstanding Options. The exercise and/or vesting of any Option that was permissible solely by reason of this paragraph 10 shall be conditioned upon the consummation of the Transfer of Control. Any Options which are neither assumed by the Acquiring Corporation nor exercised as of the date of the Transfer of Control shall terminate effective as of the date of the Transfer of Control. (d) In the event that, within twelve (12) months following a Transfer of Control, an Optionee's employment with the Participating Company Group is terminated involuntarily by his or her employer other than for "Cause" (as defined herein), then such Optionee's Options shall vest as to an additional fifty percent (50%) of the unvested shares on the date of such termination of employment. For this purpose, "Cause" means (i) an act of personal dishonesty taken by the Optionee in connection with his or her responsibilities as an employee and intended to result in substantial personal enrichment of the Optionee, (ii) Optionee being convicted of a felony, (iii) a willful act by the Optionee which constitutes gross misconduct and which is injurious to the Company, (iv) following delivery to the Optionee of a written demand for performance from the Company which describes the basis for the Company's reasonable belief that the Optionee has not substantially performed his or her duties, continued violations by the Optionee of the Optionee's obligations to the Company which are demonstrably willful and deliberate on the Optionee's part. Notwithstanding the foregoing, nothing in this Plan or in the Option Agreement modifies the "at-will" employment relationship of the Optionee, which may be terminated at any time, with or without cause or notice, at the option of either the Optionee or his or her employer. 11. PROVISION OF INFORMATION. Each Optionee shall be given access to information concerning the Company equivalent to that information generally made available to the Company's common shareholders. 12. OPTIONS NON-TRANSFERABLE. Unless otherwise provided by the Board, during the lifetime of the Optionee, the Option shall be exercisable only by the Optionee, and no Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. 13. TERMINATION OR AMENDMENT OF PLAN OR OPTIONS. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan or any Option at any time. In any event, no amendment may adversely affect any then outstanding Option or any unexercised portion thereof, without the consent of the Optionee. EXHIBIT A STANDARD FORM OF 3COM CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT 3Com Corporation (the "Company"), granted to the individual named below an option to purchase certain shares of common stock of the Company, in the manner and subject to the provisions of this Option Agreement and the 3Com Corporation 1994 Stock Option Plan (the "Plan"), all of the terms of which are incorporated by reference herein. 1. Definitions: (a) "Notice" shall mean the "3Com Corporation NOTICE OF GRANT OF STOCK OPTIONS AND GRANT AGREEMENT" which is attached hereto. (b) "Optionee" shall mean the individual whose name is set forth in the Notice. (c) "Date of Option Grant" shall mean the "Date of Grant" set forth in the Notice. (d) "Number of Option Shares" shall mean the "Total Number of Shares Granted" as set forth in the Notice. Such number of shares of common stock of the Company may be adjusted from time to time pursuant to paragraph 9 below. (e) "Exercise Price" shall mean the "Option Price per Share" set forth in the Notice. Such price per share as adjusted from time to time pursuant to paragraph 9 below. (f) "Initial Exercise Date" shall be the Initial Vesting Date. (g) "Initial Vesting Date" for employees outside of the U.K. shall be the date occurring one (1) year after the Date of Option Grant. For employees of the U.K. "Initial Vesting Date" shall be the latter of (i) the date occurring one (1) month after the Date of Option Grant, or (ii) the date occurring six (6) months after the date on which the employee commenced employment with the Company. (h) Determination of "Vested Ratio" (1) Determination of "Vested Ratio" for employees outside of the U.K.:
Vested Ratio - ------------------------------------------------------------------------------- Prior to Initial Vesting Date 0 On Initial Vesting Date, for each full 1/4 year of the Optionee's continuous employment by a Participating Company from the Date of Option Grant until the Initial Vesting Date PLUS For each full year of the Optionee's 1/4 continuous employment by a Participating Company from the Initial Vesting Date
In no event shall the Vested Ratio exceed 1/1. (2) Determination of "Vested Ratio" for employees receiving grants under the Plan or any U.K. sub-plan of the Plan:
Vested Ratio - -------------------------------------------------------------------------- Prior to Initial Vesting Date 0 On Initial Vesting Date, for each full 1/48 month of the Optionee's continuous employment by a Participating Company from the Date of Option Grant until the Initial Vesting Date PLUS For each full month of the Optionee's 1/48 continuous emplyoment by a Participating Company from the Initial Vesting Date
