10-Q 1 a2027699z10-q.txt 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 SEPTEMBER 1, 2000 COMMISSION FILE NO. 0-12867 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------------- 3COM CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2605794 -------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5400 BAYFRONT PLAZA SANTA CLARA, CALIFORNIA 95052 ---------------------------------------- --------- (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 326-5000 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 29, 2000, 350,076,909 SHARES OF THE REGISTRANT'S COMMON STOCK WERE OUTSTANDING. THIS REPORT CONTAINS A TOTAL OF 39 PAGES OF WHICH THIS PAGE IS NUMBER 1. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 3COM CORPORATION TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page ---- ITEM 1. Financial Statements Condensed Consolidated Statements of Operations THREE MONTHS ENDED SEPTEMBER 1, 2000 AND AUGUST 27, 1999 3 Condensed Consolidated Balance Sheets SEPTEMBER 1, 2000 AND JUNE 2, 2000 4 Condensed Consolidated Statements of Cash Flows THREE MONTHS ENDED SEPTEMBER 1, 2000 AND AUGUST 27, 1999 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 34 ITEM 2. Changes in Securities and Use of Proceeds 35 ITEM 3. Defaults Upon Senior Securities 35 ITEM 4. Submission of Matters to a Vote of Security Holders 35 ITEM 5. Other Information 35 ITEM 6. Exhibits and Reports on Form 8-K 36 Signatures 39
3Com, AirConnect, CommWorks, SuperStack and Total Control are registered trademarks of 3Com Corporation or its subsidiaries. Kerbango is a trademark of 3Com Corporation or its subsidiaries. U.S. Robotics is a registered trademark of U.S. Robotics Corporation. Courier is a trademark of U.S. Robotics Corporation. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3COM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended -------------------------------------- September 1, August 27, 2000 1999 ----------------- ---------------- Sales $ 933,764 $ 1,213,196 Cost of sales 593,036 638,100 --------------- ---------------- Gross margin 340,728 575,096 --------------- ---------------- Operating expenses: Sales and marketing 236,315 232,414 Research and development 145,828 148,359 General and administrative 57,543 53,993 Amortization of goodwill and acquired intangibles 7,493 4,974 Purchased in-process technology 29,406 - Merger-related credits, net (212) (2,105) Business realignment costs 9,901 - --------------- ---------------- Total operating expenses 486,274 437,635 --------------- ---------------- Operating income (loss) (145,546) 137,461 Gains on investments, net 16,736 23,551 Interest and other income, net 45,630 15,977 --------------- ---------------- Income (loss) from continuing operations before income taxes and equity interests (83,180) 176,989 Income tax provision (benefit) (20,795) 49,660 Other interests in loss of consolidated joint venture - (975) Equity interest in loss of unconsolidated investee 1,352 - --------------- ---------------- Net income (loss) from continuing operations (63,737) 128,304 Net income from discontinued operations 4,537 9,187 --------------- ---------------- Net income (loss) $ (59,200) $ 137,491 =============== ================ Net income (loss) per share: Basic: Continuing operations $ (0.18) $ 0.36 Discontinued operations 0.01 0.03 --------------- ---------------- $ (0.17) $ 0.39 =============== =============== Diluted: Continuing operations $ (0.18) $ 0.36 Discontinued operations 0.01 0.02 --------------- --------------- $ (0.17) $ 0.38 =============== =============== Shares used in computing per share amounts: Basic 353,777 353,243 Diluted 353,777 357,703
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 3COM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value)
September 1, June 2, 2000 2000 --------------- ---------------- (Unaudited) ASSETS Current assets: Cash and equivalents $ 965,089 $ 1,700,420 Short-term investments 1,736,619 1,369,520 Accounts receivable, net 467,214 355,540 Inventories 273,246 285,942 Investments and other 857,984 655,772 Net assets of discontinued operations - 1,058,237 --------------- ---------------- Total current assets 4,300,152 5,425,431 Property and equipment, net 697,688 705,824 Goodwill, intangibles, deposits and other assets 356,107 361,699 --------------- ---------------- Total assets $ 5,353,947 $ 6,492,954 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 396,335 $ 363,497 Other accrued liabilities 578,440 607,316 Income taxes payable 92,344 169,887 Deferred income taxes 74,992 27,317 Current portion of long-term debt 2,255 14,459 --------------- ---------------- Total current liabilities 1,144,366 1,182,476 --------------- ---------------- Long-term debt 2,740 14,740 Deferred income taxes 67,907 71,336 Other long term obligations 7,707 7,377 Equity interest in consolidated entity - 1,173,961 Stockholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized; none outstanding - - Common stock, $.01 par value, 990,000 shares authorized; shares issued: 365,789 and 365,825, respectively 2,294,942 2,101,242 Treasury stock, at cost, 17,438 and 12,371 shares, respectively (331,538) (312,428) Unamortized stock-based compensation (25,760) (6,450) Retained earnings 1,855,129 1,982,079 Accumulated other comprehensive income 338,454 278,621 --------------- ---------------- Total stockholders' equity 4,131,227 4,043,064 --------------- ---------------- Total liabilities and stockholders' equity $ 5,353,947 $ 6,492,954 =============== ================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 3COM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended ------------------------------------- September 1, August 27, 2000 1999 ------------- ------------- Cash flows from operating activities: Net income (loss) from continuing operations $ (63,737) $ 128,304 Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 67,589 79,717 Loss on disposal of fixed assets 8,622 2,434 Gains on investments, net (16,736) (23,551) Deferred income taxes (2,871) 23,423 Purchased in-process technology 29,406 - Merger-related credits, net (212) (2,105) Business realignment costs 9,901 - Other interests in loss of consolidated joint venture - (975) Equity interest in loss of unconsolidated investee 1,352 - Changes in assets and liabilities, net of acquisition: Accounts receivable (111,673) 156,190 Inventories 12,974 22,658 Investments and other assets (20,367) 18,600 Accounts payable 32,095 52,780 Accrued liabilities and other (26,474) (54,887) Income taxes payable (28,218) 24,390 ------------- ------------- Net cash provided by (used in) operating activities (108,349) 426,978 ------------- ------------- Cash flows from investing activities: Purchase of investments (598,118) (168,461) Proceeds from maturities and sales of investments 179,034 180,373 Purchase of property and equipment (59,148) (38,902) Proceeds from sale of property and equipment - 6,790 Business acquired in purchase transaction, net of cash acquired (51,741) - Other, net 2,348 8,100 ------------- ------------- Net cash used in investing activities (527,625) (12,100) ------------- ------------- Cash flows from financing activities: Issuance of common stock 145,075 23,436 Repurchase of common stock (250,176) (391,744) Repayments of long-term borrowings (24,204) (12,000) Other, net (343) 1,302 ------------- ------------- Net cash used in financing activities (129,648) (379,006) ------------- ------------- Net cash provided by (used in) discontinued operations 30,291 (21,506) Increase (decrease) in cash and equivalents (735,331) 14,366 Cash and equivalents, beginning of period 1,700,420 951,771 ------------- ------------- Cash and equivalents, end of period $ 965,089 $ 966,137 ============= =============
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"), pursuant to the rules and regulations of the Securities and Exchange Commission. 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 September 1, 2000, results of operations for the three months ended September 1, 2000 and August 27, 1999, and cash flows for the three months ended September 1, 2000 and August 27, 1999. Certain amounts from the prior period have been reclassified to conform to the current period presentation. Such reclassifications had no effect on net income as previously reported. 3Com uses a 52 or 53 week fiscal year ending on the Friday nearest to May 31. Accordingly, fiscal 2001 will end on June 1, 2001, resulting in a 52-week fiscal year, compared to 53 weeks included in fiscal 2000. The results of operations for the three months ended September 1, 2000 may not be indicative of the results to be expected for the fiscal year ending June 1, 2001. 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 June 2, 2000. REVENUE RECOGNITION 3Com generally recognizes a sale when the product has been shipped, risk of loss has passed to the customer, and collection of the resulting receivable is probable. 3Com accrues related product return reserves, warranty, other post-contract support obligations, and royalty expenses at the time of sale. A limited warranty is provided on 3Com products for periods ranging from 90 days to the lifetime of the product, depending upon the product. Service and maintenance sales are recognized over the contract term. 3Com provides limited product return and price protection rights to certain distributors and resellers. Product return rights are generally limited to a percentage of sales over a one to three month period. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998 and June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 will be effective for our fiscal year ending May 31, 2002. 3Com is in the process of determining the impact that adoption will have on its consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The guidance in SAB 101 must be adopted during our fourth quarter of fiscal 2001 and the effects, if any, are required to be recorded through a retroactive, cumulative-effect adjustment as of the beginning of the fiscal year, with a restatement of all prior interim quarters in the year. Management has not completed its evaluation of the effects, if any, that SAB 101 will have on 3Com's income statement presentation, operating results, or financial position. 6 2. Discontinued Operations On September 13, 1999, 3Com announced a plan to conduct an initial public offering ("IPO") of its Palm, Inc. ("Palm") subsidiary. On March 2, 2000, 3Com sold 4.7% of Palm's stock to the public and 1.0% of Palm's stock in private placements, resulting in net proceeds of $1.2 billion, which were retained by Palm. On May 8, 2000, 3Com's Board of Directors declared a special dividend of 3Com's remaining interest in Palm to 3Com's shareholders of record on July 27, 2000. On July 27, 2000, 3Com distributed its Palm common stock to 3Com shareholders. The distribution ratio was 1.4832 shares of Palm for each outstanding share of 3Com common stock. No gain was recorded as a result of these transactions. The decrease in the intrinsic value of 3Com's employee stock plans attributable to the distribution of Palm was restored in accordance with the methodology set forth in FASB Emerging Issues Task Force Issue 90-9, "Changes to Fixed Employee Stock Option Plans as a Result of Equity Restructuring." Prior to the Palm distribution, there were approximately 35 million employee options outstanding. As a result of the Palm distribution, these converted to approximately 169 million employee options outstanding, of which approximately 60 million were vested and immediately exercisable. The historical consolidated financial statements of 3Com have been restated to account for Palm as a discontinued operation for all periods presented. The financial data of Palm reflects the historical results of operations and cash flows of the businesses that comprised the handheld computing business segment of 3Com during each respective period; they do not reflect many significant changes that will occur and have occurred in the operations and funding of Palm as a result of the separation from 3Com and the IPO. The Palm financial data restated as a discontinued operation reflects the assets and liabilities transferred to Palm in accordance with the terms of a master separation agreement to which Palm and 3Com are parties. Discontinued operations include Palm net sales which totaled $188.9 million and $174.2 million for the period from June 3, 2000 to July 27, 2000 and the three months ended August 27, 1999, respectively. Net income from Palm discontinued operations was reported net of income tax expense of $2.7 million, and $6.9 million for the period from June 3, 2000 to July 27, 2000 and three months ended August 27, 1999, respectively. Allocated corporate expenses that ceased after the Palm distribution were included in net income from discontinued operations. 3. Business Realignment Costs On March 20, 2000, 3Com announced plans to refocus its business strategy, change its growth profile, and streamline its operations. The first phase of 3Com's business realignment separated the operations of Palm and made Palm an independent company. The second phase realigned 3Com's strategy to focus on high-growth markets, technologies, and products. In connection with the separation of Palm, 3Com incurred business realignment costs, which consisted primarily of incremental third party costs related to legal and accounting services, strategic business planning, information systems separation, development of compensation and benefits strategies, and costs to recruit certain key Palm management. For the three months ended September 1, 2000, 3Com incurred $0.2 million in realignment charges resulting from the separation of Palm. During fiscal 2000 and continuing through the three months ended September 1, 2000, 3Com realigned its strategy to focus on high-growth markets, technologies, and products. Operations were restructured around two distinct business models: 1) Commercial and Consumer Networks Business and 2) Carrier Networks Business. In support of this new strategy, 3Com exited its analog-only modem and high-end Local Area Network (LAN) and Wide Area Network (WAN) chassis product lines. For the three months ended September 1, 2000, 3Com incurred $9.7 million in realignment charges related to implementing its change in strategic focus. Components of accrued business realignment costs and changes in accrued amounts as of September 1, 2000 were as follows (in thousands): 7
