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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________
Commission File Number: 1-12491
LARSCOM INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 94-2362692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1845 MCCANDLESS DRIVE
MILPITAS, CA 95035
(408) 941-4000
(Address of principal executive offices, zip code and telephone number)
4600 PATRICK HENRY DRIVE
SANTA CLARA, CA 95054
(Former Address)
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
--- ---
The number of the registrant's shares outstanding as of October 31, 1997, was
8,137,287 of Class A Common Stock and 10,000,000 of Class B Common Stock.
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LARSCOM INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION............................................ 3
ITEM I: FINANCIAL STATEMENTS............................................. 3
CONDENSED CONSOLIDATED BALANCE SHEETS................................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS......................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS......................... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.................... 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 8
PART II: OTHER INFORMATION............................................... 16
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:............................... 16
A: Exhibits............................................................. 16
B: Form 8-K............................................................. 16
SIGNATURES.............................................................. 17
2
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PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
LARSCOM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1997 1996
------------- ------------
Current assets: (UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 25,530 $ 46,403
Short-term investments 23,732 -
Accounts receivable, net 11,299 9,478
Inventories 11,483 8,654
Deferred income taxes and income taxes receivable 2,589 2,026
Prepaid expenses and other assets 3,240 722
--------- ---------
Total current assets 77,873 67,283
Property and equipment, net 6,313 5,530
Other assets 216 230
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Total assets $ 84,402 $ 73,043
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,270 $ 2,569
Accrued expenses and other current liabilities 7,217 7,441
Due to Axel Johnson Inc. 597 1,329
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Total current liabilities 12,084 11,339
--------- ---------
Deferred income taxes - 259
--------- ---------
Stockholders' equity:
Class A Common Stock 81 70
Class B Common Stock 100 107
Additional paid-in capital 80,929 76,392
Accumulated deficit (8,792) (15,124)
--------- ---------
Total stockholders' equity 72,318 61,445
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Total liabilities and stockholders' equity $ 84,402 $ 73,043
--------- ---------
--------- ---------
</TABLE>
3
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LARSCOM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $ 19,336 $ 18,357 $ 54,894 $ 48,981
Cost of revenues 8,235 8,201 23,815 21,961
--------- --------- --------- ---------
Gross profit 11,101 10,156 31,079 27,020
--------- --------- --------- ---------
Operating expenses:
Research and development 2,436 2,101 7,052 5,732
Selling, general and administrative 5,220 5,223 15,411 14,132
--------- --------- --------- ---------
Total operating expenses 7,656 7,324 22,463 19,864
--------- --------- --------- ---------
Income from operations 3,445 2,832 8,616 7,156
Interest expense charged by Axel Johnson Inc. (19) (195) (56) (195)
Interest income 413 - 1,333 -
--------- --------- --------- ---------
Income before income taxes 3,839 2,637 9,893 6,961
Provision for income taxes 1,382 1,083 3,561 2,860
--------- --------- --------- ---------
Net income $ 2,457 $ 1,554 $ 6,332 $ 4,101
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share (1) $ 0.14 $ 0.11 $ 0.35 $ 0.29
Shares used to compute net income per share 18,098 14,193 18,058 14,193
</TABLE>
(1) Net income per share for the three and nine months ended September 30,
1996 is supplemental and is calculated as described in Note 1 of the Notes to
the Consolidated Financial Statements included under Item 8 of the Company's
Report on Form 10-K for the year ended December 31, 1996.
4
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LARSCOM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,332 $ 4,101
Depreciation and amortization 1,796 1,818
Loss on disposal of property and equipment 198 -
Net increase in working capital (6,251) (5,587)
---------- ----------
Net cash provided by operating activities 2,075 332
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments (191,944) -
Maturities of short-term investments 119,110 -
Sales of short-term investments 49,102 -
Purchase of property and equipment (2,719) (2,081)
---------- ----------
Net cash used by investing activities (26,451) (2,081)
---------- ----------
Cash flows from financing activities:
(Repayments to) advances from Axel Johnson Inc. (732) 1,750
Proceeds from issuance of Class A Common Stock 4,235 -
---------- ----------
Net cash provided by financing activities 3,503 1,750
---------- ----------
(Decrease) increase in cash and cash equivalents (20,873) 1
Cash and cash equivalents at beginning of period 46,403 30
---------- ----------
Cash and cash equivalents at end of period $ 25,530 $ 31
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information
Interest paid $ 56 $ 195
---------- ----------
Income taxes paid $ 4,368 $ 3,297
---------- ----------
Supplemental disclosure of non-cash financing
activities
Shares issued in connection with cancellation
of the Company's Long-Term Incentive Plans $ 306 $ -
---------- ----------
Dividend declared $ - $ 25,000
---------- ----------
</TABLE>
5
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LARSCOM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION:
The condensed consolidated financial statements for the three and nine
months ended September 30, 1997 and 1996 presented in this Quarterly Report
on Form 10-Q are unaudited. In the opinion of management these statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the results for the interim periods
presented. The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Annual Report on Form 10-K of Larscom Incorporated
(the "Company") for the year ended December 31, 1996. The results of
operations for the first nine months of 1997 are not necessarily indicative
of the results to be expected for the full year or any future period.