In no event shall the Vested Ratio exceed 1/1. (i) "Option Term Date" shall mean the date ten (10) years after the Date of Option Grant. (j) "Code" shall mean the Internal Revenue Code of 1986, as amended. (k) "Company" shall mean 3Com Corporation, a California corporation, and any successor corporation thereto. (l) "Participating Company" shall mean (i) the Company and (ii) any present or future parent and/or subsidiary corporation of the Company while such corporation is a parent or subsidiary of the Company. For purposes of this Option Agreement, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Code. (m) "Participating Company Group" shall mean at any point in time all corporations collectively which are then a Participating Company. 2. STATUS OF THE OPTION. This Option is intended to be a nonqualified stock option and shall not be treated as an incentive stock option as described in Section 422 of the Code. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. (a) RIGHT TO EXERCISE. The Option shall first become exercisable on the Initial Exercise Date. The Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option in the amount equal to the Number of Option Shares multiplied by the Vested Ratio as set forth in paragraph 1 above less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. (b) METHOD OF EXERCISE. The Option may be exercised by written notice to the Company which must state the election to exercise the Option, the number of shares for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person or by certified or registered mail, return receipt requested, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in paragraph 6 below, accompanied by full payment of the exercise price for the number of shares being purchased. (c) FORM OF PAYMENT OF EXERCISE PRICE. Such payment shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of the Company's common stock owned by the Optionee having a value not less than the exercise price, which either have been owned by the Optionee for more than one (1) year or were not acquired, directly or indirectly, from the Company, (iii) by Immediate Sales Proceeds, as defined below, or (iv) by any combination of the foregoing. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of the Company's common stock to the extent such tender of stock would constitute a violation of the provisions of any law, regulation and/or agreement restricting the redemption of the Company's common stock. "Immediate Sales Proceeds" shall mean the assignment in form acceptable to the Company of the proceeds of a sale of some or all of the shares acquired upon the exercise of the Option pursuant to a program and/or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve any such program and/or procedure. (d) TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes payroll withholding and otherwise agrees to make adequate provision for foreign, federal and state tax withholding obligations of the Company, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired on exercise of the Option, or (iii) the lapsing of any restriction with respect to any shares acquired on exercise of the Option. (e) CERTIFICATE REGISTRATION. The certificate or certificates for the shares as to which the Option shall be exercised shall be registered in the name of the Optionee, or, if applicable, the heirs of the Optionee. (f) RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of the shares upon exercise of the Option shall be subject to compliance with all applicable requirements of federal or state law with respect to such securities. The Option may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other law or regulations. In addition, no Option may be exercised unless (i) a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISABLE UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. (g) FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NON-TRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Term Date as defined above, (b) the last date for exercising the Option following termination of employment as described in paragraph 7 below, or (c) upon a Transfer of Control as described in paragraph 8 below. 7. TERMINATION OF EMPLOYMENT. (a) TERMINATION OF THE OPTION. If the Optionee ceases to be an employee of the Participating Company Group for any reason except death or disability within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee ceased to be an employee, may be exercised by the Optionee within three (3) months after the date on which the Optionee's employment terminates, but in any event no later than the Option Term Date. If the Optionee's employment with the Participating Company Group is terminated because of the death or disability of the Optionee within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee ceased to be an employee, may be exercised by the Optionee (or the Optionee's legal representative) at any time prior to the expiration of twelve (12) months from the date the Optionee's employment terminated, but in any event no later than the Option Term Date. The Optionee's employment shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of employment. (b) TERMINATION OF EMPLOYMENT DEFINED. For purposes of this paragraph 7, the Optionee's employment shall be deemed to have terminated either upon an actual termination of employment or upon the Optionee's employer ceasing to be a Participating Company. (c) EXTENSION IF EXERCISE PREVENTED BY LAW. Except as provided in this