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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
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 (IRS Employer
incorporation or organization) Identification No.)
1845 MCCANDLESS DRIVE
MILPITAS, CA 95035
(408) 941-4000
(Address of principal executive offices, zip code and telephone number)
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 March 31, 2000, was
8,543,000 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
<TABLE>
<S> <C>
Part I: Financial Information ......................................... 3
Item 1: Financial Statements (Unaudited) .............................. 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
Item 3: Quantitative and Qualitative Disclosures about
Market Risk ................................................... 14
Part II: Other Information ............................................. 15
Item 1: Legal Proceedings ............................................. 15
Item 2: Changes in Securities ......................................... 15
Item 3: Defaults upon Senior Securities ............................... 15
Item 4: Submission of Matters to a Vote of Security Holders ........... 15
Item 5: Other Information ............................................. 15
Item 6: Exhibits and Reports on Form 8-K .............................. 15
a: Exhibits ................................................... 15
b: Reports on Form 8-K ........................................ 15
Signatures .................................................... 16
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
LARSCOM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) (Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 15,632 $ 7,009
Short-term investments ...................................... 13,195 22,199
Accounts receivable, net .................................... 8,310 7,769
Inventories ................................................. 6,309 5,821
Deferred income taxes ....................................... 3,859 3,961
Income taxes receivable ..................................... 1,898 1,750
Prepaid expenses and other current assets ................... 1,435 1,671
-------- --------
Total current assets ..................................... 50,638 50,180
Property and equipment, net ...................................... 4,398 4,781
Deferred income taxes ............................................ 11,653 11,419
Other non-current assets, net .................................... 427 482
-------- --------
Total assets ............................................. $ 67,116 $ 66,862
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 3,155 $ 3,464
Accrued expenses and other current liabilities .............. 8,625 7,728
Due to Axel Johnson Inc...................................... 426 341
-------- --------
Total current liabilities ................................ 12,206 11,533
Other non-current liabilities .................................... 566 534
-------- --------
Total liabilities ........................................ 12,772 12,067
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Class A Common Stock ........................................ 86 84
Class B Common Stock ........................................ 100 100
Additional paid-in capital .................................. 82,136 81,860
Accumulated other comprehensive income ...................... (5) (6)
Accumulated deficit ......................................... (27,973) (27,243)
-------- --------
Total stockholders' equity ............................... 54,344 54,795
-------- --------
Total liabilities and stockholders' equity ............... $ 67,116 $ 66,862
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
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LARSCOM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues ............................................................. $ 13,036 $ 12,246
Cost of revenues ..................................................... 5,992 6,558
-------- --------
Gross profit ................................................... 7,044 5,688
-------- --------
Operating expenses:
Research and development ......................................... 2,571 2,340
Selling, general and administrative .............................. 5,900 5,294
-------- --------
Total operating expenses ....................................... 8,471 7,634
-------- --------
Loss from operations ................................................. (1,427) (1,946)
Interest and other income ...................................... 401 247
-------- --------
Loss before income taxes ............................................. (1,026) (1,699)
Income tax benefit ............................................. (296) (680)
-------- --------
Net loss ............................................................. $ (730) $ (1,019)
======== ========
Basic and diluted net loss per share ................................. $ (0.04) $ (0.06)
======== ========
Basic and diluted weighted average shares ............................ 18,471 18,297
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
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LARSCOM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $ (730) $ (1,019)
Depreciation and amortization .................................... 660 889
Deferred income taxes ............................................ (132) (453)
Net (increase) decrease in working capital ....................... (286) 1,418
-------- --------
