UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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
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
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(978) 614-4000
-----------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
The number of shares outstanding of the registrant's common stock, as of
November 9, 1999 was 25,743,125
1
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FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Item Number Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements 3
a.) Consolidated Balance Sheet:
As of September 30, 1999 (unaudited) and March 31, 1999
b.) Consolidated Statement of Income:
For the three and six months ended September 30, 1999
(unaudited) and September 30, 1998 (unaudited)
c.) Consolidated Statement of Cash Flows:
For the six months ended September 30, 1999 (unaudited)
and September 30, 1998 (unaudited)
d.) Notes to the Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
2
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NetScout Systems, Inc.
Consolidated Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
-------- --------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 44,554 $ 25,477
Short-term investments 14,622 --
Accounts receivable, net of allowance for doubtful accounts and returns of $1,023
and $1,036 at September 30, 1999 (unaudited) and March 31, 1999, respectively 9,429 6,550
Inventories 2,779 3,165
Refundable income taxes 69 217
Deferred income taxes 1,196 1,196
Prepaids and other current assets 2,700 821
-------- --------
Total current assets 75,349 37,426
Fixed assets, net 5,424 4,227
Notes receivable - stockholders -- 2,000
Deferred income taxes 321 321
-------- --------
Total assets $ 81,094 $ 43,974
======== ========
Liabilities, Redeemable Convertible Common Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 3,528 $ 3,945
Accrued compensation 3,482 3,539
Accrued other 1,467 1,165
Customer deposits 34 34
Deferred revenue 5,071 4,254
-------- --------
Total current liabilities 13,582 12,937
-------- --------
Commitments and contingencies
Class B redeemable convertible common stock, $0.001 par value; no shares
authorized, issued or outstanding at September 30, 1999 (unaudited); 6,977,254
shares authorized, issued and outstanding at March 31, 1999 -- 44,161
-------- --------
Stockholder's equity (deficit):
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued
or outstanding at September 30, 1999 (unaudited); no shares authorized, issued
or outstanding at March 31, 1999
Series A convertible preferred stock, $0.001 par value; no shares authorized,
issued or outstanding at September 30, 1999 (unaudited); 631,579 shares
authorized and issued, 315,790 shares outstanding at March 31, 1999 -- 5,964
Common stock, $0.001 par value:
Voting, 150,000,000 shares authorized, 29,699,904 shares issued, 25,722,650
shares outstanding at September 30, 1999 (unaudited); 121,798,382 shares
authorized, 16,000,000 shares issued, 11,250,502 shares outstanding
at March 31, 1999 30 16
Non-voting, no shares authorized, issued or outstanding at September 30, 1999
(unaudited); 21,224,364 shares authorized, 4,035,858 shares issued, 3,071,258
shares outstanding at March 31, 1999 -- 4
Additional paid-in capital 63,071 2,143
Deferred compensation (1,066) (1,312)
Treasury stock (25,306) (44,394)
Retained earnings 30,783 24,455
-------- --------
Total stockholder's equity (deficit) 67,512 (13,124)
-------- --------
Total liabilities, redeemable convertible common stock and stockholders'
equity (deficit) $ 81,094 $ 43,974
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
NetScout Systems, Inc.
