<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
LARSCOM INCORPORATED
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pur-
suant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
LARSCOM INCORPORATED
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 19, 1997
TO THE STOCKHOLDERS OF LARSCOM INCORPORATED:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of LARSCOM
INCORPORATED, a Delaware corporation (the "Company"), will be held at 2:00 p.m.,
local time, on Monday, May 19, 1997, at The Westin Hotel, 5101 Great America
Parkway, Santa Clara, California 95054, for the following purposes:
1. To elect six (6) directors to serve until the next Annual Meeting of
Stockholders or until their successors are elected and qualified.
2. To ratify the appointment of Price Waterhouse LLP as independent
auditors of the Company for the fiscal year ending December 31, 1997.
3. To transact such other business as may properly come before the meeting
or any postponements or adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only stockholders of record at the close of
business on April 7, 1997 are entitled to notice of and to vote at the Annual
Meeting.
All stockholders are cordially invited to attend the Annual Meeting in
person. However, to ensure your representation at the meeting, you are urged to
mark, sign, date and return the enclosed proxy card as promptly as possible in
the postage prepaid envelope enclosed for that purpose. You may revoke your
proxy in the manner described in the accompanying proxy statement at any time
before it has been voted at the annual meeting. Any stockholder attending the
Annual Meeting may vote in person even if he or she has returned a proxy.
By Order of the Board of Directors,
Signe S. Gates
SECRETARY
Santa Clara, California
April 22, 1997
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. PLEASE
READ THE ATTACHED PROXY STATEMENT CAREFULLY, AND COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE AND RETURN IT IN THE POSTAGE PREPAID
ENVELOPE.
<PAGE>
LARSCOM INCORPORATED
PROXY STATEMENT FOR THE
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 19, 1997
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
LARSCOM INCORPORATED (the "Company") for use at the Annual Meeting of
Stockholders to be held at 2:00 p.m. on Monday May 19, 1997, or at any
adjournment or postponement thereof, for the purposes set forth herein and in
the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting
will be held at The Westin Hotel, 5101 Great America Parkway, Santa Clara,
California 95054. The telephone number at that location is (408) 986-0700. When
proxies are properly dated, executed and returned, the shares they represent
will be voted at the meeting in accordance with the instructions of the
stockholder. If no specific instructions are given, the shares will be voted for
the election of the six nominees for director set forth herein, for the
ratification of the appointment of Price Waterhouse LLP as independent auditors
as set forth herein and at the discretion of the proxy holders upon such other
business as may properly come before the Annual Meeting or any adjournment or
postponement thereof.
These proxy solicitation materials and the Annual Report to Stockholders for
the fiscal year ended December 31, 1996, including financial statements, were
first mailed on or about April 22, 1997 to all stockholders entitled to vote at
the meeting.
RECORD DATE AND VOTING SECURITIES
Stockholders of record at the close of business on April 7, 1997 (the
"Record Date"), are entitled to notice of and to vote at the Annual Meeting. At
the Record Date, 8,075,518 shares of the Company's Class A Common Stock, $.01
par value, were issued and outstanding and 10,000,000 shares of the Company's
Class B Common Stock, $.01 par value, were issued and outstanding. No shares of
the Company's preferred stock were outstanding.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company at or before the taking of the vote at the
Annual Meeting a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of the Company at or before the taking of the
vote at the Annual Meeting or (iii) attending the Annual Meeting and voting in
person (although attendance at the Annual Meeting will not in and of itself
constitute a revocation of a proxy). Any written notice of revocation or
subsequent proxy should be delivered to Larscom Incorporated at 4600 Patrick
Henry Drive, Santa Clara, California 95054, Attention: Secretary, or
hand-delivered to the Secretary of the Company at or before the taking of the
vote at the Annual Meeting.
VOTING AND SOLICITATION
Except with respect to certain matters with respect to which Delaware law
requires each class to vote as a separate class, the holders of Class A Common
Stock and Class B Common Stock vote as a single class on all matters, with each
share of Class A Common Stock entitled to one vote per share and each share of
Class B Common Stock entitled to four votes per share.