Net cash (used) provided by operating activities ..................... (488) 835
-------- --------
Cash flows from investing activities:
Purchases of property and equipment .............................. (221) (149)
Purchases of short-term investments .............................. (7,998) (10,217)
Sales of short-term investments .................................. 1,700 19,318
Maturities of short-term investments ............................. 15,302 --
-------- --------
Net cash used by investing activities ................................ 8,783 8,952
-------- --------
Cash flows from financing activities:
Advances from (repayments to) Axel Johnson Inc.................... 85 (201)
Payment of capital lease obligations ............................. (35) (74)
Proceeds from issuances of Class A Common Stock .................. 278 101
-------- --------
Net cash provided (used) by financing activities ..................... 328 (174)
-------- --------
Increase in cash and cash equivalents ................................ 8,623 9,613
Cash and cash equivalents at beginning of period ..................... 7,009 10,265
-------- --------
Cash and cash equivalents at end of period ........................... $ 15,632 $ 19,878
======== ========
Supplemental disclosure of cash flow information
Interest paid ........................................................ $ 3 $ 8
-------- --------
Income taxes paid .................................................... $ 58 $ 18
-------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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, 2000 and 1999 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, 1999. The results of operations for the first three months of 2000 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2--INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Raw materials .............................................. $2,091 $1,884
Work-in-process ............................................ 2,098 1,847
Finished goods ............................................. 2,120 2,090
------ ------
$6,309 $5,821
====== ======
</TABLE>
NOTE 3--NET LOSS PER SHARE:
Basic net loss per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net loss per share is
computed using the weighted-average number of common shares outstanding and the
dilutive effect of options to purchase common shares. The effect of options to
purchase common shares is excluded from the computation if their effect is
antidilutive.
The following table shows how basic and diluted net loss per share are
computed (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net loss .............................................. $ (730) $ (1,019)
======== ========
Weighted average Class A and B
Common Stock outstanding ......................... 18,471 18,297
Basic and diluted net loss per share .................. $ (0.04) $ (0.06)
======== ========
</TABLE>
NOTE 4--COMPREHENSIVE INCOME:
"Comprehensive income" includes all changes in equity from non-owner
sources during the period. The only item of comprehensive income for the periods
presented related to foreign currency translation adjustments. Such amounts were
immaterial for the periods presented.
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NOTE 5--COMMITMENTS AND CONTINGENCIES:
At the end of 1998, vendors of three integrated circuits ("ICs") notified
the Company regarding their intent to cease production. As a result of
anticipated continued usage of these ICs, the Company entered into purchase
commitments of approximately $1,250,000 in aggregate, representing between one
and two years expected demand for these components. As of March 31, 2000, the
Company is obligated to purchase $563,000 of these ICs by 2001.
The Company typically indemnifies its customers for any expenses or
liabilities resulting from claims by third parties that its products infringe
the patents, trademarks or copyrights of third parties.
NOTE 6--ACQUISITION:
The Company acquired NetEdge Systems Inc. ("NetEdge"), by merger on
December 31, 1997. The Company paid total merger consideration of $25,793,000 in
cash, incurred acquisition costs of $1,182,000 and assumed liabilities of
$9,782,000.
Of the total purchase consideration, $6,300,000 was put into escrow pending
resolution of certain matters including purchase price adjustments and other
representations and warranties. In 1999, $2,147,000 was released to the
shareholders of NetEdge. In 1998, $600,000 of the escrow amount was released to
the Company and $400,000 was released to the shareholders of NetEdge. There
remained $3,677,000 in escrow, representing principal and accrued interest on
March 31, 2000, which is expected to be released by December 31, 2000.
NOTE 7--GEOGRAPHIC INFORMATION:
Revenue and long-lived assets related to operations in the United States and
other countries as of and for the quarters ended March 31, 2000 and March 31,
1999 are as follows:
<TABLE>
<CAPTION>
LONG-LIVED
REVENUES (a) ASSETS
----------------- ---------------
2000 1999 2000 1999
------- ------- ------ ------
<S> <C> <C> <C> <C>
United States .......................... $11,090 $10,535 $4,813 $5,247
Other countries ........................ 1,946 1,711 12 16
------- ------- ------ ------
Total .................................. $13,036 $12,246 $4,825 $5,263
======= ======= ====== ======
</TABLE>
(a) Revenues are reported by shipment to the final destination as determined by
records required to comply with US Department of Commerce regulations.
