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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 1, 2001 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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Preferred Stock Purchase Rights
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 [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates, based upon the closing price of the Common Stock on August 1,
2001, as reported by the Nasdaq National Market, was approximately
$1,718,622,845. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock,
based on Schedule 13G filings, have been excluded since such persons may be
deemed affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of August 1, 2001, 345,640,449 shares of the Registrant's Common Stock were
outstanding.
The Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on September 20, 2001 is incorporated by reference in
Part III of this Form 10-K to the extent stated herein.
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3Com Corporation
Form 10-K
For the Fiscal Year Ended June 1, 2001
Table of Contents
Part I Page
Item 1. Business.........................................................1
Item 2. Properties.......................................................11
Item 3. Legal Proceedings................................................13
Item 4. Submission of Matters to a Vote of Security Holders..............14
Executive Officers of 3Com Corporation ..........................14
Part II
Item 5. Market for 3Com Corporation's Common Stock and Related
Stockholder Matters...........................................17
Item 6. Selected Financial Data..........................................17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......45
Item 8. Financial Statements and Supplementary Data......................47
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................89
Part III
Item 10. Directors and Executive Officers of 3Com Corporation.............89
Item 11. Executive Compensation...........................................89
Item 12. Security Ownership of Certain Beneficial Owners and Management...89
Item 13. Certain Relationships and Related Transactions...................89
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K..
Exhibit Index....................................................91
Signatures.......................................................95
Financial Statement Schedule.....................................96
3Com, CommWorks, Megahertz, NBX, OfficeConnect, Parallel Tasking, SuperStack,
Total Control and XJACK are registered trademarks of 3Com Corporation or its
subsidiaries. Kerbango is a trademark of 3Com Corporation or its subsidiaries.
Graffiti is a registered trademark and Palm is a trademark of Palm, Inc. U.S.
Robotics is a registered trademark of U.S. Robotics Corporation. Courier is a
trademark of U.S. Robotics Corporation. Other product and brand names may be
trademarks or registered trademarks of their respective owners.
This annual report, including the following sections, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, particularly statements regarding our expectations on capital spending,
our products and services gross margins expectations for fiscal year 2002, our
expectations regarding the competitiveness of our product and service offerings,
our expectations relating to our future investments and expenses relating to
research and development, statements regarding our liquidity and capital
resources, our expectation that we will incur more charges related to our
restructuring efforts during fiscal 2002, our expectation that we will
substantially complete our restructuring activities related to the global cost
reduction to improve operational efficiencies, our expectation that gross
margins will improve in future periods as a result of our restructuring efforts,
our intention to reduce operating expenses in future periods, our plan to reduce
fixed costs by completing our reduction in force plans, our expectation that
emerging product lines will account for a higher percentage of our future sales
over time, our expectation that our Total Control 2000 product will be available
before the end of the calendar year, our plans to invest a significant portion
of financial resources in developing products for emerging growth markets, our
intention to consolidate our real estate portfolio and liquidate certain
facilities associated with our manufacturing facilities in fiscal 2002, our
intention to transition our Singapore facility into a regional distribution
center and sales and support office, our intention to enter into a contract
manufacturing relationship with Flextronics and outsource the manufacturing of
our high volume server, desktop and mobile products, our plans to exit the
consumer broadband cable and DSL modem business, our belief that we have
sufficient flexibility in the monetization of surplus real estate and other
financial resources to retire certain leases, our expectations that our
acquisitions of businesses or product lines will decrease in comparison to
historical levels, our expectation that international markets will continue to
account for a significant percentage of our sales, our plans to make investments
through 3Com Ventures and expectations related to payments that may be made over
the next twelve months with respect to capital calls, our expectation that
emerging product lines will grow at a significantly higher rate than the
networking industry average, our expectation that emerging product lines will
account for a higher percentage of our sales over time, our belief that our cash
and 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 adoption of SFAS 133 and SFAS 141 will not have
a material effect on our results of operations or financial position, our
intention to hold our fixed income investments until maturity, our expectations
regarding the number of positions that will be affected by the reduction in
force undertaken as part of our current restructuring initiatives, our
expectation that employee separations related to our current restructuring
activities will be substantially complete by May 2002, our expectations
regarding future expenses associated with our current restructuring activities,
our expectation that we will not reach minimum purchase commitments associated
with a supply agreement as a result of our intended exit from consumer product
lines, our belief that audits being conducted by certain domestic and foreign
taxing jurisdictions of our income tax returns will not have a material adverse
effect on our consolidated financial condition or results of operations and our
expectations regarding the continuing volatility of our stock price. These
statements are subject to certain risks and uncertainties that could cause
actual results and events to differ materially. For a detailed discussion of
these risks and uncertainties, see the "Business Environment and Industry
Trends" section of this Form 10-K. 3Com undertakes no obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of this Form 10-K.
PRESENTATION OF DISCONTINUED OPERATIONS--PALM, INC.
The following information relates to the continuing operations of 3Com
Corporation and our consolidated subsidiaries (3Com). Palm, Inc. (Palm) is
accounted for as a discontinued operation, as a result of our decision to
distribute the Palm common stock we owned to 3Com shareholders in the form of a
stock dividend. Subsequent to the distribution to our shareholders on July 27,
2000, Palm's operations ceased to be part of our operations and reported
results.
PART I
ITEM 1. Business
GENERAL
3Com Corporation was founded on June 4, 1979. A pioneer in the computer
networking industry, our heritage is in providing robust networking solutions
that are functionally rich, cost-effective and simple to use. Our competitive
advantages include our industry-leading intellectual property portfolio,
distributor and customer relationships, and brand identity. During fiscal year
2001, we won market share in emerging-growth product categories, established new
levels of innovation, drove changes to benefit customers and delivered new
products that validated our brand promise to our business customers - rich
connectivity and radical simplicity.
We target sectors of the enterprise and service provider markets. Beginning in
fiscal year 2002, we have structured our operations around three businesses that
are leveraging our core strengths and focusing upon specific market
opportunities that offer long-term, profitable growth. These businesses are:
o Business Networks Company (BNC), which provides network infrastructure
solutions for the enterprise and small business markets;
o Business Connectivity Company (BCC), which provides products that
enable computing devices to access computer networks; and
o CommWorks Corporation (CommWorks), which provides Internet Protocol
(IP)-based access and infrastructure and services platforms for the
telecommunications service provider market.
Each of these businesses has a unique business model tuned for the dynamics of
its target market. This simplified structure allows greater focus, faster
responsiveness, and increased accountability.
In fiscal 2001, we operated in two segments, 1) Commercial and Consumer Networks
Business (CCB) and 2) Carrier Networks Business (CNB). CCB comprised the BNC and
BCC businesses described above and the consumer product lines which were exited
during fiscal 2001, as discussed further in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
1
INDUSTRY SEGMENTS
Business Networks Company
Our Business Networks Company develops technologies and products to build and
manage networks supporting local area network (LAN) switching, web technologies,
networked telephony and wireless LANs. BNC's solutions are feature rich so they
can support the increasingly complex and demanding application environments in
today's businesses but they are also easy to install, use and operate and are
very affordable to own. BNC's network solutions help IT and business teams to
run their businesses rather than spend time focusing on getting the technology
to work.
Building upon our historical success in the networking infrastructure market,
BNC continues to be a leader in key technologies that represent future growth
opportunities. BNC achieves this leadership position through design innovation
that makes feature-rich network technology simple to use. Recent innovations
include modular, application-aware (Layer 3+) and Gigabit-over-copper networking
switches; new application-specific integrated circuit (ASIC) designs that make
our products more affordable; LAN telephony products that reliably handle voice
traffic; and wireless LANs that offer robust security, ease of use and easy
integration.
Markets and Customers
BNC provides network infrastructures to enterprises and small businesses,
targeting in particular enterprises who value innovative, feature-rich networks
that are easy to use and affordable to own. BNC distributes its solutions
primarily through its worldwide channel of value-added resellers, system
integrators and more recently, telecommunications service providers. BNC is
fully committed to its Focus Partner Program and sees its resellers and channel
partners as a vital extension of its sales force. It works extensively with its
resellers and channel partners to ensure they are able to meet their business
goals.
Competition
Principal competitors in the enterprise networking market include Avaya, Inc.,
Cisco Systems, Inc., Enterasys (Cabletron System, Inc.), Hewlett Packard
Company, Lucent Technologies, Inc., and Nortel Networks, Corp.
Current Product Offerings
BNC delivers network infrastructure solutions for enterprises and small
businesses worldwide. BNC develops three categories of products, 1) LAN
infrastructure, composed of hubs, switches and web solutions, 2) networked
telephony systems for voice over existing network connections and 3) wireless
access points and adapters based on Wi-Fi technology.
LAN Infrastructure solutions:
o Stackable SuperStack(R) 3 and Modular Switch 4000 Series family of
Ethernet, Fast Ethernet and Gigabit Ethernet switches is a new
generation of essential networking components that form the foundation
of any business network.
o The SuperStack 3 Web solutions, including firewall, Webcache and
server load balancer, allow customers to access the Web faster, more
securely and at a lower cost, as well as ensure network availability.
o An affordable family of hubs and switches for cost-sensitive
networking users that require reliable and powerful stackable LAN
solutions.
2
o OfficeConnect (R) family of switches, hubs and firewalls are designed
specially for small businesses to obtain all the benefits of rich
networking and the Internet while enjoying all the ease of the
plug-and-play products. Also available is 3Com's 800 Series of
OfficeConnect digital subscriber line (DSL) routers for high-speed
Internet access for businesses.
Networked Telephony solutions:
o SuperStack 3 NBX(R) and NBX 100 networked telephony solutions offer
enterprise and small business customers significant telephony cost
savings, flexibility and voice/data application integration over
existing wiring.
o NBX 25 networked telephony solution gives small offices of up to 20
users a cost-effective voice product that can be deployed over
existing LAN infrastructure.
Wireless LAN solutions:
o Reliable, easy-to-use wireless solutions are based on the industry
standard Wi-Fi (802.11b). The range of these wireless LANs allow them
to be used effectively in small businesses, large enterprises and even
public access areas such as airports and hotels.
New Products in Fiscal Year 2001
On June 26, 2000, we announced new solutions that enable small business
customers to reap the benefits of networked telephony with the NBX 25 business
telephone system, and to advance network security to improve Internet access
with our OfficeConnect access products. We also announced our Ethernet power
source to create a single, continuous source of power for our networked
telephony and wireless systems.