The cost of soliciting proxies will be borne by the Company. Arrangements
will be made with custodians, nominees and fiduciaries for the forwarding of
proxy solicitation materials to beneficial owners of shares held of record by
such custodians, nominees and fiduciaries. The Company will reimburse such
<PAGE>
custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith. The Company has retained The Bank of New York, its
transfer agent, at an estimated cost of $5,000, to assist in the Company's
solicitation of proxies from brokers, nominees, institutions and individuals. In
addition, proxies may be solicited by directors, officers and employees of the
Company in person or by telephone, telegram or other means of communication. No
additional compensation will be paid for such services.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of business at the Annual Meeting is
a majority of the votes eligible to be cast by holders of shares of Class A and
Class B Common Stock issued and outstanding on the Record Date. Shares that are
voted "FOR", "AGAINST" or "WITHHELD FROM" on a matter are treated as being
present at the meeting for purposes of establishing a quorum and are also
treated as shares entitled to vote at the Annual Meeting (the "Votes Cast") with
respect to such matter. An abstention will have the same effect as a vote
against the proposal. Broker non-votes will be counted for the purpose of
determining the presence or absence of a quorum for the transaction of business,
but such non-votes will not be counted for the purpose of determining the number
of Votes Cast with respect to the particular proposal on which the broker has
expressly not voted. Thus, a broker non-vote will not affect the outcome of the
voting on a proposal.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR ANNUAL MEETING FOR FISCAL YEAR
1997
The Company currently intends to hold its 1998 Annual Meeting of
Stockholders in May 1998 and to mail Proxy Statements relating to such meeting
in April 1998. The date by which stockholder proposals must be received by the
Company for inclusion in the Proxy Statement and form of proxy for its 1998
Annual Meeting of Stockholders is December 18, 1997. Such stockholder proposals
should be submitted to Larscom Incorporated at 4600 Patrick Henry Drive, Santa
Clara, California 95054, Attention: Secretary.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
NOMINEES
Pursuant to the Company's Restated Certificate of Incorporation, the
directors are elected to serve until the next annual meeting. The Company
currently has six directors.
Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the six (6) nominees named below. In the event that any
such nominee is unable or declines to serve as a director at the time of the
Annual Meeting, the proxies will be voted for a nominee who shall be designated
by the present Board of Directors to fill the vacancy. In the event that
additional persons are nominated for election as directors, the proxy holders
intend to vote all proxies received by them in such a manner as will assure the
election of as many of the nominees listed below as possible, and, in such
event, the specific nominees to be voted for will be determined by the proxy
holders. The Company is not aware of any nominee who will be unable or will
decline to serve as a director. Each director elected at this Annual Meeting
will serve until the next Annual Meeting of Stockholders or until such
director's successor has been duly elected and qualified.
VOTE REQUIRED
A board of six directors is to be elected at the Annual Meeting of
Stockholders. The directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting entitled to vote
in the election of directors. Unless otherwise instructed, the proxy holders
will vote the proxies received by them for the Company's six nominees named
below, all of whom are presently directors of the Company. If any nominee of the
Company is unable or declines to serve as a director at the time of
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the Annual Meeting of Stockholders, the proxies will be voted for the nominee
designated by the present Board of Directors to fill the vacancy. All nominees
have indicated their willingness to serve. The term of office of each person
elected as a director will continue until the next Annual Meeting of
Stockholders or until a successor has been elected and qualified.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE NOMINEES
LISTED BELOW:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Deborah M. Soon..................... 44 President, Chief Executive Officer and Director of the Company
Paul E. Graf........................ 53 President and Chief Executive Officer of Axel Johnson Inc.
Donald G. Heitt..................... 61 Chairman of the Board of Voysys Corporation
Kevin N. Kalkhoven.................. 52 Chairman of the Board, President and Chief Executive Officer of
Uniphase Corporation
Harvey L. Poppel.................... 59 Retired Managing Director of Broadview Associates L.L.C.
Joseph F. Smorada................... 50 Senior Vice President and Chief Financial Officer of Axel Johnson
Inc.
</TABLE>
Except as set forth below, each nominee has engaged in his or her principal
occupation described above during the past five years. There is no family
relationship among any directors or executive officers of the Company.
DEBORAH M. SOON has served as a Director of the Company since its initial
public offering in December 1996. Ms. Soon has served as President and Chief
Executive Officer of the Company since July 1994. Previously, she served as Vice
President of Marketing and Sales from June 1993 to June 1994, as Vice President
of Marketing from January 1991 to May 1993, and as Director of Marketing from
May 1990 to December 1990. Prior to joining the Company, Ms. Soon held
management positions in engineering, marketing and sales with AT&T, Prime
Computers, BBN Communications Corporation and Data Architects Systems Inc. Ms.
Soon earned a B.A. in Mathematics from the University of California, San Diego
and an M.B.A. from the Harvard Graduate School of Business. She has also
completed special undergraduate studies at Cambridge University in England.
PAUL E. GRAF has served as Chairman of the Board of Directors of the Company
since June 1990. Mr. Graf has served as President and Chief Executive Officer
for Axel Johnson Inc. ("Axel Johnson"). since 1989. Prior to joining Axel
Johnson, Mr. Graf held various senior executive positions with Schroders, a
venture capital company, Conrac Corporation and Texas Instruments. Mr. Graf
earned a B.S. in Electrical Engineering from Rensselaer Polytechnic Institute
and an M.B.A. from Boston University.
DONALD G. HEITT has served as a Director of the Company since its initial
public offering in December 1996. Mr. Heitt has been the Chairman of the Board
of Voysys Corporation since December 1995. From April 1990 to January 1996, Mr.