NOTE 8--RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities." The new
standard requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Under SFAS No. 133, gains or losses
resulting from changes in the value of the derivatives are to be reported in the
statement of operations or as a deferred item, depending on the use of the
derivatives and whether they qualify for hedge accounting. The Company is
required to adopt SFAS No. 133 in the first quarter of 2001. To date, the
Company has not engaged in any hedging activity and does not expect adoption of
this new standard to have a significant impact on the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition" which provides
guidance on recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. The Company does not expect SAB 101 to have a material
effect on its financial position or results of operations.
7
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LARSCOM INCORPORATED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES. The Company's revenues of $13,036,000 for the first quarter ended
March 31, 2000 represent a 6% increase over 1999's first quarter revenues of
$12,246,000. The Orion 2000, which is designed for ATM Inverse Multiplexing, was
the major contributor to the first quarter revenue growth over last year as
market demand for fractional T3 applications continued to grow. Partially
offsetting this increase were revenue declines in the ATM Access and Multiplexer
product groups.
The combined revenues for MCI WorldCom and AT&T, the Company's two
largest customers, together accounted for 39% of revenues for first quarter
2000 versus 41% for the first quarter 1999. The revenue improvement in the
first quarter of 2000 versus the first quarter of 1999 came from the
Company's domestic distributor channels, direct sales to network service
providers (NSPs) and shipments to international markets. Shipments to
international locations represented 15% of total revenues during the first
quarter of 2000 and were 14% ahead of the same period of 1999. This increase
over last year is attributed to the Company's investment in expanding its
international presence.
GROSS PROFIT. As a percentage of revenues, gross profit for the three
months ended March 31, 2000 increased by eight percentage points to 54%, as
compared to 46% for the comparable period of 1999. The increase in gross
profit from 1999 was primarily the result of lower expenses related to excess
and obsolete inventory and improved manufacturing variances.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
10% to $2,571,000 in the three months ended March 31, 2000, from $2,340,000 in
the three months ended March 31, 1999. The increase was primarily due to higher
headcount in concert with the Company's strategic initiative to grow the
business through investment in new product development.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 11% to $5,900,000 during the three months ended March 31,
2000, as compared to $5,294,000 in the comparable 1999 period. The increase was
due primarily to the Company's greater investment in its international sales
force and higher sales commissions.
Selling, general and administrative expenses include charges from Axel
Johnson Inc. ("Axel Johnson") for legal, accounting, tax, treasury, human
resources and administrative services of $113,000 for the first quarter of 2000
and $110,000 for the first quarter of 1999.
INTEREST AND OTHER INCOME. Interest income was $425,000 for the three
months ended March 31, 2000, as compared to $264,000 for the same period in
1999. The Company's investment portfolio is generally comprised of commercial
paper rated A1/P1, bank certificates of deposit rated AA or better and corporate
medium-term notes rated AA or better. The increase in interest income over the
first quarter of 1999 was primarily due to higher average market interest rates
as well as from higher average cash balances in 2000.
PROVISION FOR INCOME TAXES. The effective tax benefit rate of 29% for the
three months ended March 31, 2000, differs from the federal statutory rate
primarily because of state income taxes.
At March 31, 2000, the Company had deferred tax assets of $15,512,000.
These assets primarily relate to expected future tax benefits from the
amortization of intangible assets. The amortization of the intangible assets is
deductible for tax purposes in equal amounts over the next 12 years. The
remaining deferred tax assets relate to inventory reserves and accrued expenses.
The Company has not taken a valuation allowance against the deferred tax assets
because it believes it is more likely than not that the benefits are realizable.
