<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
December 31, 1997
Date of Report (Date of earliest event reported)
LARSCOM INCORPORATED
(Exact name of registrant as specified in its charter)
COMMISSION FILE NUMBER: 1-12491
DELAWARE 94-2362692
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
1845 McCANDLESS DRIVE 95035
MILPITAS, CALIFORNIA (ZIP Code)
(Address of principal executive offices)
(408) 941-4000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name or address, if changed since last report)
This amendment to Larscom Incorporated (the "Registrant") Form 8-K dated
December 31, 1997 is being filed to provide the information required by Item
7, Financial Statements and Pro Forma Financial Information, which pursuant
to Item 7(a)(4) of Form 8-K permits the Registrant to file the required
financial statements of the business acquired and pro forma financial
information within 60 days of the due date of the original Form 8-K.
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 7. PRO FORMA FINANCIAL INFORMATION
(a) Financial Statements of Business Acquired 3
(b) Pro Forma Financial Information 22
(c) Exhibits 27
</TABLE>
2
<PAGE>
Item 7. PRO FORMA FINANCIAL INFORMATION
(a) Financial Statements of Business Acquired
NetEdge Systems, Inc.
Audited Consolidated Financial Statements
Nine months ended September 30, 1997 and year ended December 31, 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................... 4
Audited Consolidated Financial Statements
Consolidated Balance Sheets.................................................. 5
Consolidated Statements of Operations........................................ 7
Consolidated Statements of Redeemable Preferred Stock and
Shareholders' Deficit...................................................... 8
Consolidated Statements of Cash Flows........................................10
Notes to Consolidated Financial Statements...................................11
</TABLE>
3
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
NetEdge Systems, Inc.
We have audited the accompanying consolidated balance sheets of NetEdge
Systems, Inc. and subsidiaries as of September 30, 1997 and December 31, 1996
and the related consolidated statements of operations, redeemable preferred
stock and shareholders' deficit, and cash flows for the nine months ended
September 30, 1997 and for the year ended December 31, 1996. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of NetEdge Systems, Inc. and subsidiaries as of September 30, 1997 and
December 31, 1996, and the consolidated results of their operations and their
cash flows for the nine months ended September 30, 1997 and for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1,
the Company has incurred recurring operating losses and has a working capital
deficiency. These conditions raise substantial doubt about the company's
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
- -----------------------------
Ernst & Young LLP
November 7, 1997
4
<PAGE>
NetEdge Systems, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,062,534 $ 2,101,348
Cash in escrow - 113,200
Accounts receivable, net of allowances of
$256,000 and $542,000 at September 30,
1997 and December 31, 1996, respectively 1,124,210 1,674,978
Inventories 1,648,474 1,082,913
Prepaid expenses and other current assets 157,646 379,980
------------- ------------
Total current assets 3,992,864 5,352,419
Property and equipment:
Laboratory and manufacturing equipment 2,758,407 2,707,403
Computer equipment and software 4,382,147 4,254,951
Furniture and fixtures 1,040,678 1,059,881
Leasehold improvements 173,961 172,805
------------- ------------
8,355,193 8,195,040
Accumulated depreciation and amortization (5,658,158) (4,123,767)
------------- ------------
2,697,035 4,071,273
Notes receivable from employees - 75,000
Other assets 126,633 122,720
------------- ------------
Total assets $ 6,816,532 $ 9,621,412
------------- ------------
------------- ------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 1,870,312 $ 2,244,496
Warranty accrual 945,688 953,875
Deferred revenue 336,229 132,364
Revolving line of credit - 2,000,000
Accrued retention bonus 1,369,000 -
Current portion of capital lease obligations 499,309 869,636
------------- ------------
Total current liabilities 5,020,538 6,200,371
Capital lease obligations, less current portion 236,802 572,761
Redeemable preferred stock:
Class A Convertible Voting, $.01 par value;
$31 per share liquidation value;
authorized, issued and outstanding,
56,452 shares 1,750,012 1,750,012
Class B Convertible Voting, $.01 par value;
$70 per share liquidation value;
authorized 50,000 shares; issued and
outstanding, 36,069 shares 2,524,830 2,524,830
Class C Convertible Voting, $.01 par value;
$117 per share liquidation value;
authorized 43,000 shares; issued and
outstanding, 11,420 shares 1,330,091 1,330,091
Class D Convertible Voting, $.01 par value,
$4 per share liquidation value;
authorized 3,500,000 shares, issued and
outstanding 2,768,750 shares 11,075,000 11,075,000
Class E Convertible Voting, $.01 par value;
$4 per share liquidation value;
authorized, issued and outstanding,
2,100,000 shares 8,400,000 -
Shareholders' deficit:
Common stock, $.01 par value; authorized,
20,000,000 shares; issued 5,421,716
and 5,324,428 shares at September 30, 1997
and December 31, 1996, respectively;
outstanding 5,337,966 and 5,240,678 shares at
September 30, 1997 and December 31,
1996, respectively 53,380 52,407
Additional paid-in-capital 17,474,796 17,601,484
Accumulated deficit (41,048,917) (31,485,544)
------------- ------------
Total shareholders' deficit (23,520,741) (13,831,653)
------------- ------------
Total liabilities and shareholders' deficit $ 6,816,532 $ 9,621,412
------------- ------------
------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
NetEdge Systems, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30 December 31
1997 1996
---------------- -------------
<S> <C> <C>
Net sales $ 8,155,812 $ 17,310,459
Cost of sales 4,398,623 8,575,167
------------ ------------
Gross margin 3,757,189 8,735,292
Costs and expenses:
Research and development 5,268,400 6,880,792
Selling and marketing 4,578,160 7,482,948
General and administrative 1,294,622 1,747,760
Retention bonus 1,369,000 -
Restructuring charge 716,846 -
------------ ------------
13,227,028 16,111,500
------------ ------------
Loss from operations (9,469,839) (7,376,208)
Other income (expense):
Interest income 73,059 223,379
Interest expense (166,593) (263,736)
------------ ------------
Net loss $ (9,563,373) $ (7,416,565)
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
NetEdge Systems, Inc.