NOTE 2--INVENTORIES:
Inventories consist of the following:
September 30, December 31,
------------- ------------
1997 1996
------------- ------------
(In thousands)
Inventories:
Raw materials $ 2,463 $ 1,508
Work in process 2,724 1,823
Finished goods 6,296 5,323
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$ 11,483 $ 8,654
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------------- ------------
NOTE 3--COMMON STOCK OFFERING:
In December 1996, the Company completed an initial public offering of
7,000,000 shares of Class A Common Stock at a price of $12 per share, of
which 5,800,000 shares were sold by the Company and 1,200,000 shares were
sold by Axel Johnson Inc. After deducting the underwriting discount of
$4,872,000 and issuance costs of $1,449,000, the Company received net
proceeds of $63,279,000 in December 1996. Subsequent to December 31, 1996,
the underwriters exercised their over-allotment option and sold an additional
1,050,000 shares, of which 350,000 were sold by the Company and 700,000 were
sold by Axel Johnson Inc. Net proceeds to the Company in January 1997 were
$3,827,000 after deducting the underwriting discount of $294,000 and
additional issuance costs of $79,000.
In March 1997, 25,518 shares of Class A Common Stock were issued to
certain employees at a cost of $12 per share in connection with the
cancellation of the Company's Long-Term Incentive Plans. An additional
61,769 shares of Class A Common Stock were issued in August 1997 for
consideration of $408,000 to employees under the Company's Employee Stock
Purchase Plan.
NOTE 4--COMMITMENTS AND CONTINGENCIES:
There are potential unasserted claims against the Company relating to
pricing deficiencies under two product supply contracts subject to General
Services Administration ("GSA") regulations. Management has completed an
assessment of its performance under the GSA contracts, assessed its potential
liability with the assistance of the Company's outside experts and legal
counsel, and voluntarily disclosed the identified pricing deficiencies to the
GSA contracting officer responsible for the Company's contracts. Although the
ultimate resolution of this matter potentially could involve purchase price
rebates and associated legal, audit and other costs of up to an aggregate of
approximately $1,300,000 or more,
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LARSCOM CORPORATION
management believes, after consultation with its outside experts and legal
counsel, that the Company's exposure for this matter is not likely to exceed
$800,000, which includes estimated purchase price rebates and associated
legal, audit and other costs, and prior to December 31, 1996, the Company
established a reserve for this amount less an initial payment of $268,000
made in December 1996. In August 1997 the Company was notified by the GSA
that they were commencing the audit of certain GSA contracts. This audit
commenced in September 1997 but has not yet been finalized. In management's
opinion, the ultimate resolution of this matter will not have a material
adverse effect on the Company's financial position or results of operations.
In its distribution agreements, the Company typically agrees to
indemnify its customers for any expenses or liabilities resulting from
claimed infringements of patents, trademarks or copyrights of third parties.
NOTE 5--NEW LEASE COMMITMENTS:
On March 20, 1997, the Company entered into an operating lease under
which the Company agreed to pay approximately $164,000 per month for 119,000
square feet of space located in Milpitas, California, near to the Company's
previous facilities in Santa Clara, California. The lease commenced in
September 1997 and lasts for seven years. The Company has an option to
extend the lease for a period of five years subject to certain conditions.
These facilities have replaced the Company's previous facilities in Santa
Clara. Of the 119,000 square feet the Company is currently occupying 80,000
square feet of the new building and has entered into a sublease for a portion
of the remaining space.
NOTE 6--SHORT-TERM INVESTMENTS
The Company accounts for its short-term investments in accordance with
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, the Company determines the appropriate
classification of its investments in debt and equity securities at the time
of purchase and reevaluates such determinations at each balance sheet date.