However, realization of these assets is primarily dependent on the Company's
ability to generate taxable income in the future. The determination of the
Company's ability to use the
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deferred tax assets is based on the Company's recently improved operating
results as well as the following factors:
- A significant portion of the deferred tax assets is deductible over
the next 12 years.
- Tax losses can be carried forward for 20 years.
- A portion of the losses can be carried back to prior years.
If the Company were to reduce significantly its estimate of future taxable
income, the Company would probably have to record an allowance against its
deferred tax asset. Such a change could have a materially adverse effect on the
Company's results of operations and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used cash of $488,000 in the first quarter. The
Company's net loss was almost entirely offset by non-cash items consisting of
depreciation and amortization. The primary reason for the negative net operating
cash position was an increase in working capital of $286,000, due to higher
accounts receivable and inventory balances.
Capital expenditures in the first quarter were $221,000. Such expenditures
consisted principally of the purchase of computers, software and test equipment.
The Company anticipates capital expenditures to total $2,000,000 in 2000.
The Company has a revolving line of credit of $15,000,000 under a credit
agreement with Axel Johnson (the "Credit Agreement"). The Credit Agreement
expires in December 2000. The Credit Agreement contains various representations,
covenants and events of default typical for financing a business of a similar
size and nature. Upon an event of default, any borrowings under the line of
credit shall become payable in full. To date the Company has not found it
necessary to use this line of credit. In addition to the Credit Agreement, the
Company and Axel Johnson have an administrative service agreement and a tax
sharing agreement for the purposes of defining the on-going relationship between
the two entities.
At March 31, 2000, the Company had cash and cash equivalents of $15,632,000
and short term investments of $13,195,000. The Company believes that working
capital, together with its line of credit and funds generated from operations
will provide adequate liquidity to meet its operating and capital requirements
at least through 2000. There can, however, be no assurance that future events,
such as the potential use of cash to fund any significant losses that the
Company might incur or acquisitions the Company might undertake, will not
require it to seek additional capital and, if so required, that adequate capital
will be available on terms acceptable to the Company, or at all.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE INDICATED IN ANY FORWARD-LOOKING STATEMENTS DUE
TO THE RISKS AND UNCERTAINTIES SET FORTH BELOW AS WELL AS OTHER RISKS AND
UNCERTAINTIES IT MAY DESCRIBE FROM TIME TO TIME IN OTHER FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE COMPANY UNDERTAKES NO OBLIGATION TO
REVISE ANY FORWARD-LOOKING STATEMENTS IN ORDER TO REFLECT EVENTS OR
CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE OF THIS REPORT. READERS ARE URGED TO
REVIEW CAREFULLY AND CONSIDER THE VARIOUS RISKS AND UNCERTAINTIES DESCRIBED IN
THIS REPORT AND IN OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
CUSTOMER CONCENTRATION. The Company believes that its relationships with
large customers, particularly NSPs and Internet service providers (ISPs), will
be critical to the Company's 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 1999, 1998 and 1997, two customers, MCI WorldCom and its
subsidiaries and AT&T, together accounted for 41%, 44% and 55% of the Company's
revenues, respectively. In September 1998, MCI and WorldCom merged and in May
1999, AT&T purchased the IBM Global Network from IBM. The percentages stated
above were restated for 1999, 1998 and 1997 as if the acquisitions had been
effect in
9
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those years. Accordingly, the Company's revenues are currently highly dependent
on continued orders from these two large customers.
None of the Company's customers are contractually obligated 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 it, 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 from one or more of the
Company's major customers could have a material adverse effect on its business
and operating results.
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 its control. A small number of
customers have accounted for a significant percentage of its sales. Therefore,
sales for a given quarter generally depend to a significant degree upon orders
received from and 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 are subject to change on
limited notice, in addition to the effect of competitors' product offerings. 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. Since most of the Company's sales are in
the form of large orders with short delivery times to a limited number of
customers, its backlog and consequent ability to predict revenues will continue
to be limited. In addition, announcements by the Company or its competitors of
new products and technologies could cause customers to defer, limit, or end
purchases of the Company's existing products. In the event that the Company were
to lose one or more large customers, anticipated orders from major customers
were to fail to materialize, delivery schedules were to be deferred or canceled
as a result of the above factors or other unanticipated factors, then the
Company's business and operating results would be materially adversely affected.