Consolidated Statements of Redeemable Preferred Stock
and Shareholders' Deficit
<TABLE>
<CAPTION>
Redeemable Preferred Stock
Class A Class B Class C
------------------- ------------------- --------------------
Shares Amount Shares Amount Shares Amount
------ ----------- ------ ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 56,452 $1,750,012 36,069 $2,524,830 11,427 $1,330,910
Redeemed stock - - - - (7) (819)
Exercise of stock options - - - - - -
Issuance of stock in consideration
of services rendered - - - - - -
Net loss for the year - - - - - -
------ ----------- ------ ---------- ------ ---------
Balance at December 31, 1996 56,452 1,750,012 36,069 2,524,830 11,420 1,330,091
Issuance of stock - - - - - -
Exercise of stock options - - - - - -
Cancellation of shares - - - - - -
Net loss for the period - - - - - -
------ ----------- ------ ---------- ------ ---------
Balance at September 30, 1997 56,452 $1,750,102 36,069 $2,524,830 11,420 $1,330,091
------ ----------- ------ ---------- ------ ---------
------ ----------- ------ ---------- ------ ---------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Redeemable Preferred Stock X
Class D Class E X Common Stock Additional Total
- ------------------------ ----------------------- X ------------------ Paid-In Accumulated Shareholders'
Shares Amount Shares Amount X Shares Amount Capital Deficit Deficit
- --------- ----------- ----------- ----------- X --------- ------- ----------- ------------ -------------
<S> <C> <C> <C> X <C> <C> <C> <C> <C>
2,768,750 $11,075,000 - $ - X 5,024,010 $50,240 $17,389,045 $(24,068,979) $ (6,629,694)
- - - - X - - - - -
- - - - X 212,918 2,129 195,827 - 197,956
X
- - - - X 3,750 38 16,612 - 16,650
- - - - X - - - (7,416,565) (7,416,565)
X
- --------- ----------- --------- ---------- X --------- ------- ---------- ------------ ------------
2,768,750 11,075,000 - - X 5,240,678 52,407 17,601,484 (31,485,544) (13,831,653)
- - 2,100,000 8,400,000 X - - (221,792) (221,792)
- - - - X 99,788 998 95,079 - 96,077
- - - - X (2,500) (25) 25 - -
- - - - X - - - (9,563,373) (9,563,373)
X
- --------- ----------- --------- ---------- X --------- ------- ---------- ------------ ------------
2,768,750 $11,075,000 2,100,000 $8,400,000 X 5,337,966 $53,380 $17,474,796 $(41,048,917) $(23,520,741)
- --------- ----------- --------- ---------- X --------- ------- ---------- ------------ ------------
- --------- ----------- --------- ---------- X --------- ------- ---------- ------------ ------------
</TABLE>
9
SEE ACCOMPANYING NOTES.
<PAGE>
NetEdge Systems, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months
ended Year ended
September 30 December 31
1997 1996
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (9,563,373) $ (7,416,565)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,645,431 1,924,418
Common stock issued for services - 16,650
Changes in operating assets and liabilities:
Accounts receivable, trade (net) 550,768 2,415,064
Inventories (net) (565,561) 993,566
Prepaid expenses and other assets 270,349 (218,068)
Accounts payable, accrued expenses and warranty
accrual (382,371) (369,585)
Deferred revenue 203,865 (145,146)
Accrued retention bonus 1,369,000 -
------------ ------------
Net cash used in operating activities (6,471,892) (2,799,666)
INVESTING ACTIVITIES
Changes in escrowed cash 113,200 897,355
Acquisition of property and equipment (net) (248,121) (1,040,030)
Sale of short-term investments - 3,828,340
------------ ------------
Net cash (used in) provided by investing activities (134,921) 3,685,665
FINANCING ACTIVITIES
Redemption of preferred stock - (819)
Proceeds from issuance of redeemable preferred
stock and warrants, net of issuance costs 8,178,208 -
Exercise of stock options 96,077 197,956
Receipts on line of credit - 2,000,000
Payments on line of credit (2,000,000) (1,000,000)
Principal repayments of capital lease obligations (706,286) (885,562)
------------ ------------
Net cash provided by financing activities 5,567,999 311,575
------------ ------------
(Decrease) increase in cash and cash equivalents (1,038,814) 1,197,574
Cash and cash equivalents at beginning of period 2,101,348 903,774
------------ ------------
Cash and cash equivalents at end of period $ 1,062,534 $ 2,101,348
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 166,593 $ 263,736
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
10
<PAGE>
NetEdge Systems, Inc.