All of the securities owned by the Company, which consist primarily of fixed
and variable rate municipal debt securities, have been classified as
available-for-sale. Due to the short-term nature of such securities, fair
value approximates carrying amount. Gains and losses on sales of
available-for-sale securities have been immaterial.
7
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6
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LARSCOM CORPORATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-Q THAT ARE NOT PURELY
HISTORICAL ARE FORWARD- LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING THE FUTURE.
ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON
INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY
ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE BUT ARE NOT LIMITED TO THE
FACTORS SET FORTH IN THE COMPANY'S 1996 ANNUAL REPORT ON FORM 10-K AND THIS
QUARTERLY REPORT ON FORM 10-Q .
RESULTS OF OPERATIONS
The Company's products can be split into two main categories - broadband
and digital access, based upon the bandwidth of the products supplied. The
Company sells these products primarily through a direct sales force and to a
lesser extent through a variety of resellers including original equipment
manufacturers, value added resellers, system integrators and distributors.
An increasing proportion of the Company's sales are made to network service
providers ("NSPs"). The other significant trend in revenues is that
broadband product sales represent an increasing percentage of total revenues
although this trend did not continue in the third quarter of 1997.
REVENUES. Revenues were $19,336,000 and $54,894,000 for the three and
nine months ended September 30, 1997, respectively, representing increases of
5% and 12% over revenues of $18,357,000 and $48,981,000 for the comparable
periods in 1996. During the three months ended September 30, 1997, broadband
product sales increased to 36% of total revenues as compared to 32% in the
comparable period of 1996. During the nine months ended September 30, 1997,
broadband product sales were 36% of total revenues, as compared to 27% of
total revenues in the nine months ended September 30, 1996. The increases in
broadband product sales were due primarily to higher unit sales to NSPs.
Average selling prices have decreased slightly in some product lines,
primarily in the digital access product family.
GROSS PROFIT. As a percentage of revenues, gross profit for the three
months ended September 30, 1997 increased to 57% as compared to 55% in the
comparable period in 1996. Gross profit for the nine months ended September
30, 1997 increased to 57% as compared to 55% in the comparable period in
1996. This increase was primarily the result of increased sales of higher
margin broadband products partially offset by lower average unit selling
prices of digital access products. Costs per unit remained relatively stable
for digital access products but decreased slightly for broadband products due
to the Company's ability to purchase certain components overseas at lower
costs, as well as economies of scale associated with higher production levels.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
16% to $2,436,000 in the three months ended September 30, 1997 from
$2,101,000 in the comparable period of 1996. During the first nine months of
1997 research and development expenses increased 23% from $5,732,000 to
$7,052,000. The growth in research and development expenses in the 1997
periods as compared to 1996 was due primarily to increased headcount and
therefore higher personnel related costs associated with the development of
the Company's broadband product line. The Company expects that research and
development expenses will continue to increase in absolute dollars in the
future, but may vary as a percentage of sales.
8
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LARSCOM CORPORATION
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses decreased slightly to $5,220,000 for the three
months ended September 30, 1997 as compared to $5,223,000 in the comparable
1996 period. During the first nine months of 1997, selling, general and
administrative expenses increased 9% to $15,411,000 from $14,132,000 during
the comparable period in 1996. The increase in absolute dollars for the
first nine months of 1997 was due to additional headcount and personnel costs
associated with expansion of the Company's sales and marketing resources, as
well as higher selling expenses, associated with higher revenues. The
Company anticipates that selling, general and administrative expenses will
increase in absolute dollars in the future as a result of the Company's
continued investment in the expansion of its sales, service and support
organizations, and the development of its distribution channels (particularly
outside the United States) as well as the legal, accounting, human resources
and administrative expenses associated with being a public company.
Selling, general and administrative expenses include charges from Axel
Johnson Inc. ("Axel Johnson") for legal, accounting, tax, treasury and
administrative services of $468,000 and $395,000 during the nine months ended
September 30, 1997 and 1996, respectively.
INTEREST EXPENSE CHARGED BY AXEL JOHNSON. Interest expense for the nine
months ended September 30, 1997, includes a commitment fee for the unused
portion of the line of credit available under the Credit Agreement that the
Company entered into with Axel Johnson in December 1996. See Liquidity and
Capital Resources for more details. Interest expense incurred during 1996
relates to interest on a note payable to Axel Johnson of $25,000,000 which
was subsequently paid with the proceeds of the Company's common stock
offering in December 1996.