Balance at Balance at June 2, Provision September 1, 2000 (Benefit) Deductions 2000 --------------- ---------------- --------------- --------------- Facilities lease terminations $ 8,300 $ (3,115) $ (125) $ 5,060 Long-term asset write-downs 16,494 12,359 (15,381) 13,472 Severance and outplacement 34,212 (2,847) (15,200) 16,165 Other restructuring costs 5,673 3,324 (6,017) 2,980 --------------- ---------------- --------------- --------------- $ 64,679 $ 9,721 $ (36,723) $ 37,677 =============== ================ =============== ===============
Severance and outplacement costs related to the termination of approximately 2,800 employees. Employee separation costs include severance, medical, and other benefits. Employee groups impacted by the realignment include personnel involved in duplicate corporate services, manufacturing and logistics, product organizations, sales, and customer support. As of September 1, 2000, approximately 1,400 employees had begun the separation process, resulting in $40.9 million of employee separation payments. Remaining cash expenditures associated with employee separations are estimated to be approximately $16.2 million. Employee separations are expected to be substantially complete by November 2000, and include 1,200 3Com employees transferred to Manufacturers' Services Ltd. (see note 12). 3Com has substantially completed its realignment initiatives. There can be no assurance that the estimated costs of 3Com's business realignment activities will not change. Remaining cash expenditures relating to the realignment are estimated to be $24.2 million, related primarily to employee severance, facility closure, and payments to suppliers. Remaining non-cash charges relating to the realignment are estimated to be $13.5 million, primarily related to the impairment of capital assets associated with the business activities that have been exited. 4. Business Combination During the first quarter of fiscal 2001, 3Com acquired Kerbango, Inc. ("Kerbango"), developer of the Kerbango-TM- Internet radio, radio tuning system, and radio web site. The total purchase consideration, including $0.3 million of direct transaction costs, was $73.5 million, consisting of cash paid to Kerbango of $52.2 million, issuance of restricted stock with a fair value of $17.2 million and stock options assumed with a fair value of $3.8 million. In addition, deferred cash payments to founders and certain former employees totaling $7.7 million are contingent upon certain events through July 2002. Accordingly, the effect of the deferred cash payments will be recorded as the contingent events have been satisfied. For financial reporting purposes, the aggregate purchase price, excluding deferred cash payments, was reduced by the intrinsic value of unvested stock options and restricted stock totaling $20.2 million which was recorded as deferred stock-based compensation and is being amortized over the respective vesting periods. Approximately $29.4 million of the aggregate purchase price represented purchased in-process technology that had not yet reached technological feasibility and had no alternative future use, and accordingly, was charged to operations in the first quarter of fiscal 2001. Net tangible liabilities acquired, including cash of $0.4 million, were approximately $1.7 million at the acquisition date. This purchase resulted in $25.6 million of goodwill and other intangible assets that are being amortized over estimated useful lives of three to five years. 8 5. Comprehensive Income The components of comprehensive income, net of tax, are as follows (in thousands):
Three Months Ended ------------------------------ September 1, August 27, 2000 1999 ------------- --------------- Net income (loss) $ (59,200) $ 137,491 Other comprehensive income: Change in unrealized gain on available- for-sale securities 60,176 251,743 Change in accumulated translation adjustments (343) 144 ------------- ------------- Total comprehensive income $ 633 $ 389,378 ============= ============= 6. Net Income (Loss) Per Share The following table presents the calculation of basic and diluted earnings per share (in thousands, except per share data): Three Months Ended ------------------------------ September 1, August 27, 2000 1999 ------------- ------------- Net income (loss) from continuing operations $ (63,737) $ 128,304 Net income from discontinued operations 4,537 9,187 ------------- ------------- $ (59,200) $ 137,491 ============= ============= Weighted average shares-Basic 353,777 353,243 Effect of dilutive securities: Employee stock options - 4,279 Restricted stock - 181 ------------- ------------- Weighted average shares-Diluted 353,777 357,703 ============= ============= Net income (loss) per share-Basic: Continuing operations $ (0.18) $ 0.36 Discontinued operations 0.01 0.03 ------------ ------------- $ (0.17) $ 0.39 ============ ============= Net income (loss) per share-Diluted: Continuing operations $ (0.18) $ 0.36 Discontinued operations 0.01 0.02 ------------ ------------- $ (0.17) $ 0.38 ============ =============
Employee stock options and restricted stock totaling 74.3 million shares were not included in the diluted weighted average shares calculation for the three months ended September 1, 2000, as the effects of these securities were antidilutive. 9 7. Inventories Inventories consist of (in thousands):
September 1, June 2, 2000 2000 ------------- ------------- Finished goods $ 129,987 $ 174,420 Work-in-process 43,846 31,863 Raw materials 99,413 79,659 ------------- ------------- $ 273,246 $ 285,942 ============= =============
8. Commitments and Contingencies 3Com has purchase commitments pertaining to a patent license agreement. These purchase commitments extend through the end of calendar 2005 and increase from $135 million for calendar 2001 to $180 million for calendar 2005. In the event that 3Com does not meet a calendar year purchase commitment, penalties due increase from approximately one percent to three percent of the annual commitment. In July 2000, 3Com committed to purchase certain components from a vendor through December 2002. The purchase agreement provides for cash penalties to the vendor in the event that minimum purchases are not met on a calendar quarter basis. The agreement included a warrant issued to 3Com to purchase common stock of the vendor. Since the vendor was subsequently acquired by another company ("acquirer"), the shares of common stock of the vendor were replaced by 992,000 shares of common stock of the acquirer under the warrant agreement. The fair value of the warrant at the inception of the agreement was fixed at approximately $244 million, since the agreement contains significant disincentives for nonperformance. The effect of such warrants will be recorded as a credit to cost of sales as purchases are made. Future minimum purchase commitments, excluding the effect of warrants, are as follows (in thousands):
Purchase Fiscal Year Commitment ----------- ------------- 2001 $ 117,307 2002 158,288 2003 84,975 ------------- Total $ 360,570 =============
10 9. Stock Repurchase and Option Programs During the fourth quarter of fiscal 2000, the Board of Directors authorized a stock repurchase program in the amount of up to one billion dollars. Such repurchases may be used to offset the issuance of additional shares resulting from employee stock option exercises and the sale of shares under the employee stock purchase plan. The Board has authorized a two-year time limit on the repurchase authorizations. This new program replaces previous authorizations totaling 45 million shares between June 1998 and September 1999. During the three months ended September 1, 2000, 16.1 million shares of common stock were repurchased for a cumulative purchase price of $250.2 million. In July 2000, 3Com initiated a program of selling put options and purchasing call options on its common stock. The put options entitle the holders to sell shares of 3Com common stock to 3Com on certain dates at specified prices. The call options entitle 3Com to purchase its common stock on certain dates at specified prices. As of September 1, 2000, 16.5 million put options were outstanding and 13.0 million call options were outstanding. The put options and call options expire between January 2001 and August 2002, with prices ranging from $12.95 to $22.17 per share. The option contracts give 3Com the choice of net cash settlement or settlement in its own shares of common stock. These options are accounted for as permanent equity instruments. 10. Business Segment Information The following tables display information on our reportable segments (in thousands):
Three Months Ended ------------------------------ September 1, August 27, 2000 1999 ------------- ------------- Sales: Commercial and Consumer Networks $ 639,106 $ 790,008 Carrier Networks 167,243 129,614 Exited Product Lines 127,415 293,574 ------------- ------------- $ 933,764 $ 1,213,196 ============= ============= Contribution Margin: Commercial and Consumer Networks $ 100,784 $ 289,277 Carrier Networks 26,234 21,466 Exited Product Lines (12,650) 31,542 ------------- ------------- $ 114,368 $ 342,285 ============= =============
11 A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is set forth below (in thousands):
Three Months Ended ------------------------------ September 1, August 27, 2000 1999 ------------- ------------- Total contribution margin from operating segments $ 114,368 $ 342,285 Indirect operating expenses (1) 220,819 206,929 Purchased in-process technology 29,406 - Merger-related credits, net (212) (2,105) Business realignment costs 9,901 - ------------- ------------- Total operating income (loss) (145,546) 137,461 Gains on investments, net 16,736 23,551 Interest and other income, net 45,630 15,977 ------------- ------------- Income (loss) from continuing operations before income taxes and equity interests $ (83,180) $ 176,989 ============= =============
(1) Indirect operating expenses include expenses that are not directly attributable to an operating segment, such as field sales, corporate marketing, and general and administrative expenses. 11. 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. In late 1999, these cases were stayed by the Court, pending resolution of proceedings in the EUREDJIAN V. 3COM CORPORATION matter, discussed below. Because the EUREDJIAN case has been dismissed, the HIRSCH and KRAVITZ cases are no longer stayed. They are in discovery. No trial date has been scheduled. On February 10, 1998, a securities class action, captioned EUREDJIAN V. 3COM CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California asserting the same class period and factual allegations as the HIRSCH and KRAVITZ actions. The complaint alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages. In May 2000, at the request of plaintiffs, the Court dismissed the EUREDJIAN case with prejudice. 12 In December 1997, a securities class action, captioned REIVER V. 3COM CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed in the United States District Court for the Northern District of California. Several similar actions have been consolidated into this action, including FLORIDA STATE BOARD OF ADMINISTRATION AND TEACHERS RETIREMENT SYSTEM OF LOUISIANA V. 3COM CORPORATION, ET AL., Civil Action No. C-98-1355. On August 17, 1998, the plaintiffs filed a consolidated amended complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and which seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from April 23, 1997 through November 5, 1997. 