Consolidated Statement of Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Product $13,541 $11,863 $26,355 $23,410
Service 3,099 2,284 5,564 4,157
License and royalty 3,664 1,999 7,456 3,842
------- ------- ------- -------
Total revenue 20,304 16,146 39,375 31,409
------- ------- ------- -------
Cost of revenue:
Product 5,087 4,347 9,901 8,687
Service 407 320 820 616
------- ------- ------- -------
Total cost of revenue 5,494 4,667 10,721 9,303
------- ------- ------- -------
Gross margin 14,810 11,479 28,654 22,106
------- ------- ------- -------
Operating expenses:
Research and development 2,459 1,760 4,700 3,492
Sales and marketing 6,711 4,527 12,751 9,535
General and administrative 1,150 1,213 2,087 2,028
------- ------- ------- -------
Total operating expenses 10,320 7,500 19,538 15,055
------- ------- ------- -------
Income from operations 4,490 3,979 9,116 7,051
Interest income, net 504 243 776 443
------- ------- ------- -------
Income before provision for
income taxes 4,994 4,222 9,892 7,494
Provision for income taxes 1,800 1,520 3,564 2,698
------- ------- ------- -------
Net income $ 3,194 $ 2,702 $ 6,328 $ 4,796
======= ======= ======= =======
Basic net income per share $ 0.16 $ 0.14 $ 0.36 $ 0.25
Diluted net income per share $ 0.12 $ 0.11 $ 0.25 $ 0.20
Shares used in computing:
Basic net income per share 20,556 19,611 17,461 19,486
Diluted net income per share 26,575 23,677 25,749 23,625
Pro forma basic net income per share $ 0.13 $ 0.12 $ 0.27 $ 0.22
Pro forma diluted net income per share $ 0.12 $ 0.11 $ 0.25 $ 0.20
Shares used in computing:
Pro forma basic net income per share 24,317 22,138 23,450 22,012
Pro forma diluted net income per share 26,575 23,677 25,749 23,625
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
NetScout Systems, Inc.
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,328 $ 4,988
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,254 889
Loss on disposal of fixed assets 43 45
Compensation expense associated with equity awards 246 123
Changes in assets and liabilities:
Accounts receivable (2,879) (1,335)
Inventories 386 906
Refundable income taxes 148 802
Prepaids and other current assets (1,879) 125
Accounts payable (417) (541)
Accrued expenses 245 (86)
Customer deposits -- (69)
Deferred revenue 817 302
-------- --------
Net cash provided by operating activities 4,292 6,149
-------- --------
Cash flows from investing activities:
Purchase of marketable securities (14,622) --
Proceeds from maturity of marketable securities -- 8,834
Purchase of fixed assets (2,494) (1,199)
-------- --------
Net cash provided (used) by investing activities (17,116) 7,635
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 29,901 10
Proceeds from notes receivable 2,000 --
-------- --------
Net cash provided by financing activities 31,901 10
-------- --------
Net increase in cash and cash equivalents 19,077 13,794
Cash and cash equivalents, beginning of year 25,477 6,341
-------- --------
Cash and cash equivalents, end of period $ 44,554 $ 20,135
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3 $ 1
Cash paid for income taxes $ 3,429 $ 2,005
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements as of September 30, 1999
and for the three and six months ended September 30, 1999 and 1998 are
unaudited. In the opinion of NetScout's management, the September 30, 1999 and
1998 unaudited interim consolidated financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for that
period. The results of operations for the six month period ended September 30,
1999 are not necessarily indicative of the results of operations for the year
ended March 31, 2000.
The balance sheet at March 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in NetScout's Registration Statement on Form S-1, as
amended (No. 333-76843), as filed with the Securities and Exchange Commission.
2. Cash, Cash Equivalents and Short-term Investments
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 investments. Cash equivalents and
investments are stated at amortized cost plus accrued interest, which
approximates fair value. Cash equivalents and investments consist primarily of
money market instruments and U.S. Treasury bills.
3. Inventories
Inventories consist of the following:
September 30, March 31,
1999 1999
------ ------
Raw materials $1,945 $2,620
Work-in-process 264 348
Finished goods 570 197
------ ------
$2,779 $3,165
====== ======
4. Stockholders' Equity
In August 1999, NetScout completed an initial public offering of 3,000,000
shares of its common stock for net proceeds of $29.6 million after underwriter
commissions and offering expenses. As a result, all outstanding shares
(including shares held in treasury) of Series A Preferred Stock, Class B
Convertible Common Stock and Non-Voting Common Stock were automatically
converted into 2,526,316, 6,977,254 and 4,062,321 shares, respectively, of
voting common stock.
5. 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 shares of 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 Series A Preferred Stock and the
Class B Convertible Common Stock.
6
<PAGE>
6. Pro Forma Net Income Per Share
Pro forma basic and diluted net income per share are computed assuming the
conversion of all shares of Series A Preferred Stock, Class B Convertible Common
Stock and Non-Voting Common Stock into Voting Common Stock, as if the shares had
been converted immediately upon their issuance.
