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Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2002
 
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
incorporation or organization)
  
(IRS Employer
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 November 5, 2002, was 8,861,295 of Class A Common Stock and 10,000,000 of Class B Common Stock.
 

Table of Contents
 
LARSCOM INCORPORATED
FORM 10-Q
 
TABLE OF CONTENTS
 
Part I:
      
3
Item 1:
      
3
       
3
       
4
       
5
       
6
Item 2:
      
10
Item 3:
      
18
Item 4:
      
18
Part II:
      
19
Item 1:
      
19
Item 2:
      
19
Item 3:
      
19
Item 4:
      
19
Item 5:
      
19
Item 6:
      
19
    
a:   Exhibits
   
19
       
19
  
20
  
21

2

Table of Contents
 
Part I:    Financial Information
 
Item 1:    Financial Statements (Unaudited)
 
LARSCOM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) (Unaudited)
 
    
September 30,
2002
     
December 31,
2001
  
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
15,401
 
   
$
9,789
 
Short-term investments
   
 
5,043
 
   
 
11,216
 
Accounts receivable, net
   
 
2,555
 
   
 
4,227
 
Inventories
   
 
4,127
 
   
 
3,575
 
Income tax receivable
   
 
112
 
   
 
59
 
Due from Axel Johnson Inc.
   
 
651
 
   
 
574
 
Prepaid expenses and other current assets
   
 
854
 
   
 
1,598
 
    
  
Total current assets
   
 
28,743
 
   
 
31,038
 
Property and equipment, net
   
 
2,218
 
   
 
3,135
 
Other non-current assets, net
   
 
250
 
   
 
—  
 
    
  
Total assets
   
$
31,211
 
   
$
34,173
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Current liabilities:
                  
Accounts payable
   
$
1,883
 
   
$
2,115
 
Accrued expenses and other current liabilities
   
 
7,459
 
   
 
7,120
 
    
  
Total current liabilities
   
 
9,342
 
   
 
9,235
 
Other non-current liabilities
   
 
1,715
 
   
 
2,162
 
    
  
Total liabilities
   
 
11,057
 
   
 
11,397
 
    
  
Stockholders’ equity:
                  
Class A Common Stock
   
 
89
 
   
 
88
 
Class B Common Stock
   
 
100
 
   
 
100
 
Additional paid-in capital
   
 
83,231
 
   
 
83,210
 
Accumulated other comprehensive income/(loss)
   
 
10
 
   
 
(1
)
Accumulated deficit
   
 
(63,276
)
   
 
(60,621
)
    
  
Total stockholders’ equity
   
 
20,154
 
   
 
22,776
 
    
  
Total liabilities and stockholders’ equity
   
$
31,211
 
   
$
34,173
 
    
  
 
The accompanying notes are an integral part of these financial statements.

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Table of Contents
 
LARSCOM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2002
     
2001
     
2002
     
2001
  
Product revenues
   
$
4,009
 
   
$
8,905
 
   
$
14,725
 
   
$
29,519
 
Service revenues
   
 
1,333
 
   
 
1,470
 
   
 
4,162
 
   
 
4,342
 
    
  
  
  
Total revenues
   
 
5,342
 
   
 
10,375
 
   
 
18,887
 
   
 
33,861
 
    
  
  
  
Product cost of revenues
   
 
1,926
 
   
 
4,884
 
   
 
7,232
 
   
 
19,498
 
Service cost of revenues
   
 
202
 
   
 
421
 
   
 
815
 
   
 
1,579
 
    
  
  
  
Total cost of revenues
   
 
2,128
 
   
 
5,305
 
   
 
8,047
 
   
 
21,077
 
    
  
  
  
Gross profit
   
 
3,214
 
   
 
5,070
 
   
 
10,840
 
   
 
12,784
 
    
  
  
  
Operating expenses:
                                    
Research and development
   
 
1,036
 
   
 
1,697
 
   
 
3,073
 
   
 
5,814
 
Selling, general and administrative
   
 
3,844
 
   
 
4,909
 
   
 
12,390
 
   
 
16,606
 
Restructuring
   
 
(61
)
   
 
—  
 
   
 
192
 
   
 
4,761
 
    
  
  
  
Total operating expenses
   
 
4,819
 
   
 
6,606
 
   
 
15,655
 
   
 
27,181
 
    
  
  
  
Loss from operations
   
 
(1,605
)
   
 
(1,536
)
   
 
(4,815
)
   
 
(14,397
)
Interest and other income
   
 
90
 
   
 
284
 
   
 
308
 
   
 
1,057
 
    
  
  
  
Loss before income taxes
   
 
(1,515
)
   
 
(1,252
)
   
 
(4,507
)
   
 
(13,340
)
Income tax provision/(benefit)
   
 
5
 
   
 
26
 
   
 
(1,851
)
   
 
15,896
 
    
  
  
  
Net loss
   
$
(1,520
)
   
$
(1,278
)
   
$
(2,656
)
   
$
(29,236
)
    
  
  
  
Basic and diluted net loss per share
   
$
(0.08
)
   
$
(0.07
)
   
$
(0.14
)
   
$
(1.56
)
    
  
  
  
Basic and diluted weighted average shares
   
 
18,858
 
   
 
18,823
 
   
 
18,852
 
   
 
18,800
 
    
  
  
  
 
The accompanying notes are an integral part of these financial statements.