Consequently, 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.
Results in any period could also be affected by changes in market demand,
competitive market conditions, market acceptance of new or existing products,
increasing sales channel development costs, 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, its 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. Because of 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 these factors result in the Company's financial
performance being below the expectations of public market analysts and
investors, the price of its Class A Common Stock could be materially adversely
affected.
While gross profit margins in 2000 may be higher than in 1999,
particularly due to the impact in 1999 of additional expenses related to
excess and obsolete inventory, gross margins are not expected to reach the
levels achieved before 1998 due to increased competition. In addition, the
Company is currently developing an indirect distribution channel, which
typically yields lower margins on sales than direct sales. A number of
additional factors could cause gross profits to fluctuate as a percentage of
revenue, including changes in product mix, price discounts given, costs of
components, manufacturing costs and production volume.
The Company established its expense levels for product development and
other operating expenses based on projected sales levels and margins, but
expenses are relatively fixed in the short term. Accordingly, if sales are below
expectations in any given period, the Company's inability to adjust spending in
the short term may exacerbate the adverse impact of a revenue shortfall on its
operating results. Moreover, the Board of Directors, on November 17, 1999,
approved funding for an aggressive program to develop new products and expand
into new markets that is expected to result in operating losses for 2000. If the
Company is not successful in achieving its revenue expectations, or expenses are
higher than expected, losses could continue beyond 2000.
DEVELOPMENT OF ALTERNATIVE DISTRIBUTION CHANNELS. The Company is currently
developing an indirect distribution channel for sales to domestic customers.
This channel will consist primarily of a small group
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of master distributors, such as Tech Data, and a number of authorized resellers.
Sales to large NSPs and ISPs will continue to be handled by the Company's direct
sales force. As part of this strategy the Company has appointed certain sales
people to sign up resellers and assist them in their sales efforts. There are a
number of risks associated with the development of an indirect distribution
channel. The risks would include a reduction in the Company's ability to
forecast sales, reduced average selling prices, management's inexperience in
establishing and managing a distribution channel, potential reductions in
customer satisfaction, loss of contact with users of the Company's products and
new methods of advertising and promoting the products which will result in
additional expenses. These, and other factors, could cause results of operations
and financial condition to be materially adversely affected.
The Company markets its products internationally through non-exclusive
distribution agreements with international distributors and systems integrators.
To date the use of a distribution channel outside the US has not been
particularly successful. To focus on sales to Europe, the Middle East and
Africa, the Company has created a regional sales team, headquartered in the
United Kingdom. The United Kingdom team focuses on direct sales to large NSPs
while also supporting its distributors for sales to smaller customers. In early
2000, the Company established a direct sales office in Hong Kong to focus on the
Asian market. If these initiatives are not successful, the Company's results
could be materially adversely affected.
DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT.
The Company's future operating results are highly dependent on market acceptance
of the Company's recently introduced products and products that may be
introduced in the future. These include, for example, the WANmaker line of
CSU/DSU products and the Orion 2000 and iPLEX 6000 in the Inverse Multiplexer
product line, which have only recently been introduced. There can be no
assurance that such products will 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 product versions in a timely manner, due to resource constraints or
technological or other reasons, or to achieve timely and widespread market
awareness and acceptance of its new products or releases could have a material
adverse effect on its business and operating results.
YEAR 2000. As of April 2000, there were no significant reported Year 2000
problems either in the Company, its principal customers or suppliers. The
Company cannot assert that it, its suppliers or its customers, will not be
affected by undiscovered Year 2000 problems. The Company will continue to
monitor its products, internal systems, principal suppliers and customers to try
to ensure no significant compliance problems exist concerning Year 2000 issues.