Heitt was the President and Chief Executive Officer of Voysys Corporation. Prior
to 1990, Mr. Heitt served as Senior Vice President of Telebit Corporation, Vice
President of Sales and Marketing and President of the computer division of
General Automation, Inc., and Vice President of Honeywell Information Systems,
Inc. Mr. Heitt earned a B.B.A. from the University of Iowa.
KEVIN N. KALKHOVEN has served as a Director of the Company since its initial
public offering in December 1996. Mr. Kalkhoven has been the President and Chief
Executive Officer of Uniphase Corporation since 1992. Mr. Kalkhoven joined
Uniphase in January 1992 and has been a member of its board of directors since
February 1992. Prior to joining Uniphase, Mr. Kalkhoven held executive positions
at a variety of software companies. He served as President and Chief Executive
Officer of Demax Software
3
<PAGE>
and as President and Chief Executive Officer of AIDA Corporation. Previously, he
was Vice President of Marketing for the European division of Comshare
Corporation and Group Vice President for its U.S. subsidiary.
HARVEY L. POPPEL has served as a Director of the Company since its initial
public offering in December 1996. Prior to his retirement in December 1996, he
had served as Managing Director of Broadview Associates L.L.C. since January
1985, and President of Poptech, Inc. since 1984. Previously, he was Senior Vice
President, Board Member and Managing Officer of the Information Industry
Practice at Booz, Allen & Hamilton and managed communications software
development at both Western Union and Westinghouse Electric. Mr. Poppel holds an
M.S. and a B.S. from Rensselaer Polytechnic Institute.
JOSEPH F. SMORADA has served as a Director of the Company since June 1992.
Mr. Smorada has served as Senior Vice President and Chief Financial Officer of
Axel Johnson Inc. since April 1992. Prior to joining Axel Johnson Inc., Mr.
Smorada was Senior Vice President and Chief Financial Officer for Lone Star
Industries from September 1988 to April 1992. Prior to 1988, Mr. Smorada also
held senior executive positions with Conrac Corporation and Continental Group,
Inc. Mr. Smorada earned a B.A. in Economics from California University of
Pennsylvania.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held one meeting at which all
directors were in attendance during the fiscal year ended December 31, 1996. The
Board of Directors acted by unanimous written consent in lieu of a meeting 13
times during the fiscal year. The Board of Directors does not have a nominating
committee or any committee performing similar functions.
The Audit Committee, which consisted of Messrs. Kalkhoven, Poppel and
Smorada, held no meetings during fiscal year 1996. This committee is primarily
responsible for approving the services performed by the Company's independent
accountants and for reviewing and evaluating the Company's accounting principles
and its system of internal controls.
The Compensation Committee, which consisted of Messrs. Graf, Heitt and
Poppel, held no meetings during the fiscal year 1996. This committee reviews and
approves the Company's executive compensation policies and approves all stock
option grants.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive compensation for
their services as directors at the rate of $1,500 per quarter and $1,000 per
Board of Directors or committee meeting attended. Non-employee directors were
automatically granted an initial option to purchase 18,000 shares of the
Company's Class A Common Stock and thereafter annual options to purchase 6,000
shares of the Company's Class A Common Stock pursuant to the terms of the
Company's Stock Option Plan for Non-Employee Directors (the "Directors' Plan").
Pursuant to the Directors' Plan, on December 24, 1996, each director was granted
an option to purchase 18,000 shares of Common Stock at an exercise price of
$12.00 per share, which options vest in three equal installments on the date of
each of the three Annual Meetings of Stockholders following the grant.
PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Price Waterhouse LLP, independent
accountants, to audit the consolidated financial statements of the Company for
the fiscal year ending December 31, 1997, and recommends that stockholders vote
for ratification of such appointment. In the event of a negative vote on such
ratification, the Board of Directors will reconsider its selection.
4
<PAGE>
Price Waterhouse LLP has audited the Company's financial statements since
1993. Its representatives are expected to be present at the Annual Meeting with
the opportunity to make a statement if they desire to do so and are expected to
be available to respond to appropriate questions.
