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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0000-26251
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NETSCOUT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2837575
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4 TECHNOLOGY PARK DRIVE, WESTFORD, MA 01886
(978) 614-4000
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
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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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of May 31, 2000 (based on the last reported sale price on The
Nasdaq National Market as of such date) was $117,610,243.86. As of May 31, 2000
there were 26,750,377 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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NETSCOUT SYSTEMS, INC.
FORM 10-K
FOR THE ANNUAL REPORT ENDED MARCH 31, 2000
TABLE OF CONTENTS
INDEX
PAGE
--------
PART I
Item 1. Business............................................ 2
Item 2. Properties.......................................... 12
Item 3. Legal Proceedings................................... 12
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 13
Item 6. Selected Financial Data............................. 14
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 16
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk............................................... 27
Item 8. Financial Statements & Supplementary Data........... 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 28
PART III
Item 10. Directors and Executive Officers................... 29
Item 11. Executive Compensation............................. 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 36
Item 13. Certain Relationships and Related Transactions..... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................... 39
Index to Consolidated Financial Statements.................. F-1
PART I
ITEM 1. BUSINESS
GENERAL
NetScout designs, manufactures, develops, markets and supports a family of
products that enable businesses to proactively manage the performance of their
corporate networks. This includes the proactive management of critical networked
applications, e-commerce sites, outsourced networks and network-based service
offerings. Our Application Flow Management (AFM) solution tracks and provides
information regarding the flow of software applications, such as e-mail, order
entry, and Web-based applications across the network and the performance of the
underlying computer network. Our AFM solution consists of specialized software
reporting tools and real-time, application-aware probes. Our probes are designed
to correlate response time information in real time and to achieve visibility
into the network, its applications and the content being delivered. Our solution
accommodates a wide range of network topologies, including Gigabit Ethernet and
Asynchronous Transfer Mode (ATM). Our analytical software delivers current
network and application performance information in an easy-to-use, graphical
format.
NetScout's AFM solution can distinguish individual applications' behavior as
they traverse the network, separating application performance from the
performance of the underlying computer network. This capability is particularly
valued by network managers in pinpointing the source of performance degradation
in a complex network environment. AFM is the foundation for NetScout's
innovative, solutions-based system that delivers real time and historical
information in easy-to-use graphical reports, with the high-level and the
in-depth visibility needed to accurately evaluate and manage network and
application performance.
On June 13, 2000, NetScout entered into an Agreement and Plan of
Reorganization with NextPoint Networks, Inc., NetScout Service Level
Corporation, a wholly owned subsidiary of NetScout, and certain stockholders of
NextPoint, pursuant to which NextPoint would merge with and into NetScout
Service Level Corporation. In the merger, NetScout will issue approximately
2.2 million shares of its common stock and approximately $20.6 million in cash
in exchange for all of the capital stock of NextPoint. Completion of the merger
is subject to, among other things, approval by holders of NextPoint capital
stock. The merger will be accounted for using the purchase method.
Our principal executive offices are located at 4 Technology Park Drive,
Westford, MA, and our telephone number is 978-614-4000.
INDUSTRY BACKGROUND
The continued migration of critical business processes onto the corporate
network, and from the corporate network to the Internet, is redefining
traditional enterprise networks. Driving this change is the growth in
business-critical application deployments and, to an even greater extent, the
explosive number of e-commerce networks being initiated.
To help defray the cost of infrastructure and shorten implementation cycles,
new networks are being deployed frequently with the help of third party service
providers. Contracts for uptime and availability of infrastructure and
applications, known as service-level agreements, are being established between
the enterprise and the service provider. Under these agreements, the service
provider supplies the network infrastructure and the delivery of chosen
applications to the client's desktops. The client then pays a fee based on
aspects of its rented infrastructure, applications being delivered, the number
of users and a desired level of service. Significant discounts often apply for
unmet or interrupted service levels. Increased application and internet-related
traffic are among the most frequent causes of network and/or service level
degradations.
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As a result, network management now includes additional challenges beyond
maintaining efficiency and uptime. Network managers are now faced with the
challenging task of ensuring their applications are delivered throughout their
enterprise in accordance with their service level agreements. Both service
providers and their customers need to be able to measure and monitor quality of
service, and to be able to assign accountability when there is a problem.
APPROACHES TO NETWORK PERFORMANCE MANAGEMENT. Historically, complications
arising in the network have been handled on a reactive basis, with corrective
action taking place after network degradation. The critical nature of most
networks today is now demanding network management to be a proactive approach
that prevents degradation from occurring and enables insight into application
performance. Proactive management, via close monitoring of network activity, is
a key step in maximizing network performance. Effective network and application
performance management is being recognized as an important and significant
investment that businesses must make.
There are three general approaches to proactive network management, which
consist of collecting and analyzing data from:
- Network devices, such as routers, switches and hubs;
- Data collection software agents; and
- Dedicated data collection devices (known as probes).
Depending on the approach, the information is used to:
- Determine the operating status of network devices;
- Anticipate and prevent certain network problems;
- Manage the performance of networked applications on the network;
- Plan investments in network capacity;
- Assign network costs through billings based on network usage; and
- Ensure quality of service.
The first approach to proactive management is through monitoring the
operating status of routers, switches, load balancers and other types of network
devices. The information available through such devices is focused primarily on
device capacity; thus, this approach is not suited for application performance
management. Further, the device capacity information is typically historical,
and cannot aid in real time monitoring of the status of the network. Obtaining
real time information from these devices would significantly increase their
traffic loads and degrade their performance.
The second approach is based on the installation of proprietary data
collection software agents on users' desktop computers. This approach is useful
in simulating and measuring the end-user's experience of software applications
delivery to the desktop; however, it offers little to no information as to the
reasons behind an application's poor performance, or of the network issues that
may be affecting the application's performance. Further, these solutions can
burden the processing power of desktop computers if they are enacted too
frequently.
The third approach to proactive network management relies on the placement
of probes on critical segments of the computer network to provide continuous
monitoring of network traffic. Probes are a combination of proprietary software
and dedicated hardware based on remote monitoring standards, which allow for
collection of in-depth network information. Since probes contain processors,
they can analyze, capture and store network traffic data without impacting any
of the existing network devices. However, most probes do not provide information
about both the network itself and the performance of application and content
delivery over the network.
3
NETSCOUT SOLUTION
NetScout designs, manufactures, develops, markets and supports a family of
products that enable businesses to proactively manage the performance of their
corporate networks. This includes the proactive management of critical networked
applications, e-commerce sites, outsourced networks and network-based service
offerings. Our Application Flow Management (AFM) solution tracks and provides
information regarding the flow of software applications, such as e-mail, order
entry, and Web-based applications across the network and the performance of the
underlying computer network. Our AFM solution consists of specialized software
reporting tools and real-time, application-aware probes. Our probes are designed
to correlate response time information in real time and to achieve visibility
into the network, its applications and the content being delivered. Our solution
accommodates a wide range of network topologies, including Gigabit Ethernet and
Asynchronous Transfer Mode (ATM). Our analytical software delivers current
network and application performance information in an easy-to-use, graphical
format.
NetScout's AFM solution can distinguish individual applications' behavior as
they traverse the network, separating application performance from the
performance of the underlying computer network. This capability is particularly
valued by network managers in pinpointing the source of performance degradation
in a complex network environment. AFM is the foundation for NetScout's
innovative, solutions-based system that delivers real time and historical
information in easy-to-use graphical reports, with the high-level and the
in-depth visibility needed to accurately evaluate and manage network and
application performance.
Application Flow Management addresses the following key aspects of network
management:
- APPLICATION AND WEBSITE RESPONSE TIME MEASUREMENT: Measures and provides
detailed, current information on application response time and web-page
delivery time over the computer network. Network managers are able to
optimize network configuration, prioritize software applications and
proactively manage the computer network.
- MONITORING AND TROUBLESHOOTING: Allows current monitoring and trend
analysis of network usage, performance and error conditions, which help
network managers prevent network malfunctions. The information gathered
allows for expedited troubleshooting when errors on the network do occur.
- CAPACITY PLANNING: Measures network usage trends by individual software
application. Enables network managers to make informed decisions regarding
network management and/or expenditures.
- POLICY ENFORCEMENT: Allows network managers to identify inappropriate or
wasteful usage of the computer network. Network managers can use this
information to enforce corporate policies and guidelines.
- ACCOUNTING AND CHARGE-BACK: Provides network usage information by user,
department or application. Enables businesses to track and allocates
charges for internal network usage.
STRATEGY
Our objective is to enhance our growth and expand our leadership position in
the network and application performance management market through both organic
growth and strategic acquisition--while extending our solutions to capitalize on
opportunities presented by emerging e-business markets, including e-commerce
networks, network service providers and carriers. Key elements of our strategy
include:
EXTEND TECHNOLOGY LEADERSHIP. We intend to continue to devote significant
resources to the development of new, innovative products to capitalize on our
extensive experience with large computer networks, the multi-vendor environment
and vision into emerging customer needs. As part of this strategy, we will
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enter into strategic relationships with, and/or acquire other companies to gain
complementary technologies. We intend to incorporate new technologies and
provide solutions that will enable businesses, service providers and carriers to
manage and optimize the performance of their networks, critical software
applications and network-based service offerings.
We recently announced our next-generation product architecture that will
accelerate development of NetScout solutions for new markets and meet the needs
of emerging web-centric, technically diverse end-users. The web-enabled NGenius
Performance Management System will deliver the functionality of all NetScout's
applications through a single, user-interface portal. Its open-ended
architecture will facilitate the ongoing addition of new solutions and
accommodate new functionalities. The NGenius System has enhanced data
aggregation and reporting features, intuitive displays, and pre-set
configurations aimed to assist with faster deployment across wide area networks.
NGenius probes will include new features for viewing http and URL traffic.
EXPAND REPORTING AND ANALYSIS SOFTWARE SUITE. We plan to develop new
analysis, presentation and reporting software to leverage the extensive
information collected by our probes. Our product family is designed to permit
easy integration of enhanced analysis and reporting functions, as demonstrated
by the release of Resource Monitor in 1994, NetScout Server and WebCast in 1997
and AppScout in 1999. Our NGenius system embodies significant improvements in
aggregating and presenting the data generated by huge, wide-area networks for
easier consumption.
EXTEND PROBE SUITE. We plan to develop new instrumentation to augment the
breadth of our probe line for web-based traffic and emerging network traffic
architectures or topologies. To ensure that our customers are able to instrument
every critical segment of their networks, we maintain both older (lower speed
line) topologies, and regularly introduce probes for newer ones. New topologies
typically come to market with built-in demand, because they represent an
improvement in speed and access. Our probe suite covers topologies of both
domestic and international markets. Our track record of innovation includes the
introduction of Ethernet probes (1992), Wide Area Network probes (1993), switch
embedded probes and CDDI/FDDI probes (1995), Fast Ethernet probes (1996), Wide
Area Network (T3) probes (1997), Asynchronous Transfer Mode probes (1998), and
Channelized Wide Area Network, Fast EtherChannel, DS3 ATM, E3 ATM and Gigabit
Ethernet probes (1999).
LEVERAGE INSTALLED BASE OPPORTUNITIES. We have sold a majority of our
products through indirect distribution channels and have also sold our products
directly to more than 700 customers. Our installed base consists of over 30,000
hardware probes and over 80,000 switch-embedded agents. We intend to target
existing users of our products with marketing and sales programs designed to
promote the more extensive use of our performance management system solutions
throughout their computer networks.
TARGET MARKET OPPORTUNITIES. We market our products to potential customers
in markets that we believe have the potential for growth. We have identified the
following markets as having the potential for strong demand for our products:
- E-commerce initiatives and business units within the enterprise markets;
- Network management outsourcing companies;
- Connectivity service providers (carrier and telecommunications companies);
- Application management outsourcing companies;
- eCommerce network service providers; and
- Online businesses
CONTINUE TO LEVERAGE CISCO RELATIONSHIP. Since 1994, we have had a
strategic development and OEM relationship with Cisco. Over this time, the
relationship has developed and expanded, in both technology
5
development and sales activities. The two companies' sales personnel now
collaborate extensively in the field, assisting one another in approaching and
presenting to clients, as well as determining client needs and delivering
solutions. The two companies' development personnel also collaborate extensively
on functional and implementation issues of product development, assisting one
another in developing the most useful and useable feature sets for specific
customers and environments. Our strategy is to further synchronize our product
development and marketing activities with Cisco's business strategy, supporting
Cisco's continued distribution of our products. Through our relationship with
this computer networking industry leader, we have significantly increased the
sale of our products and enhanced the market acceptance of our network and
application performance management solutions.
EXPAND DISTRIBUTION CHANNELS. We plan to substantially increase the number
of our direct field sales representatives during calendar year 2000. We also
seek to develop additional indirect distribution channels to promote our
products with computer networking equipment and software application vendors,
systems integrators, distributors, resellers and service providers. In addition
to Cisco, our channel relationships include Ameritech, Cabletron, Wavetek
Wandel & Goltermann, Compaq, Toyo, Net One Systems, Concert, Siemens, Logical
and TGS Telonic. These and other important partners facilitate the distribution
and market acceptance of our solutions to e-business markets, worldwide.
FACILITATE DEVELOPMENT OF COMPLEMENTARY THIRD-PARTY PRODUCTS. Our probes
provide a rich source of data that can be used by third-party software products.
As a means to increase demand for our products, we encourage the development of
applications that leverage our solutions. For example, we have partnered with
Apogee Networks, Concord Communications, Inc., and DeskTalk Systems, Inc. to
develop interoperable, expanded solutions. We supply a developer's toolkit,
which includes interfaces to our products, to enable the development of
complementary products. Our NGenius product platform also facilitates delivery
of complementary performance management and reporting applications with its open
architecture and user interface portal. Integration of NextPoint Networks'
product suite is expected to accelerate customer acceptance of the nGenius
platform, once the acquisition has been completed.
PRODUCTS AND TECHNOLOGY
Our products are generally purchased as a system, comprised of three
component layers: multiple data collection sources, data aggregation software,
and information presentation and analysis software.
DATA COLLECTION
Our data sources are based on the remote monitoring standard and implement
proprietary enhancements for additional functionality, such as application
response time and switched network monitoring. We offer the following family of
data sources:
PROBES. NetScout probes are dedicated data collection devices comprised of
a standard hardware platform and proprietary software. Probes contain processors
that capture, store and analyze data on a computer network. Our probes are best
suited for parts of the computer network that require continuous monitoring and
support a wide range of computer network technologies, including the following:
- Gigabit, DS3 ATM, E3 ATM, Ethernet, Fast Ethernet, Fast EtherChannel and
Token Ring;
- Sub-rate, T1/E1, T3/E3 Wide Area Network and Frame Relay;
- FDDI/CDDI; and
- Oc3 Asynchronous Transfer Mode.
SOFTWARE AGENTS. NetScout software agents are software-only data sources
that run on server or desktop computers running the Windows NT operating system.
This lower-cost alternative is best suited
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for parts of the computer network with lower traffic volume, such as branch
office networks and remote user links.
SWITCH EMBEDDED AGENTS. Switch embedded agents are data sources operating
in third-party network switches. One version of our switch embedded agent
consists of our software embedded into the switch operating system. Because the
switch embedded agent must utilize the switch's processor, it offers only a
limited subset of our data collection functionality. Another version which has
been implemented with Cisco requires the installation of a dedicated interface
module into the switch. Because the module has its own processor, it can offer
the full range of our data collection functionality.
DATA COLLECTION AGENT OPTIONS. Our data collection agent options are
proprietary software enhancements for our probes and software agents. These
options consist of:
- NetFlow Monitor. This enhancement allows certain types of our probes to
collect traffic information stored in Cisco routers in order to provide a
single, consolidated view of all traffic information to the network
manager.
- Resource Monitor. With this option, our probes are enabled to collect
information from network devices, including servers, to offer a more
complete, end-to-end view of the network.
- Application Response Time Management Information Base. This option enables
our probes or agents to monitor application response times on a given part
of the network.
- Virtual Local Area Network Monitor. With this option, users can collect
traffic information pertaining to a given subset of users within a
switched network, giving additional flexibility to the network manager for
troubleshooting and traffic accounting.
DATA AGGREGATION
NETSCOUT SERVER. NetScout Server is an optional data aggregation software
package that enables our Application Flow Management solution to effectively
manage large computer networks. NetScout Server reduces overall computer network
and application performance management traffic by aggregating, sorting,
simplifying and storing data collected at remote sites. It then transmits only
relevant periodic reports and real-time alarms through the wide area network to
the presentation and analysis software. This reduces consumption of costly wide
area network bandwidth. NetScout Server runs on the Microsoft Windows NT, Sun
Solaris, HP-UNIX and IBM AIX operating platforms.
INFORMATION PRESENTATION AND ANALYSIS
Our presentation and analysis software provides clear, meaningful, real-time
displays of relevant network and application performance data to network and
business managers in easy-to-read, graphical formats. We offer the following
family of data presentation and analysis software:
NETSCOUT MANAGER PLUS. NetScout Manager Plus presents management reports
based on data gathered from probes, embedded agents, software agents and
NetScout Server. NetScout Manager Plus provides a suite of over 40 integrated
functions, which include application-level management, monitoring and
troubleshooting, capacity planning, policy enforcement and accounting.
APPSCOUT. AppScout uses our data sources to monitor the performance of
applications over the network, including response time and bandwidth utilization
by application or by user. AppScout is a real-time, browser-based reporting
solution that is especially useful when measuring service level conformance or
deploying new applications.
WEBCAST. WebCast works in conjunction with NetScout Manager Plus and
provides a portfolio of secure, easy-to-access reports viewable by authorized
users from any Web browser.
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NEW PRODUCTS
NGENIUS PERFORMANCE MANAGEMENT SYSTEM. Our recently-announced
next-generation product architecture will accelerate the NetScout's delivery of
solutions for new markets and meet the needs of emerging web-centric,
technically diverse end-users. The web-enabled NGenius Performance Management
System for e-Business is a real-time, system-wide performance management
solution that enables visibility and control throughout the entire network. It
will deliver the functionality of all NetScout's future products through a
single user-interface portal. Its open-ended architecture will facilitate the
ongoing addition of new solutions and accommodate new functionalities.
The NGenius System has enhanced data aggregation and reporting features,
intuitive displays, and pre-set configurations to assist with faster deployment
across wide area networks. NGenius probes will include new features for viewing
http and URL traffic. The major components of the nGenius suite are planned for
release over the course of calendar year 2000. The system includes the NGenius
Performance Monitor-TM-, NGenius Traffic Monitor-TM-, NGenius Server-TM- and the
nGenius Probe-TM-.
- NGENIUS SERVER. At the heart of the system is NetScout's NGenius Server,
a simple to use and highly scalable network management server that
provides a single-point-of access to all of NetScout's e-business
performance management solutions. Collecting real-time, application flow
data from NetScout's high performance probes, as well as from other
industry-standard data sources, the server aggregates data from multiple
segments. NGenius Server is designed for quick deployment and
configuration through an intuitive, web-based user interface and out of
the box default configuration settings.
- NGENIUS PERFORMANCE MONITOR. The NGenius Performance Monitor is the first
line of defense in networked application performance management.
Delivering detailed information on URL traffic volumes, response times and
connection requests, this product helps network managers and Webmasters to
optimize the e-business experience where availability and responsiveness
are critical to success. The Performance Monitor forewarns the user of
possible flow degradation through alarms centered on volume and error
statistics. This real-time alarming feature provides rapid identification
of performance problems, which can then be handed off to nGenius Traffic
Monitor for further drill down and analysis.