3Com has answered an amended complaint and the case is now in discovery. No trial date has been scheduled. In October 1998, a securities class action lawsuit, captioned ADLER V. 3COM CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County, asserting the same class period and factual allegations as the REIVER action. The complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages. By agreement of the parties, this case will be stayed to allow the REIVER case to proceed. On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (Gaylinn), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California. Several similar actions have been consolidated into the GAYLINN action. On September 10, 1999, the plaintiffs filed a consolidated complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from September 22, 1998 through March 2, 1999. In January 2000, the Court dismissed the complaint. In February 2000, plaintiffs filed an amended complaint. In June 2000, the Court dismissed the amended complaint without prejudice. Plaintiffs filed another amended complaint. On July 24, 2000, the Company filed a motion to dismiss the latest amended complaint. In September 2000, the Court dismissed the amended complaint with prejudice. INTELLECTUAL PROPERTY On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics Corporation and U.S. Robotics Access Corp. in the United States District Court for the Western District of New York. The case is now captioned XEROX CORPORATION V. U.S. ROBOTICS CORPORATION, U.S. ROBOTICS ACCESS CORP., PALM COMPUTING, INC. AND 3COM CORPORATION (Civil Action Number 97-CV-6182T). The Complaint alleged willful infringement of United States Patent Number 5,596,656, entitled "Unistrokes for Computerized Interpretation of Handwriting." The Complaint sought to permanently enjoin the defendants from infringing the patent in the future. In an Order entered by the Court on June 6, 2000, the Court granted the defendants' motion for summary judgment of non-infringement, and the case was dismissed in its entirety. Xerox has appealed the dismissal to the U.S. Court of Appeals for the Federal Circuit. On May 26, 2000 3Com Corporation filed a patent infringement lawsuit against Xircom, Inc. The lawsuit, filed in the United States District Court for the District of Utah (2:00CV-0436G), alleges infringement of 3Com's patent numbers 6,012,953, 5,532,898 and 5,777,836. On September 21, 2000 in the United States District Court for the Central District of California (00-10198 WJR), Xircom Corporation filed suit against 3Com Corporation alleging infringement of Xircom's U.S. Patent Numbers 5,773,332, 5,940,275, 6,115,257 and 6,095,851. 3Com is currently investigating the lawsuit filed by Xircom. 13 12. Subsequent Events On September 5, 2000, 3Com finalized the sale of a 39-acre parcel of undeveloped land in San Jose, California to Palm, Inc., who simultaneously assigned its rights under the land purchase and sale agreement to a third party. 3Com expects to record a gain of approximately $175 million related to this sale in its second fiscal quarter. On September 30, 2000, 3Com finalized the sale of its manufacturing and distribution operations, located in Mt. Prospect, Illinois to Manufacturers' Services Ltd. ("MSL"). In this transaction, 3Com received approximately $60 million in cash and 1.5 million shares of common stock of MSL valued at approximately $18 million. For the next two years, 3Com has committed to purchase a minimum level of manufacturing volume from MSL. On September 30, 2000, the manufacturing and distribution operations, including approximately 1,200 3Com employees, were transferred to MSL. 3Com expects to record a loss of approximately $11 million related to this sale in its second fiscal quarter. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report on Form 10-Q contains forward-looking statements, including statements concerning our expectation that employee separations will be substantially complete by November 2000, our plan to invest a significant portion of our financial resources towards developing products for our targeted emerging growth markets, our estimate of expenses in connection with the completion of acquired research and development projects, our plans to make strategic investments, our belief that our cash and cash equivalents, short-term investments, and cash generated from operations will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months, our expectation that both sales and operating income will continue to be negatively impacted and that we will report operating losses in fiscal 2001, our expectation that our high growth emerging product lines will account for a higher percentage of our sales over time, our expectation that gross margins for our high growth emerging product lines on a stand-alone basis may be significantly lower than gross margins for networking products traditionally sold to larger businesses, our expectation that we will increase our commitment to and become increasingly reliant upon our two-tiered distribution model as well as sales to OEMs, our plans to develop our carrier channel through expanded partnerships with Internet and other competitive service providers, our expectation that significant returns or order cancellations will not occur beyond the second quarter of fiscal 2001, and our expectation that international markets will continue to account for a significant portion of our sales. 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. STRATEGIC FOCUS On March 20, 2000, we announced plans to realign our strategy to focus on high-growth markets, technologies, and products. We have now substantially completed our business transformation. In our commercial market, we have exited from our high-end LAN and WAN chassis product lines, and in our consumer market we have exited from our analog-only modem product line. We now focus on specific sectors of the commercial, consumer, and carrier markets, and have structured our operations around two distinct business models: 1) Commercial and Consumer Networks Business and 2) Carrier Networks Business. The Commercial and Consumer Networks Business is implementing a web-enabled business model to deliver our products and services to millions of customers. The focus of our Commercial and Consumer Networks Business is on targeted sectors within the commercial and consumer markets. The consumer market comprises individuals and families who we believe want user-friendly connections at home and on the go. Building upon our market position in consumer broadband access, we will concentrate on home networks and Internet appliances, a new consumer-oriented product category we intend to define and lead. Our commercial market includes all businesses with small to midsize networked sites. Since these customers do not typically have their own onsite Information Technology (IT) group, they look to us for simple solutions that give them connectivity without burdening them with technical complexity and high costs. We are continuing to provide large enterprises with products and solutions for their small to midsize locations. The Carrier Networks Business uses a targeted, direct sales business model to create service delivery solutions for our carrier and network service provider customers. The focus of our Carrier Networks Business is on carrier-class access infrastructures and Internet Protocol (IP) services platforms for the network service provider market. We offer our carrier customers robust, scalable multi-service platforms that allow them to deploy revenue-enhancing services over dial-up, Integrated Services Digital Network (ISDN), broadband, and wireless access infrastructures. 15 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 income statements:
Quarter Ended ------------- September 1, June 2, August 27, 2000 2000 1999 ------------ ---------- ----------- Sales 100.0 % 100.0 % 100.0 % Cost of sales 63.5 74.2 52.6 ------ ------- ------ Gross margin 36.5 25.8 47.4 Operating expenses: Sales and marketing 25.3 32.1 19.2 Research and development 15.6 20.3 12.2 General and administrative 6.2 7.0 4.5 Amortization of goodwill and acquired intangibles 0.8 1.1 0.4 Purchased in-process technology 3.1 1.4 - Merger-related credits, net - - (0.2) Business realignment costs 1.1 8.4 - ------ ------- ------ Total operating expenses 52.1 70.3 36.1 ------ ------- ------ Operating income (loss) (15.6) (44.5) 11.3 Gains on investments, net 1.8 11.7 2.0 Interest and other income, net 4.9 5.4 1.3 ------ ------- ------ Income (loss) from continuing operations before income taxes and equity interests (8.9) (27.4) 14.6 Income tax provision (benefit) (2.2) (6.8) 4.1 Other interests in loss of consolidated joint venture - - (0.1) Equity interest in loss of unconsolidated investee 0.1 0.3 - ------ ------- ------ Net income (loss) from continuing operations (6.8) (20.9) 10.6 Net income from discontinued operations 0.5 1.7 0.7 ------ ------- ------ Net income (loss) (6.3)% (19.2)% 11.3 % ====== ===== ====== Pro forma: Operating expenses 47.1 % 59.4 % 35.8 % Operating income (loss) (10.6) (33.6) 11.6 Net income (loss) (4.4) (21.4) 9.4
Pro forma results exclude the following, net of taxes: amortization of goodwill and acquired intangibles, purchased in-process technology, merger-related credits, net, business realignment costs, gains on investments, net, and net income from discontinued operations. 16 The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. SALES Sales in the first quarter of fiscal 2001 totaled $933.8 million, a decrease of $279.4 million, or 23 percent, compared to the same quarter one year ago, and an increase of $170.1 million or 22 percent sequentially from the fourth quarter of fiscal 2000. COMMERCIAL AND CONSUMER NETWORKS. Commercial and consumer network systems products include traditional access products (desktop Network Interface Cards (NICs), advanced access products (gigabit NICs, server NICs, mobile NICs, wireless LAN products), LAN/WAN infrastructure products (LAN switches, LAN hubs, Internet access products, network management products), LAN telephony products, services, broadband connections, home networking products, and Internet appliances. Sales of commercial and consumer networks products in the first quarter of fiscal 2001 decreased 19 percent compared to the same quarter one year ago and increased 24 percent sequentially, compared to the fourth quarter of fiscal 2000. We do not believe that meaningful comparisons can be made to the same quarter a year ago because of dramatic changes caused by our business realignment. Likewise, we believe that meaningful sequential comparisons cannot be made as the growth rate was substantially impacted by the stabilization and recovery of our business in the first quarter of fiscal 2001. The decline in sales from the same quarter one year ago was due primarily to competitive pressures in the LAN Workgroup Systems market and lower average selling prices for our desktop NIC products due to an increase in the proportion of sales of these products to Original Equipment Manufacturers (OEMs). These declines were partially offset by increased sales of our high-growth emerging technology products. The sequential sales increase from the fourth quarter of fiscal 2000 was due to the stabilization and recovery of the business as well as increased sales of our high growth emerging technology products. During the fourth quarter of fiscal 2000, sales were depressed due to uncertainty caused by our business realignment and our efforts to reduce channel inventory. Sales of commercial and consumer network products in the first quarter of fiscal 2001 represented 68 percent of total sales compared to 65 percent in the first quarter of fiscal 2000 and 68 percent in the fourth quarter of fiscal 2000. CARRIER NETWORKS. Carrier networks products include enhanced data services (remote access services (RAS)) and new technologies (IP telephony, wireless, cable access and Digital Subscriber Line (DSL) access) and customer service and support. Sales of carrier network products in the first quarter of fiscal 2001 increased 29 percent compared to the same quarter one year ago and 7 percent sequentially from the fourth quarter of fiscal 2000. Sales of carrier network products during the first quarter of fiscal 2001 represented 18 percent of total sales compared to 11 percent of total sales in the first quarter of fiscal 2000, and 21 percent of total sales in the fourth quarter of fiscal 2000. The increase in sales, both sequentially and compared to the same period one year ago, was due primarily to a continuing shift in our product mix from traditional RAS products towards new technologies. EXITED PRODUCT LINES. Sales of exited product lines (analog-only modems and high-end LAN and WAN chassis products) in the first quarter of fiscal 2001 decreased 57 percent compared to the same quarter one year ago and increased 42 percent sequentially from the fourth quarter of fiscal 2000. The decrease in sales of exited product lines as compared to the same period one year ago was due to the impact of our business realignment and change in strategic focus. The sequential increase was principally due to an increase in sales of our exited products as customers made final purchases, partially offset by product returns. 