---




UNITED
STATES


SECURITIES AND EXCHANGE COMMISSION


Washington D.C. 20549





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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, 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





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LARSCOM INCORPORATED


(Exact name of registrant as specified in its charter)





Delaware

94-2362692(State or other jurisdiction of

(IRS Employerincorporation 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 April 30, 2002, was 8,851,805 of Class A Common Stock and 10,000,000 of Class B Common
Stock.


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LARSCOM INCORPORATED


FORM 10-Q





TABLE OF CONTENTS





Part I:

Financial Information

3Item 1:

Financial Statements (Unaudited)

3Condensed Consolidated Balance Sheets

3Condensed Consolidated Statements of Operations

4Condensed Consolidated Statements of Cash Flows

5Notes to Condensed Consolidated Financial Statements

6Item 2:

Managements Discussion and Analysis of Financial Condition and Results of Operations

9Item 3:

Quantitative and Qualitative Disclosures about Market Risk

14Part II:

Other Information

15Item 1:

Legal Proceedings

15Item 2:

Changes in Securities

15Item 3:

Defaults upon Senior Securities

15Item 4:

Submission of Matters to a Vote of Security Holders

15Item 5:

Other Information

15Item 6:

Exhibits and Reports on Form 8-K

16a:    Exhibits

16b:    Reports on Form 8-K

16Signatures

17




2




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PART I:    FINANCIAL INFORMATION





Item 1:    Financial Statements (Unaudited)





LARSCOM INCORPORATED


CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands) (Unaudited)





March 31, 2002


December 31, 2001ASSETSCurrent assets:Cash and cash equivalents

$
5,160


$
9,789Short-term investments


15,371



11,216Accounts receivable, net


5,626



4,227Inventories


3,735



3,575Income tax receivable


82



59Deferred tax asset


1,894



Due from Axel Johnson Inc.


525



574Prepaid expenses and other current assets


1,142



1,598Total current assets


33,535



31,038Property and equipment, net


2,774



3,135Total assets

$
36,309


$
34,173LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,800


$
2,115Accrued expenses and other current liabilities


8,359



7,120Total current liabilities


10,159



9,235Other non-current liabilities


1,990



2,162Total liabilities


12,149



11,397Stockholders equity:Class A Common Stock


88



88Class B Common Stock


100



100Additional paid-in capital


83,228



83,210Accumulated other comprehensive gain/(loss)


2



(1
)Accumulated deficit


(59,258
)


(60,621
)Total stockholders equity


24,160



22,776Total liabilities and stockholders equity

$
36,309


$
34,173





The accompanying notes are an integral part of these financial statements.




3




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LARSCOM INCORPORATED


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data) (Unaudited)








Three Months Ended March 31,2002


2001Product revenues

$
6,329


$
10,887Service revenues


1,387



1,368Total revenues


7,716



12,255Product cost of revenues


2,730



6,016Service cost of revenues


317



619Total cost of revenues


3,047



6,635Gross profit


4,669



5,620Operating expenses:Research and development


979



2,096Selling, general and administrative


4,286



6,064Total operating expenses


5,265



8,160Loss from operations


(596
)


(2,540
)Interest and other income


85



409Loss before income taxes


(511
)


(2,131
)Income tax provision benefit


(1,874
)


(635
)Net income/(loss)

$
1,363


$
(1,496
)Basic net income/(loss) per share

$
0.07


$
(0.08
)Diluted net income/(loss) per share

$
0.07


$
(0.08
)Basic weighted average shares


18,845



18,773Diluted weighted average shares


18,878



18,773





The accompanying notes are an integral part of these financial statements.




4




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LARSCOM INCORPORATED


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands) (Unaudited)





Three Months Ended March 31,2002


2001Cash flows from operating activities:Net income/(loss)

$
1,363


$
(1,496
)Depreciation and amortization


375



573Increase in deferred income taxes


(1,894
)


(659
)Increase in deferred revenue


1,578



306Decrease in accrued restructuring


(583
)


Net (increase)/decrease in other working capital accounts


(1,272
)


259Net cash used in operating activities


(433
)


(1,017
)Cash flows from investing activities:Purchases of property and equipment


(43
)


(734
)Purchases of short-term investments


(9,247
)


(10,836
)Sales and maturities of short-term investments


5,092



12,747Net cash (used in)/provided by investing activities


(4,198
)


1,177Cash flows from financing activities:Repayments from Axel Johnson Inc.