- NGENIUS TRAFFIC MONITOR. The nGenius Traffic Monitor provides an
intuitive network troubleshooting solution that enables managers to
identify and rectify potential network trouble spots and drill down for
rapid problem resolution. Unique to the solution is its ability to provide
an integrated view of real-time and historical network information. With
this information, managers can track spikes in traffic--quickly
determining whether problems are an anomaly or trend. Users can also use
this solution to determine if additional network capacity is needed. To
facilitate problem-solving, users have the ability to create customized
views of the network, enabling quick comparisons between conditions in
different parts of the network.
- NGENIUS PROBE. As the foundation for the nGenius system, the nGenius
Probe extends the value and reach of NetScout's instrumentation by
providing data on URL traffic, response-time measurements, error rates and
connection requests. This probe provides dedicated, non-intrusive
monitoring of e-business traffic from within the site and across the
enterprise network. URL monitoring capability will also be available for
other existing NetScout probes in the future. Customizable topology
support provides users with added flexibility to conveniently monitor
multiple, disparate network segments using the same device. Additionally,
an infrared configuration port enables user to perform deployment and
re-configuration using palm-top computers. Dual power supplies ensure high
availability for business-critical applications.
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SALES AND MARKETING
NetScout targets corporations and service providers with large,
mission-critical networks through a combination of direct and indirect sales
channels, with the majority of sales occurring indirectly. Our direct sales
teams play a supportive role in many of our channel partner's accounts,
providing the technical and practical information needed to determine customer
needs and present solutions that best suit those needs. The Company is investing
aggressively in its direct, quota-carrying sales force with the intent to grow
it by 50% during fiscal 2001. In addition, we plan to integrate into our sales
force, NextPoint's nine quota-carrying sales personnel upon completion of the
acquisition. We have prioritized hiring practices and training programs to
ensure our sales personnel are both highly talented and well trained. NetScout
develops continued programs for its sales personnel throughout the year, for
in-depth product and technical training, and other professional skills. In
addition, we encourage joint initiatives involving our sales teams and the teams
of our partners.
NetScout's sales force utilizes a "high touch" sales model that consists of
meetings with end-users to understand and identify their individual business
requirements. Our sales teams then translate those requirements into tailored
business solutions that would maximize performance of their network. Due to the
complexity of the systems and the capital expenditure involved, our sales cycle
is typically four to seven months long. To capitalize on the significant revenue
opportunity with customers throughout the life of their networks, our sales
model is designed to encourage installed base selling.
Our indirect channel partners include original equipment manufacturers,
distributors, resellers, service providers, and system integrators. Revenue from
indirect distribution channels represented a substantial majority of total
revenue for the fiscal years ended March 31, 1998, 1999 and 2000. Our sales
force is organized into three main regions, Americas, Europe-Middle East-Africa
and Asia Pacific.
The majority of our indirect channel sales are sold through our strategic
development and OEM relationship with Cisco Systems, Inc. A substantial portion
of our Cisco-channeled sales are supported by high levels of involvement from
our sales force. Our sales personnel operate in close concert with Cisco sales
personnel, with the same level of intimate understanding provided on network
performance requirements, as is provided by the Cisco sales teams with respect
to the infrastructure requirements.
International sales are accomplished primarily through indirect distribution
channels. Revenues from sales outside North America represented 12% of total
revenue for each of the fiscal years ended March 31, 1998 and 1999, and 13% of
total revenue for the fiscal year ended March 31, 2000. We believe that our
North American indirect channel partners also resell a significant amount of our
products internationally.
As of March 31, 2000, our North American field sales organization consisted
of 51 employees. Our international sales organization consisted of 18 employees
with offices in the United Kingdom, France, Hong Kong, Netherlands and Germany.
In addition, we had 30 employees responsible for providing telesales, training
and sales and administrative support.
As of March 31, 2000, our marketing organization consisted of 24 employees.
Our marketing organization produces and manages a variety of programs such as
advertising, trade shows, public relations, direct mail, seminars, sales
promotions, and web marketing to promote the sale and acceptance of our
solutions and to build the NetScout brand name in the marketplace. Key elements
of our market penetration strategy are focused demand generation in large
enterprise, dot.com and e-business service provider target market segments,
strategic selling relationships with industry-leading network equipment vendors,
and leveraging our large installed base of customers.
SUPPORT SERVICES
Customer satisfaction is an integral part of NetScout's success. We offer a
wide variety of support and training to ensure user success. NetScout provides
pre and post-sales support to make implementations
9
and day to day activities seamless. We have support personnel located in the
United States, and abroad with some support provided by qualified third party
support organizations.
NetScout provides 8 a.m. to 8 p.m. Eastern time, toll-free customer support
as part of our product sales as well as fee based customer support. Our fee
based customer support service includes two plans. Depending on the level of
need, a 24x7 technical assistance plan is offered as part of our MasterCare
Platinum Plan or for those requiring less assistance 8 a.m. to 8 p.m. Eastern
time customer support is offered under our MasterCare Gold Plan. Under our fee
plans, our customers have access to an exclusive customer Web site where
information regarding frequently asked questions, technical tips, and the latest
patches and downloads are available.
RESEARCH AND DEVELOPMENT
Our success depends on our ability to adapt and innovate quickly to satisfy
our customer demands in a rapidly changing technological environment. We devote
substantial resources to developing new products and enhancing existing
products. We predominantly develop our products internally, with some third
party contracting.
As of March 31, 2000, our research and development organization consisted of
59 employees. In addition, we contract with third parties to perform specific
development projects. Research and development expenditures for the fiscal years
ended March 31, 1998, 1999 and 2000 were approximately $5.1 million,
$7.5 million, and $9.5 million, respectively. To date, all research and
development expenses have been expensed as incurred.
To promote industry standards and manifest technology leadership, we engage
actively in, contribute to, and often provide a leadership role in Internet
Engineering Task Force (IETF) standards-making activities. These activities
provide early insight into the direction of the network and application
performance management requirements going forward for current and emerging
technologies.
We also collaborate regularly, within the framework of our strategic
technology and OEM relationship with Cisco Systems, Inc., to review and address
the network and application performance management needs and plans engendered by
Cisco-specific standards-implementations, extensions there-to, technologies, and
product and technology initiatives. These collaborations, similar to the IETF
activities, also provide NetScout with early insight into Cisco-specific plans
and directions, allowing NetScout quick time to market of products and
technologies.
MANUFACTURING
Our manufacturing operations consist primarily of final product assembly,
configuration and testing. We purchase components and subassemblies from
suppliers and construct our hardware products in accordance with individual
customer requirements. We inspect, test and use process control to ensure the
quality and reliability of our products. In February 1998, we obtained ISO 9001
quality systems registration, a certification showing that our procedures and
manufacturing facilities comply with standards for quality assurance and
manufacturing process control. As of March 31, 2000, our manufacturing
organization consisted of 23 employees.
Although we generally use standard parts and components for our products,
each of the computer network interface cards used in our probes is currently
available only from separate single source suppliers. We have generally been
able to obtain adequate supplies of components in a timely manner from current
suppliers. We have few supply commitments with our suppliers but believe that,
in most cases, alternate suppliers can be identified if current suppliers are
unable to fulfill our needs.
10
CUSTOMERS
We sell our products to businesses and organizations with large and
medium-sized computer networks. Our customer base represents approximately half
of the Fortune 500 companies. We have sold a majority of our products through
indirect distribution channels. Our products have been sold to more than 700
customers operating in a wide variety of industries, such as financial services,
transportation, manufacturing, insurance, retail and software development. Due
to rapid order fulfillment, we do not operate with significant backlog.
Cisco is a significant distributor of our products under its private label.
Revenue derived from Cisco represented 40%, 51%, and 50% of our total revenue
for the fiscal years ended March 31, 1998, 1999, and 2000, respectively. We sell
NetScout Manager and NetScout probes to Cisco, which are resold by Cisco under
the names TrafficDirector and SwitchProbes. We also license versions of our
software for use in a range of Cisco switches for which we receive royalty
payments. Cisco has a worldwide, non-exclusive right to market and resell our
products on a stand-alone basis and to incorporate certain components of our
technology into its products. This relationship is governed by a project
development and license agreement dated as of January 13, 1994 and a private
labeling agreement dated as of October 17, 1995. These agreements have been
amended and were extended until October 31, 2002.
We work closely with Cisco on joint sales and marketing efforts. Foremost,
the two companies' sales forces collaborate in the field to approach customers,
define their requirements and close sales. The companies also collaborate on
product marketing. We participate in Cisco seminars, participate in
introductions to Cisco's international distributors, and link our web sites. We
devote significant time and attention of senior management, as well as resources
throughout our company, to making this strategic relationship successful and
believe that we have a strong business relationship. Other than Cisco, no other
customer represented more than 10% of our revenue for the fiscal year ended
March 31, 2000.
COMPETITION
The market for our products is new and rapidly evolving, and is expected to
become increasingly competitive as current competitors expand their product
offerings and new companies enter the market. Our principal competitors include
a number of companies offering one or more solutions for the network and
application performance management market, some of which compete directly with
our products. For example, we compete with probe vendors, such as Agilent
Technologies, providers of network performance management solutions, such as
Concord Communications and Micromuse, providers of application performance
management solutions, such as International Network Services, and providers of
portable network traffic analyzers, such as Network Associates. In addition,
leading network equipment providers could offer their own or competitors'
solutions in the future. We believe that the principal competitive factors in
the network and applications performance management solutions market include:
- product performance, functionality and price;
- name and reputation of vendor;
- distribution strength; and
- alliances with industry partners.
Although we believe that we currently compete favorably with respect to
these factors, there can be no assurance that we can maintain our competitive
position against current and potential competitors, especially those with
greater financial, management, marketing, service, support, technical,
distribution and other resources.
11
INTELLECTUAL PROPERTY RIGHTS
Intellectual property rights owned or licensed by NetScout include patents,
copyrights, trade secrets and trademarks that relate to our products. While
NetScout's competitive technology position is not determined by or dependent
upon any single factor, NetScout's intellectual property portfolio is of
significant value to it. NetScout takes appropriate action to enforce its
intellectual property rights.
We pursue registration of some of our trademarks in the U.S. and in other
countries. We have registered the trademark NETSCOUT in the U.S., Canada and the
European Union. In addition, we have applications pending for the NetScout Logo
in Canada and Japan for APPSCOUT in Canada, the European Union, Japan, and the
U.S., and have applications for registration pending in the U.S. for the
following trademarks: ART MIB, ARTSMART, EXPERTSCOUT, FRAMESCOUT, NGENIUS,
NGENIUS EVENT MANAGER, NGENIUS PACKET ANALYZER, NGENIUS PERFORMANCE MONITOR,
NGENIUS PROBES, NGENIUS TRAFFIC MONITOR, NGENIUS TREND REPORTER, PACKETSCOUT,
PHONESCOUT, TRAFFICSCOUT, TRAFFICSMART, TRENDREPORTER, TRENDSCOUT, TRENDSMART,
VOICESCOUT AND WEBSCOUT.
EMPLOYEES
As of March 31, 2000, we had 249 employees, 181 of whom were based at our
headquarters in Westford, Massachusetts. None of our employees are subject to a
collective bargaining agreement. We believe that our relations with our
employees are good.
ITEM 2. PROPERTIES
We lease approximately 97,500 square feet of space in an office building in
Westford, Massachusetts for our headquarters. The lease expires in
November 2002, and we have an option to extend the lease for an additional
five-year term. We also lease office space in eleven other cities for our sales
and support personnel, including 3,200 square feet of space in the United
Kingdom. We believe that these existing facilities are adequate to meet our
foreseeable requirements or that suitable additional or substitute space will be
available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
On November 5, 1999, a former employee of NetScout filed an action against
the Company and an employee stockholder of NetScout in the Massachusetts
Superior Court Department of the Trial Court, Middlesex County, alleging claims
of discrimination on the basis of sex and sexual harassment. On December 30,
1999, NetScout filed a Notice of Removal to the United States District Court for
the District of Massachusetts, thereby removing the action to that Court.
NetScout has filed an Answer denying these allegations and plans to vigorously
defend this matter. NetScout has recorded an accrual to address this matter.
However, since the matter is at a preliminary stage, NetScout is unable to
predict the outcome or amount of related expense, or loss, if any.
In addition to the matter noted above, from time to time NetScout is subject
to legal proceedings and claims in the ordinary course of business. In the
opinion of management, the amount of ultimate expense with respect to any other
current legal proceedings and claims will not have a material adverse effect on
NetScout's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 2000.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company completed its initial public offering on August 12, 1999 at a
price of $11.00 per share. Since that time, the Company's common stock has
traded on the Nasdaq National Market under the symbol NTCT. The following table
sets forth, for the period indicated, the high and low closing sales prices for
the common stock.
QUARTER ENDED HIGH LOW
- ------------- -------- --------
September 30, 1999.......................................... $36.50 $12.63
December 31, 1999........................................... $31.00 $20.31
March 31, 2000.............................................. $32.75 $14.88
As of June 9, 2000 there were approximately 6,298 stockholders of record of
the Company's common stock.
DIVIDEND POLICY
In fiscal 2000, we did not declare any cash dividends and do not anticipate
in the foreseeable future any dividend declaration. In addition, the terms of
our bank loan agreement prohibit the payment of cash dividends on our capital
stock. It is our intention to retain all future earnings for reinvestment to
fund the expansion and growth of our firm. Any future dividend declaration will
be at the discretion of our Board of Directors and will depend upon, among other
things, our future earnings, general financial conditions, capital requirements,
and general business conditions.
USE OF PROCEEDS
On August 17, 1999, we completed our initial public offering of three
million shares of common stock at a price of $11.00 per share. The principal
underwriters for the transaction were Deutsche Banc Alex. Brown, Bear, Sterns &
Co. Inc. and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.
The registration statement relating to this offering was declared effective by
the Securities and Exchange Commission (SEC File Number 333-76843) on
August 11, 1999. We received net proceeds of $29.6 million after deducting
$2.3 million in underwriting discounts and commissions and $1.1 million in other
offering expenses.
Upon the exercise of the over allotment option by the underwriters, certain
selling security holders sold 450,000 shares of common stock for net proceeds of
approximately $4.6 million after deducting underwriting discounts and
commissions.
To date, we have not utilized any of the proceeds from our initial public
offering. We have invested all such net proceeds primarily in U.S. Treasury
obligations and other interest bearing investment grade securities.
RECENT SALES OF UNREGISTERED SECURITIES
In January 1999, NetScout issued 6,977,254 shares of its Class B convertible
common stock, par value $0.001 per share, to certain affiliates of TA
Associates, Inc. and to Egan-Managed Capital, L.P., at $6.388051 per share, for
aggregate consideration of $44,571,054. All of the proceeds from the Class B
convertible common stock financing were used to redeem shares of the Company's
Series A preferred stock, non-voting common stock and common stock held by
certain persons, including certain officers and directors of NetScout. Upon
closing of NetScout's initial public offering, the 6,977,254 outstanding shares
of Class B convertible common stock converted into 6,977,254 shares of common
stock.
13
From April 1, 1997 through April 14, 1999, the registrant granted options to
purchase an aggregate of 2,250,000 shares of common stock under the 1990 Stock
Option Plan, as amended, exercisable at a weighted average price of $3.8646.
From April 14, 1999 through March 31, 2000, the registrant granted options
to purchase an aggregate of 1,430,789 shares of common stock under the 1999
Stock Option and Incentive Plan, exercisable at a weighted average price of
$20.9493.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with our consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of income data for the years ended March 31, 1998, 1999
and 2000, and the consolidated balance sheet data as of March 31, 1999 and 2000,
are derived from and are qualified by reference to the audited consolidated
financial statements included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of income data for the years ended March 31, 1996 and
1997, and the consolidated balance sheet data as of March 31, 1996, 1997 and
1998, have been derived from audited consolidated financial statements of
NetScout that do not appear in this Annual Report on Form 10-K. The historical
results are not necessarily indicative of the operating results to be expected
in the future.
YEAR ENDED MARCH 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenue:
Product....................................... $13,276 $25,159 $34,990 $50,374 $57,206
Service....................................... 1,521 3,888 5,143 8,710 12,804
License and royalty........................... 886 1,601 2,696 8,467 16,149
------- ------- ------- ------- -------
Total revenue................................... 15,683 30,648 42,829 67,551 86,159
------- ------- ------- ------- -------
Cost of revenue:
Product....................................... 5,897 9,427 12,638 19,250 21,139
Service....................................... 138 528 784 1,235 1,718
------- ------- ------- ------- -------
Total cost of revenue....................... 6,035 9,955 13,422 20,485 22,857
------- ------- ------- ------- -------
Gross margin...................................... 9,648 20,693 29,407 47,066 63,302
------- ------- ------- ------- -------
Operating expenses:
Research and development...................... 1,208 3,003 5,129 7,526 9,526
Sales and marketing........................... 4,384 6,778 13,583 20,375 27,945
General and administrative.................... 695 1,815 2,950 4,104 4,631
------- ------- ------- ------- -------
Total operating expenses.................... 6,287 11,596 21,662 32,005 42,102
------- ------- ------- ------- -------
Income from operations............................ 3,361 9,097 7,745 15,061 21,200
Interest income (expense), net.................... (3) 461 743 926 2,551
------- ------- ------- ------- -------
Income before provision for income taxes.......... 3,358 9,558 8,488 15,987 23,751
Provision for income taxes........................ 1,355 3,640 3,056 5,715 8,539
------- ------- ------- ------- -------
Net income........................................ $ 2,003 $ 5,918 $ 5,432 $10,272 $15,212
======= ======= ======= ======= =======
Basic net income per share........................ $ 0.11 $ 0.31 $ 0.28 $ 0.55 $ 0.70
Diluted net income per share...................... $ 0.09 $ 0.26 $ 0.23 $ 0.43 $ 0.56
Shares used in computing:
Basic net income per share.................... 18,542 19,010 19,289 18,586 21,750
Diluted net income per share.................. 22,460 22,919 23,166 23,706 26,946
14
MARCH 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities.................................. $ 7,797 $12,355 $15,175 $ 25,477 $70,322
Working capital............................... 7,837 11,140 14,163 24,489 74,866
Total assets.................................. 14,328 21,703 31,220 43,974 96,748
Class B redeemable convertible common stock... -- -- -- 44,161 --
Total stockholders' equity (deficit).......... 8,848 14,809 20,400 (13,124) 81,122
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following information should be read in conjunction with the
consolidated historical financial information and the notes thereto included
elsewhere in this Annual Report on Form 10-K.
In addition to the other information in this report, the following
Management Discussion and Analysis should be considered carefully in evaluating
the Company and our business. This Annual Report on Form 10-K contains
forward-looking statements. These statements relate to future events or our
future financial performance and are identified by terminology such as "may",
"will", "could", "should", "expects," "plans," "intends," "seeks,"
"anticipates," "believes," "estimates," "potential," or "continue" or the
negative of such terms or other comparable terminology. These statements are
only predictions. You should not place undue reliance on these forward-looking
statements. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various important factors,
including the risks outlined under "Certain Factors Which May Affect Future
Results" in this section of this report and our other filings with the
Securities and Exchange Commission. These factors may cause our actual results
to differ materially from any forward-looking statement.
OVERVIEW
NetScout designs, develops, manufactures, markets and supports a family of
products that enable businesses and network service providers to manage the
performance of their computer networks and software applications. Our products
include data collection devices, consisting of probes and software agents, which
collect, aggregate and perform detailed analysis of computer network and
application data, and analytical and presentation software, which provides
current network and application performance information in an easy-to-use,
graphical format.