17 GEOGRAPHIC. In the first quarter of fiscal 2001, U.S. sales decreased 27 percent and international sales decreased 18 percent compared to the same period one year ago. The year-over-year decrease in international sales was primarily due to weaker sales in Europe, reflecting a 30 percent decrease, partially offset by stronger sales in the Asia Pacific and Latin American regions. U.S. sales in the first quarter of fiscal 2001 represented 50 percent of total sales, compared to 53 percent of total sales in the first quarter of fiscal 2000 and 48 percent of total sales in the fourth quarter of fiscal 2000. U.S. sales and international sales increased by 27 percent and 17 percent, respectively, sequentially from the fourth quarter of fiscal 2000. GROSS MARGIN Gross margin as a percentage of sales was 37 percent in the first quarter of fiscal 2001, compared to 47 percent in the first quarter of fiscal 2000 and 26 percent in the fourth quarter of fiscal 2000. The year-over-year decrease in the gross margin percentage was affected by significantly lower gross margins on sales of exited product lines. The sequential increase in the gross margin percentage was due to one-time charges of $55.5 million dollars within cost of sales in the fourth quarter of fiscal 2000, primarily related to excess and obsolete inventory, warranty reserves, and return and rebate programs in connection with the exited product lines. These one-time charges were not as significant in the first quarter of fiscal 2001. OPERATING EXPENSES Operating expenses in the first quarter of fiscal 2001 were $486.3 million, or 52 percent of sales, compared to $437.6 million, or 36 percent of sales in the first quarter of fiscal 2000 and $536.9 million, or 70 percent of sales in the fourth quarter of fiscal 2000. Operating expenses in the first quarter of fiscal 2001 included amortization of goodwill and acquired intangibles of $7.5 million, purchased in-process technology of $29.4 million, net merger-related credits of $0.2 million, and business realignment costs of $9.9 million. Operating expenses in the first quarter of fiscal 2000 included amortization of goodwill and acquired intangibles of $5.0 million and net merger-related credits of $2.1 million. Operating expenses in the fourth quarter of fiscal 2000 included amortization of goodwill and acquired intangibles of $8.6 million, purchased in-process technology of $10.6 million, net merger-related credits of $0.2 million, and business realignment costs of $64.2 million. Excluding these unusual items, operating expenses for the first quarter of fiscal 2001 were $439.7 million, or 47 percent of sales, compared to $434.8 million, or 36 percent of sales in the first quarter of fiscal 2000 and $453.7 million, or 59 percent of sales in the fourth quarter of fiscal 2000. SALES AND MARKETING. Sales and marketing expenses in the first quarter of fiscal 2001 increased $3.9 million, or two percent, compared to the first quarter of fiscal 2000, and increased to 25 percent of total sales for the first quarter of fiscal 2001, compared to 19 percent of total sales for the first quarter of fiscal 2000. Sales and marketing expenses in the first quarter of fiscal 2001 decreased $8.6 million, or four percent sequentially, from the fourth quarter of fiscal 2000, and decreased to 25 percent of total sales in the first quarter of fiscal 2001, compared to 32 percent of total sales for the fourth quarter of fiscal 2000. The year-over-year increase was due significantly to brand advertising and marketing campaigns to promote a new 3Com brand identity, partially offset by lower sales force expenses. The sequential decrease was significantly attributable to lower sales force expenses that were partially offset by increased spending on our new brand advertising and marketing campaigns. RESEARCH AND DEVELOPMENT. Research and development expenses in the first quarter of fiscal 2001 decreased $2.5 million, or two percent, compared to the first quarter of fiscal 2000, and increased to 16 percent of sales in the first quarter of fiscal 2001 compared to 12 percent of total sales in the first quarter of fiscal 2000. Research and development expenses in the first quarter of fiscal 2001 decreased $9.5 million, or six percent, from the fourth quarter of fiscal 2000, and decreased to 16 percent of total sales in the first quarter of fiscal 2001 compared to 20 percent of total sales in the fourth quarter of fiscal 2000. As a result of our exit from our analog-only modem and high-end LAN and WAN chassis product lines, we have substantially reduced our research and development activities for these products. Nevertheless, we are continuing to invest heavily in research and development, placing a strong focus on our targeted emerging growth markets. We plan to continue to invest a significant proportion of our financial resources towards developing products for these markets. 18 GENERAL AND ADMINISTRATIVE. General and administrative expenses in the first quarter of fiscal 2001 increased $3.6 million, or seven percent, compared to the first quarter of fiscal 2000, and increased to six percent of total sales in the first quarter of fiscal 2001 compared to four percent of total sales in the first quarter of fiscal 2000. General and administrative expenses in the first quarter of fiscal 2001 increased $4.1 million, or eight percent, from the fourth quarter of fiscal 2000, and decreased to six percent of total sales in the first quarter of fiscal 2001 compared to seven percent of total sales in the fourth quarter of fiscal 2000. The increase in general and administrative expenses compared to the same period one year ago was due primarily to increased consulting costs associated with our business realignment activities, partially offset by lower spending for employee incentive programs. The sequential increase in general and administrative expenses was due significantly to an increase in the general allowance for bad debts, partially offset by lower spending for employee incentive programs. AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLES. Amortization of goodwill and acquired intangibles in the first quarter of fiscal 2001 increased $2.5 million, or 51 percent, compared to the first quarter of fiscal 2000 and decreased $1.1 million, or 13 percent, sequentially from the fourth quarter of fiscal 2000. Amortization of goodwill and acquired intangibles includes the amortization of goodwill, assembled workforce, customer relationships, developed technology and licenses and non-compete agreements acquired in purchase business combinations. PURCHASED IN-PROCESS TECHNOLOGY. During the first quarter of fiscal 2001, 3Com acquired Kerbango, Inc. ("Kerbango"), the developer of the Kerbango Internet radio, radio tuning system, and radio web site. In connection with this acquisition, 3Com recorded a charge for purchased in-process technology of approximately $29.4 million. During the fourth quarter of fiscal 2000, 3Com recorded a charge of $10.6 million for purchased in-process technology related to the acquisition of Call Technologies, Inc ("Call Technologies"). As of the acquisition dates, purchased-in-process technology was approximately 75% and 50-75% complete for Kerbango and Call Technologies projects, respectively. We are continuing development of four projects, and have spent approximately $8.0 million as of September 1, 2000. As of September 1, 2000, we estimate that approximately $3.5 million will be spent to complete acquired research and development projects. We estimate that all projects currently in process will be completed by March 2001. MERGER-RELATED CREDITS, NET. During the first quarter of fiscal 2001, we recorded a net pre-tax credit of approximately $0.2 million related to reductions in the estimates for remaining charges associated with the U.S. Robotics merger. During the first quarter of fiscal 2000, we recorded a net pre-tax credit of approximately $2.1 million, associated with the U.S. Robotics merger. During the fourth quarter of fiscal 2000, we recorded a net pre-tax credit of approximately $0.2 million, associated with the U.S. Robotics merger. BUSINESS REALIGNMENT COSTS. Business realignment costs in the first quarter of fiscal 2001 were $9.9 million, and represented costs related to steps we took to refocus our business strategy, change our growth profile and streamline our operations. These costs included $0.2 million related to the separation of Palm and $9.7 million related to the realignment of our strategy to focus on high growth markets, technologies and products. During the first quarter of fiscal 2000, we did not record any business realignment costs. During the fourth quarter of fiscal 2000, business realignment costs of $64.2 million were recorded, of which $5.2 million related to the separation of Palm from 3Com and $59.0 million related to implementing our change in strategic focus. GAINS ON INVESTMENTS, NET Gains on investments, net, in the first quarter of fiscal 2001 were $16.7 million, due primarily to gains from investments in limited partnership venture capital funds. During the first quarter of fiscal 2000, gains on investments, net were $23.5 million due to sales of investments in equity securities, and during the fourth quarter of fiscal 2000 gains on investments, net were $89.0 million due primarily to sales of investments in equity securities. 19 INTEREST AND OTHER INCOME, NET Interest and other income, net, in the first quarter of fiscal 2001 increased $29.6 million compared to the first quarter of fiscal 2000. Interest and other income, net, in the first quarter of fiscal 2001 increased $4.1 million compared to the fourth quarter of fiscal 2000. The increase in interest and other income, net compared to the same period one year ago was due primarily to higher interest income as a result of higher cash and investment balances. The increase in interest and other income sequentially from the fourth quarter of fiscal 2000 was primarily due to a shift in investment mix from tax exempt to taxable agency instruments that provide higher nominal yields and reduction in interest expense due to the repayment of long-term debt. INCOME TAX PROVISION Our effective income tax rate was a 25.0 percent benefit for the first quarter of fiscal 2001, compared to a 28.1 percent expense for the first quarter of fiscal 2000. The change in the tax rate compared to the same period one year ago was primarily attributable to changes in our market focus, increased tax exempt investment income and the relative mix of income (or loss) in jurisdictions taxed at rates greater than (or less than) the U.S. rate. OTHER INTERESTS IN LOSS OF CONSOLIDATED JOINT VENTURE In January 1999, we entered into a joint venture named ADMTek, Inc. ("ADMTek"), and began consolidating the joint venture with our results, due to our ability to exercise significant influence over operating and financial policies of the joint venture. In September 1999, we sold a portion of our existing interest in ADMTek to our joint venture partner. As a result of this sale, our ownership interest was reduced to 19 percent and we no longer have the ability to exercise significant influence over the joint venture. During the second quarter of fiscal 2000, we began accounting for this investment using the cost method. For the first quarter of fiscal 2000, the pro-rata share of the joint venture loss allocated to other investors was $1.0 million. EQUITY INTEREST IN LOSS OF UNCONSOLIDATED INVESTEE In August 1999, we invested $7.5 million in OmniSky Corporation ("OmniSky"). We currently control approximately 22 percent of the equity interests in OmniSky. We are accounting for this investment using the equity method. For the first quarter of fiscal 2001, we recorded $1.4 million as our equity interest in the loss of Omnisky. NET INCOME (LOSS) FROM CONTINUING OPERATIONS Net loss from continuing operations for the first quarter of fiscal 2001 was ($63.7) million, or ($0.18) per share, compared to net income of $128.3 million or $0.36 per share for the first quarter of fiscal 2000 and a net loss of ($159.4) million or ($0.45) per share for the fourth quarter of fiscal 2000. NET INCOME FROM DISCONTINUED OPERATIONS Net income from discontinued operations includes the results of operations of Palm. Net income from discontinued operations for the period from June 3, 2000 through July 27, 2000 was $ 4.5 million, or $0.01 per share, compared to $9.2 million, or $0.02 per share for the first quarter of fiscal 2000 and net income of $12.5 million, or $0.03 per share for the fourth quarter of fiscal 2000. NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE Net loss for the first quarter of fiscal 2001 was ($59.2) million, or ($0.17) per share, compared to net income of $137.5 million, or $0.38 per share for the first quarter of fiscal 2000 and a net loss of ($146.8) million, or ($0.42) per share, for the fourth quarter of fiscal 2000. Excluding amortization of goodwill and purchased intangibles, purchased in-process technology, merger-related credits, business realignment costs, net gains on investments and net income from discontinued operations, pro forma net income (loss) was ($41.3) million, or ($0.12) per share for the first quarter of fiscal 2001; $113.7 million, or $0.32 per share for the first quarter of fiscal 2000; and ($163.7) million, or ($0.47) per share for the fourth quarter of fiscal 2000. 