4

Table of Contents
 
LARSCOM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
    
Nine Months Ended
September 30,
  
    
2002
     
2001
  
Cash flows from operating activities:
                  
Net loss
   
$
(2,656
)
   
$
(29,236
)
Depreciation and amortization
   
 
1,164
 
   
 
1,624
 
Non-cash restructuring and cost of revenue charges
   
 
—  
 
   
 
2,280
 
Decrease in deferred income taxes
   
 
—  
 
   
 
15,790
 
Increase/(decrease) in deferred revenue
   
 
587
 
   
 
(205
)
Decrease in accrued restructuring
   
 
(855
)
   
 
(1,858
)
Net decrease in other working capital accounts
   
 
1,824
 
   
 
8,113
 
    
  
Net cash provided by/(used in) operating activities
   
 
64
 
   
 
(3,492
)
    
  
Cash flows from investing activities:
                  
Purchases of property and equipment
   
 
(192
)
   
 
(1,195
)
Purchases of short-term investments
   
 
(9,248
)
   
 
(15,066
)
Sales and maturities of short-term investments
   
 
15,420
 
   
 
20,851
 
Purchase of licenses
   
 
(333
)
   
 
—  
 
    
  
Net cash provided by investing activities
   
 
5,647
 
   
 
4,590
 
    
  
Cash flows from financing activities:
                  
Payments to Axel Johnson Inc.
   
 
(77
)
   
 
(605
)
(Decrease)/increase in long-term deposits and capital lease obligations
   
 
(55
)
   
 
42
 
Proceeds from issuances of Class A Common Stock
   
 
22
 
   
 
367
 
    
  
Net cash used in financing activities
   
 
(110
)
   
 
(196
)
    
  
Effect of unrealized investment gain and foreign exchange rates on cash
   
 
11
 
   
 
—  
 
    
  
Increase in cash and cash equivalents
   
 
5,612
 
   
 
902
 
Cash and cash equivalents at beginning of period
   
 
9,789
 
   
 
7,741
 
    
  
Cash and cash equivalents at end of period
   
$
15,401
 
   
$
8,643
 
    
  
Supplemental disclosure of cash flow information:
                  
Interest paid
   
$
2
 
   
$
2
 
    
  
Income taxes paid
   
$
39
 
   
$
69
 
    
  
 
The accompanying notes are an integral part of these financial statements.

5

Table of Contents
 
LARSCOM INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1—Basis of Presentation:
 
The condensed consolidated financial statements for the three months and nine months ended September 30, 2002 and 2001, presented in this Quarterly Report on Form 10-Q, are unaudited. In the opinion of management, these statements include all adjustments necessary for a fair statement of the results for the interim periods presented. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Larscom Incorporated Report on Form 10-K for the year ended December 31, 2001. The results of operations for the three months and nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year.
 
Note 2—Inventories:
 
Inventories consist of the following (in thousands):
 
      
September 30,
2002
   
December 31,
2001
Raw materials
     
$
1,147
   
$
1,608
Work-in-process
     
 
563
   
 
520
Finished goods
     
 
2,417
   
 
1,447
      
  
      
$
4,127
   
$
3,575
      
  
 
Note 3—Restructuring and Cost of Revenues Charges:
 
During 2001 we announced two corporate restructuring programs in response to our own reduced revenues, negative macro-economic conditions and declining demand in our markets. These initiatives were focused on improving operating performance by reducing expenses. The restructuring programs included workforce reductions of approximately 42% (88 people), the closing of our facility in Durham, North Carolina and the write-off of fixed assets due primarily to the workforce reduction and facility closing. Implementing these programs led to charges to results in the second and fourth quarters of 2001 totaling $5,772,000. In the second quarter of 2002, we announced a corporate restructuring as a result of the ongoing stagnation of the telecom market. Consequently, 16 positions were eliminated from our workforce with a charge to operating results of $394,000. Partially offsetting this charge was a $141,000 reduction to the prior restructuring reserves for outplacement services, which were not fully utilized by some of the laid-off employees. We expect to pay out the majority of employee termination costs by the end of 2002.
 
A sublease agreement was signed on February 27, 2002, between us and Silicon Wireless Corporation, a start-up company that had a commencement date of February 15, 2002 and is for the entire 27,000 square-foot facility in Durham, North Carolina. The agreement includes an initial four-and-one-half-months free-rent period. Due to the uncertainty of the receipt of income under the sublease, we have decided to release the associated real-estate accrual as the sublease income is received. During the third quarter of 2002, restructuring reserves were reduced by $61,000 as a result of rent collected from Silicon Wireless Corporation for our RTP facility. We expect the real estate lease obligation will be paid-out by January 2007.

6

Table of Contents
 
The following table provides details on the activity and remaining balances of the 2001 and 2002 restructuring charges as of September 30, 2002:
 
    
Total Charges
   
Cumulative Cash Charges
       
Cumulative Non-Cash Charges & Adjustments
       
Reserve September 30, 2002
    
(in thousands)
Employee termination costs
   
$
3,246
   
$
(2,973
)
     
$
(161
)
     
$
112
Real estate lease
   
 
2,532
   
 
(622
)
     
 
—  
 
     
 
1,910
Fixed asset write-down
   
 
388
   
 
—  
 
     
 
(388
)
     
 
—  
    
  
    
    
Total
   
$
6,166
   
$
(3,595
)
     
$
(549
)
     
$
2,022
    
  
    
    
 
On October 21, 2002, we announced an additional round of layoffs. See Note 10.
 