VOTE REQUIRED
The affirmative vote of a majority of the Votes Cast will be required to
approve the ratification of the appointment of Price Waterhouse LLP as
independent accountants of the Company for the fiscal year ending December 31,
1997.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" RATIFICATION
OF THE APPOINTMENT OF PRICE WATERHOUSE LLP AS THE COMPANY'S INDEPENDENT
ACCOUNTANTS.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding the compensation of the
Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company (collectively, the "Named Executive
Officers"), whose salary and bonus exceeded $100,000 in the last fiscal year,
for services rendered in all capacities to the Company for the fiscal years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION LONG-TERM SECURITIES ALL OTHER
FISCAL -------------------------- INCENTIVE UNDERLYING COMPENSATION
NAME YEAR SALARY($) BONUS(1)($) PLAN(2)($) OPTIONS(#) ($)
- ----------------------------- ------ --------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Deborah M. Soon ............. 1996 179,159 166,287 401,306 115,000 12,510(5)
President and Chief 1995 154,824 120,000 27,875 -- 8,876(5)
Executive Officer
Jeffrey W. Reedy ............ 1996 108,260 69,966 118,153 35,000 3,420(6)
Vice President, Engineering 1995 100,884 76,308(3) -- -- 3,358(6)
Paul A. Strudwick ........... 1996 109,602 69,817 39,270 35,000 8,879(7)
Vice President, Marketing 1995 101,509 39,664 -- -- 3,654(7)
George M. Donohoe ........... 1996 198,550(4) 60,542 31,946 35,000 11,123(8)
Vice President, Sales 1995 166,822(4) 39,670 -- -- 7,330(8)
William H. Cory ............. 1996 113,503 69,817 36,621 35,000 3,457(9)
Vice President, Operations 1995 109,142 55,105 22,300 -- 3,929(9)
</TABLE>
- ------------------------
(1) Represents bonuses earned in the fiscal year and paid in the following year.
(2) Eligible executives of the Company had historically participated in the Axel
Johnson Inc. Long-Term Incentive Plan (the "Long-Term Incentive Plan"). This
Long-Term Incentive Plan was eliminated for Larscom employees upon
consummation of the Company's initial public offering. The goal of the
Long-Term Incentive Plan was to focus executives on producing superior
long-term returns for the Company over a period longer than one year. The
Compensation Committee of Axel Johnson's Board of Directors selected the
participants and established the performance targets and associated formulas
for awards under the Long-Term Incentive Plan. The length of performance
cycles under the Long-Term Incentive Plan varied from three to five years
and performance awards have historically been paid in cash at the end of
each performance cycle. Certain executives of the Company were also
participants in an alternative long-term incentive plan for the 1994 to 1996
performance cycle based on higher performance levels which, if met, would
have provided up to approximately $300,000 in additional cash in lieu of
both the regular Long-Term Incentive Plan payment and the 1996 Annual
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<PAGE>
Bonus Plan. Upon the discontinuation of the Long-Term Incentive Plan,
participating executives received payments in both cash and stock as
follows:
<TABLE>
<CAPTION>
PAID IN STOCK AT A PRICE OF
PAID IN CASH $12 PER SHARE(3)(*)
-------------- ------------------------------
NAME 1994-1996 PLAN 1995-1999 PLAN 1996-2000 PLAN
- ------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Deborah M. Soon........................................ $ 278,821 $ 74,800 $ 47,685
Jeffrey W. Reedy....................................... 66,884 32,725 18,544
Paul A. Strudwick...................................... -- 23,375 15,895
George M. Donohoe...................................... -- 18,700 13,246
William H. Cory........................................ -- 23,375 13,246
</TABLE>
----------------------------
(*) A total of 23,466 shares were issued in March 1997 to the Named
Executive Officers related to these Plans.
(3) Includes an amount of $21,202 representing a bonus (related to the
acquisition of T3 Technologies) based on a percentage of sales of certain
products.
(4) Includes sales commissions of $108,093 and $84,026 in 1996 and 1995,
respectively.
(5) Includes the matching contribution which the Company made on behalf of the
Named Executive Officer of $5,395 and $3,330 in 1996 and 1995, respectively,
and an automobile allowance of $7,115 and $5,546 paid in 1996 and 1995,
respectively.
(6) Includes the matching contribution which the Company made on behalf of the
Named Executive Officer of $3,420 and $3,358 in 1996 and 1995, respectively.
(7) Includes the matching contribution which the Company made on behalf of the
Named Executive Officer of $3,946 and $3,654 in 1996 and 1995, respectively,
and an automobile allowance of $4,933 paid in 1996.
(8) Includes the matching contribution which the Company made on behalf of the
Named Executive Officer of $3,420 and $3,326 in 1996 and 1995, respectively,
and an automobile allowance of $7,703 and $4,004 paid in 1996 and 1995,
respectively.
(9) Includes the matching contribution which the Company made on behalf of the
Named Executive Officer of $3,457 and $3,929 in 1996 and 1995, respectively.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1996 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
----------------------------------
INDIVIDUAL GRANTS
------------------------------------------------------ ASSUMING ANNUAL USING
NUMBER OF RATES OF STOCK BLACK-
SECURITIES % OF TOTAL PRICE APPRECIATION SCHOLES
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(2) OPTION
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION --------------------- PRICING
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($) MODEL($)(3)
- ---------------------------- ----------- --------------- ----------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Deborah M. Soon............. 115,000 0.9% 12.000 12/24/06 867,875 2,199,365 589,950
Jeffrey W. Reedy............ 35,000 0.3% 12.000 12/24/06 264,136 669,372 179,550
Paul A. Strudwick........... 35,000 0.3% 12.000 12/24/06 264,136 669,372 179,550
George M. Donohoe........... 35,000 0.3% 12.000 12/24/06 264,136 669,372 179,550
William H. Cory............. 35,000 0.3% 12.000 12/24/06 264,136 669,372 179,550
</TABLE>
- ------------------------
(1) Options were granted on December 24, 1996, and have a maximum term of ten
years from the date of grant, subject to earlier termination in the event of
the optionee's cessation of service with the Company. Each option will
become exercisable for 20% of the option shares upon completion of one year
of service measured from the grant date and will become exercisable for the
remaining shares in equal annual installments over the next four years of
service thereafter.