INTEREST INCOME. Interest income of $413,000 and $1,333,000 for the
three and nine months ended September 30, 1997, respectively, represents
principally federal income tax exempt interest from the Company's cash
equivalents and short-term investments.
PROVISION FOR INCOME TAXES. The 1997 rate of 36% is higher than the
federal statutory rate of 34% primarily due to state taxes which were offset
by non-taxable interest income received on the Company's cash equivalents and
short-term investments. The effective rate of 41% for the nine months ended
September 30, 1996 differed from the federal statutory rate of 34% primarily
as a result of state taxes and to a lesser extent non-deductible goodwill
amortization which were partially offset by research and development tax
credits. The tax rate of 36% for the nine months ended September 30, 1997
was lower than the rate for the same period in 1996, primarily as a result of
non-taxable interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated $2,075,000 of cash during
the nine months ended September 30, 1997, primarily due to net income and
increases in accounts payable, offset in part by increases in accounts
receivable, inventory and non-reimbursable payments made related to leasehold
improvements on the Company's new building and decreases in accrued expenses
and other current liabilities.
In December 1996, the Company sold 5,800,000 shares of Class A Common
Stock at a price per share of $12 in its initial public offering ("IPO").
The net proceeds of the IPO were $63,279,000 after issuance costs of
$1,449,000 and the underwriting discount of $4,872,000, part of which was
used to repay a $25,000,000 note payable to Axel Johnson, Inc.. In January
1997, the underwriters exercised their option to sell an additional 350,000
shares and the Company received net proceeds of $3,827,000 after deducting
the underwriting discount of $294,000 and additional issuance costs of
$79,000.
Upon consummation of the IPO, the Company entered into a credit agreement
with Axel Johnson (the "Credit Agreement") under which the Company has
available a revolving line of credit of $15,000,000. As of September 30, 1997,
there were no amounts outstanding under this line of credit. The Credit
Agreement contains various representations, covenants and events of default
typical for financing a business of a
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LARSCOM CORPORATION
similar size and nature. The events of default under the Credit Agreement
include any failure to pay punctually any principal or interest due under the
Credit Agreement, any act of insolvency of the Company and any sale by the
Company of all or substantially all of its assets. Upon an event of default,
any borrowings under the line of credit become payable in full.
On March 20, 1997, the Company entered into an operating lease under
which the Company agreed to pay approximately $164,000 per month for 119,000
square feet of space located in Milpitas, California, near to the Company's
previous facilities in Santa Clara, California. The lease commenced in
September 1997 and lasts for seven years. The Company has an option to
extend the lease for a period of five years subject to certain conditions.
These facilities have replaced the Company's previous facilities in Santa
Clara. Of the 119,000 square feet the Company is currently occupying 80,000
square feet of the new building and has entered into a sublease for a portion
of the remaining space.
Capital expenditures in the first nine months of 1997 were $2,719,000,
and the Company expects approximately $1,800,000 of additional capital
expenditures in the balance of the year. As of September 30, 1997, the
Company's working capital was $65,789,000. The Company believes that working
capital, together with the Company's line of credit and funds generated from
operations will provide adequate liquidity to meet the Company's operating
and capital requirements for at least the next twelve months. However, there
can be no assurance that future events, such as the potential use of cash to
fund acquisitions, will not require the Company to seek additional capital at
an earlier date or, if so required, that adequate capital will be available
on terms acceptable to the Company, if at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 128 "Earnings per
Share" which establishes a different method of computing net income per share
than is currently required under the provisions of Accounting Principles
Board Opinion ("APB") No. 15. Under SFAS No. 128, the Company will be
required to present both basic net income per share and diluted net income
per share. Basic net income per share and diluted net income per share are
expected to be the same as the earnings per share that are currently
disclosed under APB No. 15. The Company plans to adopt SFAS No. 128 in its
fiscal quarter ending December 31, 1997 and at that time all historical net
income per share data presented will be restated to conform to the provisions
of SFAS No. 128.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130"). This statement is effective for the Company's fiscal year
ending June 30, 1999. The statement establishes presentation and disclosure
requirements for reporting comprehensive income. Comprehensive income
includes charges or credits to equity that are not the result of transactions
with owners. The Company plans to adopt the disclosure requirements and
report comprehensive income as part of the Consolidated Statements of
Shareholders' Equity as required under SFAS 130, and expects there to be no
material impact on the Company's financial position and results of operations
as a result of the adoption of this new accounting standard.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises the
required information regarding the reporting of operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company will adopt SFAS 131
beginning in fiscal 1999 and does not expect such adoption to have a material
effect on the consolidated financial statements.