Note 4—Deferred Tax Assets:
 
Deferred tax assets include temporary differences related to intangible assets associated with the acquisition of NetEdge Systems Inc. in 1997, inventory write-downs, accrued expenses and net operating losses that carry forward. In 2001, we concluded that a deferred tax asset valuation allowance should be established due to the uncertainty of realizing the tax loss carry-forwards and other deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Our assessment was based principally on the historical losses experienced by us in the U.S., unfavorable macro-economic conditions and capital expenditure reductions announced by several service providers. The valuation allowance was reduced by $1,894,000 in the first quarter of 2002 due to our ability to utilize additional net operating loss carry-backs against taxes paid in 1996, 1997 and 1998. This is a result of the 2002 change in the federal income tax code for tax loss carry-back provisions. A federal tax filing was made during the third quarter of 2002 and a rebate was received during the quarter for the entire $1,894,000 amount. The deferred tax asset balance as of September 30, 2002 amounted to $20,865,000 and the valuation allowance balance was $20,865,000.
 
Additional deferred tax assets will be recognized in future periods to the extent that we can reasonably expect such assets to be realized. We will evaluate the probability of realizing our deferred tax assets on a quarterly basis. If we determine that an additional portion or all of the deferred tax assets are realizable, we will reduce the income tax valuation allowance accordingly.
 
Note 5—Net Loss Per Share:
 
Basic net loss per share is computed using the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss per share is computed using the weighted-average number of shares of Common Stock outstanding and the dilutive effect of options to purchase shares of Common Stock. In computing diluted earnings per share, the average price of our Common Stock for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options. In the net loss per share computation, the effect of options to purchase shares of Common Stock is excluded, as their effect is antidilutive.

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Table of Contents
 
The following table shows how basic and diluted net loss per share is computed (in thousands, except per share data):
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2002
     
2001
     
2002
     
2001
  
Net loss
   
$
(1,520
)
   
$
(1,278
)
   
$
(2,656
)
   
$
(29,236
)
    
  
  
  
Basic and diluted weighted average Class A and B Common Stock outstanding
   
 
18,858
 
   
 
18,823
 
   
 
18,852
 
   
 
18,800
 
    
  
  
  
Basic and diluted net loss per share
   
$
(0.08
)
   
$
(0.07
)
   
$
(0.14
)
   
$
(1.56
)
    
  
  
  
Weighted average in-the-money Class A Common Stock options outstanding excluded from the basic and diluted loss per share calculation
   
 
—  
 
   
 
—  
 
   
 
1
 
   
 
251
 
    
  
  
  
 
Note 6—Comprehensive Income/(Loss):
 
“Comprehensive Income/(Loss)” includes all changes in equity from non-owner sources during the period. There were two items of adjustment from net loss to comprehensive net loss for the periods presented, which relate to unrealized gains on short-term investments and foreign currency translation adjustments. Such amounts were immaterial for the periods presented.
 
Note 7—Commitments and Contingencies:
 
In our distribution agreements, we typically agree to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. We made no payments for indemnification of customers under these agreements for either of the first nine months of 2002 or 2001.

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Table of Contents
 
Note 8—Geographic Information:
 
Revenue and long-lived assets related to operations in the United States and other countries for the three and nine months ended September 30, 2002 and 2001 and as of September 30, 2002 and December 31, 2001 are as follows (in thousands):
 
Revenues (a)
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
  
2002
   
2001
   
2002
   
2001
United States
   
$
4,343
   
$
9,096
   
$
15,463
   
$
28,184
Other countries
   
 
999
   
 
1,279
   
 
3,424
   
 
5,677
    
  
  
  
Total
   
$
5,342
   
$
10,375
   
$
18,887
   
$
33,861
    
  
  
  
(a) Revenues are reported by shipment to the final destination as determined by records required
to comply with U.S. Department of Commerce regulations.
      
As of
Long-Lived Assets
     
September 30,
2002
   
December 31,
2001
United States
     
$
2,459
   
$
3,125
Other countries
     
 
9
   
 
10
      
  
Total
     
$
2,468
   
$
3,135
      
  
 
Note 9—Recent Accounting Pronouncements:
 
In May 2002, the FASB issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections” (“SFAS 145”). Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. SFAS 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. The Company does not currently anticipate this statement to have any effect on its financial statements.
 
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002.
 
Note 10—Subsequent Events:
 
On October 21, 2002, due to the continued decline in the telecommunications business and the difficult economic environment, we announced a further reduction in force to align our expenses with our anticipated revenue levels. We eliminated 14 positions, reducing the total work force to 91 people. As a result, we expect to report pretax restructuring charges of approximately $200,000 in the fourth quarter of 2002.
 
We also announced on October 21, 2002 that our application to transfer from the Nasdaq National Market to the SmallCap Market was approved. The move comes after we failed to meet Nasdaq National Market’s requirements for minimum bid price and market value of publicly held shares. The transfer became effective as of the commencement of trading on October 23, 2002.

9

Table of Contents
 
Item 2:    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
The market for telecommunications equipment is going through a period of rationalization and contraction as service providers digest the network “overbuild” of the late 1990’s and 2000. This excess has left most service providers, our primary customers, cutting capital equipment budgets, and focusing on squeezing efficiencies out of the existing network infrastructure. While our business is generally suffering as a result, our restructuring programs have substantially reduced our operating expense levels in the first three quarters of 2002 versus the operating expense levels during the four quarters of 2001.
 
Results of Operations
 
Revenues.    Our consolidated revenues of $5,342,000 for the third quarter ended September 30, 2002 declined 49% from 2001’s third quarter revenues of $10,375,000. Our Multiplexer and Inverse Multiplexer product lines accounted for the major portion of the decrease from last year’s third quarter with a combined revenue reduction of $4,978,000 or 99 percent of the $5,033,000 total reduction. For the nine months ending September 30, 2002, revenues totaled $18,887,000, which was 44% below the comparable nine-month period of 2001, when total revenues were $33,861,000. Reduced Multiplexer and Inverse Mutiplexer product line shipments were also the primary contributors to the lower revenues in the first nine months of 2002 versus 2001.
 