(2) There is no assurance provided to any executive officer or any other holder
of the Company's securities that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% or 10% annual rate of
compounded stock price appreciation or at any other defined level. Unless
the market value of the common stock appreciates over the option term, no
value will be realized from the option grants made to the Named Executive
Officers.
(3) In determining the potential realizable value using the Black-Scholes option
pricing model the following assumptions were made: a risk-free interest rate
of 6.0%, an average expected option life of 4 years, an expected volatility
of 47% and a zero dividend yield.
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
No stock options were exercised by any officers during the fiscal year ended
December 31, 1996 and no options were exercisable at December 31, 1996.
EMPLOYMENT CONTRACTS; SEVERANCE AND CHANGE IN CONTROL ARRANGEMENTS
None of the Company's executive officers has employment, change in control,
or severance agreements with the Company and their employment may be terminated
at any time at the discretion of the Board of Directors.
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<PAGE>
RELATIONSHIP BETWEEN THE COMPANY AND AXEL JOHNSON
Prior to the Company's initial public offering, the Company was a
wholly-owned subsidiary of Axel Johnson. As the sole stockholder, Axel Johnson
was responsible for providing the Company with financial, management,
administrative and other resources. Furthermore, Axel Johnson had maintained
substantial control over the day-to-day operations of the Company.
Services provided to the Company by Axel Johnson included significant
management functions and services, including treasury, accounting, tax, internal
audit, legal, human resources and other support services. The Company was
charged and/or allocated expenses of $527,000, $549,000 and $526,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. The costs of these
services were directly charged and/or allocated using methods that the Company's
management believes are reasonable. Such charges and allocations were not
necessarily indicative of the costs the Company would have incurred to obtain
these services had it been a separate entity. Neither Axel Johnson nor the
Company conducted any study or obtained any estimates from third parties to
determine what the cost of obtaining such services from third parties may have
been.
In August 1996, the Company declared a dividend of $25,000,000 to Axel
Johnson, evidenced by a $25,000,000 promissory note payable to Axel Johnson,
bearing interest at a rate of 7.5% per annum, payable semi-annually. The
principal amount of $25,000,000 together with accrued interest of $630,000 was
repaid using the proceeds from the Company's initial public offering in December
1996.
The Company and Axel Johnson have entered into a number of agreements for
the purpose of defining the ongoing relationship between them. These agreements
were negotiated in the context of a parent-subsidiary relationship and therefore
are not the result of negotiations between independent parties. It is the
intention of the Company and Axel Johnson that such agreements and the
transactions provided for therein maintain certain mutually beneficial
arrangements on overall terms which the Company and Axel Johnson believe to be
at least as favorable to the Company as could have been obtained from unrelated
third parties. However, because of the complexity of the various relationships
between the Company and Axel Johnson, there can be no assurance that the terms
of any individual element of such arrangements are as favorable to the Company
as could have been obtained from unaffiliated third parties. The following
summaries address all material provisions of such agreements. While these
agreements will provide the Company with certain benefits, the Company is only
entitled to the ongoing assistance of Axel Johnson for a limited time and it may
not enjoy benefits from its relationship with Axel Johnson beyond the term of
the agreements.
The Company has adopted a policy that all future agreements between the
Company and Axel Johnson will be on terms that the Company believes are no less
favorable to the Company than the terms the Company believes would be available
from unaffiliated parties. In that regard, the Company intends to follow the
procedures provided by the Delaware General Corporation Law (the "DGCL") which
include a vote to affirm any such future agreements by a majority of the
Company's directors who are not employees of Axel Johnson (even though such
directors may be less than a quorum). There can be no assurance that any such
arrangements or transactions will be the same as that which would be negotiated
between independent parties.
The following is a summary of certain arrangements between the Company and
Axel Johnson that became effective upon consummation of the Company's initial
public offering.
ADMINISTRATIVE SERVICES AGREEMENT
The Company and Axel Johnson entered into an administrative services
agreement (the "Services Agreement") effective since the consummation of the
Company's initial public offering, pursuant to which Axel Johnson continues to
provide limited services to the Company, including treasury, accounting, tax,
internal audit, legal and human resource functions.