We were incorporated in 1984 and primarily provided consulting services
until 1992 when we began to develop and market our first computer network
performance management products. Our operations have been financed principally
through cash provided by operations and we have been profitable for each of the
last seven years.
Product revenue consists of sales of our hardware products and licensing of
our software products. Product revenue is recognized upon shipment, provided
that evidence of an arrangement exists, title and risk of loss have passed to
the customer, fees are fixed or determinable and collection of the related
receivable is probable. Sales to indirect channel partners that are subject to
return privileges are recognized upon shipment, net of an allowance for
estimated product returns which is based on our return policy and historical
experience. Customer payments received in advance of product shipments are
recorded as customer deposits.
Service revenue consists primarily of customer fees from support agreements,
consulting and training. We generally provide three months of software and
service support and 12 months of hardware support as part of our product sales.
Revenue from software and service support is deferred and recognized over the
three-month support period. Revenue from hardware support is deferred and
recognized over the 12-month support period. In addition, customers can elect to
purchase extended support agreements, typically for 12-month periods. Revenue
from these agreements is deferred and recognized ratably over the support
period. Revenue from consulting and training is recognized as the work is
performed.
For multi-element arrangements, each element of the arrangement is analyzed
and the Company allocates a portion of the total fee under the arrangement to
the undelivered elements, primarily support agreements and training, using
vendor specific objective evidence of fair value of the element and the
remaining portion of the fee is allocated to the delivered elements (i.e.
generally hardware products and licensing software products), regardless of any
separate prices stated within the contract for each element, under the residual
method. Vendor specific objective evidence of fair value is based on the price
the customer is required to pay when the element is sold separately.
16
License and royalty revenue consists primarily of royalties paid under
license agreements by original equipment manufacturers who incorporate
components of our data collection technology into their own products or who
reproduce and sell our software products. License revenue is recognized when
delivery has occurred and when we become contractually entitled to receive
license fees, provided that such fees are fixed or determinable and collection
is probable. Royalty revenue is recognized based upon product shipment by the
license holder.
Revenue from indirect distribution channels, including original equipment
manufacturers, distributors, resellers, system integrators and service
providers, represented a substantial majority of total revenue for the fiscal
years ended March 31, 1998, 1999 and 2000. Cisco resells our products to
customers under its own private label and incorporates components of our
technology into its products. Our revenue from Cisco represented 40%, 51% and
50% of our total revenue in the fiscal years ended March 31, 1998, 1999 and
2000, respectively. We expect revenue from Cisco to account for a significant
portion of our revenue for the foreseeable future. Network Associates, a
reseller, accounted for 12% of our total revenue in the fiscal year ended
March 31, 1998. No other customer or indirect channel partner accounted for 10%
or more of our total revenue during the fiscal years ended March 31, 1998, 1999
or 2000.
Revenue from sales outside North America represented 12% of our total
revenue in each of the fiscal years ended March 31, 1998 and 1999 and 13% for
the fiscal year ended March 31, 2000. Sales outside North America are primarily
to indirect channel partners, which are generally responsible for importing
products and providing consulting and technical support and service to customers
within their territory. Our reported international revenue does not include any
revenue from sales to customers outside North America made by any of our North
American-based indirect channel partners, including Cisco. We expect revenue
from sales outside North America to continue to account for a significant
portion of our revenue in the future.
17
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenue of certain line items included in our Statement of Income:
NETSCOUT SYSTEMS, INC.
STATEMENT OF INCOME PERCENTAGES
YEAR ENDED MARCH 31,
------------------------------
1998 1999 2000
-------- -------- --------
Revenue:
Product.............................................. 81.7% 74.6% 66.4%
Service.............................................. 12.0 12.9 14.9
License and royalty.................................. 6.3 12.5 18.7
----- ----- -----
Total revenue...................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenue:
Product.............................................. 29.5 28.5 24.5
Service.............................................. 1.8 1.8 2.0
----- ----- -----
Total cost of revenue.............................. 31.3 30.3 26.5
----- ----- -----
Gross margin........................................... 68.7 69.7 73.5
----- ----- -----
Operating expenses:
Research and development............................. 12.0 11.1 11.1
Sales and marketing.................................. 31.7 30.2 32.4
General and administrative........................... 6.9 6.1 5.4
----- ----- -----
Total operating expenses........................... 50.6 47.4 48.9
----- ----- -----
Income from operations................................. 18.1 22.3 24.6
Interest income, net................................... 1.7 1.4 3.0
----- ----- -----
Income before provision for income taxes............... 19.8 23.7 27.6
Provision for income taxes............................. 7.1 8.5 9.9
----- ----- -----
Net income............................................. 12.7% 15.2% 17.7%
===== ===== =====
YEARS ENDED MARCH 31, 2000 AND 1999
REVENUE
Total revenues were $86.2 million and $67.6 million for the fiscal years
ended March 31, 2000 and 1999, respectively, representing an increase of 28%
from 1999 to 2000.
PRODUCT. Product revenues were $57.2 million and $50.4 million for the
fiscal years ended March 31, 2000 and 1999, respectively, representing an
increase of 14% from 1999 to 2000. This increase was primarily due to a 30%
increase in average selling price attributable to larger volumes of higher speed
and multi-port probes.
SERVICE. Service revenues were $12.8 million and $8.7 million for the
fiscal years ended March 31, 2000 and 1999, respectively, representing an
increase of 47% from 1999 to 2000. This increase was primarily due to an
increase in support agreements attributable to new product sales and an increase
in the sale of support agreements to new and existing customers attributable to
increased sales and marketing efforts.
18
LICENSE AND ROYALTY. License and royalty revenues were $16.2 million and
$8.5 million, for the fiscal years ended March 31, 2000 and 1999, respectively,
representing an increase of 91% from 1999 to 2000. This increase was primarily
due to a proportionate growth in unit sales of our software and embedded
software products by Cisco.
COST OF REVENUE AND GROSS MARGIN
PRODUCT. Cost of product revenue consists primarily of components,
personnel costs, media duplication, manuals, packaging materials, licensed
technology fees and overhead. Cost of product revenue was $21.1 million and
$19.3 million, for the fiscal years ended March 31, 2000 and 1999, respectively,
representing an increase of 10% from 1999 to 2000. This increase was primarily
due to higher sales volumes offset by a 30% decrease in the average cost per
unit from 1999 to 2000. Product gross margins were 63% and 62% for the fiscal
years ended March 31, 2000 and 1999, respectively.
SERVICE. Cost of service revenue consists primarily of personnel costs.
Cost of service revenues were $1.7 million and $1.2 million for the fiscal years
ended March 31, 2000 and 1999, respectively, representing an increase of 39%
from 1999 to 2000. This increase was primarily due to a 29% increase in
personnel costs from 1999 to 2000. Service gross margins were 87% and 86% for
the fiscal years ended March 31, 2000 and 1999, respectively. This increase was
primarily due to the timing of personnel replacements and additions as well as
economies of scale.
Gross margins were $63.3 million and $47.1 million for the fiscal years
ended March 31, 2000 and 1999, respectively, representing an increase of 35%
from 1999 to 2000. Gross margin is primarily affected by the mix of product,
service, license and royalty revenue and by the proportion of sales through
direct versus indirect distribution channels. We typically realize higher gross
margins on license and royalty revenue relative to product and service revenue
and on direct sales relative to indirect distribution channel sales. This
increase was primarily due to an increase in license and royalty revenue as a
percentage of total revenue.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel costs, fees for outside consultants and related costs
associated with the development of new products and the enhancement of existing
products. Research and development expenses were $9.5 million and $7.5 million
for the fiscal years ended March 31, 2000 and 1999, respectively, representing
an increase of 27% from 1999 to 2000. This increase was primarily due to a 33%
increase in personnel costs from 1999 to 2000.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel costs and costs associated with marketing programs such as trade
shows, seminars, advertising and new product launch activities. Sales and
marketing expenses were $27.9 million and $20.4 million for the fiscal years
ended March 31, 2000 and 1999, respectively, representing an increase of 37%
from 1999 to 2000. This increase was primarily due to a 77% increase in sales
and marketing personnel costs from 1999 to 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel costs for executive, financial, information services and
human resource employees. General and administrative expenses were $4.6 million
and $4.1 million for the fiscal years ended March 31, 2000 and 1999,
respectively, representing an increase of 13% from 1999 to 2000. This increase
was primarily due to a 22% increase in personnel costs from 1999 to 2000.
19
INTEREST INCOME, NET. Interest income, net of interest expense, was
$2.6 million and $926,000, for the fiscal years ended March 31, 2000 and 1999,
respectively, representing an increase of 176% from 1999 to 2000. This increase
was primarily due to an increase in our cash balances related to the proceeds
from our initial public offering.
PROVISION FOR INCOME TAXES. The provision for income taxes was
$8.5 million and $5.7 million, for the fiscal years ended March 31, 2000 and
1999, respectively, representing an increase of 49% from 1999 to 2000, primarily
due to higher pre-tax income. Our effective tax rate remained constant at 36%
for the fiscal years ended March 31, 2000 and 1999.
YEARS ENDED MARCH 31, 1999 AND 1998
REVENUE
Total revenues were $67.6 million and $42.8 million for the fiscal years
ended March 31, 1999 and 1998, respectively, representing an increase of 58%
from 1998 to 1999.
PRODUCT. Product revenues were $50.4 million and $35.0 million for the
fiscal years ended March 31, 1999 and 1998, respectively, representing an
increase of 44% from 1998 to 1999. This increase was primarily due to a 18%
increase in average selling price attributable to larger volumes of Wide Area
Network, Asynchronous Transfer Mode and Fast Ethernet probes.
SERVICE. Service revenues were $8.7 million and $5.1 million for the fiscal
years ended March 31, 1999 and 1998, respectively, representing an increase of
69% from 1998 to 1999. Our personnel costs increased 65% from 1998 to 1999.
LICENSE AND ROYALTY. License and royalty revenues were $8.5 million and
$2.7 million for the fiscal years ended March 31, 1999 and 1998, respectively,
representing an increase of 214% from 1998 to 1999. This increase was primarily
due to a proportionate growth in unit sales of our software and embedded
software products by Cisco.
COST OF REVENUE AND GROSS MARGIN
PRODUCT. Cost of product revenue was $19.3 million and $12.6 million for
the fiscal years ended March 31, 1999 and 1998, respectively, representing an
increase of 52% from 1998 to 1999. This increase was primarily due to higher
sales volumes and a 22% increase in the average cost per unit from 1998 to 1999.
Product gross margins were 62% and 64% for the fiscal years ended March 31, 1999
and 1998.
SERVICE. Cost of service revenues were $1.2 million and $784,000 for the
fiscal years ended March 31, 1999 and 1998, respectively, representing an
increase of 58% from 1998 to 1999. This increase was primarily due to a 65%
increase in service personnel costs to support the increase in our installed
customer base. Service gross margins were 86% and 85% for the fiscal years ended
March 31, 1999 and 1998. This increase was primarily due to the timing of
personnel replacements and additions as well as economies of scale.
Gross margins were $47.1 million and $29.4 million for the fiscal years
ended March 31, 1999 and 1998, respectively, representing an increase of 60%
from 1998 to 1999. This increase was primarily due to an increase in license and
royalty revenue as a percentage of total revenue.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses were
$7.5 million and $5.1 million for the fiscal years ended March 31, 1999 and
1998, respectively, representing an increase of 47% from 1998 to 1999. This
increase was primarily due to a 40% increase in personnel costs and a 49%
increase in consulting costs from 1998 to 1999.
20
SALES AND MARKETING. Sales and marketing expenses were $20.4 million, and
$13.6 million for the fiscal years ended March 31, 1999 and 1998, respectively,
representing an increase of 50% from 1998 to 1999. This increase was primarily
due to a 53% increase in sales and marketing personnel costs and a 114% increase
in marketing programs from 1998 to 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$4.1 million and $3.0 million for the fiscal years ended March 31, 1999 and
1998, respectively, representing an increase of 39% from 1998 to 1999. This
increase was primarily due to a 30% increase in personnel costs from 1998 to
1999.
INTEREST INCOME, NET. Interest income, net of interest expense, was
$926,000, and $743,00 for the fiscal years ended March 31, 1999 and 1998,
respectively, representing an increase of 25% from 1998 to 1999. This increase
was primarily due to an increase in our cash balances.
PROVISION FOR INCOME TAXES. The provision for income taxes was
$5.7 million and $3.1 million for the fiscal years ended March 31, 1999 and
1998, respectively, representing an increase of 87% from 1998 to 1999, primarily
due to higher pre-tax income. Our effective tax rate remained constant at 36%
for the fiscal years ended March 31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had $48.5 million in cash and cash equivalents and
$21.8 million in marketable securities. Prior to our initial public offering, we
financed our operations through cash provided by operating activities. On
August 17, 1999, we completed our initial public offering of 3,000,000 shares of
common stock at a price of $11.00 per share. We received net proceeds of
approximately $29.6 million after underwriter discounts and commissions and
other offering expenses. We have a line of credit with a bank, which allows us
to borrow up to $5.0 million for working capital purposes and to obtain letters
of credit. The line of credit expires in March 2001. Amounts available under the
line of credit are a function of eligible accounts receivable and bear interest
at the bank's prime rate. At March 31, 2000, we had letters of credit
outstanding under the line aggregating $561,000. The bank line of credit is
secured by our inventory and accounts receivable.
Cash, cash equivalents and marketable securities were $70.3 million at
March 31, 2000. Cash provided by operating activities was $6.7 million,
$12.8 million, and $15.3 million for the fiscal years ended March 31, 1998,
1999, 2000, respectively. Cash provided by operating activities was primarily
derived from net income and to a lesser degree, increases in depreciation and
amortization, accrued expenses and deferred revenue in each period. This was
partially offset by increases in accounts receivable in each period and
increases in prepaids and other current assets for the fiscal year ended
March 31, 2000. These changes were due to the growth of our business.
Cash used in investing activities was $6.9 million for the fiscal year ended
March 31, 1998, which reflects the purchase of fixed assets and, to a lesser
degree, marketable securities. Cash provided by investing activities was
$6.3 million for the fiscal year ended March 31, 1999, which was primarily due
to the maturity of marketable securities, partially offset by the purchase of
fixed assets. Cash used in investing activities was $24.2 million for the fiscal
year ended March 31, 2000, which reflects the purchase of marketable securities
and, to a lesser degree, fixed assets.
Cash provided by financing activities was $32.0 million for the fiscal year
ended March 31, 2000, which was primarily due to the initial public offering
proceeds.
On June 13, 2000, NetScout entered into an Agreement and Plan of
Reorganization with NextPoint Networks, Inc., NetScout Service Level
Corporation, a wholly owned subsidiary of NetScout, and certain stockholders of
NextPoint, pursuant to which NextPoint would merge with and into NetScout
Service Level Corporation. In the merger, NetScout will issue approximately
2.2 million shares of its common stock and approximately $20.6 million in cash
in exchange for all of the capital stock of NextPoint. Completion of the
21
merger is subject to, among other things, approval by holders of NextPoint
capital stock. The merger will be accounted for using the purchase method.
We believe that our current cash balances and the cash flows generated by
operations will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for the next 12 months. Thereafter, if cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or convertible debt securities. The sale
of additional equity or debt securities could result in additional dilution to
our stockholders. A portion of our cash may be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. From time to time, in the ordinary course of business, we evaluate
potential acquisitions of such businesses, products or technologies.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which required adoption in
periods beginning after June 15, 1999. SFAS No. 133 was subsequently amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" and will
now be effective for fiscal years beginning after June 15, 2000. NetScout does
not expect SFAS No. 133 to have a material effect on its financial condition or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No.101 "Revenue Recognition in Financial
Statements", as amended by SAB No.101A. SAB No.101 summarizes the SEC's views in
applying generally accepted accounting principles to selected revenue
recognition issues in financial statements. The application of the guidance of
SAB No.101 will be required in the Company's first quarter of fiscal 2001. The
Company is currently determining the impact if any, that SAB No. 101 will have
on its financial position and results of operations.
In March 2000, the FASB issued Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation" an interpretation of APB
Opinion No. 25". FIN No. 44 clarifies the application of APB Opinion No. 25 to
certain issues including: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for
the exchange of stock compensation awards in business combination. FIN No. 44 is
effective July 1, 2000, but certain conclusions in FIN No. 44 are applicable
retroactively to specific events occurring after either December 15, 1998 or
January 12, 2000. NetScout does not expect the application of FIN No. 44 to have
a material impact on the Company's financial position or results of operations.
YEAR 2000 READINESS DISCLOSURE
To date, we have not incurred significant costs in connection with
identifying and evaluating year 2000 issues or complying with year 2000
requirements. We have not experienced any significant year 2000 problems and
have not deferred the release of any of our products or any IT projects as a
result of year 2000 complications. However, we have not used any independent
verification or validation processes to support our assertions regarding year
2000 risks and cost estimates. While we do not expect to incur significant costs
in the foreseeable future, year 2000 complications are not fully known,
therefore, there can be no assurance that year 2000 errors or defects will not
be discovered in our products or internal software systems. If such errors or
defects are discovered, there can be no assurance that the costs of making such
systems year 2000 compliant will not have a material adverse effect on our
business, operating results and financial condition.
22
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
We do not provide financial performance forecasts. Our operating results and
financial condition have varied in the past and may in the future vary
significantly depending on a number of factors. Except for the historical
information in this report, the matters contained in this report include
forward-looking statements that involve risks and uncertainties. The following
factors, among others, could cause actual results to differ materially from
those contained in forward-looking statements made in this report. Such factors,
among others, may have a material adverse effect upon our business, results of
operations and financial condition.
A REDUCTION IN ORDERS FROM CISCO SYSTEMS, INC. WOULD MATERIALLY ADVERSELY
AFFECT OUR BUSINESS. Our operating results and financial condition for a
particular fiscal period would be materially adversely affected if there is a
substantial reduction in orders from Cisco Systems, Inc. or if we are unable to
complete one or more Cisco orders planned for that period. We derive a
significant portion of our revenue from Cisco, which distributes some of our
products under its private label and incorporates some of our software in its
products. Cisco accounted for 51% of our total revenue for the fiscal year ended
March 31, 1999 and 50% of our total revenue for the fiscal year ended March 31,
2000. Our future performance is significantly dependent upon Cisco's continued
promotion of our products. Cisco has no obligation to purchase any products from
us. Further, we do not control Cisco's distribution of our products, whether
incorporated into Cisco's products or sold under private label. Finally, Cisco
may decide to internally develop products that compete with our solution or
partner with our competitors or bundle or sell competitors' solutions, possibly
at lower prices. If our relationship with Cisco were terminated or adversely
affected for any reason, our business, operating results and financial condition
would be materially adversely affected.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE. Our quarterly revenue and
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. Most of our expenses, such as employee compensation and
rent, are relatively fixed in the short term. Moreover, our expense levels are
based, in part, on our expectations regarding future revenue levels. As a
result, if revenue for a particular quarter is below our expectations, we may
not be able to reduce operating expenses proportionately for that quarter, and
therefore this revenue shortfall would have a disproportionately negative effect
on our operating results for that quarter.
Our quarterly revenue may fluctuate as a result of a variety of factors,
many of which are outside our control, including the following:
- the market for network and application performance management solutions is
in an early stage of development and therefore demand for our solutions
may be uneven;
- the timing and receipt of orders from customers, particularly Cisco,
especially in light of our lengthy sales cycle;
- the timing and market acceptance of new products or product enhancements
by us or our competitors;
- distribution channels through which our products are sold could change;
- the timing of hiring sales personnel and the speed at which such personnel
become productive;
- we may not be able to anticipate or adapt effectively to developing
markets and rapidly changing technologies; and
- our prices or the prices of our competitors' products may change.