Notes to Consolidated Financial Statements
1. BUSINESS OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
NetEdge Systems, Inc. ("NetEdge" or the "Company") was incorporated in 1993
under the laws of Delaware. The Company designs, develops and markets a
family of multi-service access concentrators that enable voice and data
carriers to offer value-added services to multiple customers over common
asynchronous transfer mode ("ATM") infrastructures. This technology improves
performance, quality of service and reduces cost of deployment over
conventional networking. NetEdge began shipping its products in May, 1994.
The Company was originally a wholly owned subsidiary of Fibercom, Inc.
("Fibercom"), a contractor for government and private enterprises
specializing in fiber-optic technology. In July 1994, substantially all of
the assets relating to the operations of FiberCom were sold to a third party.
The remaining entities, the FiberCom "shell" and the NetEdge subsidiary,
merged for the purpose of continuing the business of the NetEdge subsidiary
and the merged corporation was renamed NetEdge Systems, Inc.
The Company's primary market includes established telephone carriers such as
RBOCs, long distance companies, alternate carriers and internet service
providers. NetEdge sells direct and relies on its relationships with
value-added resellers and original equipment manufacturers to distribute its
products on a worldwide basis.
BASIS OF PRESENTATION
As of September 30, 1997, the Company has a net working capital deficiency of
$1,027,674. The Company is not generating sufficient revenues from its
operations to fund its activities and therefore is dependent on additional
financing from external sources. Such factors raise substantial doubt about
the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty. Management has entered into a letter of
intent to sell the Company to a corporate purchaser. There is no assurance
that the planned sale will close. The inability to obtain additional
financing or sell the company would have a material adverse effect on the
Company.
The consolidated financial statements include the accounts of NetEdge
Systems, Inc. and its wholly-owned subsidiaries, NetEdge Systems
International B.V. and NetEdge Systems (UK) Limited. International sales,
primarily in Europe and the UK, were approximately $2,145,000 during the nine
months ended September 30, 1997 and $3,194,000 during the year ended December
31, 1996, respectively. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
11
<PAGE>
NetEdge Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. BUSINESS OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SALES AND ACCOUNTS RECEIVABLE
The Company markets its products to a global customer base. To date, the
majority of sales have been to U.S. customers.
Revenues from significant customers, those representing 10% or more of total
revenues for the respective periods, are summarized as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30 December 31
1997 1996
------------------------------------
<S> <C> <C>
Customer 1 45.9% 50.1%
Customer 2 14.9% -
</TABLE>
Additionally, four customers accounted for 62% and 77% of accounts receivable
at September 30, 1997 and December 31, 1996, respectively.
The Company's principal financial instrument subject to potential
concentration of credit risk is accounts receivable which are unsecured. The
Company performs ongoing credit evaluations of customers and provides an
allowance for estimated uncollectible amounts.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) cost flow assumption.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is determined for
financial reporting purposes using the straight-line method over the
estimated useful lives (three to five years) of the individual assets or, for
leasehold improvements, over the terms of the related leases if shorter.
Depreciation expense (including amortization of equipment leased under
capital leases) amounted to $1,622,000 during the nine months ended September
30, 1997 and $1,875,000 during the year ended December 31, 1996.
Straight-line and accelerated methods of depreciation are used for income tax
purposes.
12
<PAGE>
NetEdge Systems, Inc.
Notes to Consolidated Financial Statements (continued)
1. BUSINESS OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Net sales consist primarily of products shipped to voice and data carriers,
ATM equipment vendors and large corporate customers. Net product sales also
include sales of certain ancillary products and services.
Generally, revenue is recognized when products are shipped. Deferred revenue
results from specific contractual terms for certain product sales and
maintenance services.
PRODUCT WARRANTIES
The Company provides warranties on substantially all of its products and
provides an accrual for estimated future warranty costs.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Advertising expense was
approximately $215,000 during the nine months ended September 30, 1997 and
$431,000 during the year ended December 31, 1996.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("SFAS 130") which addresses reporting
amounts of other comprehensive income. The Company does not believe that the
adoption of this new standard will have a material impact on the financial
statements.
13
<PAGE>
NetEdge Systems, Inc.
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
----------------------------
<S> <C> <C>
Electronic parts and other components $ 1,343,582 $ 657,182
Work-in-process 160,083 329,304
Finished goods 969,533 714,155
----------------------------
2,473,198 1,700,641
Inventory valuation reserve (824,724) (617,728)
----------------------------
$ 1,648,474 $ 1,082,913
----------------------------
----------------------------
</TABLE>
3. LEASES
Prior to 1997, the Company entered into a number of capital leases for
property and equipment used in the Company's offices, of which $528,187 were
entered into during 1996.