7. Geographic Information
Revenue was distributed geographically as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
North America............ $17,876 $14,513 $33,318 $27,704
Other international...... 2,428 1,633 6,057 3,705
------- ------- ------- -------
$20,304 $16,146 $39,375 $31,409
======= ======= ======= =======
</TABLE>
Substantially all of NetScout's identifiable assets are located in the
United States.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following information should be read in conjunction with the
consolidated historical financial information and the notes thereto included in
Item 1 of this Quarterly Report on Form 10-Q and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in our
Registration Statement on Form S-1 as filed with the Securities and Exchange
Commission, as amended (No. 333-76843).
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 Form 10-Q 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.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this Form 10-Q to conform such
statements to actual results.
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 six years.
8
<PAGE>
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
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
----- ----- ----- -----
Revenue:
Product 66.7% 73.5% 66.9% 74.5%
Service 15.3% 14.1% 14.1% 13.3%
License and royalty 18.0% 12.4% 19.0% 12.2%
----- ----- ----- -----
Total revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of revenue:
Product 25.1% 26.9% 25.1% 27.7%
Service 2.0% 2.0% 2.1% 2.0%
----- ----- ----- -----
Total cost of revenue 27.1% 28.9% 27.2% 29.7%
----- ----- ----- -----
Gross margin 72.9% 71.1% 72.8% 70.3%
----- ----- ----- -----
Operating expenses:
Research and development 12.1% 10.9% 11.9% 11.1%
Sales and marketing 33.0% 28.0% 32.4% 30.3%
General and administrative 5.7% 7.5% 5.3% 6.5%
----- ----- ----- -----
Total operating expenses 50.8% 46.4% 49.6% 47.9%
----- ----- ----- -----
Income from operations 22.1% 24.7% 23.2% 22.4%
Interest income, net 2.5% 1.5% 2.0% 1.4%
----- ----- ----- -----
Income before provision for income taxes 24.6% 26.2% 25.2% 23.8%
Provision for income taxes 8.9% 9.4% 9.1% 8.6%
----- ----- ----- -----
Net income 15.7% 16.8% 16.1% 15.2%
===== ===== ===== =====
Three Months Ended September 30, 1999 and 1998
Revenue
Total revenue increased 26% from $16.1 million for the three months ended
September 30, 1998 to $20.3 million for the three months ended September 30,
1999.
Product. Product revenue increased 14% from $11.9 million for the three
months ended September 30, 1998 to $13.5 million for the three months ended
September 30, 1999. This increase was primarily due to a 32% increase in average
selling price attributable to larger volumes of higher speed and multi-port
probes.
Service. Service revenue increased 36% from $2.3 million for the three
months ended September 30, 1998 to $3.1 million for the three months ended
September 30, 1999. 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.
9
<PAGE>
License and royalty. License and royalty revenue increased 83% from $2.0
million for the three months ended September 30, 1998 to $3.7 million for the
three months ended September 30, 1999. This increase was primarily due to a
proportionate growth in unit sales of our software and embedded software
products by Cisco. We anticipate that license and royalty revenue will decrease
in absolute dollars, and as a percentage of total revenue.
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 increased 17% from $4.3
million for the three months ended September 30, 1998 to $5.1 million for the
three months ended September 30, 1999. This increase was primarily due to a 30%
increase in the average cost per unit. Product gross margins were 63% for the
three months ended September 30, 1998 and 62% for the three months ended
September 30, 1999.
Service. Cost of service revenue consists primarily of personnel costs.
Cost of service revenue increased 27% from $320,000 for the three months ended
September 30, 1998 to $407,000 for the three months ended September 30, 1999.
This increase was primarily due to the distribution of software updates to
support our increased installed customer base. Service gross margins increased
from 86% for the three months ended September 30, 1998 to 87% for the three
months ended September 30, 1999.
Gross margin increased 29% from $11.5 million for the three months ended
September 30, 1998 to $14.8 million for the three months ended September 30,
1999. Gross margin is primarily affected by the mix of product, service and
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. We anticipate that gross margin will decrease 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 increased 40% from $1.8 million for
the three months ended September 30, 1998 to $2.5 million for the three months
ended September 30, 1999. This increase was primarily due to a 46% increase in
personnel costs and a 51% increase in consulting expenses. We anticipate that
research and development expenses will increase in absolute dollars and as a
percentage of total revenues as staffing reaches planned levels.