20 LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents and short-term investments at September 1, 2000 were $2.7 billion, a decrease of $.4 billion, or 13 percent, compared to the balance of $3.1 billion at June 2, 2000. For the first quarter of fiscal 2001, net cash used in operating activities was $108.3 million. Accounts receivable at September 1, 2000 increased $111.7 million from June 2, 2000 to $467.2 million. Days sales outstanding in receivables increased to 45 days at September 1, 2000, compared to 42 days at June 2, 2000, primarily due to a higher percentage of sales in the last month of the quarter. Inventory levels at September 1, 2000 decreased $12.7 million from June 2, 2000 to $273.2 million. Annualized inventory turnover improved to 8.5 turns for the first quarter of fiscal 2001, compared to 8.0 turns for the fourth quarter of fiscal 2000. During the first quarters of fiscal 2001 and 2000, we made investments totaling $598.1 million and $168.5 million, respectively, comprised primarily of investments in municipal and corporate bonds and government agency instruments. For the first quarters of fiscal 2001 and 2000, proceeds from maturities and sales of investments were $179.0 million and $180.4 million, respectively, related primarily to the maturities of investments in municipal and corporate bonds and government agency instruments. As part of our 3Com Ventures initiative, we selectively make strategic investments in the equity securities of privately held companies and limited partnership venture capital funds. We believe these investments will complement our business opportunities and research and development activities. We have established 3Com Ventures II, which has made strategic investments of $42 million and plans to make additional investments of $208 million. During the first quarter of fiscal 2001, 3Com made $59.1 million in capital expenditures. Major capital expenditures included upgrades and expansion of our facilities and purchases and upgrades of software and computer equipment. As of September 1, 2000, we had approximately $5.8 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. During the first quarter of fiscal 2001, we used cash of $51.7 million, net of cash acquired, in the purchase of Kerbango, Inc. During the fourth quarter of fiscal 2000, our Board of Directors authorized a stock repurchase program of up to one billion dollars. Such repurchases could be used to offset the issuance of additional shares resulting from employee stock option exercises and the sale of shares under the employee stock purchase plan. The Board has authorized a two-year time limit on the repurchase authorizations. This new program replaces previous authorizations totaling 45 million shares between June 1998 and September 1999. During the first quarter of fiscal 2001, we repurchased 16.1 million shares of our common stock at a total purchase price of $250.2 million. During the first quarter of fiscal 2001, we initiated a program of selling put options and purchasing call options on our common stock. The put options entitle the holders to sell shares of 3Com common stock to us on certain dates at specified prices. The call options entitle us to purchase our common stock on certain dates at specified prices. As of September 1, 2000, 16.5 million put options were outstanding and 13.0 million call options were outstanding. The put options and call options expire between January 2001 and August 2002, with prices ranging from $12.95 to $22.17 per share. The option contracts give us the choice of net cash settlement or settlement in shares of our own common stock. These options are accounted for as permanent equity instruments. 21 During the first quarter of fiscal 2001, we received net cash of $145.1 million from the sale of our common stock to employees through our employee stock purchase and option plans. During the same quarter one year ago, 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. During the first quarter of fiscal 2001, we recorded a tax benefit on stock option transactions of $49.3 million. During the same quarter one year ago, we recorded a tax benefit on stock option transactions totaling $14.6 million. During the first quarter of fiscal 2001, we repaid the remaining debt balance of $24 million under the 7.52% Unsecured Senior Notes agreement. 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 June 1998 and June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 will be effective for 3Com's fiscal year ending May 31, 2002. 3Com is in the process of determining the impact that adoption will have on its consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The guidance in SAB 101 must be adopted during 3Com's fourth quarter of fiscal 2001 and the effects, if any, are required to be recorded through a retroactive, cumulative-effect adjustment as of the beginning of the fiscal year, with a restatement of all prior interim quarters in the year. Management has not completed its evaluation of the effects, if any, that SAB 101 will have on 3Com's income statement presentation, operating results, or financial position. 22 BUSINESS ENVIRONMENT AND RISK FACTORS Our future results may be affected by industry trends and specific risks in our business. Some of the factors that could cause future results to materially differ from past results or those described in forward-looking statements include those discussed below. STRATEGIC FOCUS AND COMPLETION OF BUSINESS TRANSITION Since announcing our realignment plans on March 20, 2000, we have been transitioning our business and realigning our strategic focus towards high-growth markets, technologies, and products. We have exited our analog-only modem and high-end LAN and WAN chassis product lines. These product lines presented characteristics for revenue growth and profitability that did not meet our target financial model. Our new strategic focus requires re-allocation of resources, investing in new technologies, partnering with other companies, and establishing leadership positions in new high-growth markets. Proper timing and execution in identifying key product lines and market opportunities, developing products and technology and commercializing products are essential for us to be successful in our new strategic focus. Many factors may impact our ability to implement this new strategic focus, including our ability to sustain the productivity of our workforce and recruit and retain talented personnel, to introduce innovative new products in a timely manner, to successfully adopt a business model appropriate for these high-growth and emerging product lines, to adequately secure component supply for these high-growth and emerging product lines, to reduce operating expenses, and to quickly respond to and recover from unforeseen events associated with our business transformation. Internal and external changes resulting from our business transformation are still on-going and may disrupt our customers, partners, distributors, and employees and create a prolonged period of uncertainty, which could have a material adverse affect on our business. As a result of our business transition and realignment, it continues to be difficult to forecast our financial performance. However, we expect that both sales and operating income will continue to be negatively impacted, and we expect to report operating losses in fiscal 2001. As we implement the transformation of 3Com, our goal will be to post operating profits by our fourth fiscal quarter of fiscal 2001 and to make further improvements during fiscal 2002. NEW PRODUCT LINES AND MARKETS Our financial performance and future growth depend upon the rapid growth of new markets, and our ability to establish a leadership position in those markets. We are investing a significant proportion of our resources in several emerging product lines in markets that are expected to grow at a significantly higher rate than the networking industry average. We expect these product lines to account for a higher percentage of our sales over time. We are focused on the following products and solutions, leveraging our investments in broadband, wireless, IP telephony and digital home technologies: - LAN Telephony and Voice over IP Services - Broadband (cable and DSL) modems and headend equipment - Wireless LAN and Code Division Multiple Access (CDMA) Solutions - Home Networking - Internet Appliances At the present time, the markets for these products and solutions are still emerging. Industry standards for these technologies are yet to be widely adopted and the market potential remains unproven. If these markets do not grow at a significant rate or if we do not increase our sales in these product lines, our financial results could be adversely affected. 23 Additionally, we expect that the business models for these high-growth and emerging product lines, especially product lines which are more consumer and retail-oriented, may be different from the business model for our traditional networking products. We anticipate that gross margins for such products on a standalone basis may be significantly lower than gross margins for networking products traditionally sold to larger businesses. Therefore, 3Com must successfully adopt business models for such product lines that incorporate additional revenue generators, such as selling or bundling other higher margin services or products along with sales of these products, and that incorporate continued improvement in the cost of sales for these products. If we are not able to adopt or implement successful business models for these product lines, our overall gross margins may be negatively impacted which could adversely affect our financial results. ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS Products in the markets in which we compete have short life cycles. Therefore, our success depends on our ability to identify new market and product opportunities, to develop and introduce new products in a timely manner, and to gain market acceptance of new products, particularly in our targeted high-growth, emerging markets. For example, timely introductions of the following products are important to our success: - a next-generation carrier-class platform for certain applications in IP Telephony and third-generation (3G) wireless solutions for our carrier customers - a new line of Gigabit-on-Copper LAN solutions primarily for commercial enterprises - a new line of broadband modems (both cable and DSL) that support data and voice - new standards-based wireless LAN solutions, including our AirConnect-Registered Trademark- wireless LAN, for both commercial and consumer markets - a new generation of residential Internet appliances - a next generation SuperStack-Registered Trademark- workgroup solution for commercial enterprises Any delay in new product introductions, lower than anticipated demand for our new products or higher manufacturing costs could have an adverse affect on our operating results or financial condition, particularly in those product markets we have identified as emerging high-growth opportunities. SUPPLY CHAIN MANAGEMENT 3Com has a long-term objective to become best-in-class at managing its supply chain. Significant progress has been made in balancing the resources and operations required to achieve the highest levels of customer satisfaction and on-time delivery. The balancing of customer requirements and financial metrics reflects an equilibrium between dynamic elements. Such factors may include external conditions such as component shortages, fluctuations in worldwide demand, and industry consolidation. Some key components of our products and some services, which we rely on, are currently available only from single or limited sources. In addition, some of our suppliers are also our competitors. While we generally have been able to obtain adequate supplies of components from existing sources, we cannot be certain that in the future our suppliers will be able to meet our demand for components in a timely and cost-effective manner. For example, due to strong worldwide demand, the electronics industry is facing shortages on electronic components such as various memory devices and passive components. Due to these shortages, our ability to procure these components and meet our on-time delivery requirements in a cost-effective manner could be impacted. Our operating results, financial condition, or customer relationships could be adversely affected by these shortages. These adverse effects could result from an inability to fulfill customer demand or increased costs to acquire key components or services. Increasingly, we have been sourcing a greater number of components from a select number of vendors to obtain better pricing through higher volumes. Also, there has recently been a trend toward consolidation of vendors of electronic components. This greater reliance on a smaller number of suppliers increases our risk of experiencing unfavorable price fluctuations or a disruption in supply, particularly in a supply constrained environment. 