8
<PAGE>
Each service under the Services Agreement is provided for a period of two
years. However, to the extent legally permissible, the Company may terminate any
individual service or all services that it receives under the Services Agreement
at any time upon 45 days prior written notice. Otherwise, the Services Agreement
will terminate upon the earlier of, among other things, (i) two years after the
consummation of the Company's initial public offering or (ii) the date as of
which Axel Johnson owns less than 50% of the voting control of the Company;
provided, that if such reduction in voting control results from a sale or
transfer of Class B Common Stock by Axel Johnson, the services will continue to
be provided for a period of 90 days thereafter. Prior to the second anniversary
of the consummation of the Company's initial public offering, the Company may
unilaterally extend the period during which Axel Johnson provides any service
for an additional twelve months by providing Axel Johnson at least 45 prior days
written notice. The Company is obligated to take all steps necessary to obtain
its own administrative and support services prior to the termination of the
Services Agreement.
The Company is obligated to pay fees established in the Services Agreement
based upon the type and amount of services rendered. It is estimated that Axel
Johnson will charge an initial annual fee of approximately $622,000 for all of
the services that it will initially provide under the Services Agreement. In
addition, the Company will reimburse Axel Johnson for any out-of-pocket expenses
it incurs in connection with providing the services.
Axel Johnson has incurred various costs related to services provided to the
Company which have been recharged to the Company. These are as follows:
<TABLE>
<CAPTION>
1996
------------
<S> <C>
Pension and thrift plan............................................... $ 1,028,000
Insurance and workers' compensation................................... 512,000
Property, liability and general insurance............................. 633,000
Initial public offering related costs................................. 401,000
Other charges......................................................... 236,000
</TABLE>
In addition net cash remittances under the previous centralized cash
management system with Axel Johnson were $1,818,000 during 1996.
TAX SHARING AGREEMENT
The Company and Axel Johnson entered into a tax sharing agreement (the "Tax
Sharing Agreement") effective since the consummation of the Company's initial
public offering, pursuant to which the Company has made a payment to Axel
Johnson, of an amount in respect of taxes shown as due attributable to the
operations of the Company on the consolidated federal income tax return filed
along with Axel Johnson for the short period commencing on January 1, 1996 and
ending on the date on which the Company ceased to be a member of the Axel
Johnson consolidated group, December 24, 1996. For the period subsequent to the
initial public offering the Company may file combined state income tax returns
with Axel Johnson or its subsidiaries, pursuant to which appropriate payments
will be made by or to the Company. Axel Johnson will indemnify the Company from
liability for certain matters, including, net of corresponding tax benefits, any
federal, state or local income or other taxes attributable to any affiliated or
combined group of which the Company is a member for any period ending after the
Company's initial public offering. The Company will indemnify Axel Johnson and
its subsidiaries from liability for certain matters, including any federal,
state or local income or other taxes attributable to the operations of the
Company upon consummation of the Company's initial public offering. For periods
subsequent to the Company's initial public offering, the Company will make its
own tax filings, with assistance provided by Axel Johnson under the Services
Agreement.
9
<PAGE>
CREDIT AGREEMENT
The Company and Axel Johnson entered into a credit agreement (the "Credit
Agreement") effective since the consummation of the Company's initial public
offering, pursuant to which Axel Johnson has agreed to provide a revolving
credit/working capital facility (the "Credit Facility") to the Company in an
aggregate amount of up to $15,000,000. The Credit Facility has a term of 24
months, and any loans thereunder will bear interest during each calendar quarter
at a rate per annum equal to the sum of the three-month London Interbank Offered
Rate (LIBOR), as quoted in the Wall Street Journal, plus 2.0% initially on the
date when the initial loan is made, and adjusted thereafter on the first
business day of each calendar quarter. The Company shall pay to Axel Johnson a
commitment fee equal to 0.5% per annum on the average daily unused portion of
the aggregate amount of the loan on each August 31, November 30, February 28 and
May 31 during the term of the Credit Agreement and upon termination of the
Credit Agreement.
The Credit Agreement contains various representations, covenants and events
of default typical for financings of a 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, the line of credit becomes payable in full.
The Credit Agreement also permits Axel Johnson to require, upon 90 days
written notice, a mandatory prepayment of all, or a portion of all outstanding
loans and to terminate the Credit Agreement in the event that Axel Johnson (i)
owns less than the majority of the outstanding voting stock of the Company or
(ii) nominates less than a majority of the persons to be elected to the Board of
Directors of the Company.
No loans are outstanding under the Credit Facility.
10
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee administers all of the Company's various
incentive plans, including the Stock Incentive Plan, the Directors Plan and the
Employee Stock Purchase Plan. The Compensation Committee also recommends to the
Board, salaries, bonuses, benefits and other remuneration payable to the
officers and key employees of the Company. The members of the Compensation
Committee are Donald G. Heitt, Harvey L. Poppel and Paul E. Graf, none of whom
is employed by the Company.