On July 17, 2000, we announced a new version of Network Supervisor, our network
management solution that enables businesses to easily manage their 3Com LAN
networks. This version offered new automation built into the software, removing
the complexity for the user, yet offering sophisticated features, such as
proactive alarm systems to avoid network downtime.
On August 1, 2000, we announced new easy-to-use 10/100 Megabits per second
(Mbps) LAN switches at an aggressive price, leveraging product cost reductions.
On October 23, 2000, we announced new OfficeConnect products that help small
business customers do business on the web while keeping secure their
business-critical information.
On November 6, 2000, we announced a new series of products designed to address
the new fundamental needs of modern business: how to make the network run
faster, keep people constantly connected and do it all more securely and at the
best possible price. This announcement was a significant commitment to the
enterprise and small business market. This announcement addressed four key
areas: Gigabit Ethernet with SuperStack 3, Web-enablement, wireless LANs and
networked telephony.
On February 12, 2001, we announced the newest addition to our networked
telephony product family, the SuperStack 3 NBX Networked Telephony Solution. The
SuperStack 3 NBX was an expansion of our existing networked telephony product
family (NBX 25, NBX 100, Ethernet Power Source) and became available in 45
countries worldwide in April 2001. Our IP private branch exchange (PBX) solution
gives customers more capacity, increased reliability, enhanced functionality and
10/100-infrastructure support. The product enhancements and integration with the
SuperStack product family positioned us to further advance our lead in this
market by winning larger enterprise installations.
3
On March 6, 2001, we announced NBX Call Center, which is a software solution
that gives businesses advanced call center capabilities, such as intelligent
call routing, graphical alarms, drag and drop queuing, real-time monitoring and
reporting.
On March 14, 2001, we announced new modules for the award-winning SuperStack 3
Switch 4900 family. We established ourselves as the only vendor able to offer
both network interface cards (NICs) and switches in an end-to-end Gigabit
Ethernet solution. According to Cahners In-Stat first quarter 2001 report, we
increased our leadership position in the Gigabit Ethernet-over-Copper switch
market by almost 8 percentage points and now hold a 35.7 percent market share.
On March 20, 2001, we announced the 3Com 11 Mbps Wireless LAN solution. This new
Wi-Fi-certified offering comes with unique features that make set-up, use, and
configuration simple without compromising the rich functionality, reliability
and security that small business networks require.
On May 8, 2001, we announced new OfficeConnect Dual Speed Switches that
eliminate cabling issues and offer network traffic prioritization for small
business customers. This announcement reinforced our commitment to delivering
best-in-breed Ethernet switches that are easier to own, install, and manage for
small businesses.
On June 11, 2001 we announced the SuperStack(R) 3 Switch 4400, an
application-aware, stackable, wirespeed 10/100 Fast Ethernet switch; the
SuperStack 3 Switch 4300, a 48-port high-density 10/100 Ethernet switch and; the
3Com(R) Switch 4005, a 10/100/1000 Ethernet modular Layer 3 switch. Our latest
version of network management software adds an extra level of management support
for all new switches that enable intuitive setup and operation.
Business Connectivity Company
Our Business Connectivity Company is a leading provider of reliable,
high-performance access products for the enterprise market. In today's networked
world, it is important for people to stay connected while on the move. In order
for people to realize the full potential of networked computing, secure and
reliable network access must become simple.
BCC is advancing the concept of Universal Connectivity for the enterprise
market. The ability to deliver Universal Connectivity hinges on three
capabilities: Anytime, Anywhere Access, Reliable Performance and Secure
Connections. BCC focuses on solutions delivering this promise of Universal
Connectivity for users in networked environments - furthering our long-standing
vision of pervasive networking.
Anytime, Anywhere Access
BCC delivers the breadth of technology forms and types for people to connect to
information and each other anytime, anywhere. These forms include personal
computer (PC) Card Type II and Type III, Mini-PCI, Modem Daughter Card (MDC),
Compact Flash, Internal and External universal serial bus (USB), PCI and PCI-X
NIC and LAN-on-Motherboard (LOM). Its wide range of connectivity technologies
include Ethernet, Fast Ethernet, Gigabit Ethernet, Analog Modem, Wireless LAN
and Bluetooth. Innovative software such as Mobile Connection Manager, Wireless
Connection Manager and GSM Connection manager deliver one-step mobile
configurations and connectivity for multiple LAN and WAN locations.
Reliable Performance
BCC's products have a long-standing reputation for reliable performance.
Technologies and features such as Gigabit, Link Aggregation, Self Healing
Drivers, Traffic Prioritization, Failover, Exclusive Line Probing, Parallel
Tasking(R) and Digital line guard insure a reliable, high-performance
connection. Our reputation for reliability is evidenced by our partnerships with
PC original equipment manufacturers (OEMs) and our large installed base in
corporate enterprises.
4
Secure Connections
Network technologies and mobile computing have made global partnerships and
e-business initiatives achievable for many companies. With advances in network
technologies increasing the ability for users to access networks anytime
anywhere, the risks to network security have also increased. 3Com secure NICs
and embedded firewall protect enterprise networks from attacks and provide
tamper-resistant data protection. Furthermore, with IPSec encryption offloads,
IT managers can secure the LAN without sacrificing performance.
Markets and Customers
BCC solutions are targeted for worldwide distribution to enterprise and small
business customers via PC OEMs, such as Dell Computer Corp., Gateway Inc.,
Hewlett-Packard Company, and International Business Machines Corp., and
resellers and systems integrators. Increasingly, BCC is selling directly to PC
manufacturers, who integrate our connectivity products into their product
offerings. BCC's branded products are sold primarily through our two-tier
distribution channel, which leverages the capabilities of our resellers and
channel partners.
Competition
BCC's principal competitor is Intel Corp. Recently, Taiwanese manufacturers have
entered the low-end market, which is particularly price-competitive. These
companies include Accton Technology Corp., D-Link Systems, Inc., and NetGear
Inc.
Current Product Offerings
BCC offers a comprehensive product portfolio that allows users to connect to
computer networks easily and reliably. BCC products include:
o 3Com 10, 10/100 and 100 Mbps Ethernet desktop NICs for businesses of all
sizes
o 3Com 10/100, 10/100/1000 and 1000 Mbps Ethernet server NICs for businesses
of all sizes
o 3Com 10, 10/100, and 10/100LAN+56K Modem PC cards for businesses of all
sizes
o 3Com 10 Mbps LAN CompactFlash Cards for Windows CE environments
o 3Com Bluetooth PC Cards
o 3Com Management Software and Embedded Firewall
New Products in Fiscal Year 2001
On September 28, 2000, we announced our entry into the Gigabit
Ethernet-over-copper NIC market with new network connections designed for the
high-performance, reliability and manageability required in mission critical
server applications. The new 3Com 10/100/1000 PCI-X Server NIC gives customers a
feature-rich yet simple way to broaden their bandwidth and increase network
performance - by as much as 100 times - over existing unshielded twisted pair
(UTP) Category 5 copper wiring.
On November 28, 2000, we announced we would be teaming with Symantec Corporation
of Cupertino, Calif., to develop a `best-in-breed' software solution for quick
workstation deployment within a Wired for Management framework. Via integrated
components from Symantec, our boot services with Symantec Ghost Enterprise
software is the industry's premier tool for PC rollout, software and hardware
migration, and disaster recovery.
5
On December 4, 2000, we announced Dual Port server NICs to deliver network
availability in space-constrained servers. The new dual port card gives
customers instant scalability from a single NIC upgrade using one PCI slot to
support two network connections.
On December 11, 2000, we announced the formation of a strategic alliance with
Broadcom Corporation relating to deployment of Gigabit Ethernet NIC and LOM
solutions. Broadcom is a leading provider of integrated circuits enabling
broadband communications.
On May 29, 2001, we announced our Wireless Bluetooth PC Card as one of the first
network PC adapters based on the newly ratified 1.1 industry standard for
Bluetooth. We are one of nine organizations actively participating in the
Bluetooth Special Interest Group (SIG) which helps to drive the standardization
and adoption of this important wireless technology designed for quick bursts of
low-bandwidth information in a cable replacement application environment. Our
Bluetooth PC Card with 3Com Connection Manager for Bluetooth software package
and innovative XJACK (R) antenna design connects with Bluetooth-enabled personal
devices including notebooks, desktop PCs, cell phones and hand-helds.
CommWorks
CommWorks Corporation, a wholly owned subsidiary of 3Com Corporation, designs,
develops and deploys IP-based access infrastructures and service platforms for
many of the largest telecommunications service providers in the world.
CommWorks' products allow telecommunications service providers to offer new
services with the same high availability as the traditional telecommunications
network at a much lower cost. CommWorks combines expertise in network
integration with experience in custom development to deliver highly specialized
solutions that address the specific challenges telecommunications service
providers face, such as:
o cutting operating costs,
o developing new revenue-generating services,
o attracting additional network traffic,
o differentiating product offerings, and
o improving communications for end-users.
CommWorks builds networks that deliver greater functionality, at significantly
reduced cost and with the ability to offer multiple services over a single
platform. A CommWorks IP network features the following characteristics:
o Scalability. Carriers need the ability to start small and grow the
network as demand increases. CommWorks gives carriers the ability to
take their existing network and add new applications without major
additions of hardware;
o Reliability. The benchmark for network reliability is still the public
switched telephone network (PSTN). CommWorks networks deployed today
by some of the world's largest telecommunications service providers
are delivering quality and reliability on a par with - and often
better than - the traditional PSTN;
o Multiple services, common hardware. We offer carriers an IP platform
based on common hardware that allows them to deliver multiple
services. Regardless of the transport medium (wired, wireless,
broadband) or the type of traffic (voice, data, fax, video) we allow
the carrier to turn the traffic into revenue-generating services; and
o Open architecture. Our networks feature open, standards-based
interfaces for multi-vendor connectivity. This encourages
telecommunications service providers to deploy best-of-breed
components and allows them to introduce new services in less time than
for a traditional network infrastructure. Commitment to standards and
open interfaces allows telecommunications service providers to
customize solutions independently at each tier to address individual
customer needs.
6
Markets and Customers
CommWorks' exclusive focus is on the telecommunications service provider market.
Of the world's 20 largest telecommunications service providers - representing 71
percent of the world's public telecommunications service revenue - 16 are
CommWorks customers.
CommWorks customers in the carrier market include:
o Incumbent local exchange carriers (ILECs);
o Interexchange carriers (IXCs);
o Post, telephone, and telegraph administrations (PTTs);
o Competitive Local Exchange Carriers (CLECs); and
o Internet Service Providers (ISPs).