By channel of distribution, the bulk of the revenue reductions for the third quarter of 2002 as compared to the third quarter of 2001 came from service providers (“SPs”) and end users, while the reductions for the first nine months of 2002 versus the comparable periods of 2001 were attributable to lower direct sales to SPs, domestic and international distributors and end users. Shipments to international locations represented 19% of total revenues during the third quarter of 2002 and were 22% lower than the same period of 2001. For the nine-month period, international revenues were 18% of total revenues and 40% lower than the same period of last year.
 
The combined revenues from WorldCom, Inc. and AT&T, our two largest customers, accounted for 36% of the total revenues for the first nine months of 2002 versus 46% for the first nine months of 2001. The financial difficulties at WorldCom, including its bankruptcy filing, had, and we expect it to continue to have, a major adverse impact on our revenues. At the end of the third quarter, we had deferred revenues of $458,000 and reserves against open accounts receivable balances of $67,000 because the shipments for these amounts occurred prior to WorldCom’s bankruptcy filing. After the bankruptcy filing, because of WorldCom’s debtor-in-possession financing and their timely payment for shipments made after the bankruptcy filing, we resumed the recording of revenues upon shipment to WorldCom. The following table is the percentage of total revenues for our two largest customers:
 
    
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
    
2002
   
2001
   
2002
   
2001
WorldCom, Inc.
   
26%
   
39%
   
21%
   
37%
AT&T
   
10%
   
7%
   
15%
   
8%
 
Gross Profit.    Our total gross margin dollars for the third quarter of 2002 and the first nine months of 2002 were $3,214,000 and $10,840,000 versus $5,070,000 and $12,784,000 million for the same periods of 2001, respectively. The reduction in gross margin dollars for the 2002 periods versus the 2001 periods was primarily due to sales volume declines partially offset by improvements to our gross margin percentage. Our gross profit percentage in last year’s third quarter was 49% or 11 percentage points lower than this year’s third-quarter result of 60 percent. This improvement was largely due to higher 2001 Orion 5000 manufacturing costs, overall material costs and warranty costs. The 19 percentage point improvement from 38% for the first nine months of 2001 to 57% for the first nine months of 2002 was primarily due to higher 2001 excess and obsolete inventory charges, an asset impairment charge in 2001 as well as higher 2001 Orion 5000 manufacturing costs, overall material costs and warranty costs.

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Table of Contents
 
Research and Development.    Research and development expenses totaled $1,036,000 for the third quarter of 2002, which was $661,000 or 39% below the third quarter 2001 spending of $1,697,000. For the nine months ending September 30, 2002, research and development costs totaled $3,073,000 or a 47% decline as compared to the like nine-month period of 2001 when spending was $5,814,000. The expense reductions in both the third quarter and nine-month periods were primarily due to lower employee related expenses, lower outside services expenses, lower depreciation and a decline in repairs and maintenance cost, all of which resulted from the restructuring programs enacted in 2001 and the second quarter of 2002.
 
Selling, General and Administrative.    Selling, general and administrative expenses decreased 22% to $3,844,000 during the three months ended September 30, 2002, as compared to $4,909,000 for the same period in 2001. For the nine months ended September 30, 2002, selling, general and administrative expenses were $12,390,000, compared to $16,606,000 for the same period of 2001, which represents a $4,216,000 or 25% reduction from last year. The reduced spending level was mainly due to lower salary, benefit, travel, communication and outside service expenses resulting from reductions to our workforce as well as lower commission expense from lower sales.
 
Selling, general and administrative expenses include contractual charges from Axel Johnson for providing certain services to us related to treasury, accounting, tax, internal audit, legal and human resources. The costs of these services have been allocated to us based on estimates by Axel Johnson of actual costs incurred. We believe that such allocations are reasonable. Such charges and allocations are not necessarily indicative of the costs that would have been incurred if we had internally provided such services. The allocated costs of these services amounted to $116,000 for the third quarter and $349,000 for the first nine months of 2002, which was the same as the third quarter and first nine months of 2001, respectively.
 
Restructuring.    During the third quarter of 2002, we reduced our restructuring expenses by $61,000 compared to the third quarter of 2001 as a result of rental income we received for subleasing our leased facility in Durham, North Carolina. For the nine-month period of 2002, net restructuring charges were $192,000 reflecting a June 2002 charge for a workforce reduction of 16 positions, partially offset by a reduction in charges for outplacement services not fully utilized by laid-off employees and rental income for the Durham, North Carolina leased facility received in the third quarter. That compares to a $4,761,000 restructuring charge for the first nine months of 2001 when we reduced our workforce by 53 people, closed our leased facility in Durham, North Carolina and wrote-off assets associated with the closing.
 
Interest and Other Income.    Interest and other income amounted to $90,000 and $308,000 for the third quarter and first nine months of 2002, respectively, as compared to $284,000 and $1,057,000 for the same periods of 2001, respectively. Interest income, which is the major component of interest and other income, was $111,000 for the third quarter of 2002, compared to $297,000 for the same period in 2001. For the first nine months of 2002, interest income was $339,000 versus $1,083,000 for the first nine months of 2001. The lower interest income for the nine-month period was attributed to lower average interest rates (2% versus 6%) and lower average cash and short-term investment balances ($21 million versus $26 million). Our investment portfolio generally is comprised of commercial paper rated A1/P1; bank certificates of deposit rated A- or better and corporate bonds and medium-term notes rated A- or better.
 