The Company's leased equipment, included in property and equipment, is as
follows:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
----------------------------
<S> <C> <C>
Laboratory and manufacturing equipment $ 882,195 $ 886,428
Computer equipment 482,086 519,699
Furniture and fixtures 204,332 226,832
----------------------------
1,568,613 1,632,959
Accumulated amortization (1,050,373) (817,385)
----------------------------
$ 518,240 $ 815,574
----------------------------
----------------------------
</TABLE>
Future minimum lease payments under capital leases in effect at September 30,
1997 are as follows:
<TABLE>
<S> <C>
Twelve months ended September 30:
1998 $ 549,713
1999 251,949
2000 58,015
----------
Total 859,677
Less amounts representing interest (123,566)
----------
Present value of minimum lease payments 736,111
Less current portion (499,309)
----------
Long-term capital lease obligations $ 236,802
----------
----------
</TABLE>
14
<PAGE>
NetEdge Systems, Inc.
Notes to Consolidated Financial Statements (continued)
3. LEASES (CONTINUED)
The Company has entered into various noncancellable operating leases for the
rental of office facilities and equipment as well as certain month to month
leases. Future minimum lease payments under these leases at September 30,
1997 are as follows:
<TABLE>
<S> <C>
Twelve months ended September 30:
1998 $ 447,507
1999 447,507
2000 418,585
2001 412,800
2002 412,800
Thereafter 3,096,000
------------
Total $ 5,235,199
------------
------------
</TABLE>
Total rent expense, including month to month leases, was $517,000 during the
nine months ended September 30, 1997 and $622,000 during the year ended
December 31, 1996.
4. REVOLVING CREDIT AGREEMENT
The terms of the revolving credit agreement with one of the Company's banks
stipulated that the Company could borrow up to 85% of the value of its
eligible accounts receivable and up to 50% of the value of its eligible
inventory up to a combined maximum of $5,000,000. The agreement entitled the
bank to a perfected security interest in the Company's inventory and related
accounts receivable equal to the amount drawn on the line of credit. The
agreement contained restrictive financial covenants, including tangible net
worth and operating requirements. Borrowings under the revolving credit
agreement were $2,000,000 at December 31, 1996, which were repaid at maturity
in May, 1997.
On September 30, 1997, the Company entered into a revolving credit agreement
with a bank which stipulates that the Company may borrow up to 80% of the
value of its eligible accounts receivable up to a maximum of $2,000,000. The
Company must establish the amount eligible for borrowing monthly and must
repay any excess borrowings or may borrow additional amounts, if eligible.
The agreement entitles the bank to a perfected security interest in
substantially all of the assets of the Company. The agreement contains
reporting requirements and restrictive financial covenants, including
tangible net worth and operating requirements. The agreement will terminate
on September 29, 1998, at which time any outstanding balance will be payable
in full. Interest is payable monthly at the bank's published prime rate
(8.5% at September 30, 1997) plus 1%. As of September 30, 1997, there is no
outstanding balance.
15
<PAGE>
NetEdge Systems, Inc.
Notes to Consolidated Financial Statements (continued)
5. REDEEMABLE PREFERRED STOCKS
As part of the merger transaction described in Note 1, the holders of
redeemable preferred stock of FiberCom exchanged their shares for redeemable
preferred stock of NetEdge on a one for one basis.
The Class A, Class B and Class C redeemable preferred stocks ("Class A
Preferred," "Class B Preferred" and "Class C Preferred," respectively) are
convertible into common stock at a conversion ratio of 40 shares of common
stock for each share of preferred stock. The conversion prices are $.775,
$1.75 and $2.925 per common share for the Class A, Class B and Class C
Preferred, respectively. If common stock or any equity security to acquire
common stock is issued that would result in common stock being issued at a
price less than the conversion price, the conversion price is automatically
adjusted to a lower amount to ratably reflect such issuance. Issuance of
common stock under the incentive stock option plans is exempt from affecting
the conversion price. The Class A, Class B and Class C Preferred are subject
to automatic conversion in the event of a public offering for which the
aggregate proceeds exceed $7.5 million at a per share price of at least
$1.937, $3.50 and $4.00 per share, respectively. There are 4,157,640 shares
of common stock reserved for conversion of Class A, Class B and Class C
Preferred at September 30, 1997.
The Company issued 2,768,750 shares of Class D redeemable preferred stock
("Class D Preferred") at an issuance price of $4 per share on August 4, 1995.
Shares of Class D Preferred may be converted at any time into fully paid and
non-assessable shares of common stock. Each share will automatically be
converted into common stock in the event of a public offering in which the
gross proceeds equals or exceeds $15,000,000 at a per share price of at least
$8.00. At September 30, 1997, the conversion ratio was one share of common
stock for each share of preferred stock and the conversion ratio is subject
to adjustment upon the issuance of additional common stock. There are
2,768,750 shares of common stock reserved for conversion of the Class D
Preferred at September 30, 1997.
On May 2, 1997, the Company sold 2,100,000 shares of Class E redeemable
preferred stock ("Class E Preferred") and 2,100,000 detachable warrants to
purchase the Company's common stock for aggregate proceeds of $8,400,000.