Top accounts worldwide include:
o North America: AT&T, AT&T Canada, Bell Mobility, Quest, MCI/Worldcom,
Motorola, SaskTel, Sprint, Sprint PCS, Telus Mobility, Verizon, SBC;
o Asia: Bharti, China Telecom, China Unicom, Clearcom, Communications
Authority of Thailand, Commverge, CTI (Hong Kong), Gosun, Hitachi,
Japan Telecom, KDDI, Korea Telecom, New C&C, NTT, Orange, Samsung,
Satyam, Siemens (Taiwan), SingTel, SK Telecom, Telecom New Zealand,
Telstra, VSNL;
o Europe: Airtel, Austria Telekom, Blixer, Carrier 1, Cegetel, KPN,
Marconi Communications, MediaWays, Portugal Telecom, Prodigios / AOL,
Telefonica, Telia;
o Latin America: Avantel / MCI, Embratel / MCI, Iusacell, Telefonica
(Peru), Vesper, VTR (Chile); and
o Middle East: Bezeq, Internet Gold, Turk Telecom
Competition
Principal competitors in the telecommunications service provider market include
Cisco Systems, Ericsson, Lucent Technologies, Nortel Networks, Siemens and
Sonus.
Current Product Offerings
CommWorks is able to migrate telecommunications service providers to IP, with
network solutions based on the CommWorks(R) architecture. Introduced more than
two years ago, this three-tier, carrier-class solution architecture allows
telecommunications service providers to scale their infrastructure and to
rapidly deploy next-generation, enhanced services. The architecture includes:
o media processing;
o softswitch; and
o service creation layers.
7
The first layer, featuring the Total Control(R) 1000 and Total Control 2000
platforms, performs media gateway functions to integrate multiple traffic types
and accommodate disparate networks. Layer Two, the control and network and
service management layer, features the CommWorks Softswitch to bridge different
signaling and call control protocols, enabling multimedia traffic to traverse
disparate networks. Layer Three is the service creation layer, an environment
that leverages open interfaces and strategic partners to enable rapid
application and service deployment.
The softswitch is an integral component of the CommWorks architecture. It works
with multi-service access platforms at layer one to provide end-to-end,
carrier-grade IP-based communications. At layer two, it provides media control
and management, session control functions and multi-protocol PSTN/IP signaling.
At layer three, the softswitch is responsible for critical network services,
including accounting, authentication and rating, billing support, directory
mapping, and Web provisioning. The back-end services component of the softswitch
includes modules that provide network-centric services. The CommWorks softswitch
framework also includes feature servers to deliver IP Centrex, Interactive Voice
Response, prepaid calling card, and presence management applications in addition
to offerings in the area of unified messaging and fax-over-IP.
New Products in Fiscal Year 2001
In June 2000, we unveiled our next-generation Total Control(R) 2000 multiservice
access platform. The Total Control 2000 platform is a carrier-class,
high-density multiservice platform that will support both wireline and wireless
solutions. The platform will address the requirements of telecommunications
service providers for a high-density platform as they evolve from
circuit-switched networks to more intelligent and efficient IP-based networks.
Customer trials of the platform began in mid-2001, with product availability
anticipated before the end of the calendar year.
Also in June 2000, we announced the availability of the CommWorks(R) 8210
unified messaging system, which bridges the circuit and packet networks to
deliver a robust set of features. The CommWorks 8210 unified messaging system is
a network-independent open service platform that gives end-users the freedom to
communicate the way they choose with the communication device they prefer. Users
can access all their e-mail, voice mail and fax messages from the PSTN,
Internet, broadband or wireless network using an array of client devices,
including telephones, personal and laptop computers, e-mail clients, Web
browsers, wireless handsets, and personal digital assistants.
In November 2000, the new Total Control(R) 1000 Enhanced Data System was
introduced. This system delivers higher port densities, enhanced performance and
expanded service capabilities on CommWorks' Total Control 1000 multi-service
access platform. Two new carrier-class solutions for delivering virtual private
network (VPN) services were also unveiled. These VPN solutions are media access
independent and can be delivered via cable, DSL, Code Division Multiple Access
(CDMA) wireless or remote access networks.
Also in November 2000, we introduced an end-to-end solution that enables DSL
providers to cost-effectively deliver secure VPNs over DSL. The carrier-class
VPN over DSL solution integrates the advanced IP service intelligence of the
Total Control(R) 500 192-port DSL concentrator with the VPN tunnel-switching
capabilities of the Total Control 1000 multi-service access platform.
In December 2000, we announced the availability of an intelligent service
provisioning solution for our carrier-class VPN services. The CommWorks(R) 5020
Intelligent Activation System is an end-to-end service activation solution that
offers timely and accurate provisioning for numerous service opportunities and
networking options; from inexpensive public Internet services to managed,
secure, high-speed private network services. This integration eliminates the
need for time-consuming, on-site, manual configuration of multiple network
elements, enabling telecommunications service providers to drastically reduce
the time between the customer's request for service and the actual service
activation.
8
In March 2001, we demonstrated an IP Centrex solution delivered via the Session
Initiation Protocol (SIP). IP Centrex delivers the same basic services as
traditional Centrex - such as call hold, call transfer, last number look-up and
redial, call forward, and three-way calling - via a packet-based, or IP network.
At the same time, IP Centrex enables a wide range of creative new IP-based
services. IP Centrex brings the creativity of the Internet to the telephony
system, allowing rapid service creation, customization and personalization.
On April 4, 2001, we announced we would be developing "universal port"
technology that will allow telecommunications service providers to terminate
voice, data and fax calls using a "universal" dial access port.
Telecommunications service providers using the Total Control 1000 Enhanced Data
System from CommWorks can upgrade their systems to universal port status through
a software upgrade. The CommWorks Universal Port System will merge current
remote access functionality with specific voice-over-IP (VoIP) offerings.
Applications supported in the initial product release will include typical dial
access; phone-to-phone voice support; real time and store-and-forward fax;
support for SIP for call control; and various back-end servers for critical
functions like directory mapping and billing. Early field trials of the
CommWorks Universal Port System began in mid-year 2001, with general
availability of the product expected before the end of the calendar year.
Also on April 4, 2001, we announced that our Total Control 1000 Enhanced Data
System will support V.92, the latest industry standard for dial-up modem
technology. CommWorks will support the V.92 standard in its next software
upgrade for the Total Control 1000 Enhanced Data System, scheduled for the third
quarter of calendar year 2001. For current customers, the V.92 features may be
added through a simple software upgrade; no hardware changes are required. For
end users, the V.92 modem specification offers a significantly improved Internet
connection experience with the ability to switch between voice and data
sessions. Telecommunications service providers who upgrade to V.92 can offer
their subscribers more features for their dial-up connection, thus enhancing
opportunities to retain and grow their customer base.
On April 9, 2001, we announced with TCSI Corporation, a leading provider of
innovative network solutions for the telecommunications industry, the launch of
a product that offers carrier-class network and service management solutions
designed to reduce network operating costs for telecommunications service
providers while allowing them to generate more revenue by offering new enhanced
services. The CommWorks 5000 Network and Service Management System, a
Web-enabled product, is a key component in the CommWorks' three-tiered
architecture for IP-based service creation and delivery.
On April 30, 2001, we announced the CommWorks 5025 Unified Messaging System
Provisioning Manager which combines the functionality of several software
modules to provide a comprehensive solution for the activation and provisioning
of new unified messaging services.
On May 21, 2001, we announced the availability of enhanced routing, accounting
and reporting features on the Total Control 1000 transaction gateway. The Total
Control 1000 transaction gateway is our solution for providing transaction
processing services. The gateway is designed to handle hundreds of millions of
quick, secure transactions involving the transfer of small amounts of data in a
single dial access session. These transactions include credit card
authorizations, debit card fund transfers, health benefit authorizations,
electronic fund transfers, and other transactions. The Total Control 1000
transaction gateway is used by many of the largest transaction carriers in the
United States, and many other telecommunications service providers, enterprises,
health care networks, and financial institutions around the world.
On May 30, 2001, we announced we would be adding support for Internet Protocol
Version 6 (IPv6) to our Total Control 100 enhanced gigabit routers. The Total
Control 100 enhanced gigabit routers will support native IPv6 over a 2.4Gbit/s
(OC-48c) line interface, the fastest interface available on any IPv6 router
product.
9
PRODUCT DEVELOPMENT
Our research and development expenditures in fiscal years 2001, 2000, and 1999
were $535.7 million, $597.8 million, and $586.1 million, respectively. Our
research and development expenditures span efforts to create new types of
products and classes of service as well as to expand and improve our current
product lines.
We are now focusing a higher percentage of our research and development
investments in several high-growth or emerging areas. In fiscal 2002, we plan to
invest a significant amount of our total research and development in Gigabit
Ethernet-Over-Copper technology, Voice over IP and Wireless CDMA services,
wireless networking products, Layer 3+ switching and IP telephony technologies
to accelerate the introduction of new products to market.
Historically, we have incorporated proprietary ASICs into our products to
provide key functions, cost efficiency, and the capacity for future upgrades.
Customers can benefit from new technologies and enhanced capabilities through
inexpensive, simple software upgrades rather than expensive, disruptive hardware
replacements. In addition, ASICs facilitate higher density platforms--critical
in certain applications, such as high-speed Layer 3 switching--and are less
costly to manufacture. We incorporate ASIC technology into many of our products,
including NICs, switches, hubs, and remote access equipment.
SIGNIFICANT CUSTOMERS
For the fiscal year ended June 1, 2001, Ingram Micro Inc. (Ingram Micro)
accounted for 15 percent of our total sales. For the fiscal year ended June 2,
2000, Ingram Micro and Tech Data Corporation (Tech Data) accounted for 15
percent and 13 percent of our total sales, respectively. For the fiscal year
ended May 28, 1999, Ingram Micro and Tech Data accounted for 16 percent and 12
percent of our total sales, respectively.
INTERNATIONAL OPERATIONS
We market our products globally, primarily through subsidiaries, sales offices,
and relationships with OEMs and distributors with local presence in all
significant global markets. Outside the U.S., we have significant research and
development groups in the UK and Ireland. We have manufacturing facilities in
Ireland and Singapore. We will continue manufacturing products in our Singapore
facility until September 30, 2001, after which time the facility will be
utilized as a distribution center. We maintain sales offices in 49 countries
outside the U.S.
BACKLOG
In many cases we manufacture our products in advance of receiving firm product
orders from our customers based upon our forecasts of worldwide customer demand.
Generally, orders are placed by the customer on an as-needed basis and may be
canceled or rescheduled by the customer without significant penalty.