49



229(Decrease)/increase in long-term deposits and capital lease obligations


(68
)


56Proceeds from issuances of Class A Common Stock


18



275Net cash (used in)/provided by financing activities


(1
)


560Effect of unrealized investment gain and foreign exchange rates on cash


3



3(Decrease)/increase in cash and cash equivalents


(4,629
)


723Cash and cash equivalents at beginning of period


9,789



7,741Cash and cash equivalents at end of period

$
5,160


$
8,464Supplemental disclosure of cash flow information:Interest paid

$
1


$
1Income taxes paid

$
23


$
62





The accompanying notes are an integral part of these 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, 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 ended March 31, 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):





March 31, 2002

December 31, 2001Raw materials

$
1,531

$
1,608Work-in-process


273


520Finished goods


1,931


1,447$
3,735

$
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.





A sublease agreement was signed on February 27, 2002, between us and Silicon Wireless Corporation that has a commencement date of February 15, 2002 and
is for the entire 27,000 square-foot facility in Durham, North Carolina. Silicon Wireless Corporation is a start-up company currently searching for additional venture capital funds to support their current business plan. 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. We expect to pay out the
majority of employee termination costs by the end of the second quarter of 2002. The real estate lease obligation will be paid-out by January 2007.





The following table provides details on the activity and remaining balances of the 2001 restructuring charges as of March 31, 2002:





Total Charges

Cash Charges


Non-Cash Charges


Reserve March 31, 2002(in thousands)Employee termination costs

$
2,852

$
(2,640
)

$
(20
)

$
192Real estate lease reserve


2,532


(430
)






2,102Fixed asset write-down


388






(388
)


Total

$
5,772

$
(3,070
)

$
(408
)

$
2,294




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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 the Company in the U.S., unfavorable macro-economic conditions and capital
expenditure reductions announced by several service providers. The deferred tax asset balance as of March 31, 2002 amounted to $21,228,000 and the valuation allowance balance was $19,334,000. The $1,894,000 difference between the deferred tax asset
and the deferred tax asset valuation allowance represents our ability to utilize additional net operating loss carry-backs against taxes paid in 1997. This is a result of the 2002 change in the federal income tax code for tax loss carry-back
provisions and the resulting asset is classified on our balance sheet as a current asset.





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 Income/(Loss) Per Share:





Basic net income or loss per share is computed using the weighted-average number of common shares outstanding during the
period. Diluted net income per share is computed using the weighted-average number of common shares outstanding and the dilutive effect of options to purchase common shares. 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 common shares is excluded from the net loss computation, as their effect is antidilutive.





The following table shows how basic and diluted net income or loss per share are computed (in thousands, except per share data):





Three Months Ended March 312002

2001Net income/(loss)

$
1,363

$
(1,496
)Basic weighted average Class A and B Common Stock outstanding


18,845


18,773Effective of dilutive securities:Stock options


33


Diluted weighted average Class A and B Common Stock outstanding


18,878


18,773Basic net income/(loss) per share

$
0.07

$
(0.08
)Diluted net income/(loss) per share

$
0.07

$
(0.08
)Weighted average in-the-money Class A Common Stock options outstanding excluded from the basic and diluted loss per share
calculation





446




7




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Note 6Comprehensive Income:





Comprehensive Income includes all changes in equity from non-owner sources during the period. There were two items of adjustment from net income or loss to comprehensive net
income or 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 the first quarter of 2002 or 2001.





Note 8Geographic Information:





Revenue and long-lived assets related to operations in the United States and other countries for the three months ended and as of March 31, 2002 and
2001 are as follows (in thousands):





Three Months Ended March 31,2002

2001Revenues (a)United States

$
6,418

$
10,276Other countries


1,298


1,979Total

$
7,716

$
12,255


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|(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 ofMarch 31, 2002

December 31, 2001Long-Lived AssetsUnited States

$
2,764

$
3,125Other countries


10


10Total

$
2,774

$
3,135




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Item 2:    Managements Discussion and Analysis of Financial Condition and Results of Operations





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 carriers, 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
reduced the operating loss we experienced in the first quarter of 2002 versus the operating losses experienced during the four quarters of 2001.