The Class E Preferred is initially convertible at the option of the holder
into the number of shares of common stock as determined by dividing $4.00 by
the conversion price. The initial conversion price is $4.00, subject to
adjustment upon the occurrence of certain events as described in the
agreement. The Class E Preferred will automatically convert into common
shares, at the then applicable conversion price, in the event of an
underwritten public offering of the Company's common shares in which the
gross proceeds to the Company exceed $20,000,000 and the public offering
price per share is not less than $8 per share. The warrants issued have an
initial exercise price of $5 per share and expire seven years from the date
of issuance. The warrants had negligible value at the time of issuance.
There are 4,200,000 shares of common stock reserved for the conversion of
Class E Preferred and exercise of the warrants at September 30, 1997.
Under the original agreements, each holder of Class A and Class B Preferred
was entitled, at any time after September 30, 1992, to compel the Company to
redeem all shares of Class A and Class B Preferred. Holders of Class A and
Class B Preferred have agreed to postpone redemption until August 4, 2000.
The Class C Preferred was originally subject to mandatory redemption in the
amount of $850,044 per year for the three years ending September 30, 1992,
1993 and 1994. To date, the Company has paid $899,799 in connection with
redemptions of Class C Preferred shares, with the remaining holders
postponing redemption until September 30, 1998.
16
<PAGE>
NetEdge Systems, Inc.
Notes to Consolidated Financial Statements (continued)
5. REDEEMABLE PREFERRED STOCKS (CONTINUED)
At the option of each individual holder of Class D Preferred, commencing on
August 4, 2000 and continuing on each anniversary thereafter, the Company may
be required to redeem the number of shares specified in redemption requests,
by paying the original purchase price plus all declared but unpaid dividends.
On each date, the Company cannot be required to redeem in excess of 25% of
the number of shares of Class D Preferred originally issued.
At the individual option of each holder of the Class E Preferred, the Company
will redeem 25% of the outstanding Class E shares at an initial redemption
price of $4 per share on or after each of May 1, 2002, May 1, 2003, May 1,
2004, and May 1, 2005. Under terms of the agreement, no other class of
preferred may be redeemed prior to Class E Preferred.
Under the most restrictive provisions of the aforementioned securities, the
Company cannot be required to redeem or purchase any shares of its common
stock except in accordance with incentive stock option plans. Class A, B and
C Preferred stockholders are entitled to dividends, to the extent that
dividends are declared on common stock. Such dividends will be based on the
number of common shares into which each share of preferred stock can be
converted. The holders of Class D and Class E Preferred shall be entitled to
receive, when and if declared, annual noncumulative dividends at the per
annum rate of $.36 per share. The agreements also define rights to
participate in sales of additional securities of the Company. In the event
the funds of the company legally available for redemption of the Class A,
Class B and Class C Preferred are insufficient to redeem the total number of
shares, the Company shall apply 33 1/3 percent of the legally available funds
to each class of preferred stock until the Company has redeemed the number of
shares it has become obligated to redeem. Class E holders, in the event of
liquidation, dissolution or winding up of the Corporation, shall be entitled
to be paid out of the assets of the Corporation prior and in preference to
the holders of Common Stock, Class A, Class B, Class C and Class D Preferred.
Class D holders, in the event of liquidation, dissolution or winding up of
the Corporation, shall be entitled to be paid out of the assets of the
Corporation prior and in preference to the holders of Common Stock, Class A,
Class B and Class C Preferred. The liquidation preference shall be a per
share amount equal to the sum of $4.00 plus all declared but unpaid dividends.
6. STOCK COMPENSATION PLANS
On December 1, 1995, the stockholders approved incentive stock option plans
which provide for the granting of options covering up to 2,000,000 shares of
the Company's common stock to certain employees. In addition, the Company
agreed to convert FiberCom's option agreements, which were approved by the
stockholders at various times for the granting of options up to 3,632,400
shares of common stock, to options to purchase the same number of shares of
common stock of NetEdge.
Under terms of the plans, options may not be granted at less than fair market
value as of the date of the grant as determined by the Board of Directors.
Options granted under the plans generally become exercisable 25% beginning
one year after the date of grant, and 1/48th per month commencing on the
thirteenth month after the date of grant. Such options expire not later than
ten years after the date of grant.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
17
<PAGE>
NetEdge Systems, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK COMPENSATION PLANS (CONTINUED)
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if the Company accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method as
prescribed by SFAS 123. The fair value of these options was estimated at the
date of grant using the minimum value option pricing model with the following
weighted-average assumptions at September 30, 1997 and December 31, 1996,
respectively: risk-free interest rates of 6.00% and 6.24%; no dividend yield
and a weighted-average expected life of the options of 4.5 and 5 years.
Option valuation models require the input of highly subjective assumptions.