Provision for Income Taxes.    The tax benefit of $1,851,000 for the nine-month period ended September 30, 2002 is comprised primarily of an income tax refund as a result of a 2002 change in the federal income tax code. The tax code change allows corporations with certain tax losses to file for refunds for taxes paid in previous years. The tax benefit of $1,851,000 is mainly due to our filing for total refunds of $1,894,000 for taxes paid in 1996, 1997 and 1998.
 
Net loss.    The net loss for the three months ended September 30, 2002 increased 19% to $1,520,000, as compared to a net loss of $1,278,000 for the same period in 2001. The higher net loss in the third quarter of 2002 was mainly due to a 49% decline in total revenues partially offset by reductions in expenses as a result of our restructuring programs. For the nine months ending September 30, 2002, the net loss was $2,656,000, compared to a net loss of $29,236,000 for the same period of 2001. The lower net loss for the first nine months of 2002 versus the first nine months of 2001 was primarily due to a valuation allowance charge against the deferred tax assets, higher restructuring costs and asset impairment charges in 2001 as well as lower operating expenses in 2002, largely resulting from our restructuring programs.

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Liquidity and Capital Resources
 
At September 30, 2002, we had cash and cash equivalents of $15,401,000 and short-term investments of $5,043,000. Cash, cash equivalents and short-term investments declined by approximately 3% from $21,005,000 on December 31, 2001 to $20,444,000 on September 30, 2002. The $561,000 decrease in cash and short-term investments in the first nine months of 2002 is primarily attributable to the net loss for the period, payments for licenses, purchases of inventories and fixed assets and severance payments related to the restructurings. These decreases to cash were partially offset by the receipt of a federal tax rebate of $1,894,000 and cash receipts from the collections of customer accounts receivable.
 
Capital expenditures for the first nine months of 2002 were $192,000. These expenditures consisted principally of the purchase of computers, software and test equipment. We anticipate capital expenditures to total approximately $455,000 for 2002.
 
We have a revolving line of credit of $15,000,000 under a credit agreement with Axel Johnson Inc. (the “Credit Agreement”). The Credit Agreement expires in December 2003. This agreement contains various representations, covenants, conditions and events of default typical for financing a business of a similar size and nature, including a condition to any drawdown that no material adverse change has occurred in the Company’s financial condition or results of operation. We currently have a letter from Axel Johnson Inc. dated August 8, 2002, stating that it is Axel Johnson’s intent to allow borrowings under the credit line, provided we do not experience any material and adverse change after August 8, 2002. Upon an event of default or upon election by Axel Johnson if it no longer holds at least a majority of our outstanding voting power or it has elected less than a majority of our directors, any borrowings under the line of credit shall become payable in full. To date we have not found it necessary to use this line of credit. In addition to the Credit Agreement, we and Axel Johnson Inc. have an administrative service agreement and a tax-sharing agreement for the purposes of defining the on-going relationship between the two entities. As of September 30, 2002 Axel Johnson owned 53% of our Class A and Class B Common Stock, representing 82% of the outstanding voter power.
 
We believe our cash and short-term investments, after consideration of future operations, will be sufficient to fund our cash requirements, at least through the next 12 months. Nonetheless, future events, such as the potential use of cash to fund any significant losses that we might incur or acquisitions we might undertake, might require us to request borrowings under our credit line with Axel Johnson Inc. or seek additional capital from other sources. In that event, it is possible we would not be able to make the representations and warranties necessary to effect a borrowing under the Axel Johnson Inc. Credit Agreement or obtain adequate capital from other sources.
 
The effects of inflation on our revenues and operating income have not been material to date.
 
Recent Accounting Pronouncements:
 
In May 2002, the FASB issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections.” Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. SFAS 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. The Company does not currently anticipate this statement to have any effect on its financial statements.
 
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002.

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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. Our 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 we may describe from time to time in other filings with the Securities and Exchange Commission. We undertake 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.
 
Our entire industry is in an extended downturn.    The downturn for the United States economy and the rapid and severe downturn for the domestic telecommunications industry, beginning in late 2000, have negatively affected demand for our products. In addition to the deteriorating domestic economic environment, the worldwide telecommunications market is experiencing reduced demand. This decreased demand has led to fluctuating order forecasts from some of our customers. There can be no certainty as to the degree of severity or duration of this economic downturn or the reduced demand in the telecommunications industry. We also cannot predict the extent and timing of the impact of the economic downturn in the United States and the worldwide downturn for the telecommunications industry on economies in Canada, Europe and other countries and geographic regions. As recently as the first nine months of 2002, order demand from our customers continued to decline as they experienced the impact of the downturn in the telecommunications market.
 
We expect to continue to incur operating losses and may not be profitable in the future.    We have experienced substantial net losses, including a net loss of $30,879,000 in 2001 and had an accumulated deficit of $63,276,000 as of September 30, 2002. A continued decrease in revenues could have an adverse impact on our finances. There can be no assurance as to when or if we will achieve profitability.
 
Our prospects for growth depend on recently-introduced products, products under development and products licensed from others.    We expect sales of our established products to decline over time. Therefore, our future operating results are highly dependent on market acceptance of our recently-introduced products, products that may be introduced in the future and products that we license from others. These include, for example, the Larscom 6200 and the Orion 5000, 5001 and 5003, all of which have only recently been introduced. There can be no assurance that such products will achieve widespread market acceptance, and, in fact, some other products we introduced in recent years have failed to meet our sales expectations. The industry-wide downturn has caused sales of new products, such as ours, to be well below expectations. In addition, we have licensed the intellectual property and development rights for the Orion 5000, 5001 and 5003. Our dependence on others for the initial design of this product increases the risk that we may not be successful with future enhancements to the product line. We have, in the past, experienced delays and changes in course in the development of new products and the enhancement of existing products, and such delays and changes in course may occur in the future. 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 our new products or releases, would have a material adverse effect on our business and operating results.
 