24 Optimal performance of the supply chain requires accurate forecasting of demand, which may be more challenging in the case of emerging technologies and products. If demand for such products and growth of these markets are significantly different from our forecasting and planning, we may face inadequate component supply due to shortages or order lead-time requirements. This would adversely affect our revenues and financial results. The cost, quality, and availability of third party manufacturing operations are essential to the successful production and sale of many of our products. The inability of any third party manufacturer to meet our cost, quality, and availability standards could adversely impact our financial condition or results of operations. In addition we have entered into outsourcing arrangements for manufacturing services. For example, on September 30, 2000 we sold our Mt. Prospect, Illinois manufacturing and distribution operation to Manufacturers' Services Ltd. (MSL). MSL will manufacture broadband access, LAN telephony and carrier networks products for us. The sale, transfer, or consolidation of manufacturing facilities, if not properly executed, could lead to supply disruptions, an inability to satisfy demand, higher costs, or quality issues across our various businesses which could be costly to remedy. Any of these scenarios could have a significant negative impact on our financial results. Improvements in our supply chain management have enabled us to reduce our channel inventory model by two weeks on average. We have been operating within our existing channel inventory model of between five to seven weeks of supply on hand for the past two fiscal years. If we are unable to sustain the improvements we have made in our supply chain capabilities or encounter external supply chain disruptions, we may experience product stock-outs or shortages, which could adversely impact our financial results. COMPETITION FOR KEY PERSONNEL; RETENTION AND RECRUITING Our success depends to a significant extent upon retention and recruitment of a number of key employees and management. Changes associated with realignment of our business operations and strategy may impact retention of existing employees. Over the past year, we have experienced an increased rate of employee turnover compared to historical levels. The loss of the services of key employees and management could adversely affect our product introduction schedules, customer relationships, operating results, or financial condition. The ability to recruit employees, both to replace attrition and to grow our emerging businesses, may be a significant challenge due to the increasingly competitive marketplace for needed skills. Recruiting and retaining skilled personnel, including engineers, continues to be highly competitive. There has been a dramatic increase of technology start-up companies recruiting for the same talent that we require. If we cannot successfully recruit and retain skilled personnel, our ability to compete may be adversely affected. In addition, we must carefully balance the growth in our employee base commensurate with our anticipated sales growth. If our sales growth or attrition levels vary significantly, our results of operations or financial condition could be adversely affected. RELIANCE ON DISTRIBUTORS, RESELLERS, PC OEMS AND SERVICE PROVIDERS We distribute many of our products through two-tiered distribution channels that include distributors, systems integrators, value-added resellers, and retailers. We also sell to PC OEMs, large enterprises and service providers. Under our new strategic focus, we will increase our commitment to and become increasingly reliant upon our two-tiered distribution model as well as sales to OEMs. We will also be developing our Carrier channel through expanded partnerships with Internet and other competitive service providers. Our future results and financial condition are partially dependent on a number of factors relating to this distribution model, including the impact of our business realignment, issues associated with competition among and within our channels, selling to PC OEMs, and channel inventory and customer concentration. 25 BUSINESS REALIGNMENT. The activities surrounding our business realignment may adversely impact our ongoing relationships with our channel partners and the perception of us among end customers: - We have exited our analog-only modem and high-end LAN and WAN chassis product lines. In the past, through our channel partners, we have been able to present end-to-end networking solutions and complementary products to end customers, whom we believe synergistically generated sales. As a result of the business realignment, there may be a negative effect on sales of ongoing products, since these products may not be perceived to be part of a larger integrated or complementary solution. - As part of our business realignment, we reduced our direct, large account sales resources, which were primarily dedicated to promoting the now-discontinued high-end LAN and WAN chassis products. We will still be targeting such customers for our continuing high-volume products. However, the reduction in our large account sales force may result in our sales being adversely impacted. - Customers and channel partners may attempt to return products they have already purchased or cancel orders recently placed. Due to our business realignment, we have recently experienced a higher level of such returns and cancellations. We do not anticipate significant returns or order cancellations beyond the second quarter of fiscal 2001. Therefore, we may have declining levels of business through our traditional distribution channels as a result of impaired relationships with partners and end customers. There can be no guarantee that we can re-establish such relationships or forge new channel and end customer relationships in a timely manner to overcome any loss of business to existing customers or channel disruptions for sell-through of our new products. INVENTORY LEVELS IN CHANNEL. Our distributors and resellers maintain inventories of our products. As part of our efforts to optimize our supply chain, we have reduced the number of our distributors through whom we sell our products as well as the levels of inventory held by those distributors. We work closely with our distributors and resellers to monitor inventory levels and ensure that appropriate levels of products are available to end-users. Notwithstanding such efforts, if channel partners attempt to reduce their levels of inventory or if they do not maintain sufficient levels to meet customer demand, our sales could be negatively impacted. RELIANCE ON A SMALL NUMBER OF DISTRIBUTORS. Significant portions of our sales are made to a few customers. For the first quarter of fiscal year 2001, Ingram Micro represented approximately 17 percent of our total sales and Tech Data represented approximately 12 percent of our total sales. Ingram Micro and Tech Data are both distributors primarily of our commercial and consumer networking products. We cannot be certain that these customers will continue to purchase our products at current levels. Additionally, consolidation among distributors is reducing the number of distributors in the North American market. Because our sales are becoming more concentrated among a smaller number of customers, our results of operations, financial condition, or market share could be adversely affected if our customers: - stop purchasing our products or focus more on selling our competitors' products; - reduce, delay, or cancel their orders; - become unable to sell our products because we do not ship the products to them in a timely manner; or - experience competitive, operational, or financial difficulties, impairing our ability to collect payments from them. 26 PC OEMs. PC-related networking products such as NICs and PC Cards are increasingly being sold through the PC OEM channel rather than the distribution channel. We derive a significant portion of our personal connectivity product sales from PC OEMs such as Dell Computer, Toshiba, Gateway, Hewlett-Packard, and IBM, manufacturers that incorporate our NICs, PC Cards, or chipsets into their products. While sales to PC OEMs are important, products sold through the PC OEM channel typically have lower average selling prices than those sold through other channels. Therefore, our sales and margins may be adversely impacted if sales to PC OEMs continue to become a larger percentage of our business. E-BUSINESS/WEB-ENABLEMENT INITIATIVE A key initiative for us is to drive broad web-enablement of sales, supply chain, and internal processes. We are building in-house capabilities to sell directly to end-user customers (B2C) and distribution partners (B2B) over the Internet (e-Business). This e-Business initiative could cause conflict with our current indirect channels of distribution. If we are unsuccessful in selling through our e-Business channel, we could also lose market share to competitors who have more successfully developed these capabilities. These changes in the pattern of distribution of networking products could have a material adverse effect on our sales and financial results. We have also invested substantial time and resources into deploying the web as the primary medium and platform for internal applications and processes across 3Com. This involves redesigning some of our core business processes, including forecasting, supply chain operations, and order fulfillment. Implementing this initiative will require enhanced information systems, substantial training, and disciplined execution. We believe that the successful web-enablement of 3Com is critical to our long-term competitive position. There can be no assurances, however, that this initiative will be implemented successfully or that disruptions in operations will not occur in the process. CHANGES IN OUR INDUSTRY; ROLE OF ACQUISITIONS The networking business is highly competitive, and as such, our growth is dependent upon market growth and our ability to enhance existing products and introduce new products on a timely basis. Our new strategic focus on emerging and high-growth product lines mandates that we act quickly and effectively to enter into new markets. One of the ways we will address this need is through acquisitions of and minority equity investments in companies with promising technology and products and/or proven market access and position. For example, the acquisition of Call Technologies enhances the service capabilities for our CommWorks-Registered Trademark- architecture and our Total Control-Registered Trademark- multi-service access platform. In addition, our acquisition of Kerbango will allow us to offer consumers a rich Internet experience by providing a complete Internet audio solution for the home and office. Acquisitions involve numerous risks, including the following: - difficulties in integration of the operations, technologies, and products of the acquired companies; - the risk of diverting management's attention from normal daily operations of the business; - potential difficulties in completing projects associated with purchased in-process research and development; - risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; - the potential loss of key employees of the acquired company; and - an uncertain sales and earnings stream from the acquired entity, which may result in unexpected dilution to our earnings. Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not have a material adverse affect on our business, operating results, or financial condition. We must also focus on our ability to manage and integrate any such acquisition. Failure to manage growth effectively and successfully integrate acquired companies could adversely affect our business and operating results. 27 In general, there have been many mergers and acquisitions in the networking industry in the past several years. There have been mergers between telecommunications equipment providers and networking companies, as well as between networking companies and computer component suppliers. In the last 12 months, we completed four acquisitions and our competitors, including Lucent Technologies, Cisco Systems, Nortel Networks, Alcatel, Siemens, and Intel have also engaged in numerous transactions. Future changes in the networking industry may result in more companies with greater resources and stronger competitive positions and products than us. Furthermore, companies may be created that are able to respond more rapidly to market opportunities. Continued changes in our industry may adversely affect our operating results or financial condition. MANAGEMENT OF STRATEGIC RELATIONSHIPS AND INVESTMENTS In addition to mergers and acquisitions, technology companies are continually entering into strategic relationships. For example, over the past 12 months, we announced or expanded strategic relationships with numerous companies including the following: - AT&T - Accton Technology - Apropos Technology - Bell Atlantic - Broadcom - CAIS Internet - Copper Mountain Networks - Dell Computer - Extreme Networks - F5 Networks - Gateway - Hewlett-Packard - Hitachi - IBM - Inktomi - marchFIRST (formerly USWeb/CKS) - Microsoft - NatSteel Electronics - Samsung Electronics - SonicWALL - Symbol Technologies If successful, these relationships will be mutually beneficial and result in industry and market growth. However, these alliances carry an element of risk since, in most cases, we must compete in some business areas with companies with which we have strategic alliances and, at the same time, cooperate with such companies in other business areas. If these companies fail to perform, or if these relationships fail to materialize as expected, we could suffer delays in product or market development or other operational difficulties. Furthermore, 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. 28 In support of our business operations and overall strategy, we have made direct and indirect strategic investments in other technology companies and component suppliers. These investments may drive industry and market growth, strengthen supplier relationships, enhance our internal research and development efforts, accelerate the time to market of our new products, and complement our acquisition strategy. Some of these investments have significantly appreciated in value. If there is a substantial decline in the value of these investments, our financial condition could be adversely impacted. Our acquisition of technology, products, or market access through equity investments is usually coupled with a strategic commercial relationship. Our investments tend to be in very early stage technology companies with unproven technology and products. There can be no assurances that we can successfully form appropriate commercial relationships to gain and integrate such products or technology into our technology or product lines or that such companies will not be subsequently acquired by third parties, including competitors of ours. TRANSFER OF ANALOG-ONLY MODEM PRODUCT LINE On September 2, 2000 we completed the transfer of our analog-only modem product lines to U.S. Robotics Corporation ("New USR"), the new joint venture company formed with our partners Accton Technology and NatSteel Electronics. 