<PAGE>
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 March 31, 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.)
4600 PATRICK HENRY DRIVE
SANTA CLARA, CA 95054
(408) 988-6600
(Address of principal executive offices, zip code and telephone number)
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 April 30, 1997, was
8,075,518 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 1: LEGAL PROCEEDINGS:................................................16
ITEM 2: CHANGES IN SECURITIES: ...........................................16
ITEM 3: DEFAULTS UPON SENIOR SECURITIES: .................................16
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: .............16
ITEM 5: OTHER INFORMATION: ...............................................16
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K: ................................16
A: Exhibits ............................................................16
B: Form 8-K ............................................................16
SIGNATURES .............................................................17
EXHIBIT 11.1 Statement Regarding Computation of Net Income per Share ...18
EXHIBIT 27 Financial Data Schedule .....................................19
2
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PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
LARSCOM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 50,832 $ 46,403
Accounts receivable, net 9,079 9,478
Inventories 11,079 8,654
Deferred income taxes 2,026 2,026
Prepaid expenses and other current assets 837 722
------------- ------------
Total current assets 73,853 67,283
Property and equipment, net 5,194 5,530
Other assets 210 230
------------- ------------
Total assets $ 79,257 $ 73,043
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,664 $ 2,569
Accrued expenses and other current liabilities 5,460 7,441
Income tax payable 570 -
Due to Axel Johnson 2,392 1,329
------------- ------------
Total current liabilities 12,086 11,339
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Deferred income taxes 259 259
------------- ------------
Commitments and contingencies (Note 4) - -
Stockholders' equity:
Class A Common Stock 81 70
Class B Common Stock 100 107
Additional paid-in capital 80,521 76,392
Accumulated deficit (13,790) (15,124)
------------- ------------
Total stockholders' equity 66,912 61,445
------------- ------------
Total liabilities and stockholders' equity $ 79,257 $ 73,043
------------- ------------
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</TABLE>
3
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LARSCOM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Revenues $ 16,410 $ 11,848
Cost of revenues 7,394 5,426
Gross profit 9,016 6,422
--------- ---------
Operating expenses:
Research and development 2,216 1,756
Selling, general and administrative 5,180 4,060
--------- ---------
Total operating expenses 7,396 5,816
--------- ---------
Income from operations 1,620 606
Interest expense charged by Axel Johnson Inc. (19) -
Interest income 451 -
--------- ---------
Income before income taxes 2,052 606
Provision for income taxes 718 249
--------- ---------
Net income $ 1,334 $ 357
--------- ---------
--------- ---------
Net income per share (1) $ 0.07 $ 0.03
Shares used to compute net income per share 17,996 14,193
</TABLE>
- ----------
(1) Net income per share for the three months ended March 31, 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>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------------ -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,334 $ 357
Depreciation and amortization 783 622
Net increase in working capital (2,150) (3,549)
-------- ---------
Net cash used by operating activities (33) (2,570)
-------- ---------
Cash flows from investing activities:
Purchase of property and equipment (428) (315)
-------- ---------
Net cash used by investing activities (428) (315)
-------- ---------
Cash flows from financing activities:
Advances from Axel Johnson 1,063 2,887
Proceeds from issuance of Class A Common Stock 3,827 -
-------- ---------
Net cash provided by financing activities 4,890 2,887
-------- ---------
Increase in cash and cash equivalents 4,429 2
Cash and cash equivalents at beginning of period 46,403 30
-------- ---------
Cash and cash equivalents at end of period $ 50,832 $ 32
-------- ---------
-------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 19 $ -
-------- ---------
Income taxes paid $ 148 $ 249
-------- ---------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Shares issued in connection with cancellation of the Company's
Long-Term Incentive Plans $ 306 $ -
-------- ---------
</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 months
ended March 31, 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 Larscom Incorporated's (the "Company") Report on Form 10-K for
the year ended December 31, 1996. The results of operations for the first
three months of 1997 are not necessarily indicative of the results to be
expected for the full year.