Results of Operations





Revenues.    Our consolidated revenues of $7,716,000 for the
first quarter ended March 31, 2002 were 37% lower than 2001s first quarter revenues of $12,255,000. Our Multiplexer product line accounted for the major portion of the decrease from last years first quarter with a revenue reduction of
$4,492,000. In addition, growth of $211,000 in the Inverse Multiplexer product line largely offset declines in revenues for CSU/DSUs and Service Platforms.





By channel of distribution, the bulk of the revenue reduction for the first quarter of 2002 versus the comparable period of 2001 was attributable to lower direct sales to network service providers, domestic
distributors and international resellers. Shipments to international locations represented 17% of total revenues during the first quarter of 2002 versus 16% for the first quarter of 2001 and were 34% below the same period of 2001.





The combined revenues from WorldCom, Inc. and AT&T, our two largest customers, accounted for 37% of the total revenues for the first
quarter of 2002 as compared to 42% for the first quarter of 2001and 45% for total year 2001 revenues.Also, Safeway Stores accounted for 12% of our revenues for the first quarter of 2002. Safeway represented less than 1% of our revenues for
the total year of 2001.





Gross Profit.    As a percentage of revenues, gross profit for the three
months ended March 31, 2002 increased by 15 percentage points to 61%, as compared to 46% for the same period of 2001. The percentage point improvement in gross profits for the first quarter of 2002, as compared to the first quarter of 2001, was
largely due to favorable product mix within the Multiplexer and Inverse Multiplexer product lines, a reduction in manufacturing overhead expense, lower expenses related to excess and obsolete inventory and a decline in warranty reserve expenses as
well as lower parts consumption for services.





Research and Development.    Research and development
expenses totaled $979,000 for the first quarter of 2002, which was $1,117,000 or 53% below the first quarter 2001 spending of $2,096,000. The reduction in the first-quarter spending was mainly due to lower staffing levels resulting from our
restructuring programs in 2001.





Selling, General and Administrative.    Selling, general and
administrative expenses decreased 29% to $4,286,000 during the three months ended March 31, 2002, as compared to $6,064,000 for the same period of 2001. The lower spending was due primarily to reductions in staff levels, associated employee benefits
cost, travel expense, commission expense and contract services expense.





Selling, general and administrative expenses include
contractual charges from our major stockholder Axel Johnson Inc. for legal, accounting, tax, treasury, human resources and administrative services totaling $116,000 for the first quarter of 2002, which was the same as for the first quarter of 2001.





Interest and Other Income.    Interest and other income amounted to $85,000 for the first quarter of
2002 as compared to $409,000 the same period of 2001. Interest income, which is the major component of interest and other income, was $115,000 for the first quarter of 2002, as against $428,000 for the same period in 2001. The lower interest income
for the three-month period was attributed to lower interest rates (2% versus 6%) and lower average cash and investment balances ($21 million versus $28 million). Our




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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 $1,874,000 tax benefit is comprised primarily of an income tax refund for 1997 as a result of a 2002 change in the federal income tax code involving tax loss carry-back provisions.





Liquidity and Capital Resources





At March 31,
2002, we had cash and cash equivalents of $5,160,000 and short-term investments of $15,371,000. Cash and short-term investments declined by approximately 2% from $21,005,000 at December 31, 2001 to $20,531,000 at March 31, 2002. This decline was
primarily due to severance payments made against our restructuring reserve.





Capital expenditures for the first quarter were
$43,000. These expenditures consisted principally of the purchase of computers, software and test equipment.





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 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 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.





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 seek additional capital. In that event, it is
possible we would not be able to obtain adequate capital on terms acceptable to us, or at all.





The effects of inflation
on our revenues and operating income have not been material to date.





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.    We expect it to be difficult to succeed while our customers and the rest of our industry struggle.





We believe that our relationships with a few large customers will be critical to our future
success.    A small number of customers have accounted for a majority of our revenues in each of the past several years. During 2001, 2000 and 1999, two customers, WorldCom, Inc. and its subsidiaries and AT&T, together
accounted for 45%, 39% and 41% of our revenues, respectively. If either of these customers significantly changed their buying patterns with us, either positively or negatively, it would have a material impact on our results.