3Com holds a minority equity position in New USR. Although we have transferred our analog-only modem business to New USR, we will continue to have sales related to the manufacture of certain analog-only modem products for New USR in the second quarter of fiscal 2001. In addition, we entered into transitional service agreements with New USR in the areas of information technology systems, supply chain management, buildings and services, and certain treasury/finance functions. We began such services prior to the transfer and will continue such services for a period of up to one year afterwards. If we do not satisfactorily perform our obligations under these agreements we may be held liable for any resulting losses. PALM SEPARATION On July 27, 2000 3Com completed the spin-off of Palm, Inc. ("Palm"), our handheld computer business, by distributing our remaining ownership of outstanding Palm common stock to 3Com shareholders. As part of the separation, we entered into certain transitional service agreements with Palm to support ongoing Palm operations relating to information technology systems, supply chain management, human resources administration, product order administration, customer service, buildings and facilities, treasury management, and legal, finance, and accounting. These transitional service agreements generally have terms of less than two years following the separation. If we do not satisfactorily perform our obligations under these agreements, we may be held liable for any resulting losses allegedly suffered by Palm. To enable our distribution of Palm common stock to our shareholders, we received a ruling from the Internal Revenue Service that the distribution will be not be taxable. Such ruling requires 3Com and Palm, for up to two years following the distribution date, not to engage in certain business combinations that would constitute a change of more than 50 percent of the equity interest in either company. If either 3Com or Palm fail to conform to requirements set forth in the ruling, there would be material adverse consequences, potentially including making the distribution taxable. Finally, at the time of the distribution of Palm shares to our shareholders, an adjustment was made to stock options held by our employees to preserve the intrinsic value of these options and the ratio of the exercise price to the market price. As of July 27, 2000 there were approximately 35 million employee options outstanding. Immediately after the Palm distribution, there were approximately 169 million employee options outstanding, of which approximately 60 million were vested and immediately exercisable. The exercise of stock options by employees may potentially result in a dilution in the ownership interest of our current shareholders. 29 COMPETITION AND PRICING PRESSURE We participate in a highly volatile industry characterized by vigorous competition for market share as well as rapid product and technology development and maturation. Our competition comes from both small to medium sized companies and start-up companies that have a narrow product or technology focus, and from well-capitalized computer systems, data communications and telecommunications companies that compete across a broad spectrum of networking technologies. The larger, well-established competitors include Intel, Lucent, Nortel, Cisco, Alcatel, Siemens, and Hewlett-Packard. Some of the smaller or more narrowly focused competitors in our industry, along with new start-ups include Alteon, Com21, Clarent, Efficient Networks, NETGEAR, Redback Networks, Juniper Networks, Sonus Networks, Terayon, VocalTec, and Xircom. Our industry continues to undergo rapid change resulting in new competitors who may have greater financial, marketing, and technical resources than we do or who may have a greater competitive edge due to technology innovation. For example, technology innovations are driving the convergence of voice, video, and data traffic onto a single network infrastructure, resulting in new entrants to the market with whom we may compete. In addition, both we and our competitors sometimes lower product prices in order to gain market share or create more demand. For example, in the first quarter of fiscal 2001 we experienced pricing pressure in the market for our broadband modem products, and continue to experience price competition in the markets for our workgroup systems products, as well as for our more mature carrier products which tend to have a higher degree of price sensitivity. Intense pricing competition in our industry may adversely affect our business, operating results, or financial condition. We are also selling products into new markets where we are new entrants to the market ourselves and may compete with different companies than in the past. This is especially true in our high-growth emerging markets such as the wireless, IP telephony, home networking and broadband markets. Our principal competitors in these emerging markets include both traditional competitors such as Intel, Xircom, Cisco, Lucent and Alcatel, as well as new competitors such as Alteon, Com21, Clarent, Efficient Networks, Motorola, NETGEAR, Redback Networks, Juniper Networks, Sonus Networks, Terayon, Toshiba, and VocalTec. These competitors may be able to respond more rapidly than us to new or emerging technologies, changing market dynamics or changes in customer requirements. In addition, we expect intense price competition in these new markets since manufacturers may set low product prices to increase technology and product acceptance and adoption. We expect that these products, especially in the consumer and retail-oriented product lines such as home networking and internet appliances, will be very price sensitive and therefore our sales of these products and gross margins on these products may be adversely affected by competitive pressures. Our failure to compete successfully against current or future competitors could harm our business, operating results, or financial condition. Semiconductor manufacturers, such as Intel, are increasingly integrating more NIC and modem functionality onto a single chip on the motherboard. This trend may offer PC OEMs and other networking customers less costly alternatives to our solutions. If integration of networking and computer processing functionality on a reduced number of components increases, our future sales growth and profitability could be adversely affected. Furthermore, some of these semiconductor manufacturers may be our current suppliers of components; therefore, we may be competing directly with our vendors in certain future situations. 30 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. The level of international sales in different regions will be positively or negatively impacted by unforeseen conditions and events. For example, high oil prices and increased transportation costs may adversely impact shipments to certain markets and the admission of China to the World Trade Organization and granting of Permanent Normalized Trade Relations status may stimulate sales to China. Should international regions experience economic or political instability, our results of operations may be adversely affected. INDUSTRY STANDARDS AND REGULATIONS Our success also depends on: - the timely adoption and market acceptance 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. In addition, if we fail to achieve timely certification of compliance to industry standards for our products, our sales of such products could be adversely affected. There are a number of new product initiatives, particularly in the area of wireless access, IP telephony, and broadband access that could be impacted by new or revised regulations, which in turn could adversely affect our results of operations or financial condition. For example, development of a new global "third generation" standard for wireless Internet access is underway and expected to be based on CDMA. However, several technologies including Global System for Mobile Communication (GSM), Personal Digital Cellular (PDC), and Time Division Multiple Access (TDMA) are competing for the standard, which will ultimately be determined by the International Telecommunications Union (ITU). CUSTOMER ORDER FULFILLMENT The timing and amount of our sales depend on a number of factors that make estimating operating results prior to the end of any period uncertain. For example, we do not typically maintain a significant backlog and sales are dependent on our ability to appropriately forecast product demand. In addition, our customers historically request fulfillment of orders in a short period of time, resulting in limited visibility to sales trends. Consequently, our operating results depend on the volume and timing of orders and our ability to fulfill orders in a timely manner. Historically, sales in the third month of the quarter have been higher than sales in each of the first two months of the quarter. Recently this pattern has become more pronounced, which may increase the risk of unforeseen events negatively impacting our financial results. 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, we could be subject to claims for business disruption or consequential damages if a network implementation is not completed successfully or in a timely manner. 31 Our products are sold and marketed in many countries, and as such, our products must function in and meet the requirements of many different telecommunications environments and be compatible with various telecommunications systems and products. If our products fail to meet the requirements of international telecommunication environments, our sales could be negatively impacted. Our business realignment actions include transition of certain business lines to third parties, such as analog-only modems, or obsolescence of certain product lines such as high-end LAN and WAN chassis products. To the extent that third parties do not assume or fulfill our warranty obligations, we will remain obligated to provide warranty support, including repair services and spare parts for the duration of contracts or statutory legal requirements. Any failure to perform such commitments could subject us to claims, which may have a material adverse impact on our business and financial results. COMMERCIAL COMMITMENTS We enter into minimum quantity or other non-cancelable commitments as needed. For example, we have committed to minimum purchases of product components from a vendor through the end of calendar year 2002. These types of agreements subject us to risk depending on future events. If, for example, sales volumes of certain products fluctuate significantly, we may be unable to meet our commitments. This may result in us incurring liabilities that adversely affect our financial results. INTELLECTUAL PROPERTY RIGHTS Many of our competitors, such as telecommunications and computer equipment manufacturers, have large intellectual property portfolios, including patents that may cover technologies that are relevant to our business. In addition, many smaller companies, universities, and individual inventors have obtained or applied for patents in areas of technology that may relate to our business. The industry is moving towards aggressive assertion, licensing, and litigation of patents and other intellectual property rights. In the course of our business, we frequently receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses or cross-licenses to incorporate or use the proprietary technologies, protocols, or specifications in our products. If we are unable to obtain and maintain licenses on favorable terms for intellectual property rights required for the manufacture, sale, and use of our products, particularly those which must comply with industry standard protocols and specifications to be commercially viable, our business, results of operations, or financial condition could be adversely impacted. In addition to disputes relating to the validity or alleged infringement of other parties' rights, we may become involved in disputes relating to our assertion of our intellectual property rights. Whether we are defending the assertion of intellectual property rights against us or asserting our intellectual property rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive to business operations by diverting the attention and energies of management and key technical personnel. Further, plaintiffs in intellectual property cases often seek injunctive relief and the measures of damages in intellectual property litigation are complex and often subjective or uncertain. Thus, the existence of or any adverse determinations in this litigation could subject us to significant liabilities and costs. In addition, if we are the alleged infringer, we could be required to seek licenses from others or be prevented from manufacturing or selling our products, which could cause disruptions to our operations or the markets in which we compete. If we are asserting our intellectual property rights, we could be prevented from stopping others from manufacturing or selling competitive products. Any one of these factors could adversely affect our results of operations or financial condition. 