NOTE 2--INVENTORIES:
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(In thousands)
Inventories:
Raw materials $ 2,289 $ 1,508
Work in process 3,115 1,823
Finished goods 5,675 5,323
-------- --------
$ 11,079 $ 8,654
-------- --------
-------- --------
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 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 to sell additional shares
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 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.
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.
6
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LARSCOM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 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
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 $155,000 per month for 119,000
square feet of space located close to the Company's current facilities in
Santa Clara, California. The lease commences in August 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 are intended to
replace the Company's current facilities.
The Company intends to terminate the lease on its current facility in
Santa Clara which expires in January 1998.
NOTE 6--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. As the Company did not have any common stock equivalents
during the quarters ended March 31, 1997 and 1996, the basic net income
per share and diluted net income per share for these quarters 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.
7
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LARSCOM INCORPORATED
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 a limited number
of network service providers ("NSPs"). The other significant trend in
revenues is that broadband product sales represent an increasing percentage
of total revenues.
REVENUES. Revenues of $16,410,000 for the three months ended March 31,
1997, grew by 39% over revenues of $11,848,000 during the comparable period
in 1996. During the three months ended March 31, 1997, broadband product
sales were 35% of total revenues, as compared to 19% of total revenues in the
three months ended March 31, 1996. The increase in broadband and digital
access product sales is due to higher unit sales to NSPs.
GROSS PROFIT. As a percentage of revenues, gross profit for the three
months ended March 31, 1997 increased to 55% as compared to 54% in the same
period in 1996. This increase was primarily the result of higher 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.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
26% to $2,216,000 in the first three months of 1997 from $1,756,000 in the
first three months of 1996. The growth in research and development expenses
in the 1997 period as compared to 1996 was due primarily to higher personnel
related costs associated with the development of the Company's broadband
product line. The Company expects that research and development expense will
continue to increase in absolute dollars.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 28% to $5,180,000 during the three months ended March 31,
1997 as compared to $4,060,000 in the comparable 1996 period. The increase
in absolute dollars was due to additional personnel costs associated with
expansion of the Company's sales and marketing resources, as well as higher
selling expenses, in particular commissions, 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, 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.
8
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LARSCOM INCORPORATED
Selling, general and administrative expenses include charges from Axel
Johnson Inc. ("Axel Johnson") for legal, accounting, tax, treasury and
administrative services of $155,000 and $132,000 during the three months
ended March 31, 1997 and 1996, respectively.
INTEREST EXPENSE CHARGED BY AXEL JOHNSON. Interest expense includes
charges 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 INCOME. Interest income of $451,000 for the three months ended
March 31, 1997 was derived from the Company's cash and cash equivalents on
hand during the quarter.
PROVISION FOR INCOME TAXES. The effective tax rate of 35% for the three
months ended March 31, 1997 differs from the federal statutory rate primarily
due to state taxes which were offset by non-taxable interest income received
on the Company's cash equivalents. The effective rate of 41% for the three
months ended March 31, 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 35% for the three months ended March 31, 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
Since its acquisition by Axel Johnson in 1987 and until its initial
public offering in December 1996, the Company met its operating and capital
requirements primarily from cash flow from operations and advances from Axel
Johnson.
The Company's operating activities used $33,000 of cash during the three
months ended March 31, 1997 as compared to $2,570,000 in the same period in
1996. The cash used during the 1997 period was primarily a result of an
increase in inventory and decreases in accrued expenses and other current
liabilities which have been offset by net income and increases in accounts
payable.
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. 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 March 31, 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 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
shall become payable in full.
Capital expenditures in 1996 of $3,131,000 were principally for the
purchase of computers, software and test equipment. The Company expects
capital expenditures during 1997 to be approximately $4,000,000 of which
$428,000 was spent in the three months ended March 31, 1997. As of March 31,
1997, the Company's working capital was $61,767,000.
9
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LARSCOM INCORPORATED
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, or at all.