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 increased 48% from $4.5 million for the three months ended
September 30, 1998 to $6.7 million for the three months ended September 30,
1999. This increase was primarily due to an 81% increase in sales and marketing
personnel costs. We anticipate that sales and marketing expenses will increase
in absolute dollars as we expand our sales force and marketing programs to
support international expansion, increased sales efforts to major accounts,
brand awareness and product launches.
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 decreased 5% from
$1.2 million for the three months ended September 30, 1998 to $1.1 million for
the three months ended September 30, 1999. We expect that our general and
administrative expenses will increase in absolute dollars as we continue to
expand our staff to support expanded operations and facilities and incur
expenses relating to our new responsibilities as a public company.
10
<PAGE>
Interest income, net. Interest income, net of interest expense, increased
107% from $243,000 for the three months ended September 30, 1998 to $504,000 for
the three months ended September 30, 1999. 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 increased from
$1.5 million for the three months ended September 30, 1998 to $1.8 million for
the three months ended September 30, 1999, primarily due to higher pre-tax
income. Our effective tax rate remained constant at 36% for the three months
ended September 30, 1998 and 1999.
Six Months Ended September 30, 1999 and 1998
Revenue
Total revenue increased 25% from $31.4 million for the six months ended
September 30, 1998 to $39.4 million for the six months ended September 30, 1999.
Product. Product revenue increased 13% from $23.4 million for the six
months ended September 30, 1998 to $26.4 million for the six months ended
September 30, 1999. This increase was primarily due to a 27% increase in average
selling price attributable to larger volumes of higher speed and multi-port
probes.
Service. Service revenue increased 34% from $4.2 million for the six months
ended September 30, 1998 to $5.6 million for the six months ended September 30,
1999. 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.
License and royalty. License and royalty revenue increased 94% from $3.8
million for the six months ended September 30, 1998 to $7.5 million for the six
months ended September 30, 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 increased 14% from $8.7 million for the
six months ended September 30, 1998 to $9.9 million for the six months ended
September 30, 1999. This increase was primarily due to a 25% increase in the
average cost per unit. Product gross margins were 63% for the six months ended
September 30, 1998 and 62% for the six months ended September 30, 1999.
Service. Cost of service revenue increased 33% from $616,000 for the six
months ended September 30, 1998 to $820,000 for the six months ended September
30, 1999. This increase was primarily due to the distribution of software
updates to support our increased installed customer base. Service gross margins
remained constant at 85% for the six months ended September 30, 1998 and 1999.
Gross margin increased 30% from $22.1 million for the six months ended
September 30, 1998 to $28.7 million for the six months ended September 30, 1999.
Gross margin is primarily affected by the mix of product, service and 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. We anticipate that gross margin will decrease as a percentage of
total revenue.
Operating Expenses
Research and development. Research and development expenses increased 35%
from $3.5 million for the six months ended September 30, 1998 to $4.7 million
for the six months ended September 30, 1999. This increase was primarily due to
a 37% increase in personnel costs and to a lesser degree a 30% increase in
consulting expenses.
11
<PAGE>
Sales and marketing. Sales and marketing expenses increased 34% from $9.5
million for the six months ended September 30, 1998 to $12.8 million for the six
months ended September 30, 1999. This increase was primarily due to a 69%
increase in sales and marketing personnel costs.
General and administrative. General and administrative expenses increased
3% from $2.0 million for the six months ended September 30, 1998 to $2.1 million
for the six months ended September 30, 1999.
Interest income, net. Interest income, net of interest expense, increased
75% from $443,000 for the six months ended September 30, 1998 to $776,000 for
the six months ended September 30, 1999. 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 increased from
$2.7 million for the six months ended September 30, 1998 to $3.6 million for the
six months ended September 30, 1999, primarily due to higher pre-tax income. Our
effective tax rate remained constant at 36% for the six months ended September
30, 1998 and 1999.