Accordingly, backlog as of any particular date is not indicative of our future
sales. As of June 1, 2001, we do not have backlog orders that cannot be filled
within the next fiscal year.
MANUFACTURING
We use a combination of in-house manufacturing and independent contract
manufacturers to produce our products. We operate manufacturing facilities in
Santa Clara, California; Mount Prospect, Illinois; Blanchardstown, Ireland; and
Changi, Republic of Singapore. Purchasing, assembly, burn-in, testing, final
assembly, and quality assurance functions are performed at all of these
facilities. On June 19, 2001, we announced a contract manufacturing arrangement
with Flextronics International (Flextronics) for our high volume server, desktop
and mobile products, and our intention to liquidate certain facilities
associated with manufacturing operations in fiscal 2002. Those facilities are
located in Marlborough, Massachusetts; Mount Prospect, Illinois; and Santa
Clara, California. In addition, the Singapore manufacturing facility will
transition to become 3Com's Asia-Pacific regional distribution center and
regional sales and support office.
10
INTELLECTUAL PROPERTY AND RELATED MATTERS
The quality of our innovation is reflected in a substantial portfolio of patents
covering a wide variety of networking technologies. This ownership of core
networking technologies creates opportunities to leverage our engineering
investments and develop more integrated, powerful, and innovative networking
solutions for customers.
We rely on U.S. and foreign patents, copyrights, trademarks, and trade secrets
to establish and maintain proprietary rights in our technology and products. We
have an active program to file applications for and obtain patents in the U.S.
and in selected foreign countries where a potential market for our products
exists. Our general policy has been to seek patent protection for those
inventions and improvements likely to be incorporated in our products or that we
otherwise expect to be valuable. As of June 1, 2001, we had 578 U.S. patents
(including 557 utility patents and 21 design patents) and 103 foreign patents.
During fiscal 2001, we filed 349 patent applications in the U.S. Numerous patent
applications are currently pending in the U.S. and other countries that relate
to our research and development. We also have patent cross license agreements
with other companies.
We have registered 95 trademarks in the U.S. and have registered 101 trademarks
in one or more of 72 foreign countries. Numerous applications for registration
of domestic and foreign trademarks are currently pending.
EMPLOYEES
As of June 1, 2001, we had 8,165 full time employees, of whom 1,994 were
employed in engineering, 2,648 in sales, marketing, and customer service, 1,698
in manufacturing, and 1,825 in finance and administration. Our employees are not
represented by a labor organization, and we consider our employee relations to
be satisfactory.
PALM SEPARATION
On September 13, 1999, we announced a plan to conduct an initial public offering
(IPO) of our Palm subsidiary. On March 2, 2000, we sold 4.7% of Palm's stock to
the public in an IPO and sold 1.0% of Palm's stock in private placements. On
July 27, 2000, we completed the Palm spin-off by distributing to our
shareholders all of the remaining Palm common stock that we owned. The
distribution ratio was 1.4832 shares of Palm for each outstanding share of 3Com
common stock.
RESTRUCTURING CHARGES
During fiscal 2001 and fiscal 2000, we undertook several initiatives aimed at
both changing business strategy as well as improving operational efficiencies.
Restructuring charges in fiscal 2001 were $163.7 million and related to the
realignment of our business strategy and reduction in force and cost containment
efforts. Restructuring charges in fiscal 2000 were $68.9 million, of which $9.9
million related to the separation of Palm from 3Com and $59.0 million related to
implementing our change in strategic focus. These charges are discussed further
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 2. Properties
We operate in a number of locations worldwide. In fiscal 2001, we had several
significant real estate activities.
11
During the third quarter of fiscal 2001, we leased a new building totaling
78,000 square feet in West Valley City, Utah. The lease will expire in 2007. The
facility will be used primarily for office space and research and development
activities.
During the third quarter of fiscal 2001, we sold a vacated 296,000 square foot
manufacturing and office facility in Morton Grove, Illinois.
We completed an expansion project at the existing Dublin, Ireland manufacturing
facility. The construction was completed and fully operational in October 2000.
This expansion added 177,000 square feet to the existing 307,000 square feet.
In the first quarter of fiscal 2001, we sold approximately 39 acres of
undeveloped land in the San Francisco Bay Area.
We lease and sublease to third-party tenants approximately 317,000 square feet
of office and research and development space on our Santa Clara, California
headquarters site and approximately 15,000 square feet at our Winnersh site in
the UK. The terms of these agreements expire in 2002 and 2003. We also sublease
approximately 404,000 square feet of owned manufacturing and office space in the
Chicago area, 137,000 square feet of leased office and research and development
space in the Boston area, and approximately 132,000 square feet of leased office
space in the San Francisco Bay area to third-party tenants. The terms of these
agreements expire in 2003, 2002 and 2006, respectively. These locations, as well
as other subleased locations, are included in the table below.
Our primary locations include the following:
Location Sq. Ft. Owned/Leased Primary Use
-------- ------- ------------ -----------
United States - 1,374,000 Leased Corporate headquarters, office, customer service,
San Francisco research and development, manufacturing,
Bay Area distribution, and computer center
120,000 Owned Office, research and development leased to third-party
tenant
United States - 1,149,000 Owned Office, research and development, customer service,
Chicago Area and manufacturing
United States - 566,000 Leased Office, research and development, customer service
Boston Area
United States - 185,000 Owned Property vacant; held for sale
Salt Lake City Area
78,000 Leased Office, research and development
Asia Pacific - 333,000 Owned Office, manufacturing, and distribution
Singapore
Europe - 484,000 Owned Office, research and development, and manufacturing
Ireland
Europe - 283,000 Owned/Leased Office, research and development, and customer
UK service
12
As part of our initiatives to maximize the efficiency of our facilities, we will
be consolidating and liquidating excess real estate in several locations
globally over the next 12 to 18 months. We intend to liquidate certain
facilities associated with research and development and manufacturing operations
located in Marlborough, Massachusetts; Mount Prospect, Illinois; and Santa
Clara, California. In addition, the Singapore manufacturing facility will
transition to become 3Com's Asia-Pacific regional distribution center and
regional sales and support office.
ITEM 3. 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
In December 1997, a securities class action lawsuit 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 alleged violations of
the federal securities laws, specifically Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934, and which sought unspecified damages on
behalf of a purported class of purchasers of 3Com common stock during the period
from April 23, 1997 through November 5, 1997. In May 2000, 3Com answered the
amended complaint. In October 2000, the parties agreed to settle this action and
all other related actions, including Adler v. 3Com Corporation, which is
discussed below. On February 23, 2001, the Court entered a final judgment
approving the settlement.
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 alleged violations of Sections 25400 and 25500
of the California Corporations Code and sought unspecified damages. The parties
agreed to stay this case to allow the Reiver case to proceed. Along with Reiver,
this case was settled in October 2000. As part of the settlement, the plaintiffs
have agreed to dismiss this action with prejudice. The settlement amount was
$259.0 million, of which $9.0 million was recovered from insurance. Accordingly,
3Com recorded a litigation charge of $250.0 million in October 2000.
In November 2000, a shareholder derivative and class action lawsuit captioned
Shaev v. Claflin, et al., No. CV794039, was filed in California Superior Court.
The complaint alleges that the Company's directors and officers made
misrepresentations and/or omissions and breached their fiduciary duties to the
Company in connection with the adjustment of employee and director stock options
in connection with the separation of the Company and Palm, Inc. It is unclear
whether the plaintiff is seeking recovery from 3Com or if the Company is named
solely as a nominal defendant, against whom the plaintiff seeks no recovery. The
Company and the individual defendants have removed this action to the United
States District Court for the Northern District of California, where the action
is captioned Shaev v. Claflin, et al., No. CV-01-0009-MJJ. The case was later
remanded back to the California Superior Court. Defendants have not responded to
the complaint. No trial date has been set.
13
Intellectual Property
On May 26, 2000, 3Com Corporation filed suit against Xircom, Inc. in the United
States District Court for the District of Utah, Civil Action No. 2:00-CV-0436C
alleging infringement of U.S. Patents Nos. 6,012,953, 5,532,898, 5,696,660,
5,777,836 and 6,146,209, accusing Xircom of infringement of one or more of the
claims of the patents-in-suit by reason of the manufacture, sale, and use of the
Real Port and Real Port 2 families of PC Cards, as well as a number of Xircom's
Type II PC Modem Cards. Xircom has counter-claimed for a declaratory judgment
that the asserted claims of the patents-in-suit are invalid and / or not
infringed. This case is currently in the discovery phase. Currently pending
before the Court is 3Com's motion for a preliminary injunction on the '209
patent. The Company intends to vigorously pursue this action.
On September 21, 2000, Xircom, Inc. filed an action against 3Com Corporation in
the United States District Court for the Central District of California, Civil
Action No. Case No.: 00-10198 MRP, accusing 3Com of infringement of U.S. Patents
Nos. 5,773,332, 5,940,275, 6,115,257 and 6,095,851, accusing 3Com of
infringement by reason of the manufacture, sale, and use of the 3COM 10/100
LAN+Modem CardBus Type III PC Card, the 3COM 10/100 LAN CardBus Type III PC
Card, the 3COM Megahertz(R) 10/100 LAN CardBus PC Card, the 3COM Megahertz
10/100 LAN+56K Global Modem CardBus PC Card and the 3COM Megahertz 56K Global
GSM and Cellular Modem PC Card. 3Com has counter-claimed for declaratory
judgment that the asserted claims of the patents-in-suit are not infringed
and/or invalid and that the claims of the 5,940,275 patent are unenforceable.
This case is in the discovery phase. Xircom filed a motion for preliminary
injunction seeking to enjoin 3Com from the continued manufacture and sale of its
Type III PC card products. The motion was heard on March 26, 2001 and was denied
by the Court. Currently pending before the Court is 3Com's Motion for Summary
Judgment of Non-infringement of the '332 patent. The Company intends to
vigorously pursue this action.
On July 6, 2001, Xircom, Inc. filed an action against the Company in the United
States District Court for the Central District of California, Civil Action No.
01-5902 GAF (JTLX). Xircom's complaint accuses 3Com of infringement of U.S.
Patent No. 6,241,550 by reason of the manufacture, sale, and use of the 3COM
10/100 LAN+Modem CardBus Type III PC Card and the 3COM 10/100 LAN CardBus Type
III PC Card. 3Com has not yet answered the Complaint, but an answer and
counterclaim will be filed and served in the near future. This action has only
recently been filed, but Xircom has threatened to file a motion for preliminary
injunction on the '550 patent. That motion has not yet been filed. The Company
intends to vigorously pursue this action.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of 3Com Corporation
The following table lists the names, ages and positions held by all executive
officers of 3Com. There are no family relationships between any director or
executive officer and any other director or executive officer of 3Com. Executive
officers serve at the discretion of the Board of Directors.