Changes in the subjective input assumptions can materially affect the fair
value estimates. Had the compensation cost for the Company's stock option
plans been determined based on the fair value at the date of grant for awards
in 1997 and 1996 consistent with the provisions of SFAS 123, the Company's
net loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Nine months
ended Year ended
September 30 December 31
1997 1996
-----------------------------
<S> <C> <C>
Net loss - as reported $ (9,563,373) $ (7,416,565)
Net loss - pro forma $ (9,698,374) $ (7,584,568)
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------
Weighted
Shares Available Number Average
for Grant of Shares Exercise Price
---------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1995 2,162,639 2,278,021 $1.0970
Options granted (1,066,475) 1,066,475 3.0807
Options canceled 317,909 (317,909) 1.3505
Options exercised - (212,918) 0.9372
---------------------------------------------
Balances at December 31, 1996 1,414,073 2,813,669 1.8229
Options granted (1,838,590) 1,838,590 0.3120
Options canceled 582,185 (582,185) 1.4494
Options exercised - (99,788) 0.9628
---------------------------------------------
Balances at September 30, 1997 157,668 3,970,286 $1.0171
---------------------------------------------
---------------------------------------------
</TABLE>
18
<PAGE>
NetEdge Systems, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK COMPENSATION PLANS (CONTINUED)
In June, 1997, 310,000 option grants to certain terminated employees were
amended to accelerate the vesting period, extend the exercise period and
reduce the exercise price to $.10 per share, the estimated fair value of the
stock at that date.
The weighted-average grant-date fair value of options granted was $.08 for
options granted during the nine months ended September 30, 1997 and $.83 for
options granted during the year ended December 31, 1996.
At December 31, 1996, options to purchase 1,046,134 shares were exercisable
with a weighted average exercise price of $1.0526. At September 30, 1997
option summary information was as follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------
Weighted-Average
Number
Number Outstanding Remaining Exercisable at
at September 30 Contractual September 30
Exercise Prices 1997 Life 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.10 1,548,464 9.79 66,254
$1.00 892,625 6.79 708,865
$1.50 557,982 8.06 290,249
$1.75 568,750 9.09 74,099
$2.50 296,749 8.39 118,124
$4.00 105,716 8.51 22,145
------------------------------------------------------
3,970,286 8.64 1,279,736
------------------------------------------------------
------------------------------------------------------
</TABLE>
19
<PAGE>
NetEdge Systems, Inc.
Notes to Consolidated Financial Statements (continued)
7. COMMON STOCK RESERVED FOR FUTURE ISSUANCE
The Company has reserved authorized shares of common stock for future issuance
as follows:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------------------------
<S> <C> <C>
Redeemable convertible preferred stock:
Class A 2,258,080 2,258,080
Class B 1,442,760 1,442,760
Class C 456,800 456,800
Class D 2,768,750 2,768,750
Class E 2,100,000 -
Outstanding warrants 2,100,000 480,920
Outstanding stock options 3,970,286 2,813,669
Possible future issuance under stock
compensation plans 157,668 1,414,073
------------------------------
Total shares reserved 15,254,344 11,635,052
------------------------------
------------------------------
</TABLE>
8. INCOME TAXES
At September 30, 1997, the Company has net operating loss carryforwards of
approximately $21,000,000 for income tax purposes that begin to expire in
2010 and research and development tax credits of approximately $890,000 that
begins to expire in 1999. For financial reporting purposes, a valuation
allowance has been recognized to offset the deferred tax assets related to
those carryforwards. When and if realized, the tax benefit for those items
will be reflected in current operations as a reduction of income tax expense.
The Company had no significant deferred tax liabilities. Significant
components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 8,400,000 $ 4,554,000
Research and development credit carryforwards 890,000 631,000
Alternative minimum tax carryforwards 1,004,000 1,004,000
Reserves and other 1,006,000 1,141,000
------------------------------
Total deferred tax assets 11,300,000 7,330,000
Valuation allowance for deferred tax assets (11,300,000) (7,330,000)
------------------------------
Net deferred tax assets $ - $ -
------------------------------
------------------------------
</TABLE>
20
<PAGE>
NetEdge Systems, Inc.
Notes to Consolidated Financial Statements (continued)
9. RETIREMENT PLAN
The Company has a qualified 401(k) Retirement Plan. Substantially all
full-time employees are eligible to participate and participants may
contribute from 1 percent to 10 percent of their compensation to the Plan.
The Company matches 50 percent of each participant's contribution, with the
Company's portion not to exceed 2 percent of each participant's compensation.
Total expense for the plan was approximately $100,000 during the nine months
ended September 30, 1997 and $118,000 during the year ended December 31, 1996.
10. RESTRUCTURING CHARGES
During the second quarter of 1997, the Company recorded restructuring charges
of approximately $717,000 related to the Company's efforts to enhance overall
competitiveness, productivity and efficiency through the reduction of
overhead costs. This charge principally reflects the severance costs
resulting from workforce reductions and realignments throughout the Company.
To date, payments approximating $437,000 have been made related to the
restructuring.
11. COMMITMENT AND CONTINGENCIES
The Company has outstanding purchase commitments for inventory of
approximately $692,000 of which approximately $432,000 was non-cancelable at
September 30, 1997. Such commitments were at prices not in excess of current
market prices.
During 1997, the Company's Board of Directors approved retention bonuses to
be paid to certain employees who remained with NetEdge until it could be sold
or merged. The bonus was established as 10% of the net sales price of the
Company, with a minimum bonus amount of $1.5 million. As of September 30,
1997, the Company had accrued $1,369,000 as a pro rata portion of the
anticipated retention bonus.