Liquidity and Capital Resources
As of September 30, 1999, we had $44.6 million in cash and cash equivalents
and $14.6 million in short-term investments. 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 commissions and
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 2000. Amounts available under the
line of credit are a function of eligible accounts receivable and bear interest
at the bank's prime rate. At September 30, 1999, 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 short-term investments were $59.2 million at
September 30, 1999. Cash provided by operating activities was $4.3 million and
$6.1 million for the six months ended September 30, 1999 and 1998, respectively.
Cash provided by operating activities was primarily derived from net income and
to a lesser degree, increases in depreciation and amortization and decreases in
inventories and deferred revenue in each period. This was partially offset by
increases in accounts receivable. These changes were due to the growth of our
business.
Cash used by investing activities was $17.1 million for the six months
ended September 30, 1999, which reflects the purchase of short-term investments
and, to a lesser degree, fixed assets. Cash provided by investing activities was
$7.6 million for the six months ended September 30, 1998, which was primarily
due to the maturity of short-term investments, partially offset by the purchase
of fixed assets.
Cash provided by financing activities was $31.9 million for the six months
ended September 30, 1999 which is primarily due to the initial public offering
proceeds.
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. We have no
current plans, agreements or commitments, and are not currently engaged in any
negotiations with respect to any such transaction.
12
<PAGE>
Year 2000 Readiness Disclosure
Many computers and software products accept only two digit entries in date
fields which could cause problems distinguishing dates after December 31, 1999.
The use of computers and software products that are not year 2000 compliant
could result in system failures or miscalculations causing business disruptions,
including the inability to process transactions, send invoices or perform other
business activities. As a result, many computers and software products may need
to be upgraded or replaced in order to meet year 2000 requirements.
We believe that we have three general areas of potential exposure with
respect to the year 2000 problem:
o our own products;
o our internal information systems and equipment-related systems; and
o the effects of third party compliance efforts.
We have completed our review of our products to determine whether they are
year 2000 compliant. Based on this review, we believe that our products are year
2000 compliant. However, there can be no assurance that our products will not
interact with non-year 2000 compliant products, which could cause our products
to malfunction. This malfunction could expose us to claims from our customers or
third parties or result in a reduction in market acceptance of our products and
services and increased service costs to us.
With respect to our internal information systems, we believe our current
financial and accounting systems are year 2000 compliant. We anticipate that our
financial and accounting systems will be upgraded in the fourth calendar quarter
of 1999 and that such systems will also be year 2000 compliant. All other
internal systems used in our daily operations, including our computers, software
packages, telephones, security systems and shipping systems, have either been
determined to be compliant, have been certified compliant by the commercial
provider or have been tested and upgraded. We believe that our review of our
internal information systems and equipment-related systems is complete. We do
not expect the costs of making our internal information systems and
equipment-related systems year 2000 compliant to be material.
The third aspect of our year 2000 analysis involves evaluating the year
2000 efforts of third parties, including suppliers and indirect channel
partners. We have evaluated many of these third parties and believe that they
are year 2000 compliant. Failure of our suppliers' systems, however, to operate
properly could require us to incur significant expenses to remedy problems or
replace suppliers. Failure of our indirect channel partners' systems to operate
properly, however, could reduce our revenue from our indirect channel partners.
Problems with our suppliers or indirect channel partners could have a material
adverse effect on our business, operating results and financial condition.
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, the identification and evaluation process is ongoing
and 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.
Some of our products are sold to original equipment manufacturers who
incorporate them into their own product offerings. We do not know whether
original equipment manufacturer products incorporating our products are or will
be year 2000 compliant. If such original equipment manufacturer products are not
year 2000 compliant, their customers could cancel or delay orders which, in
time, would affect the orders that we receive from our original equipment
manufacturer partners. Therefore, the failure of our original equipment
manufacturer partners to be year 2000 compliant could have a material adverse
effect on our business, results of operation and financial condition.
13
<PAGE>
Under the reasonably likely worst case scenario, we may not be able to
deliver year 2000 compliant products; our indirect channel partners, our
customers 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.
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 for 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
47% of our total revenue for the six months ended September 30, 1999 and 1998.