14
Name Age Position
---- --- --------
Bruce L. Claflin 49 Chief Executive Officer
Irfan Ali 37 President, CommWorks Corporation
Dennis Connors 47 President, 3Com Business Connectivity
Company
John McClelland 56 President, 3Com Business Networks Company
Gwen McDonald 46 Interim Senior Vice President, Corporate
Services
Mark D. Michael 50 Senior Vice President, Legal and Government
Relations, and Secretary
Michael Rescoe 48 Senior Vice President, Finance and Planning,
and Chief Financial Officer
Janet L. Soderstrom 54 Senior Vice President, Worldwide Marketing
and Brand Management
BRUCE L. CLAFLIN has been 3Com's Chief Executive Officer since January 2001 and
President and Chief Operating Officer since August 1998. Prior to joining 3Com,
Mr. Claflin worked for Digital Equipment Corporation (DEC) from October 1995 to
June 1998. From July 1997 to June 1998, he was Senior Vice President and General
Manager, Sales and Marketing at DEC and prior to that he served as Vice
President and General Manager of DEC's Personal Computer Business Unit from
October 1995 to June 1997. From April 1973 to October 1995, Mr. Claflin held a
number of senior management and executive positions at International Business
Machines Corporation (IBM). Mr. Claflin serves as a director of Time Warner
Telecom.
IRFAN ALI has been President of CommWorks Corporation since December 2000 and,
prior to that, he was the Senior Vice President and General Manager of 3Com's
Carrier Systems Business Unit, the predecessor to CommWorks Corporation, since
March 1999. From October 1997 to March 1999 he was Vice President, Worldwide
Marketing of 3Com's Carrier Systems. Prior to joining 3Com, Mr. Ali worked for
Newbridge Networks, Inc., where he was Vice President, Marketing from July 1995
to October 1997 and Assistant Vice President, Fast Packet Networks from July
1993 to June 1995. Prior to working at Newbridge Networks, Inc., Mr. Ali was
Senior Manager, Market Development for Strategic Technology at Northern Telecom,
Inc. from July 1991 to July 1993.
DENNIS CONNORS has been President of 3Com Business Connectivity Company since
June 2001. Prior to that, he was 3Com's Senior Vice President of e-Commerce
Group from June 2000 to June 2001 and Senior Vice President of Global Customer
Service from November 1999 to June 2001. Prior to joining 3Com, Mr. Connors was
the Executive Vice President and General Manager of Business Operations and
Services for Ericsson, Inc. He also served as Ericsson's Vice President and
Global Business Manager for WorldCom in 1997. During his tenure in Private Radio
Systems in the Ericsson/General Electric joint venture, Mr. Connors was the Vice
President of Global Product Development and Operations from 1995 through 1997,
and between 1993 and 1995 Mr. Connors was the Vice President of Marketing and
Research and Development.
15
JOHN MCCLELLAND has been the President of 3Com Business Networks Company since
June 2001. Prior to that, he was 3Com's Senior Vice President, Operations from
December 2000 to June 2001 and Senior Vice President, Supply Chain Operations
from April 1999 to December 2000. Prior to joining 3Com, Mr. McClelland was
Chief Industrial Officer for the Philips Consumer Electronics division of
Philips International, B.V. from November 1998 to March 1999. Mr. McClelland was
Vice President of Manufacturing and Distribution at Digital Equipment
Corporation from February 1995 to October 1998. From October 1968 to January
1995, Mr. McClelland held various management positions at IBM. Most recently at
IBM, he held the position of Vice President Manufacturing and Distribution, IBM
PC Co. from April 1994 to January 1995.
GWEN MCDONALD has been 3Com's Interim Senior Vice President of Corporate
Services since May 2001. Prior to that, Ms. McDonald served in various
capacities in Human Resources within 3Com for the past 12 years, including vice
president of worldwide Human Resources for Staffing and Operations and vice
president of worldwide Supply Operations. Prior to joining 3Com, Ms. McDonald
was the HR manager for LSI Logic's Santa Clara operations in 1988 and served
Fairchild Semiconductor for the 12 years prior to that, holding numerous key HR
positions within Fairchild.
MARK D. MICHAEL has been 3Com's Senior Vice President, Legal and Government
Relations, and Secretary since May 1999. Mr. Michael served as Senior Vice
President, Legal, General Counsel and Secretary since September 1997. Mr.
Michael joined 3Com in 1984 as Counsel, was named Assistant Secretary in 1985,
and General Counsel in 1986. Prior to joining 3Com, Mr. Michael was engaged in
the private practice of law with law firms in Honolulu, Hawaii from 1977 to 1981
and in San Francisco from 1981 to 1984.
MICHAEL RESCOE has been 3Com's Senior Vice President, Finance and Planning, and
Chief Financial Officer since May 2000. Prior to joining 3Com, Mr. Rescoe was
the Chief Financial Officer for Intelisys Electronic Commerce in New York in
1999. He also served as the Chief Financial Officer for PG&E Corporation in San
Francisco from 1997 through 1999. Before holding that position, Mr. Rescoe was
the Chief Financial Officer of Enserch Corporation in Dallas between 1995 and
1997. Previous to his Enserch position, he was the Senior Managing Director
(Partner) at Bear Sterns in New York beginning in 1992 through 1995. Prior to
1992, Mr. Rescoe was the Senior Vice President of Corporate Finance at Kidder,
Peabody, also in New York.
JANET L. SODERSTROM has been 3Com's Senior Vice President, Worldwide Marketing
and Brand Management since October 1999. Prior to joining 3Com, Ms. Soderstrom
joined Visa USA in 1985 as Director of Advertising and Marketing. She served as
Visa USA's Senior Vice President of Advertising and Marketing, before being
appointed as the Executive Vice President of Marketing for Visa International
from 1996 through 1999. In the past, Ms. Soderstrom has served on the boards of
Winkler Advertising, Decker Communications, the Ad Council and the Association
of National Advertisers where she served as Chairman from 1994 through 1996.
16
PART II
ITEM 5. Market for 3Com Corporation's Common Stock and Related Stockholder
Matters
Fiscal 2001 High Low Fiscal 2000 High Low
----------- ---- --- ----------- ---- ---
First Quarter $ 17.94 $ 9.65 First Quarter $ 6.53 $ 4.75
Second Quarter 20.69 12.25 Second Quarter 9.13 5.13
Third Quarter 13.38 7.13 Third Quarter 17.19 8.25
Fourth Quarter 7.16 4.55 Fourth Quarter 21.57 7.69
Our common stock has been traded in the Nasdaq stock market under the symbol
COMS since our initial public offering on March 21, 1984. The preceding table
sets forth the high and low closing sales prices as reported on the Nasdaq stock
market during the last two years. As of June 1, 2001 we had approximately 5,488
stockholders of record. We have not paid and do not anticipate that we will pay
cash dividends on our common stock.
On July 27, 2000, we distributed to our shareholders in the form of a stock
dividend 1.4832 shares of Palm for each outstanding share of 3Com common stock.
The stock prices presented above are restated stock prices and reflect the
distribution of our ownership in Palm to our shareholders.
ITEM 6. Selected Financial Data
The following selected financial information has been derived from the audited
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-K.
Years ended
------------------------------------------------------------------------------------------
(In thousands, except June 1, June 2, May 28, May 31, May 31,
per share and employee data) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Sales $2,820,881 $4,333,942 $5,202,253 $5,156,016 $5,481,681
Net income (loss) (965,376) 674,303 403,874 30,214 500,533
Income (loss) from
continuing operations (969,913) 615,563 364,945 23,046 496,881
Income (loss) per share,
continuing operations:
Basic ($2.81) $1.77 $1.01 $0.07 $1.50
Diluted (2.81) 1.72 0.99 0.06 1.41
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $3,452,802 $6,603,077 $4,239,159 $3,871,275 $3,504,984
Assets, net of discontinued
operations 3,452,802 5,544,840 4,158,879 3,776,901 3,471,766
Working capital, net of
discontinued operations 1,397,977 3,181,420 2,111,909 1,839,527 1,527,101
Long-term obligations 10,536 141,285 94,268 92,135 170,652
Retained earnings 771,639 1,982,079 1,403,709 1,079,775 1,049,561
Stockholders' equity 2,505,421 4,043,064 3,196,455 2,807,495 2,228,344
Number of employees 8,165 10,597 12,543 12,610 13,477
- ------------------------------------------------------------------------------------------------------------------------------
17
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
Our consolidated financial statements for all periods account for Palm as a
discontinued operation, as a result of our decision to distribute the Palm
common stock we owned to 3Com shareholders in the form of a stock dividend.
Unless otherwise indicated, the following discussion relates to our continuing
operations. Subsequent to the distribution to shareholders on July 27, 2000,
Palm's operations ceased to be part of our operations and reported results.
RESTRUCTURING ACTIVITIES
During fiscal 2001 and fiscal 2000, we undertook several initiatives aimed at
both changing business strategy as well as improving operational efficiencies.
We recorded restructuring charges of $163.7 million and $68.9 million in the
fiscal years ended June 1, 2001 and June 2, 2000, respectively.
Exit of Analog-Only Modem and High-End LAN/WAN Chassis Product Lines and
Separation of Palm
We realigned our strategy in the fourth quarter of fiscal 2000 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) CommWorks. In support of this new strategy, we exited our
analog-only modem and high-end LAN and WAN chassis product lines and completed
the separation of Palm. For the fiscal year ended June 1, 2001, we recorded
restructuring charges of $13.2 million relating to these activities. For the
fiscal year ended June 2, 2000, we recorded net restructuring charges of $59.0
million, consisting of restructuring charges of approximately $125.4 million,
partially offset by a gain recognized upon receipt of a warrant to purchase
common stock in Extreme Networks, Inc., valued at $66.4 million. We also
recorded a credit of $0.2 million and charges of $9.9 million for the fiscal
years ended June 1, 2001 and June 2, 2000, respectively, related to the
separation of Palm. We completed our restructuring activities associated with
the exit of the analog-only modem and high-end LAN and WAN chassis product lines
during fiscal 2001.