During 1996, the Company entered into an agreement with a third party
pursuant to which the third party would act as the Company's exclusive
financial advisor in connection with a possible sale, merger or other
strategic combination. The terms of the agreement stipulate that should such
a transaction be consummated, NetEdge would be required to pay a transaction
fee calculated as a percentage of the aggregate value of the transaction,
with a minimum transaction fee amount of $1.5 million. If no such
transaction is consummated within one year of the termination of the
agreement, the Company will not be obligated to pay the transaction fee, but
would instead pay an advisory fee based on actual time and expenses incurred.
On October 26, 1997, the Company signed a letter of intent to be sold to a
corporate purchaser. Assuming the sale is consummated as planned, the
closing is expected to occur in the fourth quarter of 1997.
21
<PAGE>
Item 7. (b) Pro Forma Financial Information
LARSCOM INCORPORATED AND NETEDGE SYSTEMS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(in thousands, except per share data)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, 1997
---------------------------------------------------------
Historical Historical Pro Forma Pro Forma
Larscom NetEdge Adjustments Combined
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $25,530 $1,063 $(25,793)(a) $ 800
Short-term investments 23,732 - 23,732
Accounts receivable, net 11,299 1,124 12,423
Inventories 11,483 1,648 450(b) 13,581
Deferred income taxes 2,418 - - 2,418
Prepaid expenses and other current assets 3,240 158 3,398
------- ------ -------- -------
Total current assets 77,702 3,993 (25,343) 56,352
Property and equipment, net 6,313 2,697 9,010
Intangible assets, net - - 9,446(a)(c) 9,446
Deferred income taxes - - 7,947(d) 7,947
Other assets 387 126 513
------- ------ -------- -------
Total assets $84,402 $6,816 $(7,950) $83,268
------- ------ -------- -------
------- ------ -------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ - $ 499 $ - $ 499
Accounts payable 4,270 1,870 - 6,140
Accrued expenses and other current liabilities 7,217 2,651 5,782(a) 15,650
Due to Axel Johnson 597 - - 597
------- -------- -------- -------
Total current liabilities 12,084 5,020 5,782 22,886
Long-term debt - 237 - 237
Preferred Stock - 25,080 (25,080)(f) -
Stockholders' equity:
Common Stock 181 53 (53)(f) 181
Additional paid-in capital 80,929 17,475 (17,475)(f) 80,929
Accumulated deficit (8,792) (41,049) 28,876(d)(f) (20,965)
------- -------- -------- -------
Total stockholders' equity 72,318 (23,521) 11,348 60,145
------- -------- -------- -------
Total liabilities and stockholders' equity $84,402 $ 6,816 $ (7,950) $83,268
------- -------- -------- -------
------- -------- -------- -------
</TABLE>
22
<PAGE>
LARSCOM INCORPORATED AND NETEDGE SYSTEMS, INC.
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
----------------------------------------------------
Historical Historical Pro Forma Pro Forma
Larscom NetEdge Adjustments Combined
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $54,894 $8,156 $ - $63,050
Cost of revenues 23,815 4,399 1,288(c) 29,502
------- ------ ------- --------
Gross profit 31,079 3,757 (1,288) 33,548
------- ------ ------- --------
Operating expenses:
Research and development 7,052 5,268 - 12,320
Selling, general and administrative 15,411 5,873 97(c) 21,381
Retention bonus and restructuring charge - 2,086 (1,369)(a) 717
------- ------ ------- --------
Total operating expenses 22,463 13,227 (1,272) 34,418
------- ------ ------- --------
Income/(loss) from operations 8,616 (9,470) (16) (870)
Interest expense (56) (166) - (222)
Interest income 1,333 73 (1,170)(e) 236
------- ------ ------- --------
Income/(loss) before income taxes 9,893 (9,563) (1,186) (856)
Income tax provision/(benefit) 3,561 - (3,561)(g) -
------- ------ ------- --------
Net income/(loss) $ 6,332 $(9,563) $ 2,375 $(856)
------- ------ ------- --------
------- ------ ------- --------
Basic and diluted earnings/(loss) loss per share $0.35 $(0.05)
Basic and diluted weighted average shares 18,058 18,058
</TABLE>
23
<PAGE>
LARSCOM INCORPORATED AND NETEDGE SYSTEMS, INC.
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------------
Historical Historical Pro Forma Pro Forma
Larscom NetEdge Adjustments Combined
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $66,444 $17,310 $ - $83,754
Cost of revenues 29,949 8,575 1,718(c) 40,242
------- ------- --------- -------
Gross profit 36,495 8,735 (1,718) 43,512
------- ------- --------- -------
Operating expenses:
Research and development 8,123 6,881 - 15,004
Selling, general and administrative 19,408 9,231 129(c) 28,768
------- ------- --------- -------
Total operating expenses 27,531 16,112 129 43,772
------- ------- --------- -------
Income/(loss) from operations 8,964 (7,377) (1,847) (260)
Interest expense charged by Axel Johnson (630) - - (630)
Interest expense - (263) (2,210)(e) (2,473)
Interest income 33 223 - 256
------- ------- --------- -------
Income/(loss) before income taxes 8,367 (7,417) (4,057) (3,107)
Income tax provision/(benefit) 3,437 - (3,437)(g) -
------- ------- --------- -------
Net income/(loss) $ 4,930 $(7,417) $(620) $(3,107)
------- ------- --------- -------
------- ------- --------- -------
Basic and diluted earnings/(loss) per share $0.41 $(0.26)
Basic and diluted weighted average shares 12,107 12,107
</TABLE>
24
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited pro forma combined condensed consolidated financial
statements give effect to the acquisition of NetEdge Systems, Inc.