We conducted four rounds of restructuring/layoffs in the past seventeen months.    Our June 22, 2001 restructuring included a workforce reduction of approximately 25% (53 people) and the closure of our North Carolina facility. On October 18, 2001, we announced additional reductions in force of approximately 17% (35 people) of the base 2001 workforce. On May 31, 2002 we announced another reduction in force of approximately 15% (16 people) of our remaining workforce. On October 21, 2002, we announced a reduction of 13% of our current workforce (14 people). Thirty-three percent (39 people) of the total reductions in employees were from engineering personnel. Although the restructuring actions taken have lowered our expense base, we expect operating losses to continue in 2002. Therefore, there can be no assurance that another restructuring and/or workforce reduction will not be required. In addition, our June 2001, October 2001, May 2002 and October 2002 workforce reductions may deprive us of the human capital we would need to take full advantage of any upturn in the business cycle in our industry. There can be no assurance that we will not lose employees in the future as a result of the restructuring/layoffs, or that we will be able to recruit suitable replacements.

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Rapid technological change could hurt our ability to compete.    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 our products. Our success will depend to a substantial degree upon our 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 we 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. In the past, some of the products we have planned and introduced have not met our sales expectations.
 
The absence of long-term backlog makes us vulnerable in periods of weak demand.    None of our customers is 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 from year-to-year. Our current customers might not continue to place orders with us, orders from existing customers might not continue at the levels of previous periods and we might not be able to obtain orders from new customers. Recently, there has been a reduction of equipment demand throughout the telecommunications industry. Because of our limited backlog, this tends to have an immediate negative effect on our operations, which we cannot fully offset on a timely basis by implementing reductions in expenses.
 
We depend upon a small number of customers.    A small number of customers have accounted for a significant percentage of our sales. Our largest customer, WorldCom, filed for bankruptcy this year, which could lead to a substantial loss in their customer base or a major reorganization, all of which could influence their order levels to us. Therefore, sales for a given quarter generally depend on 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 is subject to change on limited notice, in addition to the ebbs and flows in our customers’ business conditions and the effect of competitors’ product offerings. We have in the past experienced both accelerations and slowdowns 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 our sales are in the form of large orders with short delivery times to a limited number of customers, our backlog and consequently our ability to predict revenues will continue to be limited. In addition, announcements by us or our competitors of new products and technologies could cause customers to defer, limit, or end purchases of our existing products. In the event that we lose one or more large customers, anticipated orders from major customers fail to materialize, or delivery schedules are deferred or canceled as a result of the above, or other unanticipated factors, our business and operating results would be materially adversely affected. Our 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 our control. Consequently, we believe that period-to-period comparisons of our 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,
 
 
•
 
sales channel development costs,
 
 
•
 
the cost and availability of components,
 
 
•
 
the mix of our customer base and sales channels,
 
 
•
 
the mix of products sold,
 
 
•
 
our sales promotion activities,
 
 
•
 
our ability to expand or contract our sales and marketing organizations effectively,
 
 
•
 
our ability to attract and retain key technical and managerial employees,
 
 
•
 
and general economic conditions.
 
We established our 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, when sales are below expectations in any given period, our inability to adjust spending proportionally in the short term may exacerbate the adverse impact of a revenue shortfall on our operating results.

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Because of all of the foregoing factors, our operating results in one or more future periods may be subject to significant fluctuations. In the event these factors result in financial performance below the expectations of public market analysts and investors, the price of our Class A Common Stock could be materially adversely affected.
 
We depend heavily on component availability and key suppliers.    On-time delivery of our products depends upon the availability of components and subsystems used in our products. We depend upon our suppliers to manufacture, assemble and deliver components in a timely and satisfactory manner. We obtain components and license certain embedded software from several single sources. We do not believe we would be able to develop alternative sources for certain essential components used in our products without incurring significant costs. In addition, while we believe we would be able to develop alternative sources for most of the other components and software used in our products there can be no assurance that we would be able to do so, in a timely manner without incurring substantial additional costs, if required. Any inability by our suppliers to meet our demand or any prolonged interruption in supply, or a significant increase in the price of one or more components or in the price of software, would likely have a material adverse effect on our business and operating results. We generally do not have any long-term contracts with our suppliers and, in fact, we have made a recent decision to change our major supplier for contract manufacturing. It is possible that our new major contract supplier and other suppliers will not continue to be able and willing to meet our future requirements.
 
The market for our products is intensely competitive, and our failure to compete effectively could reduce our revenues and margins.    Competition in the market place for high-speed network-access products is intense. Our products compete primarily with Quick Eagle Networks, Verilink, Kentrox, Cisco Systems, Alcatel, ADTRAN, RAD, Telco Systems, Carrier Access and Paradyne. We compete to a lesser extent with other telecommunications equipment companies. Many of our competitors have more broadly developed distribution channels and have made greater advances than we have in emerging technologies. Cisco Systems and Atcatel are two of the largest communications equipment companies in the world. There can be no assurance that we will be able to continue to compete successfully with existing or new competitors.
 
Our business could be materially and adversely affected by shifts in the use of technology common throughout the industry today.    Three possible shifts are:
 
 
•
 
the integration of CSU/DSU technology into routers and switches,
 
 
•
 
a move from T1/E1 services to more Ethernet-based services,
 
 
•
 
and the increase in demand for more managed, customer-premise-based services.
 