DEPENDENCE ON COMPONENT AVAILABILITY AND KEY SUPPLIERS. On-time delivery of
the Company's products depends upon the availability of components and
subsystems used in its products. The Company depends upon its suppliers to
manufacture, assemble and deliver components in a timely and satisfactory
manner. The Company obtains components and licenses certain embedded software
from numerous single sources. The Company does not believe it would be able to
develop alternative sources for certain key components used in its products. In
addition, while the Company believes it would be able to develop alternative
sources for most of the other components and software used in its products
without incurring substantial additional costs, there can be no assurance that
the Company would be able to do so, if required. Any inability by the Company's
suppliers to meet the Company's demand or any prolonged interruption in supply
or a significant price increase of one or more components or software would
likely have a material adverse effect on the Company's business and operating
results. The Company generally does not have any long-term contracts with such
suppliers. There can be no assurance that these suppliers will continue to be
able and willing to meet the Company's requirements.
At the end of 1998, vendors of three integrated circuits ("ICs") notified
the Company regarding their intent to cease production. As a result of
anticipated continued usage of these ICs, the Company entered into purchase
commitments of approximately $1,250,000 in aggregate, representing between one
and two years expected demand for these components. As of March 31, 2000, the
Company is obligated to purchase $563,000 of these ICs by 2001. The Company may
consider redesigning its products to replace those ICs. The Company has
attempted to take into account factors such as the ability to replace the
particular IC with a similar part and the estimated life of the Company's
products in determining the quantities to purchase. While the Company believes
that it will use all the quantities it has agreed to purchase, there can be no
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assurance that its estimates are correct. If the Company's estimates are not
correct and requirements for these ICs are less or more than anticipated, it
could have a material adverse effect on the Company's business and results of
operations.
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 development and marketing of
new products and enhancements on a cost effective basis. There can be no
assurance that the Company will be successful in developing, introducing or
managing the transition to new or enhanced products or that any such products
will be responsive to technological changes or will gain market acceptance. If
the Company were to be unsuccessful or to incur significant delays in developing
and introducing such new products or enhancements, the Company's business and
operating results could be materially adversely affected. For example, the
Company is aware of a competing technology with network monitoring capabilities
that can be used instead of the Split-T product that the Company sells primarily
to MCI WorldCom. If MCI WorldCom's customers were to opt for the alternative
technology as part of their services, the Company's business and operating
results would be materially adversely affected.
SOURCES OF ADDITIONAL FINANCE. The Company has access, subject to certain
conditions, to a $15,000,000 credit facility provided by Axel Johnson. In
December 1999, this agreement was amended and the termination date of the
facility was extended until December 2000. There can be no assurance that
alternative sources of financing will be available upon the expiration of such
facility in December 2000, or that additional sources of funding will be
available on terms favorable to the Company if its borrowing requirements exceed
the amount of the facility.
MANAGEMENT OF OPERATIONS. The Company's future success depends on its
ability to recruit and retain employees following the restructuring and the
Company's recent financial performance shortfalls. To grow its business, the
Company must continue to 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.
Availability of qualified sales and technical personnel is limited, and
competition for experienced sales and technical personnel in the
telecommunications equipment industry is intense. The Company's failure to
manage any expansion or contraction effectively could have a material adverse
effect on the Company's business and operating results.
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 is the sole holder of the Class B Common Stock. As a result, Axel
Johnson has sufficient combined voting power to absolutely control the direction
and policies of the Company, including mergers, the payment of dividends,
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.
RISKS ASSOCIATED WITH ENTRY INTO INTERNATIONAL MARKETS. Sales outside the
US approximated 15% of the Company's revenues for the first quarter of 2000. The
conduct of business outside the US is subject to certain customary 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, 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 US
could deny or preclude the Company's marketing and sales efforts in such
countries, which could have a material adverse effect on its business and
operating results.