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LARSCOM CORPORATION
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
CERTAIN OF THE STATEMENTS ABOVE ARE FORWARD-LOOKING STATEMENTS. IN
ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE ORAL FORWARD-LOOKING
STATEMENTS. THE FOLLOWING ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN ANY SUCH FORWARD-LOOKING
STATEMENTS.
CUSTOMER CONCENTRATION. The Company believes that its relationships
with large customers, particularly NSPs and telecommunication companies, will
be critical to its future success. A small number of customers have
accounted for a majority of the Company's revenues in each of the past
several years. During the nine months ended September 30, 1997, MCI and
IBM/Advantis accounted for 26% and 15% of revenue, respectively. During the
nine months ended September 30, 1996, the same two customers accounted for
20% and 14% of revenue, respectively. None of the Company's customers is
contractually obliged to purchase any quantity of products in any particular
period, and product sales to major customers have varied widely from quarter
to quarter and year to year. There can be no assurance that the Company's
current customers will continue to place orders with the Company, that orders
from existing customers will continue at the levels of previous periods or
that the Company will be able to obtain orders from new customers. Loss of,
or a material reduction in orders by, one or more of the Company's major
customers could have a material adverse effect on the Company's business and
operating results.
DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS AND PRODUCTS UNDER
DEVELOPMENT. The Company's future operating results are highly dependent on
continuing market acceptance of the Company's newest products, particularly
in the broadband area. Broadband product sales represented 36% of revenues
during the first nine months of 1997 and 27% of revenues during the same
period of 1996. Broadband product sales are expected to continue to increase
as a percentage of overall revenues in the longer term although the
proportion of broadband sales to total revenues may vary from quarter to
quarter. There can be no assurance that these products or any future
products will continue to achieve widespread market acceptance. In addition,
the Company has in the past experienced delays in the development of new
products and the enhancement of existing products, and such delays may occur
in the future. The Company's potential inability to develop and introduce
new products or versions in a timely manner, due to resource constraints or
technological or other reasons, or to achieve timely and widespread market
acceptance of its new products or releases, could have a material adverse
effect on the Company's business and operating results.
DEPENDENCE ON COMPONENT AVAILABILITY AND KEY SUPPLIERS. On-time
delivery of the Company's products depends upon the availability of
components and subsystems used in its products. The Company depends upon its
suppliers to manufacture, assemble and deliver components in a timely and
satisfactory manner. The Company obtains components and licenses certain
embedded software from numerous single sources. Other than components and
software supplied by Waferscale, Vicor and PMC-Sierra, the Company believes
it would be able to develop alternative sources for components and software
used in its products without incurring substantial additional costs.
However, there can be no assurance that the inability of the Company to
develop alternative sources, if required, an inability by such suppliers to
meet the Company's demand or a prolonged interruption in supply or a
significant price increase of one or more components or software will not
occur, each of which could have a material adverse effect on the Company's
business and operating results. The Company generally does not have any
long-term contracts with such suppliers. There can be no assurance that
these suppliers will continue to be able and willing to meet the Company's
requirements. Any significant interruption in the supply or degradation in
the quality of any such item could have a material adverse effect on the
Company's business and operating results.
The Company uses internal forecasts to determine its general materials
and components requirements. Lead times for materials and components may
vary significantly, and depend on factors such as specific supplier
performance, contract terms and general market demand for components. If
orders vary from forecasts, the Company may experience excess or inadequate
inventory of certain materials and components. In addition, purchase orders
from the Company's customers frequently require delivery quickly after
placement of the order. The Company maintains a supply of finished goods
inventories at its
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LARSCOM CORPORATION
manufacturing facility, as well as safety stocks of critical components, in
order to respond quickly to customer needs. However, there can be no
assurance that interrupted or delayed supplies of key components will not
occur which could have a material adverse effect on the Company's business
and operating results. From time to time, the Company has experienced
shortages and supplier allocations of certain components, resulting in delays
in fulfillment of customer orders. Such shortages and allocations could have
a material adverse effect on customer order levels and the Company's business
and operating results.