We operate with minimal backlog because our products typically are shipped
shortly after orders are received. Therefore, product revenue in any quarter is
substantially dependent on orders booked and shipped in that quarter and revenue
for any future quarter is not predictable to any degree of certainty.
23
Therefore, any significant deferral of orders for our products would cause a
shortfall in revenue for that quarter.
OUR RELIANCE ON SOLE SOURCE SUPPLIERS COULD ADVERSELY AFFECT OUR
BUSINESS. Many components that are necessary for the assembly of our probes are
obtained from separate sole source suppliers or a limited group of suppliers.
These components include some of our network interface cards, which are produced
for us solely by SDL Communications, Inc. Our reliance on sole or limited
suppliers involves several risks, including a potential inability to obtain an
adequate supply of required components and reduced control over pricing, quality
and timely delivery of components. We do not generally maintain long-term
agreements with any of our suppliers or large volumes of inventory. Our
inability to obtain adequate deliveries or the occurrence of any other
circumstance that would require us to seek alternative sources of these
components would affect our ability to ship our products on a timely basis. This
could damage relationships with current and prospective customers, cause
shortfalls in expected revenue and materially adversely affect our business,
operating results and financial condition.
OUR CONTINUED GROWTH DEPENDS ON OUR ABILITY TO EXPAND OUR SALES FORCE. We
must increase the size of our sales force in order to increase our direct sales
and support our indirect sales channels. Because our products are very
technical, sales people require a long period of time to become productive,
typically three to six months. This lag in productivity, as well as the
challenge of attracting qualified candidates, may make it difficult to meet our
sales force growth targets. Further, we may not generate sufficient sales to
offset the increased expense resulting from growing our sales force. If we are
unable to successfully expand our sales capability, our business, operating
results and financial condition could be materially adversely affected.
OUR SUCCESS DEPENDS ON OUR ABILITY TO EXPAND AND MANAGE INDIRECT
DISTRIBUTION CHANNELS. To increase our sales, we must further expand and manage
our indirect distribution channels, including original equipment manufacturers,
distributors, resellers, systems integrators and service providers. Sales to our
indirect distribution channels accounted for 81% and 78% of our total revenue
for the fiscal years ended March 31, 1999 and 2000, respectively. Sales to Cisco
accounted for 51% and 50% of our total revenue for the fiscal years ended
March 31, 1999 and 2000. Our indirect channel partners have no obligation to
purchase any products from us. In addition, they could internally develop
products, which compete with our solutions or partner with our competitors or
bundle or resell competitors' solutions, possibly at lower prices. Our inability
to expand and manage our relationships with our partners, the inability or
unwillingness of our partners to effectively market and sell our products or the
loss of existing partnerships could have a material adverse effect on our
business, operating results and financial condition.
IF WE FAIL TO INTRODUCE NEW PRODUCTS AND ENHANCE OUR EXISTING PRODUCTS TO
KEEP UP WITH RAPID TECHNOLOGICAL CHANGE, DEMAND FOR OUR PRODUCTS MAY
DECLINE. The market for network and application performance management
solutions is relatively new and is characterized by rapid changes in technology,
evolving industry standards, changes in customer requirements and frequent
product introductions and enhancements. Our success is dependent upon our
ability to meet our customers' needs, which are driven by changes in computer
networking technologies and the emergence of new industry standards. In
addition, new technologies may shorten the life cycle for our products or could
render our existing or planned products obsolete. If we are unable to develop
and introduce new network and application performance management products or
enhancements to existing products in a timely and successful manner, it would
have a material adverse effect on our business, operating results and financial
condition.
WE FACE SIGNIFICANT COMPETITION FROM OTHER TECHNOLOGY COMPANIES. The market
for network and application performance management solutions is intensely
competitive. We believe customers make network management system purchasing
decisions based primarily upon product performance, functionality and price;
name and reputation of vendor; distribution strength; and alliances with
industry partners. We compete with probe vendors, such as Agilent Technologies,
providers of network performance management solutions, such as Concord
Communications, Inc. and Micromuse, Inc., and providers of portable network
24
traffic analyzers, such as Network Associates, Inc. In addition, leading network
equipment providers could offer their own or competitors' solutions in the
future. Many of our current and potential competitors have longer operating
histories, greater name recognition and substantially greater financial,
management, marketing, service, support, technical, distribution and other
resources than we do. Therefore, they may be able to respond more quickly than
we can to new or changing opportunities, technologies, standards or customer
requirements.
As a result of these and other factors, we may not be able to compete
effectively with current or future competitors, which would have a material
adverse effect on our business, operating results and financial condition.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH IN THE MARKET
FOR AND THE COMMERCIAL ACCEPTANCE OF NETWORK AND APPLICATION PERFORMANCE
MANAGEMENT SOLUTIONS. We derive all of our revenue from the sale of products
and services that are designed to allow our customers to manage the performance
of computer networks and software applications. The market for network and
application performance management solutions is in an early stage of
development. Therefore, we cannot accurately assess the size of the market and
may be unable to predict the appropriate features and prices for products to
address the market, the optimal distribution strategy and the competitive
environment that will develop. In order for us to be successful, our potential
customers must recognize the value of more sophisticated network and application
performance management solutions, decide to invest in the management of their
networks and the performance of software applications and, in particular, adopt
our management solutions. Any failure of this market to continue to develop
would materially adversely affect our business, operating results and financial
condition. Businesses may choose to outsource the management of their networks
and applications to service providers. Our business may depend on our ability to
develop relationships with these service providers and successfully market our
products to them.
FAILURE TO PROPERLY MANAGE GROWTH COULD ADVERSELY AFFECT OUR BUSINESS. We
have been experiencing a period of rapid growth over the past several years. We
plan to continue to expand our business by hiring additional personnel. The
growth in size and complexity of our business and our customer base has been and
will continue to be a significant challenge to our management and operations. To
manage further growth effectively we must enhance our financial and accounting
systems and controls, integrate new personnel and manage expanded operations.
Our financial and accounting systems are currently being upgraded and we
anticipate the upgrade to be completed in the third calendar quarter of 2000. If
we are unable to successfully integrate these systems and controls and to
effectively manage our growth, our costs, the quality of our products, the
effectiveness of our sales organization, and our ability to retain key
personnel, our business, operating results and financial condition could be
materially adversely affected.
LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS. Our future
success depends to a significant degree on the skills, experience and efforts of
Anil Singhal, our Chairman of the Board, Chief Executive Officer and co-founder
and Narendra Popat, our President, Chief Operating Officer and co-founder. We
also depend on the ability of our other executive officers and senior managers
to work effectively as a team. The loss of one or more of our key personnel
could have a material adverse effect on our business, operating results and
financial condition.
WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR
MARKET. Qualified personnel are in great demand throughout the computer
software, hardware and networking industries. The demand for qualified personnel
is particularly acute in the New England area due to the large number of
software and high technology companies and the low unemployment in the region.
Our success depends in large part upon our ability to attract, train, motivate
and retain highly skilled employees, particularly sales and marketing personnel,
software engineers, and technical support personnel. We have had difficulty
hiring and retaining these highly skilled employees in the past. If we are
unable to attract and retain the highly skilled technical personnel that are
integral to our sales, marketing, product development and customer support
teams, the rate at which we can generate sales and develop new products or
product enhancements may be limited.
25
This inability could have a material adverse effect on our business, operating
results and financial condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY
RIGHTS. Our business is heavily dependent on our intellectual property. We rely
upon a combination of copyright, trademark and trade secret laws and
non-disclosure and other contractual arrangements to protect our proprietary
rights. The reverse engineering, unauthorized copying or other misappropriation
of our intellectual property could enable third parties to benefit from our
technology without compensating us. Legal proceedings to enforce our
intellectual property rights could be burdensome and expensive and could involve
a high degree of uncertainty. In addition, legal proceedings may divert
management's attention from growing our business. There can be no assurance that
the steps we have taken to protect our intellectual property rights will be
adequate to deter misappropriation of proprietary information, or that we will
be able to detect unauthorized use by third parties and take appropriate steps
to enforce our intellectual property rights. Further, we also license software
from third parties for use as part of our products, and if any of these licenses
were to terminate, we may experience delays in product shipment until we develop
or license alternative software.
OTHERS MAY CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS. We
may be subject to claims by others that our products infringe on their
intellectual property rights. These claims, whether or not valid, could require
us to spend significant sums in litigation, pay damages, delay product
shipments, reengineer our products or acquire licenses to such third-party
intellectual property. We may not be able to secure any required licenses on
commercially reasonable terms or secure them at all. We expect that these claims
will become more frequent as more companies enter the market for network and
application performance management solutions. Any of these claims or resulting
events could have a material adverse effect on our business, operating results
and financial condition.
IF OUR PRODUCTS CONTAIN ERRORS, THEY MAY BE COSTLY TO CORRECT, REVENUE MAY
BE DELAYED, WE COULD GET SUED AND OUR REPUTATION COULD BE HARMED. Despite
testing by our customers and us errors may be found in our products after
commencement of commercial shipments. If errors are discovered, we may not be
able to successfully correct them in a timely manner or at all. In addition, we
may need to make significant expenditures of capital resources in order to
eliminate errors and failures. Errors and failures in our products could result
in loss of or delay in market acceptance of our products and could damage our
reputation. If one or more of our products fails, a customer may assert warranty
and other claims for substantial damages against us. The occurrence or discovery
of these types of errors or failures could have a material adverse effect on our
business, operating results and financial condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO EXPAND AND MANAGE OUR INTERNATIONAL
OPERATIONS. Sales outside North America accounted for 12% and 13% of our total
revenue for the fiscal years ended March 31, 1999 and 2000, respectively. We
currently expect international revenue to continue to account for a significant
percentage of total revenue in the future. We believe that we must continue to
expand our international sales activities in order to be successful. Our
international sales growth will be limited if we are unable to expand
international indirect distribution channels, hire additional sales personnel,
adapt products for local markets, or manage geographically dispersed operations.
The major countries outside of North America, in which we do, or intend to do,
businesses are the United Kingdom, Germany and Japan. Our international
operations, including our operations in the United Kingdom, Germany and Japan,
are generally subject to a number of risks, including failure of local laws to
provide the same degree of protection against infringement of our intellectual
property, protectionist laws and business practices that favor local
competitors, dependence on local indirect channel partners, multiple conflicting
and changing governmental laws and regulations, longer sales cycles, greater
difficulty in collecting accounts receivable, foreign currency exchange rate
fluctuations and political and economic instability.
OUR BUSINESS MAY BE AFFECTED BY UNEXPECTED YEAR 2000 PROBLEMS. Many
existing computer systems and software products do not properly recognize dates
after December 31, 1999. This year 2000 problem could result in miscalculations,
data corruption, system failures or disruptions of operations. Our products, our
26
internal systems, our customers' systems, our distributors' systems and our
suppliers' systems may experience year 2000 problems, any of which could have a
material adverse effect on our business, operating results and financial
condition. Under the reasonably, likely worst case scenario our products could
interact with non-year 2000 compliant products, which could cause our products
to malfunction, our indirect channel partners, our customer or we may not be
able to process orders, or our suppliers may not be able to supply us with
critical components needed to make our products.
Year 2000 errors or defects in our products could give rise to warranty and
other claims by our customers. In addition, there can be no assurance that year
2000 errors or defects will not be discovered in our internal software systems
and, if errors or defects are present, there can be no assurance that the costs
of making such systems year 2000 compliant will not be material. If we are
unable to make our products and internal systems year 2000 compliant in a timely
manner, our business, operating results and financial condition could be
materially adversely affected.
Changing purchasing patterns of customers impacted by year 2000 issues may
result in reduced purchases of our solutions. Any year 2000 errors or defects in
our distributors' systems or the products of our original equipment manufacturer
partners could cause a reduction in their orders to us. Finally, year 2000
errors or defects in the internal systems of our suppliers, including our sole
and limited source suppliers, could require us to incur significant
unanticipated expense to remedy any problems or replace affected vendors and
could cause cancellations or delays in product shipments.
OUR BUSINESS MAY BE NEGATIVELY AFFECTED BY OUR FAILURE TO SUCCESSFULLY
INTEGRATE WITH NEXTPOINT OR TO RETAIN NEXTPOINT EMPLOYEES. On June 13, 2000 we
entered into an Agreement and Plan of Reorganization with NextPoint
Networks, Inc., NetScout Service Level Corporation, our wholly owned subsidary,
and certain stockholders of NextPoint, pursuant to which NextPoint would merge
with and into NetScout Service Level Corporation. The anticipated benefits of
the merger may not be achieved unless, among other things, the operations,
products, services and personnel of NextPoint are successfully combined with
ours in a timely and efficient manner. If the anticipated benefits of the
business combination are not achieved or are not achieved in a timely fashion,
then the merger could have an adverse affect on NetScout's operating results for
a significant period of time that cannot now be determined. Furthermore, the
diversion of the attention of management, and any difficulties encountered in
the transition process, could have an adverse impact on our revenues and
operating results.
Despite NextPoint's efforts to retain key employees, NextPoint may lose some
of its key employees following the merger. Competition for qualified management,
engineering and technical employees in the computer software, hardware and
networking industries is intense. NextPoint employees may not want to work for a
larger, publicly-traded company instead of a smaller, private company. In
addition, competitors may recruit NextPoint employees prior to the merger and
during the integration of NextPoint and us. We cannot provide any assurance that
the combined enterprise will be able to attract, retain and integrate key
employees following the merger.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We consider all highly liquid marketable securities purchased with a
maturity of three months or less to be cash equivalents and those with
maturities greater than three months are considered to be marketable securities.
Cash equivalents and marketable securities are stated at amortized cost plus
accrued interest, which approximates fair value. Cash equivalents and marketable
securities consist primarily of money market instruments and U.S. Treasury
bills. We currently do not hedge interest rate exposure, but do not believe that
an increase in interest rates would have a material effect on the value of our
marketable securities.
On January 1, 1999, eleven of the existing members of the European Union
joined the European Monetary Union. Ultimately there will be a single currency
within certain countries of the European Union, known as the Euro, and one
organization, the European Central Bank, responsible for setting
27
European monetary policy. We have reviewed the impact the Euro will have on our
business and whether this will give rise to a need for significant changes in
our commercial operations or treasury management functions. Because our
transactions are denominated in U.S. dollars, we do not believe that the Euro
conversion will have any material effect on our business, financial condition or
results of operations.
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA
NetScout's Consolidated Financial Statements and Schedules and the Report of
the Independent Accountants, appear beginning on page F-1 attached to this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of NetScout are as follows:
NAME AGE POSITION
- ---- -------- ---------------------------------------------------
Anil K. Singhal........................... 46 Chairman of the Board, Chief Executive Officer and
Treasurer
Narendra Popat............................ 50 President, Chief Operating Officer, Secretary and
Director
David Sommers............................. 53 Vice President and Chief Financial Officer
Lisa Fiorentino........................... 34 Vice President, Finance
Joyce Poggi Hager......................... 42 Vice President, Human Resources
Ashwani Singhal........................... 39 Vice President, Engineering
Gerald Stabile............................ 40 Vice President, Worldwide Sales and Services
Tracy Steele.............................. 40 Vice President, Manufacturing
Michael Szabados.......................... 47 Vice President, Marketing
Richard J. Egan........................... 64 Director
Joseph G. Hadzima, Jr..................... 48 Director
Kenneth T. Schiciano...................... 37 Director
ANIL K. SINGHAL co-founded NetScout in June 1984 and has served as
NetScout's Chairman of the Board, Chief Executive Officer and Treasurer since
July 1993. From NetScout's inception until July 1993, Mr. Singhal was President
of NetScout. Mr. Singhal has served as a director of NetScout since its
inception. Prior to founding NetScout, he was a senior architect and project
manager at Wang Laboratories, a provider of computer systems, from 1979 until
June 1984. Mr. Singhal is the brother of Ashwani Singhal, NetScout's Vice
President, Engineering.
NARENDRA POPAT co-founded NetScout in June 1984 and has served as NetScout's
President, Chief Operating Officer and Secretary since July 1993. From
NetScout's inception until July 1993, Mr. Popat was Chairman of the Board and
Treasurer of NetScout. Mr. Popat has served as a director of NetScout since its
inception. Prior to founding NetScout, Mr. Popat was a Senior Software Engineer
at Wang Laboratories from 1980 until June 1984.
DAVID SOMMERS has served as Vice President and Chief Financial Officer since
April 2000 when he joined NetScout. From November 1998 until January 2000,
Mr. Sommers was Senior Vice President and Chief Financial Officer of
FlexiInternational Software, Inc., a publicly-held developer and marketer of
financial accounting software. During 1998, Mr. Sommers was a consultant on
mergers and acquisitions to the Senior Vice President and Chief Financial
Officer of Lotus Development Corporation, an IBM subsidiary, which develops
group collaboration software. From January 1996 through August 1997, he was
Chief Financial Officer of SystemSoft Corporation, a publicly-held developer and
marketer of system level firmware. He also served as Vice President and Chief
Financial Officer of Advanced Media, Inc., a publicly-held developer and
marketer of interactive multimedia systems, from September 1993 through
December 1996.
LISA FIORENTINO has served as NetScout's Vice President, Finance since
January 2000. Ms. Fiorentino joined NetScout in August 1995 and served as
Director of Finance from May 1997 until January, 2000 and as Controller from
August 1995 until April 1997. Prior to joining NetScout, she served as Finance
Manager and various other financial management positions for Orbotech, a
manufacturer of automated optical inspection equipment for the printed circuit
board industry, from January 1989 until August 1995.
29
JOYCE POGGI HAGER has served as NetScout's Vice President, Human Resources
since January 2000. Ms. Hager joined NetScout in February 1998 and served as
Director of Human Resources from February 1998 to January 2000. Prior to joining
NetScout, she served as Senior HR Manager at PictureTel, a video conferencing
company, from July 1992 until January 1998. She also served as the Senior
Employee Relations Manager at Intel, a microchip manufacturer, from May 1984
until July 1992.
ASHWANI SINGHAL has served as Vice President, Engineering since
October 1998. Mr. Singhal joined NetScout in 1987 and served as a Senior
Software Engineer and Project Manager from 1987 until February 1997 and Director
of Engineering from February 1997 until October 1998. Prior to joining NetScout,
he was a Senior Software Engineer at Symmetrix, an artificial intelligence
systems company, from 1982 until 1987. Mr. Singhal is the brother of Anil
Singhal, NetScout's Chairman of the Board and Chief Executive Officer.
GERALD STABILE has served as Vice President, Worldwide Sales and Services
since October 1998. Mr. Stabile joined NetScout in September 1997 and served as
Vice President, Worldwide Sales from March 1998 until October 1998 and as Vice
President, North American Sales from September 1997 until March 1998. Prior to
joining NetScout, he served Olicom, formerly CrossComm Corporation, a developer
of networking and infrastructure software, as Vice President, Americas from 1996
until September 1997 and as Sales Director from 1992 through 1995.
TRACY STEELE has served as Vice President, Manufacturing since May 1997.
Mr. Steele joined NetScout in November 1995 and served as Director of
Manufacturing from November 1995 until May 1997. Prior to joining NetScout, he
served as Director of Manufacturing for Scope Communications, a developer of
hand-held network tools from 1993 to November 1995. He also served in various
manufacturing and management positions at NBase--Xyplex, Inc., a computer
networking company, from 1985 to February 1993.