Due to the Company's previous 100% ownership by Axel Johnson Inc., prior to
the Company's initial public offering, no employees, officers or directors owned
shares in the Company or were granted stock options. The Compensation Committee
believes that it is important to align the interests of the Company's executive
officers with those of its stockholders. To that end, the Company has provided
incentives to its executive officers in the following three ways:
1) BASE SALARY. The base salaries of executive officers are initially
determined by evaluating the responsibilities of the position held and the
experience and performance of the individual, with reference to the
competitive marketplace for executive talent, including a comparison of base
salaries for comparable positions based on the Compensation Committee's
periodic industry surveys.
2) CASH BONUS. The Company's executive cash bonus plan is designed to
reward executive officers for the financial performance of the Company
during the year. Under the plan cash bonuses are determined based upon the
Company's achievement against specific financial performance objectives.
This plan emphasizes the Compensation Committee's belief that, when the
Company is successful, the executives should be appropriately compensated.
Conversely, if the Company is not profitable, no bonuses are paid absent
extraordinary circumstances. Each individual executive officer's portion of
the total bonus pool is determined at the start of the year based on the
executives' salary grade.
3) STOCK OPTIONS. The principal equity compensation components of
executive compensation are options granted under the Company's Stock
Incentive Plan. Stock options are generally granted when an executive joins
the Company with additional options granted from time to time for promotions
and performance. The initial option grant to the executive vests over a
period of five years. The Compensation Committee believes that stock
participation provides a method of retention and motivation for the senior
level executives of the Company and also aligns senior management's
objectives with long-term stock price appreciation. Executives are also
eligible to participate in the Employee Stock Purchase Plan pursuant to
which stock may be purchased at 85 percent of the lower of the closing sale
price for the Class A Common Stock as reported on the NASDAQ at the
beginning or end of each six-month offering period, subject to various
limitations on the number of shares that can be purchased.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company is not aware of any interlocks or insider participation required
to be disclosed under applicable rules of the Securities and Exchange Commission
(the "SEC").
11
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total return to stockholders of
the Company's Class A Common Stock from December 24, 1996 through March 31, 1997
to the cumulative total return over such period of (i) the NASDAQ Composite
Index and (ii) the NASDAQ Telecommunications Index. The information contained in
the performance graph shall not be deemed to be "soliciting material" or to be
"filed" with the SEC, nor shall such information be incorporated by reference
into any future filing under the Securities Act or the Exchange Act, except to
the extent that the Company specifically incorporates it by reference into such
filing.
The graph assumes that $100 was invested on December 24, 1996 in the
Company's Class A Common Stock at the initial public offering price of $12.00
per share in each index, and that all dividends were reinvested. No dividends
have been declared or paid on the Company's Class A Common Stock. Stockholder
returns over the period indicated should not be considered indicative of future
stockholder returns.
COMPARISON OF TWO YEAR CUMULATIVE TOTAL RETURN
AMONG LARSCOM INCORPORATED, THE NASDAQ COMPOSITE INDEX
AND THE NASDAQ TELECOM INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
NASDAQ COMPOSITE INDEX NASDAQ TELECOM INDEX LARSCOM INCORPORATED
<S> <C> <C> <C>
12/24/96 $100.00 $100.00 $100.00
12/31/96 $99.37 $101.66 $95.79
3/31/97 $94.28 $96.22 $70.53
</TABLE>
12
<PAGE>
SECURITY OWNERSHIP
The following table sets forth as of March 31, 1997 (except as set forth in
the footnotes), certain information with respect to the beneficial ownership of
the Company's Class A Common Stock and Class B Common Stock by (i) each person
known by the Company to own beneficially more than 5% of the outstanding shares
of Common Stock, (ii) each director of the Company, (iii) each Named Executive
Officer, and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------------------------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF PERCENT OF
CLASS A CLASS A CLASS B CLASS B TOTAL VOTING
SHARES (1) SHARES (2) SHARES (1) SHARES (2) POWER (2)
----------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Axel Johnson Inc. (3)............................. 10,000 * 10,000,000 100.0% 83.2%
Prudential Insurance Co. of America (4)........... 656,800 8.1% -- * 1.4
Wellington Management Co. LLP (5)................. 542,100 6.7 -- * 1.1
Deborah M. Soon................................... 11,207 * -- * *
George M. Donohoe................................. 10,162 * -- * *
William H. Cory................................... 8,052 * -- * *
Donald G. Heitt................................... 6,000 * -- * *
Kevin N. Kalkhoven................................ 6,000 * -- * *
Harvey L. Poppel.................................. 6,000 * -- * *
Joseph F. Smorada................................. 4,500 * -- * *
Paul A. Strudwick................................. 4,273 * -- * *
Jeffrey W. Reedy.................................. 4,272 * -- * *
Paul E. Graf...................................... 2,500 * -- * *
All executive officers and directors as a group
(11 persons).................................... 61,678 * -- * *
</TABLE>
- ------------------------
* Less than 1%
(1) The number of shares beneficially owned includes Class B Common Stock, and
Class A Common Stock of which such individual has the right to acquire
beneficial ownership either currently or within 60 days of March 31, 1997,
including but not limited to, upon exercise of an option.