RAPID TECHNOLOGICAL CHANGE. The telecommunications equipment industry
is characterized by rapidly changing technologies and frequent new product
introductions. The rapid development of new technologies increases the risk
that current or new competitors could develop products that would reduce the
competitiveness of the Company's products. The Company's success will depend
to a substantial degree upon its ability to respond to changes in technology
and customer requirements. This will require the timely selection,
development and marketing of new products and enhancements on a cost
effective basis. There can be no assurance that the Company will be
successful in developing, introducing or managing the transition to new or
enhanced products or that any such products will be responsive to
technological changes or will gain market acceptance. If the Company were to
be unsuccessful or to incur significant delays in developing and introducing
such new products or enhancements, the Company's business and operating
results could be materially adversely affected.
LIMITED INDEPENDENT OPERATING HISTORY. The Company was a wholly owned
subsidiary of Axel Johnson from 1987 until the date of the Company's IPO in
December 1996 and, accordingly, has had limited independent operating
history. As a result the Company has been and will continue to be required to
further develop financial, management, administrative and other resources
previously provided by Axel Johnson which are necessary to operate
successfully as an independent public company. Although the Company and Axel
Johnson have entered into several agreements that are intended to ease the
Company's transition to being an independent public company, there can be no
assurance that the Company will be able to manage this transition or to
develop these independent resources successfully. The Company has access,
subject to certain conditions, to a $15,000,000 credit facility provided by
Axel Johnson, but there can be no assurance that alternative sources of
financing will be available upon the expiration or termination of such
facility or that additional sources of funding will be available on terms
favorable to the Company if the Company's borrowing requirements exceed the
amount of the facility.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; ABSENCE OF SIGNIFICANT
BACKLOG. The Company's operating results have fluctuated significantly in
the past and may fluctuate in the future on a quarterly and annual basis as a
result of a number of factors, many of which are beyond the Company's
control. In 1995 and 1996, the Company experienced a shift in the purchasing
behavior of its customers which resulted in higher second and third quarter
sales relative to fourth quarter sales. These purchasing patterns and
resulting cyclicality could continue in the future. Moreover, the Company's
sales historically have been concentrated in a small number of customers.
Therefore, sales for a given quarter may depend to a significant degree upon
product shipments to a limited number of customers. Sales to individual
large customers are often related to the customer's specific equipment
deployment projects, the timing of which is subject to change on limited
notice. The Company has experienced both acceleration and slowdown in orders
related to such projects, causing changes in the sales level of a given
quarter relative to both the preceding and subsequent quarters.
For example, since 1994, sales to MCI, IBM/Advantis, AT&T and other
current customers have occasionally varied by $1,000,000 or more from quarter
to quarter. Since most of the Company's sales are in the form of large
orders with short delivery times to a limited number of customers, the
Company's ability to predict revenues is limited. In addition, announcements
by the Company or its competitors of new products and technologies could
cause customers to defer purchases of the Company's existing products. In
the event that anticipated orders from major customers fail to materialize,
or delivery schedules are deferred or canceled as a result of the above
factors or other unanticipated factors, the Company's business and operating
results could be materially adversely affected. As a result, the Company
12
<PAGE>
LARSCOM CORPORATION
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as indicative of future
performance.
The Company's backlog at any point in time is typically limited.
Accordingly, sales in any quarter are largely dependent on orders received
during that quarter. Furthermore, the Company's agreements with its
customers typically provide that they may change delivery schedules and
cancel orders within specified timeframes, typically up to 30 days prior to
the scheduled shipment date, without penalty. The Company's customers have
in the past built, and may in the future build, significant inventory to
facilitate more rapid deployment of anticipated major projects or for other
reasons. Decisions by such customers to reduce their inventory levels could
lead to reductions in purchases from the Company. Therefore, customer
decisions to delay delivery, cancel orders or reduce purchases could have a
material adverse effect on the Company's business and operating results.
The Company's gross margin is affected by a number of factors, including
product mix, product pricing, cost of components and manufacturing costs.
For example, a price reduction of a particular product in response to
competitive pressure, which is not offset by a reduction in production costs
or by sales of other products with higher gross margins, would decrease the
Company's overall gross margin and could have a material adverse effect on
the Company's business and operating results. The Company's anticipated
increase in overall spending in future periods to pursue new market
opportunities may also affect operating margins. The Company establishes its
expenditure levels for product development and other operating expenses based
on projected sales levels and margins; however, expenses are relatively
fixed in the short term. Accordingly, if sales are below expectations in any
given period, the adverse impact of the revenue shortfall on the Company's
operating results may be greater due to the Company's inability to adjust
spending in the short term to compensate for the shortfall.