MICHAEL SZABADOS has served as NetScout's Vice President, Marketing since
August 1997. Prior to joining NetScout, he served as Chief Executive Officer of
Jupiter Technology, Inc., a developer of frame relay access drives, from
March 1997 to August 1997. He also served as Vice President, Product
Management/Marketing at UB Networks, a computer networking company, from
July 1994 until March 1997 and served as Director of Marketing at SynOptics
Communications, a computer networking company, from 1991 until July 1994.
RICHARD J. EGAN has served as a director of NetScout since January 1999.
Mr. Egan is a founder of EMC Corporation, a provider of computer storage systems
and software. Mr. Egan has served EMC Corporation, a publicly-held company, as
Chairman of the Board since January 1988, as a director since inception in 1979,
as Chief Executive Officer from 1979 to January 1992 and as President from 1979
to January 1988.
JOSEPH G. HADZIMA, JR. has been a director of NetScout since July 1998.
Mr. Hadzima has been a Managing Director of Main Street Partners LLC, a Venture
capital investing and technology commercialization company, since April 1998.
Since June 1996, he has also served as Of Counsel at Sullivan & Worcester LLP, a
law firm where he was a partner from October 1987 to June 1996. Mr. Hadzima
served as Senior Vice President and General Counsel of Quantum Energy
Technologies Corporation, an energy and environmental products research and
development company, from June 1996 to December 1998. Mr. Hadzima is also a
Senior Lecturer at MIT Sloan School of Management.
KENNETH T. SCHICIANO has been a director of NetScout since January 1999.
Mr. Schiciano has been a Managing Director of TA Associates, Inc., a venture
capital firm, since December 1999. Mr. Schiciano served as a Vice President of
TA Associates from August 1989 to December 1994, and as Principal from
January 1995 to December 1999. Prior to that, Mr. Schiciano was a member of the
technical staff of AT&T Bell Laboratories, a telecommunications company.
Mr. Schiciano serves as a Director of Galaxy Telecom L.P., DTK Holdings, and
several privately held companies.
30
The Board of Directors is currently fixed at five members. NetScout's
amended and restated certificate of incorporation divides the Board of Directors
into three classes. The members of each class of directors serve for staggered
three-year terms. The Board of Directors is composed of:
- one Class I director--Mr. Schiciano--whose term expires upon the election
and qualification of directors at the annual meeting of stockholders to be
held in 2000;
- two Class II directors--Messrs. Singhal and Egan--whose terms expire upon
the election and qualification of directors at the annual meeting of
stockholders to be held in 2001; and
- two Class III directors--Messrs. Popat and Hadzima--whose terms expire
upon the election and qualification of directors at the annual meeting of
stockholders to be held in 2002.
Our executive officers are elected by and serve at the discretion of the
Board of Directors. Except as noted above, there are no family relationships
among any of our executive officers and directors.
COMMITTEES OF THE BOARD OF DIRECTORS
We have a standing Compensation Committee and Audit Committee of the Board
of Directors. The current members of the Compensation Committee are
Messrs. Egan, Hadzima and Popat. The Compensation Committee's duties are to
review and evaluate the salaries and incentive compensation of our management
and employees and administer our 1990 Stock Option Plan, 1999 Stock Option and
Incentive Plan and 1999 Employee Stock Purchase Plan.
The current members of the Audit Committee are Messrs. Egan, Hadzima and
Schiciano. The Audit Committee is responsible for reviewing the results and
scope of audits and other services provided by our independent public
accountants and reviewing our system of internal accounting and financial
controls. The Audit Committee also reviews such other matters with respect to
our accounting, auditing and financial reporting practices and procedures as it
may find appropriate or may be brought to its attention.
DIRECTOR COMPENSATION
Non-employee directors are reimbursed for their reasonable out-of-pocket
expenses incurred in attending meetings of the Board of Directors or of any
committee thereof. No director who is an employee of NetScout will receive
separate compensation for services rendered as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In January 1999, NetScout's Board of Directors established the Compensation
Committee and appointed Messrs. Popat, Egan and Hadzima to serve on the
Compensation Committee. Mr. Popat had certain relationships and related
transactions with NetScout. See "Certain Relationships and Related Transactions"
in Item 13 of this Form 10-K.
The Compensation Committee evaluates the salaries and incentive compensation
of management and employees of NetScout and administers our equity incentive
plans. Other than Mr. Popat, no member of this committee was at any time during
the past year an officer or employee of NetScout, was formerly an officer of
NetScout or any of its subsidiaries, or had any relationship with NetScout.
During the last year, none of our executive officer's served as:
- a member of the compensation committee, or other committee of the Board of
Directors performing equivalent functions or, in the absence of any such
committee, the entire Board of Directors of another entity, one of whose
executive officers served on the Compensation Committee of NetScout;
- a director of another entity, one of whose executive officers served on
the Compensation Committee of NetScout; or
31
- a member of the compensation committee, or other committee of the Board of
Directors performing equivalent functions or, in the absence of any such
committee, the entire Board of Directors of another entity, one of whose
executive officers served as a director of NetScout.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the total compensation
paid or accrued for the fiscal years ended March 31, 2000 and 1999 to (i) the
Chief Executive Officer of NetScout during fiscal year ended March 31, 2000 and
(ii) each of the four other most highly compensated executive officers of
NetScout during fiscal year ended March 31, 2000. The Chief Executive Officer
and the four other most highly compensated officers of NetScout are collectively
referred to below as the Named Executive Officers. The dollar amounts listed in
the column entitled "All other compensation" are comprised of contributions to a
defined contribution plan.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($) OPTION (#) COMPENSATION ($)
- --------------------------- ----------- ---------- --------- ------------ ----------------
Anil K.Singhal .................... 2000 250,000 325,000 37,326 1,442
Chairman of the Board and Chief 1999 250,000 325,000 -- 2,144
Executive Officer
Narendra Popat .................... 2000 250,000 325,000 37,326 1,442
President and Chief Operating 1999 250,000 325,000 -- 2,144
Officer
Ashwani Singhal ................... 2000 175,000 60,000 32,188 1,211
Vice President, Engineering 1999 160,000 50,000 -- 1,620
Gerald Stabile .................... 2000 136,800 97,400 32,188 --
Vice President, World Wide Sales 1999 136,800 152,500 -- --
and Services
Michael Szabados .................. 2000 160,000 92,500 32,188 2,570
Vice President, Marketing 1999 137,500 82,500 -- 2,452
32
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding option grants made
during the fiscal year ended March 31, 2000 pursuant to NetScout's 1999 Stock
Plan to each of the Named Executive Officers. The 5% and 10% appreciation rates
are set forth in the Securities and Exchange Commission rules and no
representation is made that the common stock will appreciate at these assumed
rates or at all. Actual gains, if any, on stock options exercises and common
stock holdings are dependent on the timing of such exercises and the future
performance of NetScout's common stock. There can be no assurance that the rates
of appreciation assumed in this table can be achieved or that the amounts
reflected below will be received by the individuals.
STOCK OPTION GRANTS 2000
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES % OF TOTAL EXERCISE APPRECIATION FOR OPTION
UNDERLYING OPTION GRANTED OF BASE TERM
OPTIONS GRANTED TO EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME (# OF SHARES) 2000 ($/SH) DATE 5% 10%
- ---- --------------- --------------- -------- ---------- ----------- -------------
Anil Singhal................... 37,236 2.6% $28.94 1/25/10 $677,788 $1,717,417
Narendra Popat................. 37,236 2.6% $28.94 1/25/10 $677,788 $1,717,417
Ashwani Singhal................ 32,188 2.2% $28.94 1/25/10 $585,902 $1,484,591
Gerald Stabile................. 32,188 2.2% $28.94 1/25/10 $585,902 $1,484,591
Michael Szabados............... 32,188 2.2% $28.94 1/25/10 $585,902 $1,484,591
YEAR-END OPTION TABLE
The following table sets forth information regarding exercisable and
unexercisable stock options held as of March 31, 2000 by each of the Named
Executive Officers. The value realized upon exercise of stock options is
calculated by determining the difference between the exercise price per share
and the fair market value on the date of exercise. The value of unexercised
in-the-money options has been calculated by multiplying the number of shares
underlying the option by the difference between the exercise price per share
payable upon exercise of such options and the fair market value at March 31,
2000 of $16.75 per share.
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Anil K. Singhal............. -- -- -- 37,236 -- --
Narendra Popat.............. -- -- -- 37,236 -- --
Ashwani Singhal............. -- -- -- 32,188 -- --
Gerald Stabile.............. 110,000 $2,099,395 7,900 99,688 $ 112,575 $ 961,875
Michael Szabados............ 21,400 $ 465,669 106,600 122,188 $1,519,050 $1,282,500
STOCK PLANS
1990 STOCK OPTION PLAN. The 1990 Stock Option Plan was adopted by the Board
of Directors and approved by the stockholders on October 4, 1990. In general,
options granted pursuant to the 1990 Stock Option Plan are exercisable within
ten years of the original grant date and become exercisable over a period of
four years from a specific date; and an additional 25% of unexercisable options
shall become
33
exercisable immediately prior to the closing of a merger, acquisition, business
combination or similar transaction which results in our existing stockholders
owning less than 50% of NetScout's equity securities or assets. Options are not
assignable or transferable except by wills or the laws of decent or
distribution. We have a right of repurchase for shares issued upon the exercise
of options under certain circumstances, including unauthorized transfers of the
shares and termination of the optionees relationship with NetScout in certain
situations. As of March 31, 2000, options to purchase an aggregate of 1,638,059
shares of common stock at a weighted average exercise price of $3.30 per share
were outstanding under the 1990 Stock Option Plan. No additional options grants
will be made under the 1990 Stock Option Plan.
1999 STOCK OPTION AND INCENTIVE PLAN. Our 1999 Stock Option and Incentive
Plan ("1999 Stock Option Plan") was adopted by the Board of Directors in
April 1999 and was approved by our stockholders in June 1999. The 1999 Stock
Option Plan provides for the grant of stock-based awards to our employees,
officers and directors, consultants or advisors. Under the 1999 Stock Option
Plan, we may grant options that are intended to qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code, options
not intended to qualify as incentive stock options, restricted stock and other
stock-based awards. Incentive stock options may be granted only to employees of
NetScout. A total of 4,500,000 shares of common stock have been reserved for
issuance under the 1999 Stock Option Plan. The maximum number of shares with
respect to which awards may be granted to any employee under the 1999 Stock
Option Plan shall not exceed 1,000,000 shares of common stock during any
calendar year.
The 1999 Stock Option Plan is administered by the Compensation Committee.
Subject to the provisions of the 1999 Stock Option Plan, the Compensation
Committee has the authority to select the persons to whom awards are granted and
determine the terms of each award, including the number of shares of common
stock subject to the award. Payment of the exercise price of an award may be
made in cash or, if approved by the Compensation Committee, shares of common
stock, a combination of cash and stock, a promissory note or by any other method
approved by the Compensation Committee. Unless otherwise permitted by the
Compensation Committee, awards are not assignable or transferable except by will
or the laws of descent and distribution, and, during the participant's lifetime,
may be exercised only by the participant.
The 1999 Stock Option Plan provides, subject to certain conditions, that
upon an acquisition of NetScout, 25% of each unvested portion of any awards will
accelerate and become exercisable, with the remaining 75% of each unvested
portion to continue vesting throughout the term of the Award.
The Compensation Committee may, in its sole discretion, amend, modify or
terminate any award granted or made under the 1999 Stock Option Plan, so long as
such amendment, modification or termination would not materially and adversely
affect the participant. The Compensation Committee may also provide that any
option shall become immediately exercisable, in full or in part, or that any
restricted stock granted under the 1999 Stock Option Plan shall be free of some
or all restrictions.
As of March 31, 2000, options to purchase an aggregate of 1,323,825 shares
of common stock, at an average exercise price of $21.23 per share, were
outstanding under the 1999 Stock Option Plan.
1999 EMPLOYEE STOCK PURCHASE PLAN. The 1999 Employee Stock Purchase Plan
was adopted by the Board of Directors in April 1999 and was approved by our
stockholders in June 1999. The 1999 Purchase Plan provides for the issuance of a
maximum of 500,000 shares of common stock.
The 1999 Purchase Plan is administered by the Compensation Committee. All
employees of NetScout whose customary employment is for more than 20 hours per
week and for more than three months in any calendar year are eligible to
participate in the 1999 Purchase Plan. Employees who would own 5% or more of the
total combined voting power or value of NetScout's stock immediately after the
grant of the option may not participate in the 1999 Purchase Plan. To
participate in the 1999 Purchase Plan, an employee must authorize us to deduct
an amount not less than one percent nor more than 10 percent of a participant's
total cash compensation from his or her pay during six-month payment periods.
The payment periods
34
commence on the six-month periods commencing on April 1 and October 1,
respectively, and ending on the following September 30 and March 31,
respectively, of each year, but in no case shall an employee be entitled to
purchase more than 500 shares in any one payment period. The exercise price for
the option granted in each payment period is 85% of the lesser of the last
reported sale price of the common stock on the first or last business day of the
payment period, in either event rounded up to the nearest cent. If an employee
is not a participant on the last day of the payment period, such employee is not
entitled to exercise his or her option, and the amount of his or her accumulated
payroll deductions will be refunded. Options granted under the 1999 Purchase
Plan may not be transferred or assigned. An employee's rights under the 1999
Purchase Plan terminate upon his or her voluntary withdrawal from the plan at
any time or upon termination of employment. An aggregate of 21,963 shares of
common stock were issued to date under the 1999 Purchase Plan.
401(k) PLAN
We maintain a 401(k) plan qualified under Section 401 of the Internal
Revenue Code. All of our employees who are at least 21 years of age are eligible
to participate in the 401(k) plan. Under the 401(k) plan, a participant may
contribute a maximum of 15% of his or her pre-tax salary, commissions and
bonuses through payroll deductions, up to the statutorily prescribed annual
limit of $10,000 in calendar year 1999, to the 401(k) plan. The percentage
elected by more highly compensated participants may be required to be lower. At
the discretion of the Board of Directors, we may make matching contributions to
the 401(k) plan. During the plan year ending December 31, 1999, we matched $.25
for each $1.00 of employee contributions up to 6% of compensation. In addition,
at the discretion of the Board of Directors, we may make profit-sharing
contributions to the 401(k) plan for all eligible employees. During the plan
year ending December 31, 1999, we made no profit-sharing contributions to the
401(k) plan.
EMPLOYMENT AGREEMENTS
Anil Singhal and Narendra Popat entered into employment agreements with
NetScout on June 1, 1994, which were amended on January 14, 1999. Under the
terms of these employment agreements, each of Messrs. Singhal and Popat receive
a base salary of at least $250,000 and a year-end, non-discretionary bonus of at
least $250,000. In the event that either Mr. Singhal or Mr. Popat is terminated
without cause, or either decides to terminate his own employment for "good
reason" each is entitled to receive severance benefits for three years as
follows:
- for the first twelve months following termination, the greater of $175,000
or base salary as of the date of termination; and
- for each of the following twelve month period, an amount equal to 120% of
the amount received in the immediately preceding twelve months.
"Good reason" includes a change in executive responsibilities or a reduction in
salary or benefits. Severance benefits will be discontinued if the executive
secures alternative employment that is comparable as to position and pay. During
any period in which Mr. Singhal or Mr. Popat is entitled to receive severance
benefits, he shall also continue to receive all other benefits under the
employment agreements including life insurance, medical insurance, and
reimbursement for company car expenses. Each of Messrs. Singhal and Popat are
also entitled to reimbursement of job placement expenses of up to $25,000 plus
related travel expenses. If either Mr. Singhal or Mr. Popat is terminated with
cause, he will not be entitled to any severance payments or other benefits
except as required by law. Each employment agreement provides for a five-year
term commencing June 1, 1994 with automatic one-year renewals.
35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of May 31, 2000, and as adjusted to reflect the
sale of the shares of common stock offered hereby, by:
- each beneficial owner of more than 5% of our common stock;
- each Named Executive Officer;
- each director; and
- all executive officers and directors as a group.
Unless otherwise noted, the address of each person listed on the table is
c/o NetScout Systems, Inc., 4 Technology Park Drive, Westford, MA 01886, and
each person has sole voting and investment power over the shares shown as
beneficially owned, except to the extent authority is shared by spouses under
applicable law or as unless otherwise noted below.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock issuable by NetScout
to a person or entity named below pursuant to options which may be exercised
within 60 days after May 31, 2000 are deemed to be beneficially owned and
outstanding for purposes of calculating the number of shares and the percentage
beneficially owned by that person or entity. However, these shares are not
deemed to be beneficially owned and outstanding for purposes of computing the
percentage beneficially owned by any other person or entity.
NUMBER OF SHARES PERCENTAGE BENEFICIALLY
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
- ------------------------ ------------------ -----------------------
Anil K. Singhal(1)....................... 5,629,906 21.1%
Narendra Popat(2)........................ 4,479,906 16.8
Ashwani Singhal(3)....................... 816,087 3.1
Gerald Stabile(4)........................ 116,924 *
Michael Szabados(5)...................... 131,712 *
Richard J. Egan(6)....................... -- --
c/o Egan-Managed Capital, L.P.
30 Federal Street Boston, MA 02110-2508
Joseph G. Hadzima, Jr.(7)................ 260,428 1.0
c/o Main Street Partners
238 Main Street, Suite 400
Cambridge, MA 02142
Kenneth T. Schiciano(8).................. 16,256 *
c/o TA Associates, Inc.
125 High Street
Boston, MA 02110
TA Entities(9)........................... 6,499,170 24.3
c/o TA Associates, Inc.
125 High Street
Boston, MA 02110
All executive officers and directors as a
group (12 persons)(10)................. 11,572,306 43.3%
- ------------------------
* Less than 1% of the outstanding common stock.
(1) Includes an aggregate of 15,350 shares held in trust for the benefit of
Mr. Singhal's children; Mr. Singhal is one of two trustees of each such
trust. Includes 340,000 shares held by a family limited
36
partnership of which Mr. and Mrs. Singhal are the general partners and
trusts for the benefit of Mr. Singhal's children are the limited partners.
Includes 371,750 shares held in a grantor retained annuity trust for the
benefit of Mr. Singhal. Includes 4,655 shares issuable upon the exercise of
options exercisable within 60 days of May 31, 2000.
(2) Includes 136,056 shares held in trust for the benefit of Mr. Popat's
children; Mr. Popat's wife and Mr. Hadzima are the two trustees of such
trust. Includes 340,000 shares held by a family limited partnership of which
Mr. and Mrs. Popat are the general partners and trusts for the benefit of
Mr. Popat's children are the limited partners. Includes 365,650 shares held
in a grantor retained annuity trust for the benefit of Mr. Popat;
Mr. Hadzima is the sole trustee of such trust. Includes 4,655 shares
issuable upon the exercise of options exercisable within 60 days of May 31,
2000.
(3) Includes 40,300 shares owned by Mr. Singhal's wife. Also includes 5,587
shares issuable upon the exercise of options exercisable within 60 days of
May 31, 2000.
(4) Includes 16,924 shares issuable upon the exercise of options exercisable
within 60 days of May 31, 2000.
(5) Includes 1,400 shares owned by Mr. Szabados' daughters. Also includes
130,312 shares issuable upon the exercise of options exercisable within
60 days of May 31, 2000.
(6) Egan-Managed Capital, L.P. owns 313,084 shares. Although Mr. Egan does not
have any voting or investment powers over the shares, Mr. Egan and his
children own substantially all of the equity interest of Egan-Managed
Capital, L.P.