On March 20, 1997, the Company entered into an operating lease under
which the Company agreed to pay approximately $155,000 per month for 119,000
square feet of space located close to the Company's current facilities in
Santa Clara, California. The lease commences in August 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 are intended to
replace the Company's current facilities.
The effects of inflation on the Company's revenues and operating income
have not been material.
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. As the Company did not have any common stock equivalents
during the quarters ended March 31, 1997 and 1996, the basic net income
per share and diluted net income per share for these quarters is expected to
be the same as the earnings per share that is 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.
10
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LARSCOM INCORPORATED
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 the 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 three months ended March 31, 1997, two customers
accounted for 29% and 13% of revenue, respectively. During the three months
ended March 31, 1996, the same two customers accounted for 30% and 15% of
revenue, respectively. None of the Company's customers are 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 31% of revenues during
1996 and 35% of revenues in the first quarter of 1997. 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.
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
11
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LARSCOM INCORPORATED
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.
NO RECENT 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 very little 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. Even though the Company has
access, subject to certain conditions, to a $15,000,000 credit facility
provided by Axel Johnson, 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 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.
12
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LARSCOM INCORPORATED
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.
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. A 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.
13
<PAGE>
LARSCOM INCORPORATED
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. 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 review acquisition prospects that would complement
its existing product offerings, augment its market coverage, enhance its
technological capabilities or offer growth opportunities. The Company has no
current agreements or negotiations underway with respect to any such
acquisitions. 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.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY; PROPRIETARY INFORMATION. The
Company relies upon a combination of trade secrets, contractual restrictions,
copyrights, trademark laws 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 and
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
14
<PAGE>
LARSCOM INCORPORATED
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 INCORPORATED
PART II: OTHER INFORMATION
Item 1: Legal Proceedings:
The Company is not currently involved in any material legal
proceedings.
Item 2: Changes in Securities:
Not Applicable.
Item 3: Defaults upon Senior Securities:
Not Applicable.
Item 4: Submission of Matters to a Vote of Security Holders:
Not Applicable.
Item 5: Other Information:
Not Applicable.
Item 6: Exhibits and Reports on Form 8-K:
A: Exhibits: Page
Number
11.1 Statements Re. Computation of Net
Income Per Share 18
27 Financial Data Schedule 19
B: Reports on Form 8-K:
There were no reports on Form 8-K filed during the
quarter ended March 31, 1997.
16
<PAGE>
LARSCOM INCORPORATED
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 May 14, 1997 By /s/ Bruce D. Horn
------------------ ----------------------------------------
Bruce D. Horn
Vice President, Finance and Chief Financial
Officer
(Principal Financial and Accounting Officer)
17
<PAGE>
LARSCOM INCORPORATED
EXHIBIT 11.1
LARSCOM INCORPORATED
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
--------- ----------
(Unaudited)
<S> <C> <C>
Net income $ 1,334 $ 357
--------- ----------
Weighted average shares outstanding:
Class A and B Common Stock 17,996 14,193
--------- ----------
Net income per share (1) $ 0.07 $ 0.03
--------- ----------
</TABLE>
- ----------
(1) Net income per share for the three months ended March 31, 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 THREE MONTHS ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 50832
<SECURITIES> 0
<RECEIVABLES> 9079
<ALLOWANCES> 0
<INVENTORY> 11079
<CURRENT-ASSETS> 73853
<PP&E> 14126
<DEPRECIATION> 8932
<TOTAL-ASSETS> 79257
<CURRENT-LIABILITIES> 12392
<BONDS> 0
0
0
<COMMON> 181
<OTHER-SE> 66425
<TOTAL-LIABILITY-AND-EQUITY> 79257
<SALES> 16410
<TOTAL-REVENUES> 16410
<CGS> 7394
<TOTAL-COSTS> 7396
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (432)
<INCOME-PRETAX> 2052
<INCOME-TAX> 718
<INCOME-CONTINUING> 1334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1334
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