The failure to accommodate these shifts in technology could impact sales of our products and have a material adverse affect on our business and operating results.
 
We are controlled by Axel Johnson Inc.    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 Inc. is the sole holder of the Class B Common Stock. As a result, Axel Johnson Inc. has sufficient combined voting power to control the direction and policies of Larscom absolutely, including mergers, the payment of dividends, consolidations, the sale of all or substantially all of the assets of Larscom and the election of the Board of Directors of Larscom, and to prevent or cause a change in control of Larscom. There can be no assurance that Axel Johnson will not affect our corporate actions in a manner that conflicts with the interest of our other shareholders.
 
During growth periods, it is difficult to hire all the qualified personnel we need.    To grow our business, we must continue to attract, train, motivate and manage new employees successfully, integrate new management and employees into our overall operations and continue to improve our 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 during times when business in the telecommunications equipment industry is strong. In the past, we have had difficulty in filling all of our hiring requisitions. Our failure to manage any expansion or contraction effectively could have a material adverse effect on our business and operating results.

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We are significantly engaged in selling in international markets, which results in operational difficulties and risks.    Sales outside the U.S. approximated 18% of our revenues for the first nine months of 2002. The conduct of business outside the U.S. 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, possible expropriation and potentially adverse tax consequences. In addition, to sell our products internationally, we must meet standards established by telecommunications authorities in a variety of countries, as well as recommendations of the International Telecommunications Union. A delay in obtaining, or the failure to obtain, certification of our products in countries outside the U.S. could inhibit or preclude our marketing and sales efforts in such countries, which could have a material adverse effect on our business and operating results.
 
We have recently reorganized our sales force.    In October of 2002, we reorganized our sales force to concentrate on four account types:
 
 
•
 
major accounts,
 
 
•
 
carrier accounts,
 
 
•
 
US indirect channels (distributors and resellers) and enterprise customers,
 
 
•
 
and overseas accounts.
 
As part of this reorganization we will be reassigning certain of our sales people to a different list of customers and different types of customers. There is a risk that the new relationships with customers resulting from the reorganization might not be as productive as the prior organization in the near term or at all. Failure of the new organization to achieve sales productivity goals could have a material adverse effect on our business and operating results.
 
We have developed an indirect distribution channel for sales to domestic customers.    This channel consists primarily of a small group of master distributors, such as Tech Data, and a number of authorized resellers. There are a number of risks associated with an indirect distribution channel. The risks include a reduction in our ability to forecast sales, reduced average selling prices, potential reductions in customer satisfaction, loss of contact with users of our products, a potential build-up of inventories at resellers and new methods of advertising and promoting products that will result in additional expenses. All of these risk factors could have a material adverse effect on our business and operating results.
 
We must comply with regulations and evolving industry standards.    The market for our 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 U.S., our products must comply with various regulations defined by the Federal Communications Commission and standards established by Underwriters Laboratories, as well as industry standards established by various organizations. As standards for services such as Asynchronous Transfer Mode, Frame Relay, Internet Protocol and Synchronous Optical Network/Synchronous Digital Hierarchy evolve, we may be required to modify our existing products or develop and support new versions of our products. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry standards could delay introduction of or affect the marketability of our products, which in turn could have a material adverse effect on our business and operating results.
 
We may not be able to protect our intellectual property and proprietary information.    We rely upon a combination of trade secrets, contractual restrictions, copyrights, trademark laws and patents to establish and protect proprietary rights in our products and technologies. We believe that the success of our business depends primarily on our proprietary technology, information, processes and expertise, rather than patents. Much of our proprietary information and technology is not patented and may not be patentable. We have been issued only one U.S. patent to date. There can be no assurance that we will be able to protect our technology or that competitors will not be able to develop similar technology independently. We have entered into confidentiality and invention assignment agreements with employees, and into non-disclosure agreements with suppliers, distributors and appropriate customers so as to limit access to and disclosure of our proprietary information. There can be no assurance that these statutory and contractual arrangements will deter misappropriation of our technologies or discourage independent third-party development of similar technologies. In the event such arrangements are insufficient, our business and operating results could be materially adversely affected.

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We have not conducted a formal patent search relating to the technology used in our products.    From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies that are important to us. Since patent applications in the U.S. are not publicly disclosed immediately, applications which we do not know about may have been filed by competitors of ours that could relate to our products. Software comprises a substantial portion of the technology in our products. The scope of protection accorded to patents covering software-related inventions is evolving and is subject to uncertainty, which may increase the risk and cost to us if we discover third-party patents related to our software products or if such patents are asserted against us in the future. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of us, could result in significant expense to us and divert the efforts of our technical and management personnel. In the event of an adverse ruling in such litigation, we might be required to pay damages, discontinue the use and sale of infringing products, and expend significant resources to develop non-infringing technology or obtain licenses from third parties. There can be no assurance that licenses from third parties would be available on acceptable terms, if at all. A successful claim against us and our failure to develop or license a substitute technology could have a material adverse effect on our business and operating results.
 
We provide our customers a three-year or longer warranty on most product lines.    Complex products such as ours might contain undetected errors or failures when first introduced or as new versions are released. Although we believe that our reserves for estimated future warranty costs are adequate, our estimates, particularly those related to products that have been recently introduced, might not be correct. Warranty claims in excess of those expected could have a material adverse effect on our business and operating results.
 