COMPLIANCE WITH REGULATIONS AND EVOLVING INDUSTRY STANDARDS. The market for
the Company's products is characterized by the need to comply with a significant
number of communications regulations and standards, some of which are evolving
as new technologies are deployed. In the US, the Company's products must comply
with various regulations defined by the Federal Communications Commission and
standards
12
<PAGE>
established by Underwriters Laboratories, as well as industry standards
established by various organizations. As standards for services such as ATM and
DSL 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 its products, which in
turn could have a material adverse effect on its business and operating results.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. As part of its efforts to
grow its business, the Company reviews acquisition prospects that would
potentially complement its existing product offerings, augment its market
coverage, enhance its technological capabilities or offer growth opportunities.
Any future acquisitions by the Company could result in potentially dilutive
issuances of equity securities and/or the issuances 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 acquisition. Accordingly, such acquisitions
could result in amortization of goodwill and other charges 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 from 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. No
assurance can be given as to the ability of the Company to integrate
successfully any businesses, products, technologies or personnel 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 US patent to date, it believes that the success of its business depends
primarily on its proprietary technology, information, processes, and expertise,
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 entered into non-disclosure agreements with its suppliers,
distributors and appropriate customers so as to limit access to and disclosure
of its proprietary information. There can be no assurance that these statutory
and contractual arrangements will deter misappropriation of the Company's
technologies or discourage independent third-party development of similar
technologies. In the event such arrangements are insufficient, the Company's
business and operating results could be materially adversely affected.
13
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. The Company does not use derivative financial
instruments in its investment portfolio. The Company's investment portfolio has
been generally comprised of commercial paper rated A1/P1, bank certificates of
deposit rated AA or better and corporate medium-term notes rated AA or better.
These securities mature within one year and are classified as available for sale
in accordance with SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company places investments in instruments that meet high
credit quality standards. These securities are subject to interest rate risk,
and could decline in value if interest rates increase. Because of the short
duration and conservative nature of the Company's investment portfolio, it does
not expect any material loss with respect to its investment portfolio.
FOREIGN CURRENCY EXCHANGE RATE RISK. Certain of the Company's sales and
marketing expenses are incurred in local currencies. Consequently, the Company's
international results of operations are subject to foreign exchange rate
fluctuations. The Company does not currently hedge against foreign currency rate
fluctuations. Gains and losses from such fluctuations have not been material to
its consolidated results.
14
<PAGE>
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:
27, Financial Data Schedule
b: Reports on Form 8-K:
The Company issued one report on Form 8-K during the
first quarter of 2000. Information regarding the item
reported is as follows: Larscom Incorporated issued a
press release on February 1, 2000 regarding the
appointment of Richard E. Pospisil to its Board of
Directors.
15
<PAGE>
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 4, 2000 BY /s/ Robert Coackley
----------------- -----------------------------------
Robert Coackley
President and Chief Executive Officer
16
<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, 2000, 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 15,632
<SECURITIES> 13,195
<RECEIVABLES> 8,845
<ALLOWANCES> (535)
<INVENTORY> 6,309
<CURRENT-ASSETS> 50,638
<PP&E> 19,478
<DEPRECIATION> (15,080)
<TOTAL-ASSETS> 67,116
<CURRENT-LIABILITIES> 12,206
<BONDS> 0
0
0
<COMMON> 186
<OTHER-SE> 54,158
<TOTAL-LIABILITY-AND-EQUITY> 67,116
<SALES> 13,036
<TOTAL-REVENUES> 13,036
<CGS> 5,992
<TOTAL-COSTS> 8,471
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (401)
<INCOME-PRETAX> (1,026)
<INCOME-TAX> (296)
<INCOME-CONTINUING> (730)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (730)
<EPS-BASIC> (0.04)<F1>
<EPS-DILUTED> (0.04)
<FN>
<F1>Represents basic earnings per share
</FN>
</TABLE>