Global Cost Reduction to Improve Operational Efficiencies
On December 21, 2000, we announced further restructuring activities. The
Commercial and Consumer Networks Business and CommWorks operations were
restructured to enhance the focus and cost effectiveness in serving their
respective markets. Effective for fiscal 2002, three independent businesses -
Business Connectivity Company, Business Networks Company and CommWorks
Corporation - were formed through this restructuring effort, with each business
utilizing central shared corporate services. Additionally, we implemented
reduction in force and cost containment actions and exited our consumer Internet
Appliance product line to lower the cost structure of the Company and return it
to profitability. For the fiscal year ended June 1, 2001, we recorded charges of
approximately $150.7 million related to these restructuring initiatives.
Subsequent to June 1, 2001, we announced further cost reduction and cash flow
generating initiatives. We plan to exit the consumer broadband cable and DSL
modem product lines and outsource the manufacturing of high volume server,
desktop and mobile connectivity products to Flextronics under a contract
manufacturing arrangement. Concurrent with such outsourcing, we intend to
consolidate our real estate portfolio including the disposition of excess
facilities. We expect to incur more charges related to these restructuring
efforts during fiscal 2002. We expect to substantially complete our
restructuring activities related to the global cost reduction to improve
operational efficiencies by May 2002.
18
BUSINESS COMBINATIONS AND JOINT VENTURES
We completed the following transactions during the fiscal year ended June 1,
2001:
o During the third quarter of fiscal 2001, we acquired the Gigabit Ethernet
NIC business of Alteon WebSystems (Alteon), a wholly-owned subsidiary of
Nortel Networks Corporation (Nortel) for an aggregate purchase price of
$123.0 million, consisting of cash paid to Nortel of $122.0 million, and
$1.0 million of costs directly attributable to the completion of the
acquisition. We purchased the Alteon NIC business and are licensing certain
Gigabit Ethernet-related technology and intellectual property from Alteon.
Approximately $22.5 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 third quarter of fiscal 2001. A risk adjusted
after-tax discount rate of 25 percent was applied to the in-process
project's cash flows. This purchase resulted in $86.0 million of goodwill
and other intangible assets that are being amortized over an estimated
useful life of four years.
o During the second quarter of fiscal 2001, we acquired Nomadic Technologies,
Inc. (Nomadic), a developer of wireless networking products that we will
incorporate into solutions for both small business and enterprise customers
for an aggregate purchase price of $31.8 million, consisting of cash paid
to Nomadic of $23.5 million, issuance of restricted stock with a fair value
of $3.8 million, stock options assumed with a fair value of $4.3 million,
and $0.2 million of costs directly attributable to the completion of the
acquisition.
For financial reporting purposes, the aggregate purchase price was reduced
by the intrinsic value of unvested stock options and restricted stock
totaling $6.9 million which was recorded as deferred stock-based
compensation and is being amortized over the respective vesting periods.
Approximately $8.3 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 second quarter of fiscal 2001. A risk adjusted
after-tax discount rate of 30 percent was applied to the in-process
projects' cash flows. This purchase resulted in $18.6 million of goodwill
and other intangible assets that are being amortized over estimated useful
lives of three to five years.
o During the first quarter of fiscal 2001, we acquired Kerbango, Inc.
(Kerbango), developer of the Kerbango(TM) Internet radio, radio tuning
system, and radio web site, for an aggregate purchase price of $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, stock options assumed
with a fair value of $3.8 million, and $0.3 million of costs directly
attributable to the completion of the acquisition. In addition, deferred
cash payments to founders and certain former employees totaling $7.7
million were contingent upon certain events through July 2002.
19
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 was 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. A risk adjusted after-tax discount rate of 35 percent was
applied to the in-process project's cash flows. This purchase resulted in
$33.7 million of goodwill and other intangible assets that were being
amortized over estimated useful lives of three to five years.
As part of our efforts to improve profitability, we announced that we would
exit the Internet Appliance product line during fiscal year 2001. As a
result, we determined that the net unamortized assets had no remaining
future value and consequently wrote off the net remaining amounts of
deferred stock-based compensation, goodwill, and intangible assets. This
included $15.5 million of accelerated amortization of deferred stock-based
compensation for qualified terminated Kerbango employees and $21.1 million
of net goodwill and intangible assets related to the Kerbango acquisition.
These charges were included as part of restructuring charges in fiscal
2001.
o During the first quarter of fiscal 2001, we completed the transfer of our
analog-only modem product lines to U.S. Robotics Corporation (New USR), the
new joint venture formed with Accton Technology and NatSteel Electronics.
We contributed $3.1 million of assets to New USR, for an 18.7 percent
investment in the joint venture. U.S. Robotics Corporation has assumed the
analog-only modem product line, including U.S. Robotics and U.S. Robotics
Courier branded modems.
During fiscal 2001, we wrote off our $3.1 million investment in New USR as
the value of this investment was determined to be other-than-temporarily
impaired. The amount was charged to gains (losses) on investments, net.
We completed the following transactions during the fiscal year ended June 2,
2000:
o On April 3, 2000, we acquired Call Technologies, Inc. (Call Technologies),
a leading developer of Unified Messaging (UM) and carrier-class Operational
Systems and Support (OSS) software solutions for telecommunications service
providers, for an aggregate purchase price of $86.0 million, consisting of
cash of approximately $73.4 million, assumption of stock options with a
fair value of approximately $8.6 million, the assumption of $1.4 million in
debt and $2.6 million of costs directly attributable to the completion of
the acquisition. Approximately $10.6 million of the total purchase price
represented purchased in-process technology that had not yet reached
technological feasibility, had no alternative future use, and was charged
to operations in the fourth quarter of fiscal 2000. This purchase resulted
in approximately $86.7 million of goodwill and other intangible assets that
are being amortized over estimated useful lives of three to seven years.
During fiscal year 2001, we determined that the downturn in the
telecommunications industry resulted in an impairment of the developed OSS
technology and related goodwill that arose from the Call Technologies
acquisition. These assets were written down $18.2 million to fair value,
which was estimated using discounted future cash flows. The impairment
charge was included in amortization and write down of intangibles, and is a
component of contribution margin for CommWorks as reported in Note 19 of
the consolidated financial statements. Remaining net goodwill and
intangible assets continue to be amortized over their original useful
lives.
20
o On December 22, 1999, we acquired LANSource Technologies, Inc. (LANSource),
a leading developer of Internet and LAN fax software and modem sharing
software, for an aggregate purchase price of $15.8 million in cash
including $0.2 million of costs directly attributable to the completion of
the acquisition. Approximately $2.9 million of the total purchase price
represented purchased in-process technology that had not yet reached
technological feasibility, had no alternative future use, and was charged
to operations in the third quarter of fiscal 2000. This purchase resulted
in approximately $13.3 million of goodwill and other intangible assets that
are being amortized over estimated useful lives of two to five years.
As part of our efforts to improve profitability, we decided that we would
exit certain LANSource product lines and license the technology to a former
competitor in that market. As a result of this decision, we determined that
an impairment of developed technology and related goodwill that arose from
the LANSource acquisition had occurred. These assets were written down $1.1
million to their estimated realizable fair value. This amount was included
in restructuring charges in fiscal 2001. In addition, we determined that a
customer's product line discontinuation resulted in an impairment of a
license agreement and related goodwill that arose from the LANSource
acquisition. Those assets were determined to have no future value, and
accordingly $1.0 million was written off. The impairment charge was
recorded in amortization and write down of intangibles, and is a component
of contribution margin for CommWorks as reported in Note 19 of the
consolidated financial statements. Remaining net intangible assets continue
to be amortized over their original useful lives.
o On December 2, 1999, we acquired Interactive Web Concepts, Inc. (IWC), an
Internet business consulting, creative design, and software engineering
firm, for an aggregate purchase price of $3.5 million in cash including
$0.1 million of costs directly attributable to the completion of the
acquisition. This purchase resulted in approximately $4.1 million of
goodwill and other intangible assets that were being amortized over an
estimated useful life of three years.
As part of our efforts to improve profitability, we decided that we would
discontinue providing IWC services during fiscal year 2001. As a result, we
determined that the net unamortized assets had no remaining future value
and consequently wrote off $2.1 million, which was the net remaining amount
of goodwill and intangible assets. This amount was included in
restructuring charges in fiscal 2001.
We completed the following transactions during the fiscal year ended May 28,
1999:
o On March 5, 1999, we acquired NBX Corporation (NBX), a developer of
IP-based telephony systems that integrate voice and data communications
over small business LANs and WANs. The aggregate purchase price of $87.8
million consisted of cash of approximately $75.4 million, assumption of
stock options with a fair value of approximately $11.9 million, and $0.5
million of costs directly attributable to the completion of the
acquisition. Approximately $5.6 million of the total purchase price
represented purchased in-process technology that had not yet reached
technological feasibility, had no alternative future use, and was charged
to operations in the fourth quarter of fiscal 1999. This purchase resulted
in approximately $94.4 million of goodwill and other intangible assets that
are being amortized over estimated useful lives of two to seven years.
21
o On February 18, 1999, we acquired certain assets of ICS Networking, Inc.
(ICS), a wholly-owned subsidiary of Integrated Circuit Systems, Inc. and
manufacturer of integrated circuit products focused on the design and
marketing of mixed signal integrated circuits for frequency timing,
multimedia, and data communications applications, for an aggregate purchase
price of $16.1 million in cash including $0.1 million of costs directly
attributable to the completion of the acquisition. Approximately $5.0
million of the total purchase price represented purchased in-process
technology that had not yet reached technological feasibility, had no
alternative future use, and was charged to operations in the third quarter
of fiscal 1999. This purchase resulted in approximately $6.9 million of
goodwill and other intangible assets that are being amortized over
estimated useful lives of three to seven years.
o On January 25, 1999, we entered into a joint venture named ADMTek, Inc.
(ADMtek). We contributed approximately $5.3 million in cash for a 44
percent interest in the joint venture and began consolidating the joint
venture with our results, due to our ability to exercise control over the
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 and
we no longer exercised control over the joint venture. Therefore, during
the second fiscal quarter of fiscal 2000, we began accounting for this
investment using the cost method.
o On November 6, 1998, we acquired EuPhonics, Inc. (EuPhonics), a developer
of digital signal processor (DSP)-based audio software that drives
integrated circuits, sound cards, consumer electronics, and other hardware.
The aggregate purchase price of $8.3 million consisted of cash of
approximately $6.6 million, assumption of stock options with a fair value
of approximately $1.5 million, and $0.2 million of costs directly
attributable to the completion of the acquisition. The charge for purchased
in-process technology associated with the acquisition was not material, and
was included in research and development expenses in the second quarter of
fiscal 1999. This purchase resulted in approximately $10.8 million of
goodwill and other intangible assets that were being amortized over
estimated useful lives of four years.