As part of the strategy for growth and expansion of our business, we may make acquisitions that could disrupt our business or harm our financial condition.    As part of our business strategy, we may invest in or acquire other businesses, technologies or assets, or enter into strategic relationships with third parties. For such acquisitions, we may issue additional stock, incur debt, assume liabilities, incur impairment charges related to goodwill and other intangible assets or incur other large and immediate write-offs. With the exception of our acquisition of NetEdge in 1997, we have no recent experience in integrating acquired businesses with our existing business. Our operation of any acquired business would involve numerous risks including:
 
 
•
 
problems integrating any acquired operations with our own,
 
 
•
 
unanticipated costs,
 
 
•
 
diversion of management’s attention from our core business,
 
 
•
 
adverse effects on existing business relationships with customers,
 
 
•
 
risks associated with entering markets in which we have no or limited experience,
 
 
•
 
and the potential loss of key employees, particularly those of the purchased organization.
 
Our Class A Common Stock has traded below one dollar and may be subject to de-listing from the Nasdaq SmallCap Market. On July 16, 2002, we received a notice from Nasdaq that our Common Stock had failed to maintain the required minimum closing bid price of $1.00 for a period of 30 consecutive trading days as well as the minimum requirements for market value of publicly traded shares on the Nasdaq National Market. As a result, Nasdaq provided us 90 calendar days, or until October 14, 2002 to regain compliance with this requirement or face de-listing from trading on the Nasdaq National Market. Prior to our de-listing, we submitted an application to Nasdaq for transfer to their SmallCap market. The application was approved and our stock began trading on the Nasdaq SmallCap market effective on October 23, 2002. There can be no assurance that our trading price will be at or above Nasdaq’s SmallCap requirements for the necessary time periods mandated by Nasdaq. If we are unable to meet Nasdaq’s SmallCap listing requirements our Class A Common Stock could trade on the OTC Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. Such alternatives are generally considered to be less efficient markets, and our stock price, as well as the liquidity of our Class A Common Stock, could be adversely impacted as a result.

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Item 3:    Quantitative and Qualitative Disclosures about Market Risk
 
Interest Rate Risk.    We do not use derivative financial instruments in our investment portfolio. Our investment portfolio generally has been comprised of commercial paper rated A1/P1, bank certificates of deposit rated A- or better and corporate bonds and medium-term notes rated A- or better. These securities mature within one year and are classified as available for sale in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”
 
At September 30, 2002, our investment portfolio included fixed-income securities, of the quality described above, with a fair-market value of approximately $5.0 million. These securities are subject to interest-rate risk, and will decline in value if interest rates rise. Due to the short duration of our investment portfolio, an immediate, hypothetical 10% decrease in interest rates would not have a material effect on our current year financial condition or results of operations. Because the securities are so short in duration, their principal value would not be materially affected. The new securities we replace them with when they mature would yield us less interest income, but the amount of the reduction would not be material to us. If a 10% interest rate reduction occurred on October 1, 2002 and remained in effect throughout 2002, our interest income and our cash flow would be reduced by approximately $3,200 in 2002. We do not hold any long-term fixed instruments.
 
Foreign Currency Exchange Rate Risk.    Our international sales are typically made in U.S. dollars and are generally not subjected to foreign currency exchange rate risk. However, certain of our sales and marketing expenses are incurred in local currencies, principally the British Pound. Consequently, our international results of operations are subject to foreign exchange rate fluctuations. We do not currently hedge against foreign currency rate fluctuations. Gains and losses from such fluctuations have not been material to our consolidated results. The effect of an immediate, hypothetical 10 % change in the exchange rate for the British Pound or any other foreign currency would not be material to us.
 
Item 4:    Controls and Procedures
 
 
a.
 
Evaluation of Disclosure Controls and Procedures
 
Based on their evaluation of our disclosure controls and procedures conducted within 90 days of the date of filing this report on Form 10-Q, our Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) promulgated under the Securities Exchange Act of 1934) are effective.
 
 
b.
 
Changes in Internal Controls
 
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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Part II:    Other Information
 
Item 1:    Legal Proceedings.
 
We are 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.
 
10.1
   
Letter dated August 8, 2002 from Axel Johnson Inc. to waive the No MAC Condition to the Credit Agreement between Larscom Incorporated and Axel Johnson Inc.
99.1
   
Periodic Report Certification filed pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. § 1350, as adopted)
 
 
b.
 
Reports.
 
We filed one report on Form 8-K on July 2, 2002. Information regarding the item reported is as follows: Larscom Incorporated issued a press release on July 2, 2002 announcing the appointment of Allen R. Adams to its Board of Directors.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
       
LARSCOM INCORPORATED
Date
  
November 5, 2002
      
By
  
/s/    DANIEL L. SCHARRE
               
Daniel L. Scharre
President and Chief Executive Officer
(Principal Executive Officer)
           
By
  
/s/    DONALD W. MORGAN
               
Donald W. Morgan
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

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CERTIFICATIONS
 
I, Daniel L. Scharre, certify that:
 
1.    I have reviewed this quarterly report on Form 10-Q of Larscom Incorporated;
 
2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a)    Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
b)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
c)    Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
a)    All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.    The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
 
Date:  November 5, 2002
By:
  
/s/    DANIEL L. SCHARRE
   
Chief Executive Officer
 
 

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I, Donald W. Morgan, certify that:
 
1.    I have reviewed this quarterly report on Form 10-Q of Larscom Incorporated;
 
2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a)    Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
b)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
c)    Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
a)    All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.    The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date:  November 5, 2002
By:
  
/s/    DONALD W. MORGAN
   
Chief Financial Officer

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EXHIBIT INDEX
 
10.1
   
Letter dated August 8, 2002 from Axel Johnson Inc. to waive the No MAC Condition to the Credit Agreement between Larscom Incorporated and Axel Johnson Inc.
99.1
   
Periodic Report Certification filed pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. § 1350, as adopted)

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