Results in any period could also be affected by changes in market
demand, competitive market conditions, market acceptance of new or existing
products, the cost and availability of components, the mix of the Company's
customer base and sales channels, the mix of products sold, sales promotion
activities by the Company, the Company's ability to expand its sales and
marketing organization effectively, the Company's ability to attract and
retain key technical and managerial employees and general economic
conditions. Due to all of the foregoing factors, the Company's operating
results in one or more future periods may be subject to significant
fluctuations. In the event this results in the Company's financial
performance being below the expectations of public market analysts and
investors, the price of the Company's Class A Common Stock could be
materially adversely affected.
CONTROL BY AXEL JOHNSON. Holders of Class A Common Stock are entitled
to one vote per share and holders of Class B Common Stock are entitled to
four votes per share, subject to adjustment, to preserve the initial voting
ratio. Axel Johnson owns all of the issued and outstanding Class B Common
Stock of the Company. As a result, Axel Johnson has sufficient voting power
to control the direction and policies of the Company, including mergers,
consolidations, the sale of all or substantially all of the assets of the
Company and the election of the Board of Directors of the Company, and to
prevent or cause a change in control of the Company. In addition, the
authorized but unissued capital stock of the Company includes 5,000,000
shares of preferred stock (the "Preferred Stock"). The Board of Directors is
authorized to provide for the issuance of Preferred Stock in one or more
series and to fix the designations, preferences, powers and relative,
participating, optional or other rights and restrictions thereof.
Accordingly, the Company may issue a series of Preferred Stock in the future
that will have preference over both classes of the Company's Common Stock
with respect to the payment of dividends and upon liquidation, dissolution or
winding up or which could otherwise adversely affect holders of the Common
Stock or discourage or make difficult any attempt to obtain control of the
Company. Such control by Axel Johnson, or prospective holders of Preferred
Stock, may have the effect of discouraging certain types of transactions
involving an actual or potential change of control of the Company, including
transactions in which the holders of Class A Common Stock might otherwise
receive a premium for their shares over the then current market price.
13
<PAGE>
LARSCOM CORPORATION
RISKS ASSOCIATED WITH ENTRY INTO INTERNATIONAL MARKETS. The Company has
had minimal sales to international customers to date, and has had little
experience in international markets. The conduct of business outside the
U.S. is subject to certain risks, including unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations, longer payment cycles, greater difficulty in accounts receivable
collection, currency fluctuations, expropriation and potentially adverse tax
consequences. In addition, in order to sell its products internationally,
the Company must meet standards established by telecommunications authorities
in various countries, as well as recommendations of the International
Telecommunications Union. Any delay in obtaining, or the failure to obtain,
certification of its products in countries outside the U.S. could impair the
Company's marketing and sales efforts in such countries, which could have a
material adverse effect on the Company's business and operating results.
MANAGEMENT OF EXPANDING OPERATIONS. The growth in the Company's
business has placed a significant strain on the Company's personnel,
management and other resources, and is expected to continue to do so. To
manage any future expansion effectively, the Company must attract, train,
motivate and manage new employees successfully, integrate new management and
employees into its overall operations and continue to improve its
operational, financial and management systems, particularly as the Company
transitions from services provided to date by Axel Johnson. Availability of
qualified sales and technical personnel is limited, and competition for
experienced sales and technical personnel in the telecommunications
equipment industry is intense. Moreover, the Company expects to increase
significantly the size of its domestic and international sales support staff
and expand the scope of its sales and marketing activities. The Company's
failure to manage any expansion effectively, including the above factors,
could have a material adverse effect on the Company's business and operating
results.