(7) Includes 30,000 shares issuable upon the exercise of options exercisable
within 60 days of May 31, 2000. Includes 136,056 shares held in trust for
the benefit of Mr. Popat's children; Mrs. Popat and Mr. Hadzima are the two
trustees of such trust. Does not include 365,650 shares held in a grantor
retained annuity trust for the benefit of Mr. Popat; Mr. Hadzima is the sole
trustee of such trust. Mr. Hadzima disclaims beneficial ownership of all
shares held in trust for the benefit of either Mr. Popat's children or
Mr. Popat. The shares deemed to be beneficially owned by Mr. Hadzima do not
include 53,328 shares held in trust for the benefit of Mr. Hadzima's
children.
(8) Consists of shares of TA Investors LLC beneficially owned by Mr. Schiciano.
Mr. Schiciano is a Managing Director of TA Associates, Inc. Mr. Schiciano
disclaims beneficial ownership of the shares held by the TA Entities, except
to the extent of his pecuniary interest therein.
(9) Includes 5,298,950 shares held by TA/Advent VIII L.P.; 993,561 shares held
by Advent Atlantic and Pacific III L.P.; 100,680 shares held by TA
Executives Fund LLC; and 105,979 shares held by TA Investors LLC. TA/Advent
VIII L.P., Advent Atlantic and Pacific III L.P., TA Executives Fund LLC and
TA Investors LLC are part of an affiliated group of investment partnerships
referred to, collectively, as the "TA Entities." The general partner of
TA/Advent VIII L.P. is TA Associates VIII LLC. The general partner of Advent
Atlantic and Pacific III L.P. is TA Associates AAP III Partners L.P. TA
Associates, Inc. is the general partner of TA Associates AAP III Partners
L.P. and is the sole manager of TA Associates VIII LLC, TA Executives Fund
LLC and TA Investors LLC. In such capacity, TA Associates, Inc., through an
executive committee, exercises sole voting and investment power with respect
to all shares held of record by the named investment partnerships;
individually, no stockholder, director or officer of TA Associates, Inc. is
deemed to have or share such voting or investment power.
(10) Includes an aggregate of 257,470 shares issuable upon exercise of options
exercisable within 60 days of May 31, 2000.
37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 28, 1996, Anil K. Singhal borrowed $1,100,000 and Narendra Popat
borrowed $900,000 from NetScout. In connection with the loans, Mr. Singhal
pledged 567,744 shares of voting common stock, and Mr. Popat pledged 464,520
shares of voting common stock to NetScout. Each loan was evidenced by a
promissory note and bore interest at 6.48% per annum, compounded semi-annually.
Accrued interest was payable on an annual basis. Each of Mr. Singhal and
Mr. Popat repaid the entire outstanding principal and interest on these loans in
August 1999.
In May 1996, NetScout Systems (UK) Limited was organized under the laws of
England and Wales to serve as a wholly-owned subsidiary of NetScout.
Messrs. Popat and Singhal were issued the outstanding shares of stock of
NetScout Systems (UK) Limited. The shares were transferred to NetScout in
August 1999.
NetScout believes that all transactions described above were made on terms
no less favorable to it than would have been obtained from unaffiliated third
parties. All future transactions, if any, with our executive officers, directors
and affiliates will be on terms no less favorable to us than could be obtained
from unrelated third parties and will be approved by a majority of the Board of
Directors and by a majority of the disinterested members of the Board of
Directors.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements.
For a list of the consolidated financial information
included herein, see Index to Consolidated Financial
Statements on Page F-1.
2. Financial Statement Schedules.
The following financial statement schedules and Report of
Independent Accountants on Financial Statement Schedules
are included:
Report of Independent Accountants on Financial Statement
Schedules.............................................. S-1
Valuation and Qualifying Accounts....................... S-2
3. List of Exhibits.
The following exhibits are filed or incorporated by
reference as part of this Report.
3.1, 4.1 Third Amended and Restated Certificate of Incorporation of
NetScout (filed as Exhibit 3.3, 4.1 to NetScout's
Registration Statement on Form S-1 (No. 333-76843) and
incorporated herein by reference)
3.2, 4.2 Form of Amended and Restated By-laws of NetScout.
4.3 Specimen Certificate for shares of NetScout's Common Stock
(filed as Exhibit 4.3 to NetScout's Registration Statement
on Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.1 1990 Stock Option Plan, as amended (filed as Exhibit 10.1 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.2 1999 Stock Option and Incentive Plan (filed as Exhibit 10.2
to NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.3 1999 Employee Stock Purchase Plan (filed as Exhibit 10.3 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.4 Stock Purchase and Redemption Agreement dated December 31,
1998 by and among NetScout, Greylock Equity Limited
Partnership, certain affiliates of TA Associates, Inc. and
Egan-Managed Capital, L.P. (filed as Exhibit 10.4 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.5 Amended and Restated Rights Agreement entered into as of
January 15, 1999 by and among NetScout, Greylock Equity
Limited Partnership, certain affiliates of TA
Associates, Inc. and Egan-Managed Capital, L.P. (filed as
Exhibit 10.5 to NetScout's Registration Statement on Form
S-1 (No. 333-76843) and incorporated herein by reference).
10.6 Lease dated August 18, 1997 between NetScout and Michelson
Farm-Westford Technology Park Limited Partnership (filed as
Exhibit 10.6 to NetScout's Registration Statement on Form
S-1 (No. 333-76843) and incorporated herein by reference).
39
10.7 Amended and Restated Loan and Security Agreement dated
March 12, 1998 by and between NetScout and Silicon Valley
Bank (filed as Exhibit 10.7 to NetScout's Registration
Statement on Form S-1 (No. 333-76843) and incorporated
herein by reference).
10.8 Loan Modification Agreement entered into March 11, 1999
between NetScout and Silicon Valley Bank (filed as Exhibit
10.8 to NetScout's Registration Statement on Form S-1
(No. 333-76843) and incorporated herein by reference).
10.9 OEM Agreement dated as of February 3, 1998 by and between
SDL Communications, Inc. and NetScout (filed as Exhibit
10.9 to NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.10 Project Development and License Agreement dated as of
July 13, 1994 by and between Cisco Systems, Inc. and
NetScout (filed as Exhibit 10.10 to NetScout's Registration
Statement on Form S-1 (No. 333-76843) and incorporated
herein by reference).
10.11 Amendment No. 1 to the Project Agreement and Design License
Agreement dated as of January 4, 1995 by and between Cisco
and NetScout (filed as Exhibit 10.11 to NetScout's
Registration Statement on Form S-1 (No. 333-76843) and
incorporated herein by reference).
10.12 Private Label Agreement effective as of October 17, 1995 by
and between Cisco and NetScout (filed as Exhibit 10.12 to
NetScout's Registration Statement on Form S-1
(No. 333-76843) and incorporated herein by reference).
10.13 Amendment to Private Label Agreement and Project Development
and License Agreement dated May 15, 1996 by and between
Cisco and NetScout (filed as Exhibit 10.13 to NetScout's
Registration Statement on Form S-1 (No. 333-76843) and
incorporated herein by reference).
10.14 Amendment No. 3 to the Private Label Agreement and Project
Development and License Agreement by and between Cisco and
NetScout (filed as Exhibit 10.14 to NetScout's Registration
Statement on Form S-1 (No. 333-76843) and incorporated
herein by reference).
10.15 Amendment No. 4 to Private Label Agreement and Project
Development and License Agreement effective as of
February 23, 1998 by and between Cisco and NetScout (filed
as Exhibit 10.15 to NetScout's Registration Statement on
Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.16 Amendment No. 5 effective as of December 26, 1999 to Private
Label Agreement and Project Development and License
Agreement between Cisco and NetScout (filed as Exhibit 10.1
to NetScout's Quarterly Report on Form 10-Q and
incorporated herein by reference).
10.17 Agreement Relating to Employment dated June 1, 1994 by and
between NetScout and Anil Singhal (filed as Exhibit 10.16
to NetScout's Registration Statement on Form S-1
(No. 333-76843) and incorporated herein by reference).
10.18 Amendment No. 1 to Agreement Relating to Employment dated
January 14, 1999 by and between NetScout and Anil Singhal
(filed as Exhibit 10.17 to NetScout's Registration
Statement on Form S-1 (No. 333-76843) and incorporated
herein by reference).
10.19 Agreement Relating to Employment dated June 1, 1994 by and
between NetScout and Narendra Popat (filed as Exhibit 10.18
to NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.20 Amendment No. 1 to Agreement Relating to Employment dated
January 14, 1999 by and between NetScout and Narendra Popat
(filed as Exhibit 10.19 to NetScout's Registration
Statement on Form S-1 (No. 333-76843) and incorporated
herein by reference).
40
10.21 Secured Term Note for $1,100,000, Partially Non-Recourse,
dated June 28, 1996, Payable to NetScout by Anil Singhal
(filed as Exhibit 10.20 to NetScout's Registration
Statement on Form S-1 (No. 333-76843) and incorporated
herein by reference).
10.22 Stock Pledge Agreement, made as of June 28, 1996, between
Anil Singhal and NetScout (filed as Exhibit 10.21 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.23 Secured Term Note for $900,000, Partially Non-Recourse,
dated June 28, 1996, Payable to NetScout by Narendra Popat
(filed as Exhibit 10.22 to NetScout's Registration
Statement on Form S-1 (No. 333-76843) and incorporated
herein by reference).
10.24 Stock Pledge Agreement, made as of June 28, 1996, between
Narendra Popat and NetScout (filed as Exhibit 10.23 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.25 Loan Modification Agreement entered into March 10, 2000
between NetScout and Silicon Valley Bank.
21 Subsidiaries of NetScout.
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule.
b. Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the fourth
quarter of 2000.
c. Financial Statement Schedules
The Company hereby files as part of this Annual Report on Form 10-K the
financial statement schedule listed in Item 14(a)(2) above, which is
attached hereto.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in
Westford, Massachusetts on June 23, 2000.
NETSCOUT SYSTEMS, INC.
By: /s/ ANIL K. SINGHAL
-----------------------------------------
Anil K. Singhal
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ ANIL K. SINGHAL Chief Executive Officer and
------------------------------------------- Chairman of the Board June 23, 2000
Anil K. Singhal (Principal Executive Officer)
/s/ NARENDRA POPAT
------------------------------------------- President, Chief Operating June 23, 2000
Narendra Popat Officer and Director
Vice President and Chief
/s/ DAVID SOMMERS Financial Officer (Principal
------------------------------------------- Financial and Accounting June 23, 2000
David Sommers Officer)
/s/ JOSEPH G. HADZIMA, JR.
------------------------------------------- Director June 23, 2000
Joseph G. Hadzima, Jr.
/s/ KENNETH T. SCHICIANO
------------------------------------------- Director June 23, 2000
Kenneth T. Schiciano
/s/ RICHARD J. EGAN
------------------------------------------- Director June 23, 2000
Richard J. Egan
42
NETSCOUT SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of March 31, 1999 and 2000... F-3
Consolidated Statements of Income for the Three Years Ended
March 31, 1998, 1999 and 2000............................. F-4
Consolidated Statements of Redeemable Convertible Common
Stock and
Stockholders' Equity (Deficit) for the Three Years Ended
March 31, 1998, 1999 and 2000............................. F-5
Consolidated Statements of Cash Flows for the Three Years
Ended
March 31, 1998, 1999 and 2000............................. F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of NetScout Systems, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of redeemable convertible common stock and
stockholders' equity (deficit) and of cash flows present fairly, in all material
respects, the financial position of NetScout Systems, Inc. and its subsidiaries
at March 31, 1999 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2000, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
April 21, 2000, except for Note 16, as to
which the date is June 13, 2000
F-2
NETSCOUT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH
-------------------
1999 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................... $ 25,477 $ 48,515
Marketable securities....................................... -- 21,807
Accounts receivable, net of allowance for doubtful accounts
and returns of $1,036 and $754 at March 31, 1999 and 2000,
respectively.............................................. 6,550 10,390
Inventories................................................. 3,165 3,131
Refundable income taxes..................................... 217 1,899
Deferred income taxes....................................... 1,196 1,022
Prepaids and other current assets........................... 821 3,728
-------- --------
Total current assets...................................... 37,426 90,492
Fixed assets, net........................................... 4,227 5,657
Notes receivable-stockholders............................... 2,000 --
Deferred income taxes....................................... 321 599
-------- --------
Total assets.............................................. $ 43,974 $ 96,748
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE COMMON STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................ $ 3,945 $ 2,789
Accrued compensation........................................ 3,539 3,673
Accrued other............................................... 1,165 2,448
Customer deposits........................................... 34 78
Deferred revenue............................................ 4,254 6,638
-------- --------
Total current liabilities................................. 12,937 15,626
-------- --------
Commitments and contingencies (Note 12)
Redeemable convertible common stock:
Class B redeemable convertible common stock, $0.001 par
value; 6,977,254 shares authorized, issued and outstanding
at March 31, 1999; no shares authorized, issued or
outstanding at March 31, 2000............................. 44,161 --
-------- --------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, no shares authorized,
issued or outstanding at March 31, 1999; 5,000,000 shares
authorized, no shares issued or outstanding at March 31,
2000...................................................... -- --
Series A convertible preferred stock, $0.001 par value;
631,579 shares authorized and issued, 315,790 shares
outstanding at March 31, 1999; no shares authorized,
issued or outstanding at March 31, 2000................... 5,964 --
Common stock, $0.001 par value:
Voting, 121,798,382 shares authorized, 16,000,000 shares
issued and 11,250,502 shares outstanding at March 31,
1999; 150,000,000 shares authorized, 30,697,697 shares
issued and 26,720,443 shares outstanding at March 31,
2000.................................................... 16 31
Non-Voting, 21,224,364 shares authorized, 4,035,858 shares
issued and 3,071,258 shares outstanding at March 31,
1999; no shares authorized, issued or outstanding at
March 31, 2000.......................................... 4 --
Additional paid-in capital................................ 2,143 67,366
Deferred compensation....................................... (1,312) (636)
Treasury stock.............................................. (44,394) (25,306)
Retained earnings........................................... 24,455 39,667
-------- --------
Total stockholders' equity (deficit)...................... (13,124) 81,122
-------- --------
Total liabilities, redeemable convertible common stock and
stockholders' equity (deficit).......................... $ 43,974 $ 96,748
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
NETSCOUT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED MARCH 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
Revenue:
Product............................................. $ 34,990 $ 50,374 $ 57,206
Service............................................. 5,143 8,710 12,804
License and royalty................................. 2,696 8,467 16,149
----------- ----------- -----------
Total revenue..................................... 42,829 67,551 86,159
----------- ----------- -----------
Cost of revenue:
Product............................................. 12,638 19,250 21,139
Service............................................. 784 1,235 1,718
----------- ----------- -----------
Total cost of revenue............................. 13,422 20,485 22,857
----------- ----------- -----------
Gross margin.......................................... 29,407 47,066 63,302
----------- ----------- -----------
Operating expenses:
Research and development............................ 5,129 7,526 9,526
Sales and marketing................................. 13,583 20,375 27,945
General and administrative.......................... 2,950 4,104 4,631
----------- ----------- -----------
Total operating expenses.......................... 21,662 32,005 42,102
----------- ----------- -----------
Income from operations................................ 7,745 15,061 21,200
Interest income....................................... 750 929 2,582
Interest expense...................................... (7) (3) (31)
----------- ----------- -----------
Income before provision for income taxes.............. 8,488 15,987 23,751
Provision for income taxes............................ 3,056 5,715 8,539
----------- ----------- -----------
Net income............................................ $ 5,432 $ 10,272 $ 15,212
=========== =========== ===========
Basic net income per share............................ $ 0.28 $ 0.55 $ 0.70
Diluted net income per share.......................... $ 0.23 $ 0.43 $ 0.56
Shares used in computing:
Basic net income per share.......................... 19,289,168 18,585,676 21,750,205
Diluted net income per share........................ 23,165,529 23,705,999 26,946,046
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
NETSCOUT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CLASS B REDEEMABLE COMMON STOCK
SERIES A -----------------------------------
CONVERTIBLE COMMON CONVERTIBLE
STOCK PREFERRED STOCK VOTING NON-VOTING
--------------------- ------------------- ---------------------- ----------
SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE SHARES
---------- -------- -------- -------- ---------- --------- ----------
Balance, March 31, 1997........................ -- $ -- 631,579 $ 5,964 16,000,000 $16 3,588,800
Deferred compensation related to stock options
granted......................................
Issuance of common stock pursuant to exercise
of options................................... 19,200
Amortization of deferred compensation..........
Net income.....................................
---------- -------- -------- ------- ---------- --- ----------
Balance, March 31, 1998........................ -- -- 631,579 5,964 16,000,000 16 3,608,000
Issuance of Class B redeemable convertible
common stock, net of issuance costs of
$410......................................... 6,977,254 44,161
Purchase of treasury stock.....................
Deferred compensation related to stock options
granted......................................
Issuance of common stock pursuant to exercise
of options................................... 427,858
Amortization of deferred compensation..........
Net income.....................................
---------- -------- -------- ------- ---------- --- ----------
Balance, March 31, 1999........................ 6,977,254 44,161 631,579 5,964 16,000,000 16 4,035,858
Conversion of issued shares into common
stock........................................ (6,977,254) (44,161) (613,579) (5,964) 13,624,678 14 (4,121,108)
Issuance of common stock pursuant to exercise
of options................................... 1,051,056 1 85,250
Issuance of common stock pursuant to employee
stock purchase plan.......................... 21,963 --
Amortization of deferred compensation..........
Issuance of common stock upon NetScout's
initial public offering, net of offering
costs........................................
Tax benefit of disqualifying dispositions of
stock options................................
Net income.....................................
---------- -------- -------- ------- ---------- --- ----------
Balance, March 31, 2000........................ -- $ -- -- $ -- 30,697,697 $31 --
========== ======== ======== ======= ========== === ==========
---------------------- TOTAL
ADDITIONAL STOCKHOLDERS'
--------- PAID IN DEFERRED TREASURY RETAINED EQUITY
PAR VALUE CAPITAL COMPENSATION STOCK EARNINGS (DEFICIT)
--------- ---------- ------------ -------- -------- -------------
Balance, March 31, 1997........................ $ 4 $ 247 ($ 173) $ -- $ 8,751 $ 14,809
Deferred compensation related to stock options
granted...................................... 636 (636) --
Issuance of common stock pursuant to exercise
of options................................... -- 22 22
Amortization of deferred compensation.......... 137 137
Net income..................................... 5,432 5,432
--- ------- ------ -------- ------- --------
Balance, March 31, 1998........................ 4 905 (672) -- 14,183 20,400
Issuance of Class B redeemable convertible
common stock, net of issuance costs of
$410.........................................