("NetEdge") by Larsom Incorporated ("Larscom") under the purchase method of
accounting. The unaudited pro forma combined condensed consolidated balance
sheet combines Larscom's unaudited consolidated balance sheet and NetEdge's
unaudited balance sheet at September 30, 1997 as if the acquisition had
occurred on September 30, 1997. The unaudited pro forma combined condensed
consolidated statement of operations combine the historical results of
operations of Larscom and NetEdge, for the nine months ended September 30,
1997, and year ended December 31, 1996, as if the acquisition had occurred on
January 1, 1996.
The unaudited pro forma combined condensed consolidated financial
statements do not reflect cost savings and synergies which might be achieved
from the acquisition. The unaudited pro forma combined condensed
consolidated financial statements do not purport to be indicative of the
operating results or financial position that would have been achieved had the
acquisition been effected for the period indicated or the results or
financial position which may be obtained in the future.
These combined condensed consolidated pro forma financial statements are
based on and should be read in conjunction with the historical audited and
unaudited consolidated financial statements of Larscom, including the notes
thereto, and the audited historical financial statements of NetEdge,
including the notes thereto.
NOTE 2 - PRO FORMA ADJUSTMENTS
The following adjustments were applied to the historical condensed
financial statements to arrive at the pro-forma combined condensed financial
statements.
(a) On December 31, 1997, the Company completed its acquisition of NetEdge
Systems, Inc. The acquisition will be accounted for using the purchase
method; accordingly, the purchase price will be allocated to the assets
acquired and liabilities assumed based on their estimated fair values as
of the acquisition date. The allocation of the purchase price assuming
the acquisition occurred as of September 30, 1997 for pro forma purposes
is as follows:
<TABLE>
<S> <C>
Cash paid $25,793,000
Estimated acquisition costs 1,782,000
-----------
$27,575,000
-----------
Tangible assets $ 7,266,000
In-process research and development 20,120,000
Other tangible assets 9,446,000
Liabilities assumed (9,257,000)
-----------
$27,575,000
-----------
</TABLE>
Liabilities assumed includes amounts which were not included in the
historic NetEdge financial statements related to the payment of sellers'
transaction costs of $1,825,000 and additional retention bonuses and
severance costs of $2,175,000. Retention bonuses related to the acquisition
of $1,369,000 were eliminated in the pro forma combined condensed statement
of operations for the nine months ended September 30, 1997.
25
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(b) Represents increase in inventory to adjust to fair value in accordance
with Accounting Principles Board Opinion No. 16.
(c) Represents adjustments for capitalized intangibles and related
amortization as follows:
<TABLE>
<CAPTION>
Useful
Economic
Intangible Assets Amount Life
- ----------------- ---------- ---------
<S> <C> <C>
Acquired Technology $8,590,000 5
Trademark 560,000 7
Purchase price in excess of fair value of
assets acquired 296,000 6
----------
$9,446,000
</TABLE>
(d) On the acquisition date Larscom recorded a charge of $20,120,000 related
to the in-process research and development. The Company also recorded a
deferred tax asset of $7,947,000 related to this charge. This resulted
in a charge to retained earnings of $12,173,000 in the pro forma balance
sheet.
(e) Reflects adjustment for interest on debt assumed to be incurred to
finance the acquisition. The debt was assumed to be repaid with the
proceeds of Larscom's initial public offering in December 1996.
Thereafter interest income is assumed to be reduced as a result of lower
cash, cash equivalents and short-term investments.
(f) Represents adjustment to eliminate NetEdge's equity balances.
(g) Represents the elimination of income tax expense based on pro forma loss
for the period.
26
<PAGE>
Item 7 (c) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- -------- --------------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated as of December 2, 1997,
among Larscom Incorporated, a Delaware corporation, LPH Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of Larscom,
and NetEdge Systems, Inc., a Delaware corporation.*
23.1 Consent of Ernst & Young LLP
</TABLE>
- --------------
* Previously filed
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LARSCOM INCORPORATED
Dated: March 13, 1998 By: /s/ Bruce D. Horn
------------------------
Bruce D. Horn
Vice President, Finance
and Chief Financial
Officer (Principal Financial
and Accounting
Officer)
28
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-18251) of Larscom Incorporated of our report on
the financial statements of NetEdge Systems, Inc. dated November 7, 1997, which
appears on page F-1 of this Form 8-K.
/s/ Ernst & Young LLP
- -------------------------
Ernst & Young LLP
March 13, 1998
29