As part of our efforts to change strategic focus in fiscal 2001, we decided
that we would exit the products and technology that arose from the
EuPhonics acquisition. As a result, we determined that the net unamortized
assets had no remaining future value and consequently wrote off $5.8
million, which was the net remaining amount of goodwill and intangible
assets. This amount was included in restructuring charges in fiscal 2001.
22
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the percentage
of total sales represented by the line items reflected in our consolidated
statements of operations:
Fiscal Years Ended
---------------------------------
June 1, June 2, May 28,
2001 2000 1999
---------------------------------
Sales 100.0% 100.0% 100.0%
Cost of sales 81.1 57.1 55.7
----- ----- -----
Gross margin 18.9 42.9 44.3
----- ----- -----
Operating expenses:
Sales and marketing 28.4 22.0 19.5
Research and development 19.0 13.8 11.3
General and administrative 6.5 4.9 4.3
Amortization and write-down of intangibles 2.5 0.6 0.4
Purchased in-process technology 2.1 0.3 0.2
Merger-related credits, net -- (0.1) (0.3)
Restructuring charges 5.8 1.6 --
----- ----- -----
Total operating expenses 64.3 43.1 35.4
----- ----- -----
Operating income (loss) (45.4) (0.2) 8.9
Net gains on land and facilities 6.3 0.6 0.1
Gains (losses) on investments, net (0.7) 19.4 (0.1)
Litigation settlement (8.8) -- --
Interest and other income, net 5.1 2.4 1.1
----- ----- -----
Income (loss) from continuing operations before income
taxes and equity interests (43.5) 22.2 10.0
Income tax provision (benefit) (9.1) 7.9 3.0
Other interests in loss of consolidated joint venture -- -- --
Equity interest in loss of unconsolidated investee -- 0.1 --
----- ----- -----
Income (loss) from continuing operations (34.4) 14.2 7.0
Income from discontinued operations 0.2 1.4 0.8
----- ----- -----
Net income (loss) (34.2)% 15.6% 7.8%
===== ===== =====
Comparison of fiscal years ended June 1, 2001 and June 2, 2000
Sales
Fiscal 2001 sales totaled $2.82 billion, a decrease of 35 percent from fiscal
2000 sales of $4.33 billion. During fiscal 2001, our principal operating
segments were: 1) Commercial and Consumer Networks and 2) CommWorks.
23
Commercial and Consumer Networks. Sales of commercial and consumer network
products (e.g., switches, desktop NICs, PC cards, LAN telephony, broadband cable
and DSL modems, hubs, wireless LANs, and customer service and support) in fiscal
2001 were $2.27 billion, a decrease of 19 percent from fiscal 2000 sales of
$2.80 billion. The decrease in sales of commercial and consumer network products
when compared to fiscal 2000 was due to significant competitive pressures in our
LAN infrastructure, NIC and PC Card product lines, resulting in lower pricing
and loss of market share. The market growth for these mature technologies also
slowed with the economic downturn in fiscal 2001. The exiting of our large,
complex chassis products at the end of fiscal 2000 and cost reduction efforts in
fiscal 2001 also resulted in disruptions in sales of our ongoing products. The
decrease in sales was partially offset by growth in new product and market
segments such as Layer 3+ switching, LAN telephony, wireless LANs and
Gigabit-over-copper NICs. We also experienced revenue growth in our consumer
cable and DSL modem products, although we announced on June 7, 2001 that we have
discontinued these products due to an inability to sustain a profitable business
model. Sales of commercial and consumer network products represented 81 percent
of total sales in fiscal 2001 compared to 65 percent of total sales in fiscal
2000.
CommWorks. Sales of CommWorks products (e.g., access infrastructures and IP
services platforms for network service providers, enhanced data, IP telephony,
wireless, cable, and DSL access systems, remote access concentrators) in fiscal
2001 were $0.40 billion, a decrease of 31 percent from fiscal 2000 sales of
$0.58 billion. The decrease in sales of CommWorks products when compared to
fiscal 2000 was due primarily to the slowdown in the U.S. telecommunications
industry, which resulted in a significant decline in revenues from our enhanced
data products, partially offset by growth of our wireless CDMA access
infrastructure products. Sales of CommWorks products represented 14 percent of
total sales in fiscal 2001 compared to 13 percent of total sales in fiscal 2000.
Exited Product Lines. Sales of exited product lines (analog-only modems and
high-end LAN and WAN chassis products) in fiscal 2001 were $0.15 billion, a
decrease of 84 percent from fiscal 2000 sales of $0.95 billion. The decrease in
sales of exited product lines when compared to fiscal 2000 was due primarily to
the impact of our business restructuring and change in strategic focus. Sales of
exited products represented 5 percent of total sales in fiscal 2001 compared to
22 percent of total sales in fiscal 2000.
Geographic. U.S. sales represented 45 percent of total sales in fiscal 2001
compared to 49 percent in fiscal 2000 and decreased 40 percent when compared to
fiscal 2000. International sales in fiscal 2001 decreased 30 percent when
compared to fiscal 2000. The overall decline in both U.S. and international
sales is largely attributable to the worldwide deteriorating economic
conditions, especially the U.S. telecommunications market.
New Operating Segments. Beginning in fiscal 2002, we have implemented a new
organizational structure to refine our strategic focus. As a result, the
principal operating segments for fiscal 2002 will be: 1) Business Connectivity
Company, 2) Business Networks Company and 3) CommWorks. Revenues related to
product lines we have exited in fiscal 2001 or have announced discontinuation in
fiscal 2002, such as our consumer cable and DSL modems, will be aggregated with
other exited products and will be presented separately from our three operating
segments beginning in the first quarter of fiscal 2002.
24
Gross Margin
Gross margin as a percentage of sales was 18.9 percent in fiscal 2001, compared
to 42.9 percent in fiscal 2000. Gross margin declined ten percentage points in
fiscal 2001 due to reductions in standard margin. The decline in standard margin
was primarily caused by a mix shift to lower-margin commercial access and
consumer broadband modem products and eroding prices on LAN infrastructure, NIC
and PC Card products. Gross margin declined eight percentage points in fiscal
2001 resulting from higher provisions for excess and obsolete inventory due to
reduced demand and the discontinuation of our consumer product lines. Gross
margin declined six percentage points in fiscal 2001 due to underutilized
capacity in our manufacturing plants and commitment shortfalls with subcontract
manufacturers. We also recorded a liability related to future contractual
commitments with a subcontract manufacturer as a result of our intention to exit
our consumer product lines and the reduction in sales demand. We are taking
actions to address manufacturing capacity and other supply chain utilization
issues through our restructuring efforts. As these efforts are successfully
completed, we expect gross margins to improve over fiscal 2001 levels.
Operating Expenses
Operating expenses in fiscal 2001 were $1.81 billion, or 64.3 percent of sales,
compared to $1.86 billion, or 43.1 percent of sales in fiscal 2000. Excluding
amortization and write down of intangibles charges of $69.7 million, purchased
in-process technology charges of $60.2 million, net merger-related credits of
$0.7 million, and restructuring charges of $163.7 million, operating expenses
would have been $1.52 billion, or 53.9 percent of sales for fiscal 2001.
Excluding amortization and write down of intangibles charges of $24.5 million,
purchased in-process technology charges of $13.5 million, net merger-related
credits of $2.3 million, and restructuring charges of $68.9 million, operating
expenses would have been $1.76 billion, or 40.6 percent of sales for fiscal
2000. We are taking actions that are intended to reduce operating expenses in
future periods.
Sales and Marketing. Sales and marketing expenses in fiscal 2001 decreased
$145.2 million or 15.3 percent from fiscal 2000. Sales and marketing expenses as
a percentage of sales increased to 28.4 percent of sales in fiscal 2001 compared
to 22.0 percent of sales in fiscal 2000. The year-over-year decrease in sales
and marketing expenses in absolute dollars was attributable to lower selling
expenses resulting from the decease in sales, the exit of product lines
associated with our restructuring activities, reduced headcount, and other
cost-containment efforts. These decreases were partially offset by increased
spending on corporate advertising and brand recognition programs. The
year-over-year increase as a percentage of sales was affected by the decline in
sales greater than the decrease in sales force and related expenses as described
above.
Research and Development. Research and development expenses in fiscal 2001
decreased $62.1 million, or 10.4 percent, compared to fiscal 2000. Research and
development expenses as a percentage of sales increased to 19.0 percent of sales
in fiscal 2001 compared to 13.8 percent of sales in fiscal 2000. The
year-over-year decrease in research and development expenses in absolute dollars
was primarily due to headcount reductions and cost containment efforts,
especially in our discontinued and mature product lines. These cost savings were
partially offset by additional investments in emerging growth technologies, such
as LAN telephony, wireless LANs and next generation wireless access
infrastructure carrier products. The year-over-year increase as a percentage of
sales was affected by the decline in sales in fiscal 2001, as described above.
25
General and Administrative. General and administrative expenses in fiscal 2001
decreased $31.0 million or 14.5 percent from fiscal 2000. As a percentage of
sales, general and administrative expenses increased to 6.5 percent of sales in
fiscal 2001 compared to 4.9 percent of sales in fiscal 2000. The year-over-year
decrease in general and administrative expenses in absolute dollars was
primarily due to decreased headcount, cost containment efforts, and lower
consulting costs associated with our restructuring activities. In addition,
provisions for bad debts were significantly lower than fiscal 2000 due to the
drop in sales volume. The year-over-year increase as a percentage of sales was
affected by the decline in sales in fiscal 2001, as described above, partially
offset by the decrease in expenses.
Purchased In-Process Technology. During fiscal 2001, we recorded a charge for
purchased in-process technology of approximately $60.2 million associated with
the acquisitions of certain assets of Alteon WebSystems (Alteon), Nomadic
Technologies (Nomadic) and Kerbango. We continued to develop technologies that
were in process at Alteon, Nomadic and Kerbango, as of the dates of the
acquisitions. The fair values of the existing products and technology currently
under development were determined using the income approach, which discounts
expected future cash flows to present value. The discount rates used in the
present value calculations were typically derived from a weighted-average cost
of capital analysis, adjusted upward to reflect additional risks inherent in the
development life cycle. The costs to be incurred for the projects in process are
primarily labor costs for design, prototype development, and testing. As of the
acquisition dates, purchased in-process technology was approximately 70 percent
complete for Alteon projects and 75 percent complete for both Kerbango and
Nomadic projects. We continued development of nine projects, and spent
approximately $0.5 million, $4.8 million and $0.6 million on Alteon, Kerbango
and Nomadic projects, respectively, as of June 1, 2001. At the end of fiscal
2001, all purchased in-process technology projects were completed or terminated.