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:
o 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;
o the timing and receipt of orders from customers, particularly Cisco,
especially in light of our lengthy sales cycle;
o the timing and market acceptance of new products or product
enhancements by us or our competitors;
o distribution channels through which our products are sold could
change;
o the timing of hiring sales personnel and the speed at which such
personnel become productive;
o we may not be able to anticipate or adapt effectively to developing
markets and rapidly changing technologies; and
14
<PAGE>
o 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. 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 79% and 83% of our total revenue for the six
months ended September 30, 1999 and 1998, respectively. Sales to Cisco accounted
for 47% of our total revenue for the six months ended September 30, 1999 and
1998. 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 Hewlett-Packard
Company, providers of network performance management solutions, such as Concord
Communications, Inc. and Micromuse, Inc., and providers of portable network
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.
15
<PAGE>
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. We
anticipate that our financial and accounting systems will be upgraded in the
fourth calendar quarter in 1999. 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.
16
<PAGE>
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 us and our customers, 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 15% and 12% of our total
revenue for the six months ended September 30, 1999 and 1998, 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,
business 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
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 we may not be able
to deliver year 2000 compliant products, 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.
17
<PAGE>
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.
THE PRICE OF OUR COMMON STOCK MAY DECREASE DUE TO MARKET VOLATILITY. The stock
market in general has recently experienced extreme price and volume
fluctuations. In addition, the market prices of securities of technology
companies have been extremely volatile and have experienced fluctuations that
often have been unrelated or disproportionate to the operating performance of
these companies. These broad market fluctuations could adversely affect the
market price of our common stock.
Recently, when the market price of a stock has been volatile, holders of that
stock have occasionally instituted securities class action litigation against
the company that issued the stock. If any of our stockholders brought such a
lawsuit against us, even if the lawsuit is without merit, we could incur
substantial costs defending the lawsuit. The lawsuit could also divert the time
and attention of our management.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We consider 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 investments. Cash equivalents and
investments are stated at amortized cost plus accrued interest, which
approximates fair value. Cash equivalents and investments 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 investments.
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 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.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In August 1998, a former employee made claims against NetScout and an employee
stockholder and alleged unspecified damages. The former employee filed a related
claim with the Massachusetts Commission Against Discrimination (the "MCAD") and
the Equal Employment Opportunity Commission (the "EEOC") in December 1998. In
July 1999, the former employee requested that the claim be withdrawn from the
MCAD and the EEOC so that the claim may be filed in state and/or federal court.
In accordance with this request, the MCAD closed this matter on July 14, 1999
and the EEOC closed this matter on August 12, 1999. As of the date of filing of
this Form 10-Q, NetScout has not received notice that a claim has been filed in
state or federal court concerning this matter. Based on the information
available to date, NetScout believes that the claim is without merit and intends
to vigorously defend this claim. As this matter is at a preliminary stage,
NetScout is unable to predict the outcome or the 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On August 17, 1999, we completed our initial public offering of 3 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, Stearns & 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. The aggregate offering price of the initial public offering of our
securities to the public was $33.0 million. We received proceeds of $30.7
million after deducting $2.3 million in underwriting discounts and commissions.
We also incurred $1.1 million in other offering expenses. The net proceeds we
received after deducting underwriting discounts and commissions and other
offering expenses was approximately $29.6 million.
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 net proceeds from our initial public
offering. We have invested all such net proceeds primarily in US Treasury
obligations and other interest bearing investment grade securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed or incorporated by reference as part
of this Report.
11. Statement re Computation of Per Share Earnings
27. Financial Data Schedule
(b) Reports on Form 8-K
None
19
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NetScout Systems, Inc.
/s/ Anil Singhal
-----------------------------------
Date: November 12, 1999 Name: Anil Singhal
Title: Chairman of the Board, Chief
Executive Officer and Treasurer
NetScout Systems, Inc.