COMPLIANCE WITH REGULATIONS AND EVOLVING INDUSTRY STANDARDS. The market
for the Company's products is characterized by the need to meet a significant
number of communications regulations and standards, some of which are
evolving as new technologies are deployed. In the U.S., the Company's
products must comply with various regulations defined by the Federal
Communications Commission and standards established by Underwriters
Laboratories, as well as industry standards established by various
organizations domestically and overseas. As standards for new services such
as ATM evolve, the Company may be required to modify its existing products or
develop and support new versions of its products. The failure of the
Company's products to comply, or delays in compliance, with the various
existing and evolving industry standards could delay introduction of the
Company's products, which in turn could have a material adverse effect on the
Company's business and operating results.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. An important element of
the Company's strategy is to acquire businesses that would complement its
existing product offerings, augment its market coverage, enhance its
technological capabilities or offer growth opportunities. Future
acquisitions by the Company could result in potentially dilutive issuance of
equity securities and/or the incurrence of debt and the assumption of
contingent liabilities, any of which could have a material adverse effect on
the Company's business and operating results and/or the price of the
Company's Class A Common Stock. In this regard, as a result of the ownership
interest of Axel Johnson in the Company, the Company will not be able to use
pooling of interests accounting for any future acquisitions. Accordingly,
such acquisitions could result in amortization of goodwill and other charges
(including the immediate write-off of purchased research and development in
process) typically associated with purchase accounting. Acquisitions entail
numerous risks, including difficulties in the assimilation of acquired
operations, technologies and products, diversion of management's attention to
other business concerns, risks of entering markets in which the Company has
limited or no prior experience and potential loss of key employees of
acquired organizations. The Company's management has limited prior
experience in assimilating acquired organizations. No assurance can be given
as to the ability of the Company to successfully integrate any businesses,
products, technologies or personnel of any company that might be acquired in
the future, and the failure of the Company to do so could have a material
adverse effect on the Company's business and operating results.
14
<PAGE>
LARSCOM CORPORATION
LIMITED PROTECTION OF INTELLECTUAL PROPERTY; PROPRIETARY INFORMATION.
The Company relies upon a combination of trade secrets, contractual
restrictions, copyrights, trademarks and patents to establish and protect
proprietary rights in its products and technologies. Although the Company
has been issued only one U.S. patent to date, it believes that the success of
its business depends primarily on its proprietary technology, information,
processes and know-how, rather than patents. Much of the Company's
proprietary information and technology is not patented and may not be
patentable. There can be no assurance that the Company will be able to
protect its technology or that competitors will not be able to develop
similar technology independently. The Company has entered into
confidentiality and invention assignment agreements with all of its
employees, and enters into non-disclosure agreements with its suppliers,
distributors and appropriate customers so as to limit access to and
disclosure of its proprietary information. There can be no assurance that
these statutory and contractual arrangements will deter misappropriation of
the Company's technologies or discourage independent third-party development
of similar technologies. In the event such arrangements are insufficient,
the Company's business and operating results could be materially adversely
affected.
15
<PAGE>
LARSCOM CORPORATION
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K:
A: Exhibits:
11.1 Statements Regarding Computation of Net Income Per Share
27 Financial Data Schedule
B: Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
September 30, 1997.
16
<PAGE>
LARSCOM CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
LARSCOM INCORPORATED
Date November 12, 1997 By /s/ Bruce D. Horn
--------------------- -------------------------------------------
Bruce D. Horn
Vice President, Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer)
17
<PAGE>
LARSCOM CORPORATION
EXHIBIT 11.1
LARSCOM INCORPORATED
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
September 30, September 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net income $ 2,457 $ 1,554 $ 6,332 $ 4,101
--------- --------- --------- ---------
Weighted average Class A and B
Common Stock outstanding 18,096 14,193 18,058 14,193
Weighted average common stock
equivalents related to stock options
issued to employees 2 - - -
--------- --------- --------- ---------
Shares used in per share calculations 18,098 14,193 18,058 14,193
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share (1) $ 0.14 $ 0.11 $ 0.35 $ 0.29
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
(1) Net income per share for the three and nine months ended September 30,
1996 is supplemental and is calculated as described in Note 1 of the Notes to
the Consolidated Financial Statements included under Item 8 of the Company's
Report on Form 10-K for the year ended December 31, 1996.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LARSCOM INCORPORATED FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 25530
<SECURITIES> 23722
<RECEIVABLES> 11428
<ALLOWANCES> 129
<INVENTORY> 11483
<CURRENT-ASSETS> 77873
<PP&E> 15294
<DEPRECIATION> 8981
<TOTAL-ASSETS> 84402
<CURRENT-LIABILITIES> 12084
<BONDS> 0
0
0
<COMMON> 181
<OTHER-SE> 72137
<TOTAL-LIABILITY-AND-EQUITY> 84402
<SALES> 54894
<TOTAL-REVENUES> 54894
<CGS> 23815
<TOTAL-COSTS> 22463
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1277)
<INCOME-PRETAX> 9893
<INCOME-TAX> 3561
<INCOME-CONTINUING> 6332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6332
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