Merger-Related Credits, Net. During fiscal 2001, we recorded net pre-tax
merger-related credits of approximately $0.7 million. This net amount reflects
adjustments to previously recorded merger and restructuring charges.
Restructuring Charges. During fiscal 2001 and fiscal 2000, we undertook several
initiatives aimed at both changing business strategy as well as improving
operational efficiencies. Restructuring charges in fiscal 2001 were $163.7
million and related to the realignment of our business strategy and reduction in
force and cost containment efforts. Restructuring charges in fiscal 2000 were
$68.9 million, of which $9.9 million related to the separation of Palm from 3Com
and $59.0 million related to implementing our change in strategic focus.
Net Gains on Land and Facilities.
During fiscal 2001, 3Com finalized the sale of a 39-acre parcel of undeveloped
land in San Jose, California to a financial institution, as directed by Palm,
for total net proceeds of approximately $215.6 million. 3Com recorded a net gain
of $174.4 million related to this sale. In February 2001, 3Com sold a vacated
office and manufacturing building in Morton Grove, Illinois for total net
proceeds of $12.4 million, resulting in a gain of approximately $4.4 million.
During fiscal 2000, we sold our manufacturing facility and related assets in
Salt Lake City, Utah and recognized an impairment charge for our remaining Salt
Lake City facility held for sale, which together resulted in a net gain of $25.5
million.
26
Gains (Losses) on Investments, Net
Net losses on investments of $18.6 million were recorded during fiscal 2001,
comprised of $117.1 million of net gains realized on sales of publicly traded
equity securities and $135.7 million of net losses recognized due to fair value
adjustments of investments in limited partnership venture capital funds and
write downs for other-than-temporary declines in value of both publicly traded
securities and investments in private companies. During fiscal 2000, gains on
investments were $838.8 million, comprised of $792.7 million of net gains
realized on sales of publicly traded equity securities and $46.1 million of net
gains recognized due to fair value adjustments of investments in limited
partnership venture capital funds and in private companies acquired by public
companies.
Litigation Settlement
We recorded a charge of $250.0 million during fiscal 2001 for the settlement of
the Reiver and Adler cases, as discussed in Note 21 to the consolidated
financial statements.
Interest and Other Income, Net
Interest and other income, net was $144.6 million in fiscal 2001, compared to
$104.3 million in fiscal 2000. The increase of $40.3 million compared to fiscal
2000 was primarily due to higher interest income, attributable to higher average
cash and short-term investment balances, as well as higher interest rates.
Income Tax Provision
Our effective income tax benefit rate was 21.0 percent in fiscal 2001 compared
to an effective income tax expense rate of 35.5 percent in fiscal 2000. The
fiscal 2001 benefit rate was comprised of a tax benefit on the United States
federal tax loss, offset by tax provisions in certain foreign countries, a
valuation allowance on deferred taxes, and non-deductible expenses related to
acquisitions. The valuation allowance reduces deferred tax assets to estimated
realizable value. The valuation allowance relates to a portion of the credit and
net operating loss carryforwards and other temporary differences for which we
believe that realization is uncertain due to various limitations on their use
and our operating loss in the current year.
Equity Interest in Loss of Unconsolidated Investee
In fiscal 2000, we invested $7.0 million in OmniSky Corporation (OmniSky). This
investment was accounted for using the equity method, resulting in losses of
$1.4 million and $5.6 million in fiscal 2001 and 2000, respectively.
Income from Discontinued Operations
Income from discontinued operations includes the results of operations of Palm.
Income from discontinued operations for the fiscal year ended June 1, 2001 was
$4.5 million, or $0.01 per share, compared to $58.7 million, or $0.16 per share
for fiscal 2000.
27
Comparison of fiscal years ended June 2, 2000 and May 28, 1999
Sales
Fiscal 2000 sales totaled $4.33 billion, a decrease of 16.7 percent from fiscal
1999 sales of $5.20 billion.
Commercial and Consumer Networks. Sales of commercial and consumer network
products in fiscal 2000 were $2.80 billion, a decrease of 9 percent from fiscal
1999 sales of $3.09 billion. The decrease in sales of commercial and consumer
network products when compared to fiscal 1999 was due to price declines in NICs,
price competition and loss of market share in LAN workgroup hubs and switches,
and disruption to the sales of on-going products that resulted from our March
20, 2000 announcement to exit certain product lines. Sales of commercial and
consumer networks products represented 65 percent of total sales in fiscal 2000
compared to 59 percent of total sales in fiscal 1999.
CommWorks. Sales of CommWorks products in fiscal 2000 were $0.58 billion, an
increase of 27 percent from fiscal 1999 sales of $0.46 billion. The increase in
sales of CommWorks products when compared to fiscal 1999 was due to strong
demand for our CMDA wireless products. Sales of CommWorks products represented
13 percent of total sales in fiscal 2000 compared to 9 percent of total sales in
fiscal 1999.
Exited Product Lines. Sales of exited product lines (analog-only modems and
high-end LAN and WAN chassis products) in fiscal 2000 were $0.95 billion, a
decrease of 42 percent from fiscal 1999 sales of $1.66 billion. The decrease in
sales of exited product lines when compared to fiscal 1999 was due to increased
price competition and the loss of market share in these markets. In addition, as
a result of our March 20, 2000 announcement that we would be exiting these
product lines, we experienced a significant decrease in sales related to these
products in the fourth quarter of fiscal 2000. Sales of exited products
represented 22 percent of total sales in fiscal 2000 compared to 32 percent of
total sales in fiscal 1999.
Geographic. U.S. sales represented 49 percent of total sales in fiscal 2000
compared to 51 percent in fiscal 1999 and decreased 21 percent when compared to
fiscal 1999. International sales in fiscal 2000 decreased 12 percent when
compared to fiscal 1999. The overall decline in both U.S and international sales
was largely attributable to our decision to exit our high-end LAN and WAN
chassis and analog-only modem product lines as part of our restructuring
initiative. International sales reflected strong growth in the Asia Pacific
region, offset by lower sales in Europe.
Gross Margin
Gross margin as a percentage of sales was 42.9 percent in fiscal 2000, compared
to 44.3 percent in fiscal 1999. The decline in gross margins in fiscal 2000 was
due to the impact of our business realignment on our fourth quarter results,
partially offset by higher gross margin performance during our first three
fiscal quarters. For the first three quarters of fiscal 2000, the gross margin
percentage was 46.5 percent. The higher gross margin performance during the
first three quarters of fiscal 2000 was primarily due to improvements in our
inventory management, which resulted in reduced manufacturing period costs,
partially offset by higher costs for certain product components. During the
fourth quarter of fiscal 2000, gross margins were lower due to reduced sales
volumes associated with our restructuring activities. In addition, we incurred
one-time charges of $55.5 million within cost of sales primarily related to
excess and obsolete inventory, warranty reserves, and return and rebate programs
in connection with the exiting of certain product lines. The gross margin
percentage in the fourth quarter of fiscal 2000 was 25.8 percent. For fiscal
2000 in total, the decline in the gross margin percentage was relatively small
because the fourth quarter impact was moderated by higher gross margins during
our first three fiscal quarters.
28
Operating Expenses
Operating expenses in fiscal 2000 were $1.86 billion, or 43.1 percent of sales,
compared to $1.84 billion, or 35.4 percent of sales in fiscal 1999. Excluding
amortization and write down of intangibles of $24.5 million, purchased
in-process technology charges of $13.5 million, net merger-related credits of
$2.3 million and restructuring charges of $68.9 million, operating expenses
would have been $1.76 billion, or 40.6 percent of sales for fiscal 2000.
Excluding amortization and write-down of intangibles of $19.6 million, a
purchased in-process technology charge of $10.6 million, and net merger-related
credits of $17.6 million, operating expenses would have been $1.83 billion, or
35.2 percent of sales for fiscal 1999.
Sales and Marketing. Sales and marketing expenses in fiscal 2000 decreased $66.5
million, or 6.6 percent from fiscal 1999. Sales and marketing expenses as a
percentage of sales increased to 22.0 percent of sales in fiscal 2000 compared
to 19.5 percent of sales in fiscal 1999. The year-over-year decrease in sales
and marketing expenses in absolute dollars was attributable to lower sales force
expenses and reduced spending on marketing programs related to non-strategic
product lines. The year-over-year increase as a percentage of sales was affected
by the sharp decline in sales in the fourth quarter of fiscal 2000, as described
above, partially offset by the lower sales force expenses and reduced spending
on marketing programs related to non-strategic product lines.
Research and Development. Research and development expenses in fiscal 2000
increased $11.7 million or 2.0 percent compared to fiscal 1999. Research and
development expenses as a percentage of sales increased to 13.8 percent of sales
in fiscal 2000 compared to 11.3 percent of sales in fiscal 1999. The
year-over-year increase in research and development expenses in absolute dollars
was primarily due to increased investments in our then-targeted high-growth,
emerging product lines: multi-services access to carrier networks, LAN
telephony, broadband access (primarily cable and DSL), wireless access, home
networking, and internet appliances, partially offset by decreased spending
related to mature product lines such as analog modems. The year-over-year
increase as a percentage of sales was affected by the sharp decline in sales in
the fourth quarter of fiscal 2000, as described above, as well as the increased
investments in our then-targeted emerging growth product lines.
General and Administrative. General and administrative expenses in fiscal 2000
decreased $14.5 million or 6.4 percent from fiscal 1999. As a percentage of
sales, general and administrative expenses increased to 4.9 percent of sales in
fiscal 2000 compared to 4.3 percent of sales in fiscal 1999. The year-over-year
decrease in general and administrative expenses in absolute dollars was
primarily due to lower bad debt expenses, which resulted from an increased rate
of collection of past-due accounts, partially offset by higher spending on
employee incentive programs and higher consulting costs. The year-over-year
increase as a percentage of sales was affected by the sharp decline in sales in
the fourth quarter of fiscal 2000, as described above, as well as the increase
in spending on employee incentive programs and consulting, partially offset by
decreased bad debt expenses.
Purchased In-Process Technology. During fiscal 2000, we recorded a charge for
purchased in-process technology of approximately $13.5 million associated with
the acquisitions of certain assets of Call Technologies and LANSource. We
continued to develop technologies that were in process at Call Technologies and
LANSource, as of the dates of the acquisitions.
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Merger-Related Credits, Net. During fiscal 2000, we recorded net pre-tax
merger-related credits of approximately $2.3 million. This net amount reflects
adjustments to estimates for previously recorded merger and restructuring
charges.
Restructuring Charges. Dur