(2) Percentage of beneficial ownership and voting power are based on 8,075,518
shares of Class A Common Stock and 10,000,000 shares of Class B Common
Stock, all of which were outstanding on March 31, 1997. For each individual,
this includes Class A Common Stock of which such individual has the right to
acquire beneficial ownership either currently or within 60 days of March 31,
1997, including, but not limited to, upon the exercise of an option;
however, such Class A Common Stock shall not be deemed outstanding for the
purpose of computing the percentage owned by any other individual.
(3) Based on information provided in a Schedule 13G filed by Axel Johnson Inc.
with the SEC on February 12, 1997. The address for Axel Johnson Inc. is 300
Atlantic Street, Stamford CT 06901-0350. Antonia Ax:son Johnson and her
spouse are the owners of record of 10,000 shares of Class A Common Stock.
Ms. Johnson is the ultimate owner of Axel Johnson Inc.
(4) Based on information provided in a Schedule 13G filed by Prudential
Insurance Co. of America with the SEC on February 10, 1997. The address for
Prudential Insurance Co. of America is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102-3777.
(5) Based on information provided in a Schedule 13G/A filed by Wellington
Management Co. LLP with the SEC on February 14, 1997. The address for
Wellington Management Co. LLP is 75 State Street, Boston, MA 02109.
13
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, the Company's
directors and officers and persons who are directly or indirectly the beneficial
owners of more than 10% of the Class A Common Stock of the Company are required
to file with the SEC within specified monthly and annual due dates, a statement
of their initial beneficial ownership and all subsequent changes in ownership of
Common Stock. Rules of the SEC require such persons to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on a review of such
forms, the Company believes that during fiscal year 1996 all Section 16 filing
requirements were met with the exception of the late filing of a Form 3 by each
of Deborah M. Soon, Jeffrey W. Reedy, Paul A. Strudwick, George M. Donohoe,
William H. Cory, Paul E. Graf, Donald G. Heitt, Kevin N. Kalkhoven, Harvey L.
Poppel, Joseph F. Smorada and Antonia A. Johnson, in connection with their
initial beneficial ownership of the Company's Class A Common Stock.
OTHER MATTERS
The Company knows of no other matters to be brought before the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the accompanying proxy to vote the shares represented as the
Board of Directors may recommend.
THE BOARD OF DIRECTORS
Signe S. Gates
SECRETARY
Dated: April 22, 1997
14
<PAGE>
LARSCOM INCORPORATED
PROXY/VOTING INSTRUCTIONS CARD
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF LARSCOM
INCORPORATED FOR THE ANNUAL MEETING ON MAY 19, 1997
The undersigned appoints Paul E. Graf, Donald G. Heitt, Kevin N.
Kalkhoven, Harvey L. Poppel, Joseph F. Smorada and Deborah M. Soon and each
of them, with full power of substitution in each, the proxies of the
undersigned, to represent the undersigned and vote all shares of Larscom
Incorporated Class A Common Stock which the undersigned may be entitled to
vote at the Annual Meeting of Shareholders to be held on May 19, 1997 and at
any adjournment or postponement thereof, as indicated on the reverse side.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR PROPOSALS 1 AND 2.
(Continued and to be signed on the reverse side.)
LARSCOM INCORPORATED
P.O. BOX 11396
NEW YORK, N.Y. 10203-0396
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL NOMINEES IN ITEM 1
AND "FOR" ITEM 2.
1. Election of Directors
FOR all nominees / / WITHHOLD AUTHORITY to vote / / *EXCEPTIONS / /
listed below for all nominees listed below
Nominees: Paul E. Graf, Donald G. Heitt, Kevin N. Kalkhoven, Harvey L.
Poppel, Joseph F. Smorada and Deborah M. Soon
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK
THE "EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED
BELOW.)
Exceptions
--------------------------------------------------------------------
2. To ratify and approve the selection by the Board of Directors of Price
Waterhouse LLP as independent public accountants for the Company for the
fiscal year ending December 31, 1997.
FOR / / AGAINST / / ABSTAIN / /
In their discretion the Proxies are authorized to vote upon such other
matters as may properly come before the meeting or any adjournment or
postponement thereof.
CHANGE OF ADDRESS AND/ / /
OR COMMENTS MARK HERE
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS TO THE LEFT. WHEN SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE YOUR FULL
TITLE. IF SHARES ARE HELD JOINTLY, EACH HOLDER SHOULD SIGN.
Dated: 1997
--------------------------
- ---------------------------------------
Signature
- ---------------------------------------
Signature
Votes must be indicated / /
(x) in Black or Blue ink.
SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