32 FLUCTUATIONS IN QUARTERLY RESULTS; VOLATILITY OF STOCK PRICE Our quarterly operating results are difficult to predict and may fluctuate significantly. In addition to factors discussed above, a wide variety of factors can cause these fluctuations, including: - component shortages; - seasonality; - the introduction and acceptance of new products and technologies; - price competition; - general conditions and trends in the networking industry and technology sector; - internal reorganizations or realignments; - disruption in international markets; - general economic conditions; - industry consolidations and acquisitions; - disruption in the distribution channel; - timing of orders received within the quarter; and - non-linear sales within the quarter. In recent years, we have experienced fluctuations in our quarterly results due to some of the factors listed above. These factors, and accompanying fluctuations in periodic operating results, could have a significant adverse impact on the market price of our common stock. Additionally, we anticipate that the activities surrounding our business realignment and the transition to our new strategic focus will contribute significantly to fluctuations in our quarterly operating results for the next several quarters. Our stock price has historically experienced substantial price volatility and we expect that this will continue, particularly due to fluctuations in quarterly operating results as outlined above, variations between our actual or anticipated financial results and the published analysts' expectations, and as a result of announcements by our competitors. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies. These market price fluctuations have often been unrelated to the operating performance of these companies. These factors, as well as general economic and political conditions, may materially adversely affect the market price of our stock in the future. PROPOSED CHANGES IN ACCOUNTING FOR BUSINESS COMBINATIONS AND INTANGIBLE ASSETS The Financial Accounting Standards Board ("FASB") began deliberation of revisions to the rules for business combinations and intangible assets in 1996. Some of these deliberations have included accounting rule-making bodies from other nations as the financial communities attempt to develop global consistency where possible. Business combination rules govern the accounting for mergers and acquisitions used in either a purchase or a pooling-of-interests combination. Business combinations may generate intangible assets (including goodwill) which represent the excess purchase price of an acquired enterprise over net identifiable assets. Tentative conclusions of the FASB will prohibit the use of pooling-of-interests and will establish new accounting standards and financial presentation for intangible assets resulting from business combinations. The FASB expects to issue a final standard by the end of calendar year 2000. The final standard is not expected to address accounting for in-process research and development costs. Changes to the current accounting rules for business combinations and intangible assets will not preclude mergers or acquisitions but may increase the earnings dilution associated with future transactions. In addition, if pooling-of-interests accounting is no longer available, we may use cash more often than our common stock to pay for acquisitions of other companies. 33 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 3Com holds a substantial portfolio of marketable-equity traded securities that have a short trading history and are highly subject to market price volatility. Equity security price fluctuations of plus or minus 15 percent would have a $112.9 million impact on the value of these securities as of the end of the first quarter of fiscal 2001. Equity security price fluctuations of plus or minus 50 percent would have a $376.4 million impact on the value of these securities as of the end of the first quarter of fiscal 2001. 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 June 2, 2000. 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. In late 1999, these cases were stayed by the Court, pending resolution of proceedings in the EUREDJIAN V. 3COM CORPORATION matter, discussed below. Because the EUREDJIAN case has been dismissed, the HIRSCH AND KRAVITZ cases are no longer stayed. They are in discovery. No trial date has been scheduled. On February 10, 1998, a securities class action, captioned EUREDJIAN V. 3COM CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California asserting the same class period and factual allegations as the HIRSCH AND KRAVITZ actions. The complaint alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages. In May 2000, at the request of plaintiffs, the Court dismissed the EUREDJIAN case with prejudice. In December 1997, a securities class action, captioned REIVER V. 3COM CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed in the United States District Court for the Northern District of California. Several similar actions have been consolidated into this action, including FlORIDA STATE BOARD OF ADMINISTRATION AND TEACHERS RETIREMENT SYSTEM OF LOUISIANA V. 3COM CORPORATION, ET AL., Civil Action No. C-98-1355. On August 17, 1998, the plaintiffs filed a consolidated amended complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and which seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from April 23, 1997 through November 5, 1997. 3Com has answered an amended complaint and the case is now in discovery. No trial date has been scheduled. 34 In October 1998, a securities class action lawsuit, captioned ADLER V. 3COM CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County, asserting the same class period and factual allegations as the REIVER action. The complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages. By agreement of the parties, this case will be stayed to allow the REIVER case to proceed. On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (GAYLINN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California. Several similar actions have been consolidated into the GAYLINN action. On September 10, 1999, the plaintiffs filed a consolidated complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from September 22, 1998 through March 2, 1999. In January 2000, the Court dismissed the complaint. In February 2000, plaintiffs filed an amended complaint. In June 2000, the Court dismissed the amended complaint without prejudice. Plaintiffs filed another amended complaint. On July 24, 2000, the Company filed a motion to dismiss the latest amended complaint. In September 2000, the Court dismissed the amended complaint with prejudice. INTELLECTUAL PROPERTY On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics Corporation and U.S. Robotics Access Corp. in the United States District Court for the Western District of New York. The case is now captioned XEROX CORPORATION V. U.S. ROBOTICS CORPORATION, U.S. ROBOTICS ACCESS CORP., PALM COMPUTING, INC. AND 3COM CORPORATION (Civil Action Number 97-CV-6182T). The Complaint alleged willful infringement of United States Patent Number 5,596,656, entitled "Unistrokes for Computerized Interpretation of Handwriting." The Complaint sought to permanently enjoin the defendants from infringing the patent in the future. In an Order entered by the Court on June 6, 2000, the Court granted the defendants' motion for summary judgment of non-infringement, and the case was dismissed in its entirety. Xerox has appealed the dismissal to the U.S. Court of Appeals for the Federal Circuit. On May 26, 2000 3Com Corporation filed a patent infringement lawsuit against Xircom, Inc. The lawsuit, filed in the United States District Court for the District of Utah (2:00CV-0436G), alleges infringement of 3Com's patent numbers 6,012,953, 5,532,898 and 5,777,836. On September 21, 2000 in the United States District Court for the Central District of California (00-10198 WJR), Xircom Corporation filed suit against 3Com Corporation alleging infringement of Xircom's U.S. Patent Numbers 5,773,332, 5,940,275, 6,115,257 and 6,095,851. 3Com is currently investigating the lawsuit filed by Xircom. 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. 35 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2.1 Master Separation and Distribution Agreement between the registrant and Palm, Inc. effective as of December 13, 1999, as amended (15) 2.2 General Assignment and Assumption Agreement between the registrant and Palm, Inc., as amended (15) 2.3 Master Technology Ownership and License Agreement between the registrant and Palm, Inc. (15) 2.4 Master Patent Ownership and License Agreement between the registrant and Palm, Inc. (15) 2.5 Master Trademark Ownership and License Agreement between the registrant and Palm, Inc. (15) 2.6 Employee Matters Agreement between the registrant and Palm, Inc. (15) 2.7 Tax Sharing Agreement between the registrant and Palm, Inc. (15) 2.8 Master Transitional Services Agreement between the registrant and Palm, Inc. (15) 2.9 Real Estate Matters Agreement between the registrant and Palm, Inc. (15) 2.10 Master Confidential Disclosure Agreement between the registrant and Palm, Inc. (15) 2.11 Indemnification and Insurance Matters Agreement between the registrant and Palm, Inc. (15) 3.1 Certificate of Incorporation (11) 3.2 Certificate of Correction Filed to Correct a Certain Error in the Certificate of Incorporation (11) 3.3 Certificate of Merger (11) 3.4 Corrected Certificate of Merger (14) 3.5 Bylaws of 3Com Corporation, As Amended (12) 4.1 Amended and Restated Rights Agreement dated December 31, 1994 (Exhibit 10.27 to Form 10-Q) (4) 4.2 Amended and Restated Senior Notes Agreement between U.S. Robotics Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (5) 4.3 Amendment to amended and restated note agreements between 3Com Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (13) 4.4 Second amendment to amended and restated note agreements between 3Com Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (14) 10.1 1983 Stock Option Plan, as amended (14)* 10.2 Amended and Restated Incentive Stock Option Plan (2)* 10.3 License Agreement dated March 19, 1981 (1) 10.4 Second Amended and Restated 1984 Employee Stock Purchase Plan (Exhibit 10.5 to Form 10-Q) (6)* 10.5 3Com Corporation Director Stock Option Plan, as amended (Exhibit 19.3 to Form 10-Q) (3)* 10.6 Amended 3Com Corporation Director Stock Option Plan (Exhibit 10.8 to Form 10-Q) (6)* 10.7 3Com Corporation Restricted Stock Plan, as amended (Exhibit 10.17 to Form 10-Q) (6)* 36 10.8 1994 Stock Option Plan, as amended (14)* 10.9 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of November 20, 1996 (Exhibit 10.37 to Form 10-Q) (8) 10.10 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of November 20, 1996 (Exhibit 10.38 to Form 10-Q) (8) 10.11 Agreement and Plan of Reorganization among 3Com Corporation, OnStream Acquisition Corporation and OnStream Networks, Inc. dated as of October 5, 1996 (Exhibit 2.1 to Form S-4) (7) 10.12 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.19 to Form 10-Q) (10) 10.13 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.20 to Form 10-Q) (10) 10.14 Credit Agreement dated as of December 20, 1996 among 3Com Corporation, Bank of America National Trust and Savings Association, as Agent, and the Other Financial Institutions Party Hereto Arranged by BA Securities, Inc. (Exhibit 10.21 to Form 10-Q) (10) 10.15 Amended and Restated Agreement and Plan of Merger by and among 3Com Corporation, TR Acquisitions Corporation, 3Com (Delaware) Corporation, and U.S. Robotics Corporation, dated as of February 26, 1997 and amended as of March 14, 1997 (9) 10.16 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 25, 1997 for the Great America Phase III (PAL) site (11) 10.17 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 25, 1997 for the Great America Phase III (PAL) site (11) 10.18 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 29, 1997 for the Marlborough site (11) 10.19 Purchase agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 29, 1997 for the Marlborough site (11) 10.20 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of August 11, 1997 for the Rolling Meadows site (11) 10.21 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of August 11, 1997 for the Rolling Meadows site (11) 10.22 First Amendment to Credit Agreement (11) 10.23 Form of Management Retention Agreement, effective as of June 2, 1999, with attached list of parties.* (16) 10.24 Form of Management Retention Agreement, with attached list of parties and effective dates.* (16) 10.25 Agreement for Purchase and Sale of Land at Highway 237 and North First Street, San Jose, California entered into as of May 22, 2000 by and between the registrant and Palm, Inc. 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) 37 (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) (14) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on October 8, 1999 (File No. 0-12867) (15) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on April 4, 2000 (File No. 0-12867) (16) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 17, 2000 (File No. 0-12867) (b) Reports on Form 8-K None 38 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 13, 2000 By: /s/ Michael E. Rescoe ---------------------------- ------------------------------------- Michael E. Rescoe Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 39