paragraph 7, the Option shall terminate and may not be exercised after the Optionee's employment with the Participating Company Group terminates unless the exercise of the Option in accordance with this paragraph 7 is prevented by the provisions of paragraph 4(f) above. If the exercise of the Option is so prevented, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Term Date. (d) LEAVE OF ABSENCE. For purposes hereof, the Optionee's employment with the Participating Company Group shall not be deemed to terminate if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. In the event of a leave in excess of ninety (90) days, the Optionee's employment shall be deemed to terminate on the ninety-first (91st) day of the leave unless the Optionee's right to reemployment with the Participating Company Group remains guaranteed by statute or contract. Notwithstanding the foregoing, however, a leave of absence shall be treated as employment for purposes of determining the Optionee's Vested Ratio if and only if the leave of absence is designated by the Company as (or required by law to be) a leave for which vesting credit is given. 8. TRANSFER OF CONTROL. For purposes hereof, "Control Company" shall mean the Participating Company whose stock is subject to the Option. An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Control Company. (a) a direct or indirect sale or exchange by the shareholders of the Control Company of all or substantially all of the stock of the Control Company; (b) a merger in which the Control Company is a party; or (c) the sale, exchange, or transfer of all or substantially all of the Control Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the shareholders of the Control Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). A "Transfer of Control" shall mean an Ownership Change in which the shareholders of the Control Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company. In the event of a Transfer of Control, any unexercisable and/or unvested portion of the Option shall be immediately exercisable and vested as of 30 days prior to the Transfer of Control unless the surviving, continuing, successor, or purchasing corporation, as the case may be (the "Acquiring Corporation") assumes the Company's rights and obligations under this Option Agreement or substitutes options for the Acquiring Corporation's stock for the Option. The exercise and/or vesting of any Option that was permissible solely by reason of this paragraph 8 shall be conditioned upon the consummation of the Transfer of Control. The Option shall terminate effective as of the date of the Transfer of Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation nor exercised as of the date of the Transfer of Control. 9. EFFECT OF CHANGE IN STOCK SUBJECT TO THE OPTION. Appropriate adjustments shall be made in the number, exercise price and class of shares of stock subject to the Option in the event of a stock dividend, stock split, reverse stock split, combination, reorganization, reclassification, or like change in the capital structure of the Company. In the event a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become shares of another corporation (the "New Shares"), the Company may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the number of shares and the exercise price shall be adjusted in a fair and equitable manner. 10. RIGHTS AS A SHAREHOLDER OR EMPLOYEE. The Optionee shall have no rights as a shareholder with respect to any shares covered by the Option until the date of the issuance of a certificate or certificates for the shares for which the Option has been exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such certificate or certificates are issued, except as provided in paragraph 9 above. Nothing in the Option shall confer upon the Optionee any right to continue in the employ of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's employment at any time. 11. LEGENDS. The Company may at any time place legends referencing any applicable federal or state securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to effectuate the provisions of this paragraph. 12. BINDING EFFECT. This Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 13. TERMINATION OR AMENDMENT. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan and/or the Option at any time; provided, however, that no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee. 14. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Company other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 15. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California. The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement.3Com Corporation (the "Company"), granted to the individual named below an option to purchase certain shares of common stock of the Company, in the manner and subject to the provisions of this Option Agreement and the 3Com Corporation 1994 Stock Option Plan (the "Plan"), all of the terms of which are incorporated by reference herein. EX-27.1 6 EXHIBIT 27-1
5 1,000 3-MOS JUN-02-2000 AUG-27-1999 1,003,263 702,262 757,092 (107,720) 350,526 3,502,519 1,610,701 (814,446) 4,532,063 1,219,635 0 0 0 1,440,475 1,792,088 4,532,063 1,387,409 1,387,409 739,078 1,011,903 177,334 4,312 868 192,992 56,476 137,491 0 0 0 137,491 0.39 0.38
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