/s/ Charles Tillett
-----------------------------------
Date: November 12, 1999 Name: Charles Tillett
Title: Vice President, Finance and
Administration and Chief Financial
Officer (Principal Financial
Officer and Principal Accounting
Officer)
20
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
11. Statement re Computation of Per Share Earnings
27. Financial Data Schedule
21
<PAGE>
EXHIBIT 11
NETSCOUT SYSTEMS, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
Below is a summary of the shares used in computing basic and diluted net income
per share for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average number of shares
outstanding ................................... 20,555,524 19,611,230 17,460,573 19,486,036
Shares attributable to Class B Convertible
Common Stock .................................. 3,185,268 -- 5,070,900 --
Shares attributable to Series A Preferred
Stock ......................................... 576,660 2,526,316 918,034 2,526,316
Shares attributable to unvested Non-Voting
Common Stock .................................. -- 128,807 -- 174,017
Stock options ................................. 2,257,334 1,410,431 2,299,030 1,438,691
---------- ---------- ---------- ----------
Shares used in computing diluted net
income per share .............................. 26,574,786 23,676,784 25,748,537 23,625,060
========== ========== ========== ==========
</TABLE>
Below is a summary of the shares used in computing pro forma basic and diluted
net income per share for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average number of shares
outstanding ................................... 20,555,524 19,611,230 17,460,573 19,486,036
Shares attributable to Class B Convertible
Common Stock .................................. 3,185,268 -- 5,070,900 --
Shares attributable to Series A Preferred
Stock ......................................... 576,660 2,526,316 918,034 2,526,316
---------- ---------- ---------- ----------
Shares used in computing pro forma basic
net income per share .......................... 24,317,452 22,137,546 23,449,507 22,012,352
Shares attributable to unvested Non-Voting
Common Stock .................................. -- 128,807 -- 174,017
Stock options ................................. 2,257,334 1,410,431 2,299,030 1,438,691
---------- ---------- ---------- ----------
Shares used in computing pro forma diluted
net income per share .......................... 26,574,786 23,676,784 25,748,537 23,625,060
========== ========== ========== ==========
</TABLE>
For both diluted net income per share and pro forma diluted net income per
share, stock options to purchase 56,609 and 28,459 shares of Non-Voting Common
Stock for the three and six months ended September 30, 1998 (unaudited),
respectively, were outstanding at period end but were not included in the
computation of diluted or pro forma 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.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-2000 MAR-31-1999 MAR-31-2000 MAR-31-1999
<PERIOD-START> APR-01-1998 JUL-01-1999 JUL-01-1998 APR-01-1999 APR-01-1998
<PERIOD-END> MAR-31-1999 SEP-30-1999 SEP-30-1998 SEP-30-1999 SEP-30-1998
<CASH> 25,477 44,554 0 0 0
<SECURITIES> 0 14,622 0 0 0
<RECEIVABLES> 7,586 10,452 0 0 0
<ALLOWANCES> 1,036 1,023 0 0 0
<INVENTORY> 3,165 2,779 0 0 0
<CURRENT-ASSETS> 37,426 75,349 0 0 0
<PP&E> 8,505 10,834 0 0 0
<DEPRECIATION> 4,278 5,410 0 0 0
<TOTAL-ASSETS> 43,974 81,094 0 0 0
<CURRENT-LIABILITIES> 12,937 13,582 0 0 0
<BONDS> 0 0 0 0 0
0 0 0 0 0
5,964 0 0 0 0
<COMMON> 44,181 30 0 0 0
<OTHER-SE> (43,563) 36,699 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 43,974 81,094 0 0 0
<SALES> 0 13,541 11,863 26,355 23,410
<TOTAL-REVENUES> 0 20,304 16,146 39,375 31,409
<CGS> 0 5,087 4,347 9,901 8,687
<TOTAL-COSTS> 0 5,494 4,667 10,721 9,303
<OTHER-EXPENSES> 0 10,320 7,500 19,538 15,055
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0 0
<INCOME-PRETAX> 0 4,490 3,979 9,116 7,051
<INCOME-TAX> 0 1,800 1,520 3,564 2,698
<INCOME-CONTINUING> 0 3,194 2,702 6,328 4,796
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 0 3,194 2,702 6,328 4,796
<EPS-BASIC> 0 .16 .14 .36 .25
<EPS-DILUTED> 0 .12 .11 .25 .20
</TABLE>