Purchase of treasury stock..................... (44,394) (44,394)
Deferred compensation related to stock options
granted...................................... 983 (983) --
Issuance of common stock pursuant to exercise
of options................................... -- 255 255
Amortization of deferred compensation.......... 343 343
Net income..................................... 10,272 10,272
--- ------- ------ -------- ------- --------
Balance, March 31, 1999........................ 4 2,143 (1,312) (44,394) 24,455 (13,124)
Conversion of issued shares into common
stock........................................ (4) 50,115 44,161
Issuance of common stock pursuant to exercise
of options................................... -- 2,094 2,095
Issuance of common stock pursuant to employee
stock purchase plan.......................... 313 313
Amortization of deferred compensation.......... (234) 676 442
Issuance of common stock upon NetScout's
initial public offering, net of offering
costs........................................ 10,486 19,088 29,574
Tax benefit of disqualifying dispositions of
stock options................................ 2,449 2,449
Net income..................................... 15,212 15,212
--- ------- ------ -------- ------- --------
Balance, March 31, 2000........................ $-- $67,366 ($ 636) ($25,306) $39,667 $ 81,122
=== ======= ====== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
NETSCOUT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED MARCH 31,
------------------------------
1998 1999 2000
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 5,432 $ 10,272 $ 15,212
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,470 2,069 2,936
Loss on disposal of fixed assets........................ 171 70 49
Compensation expense associated with equity awards...... 137 343 442
Deferred income taxes................................... (504) 70 (104)
Changes in assets and liabilities:
Accounts receivable................................... (2,103) (2,255) (3,840)
Inventories........................................... (780) (111) 34
Refundable income taxes............................... (708) 491 (1,682)
Prepaids and other current assets..................... (357) (261) (2,907)
Accounts payable...................................... 1,768 994 (1,156)
Accrued expenses...................................... 966 1,611 3,866
Income taxes payable.................................. (84) -- --
Customer deposits..................................... (16) (1,212) 44
Deferred revenue...................................... 1,292 724 2,384
------- -------- --------
Net cash provided by operating activities............. 6,684 12,805 15,278
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities......................... (2,993) -- (23,807)
Proceeds from maturity of marketable securities........... -- 8,834 2,000
Proceeds from notes receivable-stockholders............... -- -- 2,000
Purchase of fixed assets.................................. (3,886) (2,525) (4,415)
------- -------- --------
Net cash provided by (used in) investing activities... (6,879) 6,309 (24,222)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 22 255 31,982
Proceeds from the issuance of Class B redeemable
convertible common stock,
net of issuance costs................................... -- 44,161 --
Purchase of treasury stock................................ -- (44,394) --
------- -------- --------
Net cash provided by financing activities............. 22 22 31,982
------- -------- --------
Net increase (decrease) in cash and cash equivalents...... (173) 19,136 23,038
Cash and cash equivalents, beginning of year.............. 6,514 6,341 25,477
------- -------- --------
Cash and cash equivalents, end of year.................... $ 6,341 $ 25,477 $ 48,515
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 7 $ 3 $ 5
Cash paid for income taxes................................ 4,351 5,158 8,376
NON-CASH FINANCING ACTIVITIES:
Tax benefits of disqualifying dispositions of stock
options................................................. -- -- $ 2,449
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS
NetScout Systems, Inc. ("NetScout") designs, develops, manufactures, markets
and supports a family of products that enable businesses and network service
providers to manage the performance of their computer networks and software
applications. NetScout's principal markets are both the domestic and
international business markets. NetScout manages its business as a single
segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of NetScout and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
NetScout considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents and those with maturities greater
than three months are considered to be marketable securities. Cash equivalents
and marketable securities are stated at amortized cost plus accrued interest,
which approximates fair value. Cash equivalents and marketable securities
consist primarily of money market instruments and U.S. Treasury bills.
NetScout accounts for its investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under the provision of SFAS
No. 115, NetScout has classified its investments as "available-for-sale" and any
associated unrealized gains or losses, if material, are recorded as a separate
component of stockholders' equity until realized. At March 31, 2000 and 1999,
any unrealized gains or losses were immaterial.
At March 31, 2000 and periodically throughout the year, NetScout has
maintained cash balances in various operating accounts in excess of federally
insured limits. NetScout limits the amount of credit exposure with any one
financial institution by evaluating the credit worthiness of the financial
institutions with which it invests.
INVENTORIES AND CONCENTRATIONS OF SUPPLIERS
Inventories are stated at the lower of cost or market with cost being
determined by the first-in, first-out ("FIFO") method.
NetScout purchases the majority of its product components from a limited
number of vendors. Although the supply sources are concentrated, management
believes that the nature of its business requires sourcing and marketing
products from the limited number of vendors who have expertise in manufacturing
the components for NetScout's products. A change in or loss of one or more of
these vendors could cause a delay in filling customer orders and a possible loss
of sales, which could adversely affect results of operations.
FIXED ASSETS
Fixed assets are stated at cost and depreciated using the straight-line
method over the estimated useful lives of the assets.
F-7
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Product revenue consists of sales of hardware products and licensing
software products. Product revenue is recognized upon shipment, provided that
evidence of an arrangement exists, title and risk of loss have passed to the
customer, fees are fixed or determinable and collection of the related
receivable is probable. Sales to indirect channel partners that are subject to
return privileges are recognized upon shipment, net of an allowance for
estimated product returns which is based on NetScout's return policy and
historical experience. Customer payments received in advance of product
shipments are recorded as customer deposits.
Service revenue consists primarily of customer fees from support agreements,
consulting and training. NetScout generally provides three months of software
and service support and 12 months of hardware support as part of our product
sales. Revenue from software and service support is deferred and recognized over
the three-month support period. Revenue from hardware support is deferred and
recognized over the 12-month support period. In addition, customers can elect to
purchase extended support agreements, typically for 12-month periods. Revenue
from these agreements is deferred and recognized ratably over the support
period. Revenue from consulting and training is recognized as the work is
performed.
For multi-element arrangements, each element of the arrangement is analyzed
and the Company allocates a portion of the total fee under the arrangement to
the undelivered elements, primarily support agreements and training, using
vendor specific objective evidence of fair value of the element and the
remaining portion of the fee is allocated to the delivered elements (i.e.
generally hardware products and licensing software products), regardless of any
separate prices stated within the contract for each element, under the residual
method. Vendor specific objective evidence of fair value is based on the price
the customer is required to pay when the element is sold separately.
License and royalty revenue consists primarily of royalties paid under
license agreements by original equipment manufacturers who incorporate
components of NetScout's data collection technology in their own products or who
reproduce and sell NetScout's software products. License revenue is recognized
when delivery has occurred and when NetScout becomes contractually entitled to
receive license fees, provided that such fees are fixed and determinable and
collection is probable. Royalty revenue is recognized based upon product
shipment by the license holder.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Management believes its credit policies are prudent and reflect normal
industry terms and business risk. In addition, NetScout maintains reserves for
potential credit losses, and such losses historically have been minimal and
within management's expectations. At March 31, 2000, two customers accounted for
approximately 14% and 11%, respectively, of NetScout's accounts receivable.
NetScout does not anticipate non-performance by its customers and, accordingly,
does not require collateral.
During the fiscal year ended March 31, 1998, two customers accounted for
approximately 40% and 12%, respectively, of NetScout's total revenue. During the
fiscal year ended March 31, 1999, one customer accounted for approximately 51%
of NetScout's total revenue. During the fiscal year ended March 31, 2000, one
customer accounted for approximately 50% of NetScout's total revenue.
F-8
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT AND COMPUTER SOFTWARE DEVELOPMENT COSTS
Costs incurred in the research and development of NetScout's products are
expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to
establishment of technological feasibility (as defined by SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed") and capitalized thereafter when material to NetScout's financial
position or results of operations. No software development costs were
capitalized during the fiscal years ended March 31, 1998, 1999 and 2000, since
costs incurred subsequent to establishment of technological feasibility were not
material.
ACCOUNTING FOR STOCK-BASED COMPENSATION
NetScout accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
NetScout has adopted the provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation," through disclosure only (Note 9). All stock-based awards to
non-employees are accounted for at their fair value in accordance with SFAS
No. 123 and, for awards made after November 16, 1998, in accordance with
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments
that are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18").
ADVERTISING EXPENSE
NetScout recognizes advertising expense as incurred. Advertising expense was
approximately $146, $627 and $973 for the years ended March 31, 1998, 1999 and
2000, respectively.
NET INCOME PER SHARE
Basic net income per share is computed by dividing income available to
common stockholders by the weighted average number of shares of common stock
outstanding during the period, excluding shares of common stock subject to
repurchase. Diluted net income per share is computed by dividing income
available to common stockholders by the sum of the weighted average number of
shares of common stock outstanding during the period and the weighted average
number of potential common stock from the assumed exercise of stock options and
shares of common stock subject to repurchase using the "treasury stock" method
and the assumed conversion of the Series A preferred stock and the Class B
convertible common stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates in these financial statements
include allowances for doubtful accounts and returns, prepaid royalties on
software licenses resold by NetScout and a loss accrual associated with a
contingency
F-9
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(Note 12). These items are constantly monitored and analyzed by management for
changes in facts and circumstances and material changes in these estimates could
occur in the future.
FINANCIAL INSTRUMENTS
The carrying value of NetScout's financial instruments, which include cash
and cash equivalents, marketable securities, accounts receivable, notes
receivable, accounts payable and accrued expenses, approximate their fair
values.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which required adoption in
periods beginning after June 15, 1999. SFAS No. 133 was subsequently amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and will
now be effective for fiscal years beginning after June 15, 2000. NetScout does
not expect SFAS No. 133 to have a material effect on its financial condition or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No.101 "Revenue Recognition in Financial
Statements", as amended by SAB No.101A. SAB No. 101 summarizes the SEC's views
in applying generally accepted accounting principles to selected revenue
recognition issues in financial statements. The application of the guidance of
SAB No. 101 will be required in the Company's first quarter of fiscal 2001. The
Company is currently determining the impact, if any, that SAB No. 101 will have
on its financial position and results of operations.
In March 2000, the FASB issued Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation--an interpretation of APB
Opinion No. 25". FIN No. 44 clarifies the application of APB Opinion No. 25 to
certain issues including: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for
the exchange of stock compensation awards in business combination. FIN No. 44 is
effective July 1, 2000, but certain conclusions in FIN No. 44 are applicable
retroactively to specific events occurring after either December 15, 1998 or
January 12, 2000. NetScout does not expect the application of FIN No. 44 to have
a material impact on the Company's financial position or results of operations.
F-10
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. INVENTORIES
Inventories consist of the following:
MARCH 31,
-------------------
1999 2000
-------- --------
Raw materials............................................... $2,620 $2,371
Work-in-process............................................. 348 476
Finished goods.............................................. 197 284
------ ------
$3,165 $3,131
====== ======
4. FIXED ASSETS
Fixed assets consist of the following:
ESTIMATED MARCH 31,
USEFUL LIFE -------------------
IN YEARS 1999 2000
----------- -------- --------
Furniture and fixtures........................... 3-7 $ 890 $ 968
Computer equipment and purchased software........ 3 4,556 7,068
Demonstration units.............................. 2 1,228 1,891
Leasehold improvements........................... 5 1,831 2,676
------ -------
8,505 12,603
Less-accumulated depreciation and amortization... 4,278 6,946
------ -------
$4,227 $ 5,657
====== =======
5. NOTES RECEIVABLE STOCKHOLDERS
In June 1996, the Board of Directors approved $1,100 and $900 loans to two
voting stockholders ($2,000 in the aggregate). The loans were collateralized by
1,032,264 shares of voting common stock of NetScout. The loans had a five-year
term with an interest rate of 6.48%, compounded semi-annually and payable
annually. The loans were paid in full on August 16, 1999.
6. LINE OF CREDIT
At March 31, 2000, NetScout had a revolving line of credit with a bank under
which it can borrow up to $5,000 based upon a percentage of eligible accounts
receivable. This line of credit expires on March 10, 2001. Borrowings under the
line are payable on demand and bear interest at the bank's prime rate. Under the
terms of the agreement, NetScout is required to comply with certain restrictive
covenants, which require that NetScout maintain minimum amounts of profitability
and liquidity. NetScout's accounts receivable and inventory secure the line of
credit. NetScout was in compliance with all restrictive covenants at March 31,
2000. No borrowings were outstanding under the line of credit at March 31, 2000
(Note 12).
F-11
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. NET INCOME PER SHARE
Below is a summary of the shares used in computing basic and diluted net
income per share for the years indicated:
YEAR ENDED MARCH 31,
------------------------------------
1998 1999 2000
---------- ---------- ----------
Weighted average number of shares
outstanding............................ 19,289,168 18,585,676 21,750,205
Shares attributable to Class B
convertible common stock............... -- 1,451,269 2,540,631
Shares attributable to Series A preferred
stock.................................. 2,526,316 2,263,579 459,955
Shares attributable to unvested
non-voting common stock................ 293,620 22,769 --
Stock options............................ 1,056,425 1,382,706 2,195,255
---------- ---------- ----------
Shares used in computing diluted net
income per share....................... 23,165,529 23,705,999 26,946,046
========== ========== ==========
Stock options to purchase 65,367, 110,977 and 128,634 shares of common stock
for the years ended March 31, 1998, 1999 and 2000, respectively, were
outstanding at period end, but were not included in the computation of diluted
net income per share because the exercise prices of the options were greater
than the average fair value of the common stock for the respective period.
8. CAPITAL STOCK
In January 1999, NetScout issued 6,977,254 shares of Class B redeemable
convertible common stock ("Class B convertible common stock") to independent
financial investors at $6.39 per share for net proceeds of $44,161. NetScout
used the proceeds from this financing to repurchase shares of the Company's
capital stock (see Treasury Stock below).
The Class B convertible common stock and Series A convertible preferred
stock ("Series A preferred stock") had the following characteristics prior to
their conversion into common stock on August 12, 1999:
VOTING RIGHTS
The holders of the Class B convertible common stock shall be entitled to
that number of votes equal to the number of shares of voting common stock into
which each share could be converted with regard to any matter submitted to the
shareholders for a vote. The holders of the Series A preferred stock have no
voting rights.
DIVIDEND RIGHTS
The holders of the Class B convertible common stock and Series A preferred
stock are entitled to receive, when and as declared by the Board of Directors
and out of funds legally available, non-cumulative dividends at the rate of
$0.64 and $0.95, respectively, per share per annum, payable in preference and
priority to any payment of any dividend on common stock. No dividends or other
distributions shall be made with respect to the common stock, until all declared
dividends on the Class B convertible common
F-12
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. CAPITAL STOCK (CONTINUED)
stock and Series A preferred stock have been paid. Through March 31, 2000, no
dividends have been declared or paid by NetScout.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the affairs of
NetScout, the holders of the then outstanding Class B convertible common stock
and Series A preferred stock shall receive for each share an amount equal to the
sum of $6.39 and $9.50 per share of Class B convertible common stock and
Series A preferred stock, respectively, plus all declared but unpaid dividends,
payable in preference and priority to any payments made to the holders of the
then outstanding common stock.
CONVERSION
Each share of Class B convertible common stock shall be convertible at any
time, at the option of the stockholder, into one share of voting common stock.
Each share of Class B convertible common stock shall automatically be
convertible (i) into shares of voting common stock upon the closing of an
initial public offering in which gross proceeds are at least $40,000 and in
which the price per common share to the public is at least $12.80 or (ii) into
voting common stock upon the written election of holders of not less than a
majority of the then outstanding Class B convertible common stock, voting as a
class, at any other time. Each share of Series A preferred stock may be
converted at any time, at the option of the stockholder, into four shares of
non-voting common stock. Each share of Series A preferred stock shall
automatically be converted (i) into shares of voting common stock upon the
closing of an initial public offering in which gross proceeds are at least
$10,000, and in which the price per common share to the public is at least
$4.75, or (ii) into voting common stock at such time upon the election of
holders of not less than two-thirds of the then outstanding Series A preferred
stock, when NetScout's common stock is registered under Section 12(g) of the
Securities Exchange Act of 1934 or (iii) into non-voting common stock upon the
election of holders of not less than two-thirds of the then outstanding
Series A preferred stock.
REDEMPTION
The holders of not less than a majority of the outstanding shares of
Class B convertible common stock may require NetScout to redeem 33.3%, 66.7% and
100% of their outstanding shares on January 15, 2004, 2005 and 2006,
respectively. The redemption amount per share will be equal to the sum of $6.39
plus all declared but unpaid dividends. For the year ended March 31, 1999,
accretion of the Class B convertible common stock issuance costs was not
material.
NON-VOTING COMMON STOCK
Shares of non-voting common stock were automatically converted into shares
of voting common stock upon the closing of the initial public offering.
STOCK SUBJECT TO REPURCHASE
During the years ended March 31, 1994 and 1995, NetScout issued 3,259,720
and 104,280 shares of unvested non-voting common stock, respectively, which
generally vest a portion at the date of grant and
F-13
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. CAPITAL STOCK (CONTINUED)
then vest yearly through 1999, to employees of NetScout. As of March 31, 1999
and 2000, all shares of non-voting common stock subject to stock repurchase
agreements were fully vested.
In August 1995, NetScout issued 200,000 shares of unvested non-voting common
stock to a related party in exchange for services to be performed. The shares
were scheduled to vest in August 2005. The fair value ascribed to the shares was
$50, which was recorded as deferred compensation and was being charged to
NetScout's results of operations ratably over the service period of the related
party. In February 1999, NetScout terminated the agreement allowing the shares
to become vested and recognized the remaining balance of deferred compensation
as a charge to operations at that time. For the year ended March 31, 1999,
NetScout recorded $27 as compensation expense related to these shares.
STOCK SPLIT
In December 1998, NetScout authorized and effected a two-for-one stock split
on the voting and non-voting common stock. As a result, all common stock shares
and per share data included in the accompanying consolidated financial
statements and notes have been retroactively restated for the split.
TREASURY STOCK
In January 1999, NetScout repurchased 4,749,498 shares of voting common
stock and 964,600 shares of non-voting common stock for $6.39 per share and
315,789 shares of Series A preferred stock for $25.55 per share ($6.39 per
common equivalent) for a total of $44,571. Of this amount, $44,394 was recorded
as treasury stock and $177 was recorded as a charge to operations. The amount
charged to operations was for 42,600 shares of non-voting common stock
repurchased from employees who acquired the stock under NetScout's stock option
plan and did not hold such stock for at least six months.
PUBLIC OFFERING
On August 17, 1999, NetScout completed an initial public offering of three
million shares of common stock at $11.00 per share. NetScout received net
proceeds of approximately $29,600 after deducting $2,300 in underwriting
discounts and commissions and $1,100 in other offering expenses.
AUTHORIZED SHARES
In April 1999, NetScout's Board of Directors approved, subject to
stockholder approval, an increase in the authorized shares of preferred and
common stock, $0.001 par value per share, to 5,000,000 and 150,000,000 shares,
respectively.
9. STOCK PLANS
1990 STOCK OPTION PLAN
In October 1990, NetScout adopted the 1990 Stock Option Plan (the "1990
Stock Option Plan"). The 1990 Stock Option Plan provides for the granting of
incentive and non-qualified stock options to employees, directors and
consultants of NetScout. The 1990 Stock Option Plan, as amended, allows for the
issuance of options to purchase up to 4,514,666 shares of non-voting common
stock. The Board of Directors determines the term of each option, option price,
number of shares for which each option is
F-14
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCK PLANS (CONTINUED)
granted and the rate at which each option is exercisable, generally over four
years. The exercise price of incentive stock options shall not be less than 100%
of the fair market value of the common stock at the date of grant (110% for
incentive stock options granted to holders of more than 10% of the voting stock
of NetScout). The term of options granted cannot exceed ten years (five years
for incentive stock options granted to holders of more than 10% of the voting
stock of NetScout). No additional option grants will be made under the 1990
Stock Option Plan.
1999 STOCK OPTION AND INCENTIVE PLAN
In April 1999, NetScout adopted the 1999 Stock Option and Incentive Plan
(the "1999 Stock Option Plan"). The 1999 Stock Option Plan provides for the
grant of stock-based awards to employees, officers and directors, consultants or
advisors. Under the 1999 Stock Option Plan, NetScout may grant options that are
intended to qualify as incentive stock options, options not intended to qualify
as incentive stock options, restricted stock and other stock-based awards.
Incentive stock options may be granted only to employees of NetScout. The 1999
Stock Option Plan is administered by the compensation committee. Subject to the
provisions of the 1999 Stock Option Plan, the compensation committee has the
authority to select the persons, to whom awards are granted and determine the
terms of each award, including the number of shares of common stock subject to
the award. Options generally vest over four years. A total of 4,500,000 shares
of common stock have been reserved for issuance under the 1999 Stock Option
Plan.