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.




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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 6000 and the Orion 5000, 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. 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 two rounds of
restructuring/layoffs in 2001.    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). Overall, our workforce was reduced from 208 before the first round of layoffs to 120 after the second round of layoffs. 33% (29 people) of the net reduction in employees was 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 and October 2001 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.





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. Generally, the products we have planned and introduced in recent years 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.





Various factors cause fluctuations in our quarterly operating results.    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. A small number of customers have accounted for a significant percentage of our sales. 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




11




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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 consequent 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. 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,
| | - |  | ----------------------------------------------




| |  |  | increasing 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 our sales and marketing organization 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.





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.





Gross profits will not attain earlier levels.    We do not expect our annual gross profit percentage to reach the levels achieved before 1998, primarily because of increased competition, even if our sales were to
return to 1998 levels. In addition, we have developed 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.





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 numerous single sources. We do not believe we would be able to develop alternative sources for certain
essential components used in our products. 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 without incurring substantial additional costs, there can be
no assurance that we would be able to do so, 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. It is possible that our suppliers will not continue to be able and willing to meet our future
requirements.





Our business could be materially and adversely affected by the integration and functionality of switches and
routers.    New technologies are displacing some parts of the T1/E1 CSU/DSU product lines, the Inverse Multiplexer product lines and the Multiplexer product lines. For example, SDSL and HDSL are




12




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subscriber loop technologies that enable service providers to deploy high bandwidth services that replace more
traditional T1/FT1 services, upon which most of our products are based.





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.





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, particularly in Northern
California, 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.





We are trying to enter more international markets, which results in operational difficulties and risks.    Sales outside the
U.S. approximated 16% of our revenues for 2001and through the first quarter of 2002, 17% of our total revenues. 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 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. Sales to large service providers continue to be handled by our direct sales force. As part of this strategy we have appointed certain sales
people to sign up resellers and assist them in their sales efforts. 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,
managements inexperience in establishing and managing a distribution channel, 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.





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 Digital Subscriber Line 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 have been issued only one U.S. patent to date.




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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. 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.





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 provideour customers a three-year product warranty.    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.





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 March 31, 2002, our investment portfolio included fixed-income securities, of the
quality described above, with a fair-market value of approximately $15.4 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% reduction occurred on April 1, 2002 and remained in effect throughout 2002,
our interest income and our cash flow would be reduced by approximately $14,000 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




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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.





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.





Gurdip Jande joined us as the Vice President of
Marketing effective February 11, 2002.





Joseph Pendergast resigned as the Vice President of Operations effective February 22,
2002.





Harvey Poppel resigned from the Board of Directors effective March 1, 2002.




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Item 6:    Exhibits and Reports on Form 8-K.





a.    Exhibits.





10.1

Separation of Employment Due to Reduction-in-Force Layoff by and between Larscom Incorporated and Liam McManus effective January
1, 2002.10.2

Employment Offer Letter Agreement by and between Larscom Incorporated and Gurdip Jande dated January 25, 2002, accepted February
11, 2002.10.3

Letter Agreement Regarding Interest-Free Loan Obligation by and between Larscom Incorporated and Joseph A. Pendergast dated March
20, 2002.





b.    Reports.





None




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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 INCORPORATEDDate: May 8, 2002

By:

/s/    DANIEL L. SCHARREDaniel L. Scharre President and Chief Executive
Officer (Principal Executive Officer)By:

/s/    DONALD W. MORGANDonald W. Morgan Vice President, Finance and Chief Financial
Officer (Principal Financial Officer and Principal Accounting Officer)




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EXHIBIT INDEX





10.1

Separation of Employment Due to Reduction-in-Force Layoff by and between Larscom Incorporated and Liam McManus effective January
1, 2002.10.2

Employment Offer Letter Agreement by and between Larscom Incorporated and Gurdip Jande dated January 25, 2002, accepted February
11, 2002.10.3

Letter Agreement Regarding Interest-Free Loan Obligation by and between Larscom Incorporated and Joseph A. Pendergast dated March
20, 2002.




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