Transactions under the 1990 and 1999 Stock Option Plan during the years
ended March 31, 1998, 1999 and 2000 are summarized as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
Outstanding--March 31, 1997................................. 1,998,400 $1.01
Granted (weighted average fair value of $0.79 and $1.63
per share for options with exercise prices equal to and
less than the market price, respectively, at the date of
grant).................................................. 1,196,000 2.87
Exercised................................................. (19,200) 1.31
Canceled.................................................. (230,600) 2.18
----------
Outstanding--March 31, 1998................................. 2,944,600 1.67
Granted (weighted average fair value of $0.99 and $4.53
per share for options with exercise prices equal to and
less than the market price, respectively, at the date of
grant).................................................. 1,054,000 5.00
Exercised................................................. (427,858) 0.58
Canceled.................................................. (484,516) 2.34
----------
Outstanding--March 31, 1999................................. 3,086,226 2.85
Granted (weighted average fair value of $13.22 per
share).................................................. 1,430,789 20.95
Exercised................................................. (1,136,306) 1.84
Canceled.................................................. (418,825) 7.56
----------
Outstanding--March 31, 2000................................. 2,961,884 11.31
==========
F-15
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCK PLANS (CONTINUED)
The following tables summarize information about employee options
outstanding and exercisable at March 31, 2000:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER REMAINING EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE
- ------------------------ ----------- ---------------- --------
(YEARS)
$0.003 to 1.50............................ 403,325 6.0 $1.04
1.75 to 2.50.............................. 442,249 7.3 2.49
4.00 to 5.00.............................. 534,168 8.1 4.18
6.00 to 6.50.............................. 258,317 8.8 6.40
10.00 to 15.00............................ 481,613 9.8 13.69
15.00 to 22.50............................ 311,438 9.2 19.75
25.00 to 30.00............................ 530,774 9.8 28.94
---------
2,961,884 8.5 11.31
=========
WEIGHTED
AVERAGE
NUMBER EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE PRICE
- ------------------------ ----------- --------
$0.003 to 1.50........................................... 383,575 $1.01
1.75 to 2.50............................................. 220,438 2.49
4.00 to 5.00............................................. 204,739 4.12
6.00 to 6.50............................................. 84,947 6.40
10.00 to 15.00........................................... 9,153 10.35
15.00 to 22.50........................................... 51,415 19.16
25.00 to 30.00........................................... 625 28.94
-------
954,892
=======
As of March 31, 1998 and 1999, 690,640 and 1,182,628 options were
exercisable, respectively, under the 1990 Stock Option Plan. As of March 31,
2000, there were 3,667,188 shares of common stock available for grant under the
1999 Stock Option Plan.
FAIR VALUE DISCLOSURES
As discussed in Note 2, NetScout has adopted SFAS No. 123 through disclosure
only. Had compensation cost for NetScout's option plan been determined based on
the fair value at the grant dates, as
F-16
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCK PLANS (CONTINUED)
prescribed in SFAS No. 123, NetScout's net income and basic and diluted net
income per share on a pro forma basis would have been as follows:
YEAR ENDED MARCH 31,
------------------------------
1998 1999 2000
-------- -------- --------
Net income:
As reported....................................... $5,432 $10,272 $15,212
Pro forma......................................... $5,208 $ 9,915 $13,437
Basic net income per share:
As reported....................................... $ 0.28 $ 0.55 $ 0.70
Pro forma......................................... $ 0.27 $ 0.53 $ 0.62
Diluted net income per share:
As reported....................................... $ 0.23 $ 0.43 $ 0.56
Pro forma......................................... $ 0.22 $ 0.42 $ 0.50
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
YEAR ENDED MARCH 31,
------------------------------
1998 1999 2000
-------- -------- --------
Expected option term for options granted prior to
NetScout's initial public offering.............. 5 years 5 years 5 years
Expected option term for options granted
subsequent to NetScout's initial public
offering........................................ -- -- 4 years
Weighted average risk-free interest rate.......... 6.0% 5.2% 6.2%
Expected volatility for options granted prior to
NetScout's initial public offering.............. -- -- --
Expected volatility for options granted subsequent
to NetScout's initial public offering........... -- -- 100.0%
Dividend yield.................................... -- -- --
Because additional grants are expected to be made each year and options vest
over several years, the above pro forma disclosures are not representative of
pro forma effects of reported net income for future years.
In May 1996, NetScout granted 332,000 options to purchase non-voting common
stock to a consultant in exchange for services to be performed. The fair value
ascribed to the shares was $166, which was recorded as deferred compensation and
was charged to NetScout's results of operations ratably over the service period.
For the year ended March 31, 2000, NetScout recorded $70 of compensation expense
related to these options.
In September 1997, NetScout granted 518,000 options to purchase non-voting
common stock at $2.50 per share to employees. At the grant date, NetScout
estimated the fair value of the common stock to be $3.50 per share. In
accordance with APB No. 25, NetScout recorded $518 of deferred compensation,
which will be charged to NetScout's results of operations over the vesting
period of the options, generally four
F-17
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCK PLANS (CONTINUED)
years. For the year ended March 31, 2000, NetScout recorded $130 of compensation
expense related to these options.
In February 1999, NetScout granted 305,500 options to purchase non-voting
common stock at $6.50 per share to employees. At the grant date, NetScout
estimated the fair value of the common stock to be $9.68 per share. In
accordance with APB No. 25, NetScout recorded $968 of deferred compensation,
which will be charged to NetScout's results of operations over the vesting
period of the options, generally four years. For the year ended March 31, 2000,
$234 of deferred compensation was reversed due to termination of employees and
NetScout recorded $242 of compensation expense related to these options.
EMPLOYEE STOCK PURCHASE PLAN
In April 1999, NetScout adopted the 1999 Employee Stock Purchase Plan (the
"1999 Purchase Plan"), which became effective on the closing of an initial
public offering. The 1999 Purchase Plan provides for the issuance of a maximum
of 500,000 shares of common stock
10. RETIREMENT PLAN
In 1996, NetScout established a 401(k) plan, which is intended to qualify
under Section 401(k) of the Internal Revenue Code of 1986, pursuant to which
NetScout matches 25% of the employee's contribution up to 6% of the employee's
salary. NetScout contributions vest at a rate of 20% per year of service.
NetScout made matching contributions of $121, $153 and $187 to the plan for the
years ended March 31, 1998, 1999 and 2000, respectively.
11. INCOME TAXES
The components of the provision for income taxes are as follow:
YEAR ENDED MARCH 31,
------------------------------
1998 1999 2000
-------- -------- --------
Current provision:
Federal........................................... $2,859 $4,938 $7,636
State............................................. 701 674 955
Foreign........................................... -- 33 53
------ ------ ------
3,560 5,645 8,644
------ ------ ------
Deferred tax (benefit) provision:
Federal........................................... (426) (20) (120)
State............................................. (78) 90 15
------ ------ ------
(504) 70 (105)
------ ------ ------
$3,056 $5,715 $8,539
====== ====== ======
F-18
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. INCOME TAXES (CONTINUED)
The components of deferred tax assets are as follows:
MARCH 31,
-------------------
1999 2000
-------- --------
Deferred tax assets:
Reserves.................................................. $ 558 $ 428
Accrued expenses.......................................... 542 557
Fixed assets.............................................. 327 585
Deferred revenue.......................................... 74 41
Other..................................................... 16 10
------ ------
$1,517 $1,621
====== ======
The income tax provision computed using the federal statutory income tax
rate differs from NetScout's effective tax rate primarily due to the following:
YEAR ENDED MARCH
31,
------------------------------
1998 1999 2000
-------- -------- --------
Statutory U.S. federal tax rate........................... 34.0% 35.0% 35.0%
State taxes, net of federal tax benefit................... 4.8 3.1 3.1
Foreign sales corporation exempt income................... (1.5) (2.1) (1.2)
Research and development tax credits...................... (1.7) (1.5) (1.7)
Other..................................................... 0.4 1.3 1.0
---- ---- ----
36.0% 35.8% 36.2%
==== ==== ====
12. COMMITMENTS AND CONTINGENCIES
LEASES
NetScout leases office space under operating leases. Total rent expense
under the leases was $942, $1,531 and $1,712 for the years ended March 31, 1998,
1999 and 2000, respectively.
Future non-cancelable minimum lease commitments are as follows:
YEAR ENDING MARCH 31,
2001........................................................ $1,231
2002........................................................ 1,174
2003........................................................ 998
2004........................................................ 73
2005........................................................ --
------
Total minimum lease payments................................ $3,476
======
F-19
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Under the terms of its principal office lease, NetScout is required to
maintain a letter of credit totaling $561 under its $5,000 revolving line of
credit (Note 6).
CONTINGENCIES
On November 5, 1999, a former employee of NetScout filed an action against
the Company and an employee stockholder of NetScout in the Massachusetts
Superior Court Department of the Trial Court, Middlesex County, alleging claims
of discrimination on the basis of sex and sexual harassment. On December 30,
1999, NetScout filed a Notice of Removal to the United States District Court for
the District of Massachusetts, thereby removing the action to that Court.
NetScout has filed an Answer denying these allegations and plans to vigorously
defend this matter. NetScout has recorded an accrual to address this matter.
However, since the matter is at a preliminary stage, NetScout is unable to
predict the outcome or amount of related expense, or loss, if any.
In addition to the matter noted above, from time to time NetScout is subject
to legal proceedings and claims in the ordinary course of business. In the
opinion of management, the amount of ultimate expense with respect to any other
current legal proceedings and claims will not have a material adverse effect on
NetScout's financial position or results of operations.
EMPLOYMENT AGREEMENT
In January 1999, NetScout amended an employment agreement with two employee
stockholders, which provides that each employee stockholder will receive a base
salary of at least $250 and a year-end, non-discretionary bonus of at least
$250. The employment agreement is terminable at will, but provides that if
either employee's employment is terminated by NetScout without cause, or either
decides to terminate his own employment for "good reason", as defined, each is
entitled to receive severance benefits for three years as follows: (i) for the
first twelve months following termination, the greater of $175 or base salary as
of the date of termination; and (ii) for each subsequent twelve-month period, an
amount equal to 120% of the amount received in the immediately preceding twelve
months. Each employment agreement provides for a five-year term commencing
June 1, 1994 with automatic one-year renewals.
13. RELATED PARTY TRANSACTIONS
For the years ended March 31, 1998, 1999 and 2000, NetScout paid
approximately $315, $470, and $0, respectively, to an affiliate, which was
two-thirds owned by two stockholders of NetScout, for consulting services. The
affiliate was sold in February 1999.
F-20
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. GEOGRAPHIC INFORMATION
Revenue was distributed geographically as follows:
YEAR ENDED MARCH 31,
------------------------------
1998 1999 2000
-------- -------- --------
North America.................................... $37,518 $59,619 $74,721
Other international.............................. 5,311 7,932 11,438
------- ------- -------
$42,829 $67,551 $86,159
======= ======= =======
Substantially all of NetScout's identifiable assets are located in the
United States.
15. QUARTERLY RESULTS OF OPERATIONS--UNAUDITED
The following table sets forth certain unaudited quarterly results of
operations of NetScout for the fiscal years ended 1999 and 2000. In the opinion
of management, this information has been prepared on the same basis as the
audited consolidated financial statements and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the quarterly information when read in
conjunction with the audited consolidated financial statements and notes thereto
included elsewhere in this Annual Report on Form 10-K. The quarterly operating
results are not necessarily indicative of future results of operations.
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- --------- -------- --------- -------- --------- -------- ---------
Revenue............................ $15,263 $16,146 $17,471 $18,671 $19,071 $20,304 $22,842 $23,942
Gross margin....................... 10,627 11,479 12,322 12,638 13,844 14,810 17,031 17,617
------- ------- ------- ------- ------- ------- ------- -------
Net Income......................... $ 2,094 $ 2,702 $ 2,893 $ 2,583 $ 3,134 $ 3,194 $ 4,371 $ 4,513
======= ======= ======= ======= ======= ======= ======= =======
Basic net income per share......... $ 0.11 $ 0.14 $ 0.15 $ 0.16 $ 0.22 $ 0.16 $ 0.17 $ 0.17
Diluted net income per share....... $ 0.09 $ 0.11 $ 0.12 $ 0.10 $ 0.13 $ 0.12 $ 0.16 $ 0.16
16. ACQUISITION
On June 13, 2000, NetScout entered into an Agreement and Plan of
Reorganization with NextPoint Networks, Inc.("NextPoint"), NetScout Service
Level Corporation, a wholly owned subsidiary of NetScout, and certain
stockholders of NextPoint, pursuant to which NextPoint would merge with and into
NetScout Service Level Corporation. In the merger, NetScout will issue
approximately 2.2 million shares of its common stock and approximately
$20.6 million in cash in exchange for all of the capital stock of NextPoint.
Completion of the merger is subject to, among other things, approval by holders
of NextPoint capital stock. The merger will be accounted for using the purchase
method.
F-21
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
NetScout Systems, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated April 21, 2000, except for Note 16, as to which the date is
June 13, 2000, appearing in Item 14 in this Form 10-K also included an audit of
the financial statement schedules listed in Item 14 of this Form 10-K. In our
opinion, the financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
April 21, 2000
S-1
NETSCOUT SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
BEGINNING OF CHARGED TO BALANCE AT
DESCRIPTION YEAR OPERATIONS DEDUCTIONS END OF YEAR
- ----------- ------------ ---------- ---------- -----------
Year ended March 31, 1998
Reserves and allowances deducted from asset
accounts
Reserves for returns........................... $1,493,000 (427,000) (353,000) $713,000
Allowance for doubtful accounts................ $ 200,000 178,000 (28,000) $350,000
Year ended March 31, 1999
Reserves and allowances deducted from asset
accounts
Reserves for returns........................... $ 713,000 (184,000) (83,000) $446,000
Allowance for doubtful accounts................ $ 350,000 244,000 (4,000) $590,000
Year ended March 31, 2000
Reserves and allowances deducted from asset
accounts
Reserves for returns........................... $ 446,000 (56,000) (61,000) $329,000
Allowance for doubtful accounts................ $ 590,000 (94,000) (71,000) $425,000
S-2
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
3.1, 4.1 Third Amended and Restated Certificate of Incorporation of
NetScout. (filed as Exhibit 3.3, 4.1 to NetScout's
Registration Statement on Form S-1 (No. 333-76843) and
incorporated herein by reference).
3.2, 4.2 Form of Amended and Restated By-laws of NetScout.
4.3 Specimen Certificate for shares of NetScout's Common Stock
(filed as Exhibit 4.3 to NetScout's Registration Statement
on Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.1 1990 Stock Option Plan, as amended (filed as Exhibit 10.1 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.2 1999 Stock Option and Incentive Plan (filed as Exhibit 10.2
to NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.3 1999 Employee Stock Purchase Plan (filed as Exhibit 10.3 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.4 Stock Purchase and Redemption Agreement dated December 31,
1998 by and among NetScout, Greylock Equity Limited
Partnership, certain affiliates of TA Associates, Inc. and
Egan-Managed Capital, L.P. (filed as Exhibit 10.4 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.5 Amended and Restated Rights Agreement entered into as of
January 15, 1999 by and among NetScout, Greylock Equity
Limited Partnership, certain affiliates of TA Associates,
Inc. and Egan-Managed Capital, L.P. (filed as Exhibit 10.5
to NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.6 Lease dated August 18, 1997 between NetScout and Michelson
Farm-Westford Technology Park Limited Partnership (filed as
Exhibit 10.6 to NetScout's Registration Statement on Form
S-1 (No. 333-76843) and incorporated herein by reference).
10.7 Amended and Restated Loan and Security Agreement dated March
12, 1998 by and between NetScout and Silicon Valley Bank
(filed as Exhibit 10.7 to NetScout's Registration Statement
on Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.8 Loan Modification Agreement entered into March 11, 1999
between NetScout and Silicon Valley Bank (filed as Exhibit
10.8 to NetScout's Registration Statement on Form S-1
(No. 333-76843) and incorporated herein by reference).
10.9 OEM Agreement dated as of February 3, 1998 by and between
SDL Communications, Inc. and NetScout (filed as Exhibit 10.9
to NetScout's Registration Statement on Form S-1
(No. 333-76843) and incorporated herein by reference).
10.10 Project Development and License Agreement dated as of July
13, 1994 by and between Cisco Systems, Inc. and NetScout
(filed as Exhibit 10.10 to NetScout's Registration Statement
on Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.11 Amendment No. 1 to the Project Agreement and Design License
Agreement dated as of January 4, 1995 by and between Cisco
and NetScout (filed as Exhibit 10.11 to NetScout's
Registration Statement on Form S-1 (No. 333-76843) and
incorporated herein by reference).
10.12 Private Label Agreement effective as of October 17, 1995 by
and between Cisco and NetScout (filed as Exhibit 10.12 to
NetScout's Registration Statement on Form S-1
(No. 333-76843) and incorporated herein by reference).
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
10.13 Amendment to Private Label Agreement and Project Development
and License Agreement dated May 15, 1996 by and between
Cisco and NetScout (filed as Exhibit 10.13 to NetScout's
Registration Statement on Form S-1 (No. 333-76843) and
incorporated herein by reference).
10.14 Amendment No. 3 to the Private Label Agreement and Project
Development and License Agreement by and between Cisco and
NetScout (filed as Exhibit 10.14 to NetScout's Registration
Statement on Form S-1 (No. 333-76843) and incorporated
herein by reference).
10.15 Amendment No. 4 to Private Label Agreement and Project
Development and License Agreement effective as of February
23, 1998 by and between Cisco and NetScout (filed as Exhibit
10.15 to NetScout's Registration Statement on Form S- 1 (No.
333-76843) and incorporated herein by reference).
10.16 Amendment No. 5 effective as of December 26, 1999 to Private
Label Agreement and Project Development and License
Agreement between Cisco and NetScout (filed as Exhibit 10.1
to NetScout's Quarterly Report on Form 10-Q and incorporated
herein by reference).
10.17 Agreement Relating to Employment dated June 1, 1994 by and
between NetScout and Anil Singhal (filed as Exhibit 10.16 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.18 Amendment No. 1 to Agreement Relating to Employment dated
January 14, 1999 by and between NetScout and Anil Singhal
(filed as Exhibit 10.17 to NetScout's Registration Statement
on Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.19 Agreement Relating to Employment dated June 1, 1994 by and
between NetScout and Narendra Popat (filed as Exhibit 10.18
to NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.20 Amendment No. 1 to Agreement Relating to Employment dated
January 14, 1999 by and between NetScout and Narendra Popat
(filed as Exhibit 10.19 to NetScout's Registration Statement
on Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.21 Secured Term Note for $1,100,000, Partially Non-Recourse,
dated June 28, 1996, Payable to NetScout by Anil Singhal
(filed as Exhibit 10.20 to NetScout's Registration Statement
on Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.22 Stock Pledge Agreement, made as of June 28, 1996, between
Anil Singhal and NetScout (filed as Exhibit 10.21 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.23 Secured Term Note for $900,000, Partially Non-Recourse,
dated June 28, 1996, Payable to NetScout by Narendra Popat
(filed as Exhibit 10.22 to NetScout's Registration Statement
on Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.24 Stock Pledge Agreement, made as of June 28, 1996, between
Narendra Popat and NetScout (filed as Exhibit 10.23 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.25 Loan Modification Agreement entered into March 10, 2000
between NetScout and Silicon Valley Bank.
21 Subsidiaries of NetScout.
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule.