<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1999
REGISTRATION NO. 333-76843
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
NETSCOUT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 04-2837575
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
</TABLE>
------------------------
NETSCOUT SYSTEMS, INC.
4 TECHNOLOGY PARK DRIVE
WESTFORD, MASSACHUSETTS 01886
(978) 614-4000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
ANIL K. SINGHAL, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
NARENDRA POPAT, PRESIDENT AND CHIEF OPERATING OFFICER
NETSCOUT SYSTEMS, INC.
4 TECHNOLOGY PARK DRIVE
WESTFORD, MASSACHUSETTS 01886
(978) 614-4000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
JOHN A. MELTAUS, ESQ. PHILIP P. ROSSETTI, ESQ.
MIGUEL J. VEGA, ESQ. MICHAEL D. BAIN, ESQ.
TESTA, HURWITZ & THIBEAULT, LLP HALE AND DORR LLP
125 High Street 60 State Street
Boston, Massachusetts 02110 Boston, Massachusetts 02109
(617) 248-7000 (617) 526-6000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
DESCRIPTION OF INSIDE COVER OF THE PROSPECTUS FOR NETSCOUT SYSTEMS, INC.
Application Flow Management
Aligns computer network resources with the business
[The inside cover of the Prospectus (before unfolding) shows a stylized
representation of the interdependencies between the information technology
infrastructure (consisting of the 'devices' and the 'connectivity' layers) and a
company's business carried out by the business applications (represented by the
two upper layers: 'applications' and 'business processes'.]
DESCRIPTION OF GATEFOLD
NetScout [with NetScout logo]
Because the network is the business-TM-.
Proactive Network and Application Performance Management Solutions
Application Response Time Measurement provides detailed, current information
on application response time which can be used to optimize network configuration
and prioritize software applications.
Monitoring and Troubleshooting allows current monitoring and trend analysis
of network usage, performance and error conditions which helps network managers
prevent network malfunctions and expedite troubleshooting.
Capacity Planning measures trends in network usage by individual software
application to enable informed spending decisions.
Policy Enforcement allows network managers to identify inappropriate or
wasteful usage of the computer network to ensure adherence to corporate policies
and guidelines.
Accounting and Charge-Back provides network usage information by user,
department, or application, which can be used to charge for internal network
usage.
[The graphic in the center of the two-page inside spread consists of
multiple servers labeled "ERP", "eMail" and "Custom Applications", desktops
representing clients in another grouping, two remote routers accessing the
internet (represented by a cloud symbol) and a customer support extranet
(represented by another cloud symbol). The central interconnection of all these
segments of the network is represented by a symbolic network center. On each
part of the networks are NetScout Probes, designated as such, indicating likely
placement of probes in a real network. Additional elements of the graphic are
stylized computer screens for the following products: NetScout Manager Plus-TM-
console software, AppScout-TM- application flow monitor and NetScout WebCast-TM-
network and trend reports. NetScout's software products.]
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 6, 1999
4,000,000 Shares
[LOGO]
Common Stock
-------------
We are selling all of the shares of common stock offered. Prior to this
offering, there has been no public market for the common stock. The initial
public offering price is expected to be between $14.00 and $16.00 per share.
The selling stockholders identified on page 54 have granted the underwriters
an option to purchase a maximum of 600,000 additional shares of common stock to
cover over-allotments of shares. We will not receive any of the proceeds from
the shares of common stock sold by the selling stockholders.
Application has been made to list the common stock on The Nasdaq Stock
Market's National Market under the symbol "NTCT."
Investing in the common stock involves risks. See "Risk Factors" beginning
on page 7.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions NetScout
--------- ---------------- ----------------
<S> <C> <C> <C>
Per Share......................................................... $ $ $
Total............................................................. $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Deutsche Banc Alex. Brown
Bear, Stearns & Co. Inc.
Dain Rauscher Wessels
a division
of Dain Rauscher Incorporated
The date of this prospectus is , 1999
<PAGE>
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary............................ 5
Risk Factors.................................. 7
Special Note Regarding Forward-Looking
Statements.................................. 17
Use Of Proceeds............................... 18
Dividend Policy............................... 18
Capitalization................................ 19
Dilution...................................... 20
Selected Consolidated Financial Data.......... 21
Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations.................................. 22
<CAPTION>
PAGE
---------
<S> <C>
Business...................................... 34
Management.................................... 45
Certain Transactions.......................... 52
Principal And Selling Stockholders............ 54
Description Of Capital Stock.................. 57
Shares Eligible For Future Sale............... 61
Underwriting.................................. 63
Legal Matters................................. 65
Experts....................................... 65
Where You Can Find More Information........... 65
Index To Consolidated Financial Statements.... F-1
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
------------------------
DEALER PROSPECTUS DELIVERY OBLIGATION
Until , 1999 (25 days after the commencement of this offering),
all dealers that effect transactions in the common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
3
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<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY.
NETSCOUT SYSTEMS, INC.
We design, develop, manufacture, market and support a family of products
that enable businesses and network service providers to manage the performance
of their computer networks and software applications. Our Application Flow
Management 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.
Application Flow Management consists of data collection products as well as
analysis and presentation software. Our data collection products collect,
aggregate and analyze network and application data from a wide range of network
technologies. Using this data, our presentation and analysis software products
provide current information to computer network managers and business executives
in an easy-to-use, graphical format.
Business enterprises increasingly rely on their software applications and
computer networks as strategic assets that are essential to business operations.
Even minor computer network malfunctions can result in significant business
interruptions, lost revenue, decreased productivity and customer
dissatisfaction. As a result, businesses are recognizing the critical importance
of effective network and application performance management.
To support the growing number of users and demand for faster and more
reliable computer network access, new network technologies and products have
been introduced. This has resulted in highly-complex computer networks, which
are more difficult to manage.
Our solution provides a proactive approach to network and application
performance management that enables businesses to anticipate and address network
and application performance problems and align their computer resources with
their business strategies. Application Flow Management provides the following
key functions:
- APPLICATION RESPONSE TIME MEASUREMENT-Provides detailed, current
information on application response time which can be used to optimize
network configuration and prioritize software applications.
- MONITORING AND TROUBLESHOOTING-Allows current monitoring and trend
analysis of network usage, performance and error conditions which helps
network managers prevent network malfunctions and expedite
troubleshooting.
- CAPACITY PLANNING-Measures trends in network usage by individual software
application to enable informed network spending decisions.
- POLICY ENFORCEMENT-Allows network managers to identify inappropriate or
wasteful usage of the computer network to ensure adherence to corporate
policies and guidelines.
- ACCOUNTING AND CHARGE-BACK-Provides network usage information by user,
department or application, which can be used to charge for internal
network usage.
Our Application Flow Management solution is used by businesses and
organizations with large and medium-sized computer networks, as well as service
providers that offer computer network and software application management
services. We sell our products through indirect distribution channels and a
direct sales force. Cisco Systems, Inc. is our largest indirect channel partner
and sells our products under its private label.
NetScout was incorporated in Massachusetts in June 1984 under the name
Frontier Software Development, Inc. We were primarily an engineering consulting
company until 1992 when we began developing the NetScout family of products. In
April 1993, we reincorporated in Delaware and, in March 1997, we changed our
name to NetScout Systems, Inc. Our principal offices are located at 4 Technology
Park Drive, Westford, Massachusetts 01886, and our telephone number is (978)
614-4000.
5
<PAGE>
THE OFFERING
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<S> <C>
Common stock offered by NetScout................... 4,000,000 shares
Common stock to be outstanding after the 26,588,637 shares
offering.........................................
Use of proceeds.................................... For general corporate purposes,
including working capital.
Proposed Nasdaq National Market symbol............. NTCT
</TABLE>
Common stock outstanding is based on 22,588,637 shares of common stock
outstanding as of June 30, 1999 and excludes 3,239,451 shares issuable upon the
exercise of outstanding stock options as of June 30, 1999 and 4,712,250 shares
available for future grant under our stock plans.
SUMMARY CONSOLIDATED FINANCIAL DATA
The pro forma data in the tables below gives effect to the conversion of all
shares of Series A Preferred Stock, Class B Convertible Common Stock and
Non-Voting Common Stock into common stock upon the closing of this offering. The
pro forma as adjusted balance sheet data as of June 30, 1999 also gives effect
to the sale of 4,000,000 shares of common stock that we are offering under this
prospectus at an assumed initial public offering price of $15.00 per share,
after deducting estimated underwriting discounts and commissions and offering
expenses. See "Capitalization."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenue.................................. $ 5,877 $ 15,683 $ 30,648 $ 42,829 $ 67,551 $ 15,263 $ 19,071
Total cost of revenue.......................... 1,962 6,035 9,955 13,422 20,485 4,636 5,227
Gross margin................................... 3,915 9,648 20,693 29,407 47,066 10,627 13,844
Total operating expenses....................... 3,214 6,287 11,596 21,662 32,005 7,555 9,218
Income from operations......................... 701 3,361 9,097 7,745 15,061 3,072 4,626
Provision for income taxes..................... 136 1,355 3,640 3,056 5,715 1,178 1,764
Net income..................................... $ 555 $ 2,003 $ 5,918 $ 5,432 $ 10,272 $ 2,094 $ 3,134
Basic net income per share..................... $ 0.03 $ 0.11 $ 0.31 $ 0.28 $ 0.55 $ 0.11 $ 0.22
Diluted net income per share................... $ 0.03 $ 0.09 $ 0.26 $ 0.23 $ 0.43 $ 0.09 $ 0.13
Shares used in computing:
Basic net income per share................... 18,043 18,542 19,010 19,289 18,586 19,304 14,331
Diluted net income per share................. 19,321 22,460 22,919 23,166 23,706 23,578 24,909
Pro forma basic net income per share........... $ 0.46 $ 0.14
Pro forma diluted net income per share......... $ 0.43 $ 0.13
Shares used in computing:
Pro forma basic net income per share......... 22,301 22,572
Pro forma diluted net income per
share...................................... 23,706 24,909
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 22,918 $ 22,918 $ 78,207
Working capital.............................................................. 26,483 26,483 81,483
Total assets................................................................. 43,748 43,748 98,748
Class B redeemable convertible common stock.................................. 44,161 -- --
Total stockholders' equity (deficit)......................................... (9,830) 34,331 89,331
</TABLE>
6
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE
DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCURS, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION
COULD BE MATERIALLY ADVERSELY AFFECTED, THE TRADING PRICE OF OUR COMMON STOCK
COULD DECLINE, AND YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT. PLEASE ALSO
SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS."
RISKS RELATED TO OUR BUSINESS
<TABLE>
<S> <C>
A REDUCTION IN ORDERS FROM Our operating results and financial condition for a
CISCO SYSTEMS, INC. WOULD particular fiscal period would be materially adversely
MATERIALLY ADVERSELY AFFECT affected if there is a substantial reduction in orders
OUR BUSINESS 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 24%, 40% and 51% of our
total revenue for the fiscal years ended March 31, 1997,
1998 and 1999, and 44% of our total revenue for each of
the three months ended June 30, 1998 and 1999. 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 resell 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.
DISAPPOINTING QUARTERLY Our quarterly revenue and operating results are difficult
OPERATING RESULTS COULD CAUSE to predict and may fluctuate significantly from quarter to
OUR COMMON STOCK PRICE TO quarter. If our quarterly revenue or operating results
DECREASE fall below the expectations of investors or securities
analysts, the price of our common stock could decrease
substantially. 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.
</TABLE>
7
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<S> <C>
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. Therefore, any significant
deferral of orders for our products would cause a
shortfall in revenue for that quarter.
OUR RELIANCE ON SOLE SOURCE Many components that are necessary for the assembly of our
SUPPLIERS COULD ADVERSELY probes are obtained from separate sole source suppliers or
AFFECT OUR BUSINESS 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.
</TABLE>
8
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<S> <C>
OUR CONTINUED GROWTH DEPENDS We must increase the size of our sales force in order to
ON OUR ABILITY TO EXPAND OUR increase our direct sales and support our indirect sales
SALES FORCE 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 or we may be unable to manage a
larger 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 To increase our sales, we must further expand and manage
ABILITY TO EXPAND AND MANAGE our indirect distribution channels, including original
INDIRECT DISTRIBUTION equipment manufacturers, distributors, resellers, systems
CHANNELS integrators and service providers. Sales to our indirect
distribution channels accounted for 73%, 76% and 81% of
our total revenue for the fiscal years ended March 31,
1997, 1998 and 1999, and 82% of our total revenue for each
of the three months ended June 30, 1998 and 1999. Sales to
Cisco accounted for 24%, 40% and 51% of our total revenue
for the fiscal years ended March 31, 1997, 1998 and 1999,
and 44% of our total revenue for each of the three months
ended June 30, 1998 and 1999. 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 The market for network and application performance
PRODUCTS AND ENHANCE OUR management solutions is relatively new and is
EXISTING PRODUCTS TO KEEP UP characterized by rapid changes in technology, evolving
WITH RAPID TECHNOLOGICAL industry standards, changes in customer requirements and
CHANGE, DEMAND FOR OUR frequent product introductions and enhancements. Our
PRODUCTS MAY DECLINE 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.
</TABLE>
9
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<S> <C>
WE FACE SIGNIFICANT The market for network and application performance
COMPETITION FROM OTHER management solutions is intensely competitive. We believe
TECHNOLOGY COMPANIES customers make network management system purchasing
decisions based primarily upon the following factors:
- 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., providers of application performance
management solutions, such as International Network
Services, 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.
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 We derive all of our revenue from the sale of products and
DEPENDS ON THE CONTINUED services that are designed to allow our customers to
GROWTH IN THE MARKET FOR AND manage the performance of computer networks and software
COMMERCIAL ACCEPTANCE OF applications. The market for network and application
NETWORK AND APPLICATION performance management solutions is in an early stage of
PERFORMANCE MANAGEMENT development. Therefore, we cannot accurately assess the
SOLUTIONS 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 solution. Any failure of this market to
continue to develop would materially adversely affect our
business, operating results and financial condition.
</TABLE>
10
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<TABLE>
<S> <C>
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 We have been experiencing a period of rapid growth over
GROWTH COULD ADVERSELY AFFECT the past several years. We plan to continue to expand our
OUR BUSINESS 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 future 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 during the third 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, our ability to retain key personnel
and our business, operating results and financial
condition could be materially adversely affected.
LOSS OF KEY PERSONNEL COULD Our future success depends to a significant degree on the
ADVERSELY AFFECT OUR BUSINESS 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 Qualified personnel are in great demand throughout the
SKILLED PERSONNEL IN A TIGHT computer software, hardware and networking industries. The
LABOR MARKET demand for qualified personnel is particularly acute in
the New England area due to the large number of software
and other 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. This
inability could have a material adverse effect on our
business, operating results and financial condition.
</TABLE>
11
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<S> <C>
OUR SUCCESS DEPENDS ON OUR Our business is heavily dependent on our intellectual
ABILITY TO PROTECT OUR property. We rely upon a combination of copyright,
INTELLECTUAL PROPERTY RIGHTS 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 We may be subject to claims by others that our products
INFRINGE ON THEIR infringe on their intellectual property rights. These
INTELLECTUAL PROPERTY RIGHTS 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 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 Despite testing by us and our customers, errors may be
ERRORS, THEY MAY BE COSTLY TO found in our products after commencement of commercial
CORRECT, REVENUE MAY BE shipments. If errors are discovered, we may not be able to
DELAYED, WE COULD GET SUED successfully correct them in a timely manner or at all. In
AND OUR REPUTATION COULD BE addition, we may need to make significant expenditures of
HARMED 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.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
OUR SUCCESS DEPENDS ON OUR Sales outside North America accounted for 12% of our total
ABILITY TO EXPAND AND MANAGE revenue for each of the three fiscal years ended March 31,
OUR INTERNATIONAL OPERATIONS 1997, 1998 and 1999, and 14% and 19% of our total revenue
for the three months ended June 30, 1998 and 1999. 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 Many existing computer systems and software products do
BY UNEXPECTED YEAR 2000 not properly recognize dates after December 31, 1999. This
PROBLEMS 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 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.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
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. We have determined
that some of our products and internal systems are not
year 2000 compliant, and other of our products or internal
systems may contain undetected errors or defects. 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 from 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 expenses to remedy any
problems or replace affected vendors and could cause
cancellations or delays in product shipments.
RISKS ASSOCIATED WITH THIS OFFERING OF OUR COMMON STOCK
THE PRICE OF OUR COMMON STOCK Prior to this offering, there has been no public market
AFTER THIS OFFERING MAY BE for our common stock. After this offering, an active
LOWER THAN THE PRICE YOU PAY trading market in our common stock might not develop or
IN THIS OFFERING continue. If you purchase shares of our common stock in
the offering, you will pay a price that was not
established in a competitive market. Rather, you will pay
a price that we negotiated with the representatives of the
underwriters based upon several factors. See
"Underwriting." The price of our common stock that will
prevail in the market after the offering may be higher or
lower than the price you pay.
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.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
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.
OUR EXECUTIVE OFFICERS AND After this offering, our executive officers and directors
DIRECTORS WILL BE ABLE TO and their affiliates will together control approximately
CONTROL ALL MATTERS REQUIRING 48.2% of the outstanding common stock. As a result, these
STOCKHOLDER APPROVAL stockholders, if they act together, will be able to
control all matters requiring stockholder approval,
including the election of directors and approval of
significant corporate transactions. This concentration of
ownership may have the effect of delaying, preventing or
deterring a change in control of NetScout, could deprive
our stockholders of an opportunity to receive a premium
for their common stock as part of a sale of NetScout and
might affect the market price of our common stock.
CERTAIN PROVISIONS OF OUR Our corporate documents and Section 203 of the Delaware
CHARTER AND OF DELAWARE LAW General Corporation Law could discourage, delay or prevent
MAKE A TAKEOVER OF NETSCOUT a third party or a significant stockholder from acquiring
MORE DIFFICULT control of NetScout. In addition, provisions of our
certificate of incorporation may have the effect of
discouraging, delaying or preventing a merger, tender
offer or proxy contest involving NetScout. Any of these
anti-takeover provisions could lower the market price of
the common stock and could deprive our stockholders of the
opportunity to receive a premium for their common stock
that they might otherwise receive from the sale of
NetScout.
FUTURE SALES BY EXISTING If our existing stockholders sell a large number of shares
SECURITY HOLDERS COULD of our common stock or the public market perceives that
DEPRESS THE MARKET PRICE OF existing stockholders might sell shares of common stock,
THE COMMON STOCK the market price of the common stock could significantly
decline. All of the shares offered under this prospectus
will be freely tradable in the open market, and
- 95,400 additional shares may be sold immediately after
this offering;
- 711,023 additional shares may be sold 90 days after the
effective date of this offering; and
- 23,618,047 additional shares may be sold upon the
expiration of 180-day lock-up agreements.
Deutsche Bank Securities Inc., as representative of the
underwriters, may release any or all shares from the
lock-up agreements at any time and without notice.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
Existing stockholders holding an aggregate of 6,977,254
shares of common stock have the right to require us to
register their shares of common stock with the Securities
and Exchange Commission. If we register their shares of
common stock, they can sell those shares in the public
market.
After this offering, we intend to register approximately
7,951,701 shares of our common stock that we have issued
or may issue under our stock plans. Once we register these
shares, they can be freely sold in the public market upon
issuance, subject to the "lock-up" agreements described
above.
WE WILL HAVE BROAD DISCRETION We have not identified specific uses for our proceeds from
IN USING OUR PROCEEDS FROM this offering, and we will have broad discretion in how we
THIS OFFERING use them. You will not have the opportunity to evaluate
the economic, financial or other information on which we
base our decisions on how to use these proceeds.
INVESTORS WILL EXPERIENCE If you purchase shares of our common stock in this
IMMEDIATE AND SUBSTANTIAL offering, you will experience immediate and substantial
DILUTION IN THE BOOK VALUE OF dilution of $11.64 in the pro forma net tangible book
THEIR INVESTMENT value per share of common stock. You will experience
additional dilution upon the exercise of outstanding stock
options to purchase common stock. See "Dilution."
</TABLE>
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
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 "Risk Factors." 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 prospectus to conform such
statements to actual results.
------------------------
EXCEPT AS SET FORTH IN THE CONSOLIDATED FINANCIAL STATEMENTS OR AS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS:
- ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED;
- REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR SERIES A
PREFERRED STOCK, NON-VOTING COMMON STOCK AND CLASS B CONVERTIBLE COMMON
STOCK INTO SHARES OF OUR COMMON STOCK UPON THE CLOSING OF THIS OFFERING;
AND
- REFLECTS THE FILING, AS OF THE CLOSING OF THIS OFFERING, OF OUR AMENDED
AND RESTATED CERTIFICATE OF INCORPORATION AND THE ADOPTION OF OUR AMENDED
AND RESTATED BY-LAWS IMPLEMENTING CERTAIN PROVISIONS DESCRIBED BELOW UNDER
"DESCRIPTION OF CAPITAL STOCK," AND THE RECEIPT OF STOCKHOLDER APPROVAL
THEREFOR.
OUR VOTING COMMON STOCK WILL BE RENAMED UPON THE CLOSING OF THIS OFFERING, AND
IS REFERRED TO HEREIN AS COMMON STOCK. SEE "MANAGEMENT--STOCK PLANS,"
"DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."
------------------------
NetScout is a registered trademark and the NetScout logo, AppScout, WebCast,
NetScout Server, NetFlow Monitor, Resource Monitor, VLAN Monitor, NetScout
Manager Plus and ART MIB are trademarks of NetScout. TrafficDirector and
SwitchProbe are trademarks of Cisco Systems, Inc. All other trade names and
trademarks referred to in this prospectus are the property of their respective
owners.
17
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 4,000,000 shares of
common stock that we are offering hereby will be approximately $55,000,000, at
an assumed initial public offering price of $15.00 per share, after deducting
estimated underwriting discounts and commissions and offering expenses. We will
not receive any proceeds from the sale of common stock by the selling
stockholders. See "Principal and Selling Stockholders."
The principal purposes of this offering are to:
- obtain additional working capital;
- create a public market for our common stock;
- increase our visibility in the marketplace;
- facilitate future access to public capital markets; and
- provide liquidity to existing stockholders.
We intend to use our net proceeds for:
- general corporate purposes, including working capital, product development
and expansion of our international operations; and
- sales and marketing capabilities.
We may also use a portion of our net proceeds to:
- acquire or invest in complementary businesses or products; and
- obtain the right to use complementary technologies.
We have no specific understandings, commitments or agreements with respect
to any such acquisition or investment. Pending such uses, we intend to invest
our net proceeds from this offering in short-term, interest-bearing,
investment-grade securities, certificates of deposit or direct or guaranteed
obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying cash dividends in the foreseeable future. In
addition, the terms of our bank loan agreement prohibit the payment of cash
dividends on our capital stock. We currently intend to retain future earnings,
if any, to fund the expansion and growth of our business. Payment of future cash
dividends, if any, will be at the discretion of our Board of Directors after
taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on an actual basis;
- on a pro forma basis giving effect to the conversion of all shares of
Series A Preferred Stock, Class B Convertible Common Stock and Non-Voting
Common Stock into common stock upon the closing of this offering; and
- on a pro forma as adjusted basis to reflect the sale by us of 4,000,000
shares of common stock offered under this prospectus at an assumed initial
public offering price of $15.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses.
This information should be read in conjunction with our consolidated financial
statements and notes thereto appearing elsewhere in this prospectus. This
information also gives effect to the filing of a certificate of amendment to our
Second Amended and Restated Certificate of Incorporation. This information
excludes 3,239,451 shares of common stock issuable upon exercise of outstanding
options as of June 30, 1999, of which options to purchase 1,384,533 shares were
then exercisable. An additional 4,712,250 shares of common stock have been
reserved for issuance under our 1999 Stock Option and Incentive Plan and our
1999 Employee Stock Purchase Plan. See "Management--Stock Plans" and Note 9 to
the Consolidated Financial Statements.
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Redeemable convertible common stock:
Class B redeemable convertible common stock, $0.001 par value; 6,977,254
shares authorized, issued and outstanding, actual; no shares issued or
outstanding, pro forma and pro forma as adjusted........................ $44,161 $ -- $ --
---------- ----------- -----------
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.001 par value; 631,579 shares
authorized and issued and 315,790 shares outstanding, actual; no shares
issued or outstanding, pro forma and pro forma as adjusted.............. 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, actual; 29,565,891 shares issued and
22,588,637 shares outstanding, pro forma; and 29,565,891 shares issued
and 26,588,637 shares outstanding, pro forma as adjusted.............. 16 30 30
Non-voting, 21,224,364 shares authorized, 4,062,321 shares issued and
3,097,721 shares outstanding, actual; no shares issued or outstanding,
pro forma and pro forma as adjusted................................... 4 -- --
Additional paid-in capital.............................................. 2,211 52,326 81,875
Deferred compensation..................................................... (1,220) (1,220 ) (1,220 )
Treasury stock............................................................ (44,394) (44,394 ) (18,943 )
Retained earnings......................................................... 27,589 27,589 27,589
---------- ----------- -----------
Total stockholders' equity (deficit).................................... (9,830) 34,331 89,331
---------- ----------- -----------
Total capitalization................................................ $34,331 $34,331 $ 89,331
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
19
<PAGE>
DILUTION
The pro forma net tangible book value of NetScout at June 30, 1999 was
$34,331,000, or $1.52 per share of common stock, assuming the conversion of all
shares of Series A Preferred Stock, Class B Convertible Common Stock and
Non-Voting Common Stock into shares of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the pro forma number of outstanding shares of common
stock. After giving effect to the sale of 4,000,000 shares of common stock
offered hereby by NetScout at an assumed initial public offering price of $15.00
per share and after deducting estimated underwriting discounts and commissions
and offering expenses, NetScout's pro forma net tangible book value as of June
30, 1999 would have been approximately $89,331,000, or $3.36 per share. This
represents an immediate increase in pro forma net tangible book value of $1.84
per share to existing stockholders and an immediate dilution of $11.64 per share
to new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 15.00
Pro forma net tangible book value per share
at June 30, 1999....................................... $ 1.52
Increase attributable to this offering................... 1.84
Pro forma net tangible book value per share after this
offering................................................... 3.36
---------
Net tangible book value dilution per share to new investors
in this offering........................................... $ 11.64
---------
---------
</TABLE>
The following table summarizes, as of June 30, 1999, on the pro forma basis
described above, the total number of shares of common stock purchased, and the
consideration paid to NetScout and the average price per share paid by the
existing stockholders for their shares and by new investors purchasing shares of
common stock in this offering at an assumed initial public offering price of
$15.00 per share, before deducting estimated underwriting discounts and
commissions and offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 22,588,637 85.0% $ 47,415,000 44.1% $ 2.10
New investors................. 4,000,000 15.0 60,000,000 55.9 $ 15.00
------------ ----- -------------- -----
Totals.................. 26,588,637 100.0% $ 107,415,000 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
If the underwriters' over-allotment option is exercised in full, the sales
by the selling stockholders in this offering will reduce the number of shares of
common stock held by existing stockholders to 21,988,637, or approximately 82.7%
of the total shares of common stock outstanding immediately after this offering,
and will increase the number of shares of common stock held by new investors to
4,600,000, or 17.3% of the total number of shares of common stock outstanding
immediately after this offering. See "Principal and Selling Stockholders."
The foregoing discussion and tables assume no exercise of any stock options
after June 30, 1999. As of June 30, 1999, there were 3,239,451 shares of common
stock issuable upon exercise of outstanding stock options, at a weighted average
exercise price of $4.21 per share. To the extent that these options are
exercised, there will be further dilution to new investors. In addition, in
April 1999, we adopted our 1999 Stock Option and Incentive Plan, pursuant to
which 4,500,000 shares of common stock are reserved for issuance, and our 1999
Employee Stock Purchase Plan, pursuant to which 500,000 shares of common stock
are reserved for issuance. See "Management-Stock Plans" and Note 9 to the
Consolidated Financial Statements.
20
<PAGE>
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 prospectus. The consolidated statement of
income data for the years ended March 31, 1997, 1998 and 1999, and the
consolidated balance sheet data as of March 31, 1998 and 1999, are derived from
and are qualified by reference to the audited consolidated financial statements
included elsewhere in this prospectus. The consolidated statement of income data
for the years ended March 31, 1995 and 1996, and the consolidated balance sheet
data as of March 31, 1995, 1996 and 1997, have been derived from audited
consolidated financial statements of NetScout that do not appear in this
prospectus. The consolidated statement of income data for the three months ended
June 30, 1998 and 1999 and the consolidated balance sheet data as of June 30,
1999 are derived from unaudited consolidated financial statements included
elsewhere in this prospectus. The unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information set forth therein. The historical results are
not necessarily indicative of the operating results to be expected in the
future.
The pro forma data in the following tables give effect to the conversion of
all shares of Series A Preferred Stock, Class B Convertible Common Stock and
Non-Voting Common Stock into common stock upon the closing of this offering.
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
----------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Product....................................... $ 4,035 $ 13,276 $ 25,159 $ 34,990 $ 50,374 $ 11,547 $ 12,814
Service....................................... 341 1,521 3,888 5,143 8,710 1,873 2,465
License and royalty........................... 1,501 886 1,601 2,696 8,467 1,843 3,792
--------- --------- --------- --------- --------- --------- ---------
Total revenue............................... 5,877 15,683 30,648 42,829 67,551 15,263 19,071
--------- --------- --------- --------- --------- --------- ---------
Cost of revenue:
Product....................................... 1,962 5,897 9,427 12,638 19,250 4,340 4,814
Service....................................... -- 138 528 784 1,235 296 413
--------- --------- --------- --------- --------- --------- ---------
Total cost of revenue....................... 1,962 6,035 9,955 13,422 20,485 4,636 5,227
--------- --------- --------- --------- --------- --------- ---------
Gross margin.................................... 3,915 9,648 20,693 29,407 47,066 10,627 13,844
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development...................... 1,008 1,208 3,003 5,129 7,526 1,732 2,241
Sales and marketing........................... 1,765 4,384 6,778 13,583 20,375 5,008 6,040
General and administrative.................... 441 695 1,815 2,950 4,104 815 937
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.................... 3,214 6,287 11,596 21,662 32,005 7,555 9,218
--------- --------- --------- --------- --------- --------- ---------
Income from operations.......................... 701 3,361 9,097 7,745 15,061 3,072 4,626
Interest income (expense), net.................. (10) (3) 461 743 926 200 272
--------- --------- --------- --------- --------- --------- ---------
Income before provision for income taxes........ 691 3,358 9,558 8,488 15,987 3,272 4,898
Provision for income taxes...................... 136 1,355 3,640 3,056 5,715 1,178 1,764
--------- --------- --------- --------- --------- --------- ---------
Net income...................................... $ 555 $ 2,003 $ 5,918 $ 5,432 $ 10,272 $ 2,094 $ 3,134
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic net income per share...................... $ 0.03 $ 0.11 $ 0.31 $ 0.28 $ 0.55 $ 0.11 $ 0.22
Diluted net income per share.................... $ 0.03 $ 0.09 $ 0.26 $ 0.23 $ 0.43 $ 0.09 $ 0.13
Shares used in computing:
Basic net income per share.................... 18,043 18,542 19,010 19,289 18,586 19,304 14,331
Diluted net income per share.................. 19,321 22,460 22,919 23,166 23,706 23,578 24,909
Pro forma basic net income per share............ $ 0.46 $ 0.14
Pro forma diluted net income per share.......... $ 0.43 $ 0.13
Shares used in computing:
Pro forma basic net income per share.......... 22,301 22,572
Pro forma diluted net income per share........ 23,706 24,909
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, 1999
----------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 346 $ 7,797 $ 6,514 $ 6,341 $ 25,477 $22,918 $ 22,918
Working capital............................. 324 7,837 11,140 14,163 24,489 26,483 26,483
Total assets................................ 2,781 14,328 21,703 31,220 43,974 43,748 43,748
Class B redeemable convertible common
stock..................................... -- -- -- -- 44,161 44,161 --
Total stockholders' equity (deficit)........ 878 8,848 14,809 20,400 (13,124) (9,830) 34,331
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF NETSCOUT SHOULD BE READ IN CONJUNCTION WITH "SELECTED
CONSOLIDATED FINANCIAL DATA" AND NETSCOUT'S CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND
ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN IMPORTANT FACTORS,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
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.
Product revenue consists of sales of our hardware products and licensing of
our software products. Product revenue is recognized upon shipment, provided
that fees are fixed and 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,
installation and training. We generally provide three-months software and
service support and 12-months 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 installation and training is recognized as the work is
performed.
License and royalty revenue consists primarily of royalties paid under
license agreements by original equipment manufacturers who incorporate
components of our data collection technology in 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 and 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 73%, 76% and 81% of total revenue for the fiscal years
ended March 31, 1997, 1998 and 1999, and 82% of total revenue for each of the
three months ended June 30, 1998 and 1999. 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 24%, 40% and
51% of our total revenue in the fiscal years ended March 31, 1997,
22
<PAGE>
1998 and 1999, and 44% of our total revenue for each of the three months ended
June 30, 1998 and 1999. 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, 1997, 1998 or 1999 or during the three months ended June 30, 1999.
Revenue from sales outside North America represented 12% of our total
revenue in each of the fiscal years ended March 31, 1997, 1998 and 1999, and 14%
and 19% for the three months ended June 30, 1998 and 1999. Sales outside North
America are primarily to indirect channel partners, which are generally
responsible for importing products and providing installation 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.
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:
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
Revenue:
Product.............................................................. 82.1% 81.7% 74.6% 75.7% 67.2%
Service.............................................................. 12.7 12.0 12.9 12.3 12.9
License and royalty.................................................. 5.2 6.3 12.5 12.0 19.9
--------- --------- --------- --------- ---------
Total revenue...................................................... 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- ---------
Cost of revenue:
Product.............................................................. 30.8 29.5 28.5 28.4 25.2
Service.............................................................. 1.7 1.8 1.8 2.0 2.2
--------- --------- --------- --------- ---------
Total cost of revenue.............................................. 32.5 31.3 30.3 30.4 27.4
--------- --------- --------- --------- ---------
Gross margin........................................................... 67.5 68.7 69.7 69.6 72.6
--------- --------- --------- --------- ---------
Operating expenses:
Research and development............................................. 9.8 12.0 11.1 11.4 11.8
Sales and marketing.................................................. 22.1 31.7 30.2 32.8 31.7
General and administrative........................................... 5.9 6.9 6.1 5.3 4.9
--------- --------- --------- --------- ---------
Total operating expenses........................................... 37.8 50.6 47.4 49.5 48.4
--------- --------- --------- --------- ---------
Income from operations................................................. 29.7 18.1 22.3 20.1 24.2
Interest income, net................................................... 1.5 1.7 1.4 1.3 1.4
--------- --------- --------- --------- ---------
Income before provision for income taxes............................... 31.2 19.8 23.7 21.4 25.6
Provision for income taxes............................................. 11.9 7.1 8.5 7.7 9.2
--------- --------- --------- --------- ---------
Net income............................................................. 19.3% 12.7% 15.2% 13.7% 16.4%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 AND 1999
REVENUE
Total revenue increased 25% from $15.3 million for the three months ended
June 30, 1998 to $19.1 million for the three months ended June 30, 1999.
23
<PAGE>
PRODUCT. Product revenue increased 11% from $11.5 million for the three
months ended June 30, 1998 to $12.8 million for the three months ended June 30,
1999. This increase was due to a 21% increase in average selling price due to
larger volumes of Wide Area Network and Asynchronous Transfer Mode probes.
SERVICE. Service revenue increased 32% from $1.9 million for the three
months ended June 30, 1998 to $2.5 million for the three months ended June 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 106% from $1.8
million for the three months ended June 30, 1998 to $3.8 million for the three
months ended June 30, 1999. This increase was primarily due to a proportionate
growth in unit sales of our software and embedded software products by Cisco, as
well as the introduction of a new embedded software product by Cisco. We
anticipate that license and royalty revenue will remain relatively constant in
absolute dollars and will decrease as a percentage of total revenue.
COST OF REVENUE
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 11% from $4.3
million for the three months ended June 30, 1998 to $4.8 million for the three
months ended June 30, 1999. This increase was primarily due to a 20% increase in
the average cost per unit. Product gross margins were 62% for each of the three
months ended June 30, 1998 and 1999.
SERVICE. Cost of service revenue consists primarily of personnel costs.
Cost of service revenue increased 40% from $296,000 for the three months ended
June 30, 1998 to $413,000 for the three months ended June 30, 1999. This
increase was primarily due to increased hardware repair and software updates to
support the increase in our installed customer base. Service gross margins
decreased from 84% for the three months ended June 30, 1998 to 83% for the three
months ended June 30, 1999. This decrease was primarily due to timing of
personnel replacements and additions. We anticipate that service gross margins
will decrease as a percentage of service revenue as staffing reaches planned
levels.
Gross margin increased 30% from $10.6 million for the three months ended
June 30, 1998 to $13.8 million for the three months ended June 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 29% from $1.7 million for
the three months ended June 30, 1998 to $2.2 million for the three months ended
June 30, 1999. This increase was primarily due to a 27% increase in personnel
costs and to a lesser degree a 12% 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.
24
<PAGE>
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 21% from $5.0 million for the three months ended
June 30, 1998 to $6.0 million for the three months ended June 30, 1999. This
increase was primarily due to an 18% increase in sales and marketing personnel
costs. We anticipate that sales and marketing expenses will increase in absolute
dollars and as a percentage of total revenue 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 increased 15% from
$815,000 for the three months ended June 30, 1998 to $937,000 for the three
months ended June 30, 1999. This increase was primarily due to a 21% increase in
general and administrative personnel costs and increases in other costs
associated with our growth. 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.
INTEREST INCOME, NET. Interest income, net of interest expense, increased
36% from $200,000 for the three months ended June 30, 1998 to $272,000 for the
three months ended June 30, 1999. This increase was primarily due to an increase
in our cash balances.
PROVISION FOR INCOME TAXES. The provision for income taxes increased from
$1.2 million for the three months ended June 30, 1998 to $1.8 million for the
three months ended June 30, 1999, primarily due to higher pre-tax income. Our
effective tax rate remained constant at 36% for the three months ended June 30,
1998 and for the three months ended June 30, 1999.
YEARS ENDED MARCH 31, 1998 AND 1999
REVENUE
Total revenue increased 58% from $42.8 million for the fiscal year ended
March 31, 1998 to $67.6 million for the fiscal year ended March 31, 1999.
PRODUCT. Product revenue increased 44% from $35.0 million for the fiscal
year ended March 31, 1998 to $50.4 million for the fiscal year ended March 31,
1999. This increase was primarily due to a 25% growth in unit sales attributable
to a 51% increase in the number of sales personnel, an increase in shipments to
existing indirect channel partners and, to a lesser extent, the addition of 50
indirect channel partners. This increase was also due to an 18% increase in
average selling price due to larger volumes of Wide Area Network, Asynchronous
Transfer Mode and Fast Ethernet probes.
SERVICE. Service revenue increased 69% from $5.1 million for the fiscal
year ended March 31, 1998 to $8.7 million for the fiscal year ended March 31,
1999. This increase was primarily due to an increase in support agreements
attributable to new product sales and, to a lesser degree, an increase in the
sale of support agreements to new and existing customers attributable to
increased sales and marketing efforts. This increase was also due to a reduction
of our software and service support period accompanying product sales from 12
months to three months in January 1998.
LICENSE AND ROYALTY. License and royalty revenue increased 214% from $2.7
million for the fiscal year ended March 31, 1998 to $8.5 million for the fiscal
year ended March 31, 1999. This increase was primarily due to a proportionate
growth in unit sales of our software and embedded software products by Cisco.
25
<PAGE>
COST OF REVENUE
PRODUCT. Cost of product revenue increased 52% from $12.6 million for the
fiscal year ended March 31, 1998 to $19.3 million for the fiscal year ended
March 31, 1999. This increase was primarily due to the increase in unit sales
and a 22% increase in the average cost per unit. Product gross margins decreased
from 64% for the fiscal year ended March 31, 1998 to 62% for the fiscal year
ended March 31, 1999. This decrease was primarily due to a shift toward indirect
sales which tend to have higher discounts than direct sales and, to a lesser
extent, larger direct sales transactions which also tend to have higher
discounts. These factors were partially offset by an increase in operating
efficiencies.
SERVICE. Cost of service revenue increased 58% from $784,000 for the fiscal
year ended March 31, 1998 to $1.2 million for the fiscal year ended March 31,
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 increased from 85% for the fiscal year ended March 31, 1998 to 86% for
the fiscal year ended March 31, 1999. This increase was primarily due to timing
of personnel replacements and additions.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses increased 47%
from $5.1 million for the fiscal year ended March 31, 1998 to $7.5 million for
the fiscal year ended March 31, 1999. This increase was primarily due to a 40%
increase in research and development personnel costs and a 49% increase in
consulting costs.
SALES AND MARKETING. Sales and marketing expenses increased 50% from $13.6
million for the fiscal year ended March 31, 1998 to $20.4 million for the fiscal
year ended March 31, 1999. This increase was primarily due to a 53% increase in
sales and marketing personnel costs and a 114% increase in marketing programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
39% from $3.0 million for the fiscal year ended March 31, 1998 to $4.1 million
for the fiscal year ended March 31, 1999. This increase was primarily due to a
30% increase in general and administrative personnel costs and increases in
other costs associated with our growth.
INTEREST INCOME, NET. Interest income, net of interest expense, increased
25% from $743,000 for the fiscal year ended March 31, 1998 to $926,000 for the
fiscal year ended March 31, 1999. This increase was primarily due to an increase
in our cash balances.
PROVISION FOR INCOME TAXES. The provision for income taxes increased from
$3.1 million for the fiscal year ended March 31, 1998 to $5.7 million for the
fiscal year ended March 31, 1999, primarily due to higher pre-tax income. Our
effective tax rate remained constant at 36% for the fiscal year ended March 31,
1998 and for the fiscal year ended March 31, 1999.
YEARS ENDED MARCH 31, 1997 AND 1998
REVENUE
Total revenue increased 40% from $30.6 million for the fiscal year ended
March 31, 1997 to $42.8 million for the fiscal year ended March 31, 1998.
PRODUCT. Product revenue increased 39% from $25.2 million for the fiscal
year ended March 31, 1997 to $35.0 million for the fiscal year ended March 31,
1998. This increase was primarily due to 26% growth in unit sales attributable
to a 27% increase in the number of sales personnel and an increase in shipments
to existing indirect channel partners and, to a lesser extent, the addition of
42 indirect distribution partners. This increase was also due to an 11% increase
in the average selling price
26
<PAGE>
attributable to an increase in the sale of Wide Area Network, Fast Ethernet and
multi-port probes and the introduction of the HSSI probe.
SERVICE. Service revenue increased 32% from $3.9 million for the fiscal
year ended March 31, 1997 to $5.1 million for the fiscal year ended March 31,
1998. This increase was primarily due to an increase in support agreements
attributable to new product sales and, to a lesser degree, 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 68% from $1.6
million for the fiscal year ended March 31, 1997 to $2.7 million for the fiscal
year ended March 31, 1998. This increase was primarily due to a proportionate
growth in unit sales of our software and embedded software products by Cisco.
COST OF REVENUE
PRODUCT. Cost of product revenue increased 34% from $9.4 million for the
fiscal year ended March 31, 1997 to $12.6 million for the fiscal year ended
March 31, 1998. The increase was primarily due to the increase in unit sales and
a 12% increase in average cost per unit. Product gross margins increased from
63% for the fiscal year ended March 31, 1997 to 64% for the fiscal year ended
March 31, 1998. This was primarily due to an increase in operational
efficiencies.
SERVICE. Cost of service revenue increased 48% from $528,000 for the fiscal
year ended March 31, 1997 to $784,000 for the fiscal year ended March 31, 1998.
This increase was primarily due to a 48% increase in service personnel costs to
support the increase in the installed customer base. Service gross margins
decreased from 86% for the fiscal year ended March 31, 1997 to 85% for the
fiscal year ended March 31, 1998. This was primarily due to the increase in
service personnel.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses increased 71%
from $3.0 million for the fiscal year ended March 31, 1997 to $5.1 million for
the fiscal year ended March 31, 1998. This increase was primarily due to an 82%
increase in research and development personnel costs and a 27% increase in
consulting costs related to development of new products and enhancements to
existing products.
SALES AND MARKETING. Sales and marketing expenses increased 100% from $6.8
million for the fiscal year ended March 31, 1997 to $13.6 million for the fiscal
year ended March 31, 1998. This increase was primarily due to a 116% increase in
sales and marketing personnel costs and an 89% increase in marketing programs,
including trade shows, seminars and advertising.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
63% from $1.8 million for the fiscal year ended March 31, 1997 to $3.0 million
for the fiscal year ended March 31, 1998. This increase was primarily due to an
81% increase in general and administrative personnel costs and increases in
other costs to support our growth and the related move to new facilities in
November 1997.
INTEREST INCOME, NET. Interest income, net of interest expense, increased
61% from $461,000 for the fiscal year ended March 31, 1997 to $743,000 for the
fiscal year ended March 31, 1998. The increase was primarily due to an increase
in our cash balances.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased from
$3.6 million for the fiscal year ended March 31, 1997 to $3.1 million for the
fiscal year ended March 31, 1998. This decrease was primarily due to lower
pre-tax income and, to a lesser degree, a decrease in our effective
27
<PAGE>
tax rate. Our effective tax rate decreased from 38% for the fiscal year ended
March 31, 1997 to 36% for the fiscal year ended March 31, 1998 primarily due to
the reinstatement of the Research and Development Tax Credit in 1998.
INCOME FROM OPERATIONS. Income from operations decreased 15% from $9.1
million for the fiscal year ended March 31, 1997 to $7.7 million for the fiscal
year ended March 31, 1998. Income from operations during the fiscal year ended
March 31, 1997 was favorably impacted by higher than anticipated revenue coupled
with expenses that did not increase proportionately.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth a summary of NetScout's unaudited quarterly
operating results for each of the eight quarters included in the period ended
June 30, 1999. This information has been derived from unaudited interim
consolidated financial statements that, in the opinion of management, have been
prepared on a basis consistent with the audited consolidated financial
statements contained elsewhere in this prospectus and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such information when read in conjunction with our audited
consolidated financial statements and notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1998 1998 1998 1998 1999 1999
----------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
STATEMENT OF INCOME DATA:
Revenue:
Product............................. $ 7,710 $ 9,722 $ 11,046 $ 11,547 $ 11,863 $ 13,327 $ 13,637 $ 12,814
Service............................. 1,033 1,230 1,688 1,873 2,284 2,172 2,381 2,465
License and royalty................. 788 686 924 1,843 1,999 1,972 2,653 3,792
----------- --------- --------- --------- --------- --------- --------- ---------
Total revenue..................... 9,531 11,638 13,658 15,263 16,146 17,471 18,671 19,071
----------- --------- --------- --------- --------- --------- --------- ---------
Cost of revenue:
Product............................. 2,649 3,488 4,339 4,340 4,347 4,927 5,636 4,814
Service............................. 152 222 274 296 320 222 397 413
----------- --------- --------- --------- --------- --------- --------- ---------
Total cost of revenue............. 2,801 3,710 4,613 4,636 4,667 5,149 6,033 5,227
----------- --------- --------- --------- --------- --------- --------- ---------
Gross margin.......................... 6,730 7,928 9,045 10,627 11,479 12,322 12,638 13,844
----------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development............ 1,196 1,277 1,586 1,732 1,760 1,803 2,231 2,241
Sales and marketing................. 2,984 3,837 4,205 5,008 4,527 5,191 5,649 6,040
General and administrative.......... 586 746 1,038 815 1,213 1,030 1,046 937
----------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses.......... 4,766 5,860 6,829 7,555 7,500 8,024 8,926 9,218
----------- --------- --------- --------- --------- --------- --------- ---------
Income from operations................ 1,964 2,068 2,216 3,072 3,979 4,298 3,712 4,626
Interest income, net.................. 176 194 188 200 243 224 259 272
----------- --------- --------- --------- --------- --------- --------- ---------
Income before provision for income
taxes............................... 2,140 2,262 2,404 3,272 4,222 4,522 3,971 4,898
Provision for income taxes............ 771 814 865 1,178 1,520 1,629 1,388 1,764
----------- --------- --------- --------- --------- --------- --------- ---------
Net income............................ $ 1,369 $ 1,448 $ 1,539 $ 2,094 $ 2,702 $ 2,893 $ 2,583 $ 3,134
----------- --------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
28
<PAGE>
AS A PERCENTAGE OF TOTAL REVENUE:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1998 1998 1998 1998
----------- ----------- ----------- ----------- ----------- -----------
Revenue:
Product................................... 80.9% 83.5% 80.9% 75.7% 73.5% 76.3%
Service................................... 10.8 10.6 12.4 12.3 14.1 12.4
License and royalty....................... 8.3 5.9 6.7 12.0 12.4 11.3
----- ----- ----- ----- ----- -----
Total revenue........................... 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- -----
Cost of revenue:
Product................................... 27.8 30.0 31.8 28.4 26.9 28.2
Service................................... 1.6 1.9 2.0 2.0 2.0 1.3
----- ----- ----- ----- ----- -----
Total cost of revenue................... 29.4 31.9 33.8 30.4 28.9 29.5
----- ----- ----- ----- ----- -----
Gross margin................................ 70.6 68.1 66.2 69.6 71.1 70.5
----- ----- ----- ----- ----- -----
Operating expenses:
Research and development.................. 12.5 11.0 11.6 11.4 10.9 10.3
Sales and marketing....................... 31.3 33.0 30.8 32.8 28.0 29.7
General and administrative................ 6.1 6.4 7.6 5.3 7.5 5.9
----- ----- ----- ----- ----- -----
Total operating expenses................ 49.9 50.4 50.0 49.5 46.4 45.9
----- ----- ----- ----- ----- -----
Income from operations...................... 20.7 17.7 16.2 20.1 24.7 24.6
Interest income, net........................ 1.8 1.7 1.4 1.3 1.5 1.3
----- ----- ----- ----- ----- -----
Income before provision for income taxes.... 22.5 19.4 17.6 21.4 26.2 25.9
Provision for income taxes.................. 8.1 7.0 6.3 7.7 9.4 9.3
----- ----- ----- ----- ----- -----
Net income.................................. 14.4% 12.4% 11.3% 13.7% 16.8% 16.6%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<CAPTION>
<S> <C> <C>
MAR. 31, JUNE 30,
1999 1999
----------- -----------
Revenue:
Product................................... 73.0% 67.2%
Service................................... 12.8 12.9
License and royalty....................... 14.2 19.9
----- -----
Total revenue........................... 100.0 100.0
----- -----
Cost of revenue:
Product................................... 30.2 25.2
Service................................... 2.1 2.2
----- -----
Total cost of revenue................... 32.3 27.4
----- -----
Gross margin................................ 67.7 72.6
----- -----
Operating expenses:
Research and development.................. 11.9 11.8
Sales and marketing....................... 30.3 31.7
General and administrative................ 5.6 4.9
----- -----
Total operating expenses................ 47.8 48.4
----- -----
Income from operations...................... 19.9 24.2
Interest income, net........................ 1.4 1.4
----- -----
Income before provision for income taxes.... 21.3 25.6
Provision for income taxes.................. 7.5 9.2
----- -----
Net income.................................. 13.8% 16.4%
----- -----
----- -----
</TABLE>
NetScout's total revenue has increased each of the eight consecutive
quarters in the period ended June 30, 1999. Product revenue increased in
absolute dollars in each consecutive quarter, other than the quarter ended June
30, 1999, due to increased market acceptance of our products and diversification
of our sales channels, including expansion of our sales force and relationships
with indirect channel partners. Product revenue was negatively impacted in the
quarter ended June 30, 1999 by the timing of sales personnel additions, as well
as the restructuring of our sales force. Service revenue generally increased due
to the growth in our customer base and new initiatives to sell support
agreements. License and royalty revenue generally increased but fluctuated due
to variability in the sales of software products by, and royalty revenue from,
Cisco.
Cost of product revenue increased in absolute dollars in each consecutive
quarter, other than the quarter ended June 30, 1999, primarily due to higher
unit volumes but fluctuated as a percentage of product revenue primarily due to
changes in the distribution channel and, to a lesser degree, variability of
component costs and the product mix. Cost of product revenue decreased in the
quarter ended June 30, 1999 due to lower product revenue. Cost of service
revenue generally increased in absolute dollars primarily due to the hiring of
additional support personnel and related costs for customer support with the
exception of the quarter ended December 31, 1998, when timing of personnel
replacements and additions resulted in lower expenses. Cost of service revenue
fluctuated as a percentage of service revenue primarily due to variability in
staffing levels.
Gross margin increased in absolute dollars in each consecutive quarter.
Gross margin as a percentage of total revenue fluctuated due to the mix of
product, service and license and royalty revenue and by the proportion of sales
through direct versus indirect distribution channels. Gross
29
<PAGE>
margin, as a percentage of total revenue, was favorably impacted during the
quarter ended June 30, 1999 as a result of an increase in license and royalty
revenue as a percentage of total revenue.
Research and development expenses increased in absolute dollars each quarter
primarily due to the hiring of additional research and development personnel and
higher consulting costs associated with enhancing existing products and
developing new products. Research and development expenses fluctuated as a
percentage of total revenue primarily due to the timing of research and
development personnel additions.
Sales and marketing expenses generally increased in absolute dollars each
quarter primarily due to the hiring of additional sales and marketing personnel
and an increase in marketing program activities. A reduction in marketing
activities for the quarter ended September 30, 1998 resulted in a decrease in
overall sales and marketing expenses for that quarter. Sales and marketing
expenses fluctuated as a percentage of total revenue primarily due to
variability in marketing expenditures and our internal hiring cycles for sales
and marketing personnel.
General and administrative expenses fluctuated but generally increased in
absolute dollars primarily due to the hiring of additional financial,
information services and human resources personnel, as well as increased use of
outside services. General and administrative expenses have fluctuated as a
percentage of total revenue primarily due to variability in purchases of outside
services.
Our operating results have varied on a quarterly basis during our operating
history and are expected to fluctuate significantly in the future. A variety of
important factors, many of which are outside of our control, may affect our
quarterly operating results. See "Risk Factors--Disappointing quarterly
operating results could cause our common stock price to decrease."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded operations primarily through cash provided
by operating activities. At June 30, 1999, we had cash and cash equivalents
totaling $22.9 million. 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, which was 7.75% on June 30, 1999. At June 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 provided by operating activities was $8.4 million, $6.7 million and
$12.8 million for the fiscal years ended March 31, 1997, 1998 and 1999, and $1.1
million for the three months ended June 30, 1998. Cash provided by operating
activities was primarily derived from net income and, to a lesser degree,
increases in deferred revenue, accrued expenses, and depreciation and
amortization in each period. This was partially offset by increases in accounts
receivable in fiscal 1998, 1999 and the three months ended June 30, 1998, and
increases in inventories in fiscal 1997 and 1998. All of these increases were
due to the growth of our business.
Cash used by operating activities was $1.0 million for the three months
ended June 30, 1999. Cash used by operating activities was the result of an
increase in accounts receivable and a decrease in accounts payable, which were
offset by net income.
Cash used by investing activities was $9.7 million and $6.9 million for the
fiscal years ended March 31, 1997 and 1998. Cash used by investing activities in
fiscal 1997 and 1998 was primarily due to purchases of marketable securities and
purchases of fixed assets and, in fiscal 1997, also due to loans that were made
to stockholders. Cash provided by investing activities was $6.3 million for
fiscal 1999, which was primarily due to the maturity of marketable securities,
partially offset by purchases of fixed assets. Cash used by investing activities
was $1.6 million for the three months ended June 30, 1999 due to the purchase of
fixed assets.
30
<PAGE>
Cash provided by financing activities was $2,000, $22,000 and $22,000 for
the fiscal years ended March 31, 1997, 1998 and 1999, and $68,000 for the three
months ended June 30, 1999, all primarily due to proceeds received upon the
exercise of stock options. In January 1999, we received gross proceeds of $44.5
million from the sale of Class B Convertible Common Stock, and all of the
proceeds were used to redeem shares of Series A Preferred Stock, Non-Voting
Common Stock and common stock.
As of June 30, 1999, our primary commitments consisted of obligations
outstanding under operating leases. Future noncancelable minimum lease
commitments are $861,000, $959,000, $1.0 million, and $683,000 for fiscal years
2000, 2001, 2002 and 2003.
We expect to experience growth in our working capital needs for the
foreseeable future in order to execute our business plan. We anticipate that
operating activities, as well as planned capital expenditures, will constitute a
material use of our cash resources. In addition, we may utilize cash resources
to fund acquisitions or investments in complementary businesses, technologies or
products. We believe that the net proceeds from this offering, together with our
current cash and cash equivalents and cash generated from operations, will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the next 12 months.
YEAR 2000 READINESS DISCLOSURE
Many computers and software products accept only two digit entries in date
fields which could cause problems distinguishing 21st century dates from 20th
century dates. 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:
- our own products;
- our internal information systems and equipment-related systems; and
- 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, except as set forth
in the next sentence, our products are year 2000 compliant. The NetScout WebCast
Unix and Windows NT products are not currently year 2000 compliant but are
expected to be made year 2000 compliant in the next product release, which is
planned for the third calendar quarter of 1999. 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 the 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 system is year 2000 compliant. We anticipate that our
financial and accounting systems will be upgraded during the third 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 are in the process of being tested and upgraded. We
believe that our review of our internal information systems and
equipment-related systems is 90% complete. We expect that our review of our
internal systems and equipment related systems will be finalized prior to the
end of the third calendar quarter and that such systems will be
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fully compliant by the end of the third calendar quarter of 1999. 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. To
date, we have not conducted a year 2000 review of our suppliers or indirect
channel partners. We are currently evaluating the need to conduct a review of
our suppliers' and indirect channel partners' year 2000 compliance issues.
Failure of our suppliers' systems 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 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. We have not used any independent verification
or validation processes to support our assertions regarding year 2000 risks and
cost estimates. We do not expect to incur significant costs in the foreseeable
future. However, since the identification and evaluation process is ongoing and
year 2000 complications are not fully known, 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.
Purchasing patterns of our customers or potential customers may be affected
by year 2000 issues. They may expend significant resources to correct their
current systems for year 2000 compliance which could result in reduced funds
available for network management products. Year 2000 complications could also
disrupt the operations of our customers which could delay purchases of network
management products. Reduced funds or delayed purchases could 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 complaint. If such original equipment manufacturer products are not
year 2000 complaint, 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 complaint could have a material adverse
effect on our business, results of operations 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 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.
We do not currently have any year 2000 contingency plans. If we discover
year 2000 compliance issues, we intend to evaluate the need for one or more
contingency plans relating to such issues.
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 marketable securities. Cash equivalents and
marketable securities are stated at amortized cost plus accrued interest,
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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.
EUROPEAN MONETARY UNION
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 result of
operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 establishes the accounting for costs of
software products developed or purchased for internal use, including when such
costs should be capitalized. We do not expect SOP 98-1, which is effective for
us beginning April 1, 1999, to have a material effect on our financial condition
or results of operations.
In April 1998, the Accounting Standards Executive Committee issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities." Start-up activities are defined
broadly as those one-time activities relating to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer, commencing some new operation
or organizing a new entity. Under SOP 98-5, the cost of start-up activities
should be expensed as incurred. SOP 98-5 is effective for our fiscal year 2000
financial statements and we do not expect its adoption to have a material effect
on our financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The new standard establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal year quarters of fiscal years beginning after June 15,
1999. We do not expect SFAS No. 133 to have a material effect on our financial
condition or results of operations.
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BUSINESS
INTRODUCTION
We design, develop, manufacture, market and support a family of products
that enable businesses and network service providers to manage the performance
of their computer networks and software applications. Our Application Flow
Management 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.
Application Flow Management consists of data collection products as well as
analysis and presentation software. Our data collection products collect,
aggregate and analyze network and application data from a wide range of network
technologies. Using this data, our presentation and analysis software products
provide current information to computer network managers and business executives
in an easy-to-use, graphical format.
INDUSTRY BACKGROUND
Business enterprises increasingly rely on software applications and computer
networks as strategic assets that are essential to business operations. Computer
networks are being expanded to deliver important software applications, such as
enterprise resource planning, e-mail, order entry, accounting and Web-based
applications, to employees, suppliers, distributors and customers. Because of
the dramatic increase in the number of users who depend on fast and reliable
computer network access, even minor computer network malfunctions can result in
significant business interruptions, lost revenue, decreased productivity and
customer dissatisfaction. As a result, businesses are recognizing the critical
importance of effective network and application performance management.
To support the growing number of users and demand for faster and more
reliable computer network access, both business enterprises and providers of
outsourced network and application management services are making significant
investments in advanced networking technology. The Gartner Group, a leading
networking industry research company, estimates that the world-wide enterprise
networking equipment market, excluding Internet remote access equipment, was
$37.4 billion in 1998. This growth has resulted in the introduction of new
technologies addressing network speed and access, such as Fast Ethernet, Gigabit
Ethernet, Asynchronous Transfer Mode and IP/Internet, and new network products
addressing quality of service and security. The implementation of new
technologies and products from a variety of vendors has resulted in
highly-complex computer networks, which are more difficult to manage.
Traditional network performance management is a reactive process in which
computer network managers respond to problems only after computer network
performance has been impacted. This type of network performance management is
based on receiving alerts from malfunctioning computer network devices or calls
from computers network users indicating that performance has degraded.
Highly-skilled technicians with portable network traffic analyzers are then
dispatched to diagnose and resolve the computer network problems. While this
approach helps computer network managers respond to technical problems, it does
not provide sufficient information to proactively manage the overall computer
network, measure the performance of software applications, or address issues
with computer network design. A further drawback of this approach is that
network problems are often addressed by adding costly network capacity instead
of identifying and correcting inefficiencies.
A new, proactive approach is emerging that is designed to anticipate and
help prevent computer network problems before performance is degraded. This
approach is based on analytical software that retrieves and analyzes information
from data sources located on the computer network. These data sources include
existing computer network devices, such as routers, switches and hubs, data
collection software agents, and dedicated data collection devices, known as
probes.
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One class of proactive network management products relies on retrieving data
from existing computer network devices. These products generally report on
computer network utilization for use in network capacity planning and device
status monitoring which can help prevent certain types of failures. Because this
class of products relies on limited, predefined data, originally intended for
device management, it provides minimal information regarding network users or
software application performance. These solutions typically provide only
historical and end-of-period reports because providing current information would
significantly increase network traffic.
A second class of proactive network management products relies on retrieving
data from proprietary software installed on users' desktop computers. These
solutions provide information regarding software application performance, but
offer limited insight into the performance of the network. In addition, these
solutions can be difficult to administer and can burden the processing power of
desktop computers.
A third class of proactive network management products relies on placing
probes on key parts of the computer network to provide continuous monitoring of
computer network traffic. Comprised of dedicated computer hardware and software,
most probes are based on the remote monitoring standard. In contrast with
approaches that utilize existing network devices, probes contain proprietary
software which allows the capture of a richer set of network information. In
contrast with approaches that require the installation of software on desktop
computers, probes contain processors which can capture, store and analyze
traffic data on a computer network segment without impacting any existing
devices on the computer network. Although probes provide the most robust data
about network performance, most probes are unable to provide information
regarding application performance, such as response time.
Business executives and computer network managers need a comprehensive
approach to network and application performance management that enables them to
anticipate and address network performance problems and align their computer
resources to their business strategies. Although each of the new, proactive
network management approaches provides better solutions than the traditional
reactive approach, none of these approaches provides the ability to manage both
network and application performance.
NETSCOUT SOLUTION
We design, develop, manufacture, market and support a family of products to
enable business managers to manage both network and application performance,
which together comprise our Application Flow Management solution. Application
Flow Management uses proprietary technology to deliver more functionality than
other solutions. Our probes collect, aggregate and perform detailed analysis on
a wide range of computer network data, including data from individual software
applications. We believe that we currently offer the industry's most extensive
family of probes, with models for a wide range of network technologies. In
addition, our robust analytical software provides current network and
application performance information in an easy-to-use, graphical format.
Application Flow Management addresses the following key aspects of network
management:
- APPLICATION RESPONSE TIME MEASUREMENT-Measures and provides detailed,
current information on application response time over the computer
network. This information enables network managers 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. When network problems do
occur, detailed information expedites troubleshooting to minimize the
impact.
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- CAPACITY PLANNING-Measures trends in network usage by individual software
application. Helps network managers make informed network spending
decisions.
- POLICY ENFORCEMENT-Allows network managers to identify inappropriate or
wasteful usage of the computer network. Network managers can use this
information to ensure adherence to corporate policies and guidelines.
- ACCOUNTING AND CHARGE-BACK-Provides network usage information by user,
department or application. When used in conjunction with accounting
software packages, it allows customers to charge for internal network
usage.
STRATEGY
Our objective is to enhance our leadership position in the network and
application performance management market. Key elements of our strategy include:
EXTEND TECHNOLOGY LEADERSHIP. We intend to continue to devote significant
resources to the development of new and innovative products, capitalizing on our
extensive experience with large computer networks and our understanding of
customer needs. As computer networks evolve, we intend to incorporate new
technologies and provide solutions to enable businesses to manage and optimize
the performance of their computer networks and critical software applications.
We have an extensive track record of innovation, including the introduction of
Ethernet probes in 1992, Wide Area Network probes in 1993, switch embedded
probes and CDDI/FDDI probes in 1995, Fast Ethernet probes in 1996, Wide Area
Network (T3) probes in 1997, Asynchronous Transfer Mode probes in 1998, and
Channelized Wide Area Network and Fast EtherChannel probes in 1999. We are
currently developing a Gigabit Ethernet probe that is planned for release later
in 1999.
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.
LEVERAGE INSTALLED BASE OPPORTUNITIES. We have sold a majority of our
products through indirect distribution channels and have also sold our products
directly to over 600 customers. Our installed base consists of over 25,000
hardware probes and over 50,000 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 data collection devices throughout their
computer networks and the adoption of our management software options.
TARGET NEW MARKET OPPORTUNITIES. We market our products to potential
customers in markets which we believe have the potential for growth. We have
identified the following markets as having the potential for strong demand for
our products:
- network management outsourcing companies, such as Compaq and WANG Global;
- connectivity service providers, such as MCI Worldcom and Concert
Communications Company; and
- application management outsourcing companies, which we believe is an
emerging market.
CONTINUE TO LEVERAGE CISCO RELATIONSHIP. Since 1994, we have had a
strategic relationship with Cisco. Our strategy is to further synchronize our
product development and marketing activities with Cisco's business strategy, and
to support Cisco's 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.
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EXPAND DISTRIBUTION CHANNELS. We plan to substantially increase the number
of our field sales representatives. We also seek to develop additional indirect
distribution channels to promote our products, including computer networking
equipment and software application vendors, system integrators, distributors,
resellers and service providers. We have strategic relationships with Paradyne
Corporation, WaveTek Wandel Goltermann, Inc., FORE Systems, Inc. and Compaq
Computer Corporation designed to facilitate the distribution and market
acceptance of our solutions. We are striving to increase sales outside of North
America through the addition of sales personnel and increased marketing
activities to support our indirect channel partners, including Cisco.
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
Concord Communications, Inc., DeskTalk Systems, Inc. and Apogee Networks, 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.
PRODUCTS AND TECHNOLOGY
Our Application Flow Management solution provides computer network and
application performance management through three layers of products:
Graphic depicting the three layers of our products: Data Collection, Data
Aggregation and Information and Presentation Analysis
Our products are generally purchased as a complete system, consisting of
multiple data sources, presentation and analysis software and optional data
aggregation software for larger networks. A representative new customer would be
a multinational corporation that deploys 25 to 50 probes, data aggregation
software and our full suite of presentation and analysis software over a
12-month period. Depending on the type of network, such a deployment would
typically cost between $100,000 and $300,000. After initial deployment of our
solution, a customer can add additional probes and management software options
on an individual basis. Our solution has been deployed in networks employing
more than 500 probes.
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:
- 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.
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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 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.
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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.
SALES AND MARKETING
We sell our products through indirect distribution channels and a direct
sales force. Our indirect channel partners include original equipment
manufacturers, distributors, resellers, system integrators and service
providers. Revenue from indirect distribution channels represented 73%, 76% and
81% of total revenue for the fiscal years ended March 31, 1997, 1998 and 1999,
and 82% of total revenue for each of the three months ended June 30, 1998 and
1999. Revenue from sales to Cisco, our largest indirect channel partner,
represented 24%, 40% and 51% of total revenue for the fiscal years ended March
31, 1997, 1998 and 1999, and 44% of total revenue for each of the three months
ended June 30, 1998 and 1999.
Our direct sales force works in cooperation with our indirect channel
partners and devotes significant efforts to support sales through indirect
distribution channels. We plan to increase the number of our field sales
representatives, which we believe will promote additional direct and indirect
sales.
We use a consultative sales approach. Our inside sales representatives
pre-qualify opportunities and set up appointments for members of the field sales
team. An initial sales meeting will generally consist of a review of the
prospect's specific computer network and application performance management
needs and a demonstration of our products' capabilities. Often, the
demonstration will be followed by a product evaluation on the customer's
network. Our sales representative will often encourage one of our indirect
channel partners to participate in the sales process. In addition, our indirect
channel partners often request that we participate in sales presentations to
their customers.
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, 1997, 1998 and 1999, and
14% and 19% of total revenue for the three months ended June 30, 1998 and 1999.
We believe that our North American indirect channel partners also resell a
significant amount of our products internationally.
As of June 30, 1999, our North American field sales organization consisted
of 48 employees. Our international field sales organization consisted of 11
employees with an office in the United Kingdom. In addition, we had 21 employees
responsible for providing telesales and sales and administrative support. In
addition to our Westford, Massachusetts headquarters, we have sales offices in
Maryland, North Carolina, Texas, Minnesota, Illinois, California, Oregon, and
Ontario, Canada.
A key element of our market penetration strategy is the formation of
strategic relationships with industry-leading network equipment vendors and
software suppliers in various complementary areas. We believe these
relationships increase our market presence and generate qualified opportunities
to sell our solutions. As of June 30, 1999, our business development
organization consisted of 7 employees.
Our marketing organization utilizes a variety of programs to promote the
sale and acceptance of our solutions. As of June 30, 1999, our marketing
organization consisted of 21 employees. Our marketing programs include:
- advertising;
- trade shows;
- public relations activities;
- direct mail;
- seminars and speaking engagements;
- brochures, data sheets and white papers; and
- Web marketing.
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STRATEGIC RELATIONSHIP WITH CISCO
Cisco is a significant distributor of our products under its private label.
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 and we provide development services to Cisco for which we receive
engineering fees. 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 May 15, 1996. These agreements have been amended
and were extended until October 2000.
We work closely with Cisco on joint sales and marketing efforts. These
include collaboration on product marketing, our participation in Cisco seminars,
joint customer presentations, introductions to Cisco's international
distributors and links between our web sites. We devote significant time and
attention of senior management, as well as resources throughout our company, to
making this partnership successful and believe that we have a strong business
relationship.
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CUSTOMERS
We sell our products to businesses and organizations with large and
medium-sized computer networks. We have sold a majority of our products through
indirect distribution channels and have also sold our products directly to over
600 customers. Our customers operate in a wide variety of industries, such as
financial services, transportation, manufacturing, insurance, retail and
software development. The following is a partial list of our customers:
<TABLE>
<S> <C>
3M Corporation Lockheed Martin Financial Services
Amoco Corporation Los Alamos National Laboratory
Army & Air Force Exchange Service Lotus Development Corp.
AT&T Mid America Energy Co.
Cargill Financial Services Merrill Corporation
CIGNA Corporation Morgan Stanley
Consumers Energy Company NationsBank
Deutsche Bank AG London NaviSite
Donaldson, Lufkin & Jenrette NCR
The GAP, Inc. Northwest Airlines
Fidelity Investments Providian Financial Corp
GTE Service Corporation State Street Bank and Trust
Global One Sun Microsystems, Inc.
Goldman Sachs & Co. Teradyne
Harvard Pilgrim Health Care Toys-R-Us
Lehman Brothers Xerox
Liberty Mutual Group
</TABLE>
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The following are examples of selected client applications of our products:
<TABLE>
<CAPTION>
THE PROBLEM NETSCOUT'S SOLUTION THE RESULT
<S> <C> <C>
Troubleshooting
Tektronix, Inc., a Using NetScout's solution, the Tektronix reconfigured its
manufacturing firm with 8,400 company monitored its network equipment and, as a result,
employees at 75 networked and identified a design issue order entry response times
locations in 23 countries, that originated with the improved.
wanted to improve order entry wide-area network service
response times and quality of provider.
customer service.
Capacity Planning
Charles Schwab Corporation, a Using NetScout's Application The company identified baseline
leading financial services Flow Management solution, the usage patterns, which helped
company with 10,000 employees company was able to understand them to intelligently plan and
at 350 sites, depended on its current and profile future implement infrastructure
network to process 200,000 capacity requirements for their expenditures. Our Application
online financial trades and network. Flow Management solution also
support up to 20 million Web identified remnants of a
site hits a day. Knowing the software test that was slowing
current and future capacity down a remote server,
requirements of this vast unnecessarily consuming network
network was essential to capacity. As a result, the
business. company avoided purchasing
unnecessary bandwidth capacity.
Usage-based Accounting
NCR, a large technology Using our Application Flow The program has just been
enterprise, had a network with Management solution, the implemented in Europe and is
12,500 users spanning 715 network operations center expected to be rolled out in
sites. The CEO wanted to designed a charge-back program the U.S. in the summer of 1999.
economize and challenged the for network usage. The program The company anticipates
network operations center to was based on quantifying substantial reductions in
control network costs. bandwidth usage and response overhead with network access
times by user and by tied to business goals.
application throughout the
network.
Application Deployment
Lockheed Martin, a large Using the NetScout solution to The network team was able to
aerospace defense contractor provide both application-level confirm that the wide-area
wanted to move its e-mail data and network-wide bandwidth network had adequate capacity.
system from a local server to a usage information, the company Our solution minimized the
remote server. This critical was able to determine the risks involved in a major
application had to continue current local server load and application deployment.
running smoothly, and the calculate how much data would
network team was unsure if the flow across the wide-area
wide-area network could handle network to the remote server.
the additional load.
</TABLE>
42
<PAGE>
SUPPORT SERVICES
We believe that providing a high level of customer service and support is
critical to achieving effective product implementation and ensuring customer
satisfaction. We offer a broad range of support and training services to our
customers and work closely with our indirect channel partners to provide
pre-sales and post-sales support.
We offer a toll-free technical support hotline to our customers under
support agreements and to our indirect channel partners. This hotline is staffed
by customer support engineers from 8:00 a.m. to 8:00 p.m., Eastern time, Monday
through Friday, from our corporate headquarters in Westford, Massachusetts. As
of June 30, 1999, our support services organization consisted of 12 employees.
RESEARCH AND DEVELOPMENT
We devote substantial resources to developing new products and enhancing
existing products. Our market is characterized by rapid technological change,
frequent product introductions and enhancements, evolving industry standards and
rapidly changing customer requirements. We have a long record of product
innovation, including:
<TABLE>
<CAPTION>
INFORMATION AGGREGATION
CALENDAR YEAR AND
INTRODUCED PROBES AND AGENTS PRESENTATION SOFTWARE
<S> <C> <C>
1992 Ethernet, Token Ring NetScout Manager
1993 -- --
1994 Wide Area Network Resource Monitor
1995 CDDI/FDDI, Switch Embedded --
1996 Fast Ethernet NetScout Manager Plus
1997 Wide Area Network (T3) NetScout Server, WebCast
1998 Asynchronous Transfer Mode --
1999 Channelized Wide Area Network, Fast AppScout
EtherChannel
1999 (Planned) Gigabit Ethernet --
</TABLE>
As of June 30, 1999, our research and development organization consisted of
58 employees. In addition, we contract with third parties to perform specific
development projects. Research and development expenditures for the fiscal years
ended March 31, 1997, 1998 and 1999 were approximately $3.0 million, $5.1
million and $7.5 million, and research and development expenditures for the
three months ended June 30, 1998 and 1999 were approximately $1.7 million and
$2.2 million. To date, all research and development expenses have been expensed
as incurred.
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
Hewlett-Packard, 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.
43
<PAGE>
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.
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 June 30, 1999, our manufacturing
organization consisted of 22 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 no 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.
INTELLECTUAL PROPERTY RIGHTS
Our success and competitiveness are dependent to a significant degree on the
protection of our proprietary technology. We rely primarily on a combination of
copyrights, trademarks, licenses, trade secret laws and restrictions on
disclosure to protect our intellectual property and proprietary rights. We also
enter into confidentiality agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information.
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. and the
European Union. We have filed applications for the NetScout trademark in Canada
and Japan, and those applications are still pending. In addition, we have
applications pending for the NetScout Logo and AppScout, in the U.S., Canada,
Europe and Japan. We are also pursuing registration in the U.S. for the
trademarks ART MIB, FrameScout and WebScout.
EMPLOYEES
As of June 30, 1999, we had 231 employees, 172 of whom were based at our
headquarters in Westford, Massachusetts. None of our employees is subject to a
collective bargaining agreement. We believe that our relations with our
employees are good.
FACILITIES
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 nine other cities for our sales and support
personnel. 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.
LEGAL PROCEEDINGS
From time to time we may be subject to legal proceedings and claims in the
ordinary course of our business, including claims of alleged infringement of
third party trademarks and other intellectual property rights by us. We are not
aware of any legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse effect on our business, financial
condition or results of operations.
44
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of NetScout are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Anil K. Singhal................................ 45 Chairman of the Board, Chief Executive Officer and
Treasurer
Narendra Popat................................. 50 President, Chief Operating Officer, Secretary and Director
Charles W. Tillett............................. 42 Vice President, Finance and Administration and Chief
Financial Officer
Nathan Kalowski................................ 54 Vice President, Business Development
Ashwani Singhal................................ 38 Vice President, Engineering
Gerald Stabile................................. 39 Vice President, Worldwide Sales and Services
Tracy Steele................................... 39 Vice President, Manufacturing
Michael Szabados............................... 47 Vice President, Marketing
Richard J. Egan................................ 63 Director
Joseph G. Hadzima, Jr.......................... 47 Director
Kenneth T. Schiciano........................... 36 Director
</TABLE>
- ------------------------
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 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
inception. Prior to founding NetScout, he was a Senior Software Engineer at Wang
Laboratories from 1980 until June 1984.
CHARLES W. TILLETT has served as NetScout's Vice President, Finance and
Administration since May 1995 and Chief Financial Officer since April 1999. Mr.
Tillett joined NetScout in July 1991 and served as Director of Finance and
Administration from July 1991 until May 1995. Prior to joining NetScout, he
served Fidelity Investments, a financial services firm, in various capacities,
most recently as Project Manager.
NATHAN KALOWSKI has served as NetScout's Vice President, Business
Development since August 1997. Mr. Kalowski joined NetScout in July 1993 and
served as Vice President, Marketing from July 1993 until August 1997. Prior to
joining NetScout, he was Vice President, Marketing for Proteon, a computer
networking company, from 1988 until May 1993. He has also held various
engineering, product management, marketing and executive positions at Texas
Instruments, a diversified electronics company, General Electric, a diversified
electronics company, and Digital Equipment Corporation, a computer hardware
company.
ASHWANI SINGHAL has served as NetScout's 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 as
Director of Engineering from February 1997 until October 1998. Prior to joining
NetScout, he was a Senior Software Engineer at Symmetrix, an artificial
intelligence
45
<PAGE>
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 NetScout's 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 NetScout's 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 until 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 devices, from March
1997 until 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 until January 1992 and as President from
1979 until January 1988. Mr. Egan is also a director of BEC Energy Company, a
public utility.
JOSEPH G. HADZIMA, JR. has served as a director of NetScout since July 1998.
Mr. Hadzima has been a Managing Director of Technology Enabling Company, LLC, a
venture capital investment 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 until 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 until December 1998. Mr. Hadzima is also a
Senior Lecturer at MIT Sloan School of Management.
KENNETH T. SCHICIANO has served as a director of NetScout since January
1999. Mr. Schiciano has been a Principal of TA Associates, Inc., a venture
capital firm, since December 1994. Mr. Schiciano served as a Vice President of
TA Associates from August 1989 until December 1994. Prior to that, Mr. Schiciano
was a member of the technical staff of AT&T Bell Laboratories, a
telecommunications company. Mr. Schiciano is also a director of Galaxy Telecom
L.P. and several privately-held companies.
The Board of Directors is currently fixed at five members. NetScout's
amended and restated certificate of incorporation, as in effect immediately
following this offering, 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
46
<PAGE>
- 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. 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 as may be brought to its attention.
DIRECTOR COMPENSATION
After this offering, non-employee directors will be reimbursed for their
reasonable out-of-pocket expenses incurred in attending meetings of the Board of
Directors or of any committee thereof. On July 14, 1998, we granted to Joseph
Hadzima, a member of the board of directors, an option to purchase 60,000 shares
of common stock vesting over a four-year period, at an exercise price of $4.00
per share. 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. Messrs. Popat, Egan and Hadzima each had certain
transactions with NetScout which we described in the "Certain Transactions"
section of this prospectus.
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 and as described under "Certain Transactions," 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 officers 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
- 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.
See "Certain Transactions."
47
<PAGE>
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the total compensation
paid or accrued for the fiscal year ended March 31, 1999 for the Chief Executive
Officer of NetScout and the four other most highly compensated executive
officers of NetScout other than the Chief Executive Officer, which 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
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)
- --------------------------------------------------------------------- --------- --------- -------------------
<S> <C> <C> <C>
Anil K. Singhal...................................................... 250,000 325,000 2,144
Chairman of the Board and
Chief Executive Officer
Narendra Popat....................................................... 250,000 325,000 2,144
President and Chief
Operating Officer
Charles W. Tillett................................................... 150,000 100,000 2,462
Vice President, Finance and
Administration and
Chief Financial Officer
Gerald Stabile....................................................... 136,800 152,500 --
Vice President, Worldwide
Sales and Services
Michael Szabados..................................................... 137,500 82,500 2,452
Vice President, Marketing
</TABLE>
- ------------------------
OPTION GRANTS IN LAST FISCAL YEAR
No stock option or stock appreciation rights were granted to any of the
Named Executive Officers during the fiscal year ended March 31, 1999.
48
<PAGE>
YEAR-END OPTION TABLE
The following table sets forth information regarding exercisable and
unexercisable stock options held as of March 31, 1999 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. There was no public trading
market for our common stock as of March 31, 1999. Accordingly, the value of
unexercised in-the-money options has been calculated by determining the
difference between the exercise price per share and an assumed initial public
offering price of $15.00.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ------------ ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Anil K. Singhal............ -- -- -- -- -- --
Narendra Popat............. -- -- -- -- -- --
Charles W. Tillett......... 116,875 1,043,107 -- 53,125 -- 757,031
Gerald Stabile............. 14,600 56,721 60,400 125,000 755,000 1,562,500
Michael Szabados........... 22,000 85,470 68,000 150,000 850,000 1,875,000
</TABLE>
- ------------------------
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. Under the 1990
Stock Option Plan, we are authorized to grant options to purchase shares of
common stock intended to qualify as incentive stock options as defined under
Section 422 of the Internal Revenue Code of 1986, as amended, to our employees.
In addition, we are authorized to grant non-qualified stock options to purchase
shares of common stock to employees, consultants and directors. 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 the unexercisable
options shall become 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 will or the laws of
descent 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 optionee's relationship with
NetScout in certain situations. As of June 30, 1999, an aggregate of 2,951,701
shares of common stock at a weighted average exercise price of $2.78 per share
were outstanding under the 1990 Stock Option Plan. No additional option grants
will be made under the 1990 Stock Option Plan.
1999 STOCK OPTION AND INCENTIVE PLAN. Our 1999 Stock Option and Incentive
Plan was adopted by our 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
49
<PAGE>
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 June 30, 1999, an aggregate of 287,750 shares of common stock, each at
an exercise price of $18.90 per share, were outstanding under the 1999 Stock
Option Plan.
1999 EMPLOYEE STOCK PURCHASE PLAN. The 1999 Employee Stock Purchase Plan
was adopted by our Board of Directors in April 1999 and was approved by our
stockholders in June 1999, to be effective upon the closing of this offering.
The 1999 Purchase Plan provides for the issuance of a maximum of 500,000 shares
of common stock.
The 1999 Purchase Plan will be 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 first payment period will commence on the earlier to occur of October 1,
1999 and the first day of the first calendar month following the effective date
of the Registration Statement on Form S-8 filed with respect to the shares
issued under the 1999 Purchase Plan and shall end March 31, 2000. Thereafter,
the payment periods will 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. 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. No options have been granted to date
under the 1999 Purchase Plan.
50
<PAGE>
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, 1998, we matched $.25
for each $1.00 of employee contributions up to 6% of salary. 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, 1998, 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 periods, an amount equal to 120% of
the amount received in the immediately preceding twelve months.
"Good reason" means 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 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.
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<PAGE>
CERTAIN TRANSACTIONS
In February 1996, NetScout issued 631,579 shares of its Series A Preferred
Stock to Greylock Equity Limited Partnership, at a purchase price of $9.50 per
share, for an aggregate of $6,000,000. Roger Evans, a general partner of the
general partner of Greylock, served as a member of the Board of Directors of
NetScout from February 1996 until January 1999. In January 1999, we redeemed
315,789 shares of Series A Preferred Stock as described below. Upon the closing
of this offering, the 315,790 outstanding shares of Series A Preferred Stock
will automatically convert, at a conversion price of $2.375 per share, into
1,263,160 shares of common stock.
In January 1999, NetScout issued 6,977,254 shares of its Class B Convertible
Common Stock at a purchase price of $6.388051 per share to certain affiliates of
TA Associates, Inc. for an aggregate consideration of $42,571,057 and to
Egan-Managed Capital, L.P. for an aggregate consideration of $1,999,997. In
connection with this transaction, Kenneth Schiciano and Richard Egan were
elected to the Board of Directors. Mr. Schiciano is a Principal of TA
Associates, Inc., which is either the manager or the general partner of the
general partner of the TA entities. Mr. Egan and his children own substantially
all of the equity interests in Egan-Managed Capital, L.P. All of the proceeds
from the Class B Convertible Common Stock financing were used to redeem shares
of Series A Preferred Stock, Non-Voting Common Stock and common stock from the
officers, directors and 5% stockholders and certain other persons as set forth
below.
<TABLE>
<CAPTION>
TYPE OF NUMBER OF AGGREGATE
SECURITY SHARES PAYMENT RECEIVED
NAME POSITION REDEEMED REDEEMED BY NAMED PARTY
- ------------------------- ------------------------- ------------------------- ------------- ----------------
<S> <C> <C> <C> <C>
Greylock Equity Limited 5% stockholder and Series A Preferred Stock 315,789 $ 8,069,105
Partnership formerly represented on (1,263,156
the Board of Directors common stock
equivalents)
Anil K. Singhal Chairman of the Board, Voting Common Stock 2,374,749 $ 15,170,018
Chief Executive Officer
and Treasurer
Narendra Popat President, Chief Voting Common Stock 2,374,749 $ 15,170,018
Operating Officer,
Secretary and Director
Charles W. Tillett Vice President, Finance Non-Voting Common Stock 190,000 $ 1,213,730
and Administration and
Chief Financial Officer
Nathan Kalowski Vice President, Business Non-Voting Common Stock 190,000 $ 1,213,730
Development
Ashwani Singhal Vice President, Non-Voting Common Stock 352,000 $ 2,248,594
Engineering
Gerald Stabile Vice President, Worldwide Non-Voting Common Stock 14,600 $ 93,266
Sales and Services
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TYPE OF NUMBER OF AGGREGATE
SECURITY SHARES PAYMENT RECEIVED
NAME POSITION REDEEMED REDEEMED BY NAMED PARTY
- ------------------------- ------------------------- ------------------------- ------------- ----------------
<S> <C> <C> <C> <C>
Tracy Steele Vice President, Non-Voting Common Stock 6,000 $ 38,328
Manufacturing
Michael Szabados Vice President, Marketing Non-Voting Common Stock 22,000 $ 140,537
Ralph Lowry Former Vice President, Non-Voting Common Stock 190,000 $ 1,213,730
International Sales
</TABLE>
Anil K. Singhal and Ashwani Singhal are brothers.
Upon closing of the offering, all of the 6,977,254 outstanding shares of
Class B Convertible Common Stock will automatically convert, at a conversion
price of $6.388051 per share, into an aggregate of 6,977,254 shares of common
stock. The holders of shares of common stock issuable upon conversion of the
Class B Convertible Common Stock have certain rights with respect to the
registration by NetScout of their shares. See "Description of Capital
Stock--Registration Rights."
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 is evidenced by a
promissory note and bears interest at 6.48% per annum, compounded semi-annually.
Accrued interest is payable on an annual basis. Each of Mr. Singhal and Mr.
Popat have agreed to repay the entire outstanding principal and interest on
these loans upon the closing of this offering.
Joseph G. Hadzima, Jr., a member of the Board of Directors since July 1998,
was a partner at the law firm of Sullivan & Worcester LLP until June 1996 and
since June 1996 has served as Of Counsel at Sullivan & Worcester. Sullivan &
Worcester was NetScout's counsel until October 1996.
Anil K. Singhal, Narendra Popat and Shirish Deodhar each own 33.3% of the
voting capital stock of Frontier Software Development Pvt. Ltd., a private
company located in Bombay and Pune, India. Frontier Software Development Pvt.
Ltd. provides software development services to NetScout for which we paid
approximately $352,000, $315,000 and $470,000 during fiscal years 1997, 1998 and
1999. Shirish Deodhar, who oversees the day-to-day operations of Frontier
Software Development Pvt. Ltd., is a holder of 200,000 shares of our Non-Voting
Common Stock. In February 1999, the Board of Directors of NetScout fully
accelerated the vesting schedule applicable to Mr. Deodhar's 200,000 shares of
Non-Voting Common Stock. Frontier Software Development Pvt. Ltd. sold a majority
of its assets to Veritas Software Corporation USA, a Delaware corporation, in
February 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 are currently in the process of being
transferred to NetScout.
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.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of June 30, 1999, 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;
- all executive officers and directors as a group; and
- the selling stockholders.
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 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 June 30, 1999 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.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED +
NUMBER OF SHARES ------------------------
BENEFICIALLY OWNED BEFORE AFTER
NAME OF BENEFICIAL OWNER + OFFERING OFFERING
- ------------------------------------------------------------------------ ------------------- ----------- -----------
<S> <C> <C> <C>
Anil K. Singhal(1)...................................................... 5,229,501 23.2% 19.7%
c/o NetScout Systems, Inc.
4 Technology Park Drive
Westford, MA 01886
Narendra Popat(2)....................................................... 5,229,501 23.2 19.7
c/o NetScout Systems, Inc.
4 Technology Park Drive
Westford, MA 01886
Charles W. Tillett(3)................................................... 461,125 2.0 1.7
Nathan Kalowski(4)...................................................... 434,186 1.9 1.6
Ashwani Singhal(5)...................................................... 848,000 3.8 3.2
Gerald Stabile(6)....................................................... 72,900 * *
Tracy Steele(7)......................................................... 57,125 * *
Michael Szabados(8)..................................................... 98,000 * *
Richard J. Egan(9)...................................................... -- -- --
c/o Egan-Managed Capital, L.P.
30 Federal Street
Boston, MA 02110-2508
Joseph G. Hadzima, Jr.(10).............................................. 633,678 2.8 2.4
c/o Technology Enabling Company, LLC
238 Main Street, Suite 400
Cambridge, MA 02142
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED +
NUMBER OF SHARES ------------------------
BENEFICIALLY OWNED BEFORE AFTER
NAME OF BENEFICIAL OWNER + OFFERING OFFERING
- ------------------------------------------------------------------------ ------------------- ----------- -----------
<S> <C> <C> <C>
Kenneth T. Schiciano(11)................................................ 16,680 * *
c/o TA Associates, Inc.
125 High Street
Boston, MA 02110
TA Entities(12)......................................................... 6,664,170 29.5 25.0
c/o TA Associates, Inc.
125 High Street
Boston, MA 02110
Greylock Equity Limited Partnership(13)................................. 1,263,160 5.6 4.6
c/o Greylock Management Corporation
One Federal Street
Boston, MA 02110
All executive officers and directors as a group (11 persons)(14)........ 12,944,648 56.6% 48.2%
</TABLE>
- ------------------------
* Less than 1% of the outstanding common stock.
+ The above table assumes no exercise of the over-allotment option to purchase
up to an aggregate of 600,000 shares of common stock. If the underwriters
exercise their over-allotment option in full, the stockholders identified
below will sell 600,000 shares of common stock pursuant to such option.
(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 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. Does not include 395,750 shares
held in a grantor retained annuity trust for the benefit of Mr. Singhal.
(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. Does not include 395,750
shares held in a grantor retained annuity trust for the benefit of Mr.
Popat; Mr. Hadzima is the sole trustee of such trust. If the underwriters'
over-allotment option is exercised in full, Mr. Popat will sell 200,000
shares of common stock.
(3) Includes 21,250 exercisable within 60 days of June 30, 1999. Excludes 31,875
shares issuable upon the exercise of options that become exercisable upon
the closing of this offering. If the underwriters' over-allotment option is
exercised in full, Mr. Tillett will sell 35,000 shares of common stock.
(4) Does not include 58,814 shares held in trusts for the benefit of Mr.
Kalowski's children. If the underwriters' over-allotment option is
excercised in full, Mr. Kalowski will sell 35,000 shares of common stock.
(5) Includes 40,300 shares owned by Mr. Singhal's wife. If the underwriters'
over-allotment option is excercised in full, Mr. Singhal will sell 50,000
shares of common stock.
(6) Consists of shares issuable upon the exercise of options exercisable within
60 days of June 30, 1999. Excludes 11,250 shares issuable upon the exercise
of options that become exercisable upon the closing of this offering.
(7) Consists of shares issuable upon the exercise of options exercisable within
60 days of June 30, 1999.
(8) Consists of shares issuable upon the exercise of options exercisable within
60 days of June 30, 1999.
55
<PAGE>
(9) 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.
(10) Includes 15,000 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 1999. 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. Includes 395,750 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 does not include
53,328 shares held in trust for the benefit of Mr. Hadzima's children. If
the underwriters' over-allotment option is exercised in full, Mr. Hadzima
will sell 10,000 shares of common stock.
(11) Consists of shares of TA Investors LLC beneficially owned by Mr. Schiciano.
Mr. Schiciano is a Principal 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.
(12) Includes 5,433,480 shares held by TA/Advent VIII L.P., of which 179,373
shares will be sold if the underwriters' over-allotment option is exercised
in full; 1,018,784 shares held by Advent Atlantic and Pacific III L.P., of
which 33,631 shares will be sold if the underwriters' over-allotment option
is exercised in full; 103,236 shares held by TA Executives Fund LLC, of
which 3,408 shares will be sold if the underwriters' over-allotment option
is exercised in full; and 108,670 shares held by TA Investors LLC, of which
3,588 shares will be sold if the underwriters' over-allotment option is
exercised in full. 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.
(13) Messrs. Henry F. McCance, Howard E. Cox, David N. Strohm, Roger L. Evans,
William W. Helman and William S. Kaiser, the general partners of the general
partner of Greylock Equity Limited Partnership, exercise shared voting and
investment power with respect to the 1,263,160 shares owned by Greylock
Equity Limited Partnership. Each of Messrs. McCance, Cox, Strohm, Evans,
Helman and Kaiser disclaims beneficial ownership of such shares except to
the extent of his respective proportionate pecuniary interest therein. If
the underwriters' over-allotment option is exercised in full, Greylock
Equity Limited Partnership will sell 50,000 shares of common stock.
(14) Includes an aggregate of 264,275 shares issuable upon exercise of options
exercisable within 60 days of June 30, 1999. Excludes 43,125 shares issuable
upon exercise of options that become exercisable upon the closing of this
offering.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering and the filing of NetScout's
Third Amended and Restated Certificate of Incorporation, the authorized capital
stock of NetScout will consist of 150,000,000 shares of common stock, par value
$.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per
share.
The following summary description of NetScout's capital stock, as of the
closing of this offering, is not intended to be complete and is qualified by
reference to the provisions of applicable law and to NetScout's Third Amended
and Restated Certificate of Incorporation and Amended and Restated By-laws filed
as exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
As of June 30, 1999, there were 22,588,637 shares of common stock
outstanding and held of record by 74 stockholders, after giving effect to the
conversion of all shares of Series A Preferred Stock, Class B Common Stock and
Non-Voting Common Stock upon the closing of this offering. Based upon the number
of shares outstanding as of June 30, 1999 and giving effect to the issuance of
the shares of common stock offered by NetScout hereby, there will be 26,588,637
shares of common stock outstanding upon the closing of this offering. In
addition, as of June 30, 1999, there were outstanding stock options for the
purchase of a total of 3,239,451 shares of Non-Voting Common Stock which upon
the closing of the offering will be automatically converted into options to
purchase an aggregate of 3,239,451 shares of common stock.
Holders of common stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders and do not
have cumulative voting rights. Directors are elected by a plurality of the votes
of the shares present in person or by proxy at the meeting. The holders of
common stock are entitled to receive ratably such lawful dividends as may be
declared by the Board of Directors. However, such dividends are subject to
preferences that may be applicable to the holders of any outstanding shares of
preferred stock. In the event of a liquidation, dissolution or winding up of the
affairs of NetScout, whether voluntarily or involuntarily, the holders of common
stock will be entitled to receive pro rata all of the remaining assets of
NetScout available for distribution to its stockholders. Any such pro rata
distribution would be subject to the rights of the holders of any outstanding
shares of preferred stock. The common stock has no preemptive, redemption,
conversion or subscription rights. All outstanding shares of common stock are
fully paid and non-assessable. The shares of common stock to be issued by
NetScout in this offering will be fully paid and non-assessable. The rights,
powers, preferences and privileges of holders of common stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of preferred stock which NetScout may designate and issue in the future.
Upon the closing of this offering, there will be no shares of preferred stock
outstanding.
PREFERRED STOCK
The Board of Directors will be authorized, subject to any limitations
prescribed by Delaware law, without further stockholder approval, to issue from
time to time up to an aggregate of 5,000,000 shares of preferred stock, in one
or more series. The Board of Directors is also authorized, subject to the
limitations prescribed by Delaware law, to establish the number of shares to be
included in each series and to fix the voting powers, preferences,
qualifications and special or relative rights or privileges of each series. The
Board of Directors is authorized to issue preferred stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of common stock.
NetScout has no current plans to issue any preferred stock. However, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a
57
<PAGE>
third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of the outstanding common stock of NetScout.
REGISTRATION RIGHTS
The Amended and Restated Rights Agreement dated as of January 15, 1999,
provides that the holders of 6,977,254 shares of common stock, after giving
effect to the conversion of the Class B Common Stock, are entitled to certain
rights with respect to the registration of such shares under the Securities Act.
If NetScout proposes to register any of its securities under the Securities Act,
either for its own account or for the account of another securityholder, the
registration rights holders are entitled to notice of such registration and to
include such registrable shares in such registration. However, in the event of a
registration pursuant to an underwritten public offering of common stock, the
underwriters shall have the right, subject to certain conditions, to limit the
number of shares included in such registration.
In addition, after six months after this offering, the holders of at least
40% of the then outstanding registrable shares issued are entitled to request
that NetScout file a registration statement under the Securities Act covering
the sale of some or all of the shares held by the requesting holder or holders.
Upon the receipt of such a request, NetScout is required to use its reasonable
best efforts to effect such registration, subject to certain conditions and
limitations. NetScout is not required to effect more than two such demand
registrations for the registration rights holders, and each such demand
registration must have an offering value of at least $2,500,000.
Once NetScout has qualified to use Form S-3 to register securities under the
Securities Act, the registration rights holders have the right to request that
NetScout file a registration statement on Form S-3 or any successor thereto for
a public offering of all or any portion of their registrable shares, provided
that the reasonably anticipated aggregate price to the public of such offering
would not be less than $1,000,000. NetScout is not required to effect a
registration in this manner more than once in any twelve-month period.
In general, all fees, costs and expenses of such registrations, other than
underwriting discounts and commissions and fees and disbursements of counsel to
the registration rights holders, will be borne by NetScout. We have agreed to
indemnify the registration rights holders against, and provide contribution with
respect to, certain liabilities relating to any registration in which any
registrable shares of registration rights holders are sold under the Securities
Act.
The previously described registration rights shall terminate for a
registration rights holder at such time as such particular holder could sell all
of such holder's shares under the terms of Rule 144(k) under the Securities Act.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF NETSCOUT'S THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BY-LAWS AND DELAWARE LAW
NetScout's Third Amended and Restated Certificate of Incorporation, known as
the Charter, NetScout's Amended and Restated By-Laws and the Delaware General
Corporation Law contain certain provisions that could discourage, delay or
prevent a change in control of NetScout or an acquisition of NetScout at a price
which many stockholders may find attractive. The existence of these provisions
could limit the price that investors might be willing to pay in the future for
shares of common stock.
THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Charter provides for the division of the Board of Directors into three
classes as nearly as equal in size as possible with staggered three-year terms.
In addition, the Charter provides that directors may be removed only for cause
by the affirmative vote of the holders of 75% of the shares of capital stock of
NetScout entitled to vote. The By-Laws provide that, except as otherwise
provided by
58
<PAGE>
law or the Charter, newly created directorships resulting from an increase in
the authorized number of directors or vacancies on the Board may be filled only
by:
- a majority of the directors then in office, even though less than a quorum
may then be in office; or
- the sole remaining director.
These provisions prevent a stockholder from enlarging the Board and filling
the new directorships with such stockholder's own nominees without Board
approval.
These provisions of the By-Laws may have the effect of discouraging a third
party from initiating a proxy contest, making a tender offer or otherwise
attempting to gain control of NetScout, or attempting to change the composition
or policies of the Board, even though such attempts might be beneficial to
NetScout or its stockholders.
The Charter and By-Laws provide that, unless otherwise prescribed by law,
only a majority of the Board, the Chairman of the Board or the President is able
to call a special meeting of stockholders. The Charter and the By-Laws also
provide that, unless otherwise prescribed by law, stockholder action may be
taken only at a duly called and convened annual or special meeting of
stockholders and may not be taken by written consent. These provisions, taken
together, prevent stockholders from forcing consideration by the stockholders of
stockholder proposals over the opposition of the Board, except at an annual
meeting.
The By-Laws provide that any action required or permitted to be taken by the
stockholders of NetScout at an annual meeting or special meeting of stockholders
may only be taken if NetScout is given proper advance notice of the action. This
notice procedure affords the Board an opportunity to consider the qualifications
of proposed director nominees or the merit of stockholder proposals, and, to the
extent deemed appropriate by the Board, to inform stockholders about such
matters. The notice procedure also provides a more orderly procedure for
conducting annual meetings of stockholders. The By-Laws do not give the Board
any power to approve or disapprove stockholder nominations for the election of
directors or proposals for action. However, the notice procedure may prevent a
contest for the election of directors or the consideration of stockholder
proposals. This could deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal if
the proper advance notice procedures are not followed, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
NetScout and its stockholders.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares issued and outstanding is required
to amend a corporation's certificate of incorporation or by-laws, unless a
corporation's certificate of incorporation or by-laws, as the case may be,
requires a greater percentage. The By-Laws require the affirmative vote of the
holders of at least 75% of the issued and outstanding shares of capital stock of
NetScout entitled to vote to amend or repeal any of the foregoing provisions of
the By-Laws. The 75% stockholder vote would be in addition to any separate class
vote that might be required pursuant to the terms of any series of preferred
stock that might be outstanding at the time any such amendments are submitted to
stockholders.
DELAWARE LAW
NetScout is subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder.
59
<PAGE>
Section 203 does not apply if:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock which is not owned by the
interested stockholder.
The application of Section 203 may limit the ability of stockholders to approve
a transaction that they may deem to be in their best interests.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation to or with the interested stockholder;
- subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation or is an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of the corporation at any time
within the past three years, and any entity or person associated with,
affiliated with or controlling or controlled by such entity or person.
LIMITATION OF LIABILITY
The Charter provides that no director of NetScout shall be personally liable
to NetScout or to its stockholders for monetary damages for breach of fiduciary
duty as a director, except that the limitation shall not eliminate or limit
liability to the extent that the elimination or limitation of such liability is
not permitted by the Delaware General Corporation Law as the same exists or may
hereafter be amended.
The Charter further provides for the indemnification of NetScout's directors
and officers to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, including circumstances in which indemnification is
otherwise discretionary. A principal effect of these provisions is to limit or
eliminate the potential liability of NetScout's directors for monetary damages
arising from breaches of their duty of care, subject to certain exceptions.
These provisions may also shield directors from liability under federal and
state securities laws.
STOCK TRANSFER AGENT
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for NetScout's stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices from time to time. Furthermore, since
only a limited number of shares will be available for sale shortly after the
offering because of certain contractual and legal restrictions on resale as
described below, sales of substantial amounts of common stock of NetScout in the
public market after the restrictions lapse could adversely affect the prevailing
market price and the ability of NetScout to raise equity capital in the future.
Upon completion of this offering and based on shares outstanding as of June
30, 1999, NetScout will have outstanding an aggregate of 26,588,637 shares of
common stock, assuming no exercise of outstanding options. Of these shares, the
4,000,000 shares sold in the offering will be freely tradable without
restrictions or further registration under the Securities Act, unless such
shares are purchased by an "affiliate" of NetScout as that term is defined in
Rule 144 under the Securities Act.
The remaining 22,588,637 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act or are subject to the contractual restrictions
described below. Of these restricted securities:
- 95,400 shares may be sold immediately after completion of this offering;
- 711,023 additional shares may be sold 90 days after the effective date of
this offering; and
- 23,618,047 additional shares may be sold upon expiration of the 180-day
lock-up agreement.
All of the officers and directors and certain stockholders and optionholders
of NetScout have signed lock-up agreements in favor of the underwriters. As a
result, these individuals are not permitted to offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of common
stock, other than shares purchased by certain securityholders of NetScout in the
open market post-offering or shares sold as part of this offering, for a period
of 180 days after the date of this prospectus, without the prior written consent
of Deutsche Bank Securities Inc. Deutsche Bank Securities Inc. currently has no
plans to release any portion of the securities subject to lock-up agreements,
but may do so without notice. When determining whether or not to release shares
from the lock-up agreements, Deutsche Bank Securities Inc. will consider, among
other factors, the stockholder's reasons for requesting the release, the number
of shares for which the release is being requested and market conditions at the
time.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
the holding period of any prior owner except when purchased from an affiliate,
would be entitled to sell a certain number of shares within any three-month
period. That certain number of shares cannot exceed the greater of one percent
of the number of shares of common stock then outstanding, which will equal
approximately 265,886 shares immediately after the offering, or the average
weekly trading volume of the common stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about NetScout. Rule 144 also provides that affiliates of NetScout
who are selling shares of common stock that are not restricted shares must
nonetheless comply with the same restrictions applicable to restricted shares
with the exception of the holding-period requirement.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
NetScout at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except when purchased from an
61
<PAGE>
affiliate, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Accordingly, unless otherwise restricted, "144(k) shares" may therefore be sold
immediately upon the completion of this offering.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from NetScout by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended. To be eligible for resale under Rule 701, shares must have
been issued pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Securities and
Exchange Commission has indicated that Rule 701 will apply to typical stock
options granted by an issuer before it becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, along with the shares
acquired upon exercise of such options, including exercises after the date of
the offering. Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by persons
other than Affiliates, subject only to the manner of sale provisions of Rule
144, and by Affiliates, under Rule 144 without compliance with its one-year
minimum holding period requirements.
NetScout has agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of common stock or any securities convertible into or exercisable
or exchangeable for common stock, or publicly disclose the intention to make any
such offer, sale, pledge, disposition or filing, for a period of 180 days after
the date of this prospectus, without the prior written consent of Deutsche Bank
Securities Inc., subject to certain limited exceptions.
Following the offering, NetScout intends to file registration statements
under the Securities Act covering approximately 7,951,701 shares of common stock
issued pursuant to the exercise of stock options, subject to outstanding options
or reserved for issuance under NetScout's 1990 Stock Option Plan, 1999 Stock
Option and Incentive Plan and 1999 Employee Stock Purchase Plan. Accordingly,
shares registered under such registration statements will, subject to Rule 144
provisions applicable to affiliates, be available for sale in the open market,
except to the extent that such shares are subject to NetScout's vesting or
exercise restrictions or the contractual restrictions described above. See
"Management--Stock Plans."
62
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom
Deutsche Bank Securities Inc., Bear, Stearns & Co. Inc. and Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated, are acting as
representatives, have severally but not jointly agreed to purchase from NetScout
and the selling stockholders the following respective number of shares of common
stock:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Deutsche Bank Securities Inc. .............................................
Bear, Stearns & Co. Inc....................................................
Dain Rauscher Wessels......................................................
-----------------
Total.................................................................. 4,000,000
-----------------
-----------------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to approval of certain conditions precedent and that the
underwriters will be obligated to purchase all of the shares of the common stock
offered hereby, other than those shares covered by the over-allotment option
described below, if any are purchased. The underwriting agreement provides that,
in the event of a default by an underwriter, in certain circumstances the
purchase commitments of non-defaulting underwriters may be increased or the
underwriting agreement may be terminated.
The following table summarizes the compensation to be paid to the
underwriters by NetScout and the selling stockholders and the expenses payable
by NetScout:
<TABLE>
<CAPTION>
TOTAL
--------------------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------------- --------------------- ---------------------
<S> <C> <C> <C>
Underwriting discounts and commissions payable by
NetScout.........................................
Expenses payable by NetScout.......................
Underwriting discounts and commissions payable by
the selling stockholders.........................
</TABLE>
Certain of the selling stockholders have granted to the underwriters an
option expiring on the 30th day after the date of this prospectus to purchase up
to 600,000 additional shares of common stock at the initial public offering
price, less the underwriting discounts and commissions. Such option may be
exercised only to cover over-allotments in the sale of shares of common stock.
To the extent such option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares of common stock as it was obligated to purchase pursuant
to the underwriting agreement.
NetScout and the selling stockholders have been advised by the
representatives that the underwriters propose to offer the shares of common
stock to the public initially at the public offering price set forth on the
cover page of this prospectus and, through the representatives, to selling group
members at such price less a concession of $ per share, and the
underwriters and such selling group members may allow a discount of $ per
share on sales to certain other broker-dealers. After the offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The representatives have informed NetScout that they do not expect
discretionary sales by the underwriters to exceed 5% of the shares being offered
hereby.
NetScout, its officers and directors, and certain other existing
stockholders and optionholders of NetScout have agreed that they will not offer,
sell, contract to sell, pledge or otherwise dispose of or
63
<PAGE>
transfer, directly or indirectly, or, in the case of NetScout, file with the
Securities and Exchange Commission a registration statement relating to, any
shares of common stock or securities exchangeable or exercisable for or
convertible into shares of common stock or publicly disclose the intention to do
any of the foregoing without the prior written consent of Deutsche Bank
Securities Inc. for a period of 180 days after the date of this prospectus,
except under certain circumstances.
The underwriters have reserved for sale, at the initial public offering
price, up to 200,000 shares of the common stock for employees, directors and
certain other persons associated with NetScout who have expressed an interest in
purchasing such shares of common stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same basis as other
shares offered hereby.
NetScout and the selling stockholders have agreed to indemnify the
underwriters against liabilities, including civil liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in respect thereof.
NetScout has applied for listing of the common stock on The Nasdaq Stock
Market's National Market under the symbol "NTCT."
Prior to the offering, there has been no public market for the common stock.
The initial public offering price will be determined by negotiation between
NetScout and the representatives. The principal factors to be considered in
determining the initial public offering price include:
- the information set forth in this prospectus and otherwise available to
the representatives;
- the history of, and the prospects for, NetScout and the industry in which
it competes;
- an assessment of NetScout's management;
- the prospects for, and the timing of, future earnings of NetScout;
- the present state of NetScout's development and its current financial
condition;
- the general condition of the securities markets at the time of the
offering;
- the recent market prices of, and the demand for, publicly-traded common
stock of companies in businesses similar to those of NetScout;
- market conditions for initial public offerings; and
- other relevant factors.
There can be no assurance that an active trading market will develop for the
common stock or that the common stock will trade in the market subsequent to the
offering at or above the initial public offering price.
The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases of
shares of the common stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when
shares of the common stock originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
64
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for NetScout by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Additional legal matters will be passed upon for the underwriters by Hale and
Dorr LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of NetScout Systems, Inc. as of March
31, 1998 and 1999, and for each of the three years in the period ended March 31,
1999, included in this prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
NetScout has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement. For further information
with respect to NetScout and the common stock, reference is made to the
registration statement. Some of the contracts and other documents referred to in
this prospectus are exhibits to the registration statement. For further
information regarding these contracts and documents, reference is made to the
copies filed as exhibits to the registration statement. Copies of the
registration statement may be examined without charge at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Regional Offices of the
Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7
World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of all or
any portion of the registration statement may be obtained from the Public
Reference Room of the Commission at 450 Fifth Street, N.W., Washington D.C.
20549, at prescribed rates. Information on the operation of the Public Reference
Room may be obtained by calling the Commission at 1-800-SEC-0330. The Commission
also maintains a Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants, such as
NetScout, that make electronic filings with the Commission.
NetScout intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm.
65
<PAGE>
NETSCOUT SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheet as of March 31, 1998 and 1999 and June 30, 1999 (unaudited)..................... F-3
Consolidated Statement of Income for the years ended March 31, 1997, 1998 and 1999 and for the three months
ended June 30, 1998 and 1999 (unaudited)................................................................. F-4
Consolidated Statement of Redeemable Convertible Common Stock and Stockholders' Equity (Deficit) for the
years ended March 31, 1997, 1998 and 1999 and for the three months ended June 30, 1999 (unaudited)....... F-5
Consolidated Statement of Cash Flows for the years ended March 31, 1997, 1998 and 1999 and for the three
months ended June 30, 1998 and 1999 (unaudited).......................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of NetScout Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
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,
1998 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended March 31, 1999, in conformity with
generally accepted accounting principles. 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 generally accepted auditing
standards 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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 14, 1999
F-2
<PAGE>
NETSCOUT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
-------------------- -----------
1998 1999 1999
--------- --------- -----------
<S> <C> <C> <C>
(NOTE 2)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 6,341 $ 25,477 $ 22,918
Marketable securities................................................................. 8,834 -- --
Accounts receivable, net of allowance for doubtful accounts and returns of $1,063,
$1,036, and $1,048 at March 31, 1998 and 1999 and June 30, 1999 (unaudited),
respectively........................................................................ 4,295 6,550 8,431
Inventories........................................................................... 3,054 3,165 2,584
Refundable income taxes............................................................... 708 217 --
Deferred income taxes................................................................. 1,191 1,196 1,196
Prepaids and other current assets..................................................... 560 821 771
--------- --------- -----------
Total current assets.............................................................. 24,983 37,426 35,900
Fixed assets, net..................................................................... 3,841 4,227 5,238
Notes receivable--stockholders........................................................ 2,000 2,000 2,000
Deferred income taxes................................................................. 396 321 321
Other assets.......................................................................... -- -- 289
--------- --------- -----------
Total assets...................................................................... $ 31,220 $ 43,974 $ 43,748
--------- --------- -----------
--------- --------- -----------
LIABILITIES, REDEEMABLE CONVERTIBLE COMMON STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................................................... $ 2,951 $ 3,945 $ 500
Accrued compensation.................................................................. 2,690 3,539 2,417
Accrued other......................................................................... 403 1,165 1,130
Income taxes payable.................................................................. -- -- 507
Customer deposits..................................................................... 1,246 34 34
Deferred revenue...................................................................... 3,530 4,254 4,829
--------- --------- -----------
Total current liabilities......................................................... 10,820 12,937 9,417
--------- --------- -----------
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 and June 30, 1999 (unaudited);
no shares issued or outstanding at June 30, 1999 pro forma (unaudited).............. -- 44,161 44,161
--------- --------- -----------
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.001 par value; 631,579 shares authorized and
issued at March 31, 1998 and 1999 and June 30, 1999 (unaudited), 631,579, 315,790
and 315,790 shares outstanding at March 31, 1998 and 1999 and June 30, 1999
(unaudited), respectively; no shares issued or outstanding at June 30, 1999 pro
forma (unaudited)................................................................... 5,964 5,964 5,964
Common stock, $0.001 par value:
Voting, 12,640,786, 121,798,382 and 121,798,382 shares authorized at March 31,
1998 and 1999 and June 30, 1999 (unaudited), respectively, 16,000,000 shares
issued, and 16,000,000, 11,250,502 and 11,250,502 shares outstanding at March 31,
1998 and 1999 and June 30, 1999 (unaudited), respectively; 29,565,891 shares
issued and 22,588,637 shares outstanding at June 30, 1999 pro forma
(unaudited)...................................................................... 16 16 16
Non-voting, 12,640,786, 21,224,364 and 21,224,364 shares authorized at March 31,
1998 and 1999 and June 30, 1999 (unaudited), respectively, 3,608,000, 4,035,858
and 4,062,321 shares issued and 3,608,000, 3,071,258 and 3,097,721 shares
outstanding at March 31, 1998 and 1999 and June 30, 1999 (unaudited),
respectively; no shares issued or outstanding at June 30, 1999 pro forma
(unaudited)...................................................................... 4 4 4
Additional paid-in capital........................................................ 905 2,143 2,211
Deferred compensation................................................................. (672) (1,312) (1,220)
Treasury stock........................................................................ -- (44,394) (44,394)
Retained earnings..................................................................... 14,183 24,455 27,589
--------- --------- -----------
Total stockholders' equity (deficit).............................................. 20,400 (13,124) (9,830)
--------- --------- -----------
Total liabilities, redeemable convertible common stock and
stockholders' equity (deficit).................................................. $ 31,220 $ 43,974 $ 43,748
--------- --------- -----------
--------- --------- -----------
<CAPTION>
PRO FORMA
JUNE 30,
1999
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 22,918
Marketable securities................................................................. --
Accounts receivable, net of allowance for doubtful accounts and returns of $1,063,
$1,036, and $1,048 at March 31, 1998 and 1999 and June 30, 1999 (unaudited),
respectively........................................................................ 8,431
Inventories........................................................................... 2,584
Refundable income taxes............................................................... --
Deferred income taxes................................................................. 1,196
Prepaids and other current assets..................................................... 771
-----------
Total current assets.............................................................. 35,900
Fixed assets, net..................................................................... 5,238
Notes receivable--stockholders........................................................ 2,000
Deferred income taxes................................................................. 321
Other assets.......................................................................... 289
-----------
Total assets...................................................................... $ 43,748
-----------
-----------
LIABILITIES, REDEEMABLE CONVERTIBLE COMMON STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................................................... $ 500
Accrued compensation.................................................................. 2,417
Accrued other......................................................................... 1,130
Income taxes payable.................................................................. 507
Customer deposits..................................................................... 34
Deferred revenue...................................................................... 4,829
-----------
Total current liabilities......................................................... 9,417
-----------
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 and June 30, 1999 (unaudited);
no shares issued or outstanding at June 30, 1999 pro forma (unaudited).............. --
-----------
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.001 par value; 631,579 shares authorized and
issued at March 31, 1998 and 1999 and June 30, 1999 (unaudited), 631,579, 315,790
and 315,790 shares outstanding at March 31, 1998 and 1999 and June 30, 1999
(unaudited), respectively; no shares issued or outstanding at June 30, 1999 pro
forma (unaudited)................................................................... --
Common stock, $0.001 par value:
Voting, 12,640,786, 121,798,382 and 121,798,382 shares authorized at March 31,
1998 and 1999 and June 30, 1999 (unaudited), respectively, 16,000,000 shares
issued, and 16,000,000, 11,250,502 and 11,250,502 shares outstanding at March 31,
1998 and 1999 and June 30, 1999 (unaudited), respectively; 29,565,891 shares
issued and 22,588,637 shares outstanding at June 30, 1999 pro forma
(unaudited)...................................................................... 30
Non-voting, 12,640,786, 21,224,364 and 21,224,364 shares authorized at March 31,
1998 and 1999 and June 30, 1999 (unaudited), respectively, 3,608,000, 4,035,858
and 4,062,321 shares issued and 3,608,000, 3,071,258 and 3,097,721 shares
outstanding at March 31, 1998 and 1999 and June 30, 1999 (unaudited),
respectively; no shares issued or outstanding at June 30, 1999 pro forma
(unaudited)...................................................................... --
Additional paid-in capital........................................................ 52,326
Deferred compensation................................................................. (1,220)
Treasury stock........................................................................ (44,394)
Retained earnings..................................................................... 27,589
-----------
Total stockholders' equity (deficit).............................................. 34,331
-----------
Total liabilities, redeemable convertible common stock and
stockholders' equity (deficit).................................................. $ 43,748
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NETSCOUT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1997 1998 1999 1998 1999
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product........................................ $ 25,159 $ 34,990 $ 50,374 $ 11,547 $ 12,814
Service........................................ 3,888 5,143 8,710 1,873 2,465
License and royalty............................ 1,601 2,696 8,467 1,843 3,792
---------- ---------- ---------- ---------- ----------
Total revenue................................ 30,648 42,829 67,551 15,263 19,071
---------- ---------- ---------- ---------- ----------
Cost of revenue:
Product........................................ 9,427 12,638 19,250 4,340 4,814
Service........................................ 528 784 1,235 296 413
---------- ---------- ---------- ---------- ----------
Total cost of revenue........................ 9,955 13,422 20,485 4,636 5,227
---------- ---------- ---------- ---------- ----------
Gross margin..................................... 20,693 29,407 47,066 10,627 13,844
---------- ---------- ---------- ---------- ----------
Operating expenses:
Research and development....................... 3,003 5,129 7,526 1,732 2,241
Sales and marketing............................ 6,778 13,583 20,375 5,008 6,040
General and administrative..................... 1,815 2,950 4,104 815 937
---------- ---------- ---------- ---------- ----------
Total operating expenses..................... 11,596 21,662 32,005 7,555 9,218
---------- ---------- ---------- ---------- ----------
Income from operations........................... 9,097 7,745 15,061 3,072 4,626
Interest income.................................. 471 750 929 200 274
Interest expense................................. (10) (7) (3) -- (2)
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes......... 9,558 8,488 15,987 3,272 4,898
Provision for income taxes....................... 3,640 3,056 5,715 1,178 1,764
---------- ---------- ---------- ---------- ----------
Net income....................................... $ 5,918 $ 5,432 $ 10,272 $ 2,094 $ 3,134
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic net income per share....................... $ 0.31 $ 0.28 $ 0.55 $ 0.11 $ 0.22
Diluted net income per share..................... $ 0.26 $ 0.23 $ 0.43 $ 0.09 $ 0.13
Shares used in computing:
Basic net income per share..................... 19,009,601 19,289,168 18,585,676 19,304,432 14,331,206
Diluted net income per share................... 22,918,617 23,165,529 23,705,999 23,578,435 24,908,625
Unaudited pro forma basic net income per share... $ 0.46 $ 0.14
Unaudited pro forma diluted net income per
share.......................................... $ 0.43 $ 0.13
Shares used in computing:
Unaudited pro forma basic net income per
share........................................ 22,300,525 22,571,618
Unaudited pro forma diluted net income per
share........................................ 23,705,999 24,908,625
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NETSCOUT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
CLASS B REDEEMABLE -----------------------------------
CONVERTIBLE COMMON SERIES A CONVERTIBLE
STOCK PREFERRED STOCK VOTING NON-VOTING
-------------------- ---------------------- ------------------------ ---------
SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE SHARES
--------- --------- --------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996............ -- $ -- 631,579 $ 5,964 16,000,000 $ 16 3,571,200
Deferred compensation related to
stock options granted............
Issuance of common stock pursuant
to exercise of options........... 17,600
Amortization of deferred
compensation.....................
Net income.........................
--------- --------- --------- ----------- --------- --- ---------
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
Issuance of common stock pursuant
to exercise of options
(unaudited)...................... 26,463
Amortization of deferred
compensation (unaudited).........
Net income (unaudited).............
--------- --------- --------- ----------- --------- --- ---------
Balance, June 30, 1999 (unaudited) 6,977,154 44,161 631,579 5,964 16,000,000 16 4,062,321
Conversion of issued shares into
voting common stock
(unaudited)...................... (6,977,254) (44,161) (631,579) (5,964) 13,565,891 14 4,062,321
--------- --------- --------- ----------- --------- --- ---------
Balance, June 30, 1999 pro forma
(unaudited)...................... -- $ -- -- $ -- 29,565,891 $ 30 --
--------- --------- --------- ----------- --------- --- ---------
--------- --------- --------- ----------- --------- --- ---------
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN DEFERRED TREASURY RETAINED EQUITY
PAR VALUE CAPITAL COMPENSATION STOCK EARNINGS (DEFICIT)
------------- ----------- ------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996............ $ 4 $ 79 $ (47) $ -- $ 2,833 $ 8,849
Deferred compensation related to
stock options granted............ 166 (166) --
Issuance of common stock pursuant
to exercise of options........... -- 2 2
Amortization of deferred
compensation..................... 40 40
Net income......................... 5,918 5,918
--- ----------- ------------- --------- ----------- ------------
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)
Issuance of common stock pursuant
to exercise of options
(unaudited)...................... -- 68 68
Amortization of deferred
compensation (unaudited)......... 92 92
Net income (unaudited)............. 3,134 3,134
--- ----------- ------------- --------- ----------- ------------
Balance, June 30, 1999 (unaudited) 4 2,211 (1,220) (44,394) 27,589 (9,830)
Conversion of issued shares into
voting common stock
(unaudited)...................... (4) 50,115 44,161
--- ----------- ------------- --------- ----------- ------------
Balance, June 30, 1999 pro forma
(unaudited)...................... $ -- $ 52,326 $ (1,220) $ (44,394) $ 27,589 $ 34,331
--- ----------- ------------- --------- ----------- ------------
--- ----------- ------------- --------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NETSCOUT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 5,918 $ 5,432 $ 10,272 $ 2,094 $ 3,134
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 1,171 1,470 2,069 409 580
Loss on disposal of fixed assets......................... 78 171 70 29 28
Compensation expense associated with equity awards....... 40 137 343 49 92
Deferred income taxes.................................... (848) (504) 70 -- --
Changes in assets and liabilities:
Accounts receivable.................................... 1,480 (2,103) (2,255) (1,928) (1,881)
Inventories............................................ (773) (780) (111) 580 581
Refundable income taxes................................ -- (708) 491 1,085 217
Prepaids and other assets.............................. (82) (357) (261) 210 (239)
Accounts payable....................................... (405) 1,768 994 (532) (3,445)
Accrued expenses....................................... 1,022 966 1,611 (1,007) (1,157)
Income taxes payable................................... (1,122) (84) -- -- 507
Customer deposits...................................... 1,227 (16) (1,212) (62) --
Deferred revenue....................................... 693 1,292 724 209 575
--------- --------- --------- --------- ---------
Net cash provided by operating activities.............. 8,399 6,684 12,805 1,136 (1,008)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities.......................... (5,841) (2,993) -- 6,869 --
Proceeds from maturity of marketable securities............ -- -- 8,834 -- --
Issuance of notes receivable--stockholders................. (2,000) -- -- -- --
Purchase of fixed assets................................... (1,844) (3,886) (2,525) (598) (1,619)
--------- --------- --------- --------- ---------
Net cash (used) provided by investing activities....... (9,685) (6,879) 6,309 6,271 (1,619)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of non-voting common stock.......... 2 22 255 3 68
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.............. 2 22 22 3 68
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents......... (1,284) (173) 19,136 7,410 (2,559)
Cash and cash equivalents, beginning of year................. 7,798 6,514 6,341 6,341 25,477
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year....................... $ 6,514 $ 6,341 $ 25,477 $ 13,751 $ 22,918
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest..................................... $ 10 $ 7 $ 3 $ 699 $ 1
Cash paid for income taxes................................. 4,340 4,351 5,158 93 1,053
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
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 the domestic and international
business markets. NetScout manages its business as a single segment.
The consolidated financial statements include the accounts of NetScout and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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, 1998 and 1999,
any unrealized gains or losses were immaterial.
At March 31, 1999 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.
REVENUE RECOGNITION
Product revenue consists of sales of hardware products and licensing
software products. Product revenue is recognized upon shipment, provided that
fees are fixed and 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,
installation and training. NetScout generally provides three-months software and
service support and 12-months hardware support as part of our product sales.
Revenue from software and service support is deferred
F-7
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 installation and training is
recognized as the work is performed.
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, 1999, two customers accounted for
approximately 23% and 12%, respectively, of NetScout's accounts receivable.
NetScout does not anticipate non-performance by counterparties and, accordingly,
does not require collateral.
During the year ended March 31, 1997, one customer accounted for
approximately 24% of NetScout's total revenue. During the year ended March 31,
1998, two customers accounted for approximately 40% and 12%, respectively, of
NetScout's total revenue. During the year ended March 31, 1999, one customer
accounted for approximately 51% of NetScout's total revenue.
(UNAUDITED)
At June 30, 1999, one customer accounted for approximately 14% of NetScout's
accounts receivable. During the three months ended June 30, 1999, one customer
accounted for 44% of NetScout's total revenue.
INVENTORIES AND CONCENTRATIONS OF SUPPLIERS
Inventories are stated at the lower of cost or market with cost being
determined on the first-in, first-out method.
NetScout purchases the majority of its product components from a limited
number of vendors. Although there is a concentration of sources of supply,
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.
F-8
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
Fixed assets are stated at cost and depreciated using the straight-line
method over their estimated useful lives.
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 years ended March 31, 1997, 1998 and 1999, 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 $70, $146 and $627 for the years ended March 31, 1997, 1998 and
1999, respectively.
UNAUDITED PRO FORMA BALANCE SHEET AND UNAUDITED PRO FORMA STATEMENT OF
REDEEMABLE CONVERTIBLE COMMON STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Upon the closing of NetScout's initial public offering, all of the
outstanding shares (including shares held in treasury) of Series A Preferred
Stock, Class B Convertible Common Stock and Non-Voting Common Stock will
automatically convert into 2,526,316, 6,977,254 and 4,062,321 shares,
respectively, of Voting Common Stock (Note 8). These transactions have been
reflected in the unaudited pro forma balance sheet and unaudited pro forma
statement of redeemable convertible common stock and stockholders' equity
(deficit) as of June 30, 1999.
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
F-9
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
common stock outstanding during the period and the weighted average number of
potential common stock from the assumed exercise of stock options and 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.
UNAUDITED PRO FORMA NET INCOME PER SHARE
Pro forma basic and diluted net income per share have been 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 converted immediately upon their issuance.
UNAUDITED INTERIM FINANCIAL STATEMENTS
Data and information as of June 30, 1999 and for the three months ended June
30, 1998 and 1999 is unaudited. In the opinion of NetScout's management, the
June 30, 1998 and 1999 unaudited interim consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and result of
operations for that period. The results of operations for the three month period
ended June 30, 1999 are not necessarily indicative of the results of operations
for the year ended March 31, 2000.
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 March 31, 1998 and 1999 and
the reported amounts of revenues and expenses during fiscal 1997, 1998 and 1999.
Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. NetScout does not expect
SOP 98-1, which is effective for NetScout beginning April 1, 1999, to have a
material effect on its financial condition or results of operations.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities relating to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SOP 98-5, the cost of start-up activities should be expensed as incurred.
SOP 98-5 is effective for NetScout's fiscal year 2000 financial statements and
NetScout does not expect its adoption to have a material effect on its financial
condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The new standard
establishes accounting and reporting
F-10
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
NetScout does not expect SFAS No. 133 to have a material effect on its financial
condition or results of operations.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------- JUNE 30,
1998 1999 1999
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials................................................ $ 2,482 $ 2,620 $ 2,162
Work-in-process.............................................. 259 348 228
Finished goods............................................... 313 197 194
--------- --------- -----------
$ 3,054 $ 3,165 $ 2,584
--------- --------- -----------
--------- --------- -----------
</TABLE>
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
ESTIMATED 1999
USEFUL MARCH 31, -----------
LIFE --------------------
IN YEARS 1998 1999 (UNAUDITED)
--------- --------- ---------
<S> <C> <C> <C> <C>
Furniture and fixtures............................ 3-7 $ 788 $ 890 $ 925
Computer equipment and purchased software......... 3 2,815 4,556 5,200
Demonstration units............................... 2 971 1,228 1,554
Leasehold improvements............................ 5 1,815 1,831 2,336
--------- --------- -----------
6,389 8,505 10,015
Less--accumulated depreciation and amortization... 2,548 4,278 4,777
--------- --------- -----------
$ 3,841 $ 4,227 $ 5,238
--------- --------- -----------
--------- --------- -----------
</TABLE>
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 are collateralized by
1,032,264 shares of Voting Common Stock of NetScout. The loans have five-year
terms with an interest rate of 6.48%, compounded semi-annually and payable
annually.
F-11
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. LINE OF CREDIT
At March 31, 1999, 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, 2000. 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. The line of credit is secured by NetScout's accounts receivable
and inventory. NetScout was in compliance with all restrictive covenants at
March 31, 1999. No borrowings were outstanding under the line of credit at March
31, 1999 (Note 12).
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
---------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Weighted average number of shares
outstanding.............................. 19,009,601 19,289,168 18,585,676 19,304,432 14,331,206
Shares attributable to Class B Convertible
Common Stock............................. -- -- 1,451,269 -- 6,977,254
Shares attributable to Series A Preferred
Stock.................................... 2,526,316 2,526,316 2,263,579 2,526,316 1,263,158
Shares attributable to unvested Non-Voting
Common Stock............................. 548,736 293,620 22,769 291,763 --
Stock options.............................. 833,964 1,056,425 1,382,706 1,455,924 2,337,007
------------ ------------ ------------ ------------ ------------
Shares used in computing diluted net income
per share................................ 22,918,617 23,165,529 23,705,999 23,578,435 24,908,625
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
Stock options to purchase 123,600, 65,367, 73,985, and 205,536 shares of
Non-Voting Common Stock for the years ended March 31, 1997, 1998 and 1999 and
for the three months ended June 30, 1999 (unaudited), 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") have the following characteristics:
F-12
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. CAPITAL STOCK (CONTINUED)
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, noncumulative dividends at the rate of $.64
and $.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 Stock and Series A Preferred Stock
have been paid. Through March 31, 1999, 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.
F-13
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. CAPITAL STOCK (CONTINUED)
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 are automatically convertible into shares
of Voting Common Stock upon the closing of an 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 then vest yearly through 1999,
to employees of NetScout. As of March 31, 1999, 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 share
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.
F-14
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. CAPITAL STOCK (CONTINUED)
RESERVED SHARES
NetScout has reserved 4,035,608 shares of Non-Voting Common Stock for
issuance under the 1990 Stock Option Plan (Note 9). NetScout has also reserved
17,575,036 shares of Voting Common Stock for issuance upon conversion of
NetScout's Class B Convertible Common Stock and Series A Preferred Stock and
Non-Voting Common Stock. In addition, NetScout has reserved 2,526,316 shares of
Non-Voting Common Stock for issuance upon conversion of NetScout's Series A
Preferred Stock.
AUTHORIZED SHARES
In April 1999, NetScout's Board of Directors approved, subject to
stockholder approval, an increase in the authorized shares of Voting and
Non-Voting Common Stock, $0.001 par value per share, to 121,798,382 and
21,224,364 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 granted and the rate at which each
option is exercisable. 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).
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. A total of 4,500,000 shares of common stock have been reserved for
issuance under the 1999 Stock Option Plan.
EMPLOYEE STOCK PURCHASE PLAN
In April 1999, NetScout adopted the 1999 Employee Stock Purchase Plan (the
"1999 Purchase Plan"), to be effective upon 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.
F-15
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCK PLANS (CONTINUED)
Transactions under the 1990 Stock Option Plan during the years ended March
31, 1997, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
Outstanding--March 31, 1996................................................................ 665,500 $ .10
Granted (weighted average fair value of $.43 per share).................................. 1,404,500 1.41
Exercised................................................................................ (17,600) .12
Canceled................................................................................. (54,000) .48
----------
Outstanding--March 31, 1997................................................................ 1,998,400 1.01
Granted (weighted average fair value of $.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 $.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) .58
Canceled................................................................................. (477,117) 2.34
----------
Outstanding--March 31, 1999................................................................ 3,093,625 2.85
----------
----------
</TABLE>
F-16
<PAGE>
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, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE
- ------------------------------------------------------ ----------- -------------- -----------
<S> <C> <C> <C>
(YEARS)
$.003 to 1.50........................................ 1,032,575 6.7 $ .76
1.75 to 2.50........................................ 840,363 8.2 2.49
4.00 to 5.00........................................ 848,187 9.1 4.20
6.00 to 6.50........................................ 372,500 9.8 6.40
-----------
3,093,625 8.1 2.85
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE PRICE
- ----------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
$.003 to 1.50......................................................... 666,501 $ .67
1.75 to 2.50......................................................... 352,992 2.47
4.00 to 5.00......................................................... 152,879 4.09
6.00 to 6.50......................................................... 10,256 6.42
----------
1,182,628
----------
----------
</TABLE>
As of March 31, 1997 and 1998, 270,760 and 690,640 options were exercisable,
respectively, under the 1990 Stock Option Plan. As of March 31, 1999, there were
941,983 shares of common stock available for grant under the 1990 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 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:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1997 1998 1999
--------- --------- ---------
Net income:
As reported................................................... $ 5,918 $ 5,432 $ 10,272
Pro forma..................................................... $ 5,824 $ 5,208 $ 9,915
Basic net income per share:
As reported................................................... $ .31 $ .28 $ .55
Pro forma..................................................... $ .31 $ .27 $ .53
Diluted net income per share:
As reported................................................... $ .26 $ .23 $ .43
Pro forma..................................................... $ .25 $ .22 $ .42
</TABLE>
F-17
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCK PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions for grants in 1997, 1998
and 1999: dividend yield of 0.0%; risk-free interest rates of 6.4%, 6.0% and
5.1% for 1997, 1998 and 1999, respectively; and a weighted-average expected
option term of 5 years. Because options granted after the initial filing for
NetScout's initial public offering must contain a volatility factor under SFAS
No. 123, additional option 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
is being charged to NetScout's results of operations ratably over the service
period. For the year ended March 31, 1999, NetScout recorded $33 of compensation
expense related to these options.
In September 1997, NetScout granted 40,000 options to purchase Non-Voting
Common Stock to consultants for services to be performed. In November 1997, the
EITF finalized Issue No. 96-18. Under EITF 96-18, the compensation expense that
will ultimately be recognized for options issued to these consultants will be
measured at the vesting dates of the underlying options. As these options vest
over five years, NetScout will be required to remeasure the fair value of these
options at each reporting period prior to vesting and then finally at the
vesting dates of the options. Changes in the estimated fair value of these
options will be recognized as compensation expense in the period of the change.
In March 1999, NetScout terminated the agreement with the consultants and a
total of 16,000 options vested. For the year ended March 31, 1999, NetScout
recorded $105 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 years. For the year ended March 31, 1999,
NetScout recorded $138 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, 1999,
NetScout recorded $40 of compensation expense related to these options.
In April 1999, NetScout granted 287,750 options to purchase Non-Voting
Common Stock at $18.90 per share, the estimated fair value of the common stock
at the grant date, to employees.
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
F-18
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. RETIREMENT PLAN (CONTINUED)
of service. NetScout made matching contributions of $57, $121 and $153 to the
plan for the years ended March 31, 1997, 1998 and 1999, respectively.
11. INCOME TAXES
The components of the provision for income taxes are as follow:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1997 1998 1999
--------- --------- ---------
Current provision:
Federal........................................................ $ 3,438 $ 2,859 $ 4,938
State.......................................................... 1,050 701 674
Foreign........................................................ -- -- 33
--------- --------- ---------
4,488 3,560 5,645
--------- --------- ---------
Deferred tax (benefit) provision:
Federal........................................................ (721) (426) (20)
State.......................................................... (127) (78) 90
--------- --------- ---------
(848) (504) 70
--------- --------- ---------
$ 3,640 $ 3,056 $ 5,715
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
<S> <C> <C>
1998 1999
--------- ---------
Deferred tax assets:
Reserves................................................................. $ 486 $ 558
Accrued expenses......................................................... 226 542
Fixed assets............................................................. 335 327
Deferred revenue......................................................... 479 74
Other.................................................................... 61 16
--------- ---------
$ 1,587 $ 1,517
--------- ---------
--------- ---------
</TABLE>
F-19
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. INCOME TAXES (CONTINUED)
The income tax provision computed using the federal statutory income tax
rate differs from NetScout's effective tax rate primarily due to the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1997 1998 1999
--------- --------- ---------
Statutory U.S. federal tax rate....................................... 34.0% 34.0% 35.0%
State taxes, net of federal tax benefit............................... 6.4 4.8 3.1
Foreign sales corporation exempt income............................... (.8) (1.5) (2.1)
Research and development tax credits.................................. (1.3) (1.7) (1.5)
Other................................................................. (.2) .4 1.3
--- --- ---
38.1% 36.0% 35.8%
--- --- ---
--- --- ---
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
LEASES
NetScout leases office space under operating leases. Total rent expense
under the leases was $198, $942 and $1,531 for the years ended March 31, 1997,
1998 and 1999, respectively. Future noncancelable minimum lease commitments are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
- -------------------------------------------------------------------------------------
<S> <C>
2000................................................................................. $ 861
2001................................................................................. 959
2002................................................................................. 1,024
2003................................................................................. 683
2004................................................................................. --
---------
Total minimum lease payments......................................................... $ 3,527
---------
---------
</TABLE>
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
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") in December 1998. In July 1999, the former employee requested that the
claim be withdrawn from the MCAD, so that the claim may be filed in state and/or
federal court. Based on the information available to date, NetScout believes
that the claim is without merit and intends to vigorously defend this claim. The
parties have had preliminary settlement negotiations. 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
F-20
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1997, 1998 and 1999, NetScout paid
approximately $352, $315 and $470, respectively, to an affiliate, which is
two-thirds owned by the two voting common stockholders of NetScout, for
consulting services.
14. GEOGRAPHIC INFORMATION
Revenue was distributed geographically as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
MARCH 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
North America.......................... $ 26,823 $ 37,518 $ 59,619 $ 13,191 $ 15,442
Other international.................... 3,825 5,311 7,932 2,072 3,629
--------- --------- --------- --------- ---------
$ 30,648 $ 42,829 $ 67,551 $ 15,263 $ 19,071
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Substantially all of NetScout's identifiable assets are located in the
United States.
F-21
<PAGE>
NETSCOUT SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF CHARGED TO END OF
DESCRIPTION PERIOD OPERATIONS DEDUCTIONS PERIOD
- --------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended March 31, 1997
Reserves and allowances deducted from asset accounts
Reserve for returns.................................. $ 117,000 2,868,000 1,492,000 $1,493,000
Allowance for doubtful accounts...................... $ 80,000 151,000 31,000 $ 200,000
Year ended March 31, 1998
Reserves and allowances deducted from asset accounts
Reserve 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
Reserve for returns.................................. $ 713,000 (184,000) 83,000 $ 446,000
Allowance for doubtful accounts...................... $ 350,000 244,000 4,000 $ 590,000
Three months ended June 30, 1999
Reserves and allowances deducted from asset accounts
Reserve for returns.................................. $ 446,000 61,000 44,000 $ 463,000
Allowance for doubtful accounts...................... $ 590,000 (4,300) 800 $ 584,900
</TABLE>
S-1
<PAGE>
[Picture of three different models of NetScout probes.]
S-2
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the common stock offered hereby are as
follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 28,773
NASD filing fee................................................... 10,850
Nasdaq National Market listing fee................................ 95,000
Printing and engraving expenses................................... 120,000
Legal fees and expenses........................................... 300,000
Accounting fees and expenses...................................... 225,000
Blue Sky fees and expenses (including legal fees)................. 5,000
Transfer agent and registrar fees and expenses.................... 5,000
Miscellaneous..................................................... 10,377
---------
Total........................................................... $ 800,000
---------
---------
</TABLE>
NetScout will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and the Company's charter and by-laws
provide for indemnification of the Company's directors and officers for
liabilities and expenses that they may incur in such capacities. In general
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company and, with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
Reference is made to the Company's charter and by-laws filed as Exhibits 3.3 and
3.5 hereto, respectively.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. Reference is made to the form of
Underwriting Agreement filed as Exhibit 1.1 hereto.
In addition, the Company has an existing directors and officers liability
insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three fiscal years preceding the filing of this registration
statement, the Company has issued the following securities that were not
registered under the Securities Act:
(a) Issuances of Capital Stock.
In January 1999, the Company 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
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
this offering, the 6,977,254 outstanding shares of Class B Convertible Common
Stock will automatically convert into 6,977,254 shares of common stock.
In February 1996, NetScout issued 631,579 shares of its Series A Preferred
Stock, par value $0.001 per share, to Greylock Equity Limited Partnership, at
purchase price of $9.50 per share, for an aggregate of
II-1
<PAGE>
$6,000,000. Roger Evans, a general partner of the general partner of Greylock,
served as a member of the Board of Directors of NetScout from February 1996
until January 1999. Upon closing of this offering, the 315,790 shares of
outstanding Series A Preferred Stock will automatically convert into an
aggregate of 1,263,160 shares of common stock.
(b) Grants and Exercises of Stock Options
As of June 30, 1999, the Company has outstanding options to purchase an
aggregate of 3,239,451 shares of Non-Voting Common Stock under the 1990 Stock
Option Plan exercisable at a weighted average exercise price of $4.21 per share.
From April 1, 1996 to June 30, 1999, the Company issued 491,121 shares of
Non-Voting Common Stock for an aggregate purchase price of $348,279 pursuant to
exercise of employee options.
Upon closing of this offering, each share of Non-Voting Common Stock will
convert into one share of common stock.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 under
the Securities Act. All of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
1.1 TRIANGLE Form of Underwriting Agreement.
3.1++ Second Amended and Restated Certificate of Incorporation of NetScout.
3.2++ Form of Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of
NetScout.
3.3, 4.1++ Form of Third Amended and Restated Certificate of Incorporation of NetScout.
3.4++ By-laws of NetScout.
3.5, 4.2++ Form of Amended and Restated By-laws of NetScout.
4.3++ Specimen Certificate for shares of NetScout's Common Stock.
5.1++ Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1**++ 1990 Stock Option Plan, as amended.
10.2**++ 1999 Stock Option and Incentive Plan.
10.3**++ 1999 Employee Stock Purchase Plan.
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.
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.
10.6++ Lease dated August 18, 1997 between NetScout and Michelson Farm-Westford Technology Park Limited
Partnership.
10.7++ Amended and Restated Loan and Security Agreement dated March 12, 1998 by and between NetScout and
Silicon Valley Bank.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
10.8++ Loan Modification Agreement entered into March 11, 1999 between NetScout and Silicon Valley Bank.
+10.9++ OEM Agreement dated as of February 3, 1998 by and between SDL Communications, Inc. and NetScout.
+10.10 TRIANGLE Project Development and License Agreement dated as of July 13, 1994 by and between Cisco Systems,
Inc. and NetScout.
+10.11 TRIANGLE Amendment No. 1 to the Project Agreement and Design License Agreement dated as of January 4, 1995
by and between Cisco and NetScout.
+10.12 TRIANGLE Private Label Agreement effective as of October 17, 1995 by and between Cisco and NetScout.
+10.13 TRIANGLE Amendment to Private Label Agreement and Project Development and License Agreement dated May 15,
1996 by and between Cisco and NetScout.
+10.14 TRIANGLE Amendment No. 3 to the Private Label Agreement and Project Development and License Agreement by and
between Cisco and NetScout.
+10.15 TRIANGLE 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.
10.16**++ Agreement Relating to Employment dated June 1, 1994 by and between NetScout and Anil Singhal.
10.17**++ Amendment No. 1 to Agreement Relating to Employment dated January 14, 1999 by and between NetScout
and Anil Singhal.
10.18**++ Agreement Relating to Employment dated June 1, 1994 by and between NetScout and Narendra Popat.
10.19**++ Amendment No. 1 to Agreement Relating to Employment dated January 14, 1999 by and between NetScout
and Narendra Popat.
10.20++ Secured Term Note for $1,100,000, Partially Non-Recourse, dated June 28, 1996, Payable to NetScout
by Anil Singhal.
10.21++ Stock Pledge Agreement, made as of June 28, 1996, between Anil Singhal and NetScout.
10.22++ Secured Term Note for $900,000, Partially Non-Recourse, dated June 28, 1996. Payable to NetScout by
Narendra Popat.
10.23++ Stock Pledge Agreement, made as of June 28, 1996, between Narendra Popat and NetScout.
21.1++ Subsidiaries of NetScout.
23.1++ Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit 5.1).
23.2++ Consent of PricewaterhouseCoopers LLP.
24.1++ Power of Attorney.
27.1++ Financial Data Schedule.
27.2++ Financial Data Schedule.
</TABLE>
- ------------------------
** Indicates a management contract or any compensatory plan, contract or
arrangement.
+ Confidential materials omitted and filed separately with the Securities and
Exchange Commission.
++ Previously filed.
TRIANGLE Filed herewith.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are either not applicable
or the required information is included with the Consolidated Financial
Statement and Notes thereto, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; and (3) that for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Westford, Massachusetts on August 6, 1999.
NETSCOUT SYSTEMS, INC.
By: /s/ NARENDRA POPAT
------------------------------------------
Narendra Popat
PRESIDENT AND CHIEF OPERATING OFFICER
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------ --------------------------- -------------------
<S> <C> <C>
Chief Executive Officer and August 6, 1999
* Chairman of the Board
---------------------------- (Principal Executive
Anil K. Singhal Officer)
/s/ NARENDRA POPAT President, Chief Operating August 6, 1999
---------------------------- Officer and Director
Narendra Popat
Vice President, Finance and August 6, 1999
* Administration and Chief
---------------------------- Financial Officer
Charles W. Tillett (Principal Financial and
Accounting Officer)
* Director August 6, 1999
----------------------------
Joseph G. Hadzima, Jr.
* Director August 6, 1999
----------------------------
Kenneth T. Schiciano
* Director August 6, 1999
----------------------------
Richard J. Egan
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ NARENDRA POPAT
-------------------------
Narendra Popat
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
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<S> <C>
1.1 TRIANGLE Form of Underwriting Agreement.
3.1++ Second Amended and Restated Certificate of Incorporation of NetScout.
3.2++ Form of Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of
NetScout.
3.3, 4.1++ Form of Third Amended and Restated Certificate of Incorporation of NetScout.
3.4++ By-laws of NetScout.
3.5, 4.2++ Form of Amended and Restated By-laws of NetScout.
4.3++ Specimen Certificate for shares of NetScout's Common Stock.
5.1++ Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1**++ 1990 Stock Option Plan, as amended.
10.2**++ 1999 Stock Option and Incentive Plan.
10.3**++ 1999 Employee Stock Purchase Plan.
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.
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.
10.6++ Lease dated August 18, 1997 between NetScout and Michelson Farm-Westford Technology Park Limited
Partnership.
10.7++ Amended and Restated Loan and Security Agreement dated March 12, 1998 by and between NetScout and
Silicon Valley Bank.
10.8++ Loan Modification Agreement entered into March 11, 1999 between NetScout and Silicon Valley Bank.
+10.9++ OEM Agreement dated as of February 3, 1998 by and between SDL Communications, Inc. and NetScout.
+10.10 TRIANGLE Project Development and License Agreement dated as of July 13, 1994 by and between Cisco Systems,
Inc. and NetScout.
+10.11 TRIANGLE Amendment No. 1 to the Project Agreement and Design License Agreement dated as of January 4, 1995
by and between Cisco and NetScout.
+10.12 TRIANGLE Private Label Agreement effective as of October 17, 1995 by and between Cisco and NetScout.
+10.13 TRIANGLE Amendment to Private Label Agreement and Project Development and License Agreement dated May 15,
1996 by and between Cisco and NetScout.
+10.14 TRIANGLE Amendment No. 3 to the Private Label Agreement and Project Development and License Agreement by and
between Cisco and NetScout.
+10.15 TRIANGLE 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.
10.16**++ Agreement Relating to Employment dated June 1, 1994 by and between NetScout and Anil Singhal.
10.17**++ Amendment No. 1 to Agreement Relating to Employment dated January 14, 1999 by and between NetScout
and Anil Singhal.
10.18**++ Agreement Relating to Employment dated June 1, 1994 by and between NetScout and Narendra Popat.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
10.19**++ Amendment No. 1 to Agreement Relating to Employment dated January 14, 1999 by and between NetScout
and Narendra Popat.
10.20++ Secured Term Note for $1,100,000, Partially Non-Recourse, dated June 28, 1996, Payable to NetScout
by Anil Singhal.
10.21++ Stock Pledge Agreement, made as of June 28, 1996, between Anil Singhal and NetScout.
10.22++ Secured Term Note for $900,000, Partially Non-Recourse, dated June 28, 1996. Payable to NetScout by
Narendra Popat.
10.23++ Stock Pledge Agreement, made as of June 28, 1996, between Narendra Popat and NetScout.
21.1++ Subsidiaries of NetScout.
23.1++ Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit 5.1).
23.2++ Consent of PricewaterhouseCoopers LLP.
24.1++ Power of Attorney.
27.1++ Financial Data Schedule.
27.2++ Financial Data Schedule.
</TABLE>
- ------------------------
** Indicates a management contract or any compensatory plan, contract or
arrangement.
+ Confidential materials omitted and filed separately with the Securities and
Exchange Commission.
++ Previously filed.
TRIANGLE Filed herewith.
<PAGE>
Exhibit 1.1
4,000,000 SHARES
NETSCOUT SYSTEMS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
__, 1999
DEUTSCHE BANC ALEX. BROWN
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
As Representatives of the Several Underwriters,
c/o Deutsche Banc Alex. Brown
101 Federal Street, 15th Floor
Boston, Massachusetts 02110
Dear Sirs:
1. INTRODUCTORY. NetScout Systems, Inc., a Delaware corporation
("COMPANY"), proposes to issue and sell 4,000,000 shares of its common stock,
$.001 par value per share ("SECURITIES") (such shares of Securities being
hereinafter referred to as the "FIRM SECURITIES"). The stockholders listed in
Schedule A hereto (the "Selling Stockholders") also propose to sell to the
Underwriters, at the option of the Underwriters, an aggregate of not more than
600,000 additional outstanding shares of the Company's Securities, as set forth
below (such 600,000 additional shares being hereinafter referred to as the
"OPTIONAL SECURITIES"). The Firm Securities and the Optional Securities are
herein collectively called the "OFFERED SECURITIES". The Company and the Selling
Stockholders hereby agree with the several Underwriters named in Schedule B
hereto ("UNDERWRITERS") as follows:
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS. (a) The Company and Narendra Popat (the "Principal Selling
Stockholder"), jointly and severally, represent and warrant to, and agree with,
the several Underwriters that:
(i) A registration statement (No. 333-76843) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("COMMISSION") and either (A)
has been declared effective under the Securities Act of 1933 ("ACT")
and is not proposed to be amended or (B) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
(the "INITIAL REGISTRATION STATEMENT") has been declared effective,
either (A) an additional registration statement (the "ADDITIONAL
REGISTRATION STATEMENT")
<PAGE>
relating to the Offered Securities may have been filed with the
Commission pursuant to Rule 462(b) ("RULE 462(b)") under
the Act and, if so filed, has become effective upon filing pursuant to
such Rule and the Offered Securities all have been duly registered
under the Act pursuant to the initial registration statement and, if
applicable, the additional registration statement or (B) such an
additional registration statement is proposed to be filed with the
Commission pursuant to Rule 462(b) and will become effective upon
filing pursuant to such Rule and upon such filing the Offered
Securities will all have been duly registered under the Act pursuant to
the initial registration statement and such additional registration
statement. If the Company does not propose to amend the initial
registration statement or if an additional registration statement has
been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("RULE 462(c)") under the
Act or, in the case of the additional registration statement, Rule
462(b). For purposes of this Agreement, "EFFECTIVE TIME" with respect
to the initial registration statement or, if filed prior to the
execution and delivery of this Agreement, the additional registration
statement means (A) if the Company has advised the Representatives that
it does not propose to amend such registration statement, the date and
time as of which such registration statement, or the most recent
post-effective amendment thereto (if any) filed prior to the execution
and delivery of this Agreement, was declared effective by the
Commission or has become effective upon filing pursuant to Rule 462(c),
or (B) if the Company has advised the Representatives that it proposes
to file an amendment or post-effective amendment to such registration
statement, the date and time as of which such registration statement,
as amended by such amendment or post-effective amendment, as the case
may be, is declared effective by the Commission. If an additional
registration statement has not been filed prior to the execution and
delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "EFFECTIVE TIME" with
respect to such additional registration statement means the date and
time as of which such registration statement is filed and becomes
effective pursuant to Rule 462(b). "EFFECTIVE DATE" with respect to the
initial registration statement or the additional registration statement
(if any) means the date of the Effective Time thereof. The initial
registration statement, as amended at its Effective Time, including all
information contained in the additional registration statement (if any)
and deemed to be a part of the initial registration statement as of the
Effective Time of the additional registration statement pursuant to the
General Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("RULE
430A(b)") under the Act, is hereinafter referred to as the "INITIAL
REGISTRATION STATEMENT". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "ADDITIONAL REGISTRATION
STATEMENT". The Initial Registration Statement and the Additional
Registration Statement are hereinafter referred to collectively as the
"REGISTRATION STATEMENTS" and individually as a "REGISTRATION
STATEMENT". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("RULE 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter
referred to as the "PROSPECTUS". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
("RULES AND REGULATIONS") and did not include any
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<PAGE>
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, (B) on the Effective Date of the Additional Registration
Statement (if any), each Registration Statement conformed or will
conform, in all respects to the requirements of the Act and the Rules
and Regulations and did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not omit, to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading, and (C) on the date of this Agreement,
the Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included,
each Registration Statement and the Prospectus will conform, in all
material respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will include,
any untrue statement of a material fact or omits, or will omit, to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all material respects to the requirements of the Act and the
Rules and Regulations, neither of such documents will include any
untrue statement of a material fact or will omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading, and no Additional Registration Statement has
been or will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(c) hereof.
(iii) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus; the merger of
Frontier Software Development, Inc., a Massachusetts corporation, into
the Company was duly and validly consummated; and the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification and the failure
to be so qualified would have a material adverse effect on the
condition (financial or other), business, prospects, properties or
results of operations of the Company and its subsidiaries, taken as
whole ("MATERIAL ADVERSE EFFECT").
(iv) Each subsidiary of the Company has been duly incorporated and
is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus; and each subsidiary of the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification and the failure to
be so qualified would have a Material Adverse Effect; all of the issued
and outstanding capital stock of each subsidiary of the Company has
been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each subsidiary owned by the
Company, directly or through subsidiaries, is owned free from liens,
encumbrances and defects.
(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on
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<PAGE>
each Closing Date (as defined below) will have been, validly issued,
fully paid and nonassessable and will conform to the description
thereof contained in the Prospectus; and neither the stockholders of
the Company nor any other person has any preemptive rights with respect
to the Offered Securities that have not been waived. The information
set forth under the caption "Capitalization" in the Prospectus is true
and correct. There are no outstanding options, warrants or other rights
(that have not been waived) granted to or by the Company to purchase
Offered Securities or other securities of the Company other than (i) as
described in the Prospectus or (ii) options to purchase up to 175,000
shares of Common Stock granted by the Company to employees and
consultants in the ordinary course of business consistent with past
practice.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like
payment in connection with this offering.
(vii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act.
(viii) The Securities have been approved for listing, subject to
notice of issuance, on the Nasdaq Stock Market's National Market.
(ix) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities, except
such as have been obtained and made under the Act and such as may be
required under state securities laws.
(x) The execution, delivery and performance of this Agreement, and
the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, (i) any statute, any rule, regulation or
order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company or any subsidiary of the
Company or any of their properties, (ii) any agreement or instrument to
which the Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject and that is
material to the Company and its subsidiaries, taken as a whole, or
(iii) the charter or by-laws of the Company or any such subsidiary; and
the Company has full power and authority to authorize, issue and sell
the Securities to be sold by the Company as contemplated by this
Agreement.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(xii) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and
all other properties and assets owned by them which are material to the
business of the Company and its subsidiaries, taken as a whole, in each
case free from liens, encumbrances and defects that would materially
affect the value thereof or materially interfere with the use made or
to be made thereof by them; and except as disclosed in the Prospectus,
the Company and its subsidiaries hold any leased real or personal
property under valid and enforceable leases with no exceptions that
would materially interfere with the use made or to be made thereof by
them.
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<PAGE>
(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by
them and have not received any notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit
that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect.
(xiv) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(xv) Except as disclosed in the Prospectus, (i) the Company and
each of its subsidiaries have the right to use all trademarks, trade
names, trade secrets, servicemarks, inventions, patent rights, mask
works, copyrights, licenses, software code, audiovisual works, formats,
algorithms and underlying data required to operate its business as
presently being conducted and proposed to be conducted as described in
the Prospectus, (ii) the Company and each of its subsidiaries have all
required approvals and governmental authorizations now used in, or
which are necessary for fulfillment of their respective obligations or
the conduct of, their respective businesses as now conducted or
proposed to be conducted as described in the Prospectus, except where
the failure to have such approvals or authorizations do not have a
Material Adverse Effect and (iii) neither the Company nor any of its
subsidiaries is knowingly infringing any trademark, trade name rights,
patent rights, mask works, copyrights, licenses, trade secret,
servicemarks or other similar rights of others, and there is no claim
being made against the Company or any of its subsidiaries regarding
trademark, trade name, patent, mask work, copyright, license, trade
secret or other infringement or assertion of intellectual property
rights which could have a Material Adverse Effect. The Company has
agreements in place with each employee, consultant or other person or
party engaged by the Company or any subsidiary providing for the
assignment to the Company or any of its subsidiaries, as the case may
be, of all intellectual property and exploitation rights in the work
performed and the protection of the trade secrets and confidential
information of the Company, each of its subsidiaries and of third
parties which have been developed by such person for or on behalf of
the Company or any of its subsidiaries. The description of the
Company's Year 2000 readiness under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness Disclosure" in the Prospectus is
accurate and complete in all material respects.
(xvi) Except as disclosed in the Prospectus, neither the Company
nor any of its subsidiaries is knowingly in violation of any statute,
any rule, regulation, decision or order of any governmental agency or
body or any court, domestic or foreign, relating to the use, disposal
or release of hazardous or toxic substances or relating to the
protection or restoration of the environment or human exposure to
hazardous or toxic substances (collectively, "ENVIRONMENTAL LAWS"),
owns or knowingly operates any real property contaminated with any
substance that is subject to any environmental laws, is liable for any
off-site disposal or contamination pursuant to any environmental laws,
or is subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim would individually or in
the aggregate have Material Adverse Effect; and the Company is not
aware of any pending investigation which might lead to such a claim.
(xvii) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of
its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect, or
would materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or which are otherwise
material in the context of the sale of the Offered Securities; and,
except as disclosed in the Prospectus, no
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<PAGE>
such actions, suits or proceedings have been threatened or, to the
Company's knowledge, are contemplated.
(xviii) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown, and
such financial statements have been prepared in conformity with the
generally accepted accounting principles in the United States applied
on a consistent basis; and the schedules included in each Registration
Statement present fairly the information required to be stated therein;
and the assumptions used in preparing the pro forma financial
statements included in each Registration Statement and the Prospectus
provide a reasonable basis for presenting the significant effects
directly attributable to the transactions or events described therein,
the related pro forma adjustments give appropriate effect to those
assumptions, and the pro forma columns therein reflect the proper
application of those adjustments to the corresponding historical
financial statement amounts.
(xix) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there
has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole, and, except as
disclosed in or contemplated by the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(xx) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(xxi) The Company and each of its subsidiaries has filed all
foreign, federal, state and local tax returns that are required to be
filed or has requested extensions thereof (except in any case in which
the failure so to file would not have a Material Adverse Effect) and
the Company and each of its subsidiaries has paid all material taxes
required to be paid by it and any other assessment, fine or penalty
levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is
currently being contested in good faith or as described in or
contemplated by the Registration Statement or the Prospectus.
(xxii) PricewaterhouseCoopers, LLP, who have audited the financial
statements filed with the Commission as part of each Registration
Statement, are independent public accountants as required by the Act
and the Rules and Regulations. The Company maintains a system of
internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; and (iii) access to assets is
permitted only in accordance with management's general or specific
authorization.
(xxiii) The Company and each of its subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the value
of their respective properties and as is customary for companies
engaged in similar industries.
(xxiv) The Company and each of its subsidiaries are in compliance
in all material respects with all presently applicable provisions of
the Employee Retirement Income Security Act of 1974,
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<PAGE>
as amended, including the regulations thereunder ("ERISA"); no
"reportable event" (as defined in ERISA) has occurred with respect to
any "pension plan" (as defined in ERISA) for which the Company or any
of its subsidiaries would have any liability; the Company and each of
its subsidiaries have not incurred and do not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Section 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations
thereunder ("CODE"); and each "pension plan" for which the Company and
each of its subsidiaries would have any liability that is intended to
be qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
(xxv) Except as set forth in each Registration Statement and the
Prospectus, there are no agreements, claims, payments, issuances,
arrangements or understandings, whether oral or written, for services
in the nature of finder's, consulting or origination fees with respect
to the sale of the Offered Securities or any other arrangements,
agreements, understandings, payments or issuance with respect to the
Company or any of its officers, directors, shareholders, partners,
employees, subsidiaries or affiliates that may affect the Underwriters'
compensation as determined by the National Association of Securities
Dealers, Inc. (the "NASD").
(xxvi) Except as set forth in each Registration Statement and the
Prospectus and as is required to be disclosed in each Registration
Statement and the Prospectus, no officer, director or shareholder of
the Company or any "affiliate" or "associate" (as these terms are
defined in Rule 405 under the Act) of any of the foregoing persons or
entities has or has had, either directly or indirectly (i) an interest
in any person or entity that (x) furnishes or sells services or
products which are furnished or sold or that are proposed to be
furnished or sold by the Company, or (y) purchases from or sells or
furnishes to the Company any goods or services, or (ii) a beneficial
interest in any contract or agreement to which the Company is a party
or by which it may be bound or affected. Except as set forth in each
Registration Statement and the Prospectus under the caption "Certain
Transactions", "Management", "Description of Capital Stock" and Item
16, Exhibits and Financial Statement Schedules and as is required to be
disclosed in each Registration Statement and Prospectus, there are no
existing or proposed agreements, arrangements, understandings or
transactions, between or among the Company and any officer, director,
principal shareholder of the Company or any partner, affiliate or
associate of any of the foregoing persons or entities.
(xxvii) The minute books of the Company made available to the
Underwriters contain a complete summary of all meetings and actions of
the directors and stockholders of the Company (including its
predecessor Massachusetts corporation) since the time of its
incorporation and reflect accurately and fairly in all respects all
transactions referred to in such minutes.
(b) Each Selling Stockholder severally and not jointly represents and
warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has and on each Closing Date
hereinafter mentioned will have good, valid and unencumbered title to
the Offered Securities to be delivered by such Selling Stockholder on
such Closing Date and full right, power and authority to enter into
this Agreement and to sell, assign, transfer and deliver the Offered
Securities to be delivered by such Selling Stockholder on such Closing
Date hereunder; and upon the delivery of and payment for the Offered
Securities on each Closing Date hereunder the several Underwriters will
acquire good, valid and unencumbered title to the Offered Securities to
be delivered by such Selling Stockholder on such Closing Date.
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<PAGE>
(ii) Such Selling Stockholder has duly authorized (if applicable),
executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of
Attorney") appointing Anil K. Singhal, Narendra Popat and Charles W.
Tillett as attorneys-in-fact (collectively, the "Attorneys" and
individually, an "Attorney") and a Custody Agreement (the "Custody
Agreement") with NetScout Systems, Inc., as custodian (the
"Custodian"); each of the Power of Attorney and the Custody Agreement
constitutes a valid and binding agreement on the part of such Selling
Stockholder, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles; and each of such Selling Stockholder's Attorneys, acting
alone, is authorized to execute and deliver this Agreement and such
certificates as the Representatives shall reasonably request at the
Closing on behalf of such Selling Stockholder, to determine the
purchase price to be paid by the several Underwriters to such Selling
Stockholder, to authorize the delivery of the Offered Securities to be
sold by such Selling Stockholder under this Agreement and to duly
endorse (in blank or otherwise) the certificate or certificates
representing such Securities or a stock power or powers with respect
thereto, to accept payment therefor, and otherwise to act on behalf of
such Selling Stockholder in connection with this Agreement.
(iii) All consents, approvals, authorizations and orders required
for the execution and delivery by such Selling Stockholder of the Power
of Attorney and the Custody Agreement, the execution and delivery by or
on behalf of such Selling Stockholder of this Agreement and the sale
and delivery of the Offered Securities to be sold by such Selling
Stockholder under this Agreement (other than, at the time of the
execution hereof (if the Registration Statement has not yet been
declared effective by the Commission) the issuance of the order of the
Commission declaring the Registration Statement effective and such
filings required under Rule 424(b) promulgated under the Securities Act
and such consents, approvals, authorizations or orders as may be
necessary under state or other securities or Blue Sky laws) have been
obtained and are in full force and effect; such Selling Stockholder, if
other than a natural person, has been duly organized and is validly
existing in good standing under the laws of the jurisdiction of its
organization as the type of entity that it purports to be; and such
Selling Stockholder has full legal right, power and authority to enter
into and perform its obligations under this Agreement and such Power of
Attorney and Custody Agreement, and to sell, assign, transfer and
deliver the Securities to be sold by such Selling Stockholder under
this Agreement.
(iv) Certificates in negotiable form for all Securities to be sold
by such Selling Stockholder under this Agreement, together with a stock
power or powers duly endorsed in blank by such Selling Stockholder,
have been placed in custody with the Custodian for the purpose of
effecting delivery hereunder.
(v) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles; and the performance of this Agreement and the consummation
of the transactions herein contemplated will not result in a material
breach or violation of any of the terms and provisions of or constitute
a default under any material bond, debenture, note or other evidence of
indebtedness, or under any material lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which such Selling Stockholder is a party or
by which such Selling Stockholder, or any Offered Securities to be sold
by such Selling Stockholder hereunder, may be bound or, to the best of
such Selling Stockholders'
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<PAGE>
knowledge, result in any violation of any law, order, rule, regulation,
writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction
over such Selling Stockholder or over the properties of such Selling
Stockholder, or, if such Selling Stockholder is other than a natural
person, result in any violation of any provisions of the charter,
bylaws or other organizational documents of such Selling Stockholder.
(vi) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the
Securities.
(vii) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with
the offering and sale of the Securities.
(viii) Such Selling Stockholder does not have, or has waived prior
to the date hereof, any preemptive right, co-sale right or right of
first refusal or other similar right to purchase any of the Offered
Securities that are to be sold by the Company or any of the other
Selling Stockholders to the Underwriters pursuant to this Agreement;
such Selling Stockholder does not have, or has waived prior to the date
hereof, any registration right or other similar right to participate in
the offering made by the Prospectus, other than such rights of
participation as have been satisfied by the participation of such
Selling Stockholder in the transactions to which this Agreement relates
in accordance with the terms of this Agreement; and such Selling
Stockholder does not own any warrants, options or similar rights to
acquire, and does not have, or has waived prior to the date hereof, any
right or arrangement to acquire, any capital stock, rights, warrants,
options or other securities from the Company, other than those
described in the Registration Statement and the Prospectus or those
issued pursuant to the Company's option plans described in the
Prospectus.
(ix) The information regarding such Selling Stockholder under the
caption "Principal and Selling Stockholders" and "Certain Transactions"
in the Registration Statement is true and correct in all material
respects.
(x) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between such Selling Stockholder and any
person that would give rise to a valid claim against such Selling
Stockholder or any Underwriter for a brokerage commission, finder's
fee or other like payment in connection with this offering.
In addition, each Selling Stockholder, other than Greylock Equity
Limited Partnership ("Greylock"), severally and not jointly, represents and
warrants to, and agrees with, the several Underwriters that, without having
undertaken to determine independently the accuracy or completeness of the
information contained in the Registration Statement, such Selling Stockholder
has reviewed the Registration Statement and Prospectus and nothing has come to
the attention of such Selling Stockholder that would lead such Selling
Stockholder to believe that either (A) on the Effective Date, the Registration
Statement contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order to make
the statements therein in light of the circumstances under which they were made
not misleading, or (B) on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Optional Securities are to be purchased
will not, contain any untrue statement of a material fact or omitted or omits to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to each
Underwriter, and each Underwriter agrees, severally and not jointly, to
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purchase from the Company at a purchase price of $ per share, that
number of Firm Securities set forth opposite the name of such Underwriter
in Schedule B.
Certificates in negotiable form for the Offered Securities to be sold
by the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under Custody Agreements made with NetScout Systems, Inc.,
as custodian ("CUSTODIAN"). Each Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholders
under such Custody Agreements are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of law, whether by
the death of any individual Selling Stockholder or the occurrence of any other
event, or in the case of a trust, by the death of any trustee or trustees or the
termination of such trust. If any individual Selling Stockholder or any such
trustee or trustees should die, or if any other such event should occur, or if
any of such trusts should terminate, before the delivery of the Offered
Securities hereunder, certificates for such Offered Securities shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death or other event or termination had not occurred,
regardless of whether or not the Custodian shall have received notice of such
death or other event or termination.
The Company will deliver the Firm Securities to the Representatives
for the accounts of the Underwriters, at the office of Testa, Hurwitz &
Thibeault, LLP, against payment of the purchase price in Federal (same day)
funds by official bank check or checks or wire transfer to an account at a
bank designated by the Company drawn to the order of NetScout Systems, Inc.,
at 9:30 A.M., New York time, on August , 1999, or at such other time not
later than seven full business days thereafter as Deutsche Banc Alex. Brown
("DEUTSCHE BANC") and the Company determine, such time being herein referred
to as the "FIRST CLOSING DATE". For purposes of Rule 15c6-1 under the
Securities Exchange Act of 1934, as amended, the First Closing Date (if later
than the otherwise applicable settlement date) shall be the settlement date
for payment of funds and delivery of securities for all the Firm Securities
sold pursuant to the offering. The certificates for the Firm Securities so to
be delivered will be in definitive form, in such denominations and registered
in such names as Deutsche Banc requests and will be made available for
checking and packaging at such location as Deutsche Banc shall reasonably
request at least 24 hours prior to the First Closing Date.
In addition, upon written notice from Deutsche Banc given to the
Company and the Selling Stockholders from time to time not more than 30 days
subsequent to the date of the Prospectus, the Underwriters may purchase all or
less than all of the Optional Securities at the purchase price per Offered
Security to be paid for the Firm Securities. The Selling Stockholders agree,
severally and not jointly, to sell to the Underwriters the respective numbers of
Optional Securities obtained by multiplying the number of Optional Securities
specified in such notice by a fraction the numerator of which is the number of
shares set forth opposite the names of such Selling Stockholders in Schedule A
hereto under the caption "Number of Optional Securities to be Sold" and the
denominator of which is the total number of Optional Securities (subject to
adjustment by Deutsche Banc to eliminate fractions). Such Optional Securities
shall be purchased from each Selling Stockholder for the account of each
Underwriter in the same proportion as the number of Firm Securities set forth
opposite such Underwriter's name bears to the total number of Firm Securities
(subject to adjustment by Deutsche Banc to eliminate fractions) and may be
purchased by the Underwriters only for the purpose of covering over-allotments
made in connection with the sale of the Firm Securities. No Optional Securities
shall be sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by Deutsche Banc to the Company and the Selling Stockholders.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First
Closing Date (the First Closing Date and each
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<PAGE>
Optional Closing Date, if applicable, being sometimes referred to as a "CLOSING
DATE"), shall be determined by Deutsche Banc but shall be not later than five
full business days after written notice of election to purchase Optional
Securities is given. The Company and the Custodian will deliver the Optional
Securities being purchased on each Optional Closing Date to the Representatives
for the accounts of the several Underwriters, at the office of Testa, Hurwitz &
Thibeault, LLP, against payment of the purchase price therefor in Federal (same
day) funds by official bank check or checks or wire transfer to an account at a
bank designated by the Custodian drawn to the order of the Custodian, for the
account of the Selling Stockholders, in the case of the Optional Securities sold
by the Selling Stockholders. The certificates for the Optional Securities being
purchased on each Optional Closing Date will be in definitive form, in such
denominations and registered in such names as Deutsche Banc requests upon
reasonable notice prior to such Optional Closing Date and will be made available
for checking and packaging at such location as Deutsche Banc shall reasonably
request at a reasonable time in advance of such Optional Closing Date.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. CERTAIN AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. The
Company agrees and each of the Selling Stockholders (with respect to
subparagraphs (i) and (j) below) agrees with the several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance
with subparagraph (1) (or, if applicable and if consented to by
Deutsche Banc, subparagraph (4)) of Rule 424(b) not later than the
earlier of (A) the second business day following the execution and
delivery of this Agreement or (B) the fifteenth business day after the
Effective Date of the Initial Registration Statement.
The Company will advise Deutsche Banc promptly of any such filing
pursuant to Rule 424(b). If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement and an additional registration statement is necessary to
register a portion of the Offered Securities under the Act but the
Effective Time thereof has not occurred as of such execution and
delivery, the Company will file the additional registration statement
or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior
to 10:00 P.M., New York time, on the date of this Agreement or, if
earlier, on or prior to the time the Prospectus is printed and
distributed to any Underwriter, or will make such filing at such later
date as shall have been consented to by Deutsche Banc.
(b) The Company will advise Deutsche Banc promptly of any proposal
to amend or supplement the initial or any additional registration
statement as filed or the related prospectus or the Initial
Registration Statement, the Additional Registration Statement (if any)
or the Prospectus and will not effect such amendment or supplementation
without Deutsche Banc's consent, which consent shall not be
unreasonably withheld; and the Company will also advise Deutsche Banc
promptly of the effectiveness of each Registration Statement (if its
Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration
Statement or the Prospectus and of the institution by the Commission of
any stop order proceedings in respect of a Registration Statement and
will use its best efforts to prevent the issuance of any such stop
order and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements
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<PAGE>
therein, in the light of the circumstances under which they were made,
not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, the Company will promptly notify
Deutsche Banc of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect
such compliance. Neither Deutsche Banc's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to
its securityholders an earnings statement covering a period of at least
12 months beginning after the Effective Date of the Initial
Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the provisions of
Section 11(a) of the Act. For the purpose of the preceding sentence,
"AVAILABILITY DATE" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last
quarter of the Company's fiscal year, "AVAILABILITY DATE" means the
90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (one of which will be signed and will include
all exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be
delivered under the Act in connection with sales by any Underwriter or
dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as Deutsche Banc requests.
The Prospectus shall be so furnished on or prior to 3:00 P.M., New York
time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other such documents shall be so furnished
as soon as available. The Company and the Selling Stockholders will pay
the expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as Deutsche
Banc designates and will continue such qualifications in effect so long
as required for the distribution; provided, however, that the Company
shall not be obliged to file any general consent to service of process
or to qualify as a foreign corporation or as a securities dealer in any
jurisdiction or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year,
a copy of its annual report to stockholders for such year; and the
Company will furnish to the Representatives (i) as soon as available, a
copy of each report and any definitive proxy statement of the Company
filed with the Commission under the Securities Exchange Act of 1934 or
mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as Deutsche Banc may reasonably
request.
(h) For a period of 180 days after the Effective Date, the Company
will not offer, sell, contract to sell, grant any option to purchase,
pledge or otherwise dispose of or transfer, directly or indirectly, or
file with the Commission a registration statement (other than a
Registration Statement on Form S-8) under the Act relating to, any
additional shares of its securities or securities convertible into or
exchangeable or exercisable for any shares of its securities, or
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of Deutsche
Banc, except for the sale by the Company of the Offered Securities to
the Underwriters, the issuances of securities pursuant to the
conversion of convertible
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<PAGE>
securities or the exercise of warrants or options, in each case
outstanding on the date hereof, or grants of director, consultant and
employee stock options or stock pursuant to the terms of a plan in
effect on the Closing Date and described in the Prospectus, or
issuances of securities pursuant to the exercise of such options.
(i) The Company and each Selling Stockholder agree with the
several Underwriters that the Company and such Selling Stockholder will
pay all expenses incident to the performance of the obligations of the
Company and such Selling Stockholder, as the case may be, under this
Agreement, including, without limitation, for any filing fees and other
expenses (including reasonable fees and disbursements of counsel) in
connection with qualification of the Offered Securities for sale under
the laws of such jurisdictions as Deutsche Banc designates and the
printing of memoranda relating thereto, for the filing fee incident to,
and the reasonable fees and disbursements of counsel to the
Underwriters in connection with, the review by the NASD of the Offered
Securities, for any travel expenses of the Company's officers and
employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the
Offered Securities, for any transfer taxes on the sale by the Selling
Stockholders of the Offered Securities to the Underwriters and for
expenses incurred in distributing preliminary prospectuses and the
Prospectus (including any amendments and supplements thereto) to the
Underwriters. Notwithstanding the provisions of the foregoing
paragraph, each Selling Stockholder shall be responsible for his, her
or its own transfer taxes.
(j) Each Selling Stockholder agrees to deliver to Deutsche Banc,
attention: Transactions Advisory Group on or prior to the First Closing
Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received from
PricewaterhouseCoopers, LLP a letter dated the date hereof and each
Closing Date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such
letter for each of the Underwriters containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain information contained in each Registration Statement and the
Prospectus.
In the event that the letters referred to above set forth any
changes in capital stock, increases in short-term or long-term debt or
decreases in net current assets, net assets, revenues, net income or
net income per share as reflected on the most recently available
financial statements not included in the Prospectus as compared to the
corresponding date or period of the prior year and as compared to the
most recent date and the most recent period of corresponding length
included in the financial statements included in the Prospectus, it
shall be a further condition to the obligations of the Underwriters
that (i) such letters shall be accompanied by a written explanation of
the Company as to the significance thereof, unless the Representatives
deem such explanation unnecessary, and (ii) such changes, decreases or
increases do not, in the sole judgment of the Representatives, make it
impractical or inadvisable to proceed with the purchase and delivery of
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<PAGE>
the Offered Securities as contemplated by such Registration Statement,
as amended as of the date hereof.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or such later date as shall have
been consented to by Deutsche Banc. If the Effective Time of the
Additional Registration Statement (if any) is not prior to the
execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or, if earlier, the time the Prospectus is printed and
distributed to any Underwriter, or shall have occurred at such later
date as shall have been consented to by Deutsche Banc. If the Effective
Time of the Initial Registration Statement is prior to the execution
and delivery of this Agreement, the Prospectus shall have been filed
with the Commission in accordance with the Rules and Regulations and
Section 5(a) of this Agreement. Prior to such Closing Date, no stop
order suspending the effectiveness of a Registration Statement shall
have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of any Selling Stockholder, the Company
or the Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or
event involving a prospective change, in the condition (financial or
other), business, properties or results of operations of the Company or
its subsidiaries taken as one enterprise which, in the judgment of a
majority in interest of the Underwriters including the Representatives,
is material and adverse and makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and
payment for the Offered Securities; (ii) any downgrading in the rating
of any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule
436(g) under the Act), or any public announcement that any such
organization has under surveillance or review its rating of any debt
securities of the Company (other than an announcement with positive
implications of a possible upgrading, and no implication of a possible
downgrading, of such rating); (iii) any suspension or limitation of
trading in securities generally on the New York Stock Exchange or any
setting of minimum prices for trading on such exchange, or any
suspension of trading of any securities of the Company on any exchange
or in the over-the-counter market; (iv) any banking moratorium declared
by U.S. Federal or New York authorities; or (v) any outbreak or
escalation of major hostilities in which the United States is involved,
any declaration of war by Congress or any other substantial national or
international calamity or emergency if, in the judgment of a majority
in interest of the Underwriters including the Representatives, the
effect of any such outbreak, escalation, declaration, calamity or
emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Testa, Hurwitz & Thibeault, LLP, counsel for the
Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Prospectus; the
merger of Frontier Software Development, Inc., a Massachusetts
corporation, into the Company was duly and validly consummated;
and the Company is duly qualified to do business as a foreign
corporation in Massachusetts, Arizona, California, Colorado,
Florida, Georgia, Illinois, Kentucky, Maryland, Michigan,
Minnesota, New Hampshire, New Jersey, New York, North Carolina,
Ohio, Oregon, Pennsylvania, Texas, Virginia, and Washington;
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(ii) The Offered Securities delivered on such Closing Date and
all other outstanding shares of the Common Stock of the Company
have been duly authorized and validly issued, are fully paid and
nonassessable and conform in all material respects to the
description thereof contained in the Prospectus; the Company has
authorized and outstanding capital stock as set forth under the
caption "Capitalization" in the Prospectus as of the date
specified therein; the certificates for the Offered Securities,
assuming they are in the form filed with the Commission, are in
due and proper form; and no stockholder of the Company or any
other person has any preemptive rights with respect to the Offered
Securities pursuant to the Delaware General Corporation Law, the
Company's Certificate of Incorporation, By-laws, or to such
counsel's knowledge, any agreement with the Company that have not
been waived;
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no
outstanding securities of the Company convertible or exchangeable
into or evidencing the right to purchase or subscribe for any
shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or other securities
obligating the Company to issue any shares of its capital stock or
any securities convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of such capital
stock;
(iv) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings known to such counsel
between the Company and any person granting such person the right
to require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company
under the Act which have not been waived;
(v) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of
the proceeds thereof as described in the Prospectus, will not be
an "investment company" as defined in the Investment Company Act
of 1940, as amended.
(vi) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required to be obtained or made by the Company for the
consummation of the transactions contemplated by this Agreement or
the Custody Agreement in connection with the issuance or sale of
the Offered Securities, except such as have been obtained and made
under the Act (except that such counsel need express no opinion as
to state securities laws);
(vii) The execution, delivery and performance of this
Agreement or the Custody Agreement and the consummation of the
transactions herein or therein contemplated will not result in (a)
a material breach or violation of any of the terms and provisions
of, or constitute a default under, any statute, any rule,
regulation or order of any governmental agency or body or any
court having jurisdiction over the Company or any U.S. subsidiary
of the Company or any of their properties (except that such
counsel need express no opinion as to state securities laws), or
any agreement or instrument listed in the exhibit index to the
Registration Statement to which the Company or any such U.S.
subsidiary is a party or by which the Company or any such U.S.
subsidiary is bound or to which any of the properties of the
Company or any such subsidiary is subject, or (b) a breach or
violation of the charter or by-laws of the Company or any such
U.S. subsidiary; and the Company has the corporate power and
authority to authorize issue and sell the securities to be sold by
the Company as contemplated by this Agreement;
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(viii) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in such
opinion, the Additional Registration Statement (if any) was filed
and became effective under the Act as of the date and time (if
determinable) specified in such opinion, the Prospectus either was
filed with the Commission pursuant to the subparagraph of Rule
424(b) specified in such opinion on the date specified therein or
was included in the Initial Registration Statement or the
Additional Registration Statement (as the case may be), and, to
the knowledge of such counsel after due inquiry, no stop order
suspending the effectiveness of a Registration Statement or any
part thereof has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the Act,
and each Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective effective
or issue dates, complied as to form in all material respects with
the requirements of the Act and the Rules and Regulations; such
counsel has no reason to believe that any part of a Registration
Statement or any amendment thereto, as of its effective date or as
of such Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading; or that the Prospectus or any amendment or supplement
thereto, as of its issue date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading; and the descriptions in the Registration
Statements and Prospectus of United States statutes, legal and
governmental proceedings and contracts and other documents are
accurate in all material respects and fairly present the
information required to be shown; it being understood that such
counsel need express no opinion as to the financial statements or
schedules or other financial data contained in the Registration
Statements or the Prospectus;
(ix) This Agreement has been duly authorized, executed and
delivered by the Company;
(x) All of the Offered Securities have been duly authorized
for quotation on the Nasdaq National Market, subject to official
notice of issuance; and
(xi) Such counsel does not know of any legal or governmental
proceedings or investigations pending or threatened to which the
Company or any of its U.S. subsidiaries is a party or to which the
property of the Company or any of its subsidiaries is subject that
are required to be described in any Registration Statement or the
Prospectus and are not described therein or any statutes,
regulations, contracts or other documents that are required to be
described in any Registration Statement or the Prospectus or to be
filed as exhibits to any Registration Statement that are not
described therein or filed as required.
With respect to subparagraph (viii) of paragraph (d) above,
Testa, Hurwitz & Thibeault, LLP may state that their opinion and
belief are based upon their participation in the preparation of
the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents
thereof, but are without independent check or verification.
(e) The Representatives shall have received an opinion, dated any
such Optional Closing Date, of Testa, Hurwitz & Thibeault, LLP, counsel
for the Selling Stockholders who are natural persons (the "Individual
Selling Stockholders"), to the effect that:
(i) Upon the Underwriters obtaining control of the Offered
Securities to be sold by the Individual Selling Stockholders, and
assuming that the Underwriters acquired such Offered Securities
for value and without notice of any adverse claim to such Offered
Securities within the meaning of Section 8-102 of the Uniform
Commercial Code as in effect in the
-16-
<PAGE>
Commonwealth of Massachusetts, the Underwriters will have acquired
all rights of the Individual Selling Stockholders in such Offered
Securities free of any adverse claim;
(ii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required to be obtained or made by any Individual Selling
Stockholder for the consummation of the transactions contemplated
by the Custody Agreement or this Agreement in connection with the
sale of the Offered Securities sold by the Individual Selling
Stockholders, except such as have been obtained and made under the
Act and such as may be required under state securities laws;
(iii) The execution, delivery and performance of the Custody
Agreement and this Agreement and the consummation of the
transactions therein and herein contemplated will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court having
jurisdiction over any Individual Selling Stockholder or any of
their properties;
(iv) The Power of Attorney and related Custody Agreement with
respect to each Individual Selling Stockholder has been duly
authorized, executed and delivered by such Individual Selling
Stockholder and constitute valid and legally binding obligations
of each such Individual Selling Stockholder enforceable in
accordance with their terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors'
rights and to general equity principles; and
(v) This Agreement has been duly executed and delivered by
each Individual Selling Stockholder.
(e) The Representatives shall have received an opinion, dated any
such Optional Closing Date, of Goodwin, Procter & Hoar, LLP, counsel
for the TA Entities (as defined in the Prospectus) and of Hale and Dorr
LLP, special counsel to Greylock, to the effect that:
(i) To such counsel's knowledge, each of the TA Entities or
Greylock, as the case may be, had valid and unencumbered title to
the Offered Securities delivered by such Selling Stockholder on
such Closing Date and had full right, power and authority to sell,
assign, transfer and deliver the Offered Securities delivered by
such Individual Selling Stockholder on such Closing Date
hereunder; and upon delivery to the Underwriters of a certificate
or certificates for the Offered Securities that are being sold by
each Selling Stockholder under this Agreement and payment for such
Offered Securities by the Underwriters, each Underwriter will
acquire all of the rights of such Selling Stockholder in such
Offered Securities, and each Underwriter will also acquire each of
the Offered Securities free of any "adverse claim" (within the
meaning of Section 8-102 of the Uniform Commercial Code);
(ii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required to be obtained or made by any TA Entity or Greylock, as
the case may be, for the consummation of the transactions
contemplated by the Custody Agreement or this Agreement in
connection with the sale of the Offered Securities sold by the TA
Entities or Greylock, as the case may be, except such as have been
obtained and made under the Act and such as may be required under
state securities laws;
(iii) The execution, delivery and performance of the Custody
Agreement and this Agreement and the consummation of the
transactions therein and herein contemplated will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default
-17-
<PAGE>
under, any statute, any rule, regulation or order of any
governmental agency or body or any court having jurisdiction over
any TA Entity or Greylock, as the case may be, or any of their
properties or any agreement or instrument to which any TA Entity
or Greylock, as the case may be, is a party or by which any TA
Entity or Greylock, as the case may be, is bound or to which any
of the properties of any TA Entity or Greylock, as the case may
be, is subject and as set forth on EXHIBIT A attached to such
counsel's opinion;
(iv) The Power of Attorney and related Custody Agreement with
respect to each TA Entity or Greylock, as the case may be, has
been duly authorized, executed and delivered by such Selling
Stockholder and constitute valid and legally binding obligations
of each such Selling Stockholder enforceable in accordance with
their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to
general equity principles; and
(v) This Agreement has been duly authorized, executed and
delivered by each such Selling Stockholder.
(g) The Representatives shall have received from Hale and Dorr
LLP, counsel for the Underwriters, such opinion or opinions, dated such
Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as
the Representatives may require, and the Selling Stockholders and the
Company shall have furnished to such counsel such documents as they
request for the purpose of enabling them to pass upon such matters. In
rendering such opinion, Hale and Dorr LLP may rely as to the
incorporation of the Company upon the opinion of Testa, Hurwitz &
Thibeault, LLP.
(h) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, shall state that: the representations and warranties of
the Company in this Agreement are true and correct; the Company has
complied with all agreements and satisfied all conditions on its part
to be performed or satisfied hereunder at or prior to such Closing
Date; no stop order suspending the effectiveness of any Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule
462(b), including payment of the applicable filing fee in accordance
with Rule 111(a) or (b) under the Act, prior to the time the Prospectus
was printed and distributed to any Underwriter; and, subsequent to the
date of the most recent financial statements in the Prospectus, there
has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole except as set forth
in or contemplated by the Prospectus or as described in such
certificate.
(i) The Representatives shall have received a letter, dated such
Closing Date, of PricewaterhouseCoopers, LLP which meets the
requirements of subsection (a) of this Section, except that the
specified date referred to in such subsection will be a date not more
than three days prior to such Closing Date for the purposes of this
subsection.
(j) The Representatives shall have received from all officers and
directors of the Company and holders of Common Stock, securities
convertible into Common Stock and options to purchase Common Stock
(representing an aggregate of at least 95% of the Common Stock, on an
as-converted, fully-diluted basis) an agreement ("LOCK-UP AGREEMENT")
dated on or before the date
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<PAGE>
of this Agreement to the effect that, for a period of 180 days after
the Effective Date, such person will not, except as otherwise provided
in the Lock-Up Agreement without the prior written consent of Deutsche
Banc, offer, sell, contract to sell, grant any option to purchase,
pledge or otherwise dispose of or transfer, directly or indirectly, any
shares of Securities or securities convertible into or exchangeable or
exercisable for any shares of Securities.
If any of the conditions hereinabove provided for in this Section
6 shall not have been fulfilled when and as required by this Agreement
to be fulfilled, the obligations of the Underwriters hereunder may be
terminated by the Representatives by notifying the Company of such
termination in writing or by telegram at or prior to the First Closing
Date and each Optional Closing Date.
The Selling Stockholders and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. Deutsche Banc may in its sole discretion
waive on behalf of the Underwriters compliance with any conditions to the
obligations of the Underwriters hereunder, whether in respect of an optional
Closing Date or otherwise.
7. INDEMNIFICATION AND CONTRIBUTION. (a) Subject to Section 7(h), the
Company and the Principal Selling Stockholder, jointly and severally, will
indemnify and hold harmless each Underwriter, its partners, directors and
officers and each person, if any who controls such Underwriter within the
meaning of Section 15 of the Act, against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any breach of any representation, warranty, agreement or covenant of the Company
and the Principal Selling Stockholder contained in Section 2(a), (ii) any untrue
statement or alleged untrue statement of any material fact contained in any
Registration Statement, the Prospectus, or any amendment or supplement thereto,
or any related preliminary prospectus or (iii) the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the Company will be liable
only for the fees of one counsel for all of the Underwriters and will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information furnished
by any Underwriter consists of the information described as such in subsection
(c) below; PROVIDED, FURTHER HOWEVER, that this indemnification provision with
respect to any Registration Statement or preliminary prospectus shall not inure
to the benefit of any Underwriter (or any person controlling such Underwriter)
from whom the person asserting any such losses, claims, damages or liabilities
purchased Offered Securities if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, at or prior to the written confirmation of the sale of the Offered
Securities to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such losses, claims, damages or
liabilities.
(b) Each Selling Stockholder severally and not jointly will indemnify
and hold harmless each Underwriter, its partners, directors and officers and
each person who controls such Underwriter within the meaning of Section 15 of
the Act, against any losses, claims, damages or liabilities, joint or several,
to which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any breach of any representation,
warranty, agreement or covenant of such Selling Stockholder contained herein,
and will
-19-
<PAGE>
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such loss,
claim, damage, liability or action as such expenses are incurred; provided,
however, that the Selling Stockholders will be liable only for the fees of one
counsel for all of the Underwriters and will not be liable in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement in or omission or
alleged omission from any of such documents in reliance upon and in conformity
with written information furnished to the Company by an Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; PROVIDED, FURTHER
HOWEVER, that this indemnification provision with respect to any Registration
Statement or preliminary prospectus shall not inure to the benefit of any
Underwriter (or any person controlling such Underwriter) from whom the person
asserting any such losses, claims, damages or liabilities purchased Offered
Securities if a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of such Underwriter to such person, at or prior to the
written confirmation of the sale of the Offered Securities to such person, and
if the Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such losses, claims, damages or liabilities.
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the Act, and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will reimburse any
legal or other expenses reasonably incurred by the Company and each Selling
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
only of the following information in the Prospectus furnished on behalf of each
Underwriter: (i) the table under the first paragraph under the caption
"Underwriting", (ii) the concession and reallowance figures appearing in the
fifth paragraph under the caption "Underwriting" and (iii) the information
contained in the sixth and thirteenth paragraphs under the caption
"Underwriting".
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above (except to the extent that
such liability was directly caused by such lack of notice). In case any such
action is brought against any indemnified party and it notifies an indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that if
the indemnified party or parties reasonably determines that there may be a
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<PAGE>
conflict between the positions of the indemnifying party or parties and the
indemnified party or parties in conducting the defense of such action or that
there may be legal defenses available to such indemnified party or parties
different from or in addition to those available to the indemnifying party or
parties, then counsel for the indemnified party or parties shall be entitled to
conduct the defense to the extent reasonably determined by such counsel to be
necessary to protect the interests of the indemnified party or parties, and the
indemnifying party or parties shall bear the legal or other expenses incurred in
connection with the conduct of such defense. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement (i) includes
an unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action, and (ii) does not include a
statement as to, or an admission of, fault, culpability, or a failure to act by
or on behalf of an indemnified party. The indemnifying party or parties shall
not be responsible and shall have no liability under this Section for any
settlement effected by the indemnified party without the indemnifying parties'
consent.
(e) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a), (b)
or (c) above, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims, damages
or liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other from the offering of the Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by
the Company and the Selling Stockholders bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Stockholders or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this subsection (e) shall be deemed to include any legal expenses of one counsel
to the Company and the Selling Stockholders as a group on the one hand and the
Underwriters as a group on the other hand, as the case may be, or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any action or claim which is the subject of this subsection (e).
Notwithstanding the provisions of this subsection (e), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under
this Section shall be in addition to any liability which the Company and the
Selling Stockholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms
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<PAGE>
and conditions, to each director of the Company or the Selling Stockholders, to
each officer of the Company who has signed a Registration Statement and to each
person, if any, who controls the Company or the Selling Stockholders within the
meaning of the Act.
(g) The liability of each Selling Stockholder (including the Principal
Selling Stockholder) for breach of any representation, warranty, agreement or
covenant of this Agreement and under the indemnification and contribution
provisions under this Section 7 shall not exceed the lesser of (i) that
percentage of the total amount of such losses, claims, damages or liabilities
indemnified against which equals the percentage obtained by dividing the total
number of shares of the Offered Securities sold by such Selling Stockholder
hereunder by the total number of shares of the Offered Securities sold
hereunder, or (ii) the net proceeds received by such Selling Stockholder from
the Underwriters in the offering. Except in the case of claims based on fraud or
seeking equitable relief, the sole and exclusive remedy for breach of any
representation, warranty, agreement or covenant of this Agreement shall be
limited to the indemnification and contribution provisions of this Section 7.
The Company and the Selling Stockholders may agree, as among themselves and
without limiting the rights of the Underwriters under this Agreement, as to the
respective amounts of liability for which they shall each be responsible.
(h) In the event that any Underwriter is entitled to indemnification or
contribution from the Company or the Principal Selling Stockholder under Section
7(a), such Underwriter shall first obtain recovery, to the extent recoverable,
against the Company for such indemnification or contribution prior to taking any
action against the Principal Selling Stockholder under Section 7(a); PROVIDED,
that such Underwriter shall not be required to delay acting against the
Principal Selling Stockholder if such delay would materially prejudice such
Underwriter's rights under this Agreement.
8. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, Deutsche
Banc may make arrangements satisfactory to the Company and the Selling
Stockholders for the purchase of such Offered Securities by other persons,
including any of the Underwriters, but if no such arrangements are made by such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Offered
Securities that such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to Deutsche Banc, the Company and the Selling
Stockholders for the purchase of such Offered Securities by other persons are
not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Selling Stockholders, except as provided in Section 9 (provided that if such
default occurs with respect to Optional Securities after the First Closing Date,
this Agreement will not terminate as to the Firm Securities or any Optional
Securities purchased prior to such termination). As used in this Agreement, the
term "Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability for
its default.
9. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholders, of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered
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<PAGE>
Securities by the Underwriters is not consummated, the Company shall remain
responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
Stockholders, and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Company will reimburse the
Underwriters for all out-of-pocket expenses (including fees and disbursements of
counsel) reasonably incurred by them in connection with the offering of the
Offered Securities.
10. NOTICES. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives c/o Deutsche Banc Alex. Brown, 101 Federal Street, 15th
Floor, Boston, Massachusetts, 02110, Attention: Investment Banking Department,
or, if sent to the Company, will be mailed, delivered or telegraphed and
confirmed to it at NetScout Systems, Inc., 4 Technology Park Drive, Westford, MA
01886, Attention: President, or, if sent to the Selling Stockholders or any of
them, will be mailed, delivered or telegraphed and confirmed to Anil K. Singhal,
Narendra Popat and Charles W. Tillett at c/o NetScout Systems, Inc., 4
Technology Park Drive, Westford, MA, 01886; provided, however, that any notice
to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed
and confirmed to such Underwriter.
11. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective personal representatives
and successors and the officers and directors and controlling persons referred
to in Section 7, and no other person will have any right or obligation
hereunder.
12. REPRESENTATION. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this Agreement,
and any action under this Agreement taken by the Representatives jointly or by
Deutsche Banc will be binding upon all the Underwriters. Anil K. Singhal,
Narendra Popat and Charles W. Tillett will act for the Selling Stockholders in
connection with such transactions, and any action under or in respect of this
Agreement taken by Anil K. Singhal, Narendra Popat and Charles W. Tillett will
be binding upon all the Selling Stockholders.
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to
principles of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
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<PAGE>
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement among the
Selling Stockholder[s], the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
--------------------------------------
[INSERT NAMES OF SELLING STOCKHOLDERS]
--------------------------------------
NETSCOUT SYSTEMS, INC.
By
-----------------------------------
[INSERT TITLE]
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above
written.
DEUTSCHE BANC ALEX. BROWN
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
Acting on behalf of themselves and as the
Representatives of the several
Underwriters.
By DEUTSCHE BANC ALEX. BROWN
-------------------------
By
-------------------------
[INSERT TITLE]
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<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
OPTIONAL
SECURITIES TO
SELLING STOCKHOLDER BE SOLD
------------------- -------------
<S> <C>
-------------
Total .................................................... 600,000
-------------
-------------
</TABLE>
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<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF
FIRM SECURITIES
UNDERWRITER TO BE PURCHASED
----------- ---------------
<S> <C>
Deutsche Banc Alex. Brown ...............................
Bear, Stearns & Co. Inc. ................................
Dain Raucher Wessels ....................................
---------------
Total ............................................... 4,000,000
---------------
---------------
</TABLE>
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<PAGE>
Exhibit 10.10
CISCO SYSTEMS, INC.
PROJECT DEVELOPMENT AND LICENSE AGREEMENT
This Project Development and License Agreement ("Agreement") is made in
California as of January 13, 1994, by and between Cisco Systems, Inc., a
California corporation having its principal place of business at 1525 O'Brien
Drive, Menlo Park, CA, 94025, ("Cisco"), and Frontier Software Development, Inc.
("Frontier"), a Delaware corporation having its principal place of business at
1501 Main Street, Tewksbury, 01876.
The parties hereto agree as follows:
1. Definitions.
"Derivative Work" means the incremental work constituting enhancements and
modifications to the Software and/or works based on the source code developed as
a result of a porting the Software to Cisco platforms.
"Software" shall mean Frontier's RMON software and Derivative Work, in machine
readable binary and source code form, and all related documentation and tools
necessary to use the software listed in Exhibit A.
"RMON Extensions" shall mean Frontier's proprietary RMON extensions in machine
readable binary and source code form, and all related documentation and tools
necessary to use the software listed in Exhibit A.
"NETscout Manager" shall mean Frontier's network management application software
in machine readable binary form, and all documentation and tools necessary to
use the network management application software listed in Exhibit A.
2. Scope Of Work.
Frontier agrees to use commercially reasonable efforts to develop the Derivative
Work for Cisco's platforms and modify the NETscout Manager to incorporate
Cisco's OEM labeling requirements in accordance with the Specification and
Project Plan ("Specifications") attached hereto as Exhibit A and the Project
Schedule set forth in Exhibit B. Material changes in the Project Schedule or the
Specifications may be agreed to by both of the Project Managers in writing from
time to time during the port of the Software and RMON Extensions. Each party
agrees to negotiate in good faith and in a reasonable manner to reach agreement
for such changes or modifications. Frontier shall provide Cisco with periodic
updates of the status of the development effort in such form as Frontier and
Cisco deem appropriate.
Frontier designates NATE KALOWSKI as the Project Manager and Cisco designates
JAYSHREE ULLAL as the Project Manager for this Agreement. Frontier designates
NATE KALOWSKI as the Marketing Manager and Cisco designates MARK FARINO as the
Marketing Manager for
<PAGE>
this Agreement. The Project Managers, or their representatives, shall meet on a
regular basis throughout the development phase of this Agreement for the purpose
of joint progress reporting and relationship/program management.
The parties agree to use commercially reasonable efforts to provide appropriate
test equipment and engineering assistance to the other party for development of
the Software. Test equipment shall be returned upon request of the loaning
party.
3. Acceptance Testing.
From the date of delivery of each development milestone for the Software and
RMON Extensions, Cisco will have [*] to perform the acceptance tests specified
in the Specifications on the products. If the Software and RMON Extensions do
not conform to the Specifications, or do not otherwise pass the acceptance
tests, Frontier must deliver a detailed plan of how and when the error will be
corrected within five (5) days and must execute the plan if approved by Cisco.
At each delivery until such products pass the final acceptance tests, Cisco may
re-test the Software and RMON Extensions and Frontier agrees to best efforts
cure the defects.
4. License.
Subject to the terms and conditions hereof including payment, Frontier grants to
Cisco a worldwide, irrevocable (except for breach of the terms of this license
grant), perpetual, and non-exclusive license to use, modify, copy, market,
distribute or otherwise dispose of the Software and RMON Extensions. The license
granted hereunder shall include rights under any applicable patents, copyrights
or trade secrets necessary to use the Software and RMON Extensions.
Frontier also grants Cisco a worldwide, non-exclusive license to market and
distribute NETscout Manager under Cisco's label. The license granted hereunder
shall include rights under any applicable patents, copyrights or trade secrets
necessary to use the NETscout Manager.
5. Restrictions.
In consideration of the License granted herein and a material inducement for
Cisco's entering into this Agreement and paying the amounts required to be paid
hereunder, Frontier agrees, that it will not, directly or indirectly, publicly
announce or disclose any agreement or undertaking relating to license or port of
the Software or RMON Extensions or resale of NETscout Manager with the Cisco
competitor's listed in Exhibit C. The foregoing restriction shall commence upon
the execution date of this Amendment and continue for a period ending on the
later of (5) months after execution of this Agreement
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SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
or three (3) months from delivery of beta Software and RMON Extensions that
meets a mutually agreed upon test suite.
Cisco shall have no right to sublicense or cross license the Software and RMON
Extensions as a standalone product. Subject to payment of the Software License
Fees set forth in Exhibit D, Cisco shall full right to sublicense, cross-license
or otherwise transfer Cisco protocols that incorporate the Software and RMON
Extensions to any third party; provided however, such third party is restricted
from extracting the Software and RMON Extensions from the Cisco protocols or
otherwise using the Software and RMON Extensions apart from its use with Cisco's
protocol without obtaining a license from Frontier.
6. Title.
Title and full ownership rights to the RMON software and RMON Extensions shall
remain solely with Frontier.
Title and full ownership rights to the Derivative Work developed hereunder shall
vest solely with Cisco.
All rights, whether now existing or hereafter arising, which are not
specifically granted to the receiving party hereunder are retained by their
respective holders.
7. Price/Delivery.
Upon execution of this Agreement, Frontier shall deliver to Cisco one (1) copy
of the Software and RMON Extensions in the format requested by Cisco.
In consideration of the development efforts and rights and licenses granted
herein by Frontier, Cisco's shall pay to Frontier the license fees set forth in
Exhibit D hereto.
All payments required by this Agreement are exclusive of sales, use, rental
receipt, personal property or other taxes or excise taxes which may be levied or
assessed in connection with this Agreement, and Cisco agrees to bear and be
responsible for the payment of all such taxes, except taxes based on Frontier's
income.
8. Support/Consulting.
During the first year of this Agreement, Frontier shall provide to Cisco
maintenance, in the form of telephone hotline support, updates, revisions, bug
fixes and new releases to the Software and RMON Extensions shall be provided at
no charge. Thereafter, Cisco may purchase annual maintenance services for an
annual maintenance fee of [*].
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TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE
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SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
All updates, revisions, bug fixes and new releases provided to Cisco by Frontier
shall be subject to the terms and conditions of this Agreement.
9. Warranty.
Frontier warrants that the Software and the port of the RMON Extensions wild be
designed in accordance with Specifications. Frontier warrants for a period of
ninety days that the software modified or delivered by it will conform to the
Specifications for the Software. In the event that Cisco reports a defect to
Frontier, Frontier will use its best efforts to cure the defect within the
reasonable time periods requested by Cisco.
Frontier warrants that it has and shall throughout the term of the Agreement
have sufficient right, title and interest in the Software and RMON Extensions
provided to the Cisco to enter into this Agreement and to grant the rights it
has under this Agreement. Further, Frontier warrants that no additional rights
or licenses will be necessary to exercise the rights granted hereunder.
EXCEPT FOR THE EXPRESS WARRANTIES STATED IN THIS AGREEMENT, FRONTIER MAKES NO
ADDITIONAL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO ANY MATTER
WHATSOEVER. IN PARTICULAR, ANY AND ALL WARRANTIES OF MERCHANTABILITY AND FITNESS
FOR A PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED.
10. Confidential Information.
Cisco acknowledges Frontier's representation that the Software and RMON
Extensions and the design thereof constitutes a valuable trade secret to
Frontier and agrees that the Software and RMON Extensions and the design thereof
are provided in confidence as proprietary to Frontier, and such Software and
RMON Extensions is provided solely for Cisco's and Cisco's sublicensees'
nonexclusive use subject to the terms of this Agreement. Cisco agrees to employ
the same degree of care, but not less than reasonable care, to protect the
Software and RMON Extensions and RMON Extensions from unauthorized disclosure or
use as Cisco uses to protect its own proprietary information of a similar kind
and importance.
Cisco agrees that prior to disclosure of the Software, RMON Extensions or design
thereof to any consultant or sublicensee it shall secure that third party's
agreement to treat the Software and RMON Extensions as confidential information
under restrictions at least as protective as the provisions of this Agreement.
Cisco agrees that it will take appropriate action with its employees,
consultants, and sublicensees by agreement or otherwise, to ensure that they
will take appropriate steps to comply with their obligations with respect to
use, copying, transference, protection and security of the Software and RMON
Extensions.'
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TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Cisco's obligations to hold the Software and RMON Extensions in confidence shall
not apply to any part of the Software or RMON Extensions which:
a. is, or becomes, available to the public other than by breach of any
obligation herein assumed by Cisco; or
b. is furnished to a third party by Frontier without restriction of the
third party's right to disseminate the Software or RMON Extensions; or
c. is independently developed by Cisco without use or access to the
Software, RMON Extensions and the design thereof, or
d. is disclosed to Cisco by a third party having the right to make such
disclosure.
11. Publicity.
Neither party shall disclose, advertise or publish the existence nor the terms
or conditions of this Agreement, except to auditors, counsel, financing sources
and in connection with a merger or sale of all or substantially all of such
parties assets, without the prior written consent of the other party.
12. Term and Termination.
This development portion of this Agreement shall commence on the date first set
forth above and continue until a period of three (3) years. Either party may
terminate this Agreement in the event the other party breaches any term or
condition of this Agreement, and the breaching party fails to cure such breach
within thirty (30) days of receipt of notice from the nonbreaching party. Except
as expressly set forth below, Sections 4, 5, 6, 7, 8, 10, 11, 13, 16 and Exhibit
B shall survive any termination or expiration of this Agreement.
Solely in the event Frontier terminates this Agreement as a result of Cisco's
unsecured breach of Section 4, 5 or Exhibit D, Cisco shall cease distributing
and return the RMON Extensions and any copies thereof to Frontier within thirty
(30) days of the effective date of termination. Cisco may retain a reasonable
number of copies of the RMON Extensions for support purposes.
In no event shall termination or expiration of this Agreement affect Cisco's
customers or partners sublicense rights in the Software and RMON Extensions.
13. Intellectual Property Indemnification
Frontier warrants that it owns all rights to the Software and RMON Extensions
and that the Software and RMON Extensions does not infringe upon or violate any
patent, copyright or trade secret of any third party. If any claim of
infringement is made by any
5
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TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE
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SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
third party against Cisco or its customers, Cisco shall promptly notify
Frontier, and Frontier shall indemnify, defend, and hold Cisco harmless against
any and all liability, losses, claims, expenses (including reasonable attorneys'
fees), demands of any kind arising out of any such claim, whether or not that
claim is successful, provided that Cisco (i) gives Frontier notice of such
claim, (ii) cooperates with Frontier, at Frontier's expense, in the defense of
such claim, and (iii) gives Frontier the right to control the defense and
settlement of any such claim, except that Frontier shall not enter into any
settlement that affects Cisco's rights or interest without Cisco's prior written
approval. Cisco shall have no authority to settle any claim on behalf of
Frontier.
If by reason of such infringement claim any patent, copyright or trade secret of
any third party, Cisco or its customers shall be prevented or is likely to be
prevented by legal means from selling or using the Software and RMON Extensions,
or if, in Frontier's opinion, such claim is likely to occur, Frontier will use
its best efforts, at its expense, to: (i) obtain all rights required to permit
the sale or use of the Software and RMON Extensions by Cisco and its customers;
or (ii) modify or replace such Software and RMON Extensions to make them
noninfringing (and extend this indemnity thereto), provided that any such
replacement or modified Software and RMON Extensions are satisfactory to Cisco.
If Frontier using its best efforts, is unable to achieve either of the options
set forth above within a reasonable period of time after the issuance of the
injunction, Frontier shall promptly refund to Cisco all fees paid hereunder.
The foregoing indemnification shall not extend to any claim based solely upon
the combination, operation or use of the Software or RMON Extensions supplied
hereunder with equipment, devices or software not supplied by Frontier, or any
alteration or modification of the Software and RMON Extensions supplied
hereunder.
THE FOREGOING STATES THE ENTIRE OBLIGATION OF FRONTIER WITH RESPECT TO
INFRINGEMENT OF PATENTS, COPYRIGHTS AND TRADE SECRETS.
14. General.
No waiver of rights under this agreement by either party shall constitute a
subsequent waiver of this or any other right under this Agreement.
Neither party shall be liable for any delay or failure in performance due to
such acts of God, earthquake, labor disputes, riots, war, fire, epidemics, or
transportation difficulties. The obligations and rights of the excused party
shall be extended on a day to day basis for the time period equal to the period
of the excusable delay.
Neither this Agreement nor any rights under this Agreement, other than monies
due or to become due, shall be assigned or otherwise transferred by either party
without the prior
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TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE
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SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
written consent of the other party. This Agreement may be transferred or
otherwise assigned to any company or other entity which acquires all or
substantially all of the assets of such party.
In the event that any of the terms of this Agreement become or are declared to
be illegal by any Court or tribunal of competent jurisdiction, such term or
terms shall be null and void and shall be deemed deleted from this Agreement.
All the remaining terms of this Agreement shall remain in full force and effect
provided, however, that if this paragraph becomes applicable and if the effect
thereof is to substantially impair the value of this Agreement to either party,
then the affected party may terminate this Agreement by written notice to the
other.
This Agreement (including the Exhibits hereto) constitutes the entire Agreement
between the parties hereto concerning the subject matter of this Agreement; and
there are no conditions, understandings, agreements, representations, or
warranties, expressed or implied, which are not specified herein. This Agreement
may only be modified by a written document executed by the parties thereto.
Neither party has the right or authority to, and shall not, assume or create any
obligation of any nature whatsoever on behalf of the other party or bind the
other party in any respect whatsoever.
This Agreement shall bind and insure to the benefit of the successors and
permitted assigns of the parties.
This Agreement shall be interpreted and construed and legal relations created
shall be determined in accordance with the Laws of the State of California.
15. Joint Marketing
The parties agree to explore in good faith and, upon mutual consent of the
parties, participate in appropriate marketing and sales activities to leverage
each parties products. Such activities may include, but are not limited to,
trade shows, product training, sales training and product literature.
16. Notice.
Any notice which may be given by a party under this Agreement shall be in
writing and shall be either delivered in person, U.S. Mailed, First Class,
postage prepaid, air courier, or telex or facsimile to the party to be notified,
at the address set forth below.
If to Cisco:
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TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Cisco Systems, Inc.
170 West Tasman Drive
San Jose, California 95134
Attn: Vice President - Bus Dev
If to Frontier.
Frontier Software Development, Inc.
1501 Main Street
Tewksbury, MA 01876.
Attn: President
17. Limitation of Liability.
IN NO EVENT SHALL EITHER PARTY BE LIABLE, EXCEPT FOR CLAIMS ARISING UNDER
SECTION 13 INTELLECTUAL PROPERTY INDEMNIFICATION OR CLAIMS OF PERSONAL INJURY OR
DAMAGE TO TANGIBLE PERSONAL PROPERTY RESULTING FROM HE NEGLIGENT ACTS OR
OMISSIONS OF EITHER PARTY, FOR AN AMOUNT WHICH EXCEEDS [*].
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES, LOST PROFITS, OR LOST DATA, OR ANY OTHER INDIRECT DAMAGES
EVEN IF SUCH PARTY HAS BEEN INFORMED OF THE POSSIBILITY THEREOF.
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TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day
and year first written above.
CISCO SYSTEMS, INC. FRONTIER SOFTWARE
DEVELOPMENT, INC.
By: /S/ MARIO MAZZOLA By: /S/ NARENDRA POPAT
Name: MARIO MAZZOLA Name: NARENDRA POPAT
Title:V.P. WBU Title:PRESIDENT
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TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Exhibit A
[Insert list of deliverables/code lists]
Statement of Work
(This section supports Exhibit A&B)
Frontier Software will port its RMON agent and SNMP protocol software to Cisco's
[*] environment. It will be closely integrated with Cisco's existing OS, LAN
driver and UDP/IP stack. The resulting agent will be compliant with RFC 1271. In
addition, Frontier Software agent will port its DomainView extensions to this
environment. The DomainView extensions allow the agent to support the concept of
virtual monitors in a single physical agent. Each domain or virtual monitor can
be used to monitor the activity of a particular protocol on the attached segment
by applying the entire RMONMIB to this domain. This forms the basis for very
focused diagnostics when coupled with Frontier's client software. The ported
RMON agent will co-exist with your existing agent. The two agents will be
multiplexed suing separate community strings.
10
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TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Exhibit B
[Insert Software Specifications]
11
<PAGE>
Exhibit C
[*]
12
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TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Exhibit D
1. Software License Fees.
Cisco agrees to pay to Frontier a Software License Fee for object code copies of
the Frontier's Proprietary RMON Extensions distributed to any third party
coincident with the sale of Cisco technology in accordance with the following
schedule:
<TABLE>
<CAPTION>
CHASSIS type LICENSE fee
- ------------ -----------
<S> <C>
Cisco 7000 family or equivalent [*] per card running Frontier's Proprietary RMON
Extensions (Not to exceed ([*] per chassis)
All other Cisco platforms [*] per chassis running Frontier's Proprietary RMON
Extensions
</TABLE>
2. NETscout Manager License Fees.
Frontier agrees that Cisco shall receive a discount of [*] off Frontier's
published list price for NETscout Manager sold to any third party.
3. License Fees Payment Terms.
Cisco shall provide Frontier with report which shall be sufficient to allow
Frontier to verify the Software License Fees due and payment of such Software
License Fees within forty-five (45) days of the end of each calendar quarter.
If at any time during the term of this Agreement Frontier enters into an
agreement with any party under substantially similar terms and conditions, at
charges, license fees or discounts more favorable than those provided to Cisco
herein, Frontier shall within thirty (30) days of its acceptance of the new
agreement with the other party, notify Cisco of such agreement. Within thirty
(30) days of receipt of Frontier's notice, Cisco may give written notice to
Frontier that this Agreement is [*] Cisco with the [*] provided to the other
party. Such [*] shall be made [*] of the other party's agreement.
13
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TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Exhibit 10.11
Amendment No. 1
PROJECT AGREEMENT & DESIGN LICENSE AGREEMENT
This Amendment No. 1 ("Amendment") to the Project Agreement & Design License
Agreement ("Agreement') is made in California as of January 4, 1995, by and
between Cisco Systems, Inc., ("CISCO") a California corporation having its
principal place of business at 170 West Tasman Drive, San Jose CA 95134, and
Frontier Software Development, Inc. ("Frontier') a Delaware corporation having
its principal place of business at 1501 Main Street, Tewksbury, MA 01876.
WHEREAS, Cisco and Frontier have previously entered into the Project Agreement &
Design License Agreement dated February 25,1994; and
WHEREAS, Cisco and Frontier wish to amend the Agreement to clarify NETscout
Manager License Fees;
NOW WHEREFORE, the parties agree to amend the Agreement as follows:
2. EXHIBIT D - SOFTWARE LICENSE FEES. Replace Section 2 NETScout
Manager License Fees with Supplement Exhibit D-1 attached
hereto and made a part hereof.
5. All other term and conditions of the Agreement remain
unchanged.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
CISCO SYSTEMS, INC. FRONTIER SOFTWARE
DEVELOPMENT, INC.
By: /s/ JAYSNREE ULLAL By: /s/ NATHAN KALOWSKI
------------------------------- -------------------------------
(Authorized Signature) (Authorized Signature)
Name: /s/ JAYSNREE ULLAL Name: /s/ NATHAN KALOWSKI
----------------------------- -----------------------------
(Authorized Signature) (Authorized Signature)
Title: Director, Mktg. Title: VP Marketing
---------------------------- ----------------------------
<PAGE>
Supplement
Exhibit D-1
2. NETscout Manager License Fees.
A. Frontier agrees that Cisco shall receive a discount of [*] off
Frontier's published list price for NETscout Manager sold to any third
party. Upon execution of this Amendment, Cisco agrees to purchase a
prepaid license for fifty (50) NETscout Manager clients for [*].
B. Frontier will provide NETscout Manager clients for inventory on the
following basis:
i. Cisco will purchase inventory at a mutually agreed upon
material cost of [*].
ii. Cisco will pay Frontier licensing fees for copies of NETscout
Manager sold by Cisco during the preceding calendar month.
Cisco shall provide Frontier with report which shall be
sufficient to allow Frontier to verify the NETscout Manager
License Fees due
iii. Payment of such NETscout Manager License Fees within
forty-five (45) days of the end of each calendar month.
C. The prices for NETscout Manager shall [*] for a period of [*] from the
date of this Amendment. Thereafter, Frontier may [*]for NETscout
Manager on not less than 160 days prior written notice to Cisco. Orders
placed during the notice period shall be at [*]. [*] shall be effective
immediately upon notice from Frontier.
D. Frontier will provide customization to the Software and Documentation
that uses the title "NetScout for Cisco".
E. Frontier agrees to provide Cisco with [*] Windows licenses for internal
usage only at no charge. These copies will be marked for demonstration
and not for resale.
[*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED.
2
<PAGE>
Exhibit 10.12
PRIVATE LABEL AGREEMENT
THIS PRIVATE LABEL AGREEMENT, including the Exhibits ("Agreement"), effective as
of October 17, 1995 ("Effective Date"), is hereby made by and between Cisco
Systems, Inc., a California corporation, having principal offices at 170 West
Tasman Drive, San Jose, California 95134-1706 ("Cisco") and Frontier Software
Development, Inc., a Delaware corporation, having principal offices at 321
Billerica Road, Chelmsford, Massachusetts 01824 ("Frontier").
1. SALES AND PURCHASES OF PRODUCTS.
1.1 PRODUCTS. Subject to the terms and conditions of this Agreement,
Frontier agrees to sell to Cisco the Frontier products ("Products") which Cisco
may order from Frontier, as described in the Price Schedule attached and
incorporated herein as Exhibit A, as it may be amended from time to time in
accordance with the terms hereof. Products include hardware products and
software imbedded in hardware (or provided separately on disks or other media),
user documentation, packaging and any enhancements, modifications, updates, bug
fixes or releases related thereto ("Software"). Products shall be manufactured
by Frontier according to the functional, technical and other specifications for
each Product set forth in Exhibit C as modified from time to time by written
agreement of the parties ("Specifications"). Subject to the rights and licenses
granted to Cisco in this Agreement, Frontier shall retain ownership in and to
all Product intellectual property that was developed or acquired by Frontier.
1.2 NEW PRODUCT INCLUSION. Frontier agrees to keep Cisco informed of any
new products or improvements to existing Products. Frontier shall use best
efforts to provide Cisco with ninety (90) days written notice (prior to
shipment) of any upgrades to a Product that will alter the form, fit, function
or price of that Product. Cisco will notify Frontier if it wishes to add a new
product or series of products of Frontier's to this Agreement. Cisco and
Frontier shall then proceed to establish pricing and delivery schedules for each
of such new Product. Upon agreement of these items, such product(s) shall be
considered Products under this Agreement, and shall be purchased and sold under
the terms and conditions of this Agreement. Frontier shall notify Cisco when
Frontier is first reasonably prepared to ship more advanced technology of a
similar Product category to customers, and thereafter Cisco may convert any or
all of its future orders of Product to the more advanced technology.
1.3 PRODUCT UPGRADES. All upgrades, Product enhancements and bug fixes for
the Software will be made available to Cisco no later than the date Frontier's
related standard products have been released for shipment and at no additional
charge unless provided Frontier has made such Product upgrades and/or
enhancements available to its general customer base free of charge. In the event
Frontier has charged or plans to charge its general customer base for Product
upgrades and/or enhancements, Frontier reserves the right to charge Cisco a
price to be mutually determined prior to distribution of such Product upgrades
and/or enhancements.
1.4 PROJECT MANAGERS. Each party will appoint a single project manager
("Project Manager") and provide written notification to the other party of the
name of the Project Manager
Page 1
Frontier Software - Company Confidential
<PAGE>
within five (5) days of the Effective Date. The Project Managers will act as
liaisons between the parties with respect to their respective performances of
this Agreement and shall provide the parties from time to time with the names
and telephone numbers of additional specific contact persons (e.g., to
communicate specific information regarding support, enhancements, etc.) when
such direct contact is preferable. In the event that either party appoints a new
Project Manager, such party will promptly notify the other.
2. OWNERSHIP; GRANT OF RIGHTS
2.1 OWNERSHIP. As between the parties, Frontier retains title to and
ownership of, and all proprietary rights with respect to, the Software.
2.2 OEM RIGHT. Frontier hereby grants Cisco a nonexclusive, worldwide,
royalty-free right and license to promote, market, resell and distribute the
Products as stand-alone products or incorporated into or in connection with
Cisco's products.
2.3 SOFTWARE LICENSE Frontier hereby grants Cisco a nonexclusive,
worldwide, royalty-free (except as provided below) license to use the Software
(in object code form) subject to the following conditions and for the following
purposes:
(a) For promotion, marketing and distribution to resellers and end users
in connection with Cisco's distribution of the Products; and
(b) To provide customer support pursuant to Section 8.
2.4 CISCO PROPERTY.
(a) All property, including without limitation designs or materials,
furnished to Frontier by Cisco or paid for by Cisco in connection with this
Agreement (collectively "Cisco Property") shall:
(i) Be clearly marked or tagged as the property of Cisco;
(ii) Be and remain personal property, and not become a fixture to
real property;
(iii) Be subject to inspection by Cisco at a mutually agreed upon
time;
(iv) Be used only in filling purchase orders from Cisco and
subcontractors, if any, and in providing service or support
for the Products;
(v) Be kept free of liens and encumbrances;
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
(vi) Be kept separate from other materials, tools, or property of
Frontier or held by Frontier; and
(vii) Not be modified in any manner by Frontier.
(b) Cisco shall retain all rights, title and interest in the Cisco
Property, and Frontier agrees to treat and maintain the Cisco Property with
the same degree of care as Frontier uses with respect to its own valuable
equipment. Frontier shall bear all risk of loss or damage to Cisco Property
until it is returned to Cisco. Upon Cisco's request, Frontier shall deliver
all Cisco Property to Cisco in good condition, normal wear and tear
excepted, without cost to Cisco (exclusive of freight costs); Cisco shall
determine the manner and procedure for returning the Cisco Property, and
shall pay the corresponding freight costs. Frontier waives any legal or
equitable right it may have to withhold Cisco Property, and Frontier agrees
to execute all documents, or instruments evidencing Cisco's ownership of the
Cisco Property as Cisco may from time to time request.
3. PRICES; PAYMENT
3.1 PRICES. The prices to Cisco of the Products shall be the prices
contained in the attached Exhibit A less a discount calculated in accordance
with Exhibit A. Such prices shall be fixed for one (1) year, commencing with the
Effective Date of this Agreement, except that if Frontier's price for a
comparable standard product is reduced, such reduction shall be immediately
effective and shall apply to all unshipped orders of that Product. Sixty (60)
days prior to expiration of the first year an any subsequent years of the
Agreement, the parties shall meet to negotiate, in good faith, pricing and
discount to be applied to the Products for the ensuing year of the Agreement.
All prices are F.O.B. Frontiers facility in Chelmsford, Massachusetts.
3.2 COST REDUCTIONS. Frontier agrees to work on achieving cost savings on
both materials and processes. In the event cost savings are identified, and the
parties elect to institute any such savings, the parties agree to share the
benefits which shall result from the instituted cost savings. Cost savings
rights and obligations shall apply to materials and processes related rights and
obligations shall apply to materials and processes related to Products
manufactured by Frontier as well as those manufactured by Cisco upon Frontier's
grant of Manufacturing Rights to Cisco pursuant to Section 10 of the Agreement.
In addition, Frontier agree to institute any cost reduction proposals reasonably
suggested by Cisco.
3.3 TAXES. Prices stated in Exhibit A are in U.S. dollars and do not include
applicable U.S. federal or state sales or use taxes which shall be paid by Cisco
if separately indicated on the invoice for the applicable Product shipment, but
do include any duties, export or import charges and the like unless Cisco
requests direct shipment to a non U.S. location.
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
3.4 PAYMENT TERMS. Frontier will invoice Cisco with each shipment and
payment terms will be the full invoiced amount payable within [*] after Cisco
receives the invoice and shipment [*]. Cisco shall be entitled to a [*] if
payment is made within [*] after Cisco receives the invoice. No invoice shall be
submitted to Cisco until shipment to Cisco of the items covered by such invoice.
4. PURCHASE ORDERS
4.1 PURCHASE ORDERS. Cisco purchase orders for Products shall be submitted
to Frontier in writing. Each purchase order shall include:
Identification of Products ordered;
Quantity to be purchased;
Price of Products ordered;
Requested delivery dates;
Shipping instructions.
4.2 FORECASTS. Cisco will provide Frontier with nonbinding one hundred
twenty (120) day forecasts of its requirements for Products on a monthly basis.
4.3 PLACEMENT BY CISCO. All purchase orders and invoices under this
Agreement shall be subject only to the terms and conditions hereof. In the event
the terms of any such purchase order, confirmation or similar document conflict
with or are additional to the terms of this Agreement, the terms of this
Agreement alone shall apply and shall govern regardless of execution of such
document by one or both parties, except that the parties may agree to negotiate
non-preprinted terms which shall be effective if executed by both parties. Any
other Frontier terms and conditions shall not apply to this Agreement or the
purchase orders.
4.4 ACCEPTANCE BY FRONTIER. Subject to the establishment of mutually
reasonably agreeable delivery dates, Frontier shall accept and acknowledge in
writing all purchase orders submitted by Cisco within three (3) working days
after receipt thereof. Notwithstanding the foregoing, Frontier shall accept all
Cisco purchase orders requesting shipment [*] (or greater) from the date of
Frontier's receipt of the purchase order and shall keep a sufficient supply of
the Products on hand to enable Frontier to timely fill all such purchase orders.
Each acknowledgment shall include a firm shipping date for the Products ordered
in the purchase order. "Working day" shall mean a regular week day on which
Cisco is open for business.
4.5 [*]. Cisco reserves the right to [*] delivery of any purchase orders, or
part of any purchase order at any time prior to [*] from the scheduled delivery
date. Cisco may [*] any purchase orders, or any part of any purchase order at
any time prior to the scheduled delivery date, however, Cisco shall be limited
to [*] per purchase order, and such request, if made within thirty (30) days of
the initially scheduled delivery date, may not extend beyond [*] from the
initially scheduled delivery date. [*] made prior to [*] of the initially
scheduled delivery date shall be subject to the following limitations and/or
penalties:
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
<TABLE>
<CAPTION>
DAYS FROM SCHEDULED DELIVERY DATE [*] TERMS PENALTY CHARGES
- --------------------------------- --------- ---------------
<S> <C> <C>
Less than/equal to [*], but greater than [*] [*] [*]
Less than/equal to [*], but greater than [*] [*] [*]
Less than/equal to [*], but greater than [*] [*] [*]
</TABLE>
Frontier will use its best efforts to meet any scheduled ship dates, but
reserves the right to schedule, reschedule or make partial shipments at its
discretion. When Products are in short supply, Frontier will use its best
efforts to allocate equitably among all customers.
Notwithstanding anything to the contrary in this Section 4.5, in the event
Frontier reschedules the delivery of any Product order, or part thereof by
twenty-one (21) days or more, or if Frontier is twenty-one(21) days or more late
in delivering a Product order or part thereof, Cisco shall have the right to
cancel any such rescheduled or late order without penalty.
4.6 ORDER INCREASES. Upon written request from Cisco, Frontier shall use
best efforts to increase the quantities of Product to be delivered to Cisco
under existing purchase orders as follows: (i) from [*] prior to a scheduled
shipping date, Frontier will increase quantities of Products by up to [*]; (ii)
from [*] prior to a scheduled shipping date, Frontier will increase quantities
of Products by up to [*]; and (iii) more than [*] prior to a scheduled shipping
date, Frontier will increase quantities of Products by up to [*].
4.7 RUSH ORDERS. Frontier shall use its best efforts to meet Cisco's
requirements for reasonable rush orders for Products requiring immediate
delivery within [*]. The parties will negotiate in good faith the prices for
such rush orders, taking into consideration Frontier's available inventory and
additional shipping and personnel expense necessary.
4.8 DISCONTINUANCE. In the event that Frontier intends to discontinue the
manufacture and sale of any Product, Frontier shall give at least [*] prior
written notice to Cisco. During such [*] period (the "Discontinuance Period"),
Cisco may place purchase orders for such Product pursuant to this Agreement,
provided however, the last delivery date for such Product shall not be more than
[*] after the end of such Discontinuance Period. In no event shall Frontier sell
such Product to any other of its customers after it stops selling such Product
to Cisco.
5. PRODUCT ACCEPTANCE AND QUALITY
5.1 INSPECTION AND ACCEPTANCE BY CISCO. Notwithstanding any prior inspection
or payment by Cisco, all Products will be subject to final inspection and
acceptance at Cisco's specified destination after delivery by Frontier. If and
when Frontier qualifies to bypass Cisco's incoming inspection requirement
pursuant to Cisco's Quality Program described in Exhibit G, then Frontier agrees
that any Product which Cisco determines to be nonoperable upon its removal from
its original packaging and initial checkout ("DOA"), whether discovered by
Cisco, its subcontractor or its customer, will be treated as though discovered
during Cisco's final acceptance process and shall be rejectable pursuant to the
terms hereof.
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Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
5.2 REJECTION. In case any Product is defective in material or workmanship,
or otherwise not in conformity with the requirements of Cisco's applicable
Specifications, Cisco will have the right, at its sole option, to reject such
Product; to require correction of such Product; to accept such Product with an
adjustment in price; or to return such Product for credit or refund. Any Product
that has been rejected or required to be corrected must be replaced or corrected
by and at the expense of Frontier on a best efforts basis within [*] after
receipt by Frontier of the rejected material. If, after being requested by
Cisco, Frontier fails to promptly replace or correct any defective item, then
Cisco shall have the right, at its sole option, to (i) replace or correct such
Product and charge to Frontier the cost occasioned thereby, or (ii) without
further notice, cancel the applicable purchase order relative to the rejected
material without penalty or this Agreement for default in accordance with
Section 14 below and require refund of any payments made relative to the
rejected purchase order material. In the event Cisco returns Products due to
perceived defects in material and workmanship and/or nonconformity to
Specifications and Frontier determines, upon its examination and testing of the
Products, that Cisco has currently rejected the Products which are not defective
or in conformity to the Specifications (categorized as "No Problem Found" or
"NPF"), Frontier retains the right to charge Cisco a reasonable fee to cover the
necessary processing and testing of the returned units. Cisco shall further
credit Frontier for any reasonable fees that Frontier may have paid to deliver
the replacement Products to Cisco per Cisco's request. Frontier agrees to
provide Cisco with the review documentation to validate its findings with
respect to NPF's. No fees or credits shall be paid by Cisco unless and until
Cisco has validated Frontier's NPF findings.
5.3 PACKING. Unless otherwise specified by Cisco, Frontier will package and
pack all goods in a manner which is (i) in accordance with good commercial
practice, (ii) acceptable to common carriers for shipment at the lowest rate for
the particular goods, (iii) in accordance with I.C.C. regulations, and (iv)
adequate to insure safe arrival of the goods at the named destination. Frontier
will mark all containers with necessary lifting, handling and shipping
information and with purchase order numbers, date of shipment, and the names of
the consignee and consignor. An itemized packing list must accompany each
shipment which shall include (i) prominently the purchase order number and (ii)
the description, part number, revision level, and quantity of the Products so
shipped.
5.4 LABELING. Frontier shall label and package all Products pursuant to the
specifications set forth in Exhibit H, which may be amended by Cisco from time
to time upon thirty (30) days' notice. Frontier acknowledges and agrees that,
except as necessary to fulfill its obligations under this Agreement, it obtains
no rights in Cisco's trade names, trademarks, service marks or other
designations and shall not use any of the Cisco material provided pursuant to
this Section 5.4 other than as expressly permitted herein.
5.5 RETURN PROCEDURE. In the event Cisco rejects Product due to defects in
workmanship or non-conformance to Specifications, Cisco may, at its option,
return the Product to Frontier F.O.B. Cisco's location or retain such Product,
at Frontier's expense, and withhold payment pending Frontier's instructions.
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
6. PRODUCT SPECIFICATIONS; CHANGES
6.1 SPECIFICATIONS. Frontier agrees to supply materials acceptable to
Cisco's Specifications. Frontier shall not make any changes in the form, fit,
function, design or appearance of the Product purchased hereunder, or to any
Specifications for any Product irrespective of impact on form, fit, or function,
without Cisco's prior written approval.
6.2 PRE-SHIPMENT TESTING. Prior to delivery, Frontier shall test all
Products in accordance with the test procedure set forth in Exhibit D ("Test
Procedure"), and shall not ship Products which fail to meet the Specifications.
Cisco may from time to time and at a mutually acceptable time send its quality
control personnel to Frontier's factory to assist in or observe the testing. In
addition, Cisco may, from time to time, request modifications to Frontier's test
procedure, where repetitive failure to meet Specifications has been noted on
shipped equipment. Frontier shall not unreasonably withhold modifications of
this procedure.
6.3 ENGINEERING CHANGE APPROVAL. Frontier shall not make any changes to any
production process, or the controlled process parameters or sources, types or
grade classifications of materials used, which alter the form, fit or function
of the Product without first obtaining from Cisco an engineering change
approval. Within one (1) working day after learning of any bug or other problem
in a Product which will or already has resulted in an impact to the installed
customer base of such Product, and in any event no later than at the time an
engineering request is made, Frontier will notify Cisco of such problem. For
purposes of the immediately preceding sentence in this Section 6.3, "impact"
shall mean that a significant number of Frontier's customers have been affected
by a bug or any other problem with the Product, and have notified Frontier of
the respective bug or problem. Frontier shall submit a request to make a change
containing engineering data in support of the request. Within ten (10) working
days of receiving such request, Cisco shall respond to Frontier's request and
shall either (i) approve the change, (ii) disapprove the change, or (iii) extend
the deadline for the approval or disapproval period for an additional twenty
(20) working days.
6.4 CISCO'S ENGINEERING CHANGE REQUEST. When an engineering change is
required by Cisco, Cisco shall provide Frontier all applicable documentation,
specifications and requested effective date of such engineering change. Frontier
will respond initially within ten (10) working days, advising Cisco as to (i)
implementation and the effective date of such change, (ii) associated costs and
effect to on-hand materials, (iii) on order materials, work in process, and (iv)
the impact of the change upon existing Product pricing and shipment schedules
for the entire period for which purchase orders are outstanding. Frontier shall
also identify any materials issue or process issue that modifies the shipment
schedule that was in effect immediately prior to the engineering change.
6.5 Where a requested change may create scrap costs, Frontier agrees to stop
work in process and/or orders for materials within [*] of notification by Cisco.
Materials on-hand or on order and work in process which has become obsolete as a
result of the engineering change shall
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
be treated in the same manner as termination of a purchase order in accordance
with Section 14.6 hereunder. Cisco must issue requisite documentation and
purchase order release changes before Frontier will begin the change
implementation.
7. END-USER DOCUMENTATION
7.1 SCOPE. Frontier agrees to develop, write, print, manufacture, maintain,
and ship all Product-related end-user documentation so that it will have a Cisco
"look-and-feel" (as defined below).
(a) End-user Product documentation content is determined by the Product,
and Cisco's documentation guidelines. Documentation will include, without
limitation, user guides, hardware installation guides, software
configuration and command reference guides, software release notes and
hardware errata.
(b) Frontier hereby grants to Cisco, for the term of the Agreement
(inclusive of any extensions or associated survival periods), and pursuant
to the terms and conditions of this Section 7, a royalty-free,
non-exclusive, non-transferable license to use, modify and distribute any of
Frontier's standard documentation which has been incorporated into the "look
and feel" documentation developed by Frontier for Cisco hereunder (the
"Cisco Documentation"). While Frontier shall include all proprietary rights
notices on Frontier's standard documentation during the development process
of the Cisco Documentation, Cisco retains the right to modify the Cisco
Documentation subsequent to Frontier's delivery of the Cisco Documentation
to Cisco, and, as such, shall incorporate any such proprietary rights
notices which may have been removed by Cisco during its modification of the
Cisco Documentation prior to distribution of the Cisco Documentation to its
end user customers.
(c) Cisco "look-and-feel" means utilizing and adhering to Cisco's then
current customer documentation templates, style guide, and printing
standards, as defined and specified from time to time by Cisco.
(d) Cisco will provide at its expense all required templates, style
guides, documentation samples, and printing guidelines.
(e) Frontier agrees not to modify Cisco documentation templates.
(f) Frontier will develop and maintain all end-user documentation in
FrameMaker templates provided by Cisco. Frontier will provide any required
technical illustrations in Adobe Illustrator format. Frontier will purchase
and maintain the FrameMaker and Adobe Illustrator Software tools at its own
expense.
(g) Cisco will provide reasonable editorial assistance at alpha, beta,
and final draft stages to assist Frontier in complying with the Cisco "look
and feel."
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
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<PAGE>
(h) Frontier will provide one (1) printed copy of each end-user manual
with each Product shipped.
7.2 DOCUMENTATION REVIEW CYCLES. Cisco will review all end-user
documentation at alpha, beta, and final draft stages and will provide markups to
Frontier in hard-copy or electronic medium for incorporation into the
documentation. Cisco retains sole and final sign-off approval at the
above-mentioned draft stages for all end-user documentation.
7.3 ELECTRONIC PUBLICATION. Frontier will provide an electronic copy of the
end-user documentation files (including all illustrations) at alpha, beta and
final sign-off stages, and prior to any subsequent revision cycle, for the life
of the manual(s). Cisco shall have the exclusive right to distribute manual(s)
electronically.
7.4 OWNERSHIP. Cisco shall own all right, title and interest in the Cisco
Documentation provided, however, that Frontier retains all rights, title and
interest in the content of Frontier's standard documentation which has been
utilized in the development of the Cisco Documentation. Frontier hereby assigns
to Cisco all right, title and interest to the Cisco Documentation and shall
execute such instruments as Cisco may reasonably may request to effect and
record such assignment. Frontier may not distribute the Cisco Documentation in
any format or medium or for any purpose to any third party without prior written
consent of Cisco. Upon termination or expiration of the Agreement, the Parties
shall cease any development and distribution of the Cisco Documentation, except
to the extent that Cisco retains survival rights to distribute any Cisco
Documentation with Products remaining in Cisco's inventory at the time of
termination or expiration that are subsequently sold by Cisco during the
survival period of the Agreement and for technical and support purposes for the
installed base of Products. The Parties further agree, upon termination or
expiration, to meet to determine the appropriate disposition for all work in
process and excess, unreserved Cisco Documentation which remains in either
Cisco's inventory or at Frontier's manufacturing facility awaiting completion
and/or delivery to Cisco at the time of termination or expiration.
7.5 PRINT QUALITY. Cisco's written approval is required prior to printing
any end-user documentation with Cisco "look-and-feel."
(a) Cisco retains the right to review and approve any print vendor
selected by Frontier for adherence to Cisco quality practices and
competitive pricing.
(b) Four-color process covers: Cisco will provide at its expense all
film for four-color covers. Frontier will provide, at is expense, a trimmed
composite blueline for Cisco's approval prior to printing any color process
covers.
(c) Self-cover manuals (one-color): Frontier will provide a trimmed
blueline for Cisco approval prior to printing.
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Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
(d) Cisco may, at its discretion, require a first-article prior to
accepting delivery of any end-user documentation.
7.6 REVISION CYCLES. Once documentation is "in-print," Frontier will revise
the printed end-user manual(s) as necessary to accurately support the Product.
Frontier and Cisco will agree upon a reasonable revision cycle, determined by
anticipated Product enhancements, documentation errors, and/or changes.
(a) Frontier will issue Software release notes or hardware errata in a
timely manner, and ship them with their related Cisco Documentation.
(b) Frontier will notify Cisco within thirty (30) days of Frontier's
intent to revise a printed document.
(c) Document revisions will include all relevant Product enhancements
and new technical information.
(d) Document revisions will receive alpha, beta, and final draft reviews
by Cisco. Cisco retains sole and final draft sign-off approval.
(e) With each revision, Frontier will provide electronic copies of
files, as specified in Section 7.3.
(f) Frontier will reprint revised documentation as specified in Section
7.5.
7.7 DOCUMENTATION LIFE-CYCLE. Frontier agrees to maintain end-user
documentation in print until Cisco notifies Frontier it will cease distributing
a particular Product. Frontier will manage the physical documentation inventory.
7.8 DOCUMENTATION NRE. In consideration of Frontier's creation of the Cisco
Documentation hereunder, Cisco agrees to pay Frontier the amount of [*] upon
completion and Cisco's acceptance of the Cisco Documentation. Cisco further
agrees to pay for additions,/modifications to existing Cisco Documentation or
for the creation of new documentation, both of which may be required as a result
of Frontier's addition of new Products to the Agreement, provided, however, that
(i) Cisco has requested and/or authorized the modifications of the existing
documentation or the creation of any new documentation, and (ii)
specification/technical requirements have been provided by Cisco to Frontier,
and (iii) the Parties have reached agreement with respect to the price to be
paid to Frontier for the documentation prior to Frontier's initiation of any
such work.
8. SUPPORT
8.1 CUSTOMER SUPPORT. Cisco will provide all first and second level customer
support in the same manner that it provides such support for its other similar
products. Frontier will
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Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
provide third-level or other customer support [*] to Cisco by telephone and
e-mail seven days a week, twenty-four hours per day with a maximum one hour
telephone response time. On-site third level problem support shall be as
mutually agreed by Cisco and Frontier, but at a minimum will include
troubleshooting and providing bug fixes in the Software and hardware of the
Product. Cisco shall provide Frontier feedback on any software bugs and
potential fixes, which will then be incorporated into the Software.
8.2 TECHNICAL SUPPORT. Frontier agrees to regularly supply Cisco with all
bug notes or other documentation defining the relevant hardware and software
information, symptoms, solutions or work-arounds for Product problems which
affect form, fit or function. During the term of this Agreement, Frontier will
provide such support to Cisco [*]. This information will be provided via an
electronic means (e.g. an FTP server).
8.3 ENGINEERING CHANGES. Frontier agrees to provide Cisco, with new releases
of maintenance modifications or engineering changes approved by Cisco pursuant
to Section 6.3, suitable for preparation by Cisco as a Product for distribution
to Cisco's customers, at Cisco's discretion. Cisco may request that Frontier
update all of Cisco's customer support documentation and Product inventory to
incorporate modifications or changes. In addition, if the parties mutually
determine that Products or Product parts must be replaced in the field
(including without limitation to rectify epidemic failure), Frontier will, at a
minimum, provide retrofit kits to Cisco [*].
8.4 REPAIR PROCEDURE. After expiration of the Warranty Period, Frontier will
continue to provide repair for Products and Product parts. Repair is defined as
repairing the part or Product and bringing it up to the current engineering
change. Frontier will track Products returned for repair by serial number and
will ship repaired parts within five (5) days from receipt. Cisco shall be
responsible for all inbound and outbound freight associated with Product repair.
Each part will be individually packaged and meet Cisco packaging specifications.
Frontier will provide quarterly part failure reports on a best efforts basis.
Such part failure reports will include, by serial number, each part repaired,
failure symptom, and determined failure. Frontier will use a 2-day carrier or
better within the U.S. and [*] or better internationally (if applicable). Prices
and charges for repair of parts and Products and for spare parts are set forth
in Exhibit E.
8.5 EMERGENCY PART SHIPMENT PROCEDURE. In cases of emergency, as reasonably
determined by Cisco, Frontier will ship (at Cisco's expense) to Cisco part(s) or
Product(s) with overnight delivery to Cisco. Such parts or Products shall only
be used for service and support and may not be resold by Cisco other than as
part of Cisco's customer service and support program.
8.6 SUPPORT DOCUMENTATION. Promptly upon Cisco's written request, Frontier
agrees to supply Cisco with all technical documentation and resources that the
Parties reasonably determine to be useful or necessary to perform customer
support and troubleshooting or to analyze the technical benefits and risks of
introducing new software or hardware releases of the Products into Cisco's
customer base. Such support documentation will include, without
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Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
limitation: (i) hardware and software specifications, (ii) information on
debugging/support tools, and (iii) lists of all error messages with explanations
as needed and recommended actions.
8.7 PRODUCT REPORTS. Frontier will keep accurate records of Product
deficiencies (bugs) and make such reports available to Cisco at least quarterly
on a best efforts basis. Frontier will maintain an electronic means (e.g., an
FTP server) through which Cisco can obtain up-to-date information on bugs,
fixes, and code updates.
8.8 DISCONTINUED PRODUCTS. Frontier will use best efforts to provide support
to Cisco, pursuant to this Section 8, for each discontinued Product for [*]
after the date of such discontinuance.
8.9 SUPPORT PRIORITIZATION AND ESCALATION GUIDELINES, To ensure that all
Product problems and technical inquiries are reported in a standard format,
Frontier will use and comply with the problem priority definitions and
escalation guidelines as set forth in Exhibit F hereto, and Cisco shall assign a
priority to all problems submitted to Frontier. Based on the priority of a
Product problem, Frontier agrees to provide Cisco fixes or work-arounds in the
following time frames:
Priority 1: Fix or work-around within [*] of problem report to Frontier
Priority 2: Fix or work-around within [*] of problem report to Frontier
Priority 3: Fix of work-around within [*] of problem report to Frontier
Priority 4: Fix or work-around within [*] of problem report to Frontier
For Priority 3 or 4 problems, if Frontier is unable to meet at the time frames
listed above, the Frontier will provide to Cisco within [*], at a minimum, a
written plan for addressing the problem.
8.10 TRAINING. Frontier shall offer, at its expense, its standard training
and instruction class in the service and maintenance of the Products up to three
(3) times during the term of this Agreement at Cisco's San Jose headquarters at
times mutually reasonably agreed upon by Frontier and Cisco, such training
classes to last no more than three (3) days each. In addition, this training
will be offered from time to time as requested by Cisco or as otherwise needed
as new Products are added to this Agreement and as existing Products are
enhanced and shall also include compatibility issues, engineering debug
capabilities, customer premises debug capabilities. Frontier will provide
training for new Products prior to initial shipment of each new Product and for
a minimum of twenty-five (25) people at a Frontier facility or a location
mutually reasonably agreed upon by Frontier and Cisco. Training will be provided
at no cost to Cisco, except that Cisco will bear all travel and living expenses
of its employees during such training. Frontier shall pay all costs associated
with shipping training materials to Cisco's San Jose facilities. Additional
terms regarding training classes at Cisco sales offices will be negotiated by
the parties in good faith.
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Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
8.11 SUPPORT OF CISCO ENHANCEMENTS. In the event Cisco exercises its right
to make Software enhancements, Frontier is obligated to fix software bugs only
if the problem can be demonstrated to exist in the Software without the Cisco
enhancements.
9. REPRESENTATIONS AND WARRANTIES
9.1 WARRANTY OF TITLE. Frontier warrants and represents to Cisco that (i)
Cisco shall acquire good and clear title to the Products, free and clear of all
liens and encumbrances, (ii) all materials and services provided hereunder
including, without limitation, the Products, are either owned or properly
licensed by Frontier or are in the public domain and the use thereof by Cisco or
its affiliates, customers, representatives, distributors or dealers will not
infringe any proprietary rights of any third party, (iii) Frontier has the full
power to enter into this Agreement, to carry out its obligations under this
Agreement and to grant the rights and licenses granted to Cisco in this
Agreement and (iv) Frontier's compliance with the terms and conditions of this
Agreement will not violate any Federal, state or local laws, regulations or
ordinances or any third party agreements.
9.2 PRODUCT WARRANTY To Cisco and its customers Frontier warrants the
Products will be new and unused, will perform in accordance with the applicable
Specifications and related documentation provided by Frontier (and will achieve
any function described therein), and will be free from defects in materials,
workmanship or design for a period of [*] from the date of shipment (the
"Warranty Period"). Frontier further warrants that repairs will be free from
defects outside the Warranty Period for a period of [*].
9.3 During the Warranty Period, Frontier will repair or replace (at its
option), and return or deliver to the location designated by Cisco within five
(5) working days from receipt, any defective Product or part, provided that the
Product or part is returned to Frontier. Unless Frontier reasonably demonstrates
a returned item is free from defect, Frontier shall pay the costs of all
shipping and insurance of the item (including, upon repair or replacement,
return of the same or replacement item to the original location) and assume the
risk of loss during shipping. All replaced parts become the property of
Frontier.
9.4 This limited warranty does not extend to any Products that have been
misused, abused, serviced by anyone other than a Frontier authorized
representative, Cisco or a party authorized by Cisco, or damaged due to accident
or act of God. EXCEPT FOR THE WARRANTIES PROVIDED IN THIS AGREEMENT, NO OTHER
WARRANTIES ARE EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. EXCEPT FOR
THE WARRANTIES PROVIDED BY FRONTIER IN THIS AGREEMENT, NO ADDITIONAL
REPRESENTATION OR WARRANTY, INCLUDING BUT NOT LIMITED TO: STATEMENTS OF
CAPACITY, SUITABILITY FOR USE OR PERFORMANCE, WHETHER MADE BY FRONTIER EMPLOYEES
OR CISCO SHALL BE CONSIDERED TO BE A WARRANTY BY FRONTIER FOR ANY PURPOSE OR
GIVE RISE TO ANY LIABILITY OF FRONTIER WHATSOEVER.
13
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
9.5 EPIDEMIC HARDWARE FAILURE. For the purposes of this Agreement epidemic
failure will be deemed to have occurred if more than [*] of the then current
total installed base of [*] Product should fail in [*] within a time period of
[*] days. In the case of epidemic failure Frontier and Cisco will cooperate to
implement the following procedure:
(a) Cisco will immediately notify Frontier upon discovery of the
failure.
(b) Within two (2) working days Frontier will give an initial response
indicating its preliminary plan for diagnosing the problem.
(c) Frontier and Cisco will jointly exert [*] efforts to diagnose the
problem and plan a work-around or more permanent solution.
(d) Frontier will apply its engineering change order procedure in
appropriate circumstances for hardware problems originating in the
manufacturing process.
(e) Frontier will prepare and consult with Cisco regarding an
appropriate [*] as well as an appropriate [*], as an interim solution, if
one is needed.
(f) Frontier and Cisco will [*] on a recovery plan.
[*] will be responsible for [*] in rectifying any epidemic failure, including
without limitation, for any solution, work-arounds, recovery plan or engineering
changes.
10. MANUFACTURING RIGHTS
10.1 CISCO'S RIGHT TO MANUFACTURE. Frontier grants Cisco, for a period not
to exceed [*] from Cisco's exercise of such grant, a worldwide, nonexclusive,
non-transferable right and license to manufacture or have manufactured the
Products ("Manufacturing Rights") at any time upon occurrence of any of the
events and/or circumstances defined below, provided the parties' management has
met to review the event and/or circumstances causing the transfer of
Manufacturing Rights to Cisco and has failed, after exhausting all reasonable
efforts, to reach an alternative resolution.
(a) If Frontier fails to consistently supply Cisco with Products meeting
the applicable Specifications in the quantities required in accordance with
Cisco purchase orders, and fails to provide Cisco with a reasonable cure
and/or reasonable assurances of an expeditious cure within [*] days of
receipt of Cisco's notification of Frontier's failed performance. For the
purposes of this section, Frontier shall have been deemed to have failed
consistently in performing its obligations to supply Products if: (i) for
any [*] period, Frontier fails to deliver at least [*] of the required
quantities of the Product on or before the scheduled delivery dates; or,
(ii) greater than [*] of the Products delivered over any [*] period are
defective in any material respect with regard to materials and
14
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
workmanship. Cisco agrees to provide Frontier with a monthly report which
identifies the measurements associated with Frontier's [*] to enable
Frontier to review and correct any deficiencies in its performance
hereunder. In the event Cisco fails to provide the required monthly report
for any of the [*] which are the basis for Frontier's failed performance
hereunder, Cisco may not invoke its Manufacturing Rights unless and until
such time as Cisco provides Frontier with the required reporting information
and notice of Frontier's failure for the specified [*], and Frontier, after
receipt of the reporting information and notification from Cisco, fails to
provide Cisco with a reasonable cure and/or reasonable assurances of an
expeditious cure within [*] of receipt of said notification. In the event
Frontier cures its failed performance within the required time frame, Cisco
may not invoke any Manufacturing Rights under this section until such time
as Frontier fails to meet delivery or quality standards for any subsequent
[*] period.
(b) If Frontier discontinues manufacturing of the Product and fails to
make a substitute available that, in Cisco's reasonable judgment, is
equivalent in form, fit and function.
(c) If Frontier becomes insolvent or seeks protection under any
bankruptcy, receivership, trust, deed, deed, creditors arrangement,
composition or comparable proceeding, or if such is instituted against
Frontier.
(d) If Frontier assigns or transfers its rights or obligations under the
Agreement to a direct competitor of Cisco's without prior written consent,
including, without limitation, any transfer by sale, merger or other working
combination of ownership of or control over more than [*] of the voting
securities or control of Frontier.
(e) If Cisco terminates the Agreement by reason of any other material
breach by Frontier of its obligations hereunder, and such obligations remain
uncured for the later of thirty (30) days or a mutually accepted period of
time after Frontier's receipt of written notice thereof from Cisco.
Notwithstanding Cisco's rights with respect to termination as defined in
this Section 10, Cisco agrees, in the interest of maintaining the ongoing
relationship between the Parties as set forth by the Agreement, to contact
Frontier to schedule a meeting with Frontier's senior management to discuss
and review resolution alternatives to the material breach prior to delivery
of written notice of termination to Frontier. In the event the Parties fail
to identify a reasonable resolution to the breach during the management
meeting, Cisco may, immediately thereafter, deliver termination notice to
Frontier.
10.2 ROYALTIES AND LICENSE FEES.
(a) In the event Cisco exercises its Manufacturing Rights, Cisco agrees
to pay Frontier royalties on all Products manufactured and distributed by
Cisco hereunder equal to [*] of Cisco's [*] for the Product. All royalties
will be computed on a per unit basis and paid quarterly within forty-five
(45) days following the end of each Cisco quarter.
15
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
(b) Cisco shall be obligated to pay all license fees and royalties, if
any, with respect to any third party proprietary rights and technologies
which are required for the exercise of Cisco's Manufacturing Rights and
which are listed in Exhibit I. All other such third party royalties and
licenses which are not listed in Exhibit I and which are required for Cisco
to exercise the Manufacturing Rights under this Agreement shall be paid by
Frontier.
10.3 AUDIT RIGHTS. In the event Cisco exercises its Manufacturing Rights as
provided hereunder, Cisco agrees to keep and maintain, for a period of [*] after
the end of the year to which they pertain, complete and accurate records of the
Products manufactured and distributed by Cisco in order to calculate and confirm
Cisco's royalty obligations under Section 10.2 above. Upon reasonable prior
notice, Frontier will have the right, exercisable not more than once every
twelve (12) months, to appoint an independent accounting firm reasonably
acceptable to Cisco, at Frontier's expense, to examine such books, records and
accounts during Cisco's normal business hours to verify the royalties due by
Cisco to Frontier under Section 10.2 above, subject to such independent
accounting firm's execution of Cisco's standard confidentiality agreement;
provided that execution of such agreement will not preclude such firm from
reporting its results to Frontier. In the event such audit discloses an
underpayment or overpayment of royalties due hereunder, the appropriate party
will promptly remit the amounts due to the other party.
10.4 MANUFACTURING INFORMATION ESCROW.
(a) The parties agree that upon request by Cisco, Frontier will promptly
place the following materials into an escrow account: (i) the source code
and applicable documentation for the Products (in either electronic media
form or hard copy) and (ii) certain applicable manufacturing information
("Escrowed Materials"). Cisco shall select the escrow agent (subject to
Frontier's reasonable approval), and be responsible for the establishment,
administration and cost of the escrow account. Immediately upon termination
of this Agreement, all Escrowed Materials will be released back to Frontier.
The Escrowed Materials will be released for use by Cisco, subject to the
terms and conditions hereof, only after notice to Frontier and only under
circumstances in which Cisco would otherwise be entitled to exercise the
Manufacturing Rights. Frontier agrees to promptly deposit, at least two (2)
times per year, into escrow any and all updates, enhancements and
modifications to the Escrowed Materials.
(b) In the event Cisco exercises its Manufacturing Rights hereunder, at
no cost to Cisco, Frontier shall provide Cisco such technical support and
assistance as Cisco may reasonably request in connection with the
manufacture of the Products.
(c) Cisco agrees that it will maintain the Escrowed Material delivered
to it under this Agreement in strict confidence and will require its
contractors to do the same. Any source code which is delivered as part of
the Escrowed Material will be subject to Cisco's confidentiality obligations
set forth in Section 12.
16
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
(d) Cisco's rights to use the Escrowed Materials, upon the exercise of
Manufacturing Rights, shall be limited to support, maintenance and
manufacture of the Products only. Cisco shall be prohibited from: (i)
disclosing, selling, copying or otherwise transferring the Escrowed
Materials except as necessary to carry out Cisco's right to support,
maintain and manufacture the Products; or (ii) removing the Escrowed
Materials from Cisco's facilities or the facilities of Cisco's authorized
manufacturer(s) of the Products. Cisco further agrees, at all times while in
possession of Frontier's Escrowed Materials, to protect against unlawful
disclosure and ensure the integrity and protection of Frontier's proprietary
rights by maintaining, as applicable, Frontier's proprietary rights notices
(A) in the source code of the Escrowed Materials, in the comment lines at
the beginning of each significant module; (B) on the terminal screen when
each user starts that program; (C) on the label for the magnetic media that
contains the program; and (D) on all technical manuals and related
documentation for the program.
11. INDEMNIFICATION
11.1 PROPRIETARY RIGHTS.
(a) Frontier agrees to indemnify, defend and hold harmless Cisco and its
officers, directors, employees, shareholders, customers, agents, successors
and assigns from and against any and all loss, damage, settlement or expense
(including legal expenses), as incurred, resulting from or arising out of
any claims which allege that any Products or the use or sale thereof
infringe upon, misappropriate or violate any patents, copyrights, or trade
secret rights or other proprietary rights of persons, firm or entities who
are not parties to this Agreement except for such claims that result solely
(i) from Frontier's compliance with design specifications and/or data sheets
supplied by Cisco or (ii) from Cisco's alteration or modification of
Products after delivery by Frontier; provided that Cisco (i) promptly
notifies Frontier, in writing, of any notice or claim of such alleged
infringement or misappropriation involving the Products of which it becomes
aware, and (ii) permits Frontier to control, in a manner not adverse to
Cisco, the defense, settlement adjustment or compromise of any such claim
using counsel reasonably acceptable to Cisco. Cisco may employ counsel, at
its own expense (provided that if such counsel is necessary because of a
conflict of interest of either Frontier or its counsel or because Frontier
does not assume control, Frontier will bear such expense), to assist it with
respect to any such claim. Frontier shall not enter into any settlement that
affects Cisco's rights or interest without Cisco's prior written approval.
Cisco shall have no authority to settle any claim on behalf of Frontier.
(b) If by reason of such infringement claim, Cisco or its customers
shall be prevented or are likely to be prevented by legal means from selling
or using any Products, or if, in Frontier's opinion, such claim is likely to
occur, Frontier will use its best efforts, at its expense, to: (i) obtain
all rights required to permit the sale or use of the Products by Cisco and
its customers; or (ii) modify or replace such Products to make them
17
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
non-infringing (and extend this indemnity thereto), provided that any such
replacement or modified Products are satisfactory to Cisco. If Frontier is
unable to achieve either of the options set forth above within a reasonable
period of time after the issuance of the injunction, but in no event longer
than thirty (30) days after receipt of notice thereof, Frontier shall
promptly refund to Cisco the invoiced purchase price, plus all shipping,
storage, and associated costs, of any Products returned freight collect to
Frontier which Cisco or its customers are legally prohibited from selling or
using.
11.2 PRODUCT LIABILITY INDEMNIFICATION.
(a) Frontier expressly and unequivocally agrees to and hereby does
indemnify, release, defend and hold Cisco and its officers, directors,
employees, shareholders, agents, successors and assigns harmless from and
against all claims, damages, losses, costs and expenses, including
attorneys' fees, arising in favor of any person, firm or corporation on
account of product liability in any way relating to the Product, provided
that Cisco (i) promptly notifies Frontier, in writing, of any notice or
claim hereunder of which it becomes aware, and (ii) permits Frontier to
control, in a manner not adverse to Cisco, the defense, settlement,
adjustment or compromise of any such claim using counsel reasonably
acceptable to Cisco. Cisco may employ counsel, at its own expense (provided
that if such counsel is necessary because of a conflict of interest of
either Frontier or its counsel or because Frontier does not assume control,
Frontier will bear such expense), to assist it with respect to any such
claim. Frontier shall not enter into any settlement that affects Cisco's
rights or interest without Cisco's prior written approval. Cisco shall have
no authority to settle any claim on behalf of Frontier. Notwithstanding the
indemnification provisions of this Section 11.2, it is mutually agreed and
understood that any and all obligations, commitments and liabilities with
respect to Product liability as defined in this Section 11.2 shall not apply
to Frontier to the extent Products are manufactured by Cisco in the event
Cisco has exercised its rights to manufacture Frontier's Products pursuant
to Section 10 hereunder, provided that Frontier's Product liability
indemnity obligations under this Section 11.2 shall continue to apply for
defects arising from the design of the Product.
12. CONFIDENTIALITY
Any proprietary information exchanged by the Parties during the term of this
Agreement shall be treated pursuant to the Non-Disclosure Agreement, dated
July 10, 1995.
13. LIMITATION OF LIABILITY
EXCEPT UNDER SECTIONS [*], UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO
THE OTHER IN CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT UNDER ANY
CONTRACT, STRICT LIABILITY, NEGLIGENCE OR OTHER LEGAL OR EQUITABLE THEORY, FOR
(I) ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, (II) LOST
PROFITS OR DATA OR
18
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
(III) ANY AMOUNTS IN EXCESS OF THE [*] OR THE [*] FOR THE [*] THAT ARE THE
SUBJECT OF THE CLAIM. THIS SECTION DOES NOT LIMIT EITHER PARTY'S LIABILITY FOR
BODILY INJURY OF A PERSON.
14. TERM AND TERMINATION
14.1 TERM. Unless terminated earlier as provided herein, this Agreement
shall have a term of three (3) years commencing from the Effective Date, unless
terminated sooner by written notice given by a party pursuant to this Section
14. The parties may extend the term of this Agreement for up to additional one
(1) year periods by written agreement executed no later than sixty (60) days
prior to the expiration of the then current term period. Upon any expiration or
termination, the rights and obligations of the parties shall continue except
that Frontier will not be required to accept further orders or undertake further
product development.
14.2 TERMINATION FOR CAUSE This Agreement may be terminated by a party for
cause immediately by written notice upon the occurrence of any of the following
events:
(a) If the other ceases to do business, or otherwise terminates its
business operations; or
(b) If the other breaches any provision of this Agreement and fails to
cure such breach within thirty (30) days (immediately in the case of a
breach of Section 12) of written notice describing the breach; or
(c) If the other becomes insolvent or seeks protection under any
bankruptcy, receivership, trust deed, creditors arrangement, composition or
comparable proceeding, or if any such proceeding is instituted against the
other (and not dismissed within ninety (90) days).
14.3 TERMINATION FOR CONVENIENCE. Subject to the terms of this Section 14,
Cisco may terminate this Agreement or any purchase order issued hereunder upon
notice to Frontier. Both Cisco and Frontier agree to cooperate in good faith to
minimize the negative impact to both parties. Cisco agrees to execute any
termination for convenience in the following manner.
(a) Written notice informing Frontier of Cisco's intent to terminate
this Agreement or any purchase orders issued hereunder.
(b) A minimum of nine (9) months lead time from the date of receipt of
written notice by Cisco before full termination of Cisco's requirements.
14.4 FRONTIER'S ACTIONS. Upon receipt of written notice pursuant to Section
14.3, Frontier will, to the extent and at the times specified by Cisco, stop all
work under the affected purchase order, place no further orders for materials to
complete the work, orders and any surviving rights under terminated subcontracts
or orders, settle all claims thereunder after
19
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
obtaining Cisco's approval, protect all property in which Cisco has or may
acquire an interest, and transfer title and make delivery to Cisco of all
completed Products, articles, raw materials, work in process, and other things
held or acquired by Frontier in connection with the terminated portion of this
purchase order. Frontier will proceed promptly to comply with Cisco's
instructions respecting each of the foregoing without awaiting settlement of
payment of its termination claim.
14.5 CLAIMS. Within thirty (30) days after termination according to Section
14.3, Frontier may submit to Cisco its written claim for any charges due to
Frontier from Cisco. Failure to submit the claim within thirty (30) working days
will constitute a waiver of all claims and a release of all Cisco's liability
arising out of the termination.
14.6 SETTLEMENT. In the event that Frontier properly files any claims under
Section 14.5 above, Cisco agrees to pay to Frontier the amounts identified by
Frontier in its invoice for any such termination that is promptly submitted to
Cisco. Notwithstanding the foregoing, if Cisco reasonably disputes the amounts
identified by Frontier in the submitted invoice and the parties fail (in good
faith) to reach agreement on an adjusted invoice value, Cisco agrees to pay and
Frontier shall accept the following amounts:
(a) The price for all Products completed (which items were delivered or
available for delivery at the time notice of termination was given) pursuant
to the affected purchase order(s) and not previously paid for as specified
in Exhibit A.
(b) The actual, documented costs incurred by Frontier related to the
terminated portion of the purchase order, including, only to the extent that
any components, materials and other inventory cannot be used in any of
Frontier's non-Cisco products: (i) Frontier's cost of component inventory
for the terminated portion of the purchase order(s), (ii) Frontiers cost of
work in process materials including manufacturing operations completed at
the time of cancellation for the terminated portion of Cisco's purchase
order, and (iii) reasonable cancellation charges incurred by Frontier from
component suppliers for the terminated portion of Cisco's purchase order.
(c) The reasonable, documented costs incurred by Frontier in protecting
property in which Cisco has or may acquire an interest.
(d) Notwithstanding the foregoing, payments made under this Section 14.6
shall in no event [*] in the terminated purchase order(s) less payments
otherwise made or to be made. Any amounts payable for property lost,
damaged, stolen or destroyed prior to delivery to Cisco win be excluded from
amounts otherwise payable to Frontier under this Section 14. THIS SECTION
14.6 SETS FORTH FRONTIER'S ENTIRE REMEDIES WITH RESPECT TO A TERMINATION OF
THIS AGREEMENT BY CISCO UNDER SECTION 14.3 ABOVE.
20
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
14.7 SURVIVAL; SUPPORT AFTER TERMINATION. Sections 2, 7.4, 9, 11, 12, 13,
14, 15, 16, 17, 18 and 19 and Cisco's right to distribute Products in inventory
or subject to any pending purchase order shall survive termination or expiration
of this Agreement. In the event of any termination or expiration of this
Agreement, Frontier shall continue to provide maintenance support and hardware
repair to Cisco at Frontier's prevailing rates. The support shall be provided a
minimum of three (3) years after termination or expiration.
14.8 Subject to Cisco's Manufacturing Rights under Section 10, upon
Frontier's request, Cisco shall deliver to Frontier all Frontier property loaned
to Cisco under this Agreement, without cost to Frontier (exclusive of freight
costs). Frontier shall determine the manner and procedure for returning the
Frontier property, and shall pay the corresponding freight costs.
15. FORCE MAJEURE
Neither party shall be considered in default of performance of its
obligations under this Agreement to the extent that performance of such
obligations is delayed by force majeure or contingencies or causes beyond the
reasonable control of such party or its suppliers. In the event Frontier fails
to deliver product due to such causes, Cisco may either:
(a) Terminate this Agreement or any part hereof as to Product(s) not
shipped; or
(b) Suspend this Agreement in whole or in part for the duration of the
delaying cause, and at Cisco's option, buy the Product(s) elsewhere and
deduct from any commitment to Frontier the quantity so purchased. Frontier
shall resume performance under this Agreement immediately after the delaying
cause ceases and, at Cisco's option, extend the then current term period for
a period equivalent to the length of time the excused delay endured.
16. ASSIGNMENT
This Agreement shall be binding on the parties hereto and their successors
and assigns; provided, however, that Frontier shall not assign or transfer, in
whole or in part, this Agreement or any of its rights or obligations arising
hereunder without the prior written consent of Cisco, except that Frontier may
assign this Agreement to a party that acquires all or substantially all of
Frontier's business, stock or assets. Any purported assignment without such
consent shall be null and void. Cisco may freely transfer, in whole or part,
this Agreement and its rights and obligations hereunder.
17. NONSOLICITATION
During the term of this Agreement and for one (1) year thereafter, each
party will refrain from (i) soliciting the other party's employees or
consultants for employment or other service or
21
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
(ii) encouraging the other party's employees or consultants to leave the such
other party for any reason.
18. COMPLIANCE WITH LAWS; IMPORT/EXPORT
18.1 COMPLIANCE WITH LAWS. Frontier warrants that in performance of work
under this Agreement it has complied with or will comply with all applicable
federal, state, local laws and ordinances now or hereafter enacted including,
but not limited to OSHA, the Fair Labor Standards Act of 1938 (29 U.S.C.
201-219), the 8-Hour Law (40 U.S.C. 327-332), the Equal Opportunity and
Affirmative Action Regulations, and laws restraining the use of convict labor.
Frontier warrants that in performance of work under this Agreement it has
complied with all laws, regulations, statutes and ordinances of all governmental
entities including local, state, federal or international, now or hereafter
enacted, which regulate any material because it is radioactive, toxic, hazardous
or otherwise a danger to health, reproduction or the environment including but
not limited to the Comprehensive Environmental Response Compensation and
Liability Act of 1980, the Resource Conservation Recovery Act, the Federal Water
Pollution Control Act, the Clean Air Act, the Montreal Protocol, the Toxic
Substances Control Act and similar laws, rules, statutes, treaties or orders and
international understandings. In addition, Frontier shall secure and maintain
adequate workmen's compensation insurance in accordance with the laws of the
state or states from which Frontier shall furnish Product and/or services for
Cisco. Upon request, Frontier agree to issue certificates certifying compliance
with any of the aforementioned laws or regulations as may be applicable to the
Product and/or services being furnished hereunder.
18.2 IMPORT AND EXPORT. Frontier shall provide all information under its
control which is necessary or useful for Cisco to obtain any export or import
licenses required for Cisco to ship or receive Products, including, but not
limited to, U.S. customs certificates of delivery, affidavits or origin, and
U.S. Federal Communications Commissions identifier, if applicable.
19. GENERAL
19.1 NOTICES. All notices shall be sufficient only if personally delivered,
delivered by telecopy, delivered by a major commercial rapid delivery courier
service or mailed by certified or registered mail, return receipt requested, to
either party at its address set forth below (or such other address as such party
may provide by notice pursuant to this Section):
Cisco Systems, Inc. Frontier Software Development, Inc.
170 West Tasman Drive 321 Billerica
San Jose, CA 95134-1706 Chelmsford, MA 01824
If not received sooner, notice by mail shall be deemed received five (5)
days after deposit in the U.S. mails, properly addressed, with first class
postage prepaid. Notice by telecopy shall be deemed received at the time sent or
the next working day if such time is not during a working day.
22
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
19.2 CONTROLLING LAW AND JURISDICTION. This Agreement shall be governed,
controlled, interpreted and defined by and under the laws of the State of
California and the United States, without regard to the conflicts of laws
provisions thereof. Unless waived by Cisco (which it may do in its sole
discretion) the exclusive jurisdiction and venue of any action with respect to
the subject matter of this Agreement shall be the Superior Court of California
for the County of Santa Clara or the United States District Court for the
Northern District of California and each of the parties hereto submits itself to
the exclusive jurisdiction and venue of such courts for the purpose of any such
action. Service of process in any such action may be effected in the manner
provided in Section 19.1 for delivery of notices.
19.3 WAIVERS AND AMENDMENTS. No failure or delay by either party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial waiver thereof include any other right,
power or privilege. This Agreement may not be amended, changed, discharged or
terminated except by a written document signed by duly authorized officers of
the parties.
19.4 SEVERABILITY. In the event that any provision of this Agreement shall
be unenforceable or invalid under any applicable law or be so held by applicable
court decision, such unenforceability or invalidity shall only apply to such
provision and shall not render this Agreement unenforceable or invalid as a
whole; and, in such event, such provision shall be modified or interpreted so as
to best accomplish the objective of such unenforceable or invalid provision
within the limits of applicable law or applicable court decision and the
manifest intent of the parties hereto.
19.5 RELATIONSHIP OF THE PARTIES. In fulfilling its obligations under this
Agreement, each party shall be acting as an independent contractor. This
Agreement does not make either party the employee, agent or legal representative
of the other.
19.6 BASIS OF BARGAIN. EACH PARTY RECOGNIZES AND AGREES THAT THE WARRANTY
DISCLAIMERS AND LIABILITY AND REMEDY LIMITATIONS IN THIS AGREEMENT ARE MATERIAL
BARGAINED FOR BASES OF THIS AGREEMENT AND THAT THEY HAVE BEEN TAKEN INTO ACCOUNT
AND REFLECTED IN DETERMINING THE CONSIDERATION TO BE GIVEN BY EACH PARTY UNDER
THIS AGREEMENT AND IN THE DECISION BY EACH PARTY TO ENTER INTO THIS AGREEMENT.
19.7 ENTIRE AGREEMENT. This Agreement (including the Exhibits hereto)
constitutes the entire Agreement between the parties hereto concerning the
subject matter of this Agreement; and there are no conditions, understandings,
agreements, representations, or warranties, expressed or implied, which are not
specified herein.
23
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
persons duly authorized as of the date and year first above written.
CISCO SYSTEMS, INC.
By: /s/ MARIO MAZZOLA
-------------------------------
Title: V.P. AND G.M. WBU
----------------------------
FRONTIER SOFTWARE DEVELOPMENT, INC.
By: /s/ NARENDRA POPAT
-------------------------------
Title: PRESIDENT
----------------------------
24
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
EXHIBIT A
PRODUCTS/PRICING
<TABLE>
<CAPTION>
- ------------------------ ---------------------- --------------------------------------------------------------------
PRODUCT U.S. DISCOUNT
MODEL LIST
NUMBER PRICE
- ------------------------ ---------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
[*]
--------------------------------------------------------------------
[*] [*] [*]
- ------------------------ --------------------- ---------------------- ----------------------- -------------------
6010 [*] [*] [*] [*]
- ------------------------ --------------------- ---------------------- ----------------------- -------------------
6010E2 [*] [*] [*] [*]
- ------------------------ --------------------- ---------------------- ----------------------- -------------------
6020 [*] [*] [*] [*]
- ------------------------ --------------------- ---------------------- ----------------------- -------------------
6020T2 [*] [*] [*] [*]
- ------------------------ --------------------- ---------------------- ----------------------- -------------------
7101ET [*] [*] [*] [*]
- ------------------------ --------------------- ---------------------- ----------------------- -------------------
7101TR [*] [*] [*] [*]
- ------------------------ --------------------- ---------------------- ----------------------- -------------------
7102ET [*] [*] [*] [*]
- ------------------------ --------------------- ---------------------- ----------------------- -------------------
7102TR [*] [*] [*] [*]
- ------------------------ --------------------- ---------------------- ----------------------- -------------------
7103ET [*] [*] [*] [*]
- ------------------------ --------------------- ---------------------- ----------------------- -------------------
7103TR [*] [*] [*] [*]
- ------------------------ --------------------- ---------------------- ----------------------- -------------------
</TABLE>
When reference is made in the Agreement or any exhibit to Frontier's
published U.S. List Price of a Product specially modified for Cisco, such
reference shall mean Frontier's published U.S. List Price for Frontier standard
product upon which the Product has been based. If Frontier shall modify, update,
enhance or create a new version of a standard product upon which such a Product
is based, it shall similarly modify, update, enhance or create a new version of
the corresponding Product. Frontier will sell Products specially modified for
Cisco only to Cisco.
25
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
EXHIBIT B
NOT USED
26
<PAGE>
EXHIBIT C
PRODUCT SPECIFICATIONS
27
<PAGE>
INTELLIGENT RMON PROBES FOR FDDI/CDDI BACKBONES
- -- Cost effective RMON probes for 62.5/125 micron multimode FDDI and for CDDI
- -- High Performance 90 Mhz Pentium processor
- -- RMON MIB and SMT support FDDI/CDDI for enterprise wide standard diagnostics
- -- Support for Single and Dual attached physical connections
- -- Virtual analyzer for 7 layer EnterpriseRMON(TM) monitoring of multiple
network parameters concurrently
- -- In Band/Out of band configuration support via BootP, TFTP, and NSlogin
- -- Resource Manager(TM) option provides proactive monitoring of SNMP devices
- -- Ethernet or Token Ring interface connections for management communications
- -- Full packet capture and seven level protocol decode for FDDI/CDDI traffic
- -- Integrates with NETscout Manager for comprehensive mutli-topology monitoring
<TABLE>
<CAPTION>
- -----------------------------------------------------------
NETscout
FDDI/CDDI Probes
- ----------------------------------------------------------- ----------------------------------
- ----------------------- ----------------------------------- ----------------------------------
MODEL DESCRIPTION TOPOLOGY
- ----------------------- ----------------------------------- ----------------------------------
- ----------------------- ----------------------------------- ----------------------------------
<S> <C> <C>
7101ET CDDI Probe CDDI/Ethernet
7101TR Single Attached CDDI/Token Ring
- ----------------------- ----------------------------------- ----------------------------------
- ----------------------- ----------------------------------- ----------------------------------
7102ET FDDI Probe FDDI/Ethernet
7102TR Single Attached FDDI/Token Ring
- ----------------------- ----------------------------------- ----------------------------------
- ----------------------- ----------------------------------- ----------------------------------
7103ET FDDI Probe FDDI/Ethernet
7103TR Dual Attached FDDI/Token Ring
- ----------------------- ----------------------------------- ----------------------------------
</TABLE>
NETSCOUT FDDI/CDDI PROBES PROVIDE FULL RMON CAPABILITIES FOR HIGH SPEED
BACKBONES
Distributed networks use a variety of topologies in order to maximize network
performance and utilization. In many cases FDDI and/or CDDI technologies have
been applied to needs for a high speed, high performance backbone connecting the
variety of Ethernet, Token Ring, and WAN segments which typically integrate to
form enterprise wide communications.
Since the development of the RMON standard, first for Ethernet and then extended
to Token Ring, users have quickly adopted this standards based technology to
provide both pro-active as well as reactive diagnostic operations for
increasingly complex network configurations. However, no cost effective
mechanism has exited to address the needs of users to understand the operation
and diagnose problems associated with high speed backbone segments.
The NETscout 7100 Series EnterpriseProbe for FDDI/CDDI networks fills this major
hole in diagnostic capabilities. Depending on the model selected, users may
connect to both FDDI and CDDI network segments in either single or
28
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
dual attached configurations. The NETscout's high performance Pentium processor
allows users to gather RMON based statistics for all ring traffic activity.
NETscout's Domain View architecture provides the same capability to subdivide
traffic on the ring and effectively operate multiple concurrent RMON probes on a
single platform. Management from the NETscout RMON management package presents
FDDI/CDDI information in exactly the same forms as for Ethernet and Token Ring
thus presenting a complete and uniform diagnostic mechanism for multi-media
enterprise networks.
29
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
SPECIFICATIONS
MODEL 7100 PROBE FAMILY
High performance Pentium processor based stand alone probes include all nine
RMON-MIB groups for FDDI or CDDI with an Ethernet or a Token Ring connection
for management communication.
SMT SUPPORT
The NETscout EnterpriseProbe for FDDI has built-in support for monitoring and
capturing Station management (SMT) frames. This capability allows the
NETscout Manager to filter and decode all SMT frames, and to present an
active ring map and topology for all FDDI devices on a FDDI Segment.
PHYSICAL
Dimensions 6-3/4"H x 17"W x 16"D
Weight 24 pounds
CDDI INTERFACE
RJ-45 accepts Category 5 UTP or Category 5 sheath - shielded, 100 ohm twisted
pair cable with TP-MIC plug.
FDDI
Single or dual SC type connectors accept SC to SC or SC to MIC MULTIMODE
fiber optic cable.
CONSOLE, SLIP
9 pin D type male supporting RS232 signals. SLIP support is standard.
ETHERNET INTERFACE
AUI(Thicknet), BNC(Thinnet), RJ-45 (10BaseT) selected through internal
strapping.
TOKEN RING INTERFACE
9 Pin D type (STP), RJ-45 UTP autoselected.
MEMORY
8 Meg standard
Expandable to 32 Meg
OPERATING ENVIRONMENT
Temperature 0 to 40 deg C
Humidity 5% to 95% non-
condensing
POWER
120VAC/230VAC, 50/60 Cycles
Auto Switching, 200 Watts
STANDARDS COMPLIANCE
UL, CSA, FCC
NETscout and Domain View are Trade Marks of Frontier Software Development,
Inc. All other trademarks belong to their respective companies.
Printed in the USA.
FDDI 4/95
Specifications are subject to change without notice.
Frontier Software Development, Inc.
321 Billerica Rd.
Chelmsford, MA 01824
Tel: 508.244.4000
Fax: 508.244.4004
EMAIL: [email protected]
30
<PAGE>
[INSERT TABLE]
31
<PAGE>
INTELLIGENT RMON PROBES AND AGENTS
- -- High Performance 486 based multisegment probes and cost effective software
agents
- -- Support for Ethernet, Token Ring, FDDI, and WAN
- -- Compatible with RMON standards for Ethernet (RFC 1271) and Token Ring (RFC
1513)
- -- Compatible with any SNMP based Network Management System
- -- Virtual analyzer for 7 layer EnterpriseRMON(TM) monitoring of multiple
network parameters concurrently
- -- Selective packet capture and seven level protocol decode software
- -- In Band/Out of Band configuration support via BootP, TFTP, and Nslogin
- -- Support for duplicate IP address detection
- -- Provides accounting statistics for utilization/bandwidth cost analysis
- -- Resource Manager(TM) software option supports proxy SNMP
<TABLE>
<CAPTION>
- -----------------------------------------------------------
NETscout
Product Family
- ------------------------------------------------------------------------------------------------------
- ----------------------- -------------------------------------- --------------------------------------
MODEL DESCRIPTION TOPOLOGY
<S> <C> <C>
- ----------------------- -------------------------------------- --------------------------------------
- ----------------------- -------------------------------------- --------------------------------------
6010 High performance 486 based Ethernet
6020 intelligent probes Token Ring
6040 WAN (E connection)
6050 Ethernet/WAN
6060 WAN (TR Connection)
6070 Token Ring/WAN
- ----------------------- -------------------------------------- --------------------------------------
- ----------------------- -------------------------------------- --------------------------------------
9510 SPARC based software agents Ethernet
9530 FDDI
- ----------------------- -------------------------------------- --------------------------------------
</TABLE>
A COMPLETE FAMILY OF HIGH PERFORMANCE PROBES AND SOFTWARE AGENTS
Frontier offers the industry's broadest product lines of RMON base hardware
probes and software. This family supports Ethernet, Token
Ring, FDDI and WAN. This family of integrated products are fully compatible and
supported from a single monitoring environment. NETscout is also compatible with
any SNMP based network management system. With the NETscout family, the network
administrator can choose different price points matching the performance needs
of the network. The NETscout 6000 series utilizes a high-performance 486
processor and real time operating system delivering excellent price performance.
The NETscout 6000 series has a scaleable architecture.
For those users who want to utilize existing SPARC platforms Frontier offers the
NETscout 9500 series and DOS software agents for a cost-effective way to add
RMON to LAN segments. The Ethernet probes and agents support
32
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
all 9 RMON groups (RFC 1271). The Token Ring probes and agents support ten
groups (RFC 1513). The WAN probe is ideal for monitoring bandwidth utilization
and providing accounting information. The WAN probe supports encapsulation and
is compatible with Cisco, Wellfleet, 3COM, DEC, Proteon and other routers. The
new Resource Manager Option lets a single probe proactively monitor both LAN/WAN
traffic and any SNMP device.
33
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
NETSCOUT: UNBEATABLE SCALABILITY, FLEXIBLE FOR ENTERPRISE NETWORKS
A typical network can be equipped with multiple Frontier NETscout probes and
agents with one agent or probe connected to each individual network segment. The
agents are managed and controlled from a centrally located network management
console, called the NETscout Manager. The network management console consists of
a number of analysis tools which permit the user to request and examine data
provided by the selected agent. NETscout probes and agents are supported by
Frontier's SNMP compatible management console analysis software which runs with
SunNet Manager, IBM NetView 6000, HP Openview, AT&T and MS Windows. With
Frontier NETscout probes and agents, it is possible to have multiple clients
active so that network diagnostic functions may be performed from multiple
locations such as from primary and secondary network management centers. Also
with NETscout probes multiple segments can be monitored.
PLUG AND PLAY INSTALLATION
NETscout probes can be easily installed by simply typing in the IP address and
connecting the probe to the network. Once connected, NETscout immediately begins
collecting RMON statistics.
INDEPENDENT OPERATION
Frontier's intelligent probes/agents collect statistics continuously, even when
not communicating with the management station. Fault, performance, and
configuration information is accumulated and communicated to the management
station upon a fault or administrators request.
PROACTIVE MONITORING
NETscout intelligent probes/agents are constantly "watching" the network traffic
conditions which can lead to failures. The probes/agents can be configured to
automatically detect error conditions and log these errors upon occurrence. They
will not only notify the management station of the failure, but also provide
historical data for analysis.
VALUE ADDED DATA
Frontier's intelligent probes/agents add significant value to the data it
collects. With the Domain View(TM) architecture NETscout probes and agents can
be directed to focus and "zoom" in on a particular segment, node and type of
traffic in real time and report all RMON statistics to a management station.
This data can be viewed graphically, all from a single screen for easy diagnosis
of a problem.
MULTIPLE MANAGERS
Distributed network environments utilize multiple management stations. NETscout
probes/agents are concurrently accessible from more than one management station.
MULTISEGMENT MONITORING
Frontier's RMON based diagnostics architecture has the capability to monitor
more than one segment at a time. For example, the Model 6010 can monitor two
Ethernet segments concurrently. This provides a cost-effective way to deploy
diagnostic probes.
34
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
35
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
EXHIBIT D
PRODUCT TEST PROCEDURE
THIS EXHIBIT IS COMBINED WITH EXHIBIT G
36
<PAGE>
EXHIBIT E
REPAIR CHARGES
Maintenance (single repair)
6000 family
7000 family[*]
Replacement Units as Spares:
[*]
Maintenance Agreement (Hardware and Software):
6000 family
7000 family[*]
Spare Part:
This is not applicable since all repairs are done on a factory repair basis.
37
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
EXHIBIT F
PRIORITIZATION AND ESCALATION GUIDELINES
PROBLEM PRIORITIES DEFINITIONS:
<TABLE>
<S> <C>
Priority 1: Cisco customer's production network is [*]. [*] is available.
Frontier, Cisco and customers are willing to commit [*] to
resolve the situation.
Priority 2: Cisco customer's production network is [*]. [*] is available.
Frontier, Cisco and customers are willing to commit [*] to
resolve the situation.
Priority 3: Cisco customer's Network performance is degraded. Network
functionality is noticeably impaired but [*] continue.
Priority 4: Cisco or Cisco customer requires information or assistance on
product capabilities, installation, or configuration.
</TABLE>
ESCALATION GUIDELINE: [Note: these titles need to be adjusted for each
Frontier.]
Elapsed Time Priority 1 Priority 2 Priority 3 Priority 4
[*]
Frontier manager to whom the problem is escalated to will take ownership of the
problem and ensure that updates are provided to the appropriate Cisco personnel.
Cisco-initiated escalations will begin at the [Technical Group Leader level] and
proceed upward using the escalation guideline shown above for reference. This
will allow those most closely associated with the support resources to correct
any service problems quickly.
38
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
EXHIBIT G
CISCO QUALITY PROGRAM
39
<PAGE>
ORDERING PROCEDURE FOR RECEIVED MATERIALS
Every component being ordered for NETscout must strictly be as per the
specifications in the Bill of Materials. SPECIAL CARE MUST BE TAKEN TO ENSURE
THAT THE REVISION (OR VERSION) NUMBER OF THE COMPONENTS AND SUB-ASSEMBLIES
MATCHES THE APPROVED SPECIFICATIONS.
The components are to be ordered out of the approved manufacturer's list for
them.
NOTE: Use the anti-static band while assembling the system.
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Frontier Software - Company Confidential
<PAGE>
PART NUMBER AND CURRENT REV NUMBER OF SUB-ASSEMBLIES
<TABLE>
<S> <C>
Chassis Al005
Power Supply HP060A
Fan SU6025-M
Motherboard B6011
Memory(2MB) D1001
Memory(8MB) D2001
ETHERNET EMASTER+ ATS Part# 727001-00
TOKENRING SMART 16/4 AT RINGNODE
WAN CARD RISCOM/H2 REV B
PCC MFM Rev B
</TABLE>
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Frontier Software - Company Confidential
<PAGE>
INSPECTION PROCEDURE FOR RECEIVED MATERIALS
Every sub-assembly that goes into the NETscout unit is first inspected and
approved before use in the system. The following list specifies the inspection
procedure.
THE MOTHERBOARD/MEMORY/CHASSIS:
NOTE: Use the anti-static band while assembling the system.
1) Inspect the motherboard and memory against the order that was placed.
Ensure that the revision number of the card matches the order placed.
Visually check to see if the card is in good condition.
2) Inspect the routing of all the cables in the chassis.
3) Inspect the firmness of all the screws used to fix the components in
the chassis.
4) Ensure the adapter card is clamped in firmly on both sides.
5) Ensure that the BIOS EPROM is the custom-configured BIOS as per
Frontier's specifications.
6) Do Hypot testing. (See Hypot test)
7) Power-on the unit and make sure the system powers on and boots up
correctly.
THE NETWORK CARD:
1) Inspect the card and make sure that the card received is per the
order placed. Ensure that the revision number of the card is per
Frontier's specifications.
2) Visually check the card to make sure it is good.
3) Ensure that all the jumpers are set correctly as follows (Ethernet).
<TABLE>
<S> <C> <C>
a. I/0 Base 300H
b. DRQ 5
c. DACK 5
d. IRQ 10
e. LAN. A
f. PROM Base NO PROM
g. PROM Size 8K
h. SA19-17 EN
i. UTP/AUI/BNC AUI
</TABLE>
(TokenRing MADGE)
<TABLE>
<S> <C> <C>
a. UTP/STP selection STP
b. DMA Channel 3 (DMA 5)
c. Interrupt no. 7 (IRQ 3)
d. DIP switch 1 - ON
2 - ON
3 - OFF
4 - ON
5 - ON
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Frontier Software - Company Confidential
<PAGE>
6 - ON
7 - OFF
8 - ON
</TABLE>
(WAN SDL RISCOM/H2)
<TABLE>
<S> <C> <C>
a. DIP SWITCH Sl BIT1 - ON
BIT2 - ON
BIT4 - ON
BIT5 - ON
ALL OTHERS OFF
b. DREQ 7
c. DACK 7
d. IRQ 5
</TABLE>
4) Remove the MADGE product logo from the face plate on the card.
THE PCC CARD:
NOTE: Use the anti-static band while assembling the system.
1) Visually inspect the card to make sure there are no shorts, opens,
or bad solder joints etc., on the card. Ensure that the revision
number of the card is per Frontier's specifications.
2) Ensure that the wires are soldered on the card as per
specifications.
3) Inspect the components to ensure they are as per the layout of the
card.
4) Ensure that the following jumpers are set on the PCC card.
These settings configures the PCC board as follows:
256KB X 8 EPROM
SERIAL PORT 1 on INT3
SERIAL PORT 2 on INT4
a. W2 1-2
b. W3 4-5
c. W4 1-2
d. W5 3-4 (shorted on the solder side)
e. W6 free
f. W7 free
g. W9 2-3
h. W10 1-2 (shorted on the solder side)
i. W11 1-2 (shorted on the solder side)
j. W12 free
k. WI3 free
1. W14 free
5) Ensure that the following DIP switches are set on the PCC card.
These settings configure the PCC as follows:
IO ADDRESS - 2E0
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Frontier Software - Company Confidential
<PAGE>
MEMORY ADDRESS - D000
BAUD RATE OF SERIAL PORT 1 - 9600
a. SW1 (8 position) BIT 4 - ON
BIT 8 - ON
ALL OTHERS OFF
b. SW2 (4 position) BIT 3 - ON
ALL OTHERS OFF
6) Insert the latest version of EPROM into the appropriate socket in
PCC (U8).
SPECIAL CARE MUST BE TAKEN TO ENSURE THAT THE EPROM IS FULLY
INSERTED INTO THE SOCKET AND IS SNUG.
7) Insert a pre-programmed NVRAM into the appropriate socket in PCC
(U14).
8) Insert the 44 pin PLCC Serial Controllers (PC1645OCV) into the
appropriate sockets (U2 and U10).
9) Insert the flash EPROM into the appropriate socket (U4).
10) Put the cards in the "TO BE TESTED" bin for diagnostic testing.
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Frontier Software - Company Confidential
<PAGE>
UNIT MANUFACTURING PROCEDURE
The following components constitute the NETscout 6010 and 6020 units.
<TABLE>
<CAPTION>
MODEL 6010 MODEL 6020
---------- ----------
<S> <C>
1) Chassis with Motherboard and Memory (2MB, 4MB, 8MB) 1) Chassis with Motherboard and Memory (2MB, 4MB, 8MB)
2) PCC card 2) PCC card
3) Ethernet card 3) TokenRing card
4) Associated labels 4) Associated labels
</TABLE>
Each of the above sub-assemblies upon arrival are inspected and stored
in their designated storage areas after testing (refer to inspection
procedure)
THE MANUFACTURING PROCEDURE:
NOTE: Use the anti-static band while assembling the system.
1) Pick a chassis with the motherboard and the appropriate memory. The
size of memory would depend on the order or the advance requirement
that needs to be filled.
2) Remove the top cover and place it on the ASSEMBLY table.
3) Insert a tested LAN card into the bottom slot of the unit.
4) Insert a tested PCC card into the top slot of the unit.
5) Fix the screws to hold the two cards in their places.
6) Insert the two LED cables "turbo (yl-blk)" and "hdd (red-blk)" onto
the LED connector on the PCC card (WI pins 15-16 and pins 1-2
respectively).
7) Stick the labels at the back of the unit to identify the various
ports as given in the manual for this product.
16) Note the MAC address and serial number of the system.
17) Stick the MAC address, Serial number and the FCC label at the
appropriate places in the system.
18) Note the chassis vendor's serial number affixed on the power supply.
19) Note the serial number of the network card.
20) Fill out the test report form for this unit and insert it in its
holder.
21) Close the box by fixing the four screws at the bottom of the
chassis.
22) Place the box in one of the vacant slots on the TEST RACK. Power-on
the system and ensure that the system is up and running fine.
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Frontier Software - Company Confidential
<PAGE>
23) Now you are all set. Refer to test procedures to test the system.
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Frontier Software - Company Confidential
<PAGE>
SUB-ASSEMBLY TEST PROCEDURES
The following procedure is followed to test or qualify the sub-assemblies in
NETscout.
The Motherboard:
NOTE: Use the anti-static band while assembling the system.
These tests check out all the relevant circuit blocks on the card including the
memory.
1) Insert a floppy drive controller into an available slot in the
system.
2) Connect a 1.2 MB / 1.44 MB floppy drive to the system.
3) Insert a monitor card in the next available slot and a keyboard in
the appropriate port. Connect a monitor to the system.
4) Power on the system and enter set-up mode by pressing the [DEL] key
during BIOS boot up.
5) Configure the following settings in the BASIC SETUP.
a. Floppy Drive - 1.2MB or 1.44MB depending on the drive that is
connected. Set all others to NOT INSTALLED
6) Ensure the following settings in the ADVANCED SETUP.
a. Remapping of video Ram - DISABLED
b. Remapping of BIOS - DISABLED
7) Ensure the following settings in ADVANCED CHIPSET SETUP.
a. DRAM write wait states - 0
b. DRAM read wait states - 0
c. AT Bus Cycle wait states - 0
d. AT Bus CLK speed - CLKIN/6
8) Boot up the system with the test floppy provided. The test floppy
contains the file BURN_IN.BAT that invokes the QAPLUS diagnostic
software.
9) This test can be run as long as desired in the continuous mode. The
minimum suggested duration is 24 hours.
10) Once the system passes all these tests, the motherboard and memory
is deemed to be good. Any errors in the system will be reported by
an error log in a file as well as audible beeps.
THE NETWORK INTERFACE CARD:
NOTE: Use the anti-static band while assembling the system.
The diagnostics supplied by Cogent Data Technology is used to test Ethernet
card. Similarly, the diagnostics provided by MADGE is used to test the MADGE
SmartRing AT card. These tests require the following set up.
a. The NETscout unit with the Ethernet EMASTER/MADGE TokenRing
card.
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Frontier Software - Company Confidential
<PAGE>
b. A floppy controller card and drive attached to it.
c. A monitor card and monitor.
d. A keyboard.
e. A running ethernet/token ring network.
1) The video card, the keyboard and the floppy controller card are
inserted into the system and the system is reconfigured through BIOS
to recognize these additional interfaces.
2) Attach the unit to the ring (if token ring).
3) Insert the diagnostic floppy into the drive.
4) Run A:\DIAG (for MADGE TokenRing card)
Run A:\DIAGNOSE\EM2DIAG (for Ethernet)
Run A:H2 (for SDL WAN Card)
The PCC Card:
NOTE: Use the anti-static band while assembling the system.
The diagnostics developed by Frontier is used to test the card and qualify it.
The set up required for these tests is the same as that for the network
interface card except that the PCC card will be used in place of the network
card.
1) The video card, the keyboard and the floppy controller card are
inserted into the system and the system is reconfigured through BIOS
to recognize these additional interfaces.
2) Execute the command A:\PCC_DIAG
3) The diagnostics perform tests on all the subsystem in the PCC card
and report the status at every stage. The subsytems tested are the
following:
a. The EPROM
b. The NVRAM
c. The serial ports
d. The LEDs
e. The FLASH
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Frontier Software - Company Confidential
<PAGE>
HYPOT TEST PROCEDURE SPECIFICATIONS
Required Equipment:
1) Digital voltmeter with two leads
2) Hypot Tester with two leads
3) Power cord with insulation stripped away.
The following tests are performed as part of the Hypot Test procedure.
a. Breakdown Voltage Test (both AC and DC)
b. Leakage current Test (AC)
BREAKDOWN VOLTAGE TEST (AC)
Connect the red lead of the Hypot tester to the AC output. Connect the other end
of the same cable to the black and white leads of the power cord. Connect the
black cable of the tester to the GND terminal of the tester. Connect the other
end of the same cable to the green wire of the power cord. Connect the power
cord to the unit under test. Turn the power on by throwing the switch to the
HYPOT position. Gradually turn the voltage knob until the voltage meter
indicates 1414 volts. Keep the switch in this position for 60 seconds. If the
BREAKDOWN indicator light glows, it indicates failure and the unit has to be
rejected. Now, gradually reduce the voltage to zero. Again gradually increase
the voltage until 2121 volts is achieved. Keep the switch in that position for
one second. If the BREAKDOWN indicator light comes on, it indicates a failure
and the unit should be rejected. Now, gradually reduce the voltage down to zero.
This completes this test.
BREAKDOWN VOLTAGE TEST (DC)
Connect the red lead of the Hypot tester to the DC output. Connect the other end
of the same cable to the black and white leads of the power cord. Connect the
black cable of the tester to the GND terminal of the tester. Connect the other
end of the same cable to the green wire of the power cord. Connect the power
cord to the unit under test. Turn the power on by throwing the switch to the
HYPOT position. Gradually turn the voltage knob until the voltage meter
indicates 1414 volts. Keep the switch in this position for 60 seconds. If the
BREAKDOWN indicator light glows, it indicates failure and the unit has to be
rejected. Now, gradually reduce the voltage to zero. Again gradually increase
the voltage until 2121 volts is achieved. Keep the switch in that position for
one second. If the BREAKDOWN indicator light comes on, it indicates a failure
and the unit should be rejected. Now, gradually reduce the voltage down to zero.
This completes this test.
LEAKAGE CURRENT TEST (AC)
Connect the red lead of the Hypot tester to the AC output. Connect the other end
of the same cable to the black and white leads of the power cord. Connect the
black cable of the tester to the GND terminal of the tester. Connect the other
end of the same cable to the green wire of the power cord. Connect the power
cord to the unit under test. Connect a Digital Voltmeter across the positive and
negative terminals of the power cord. Now gradually increase the voltage to 120
V is reached. If the leakage indicator light glows during this process, the unit
should be rejected. Repeat the same test at 254V.
IMPORTANT: THE HYPOT TESTER HAS TO BE TESTED ONCE EVERY WEEK
TO ENSURE THAT THE BREAKDOWN AND LEAKAGE LEDS ARE FUNCTIONING PROPERLY.
Procedure to test LEDs
The LEDs are tested once every week to ensure that they are working. The test is
done every. Friday of the week. If the Friday is a holiday, the test will be
conducted the following Monday.
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Frontier Software - Company Confidential
<PAGE>
For BREAKDOWN and LEAKAGE LED test:
Throw the switch on the tester to the HYPOT position. Crank up the
voltage a little to about 200-300 V. Using the exposed portion of the red and
black wires, momentarily short the outputs thereby causing an `arc'ing effect.
The BREAKDOWN LED and the LEAKAGE LED would then come on indicating that R is
working correctly.
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Frontier Software - Company Confidential
<PAGE>
SUB-ASSEMBLY MANUFACTURING AND TEST PROCEDURES
The following document illustrates the procedure that is presently being
employed in the manufacture of 6OXX NETscout probes. A portion of the assembly
is done by third party vendors and a part of it is done at Frontier. This is a
comprehensive procedure encompassing the complete process.
CARD AND INVENTORY SET UP.
1) Assemble all the inventory. The list is given below.
<TABLE>
<CAPTION>
NO. PART/SUB-ASSY VENDOR QTY
- --- ------------- ------ ---
<S> <C> <C> <C>
1** NETscout Chassis BYTECH 1
2 486SX Motherboard WIN 1
3 2MB Memory WIN 8
(8MB Memory in special case)
4 EMASTER+ATS COGENT 1 (or)
SMART 16/4 AT Ringnode MADGE 1
RISCOM/H2 SDL 1
5 PCC (MFM) card FRONTIER 1
6 NETscout label BOVIE 1
7 Model 6010 label BOVIE 1
8 PCC-backplate IDEAS 1
9 Adapter clamp IDEAS 1
10 Cable ties MOUSER 3
11 Cn'ctr jack screws MOUSER 4
12 Jack screw spacer KEYSTONE 1
13 Fiber washers MOUSER 2
14 Claywhite carton PERRY 1
15 Styrofoam strips PERRY 2
16 60XX (appropriate) Manual FRONTIER 1
</TABLE>
**The following items come with the NETscout chassis:
a. A "nearly complete" set of screws, nuts, etc., as well as the
extender card.
b. The AC adapter power cord (UL approved)
c. A plastic dust cover and thermocol packing case
d. The Power Supply
2) Set the following jumpers on the EMASTER+ATS card.
<TABLE>
<S> <C> <C>
a. I/0 Base 300H
b. DRQ 5
c. DACK 5
d. IRQ 10
</TABLE>
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Frontier Software - Company Confidential
<PAGE>
<TABLE>
<S> <C> <C>
e. LAN. A
f. PROM Base NO PROM
g. PROM Size 8K
h. SAl-917 EN
i. UTP/AUI/BNC AUI
</TABLE>
(TokenRing MADGE)
<TABLE>
<S> <C> <C>
a. UTP/STP selection STP
b. DMA Channel 3 (DMA 5)
c. Interrupt no. 7 (IRQ 3)
d. DIP switch 1 - ON
2 - ON
3 - OFF
4 - ON
5 - ON
6 - ON
7 - OFF
8 - ON
</TABLE>
(WAN SDL RISCOM/H2)
<TABLE>
<S> <C> <C>
a. DIP SWITCH S1 BIT1 - ON
BIT2 - ON
BIT4 - ON
BIT5 - ON
ALL OTHERS OFF
b. DREQ 7 (fixed upon request)
c. DACK 7 (fixed upon request)
d. IRQ 5 (fixed upon request)
</TABLE>
3) Set the following jumpers on the PCC card. These settings configures
the PCC board as follows:
256KB X 8 EPROM
SERIAL PORT 1 on INT3
SERIAL PORT 2 on INT4
<TABLE>
<S> <C>
a. W2 1-2
b. W3 4-5
c. W4 1-2
d. W5 3-4 (shorted on solder side)
e. W6 free
f. W7 free
9. W9 2-3
h. W10 1-2 (shorted on solder side)
i. W11 1-2 (shorted on solder side)
j. WI2 free
k. W13 free
1. W14 free
</TABLE>
4) Set the following DIP switches on the PCC card. These settings
configures the PCC as follows:
Page 13
Frontier Software - Company Confidential
<PAGE>
10 ADDRESS - 2E0
MEMORY ADDRESS - D000
BAUD RATE OF SERIAL PORT 1 - 9600
a. SWI (8 position) BIT4 - ON
BIT 8 - ON
ALL OTHERS OFF
b. SW2 (4 position) BIT 3 - ON ALL
OTHERS OFF
5) Insert the latest version of EPROM into the appropriate socket in
PCC (U8).
6) Insert the 44 in PLCC Serial Controllers (PC16450CV) into the
appropriate sockets (U2 and U10).
7) Insert the FLASH chip into its appropriate socket (U4)
ASSEMBLY PROCEDURE.
MOTHERBOARD
NOTE: Use the anti-static band while assembling the system.
1) Stick a washer at the bottom of the mounting hole # 3 on the
motherboard. (This hole does not have a ground padding around it).
2) Mount stand-offs and threaded hex spacers on the bottom plate of the
chassis in the positions indicated.
REAR PORTION OF THE BOX
INSERT CHART
FRONT PORTION OF THE BOX
o - indicates standoff locations
+ - threaded hex spacer location
x - unused holes
3) Remove the Power Supply from the box by unscrewing the two screws at
the rear of the power supply outside the box and two at the front,
inside the box. Fix the blank (comes with the box) backplate over
the unused bay In the backpanel and fix the power supply back in
place.
4) Remove the hard-disk/floppy plate at the front end of the box.
5) Fix the motherboard onto the bottom plate of the chassis and fix the
three screws.
6) Insert memory modules onto the motherboard.
7) Route the AC power line cable inside the box as per prototype unit.
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Frontier Software - Company Confidential
<PAGE>
8) Fix the power supply cables (numbered P8 and P9) onto the
motherboard taking sufficient care of the polarity of the cable (the
two black wires from each connector will be placed at the center).
9) Ensure the power cable for the exhaust fan is properly connected.
10) Fix the extender card clamps, insert the card in the appropriate
slot and fix the screws.
11) Insert "power led (gr-blk)", "reset s/w (or-blk)", and "speaker
(yl-blk)" cables into the corresponding jumpers provided on the
motherboard. Refer to an existing box for polarity details.
12) Route the led cables and tie them with tie-wrap leaving the
"harddisk (rd-blk)" and "turbo (yl-blk)" wires free.
13) Fix the harddisk/floppy plate in its place. Fix the front end of the
extender card to this plate with the S clamp provided.
This completes the first stage of assembly of the box.
Page 15
Frontier Software - Company Confidential
<PAGE>
TEST PROCEDURE
A minimum of two types of tests are run on the box. Additional diagnostic tests
may be required if certain sub-assemblies are found to be failing at any stage.
MOTHERBOARD TEST PROCEDURE
NOTE: Use the anti-static band while assembling the system.
1) Insert a floppy drive controller into an available slot in the
system.
2) Connect a 1.2 MB/1.44 MB floppy drive to the system.
3) Insert a monitor card in the next available slot and a keyboard in
the appropriate port.
4) Power on the system and enter set-up mode.
5) Configure the following setting in the BASIC SETUP.
a. Floppy Drive - according to what is connected. Set all others to
NOT INSTALLED
6) Configure the following settings in the ADVANCED SETUP.
a. Remapping of video Ram - DISABLED
b. Remapping of BIOS - DISABLED
7) Configure the following settings in ADVANCED CHIPSET SETUP.
a. DRAM write wait states - 0
b. DRAM read wait states - 0
c. AT Bus Cycle wait states - 0
d. AT Bus CLK speed CLKIN/6
8) Boot up the system with the test floppy provided.
Continuous tests of the entire motherboard would now be Performed. This test has
to run successfully for 48 hours before the system can pass to the next stage.
SYSTEM ASSEMBLY/TEST PROCEDURE
NOTE: Use the anti-static band while assembling the system.
1) Remove the floppy controller card, the floppy drive, the monitor
card and the keyboard from the system.
2) Remove the existing BIOS EPROM from the card and replace it with the
Custom-configured BIOS EPROM.
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Frontier Software - Company Confidential
<PAGE>
3) Insert the EMASTER+ATS/MADGE SMARTRING card into the bottom slot and
fasten with screws.
In the case of 6040/6050 models, the following additional steps are
to be followed:
a. Unscrew the power supply from its place.
b. Remove the blank backplate in the third slot at the back.
c. Insert the SDL WAN card in this slot
d. Ensure the card sits tightly in its place and is supported
securely by the screws and the power cables.
e. Insert the power supply back into its place and fix the screws.
4) Insert the PCC card into the top slot and fasten with screws.
5) Fix labels at the back panel to indicate the various ports available
on the system. Refer to the manual or an existing box to identify
locations.
6) Route the power cables properly and damp them with tie-wraps.
7) Insert the led cables "turbo(yl-blk)" and "hdd (rd-blk)" on the PCC
card into the appropriate jumper posts.
8) Close the box.
9) Boot up the system and hook it on to the network. Ensure that the
network switch (SW2) and baud rate switch (SW1) are in the proper
position.
10) Connect a console and configure the network parameters.
11) Run the application from a Client Sparcstation.
The Application is run while simulating conditions similar to a normal network
(network traffic etc.). The tests are run successfully for at least 48 hours
before shipping.
12) Affix labels for MAC address and Serial numbers at the back of the
unit.
PACKING/SHIPPING
1) Assemble the inventory. a. The NETscout probe
b. The packing carton.
c. The thermocol cushion from the original chassis carton.
d. Two styrofoam strips.
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Frontier Software - Company Confidential
<PAGE>
e. Power cord.
f. The Manual.
2) Pack them up. The styrofoam strip provides adequate cushion for the
packaging while providing enough space for the power cord.
3) SHIP `EM.
Page 18
Frontier Software - Company Confidential
<PAGE>
CHECKLIST FOR NETscout ASSEMBLY
The following is a list of items to be inspected on the 60xx boxes after they
have been assembled, to ensure the quality of our products.
NOTE: Use the anti-static band while assembling the system.
1) Check the jumper settings on the PCC card.
2) Check the jumper settings on the network card.
3) Ensure that the Bus adapter card is clamped securely.
4) Ensure that the PCC and network card are secured properly.
5) Ensure that the labels on the back panel are straight and are
correctly placed.
6) Make sure that the memory size of the unfit matches the purchase
order that is being filled.
7) Make sure the LED jumper connections are secure and proper.
8) Ensure that the version number of the EPROM is correct.
9) Make a physical inspection of the wires and ensure that they are
routed property. Ensure that no wires come in proximity to the fan.
10) Ensure that the labels on the cover of the box are placed properly
and that they match the unit inside.
11) Make sure that the company logo on the MADGE card is removed.
12) Ensure that the FCC and UL label are placed in their proper places
at the bottom and side of the chassis respectively.
13) Make sure that the chassis vendor's serial number and the serial
numbers of the Network cards are recorded.
14) Check to make sure that the serial number and MAC address of the
unit matches the labels placed on the box.
15) Shake the box to ensure there are no loose articles in the box.
16) Make sure all screws have been put in and that all of them are tight
and secure.
17) Make sure that the socketed ICs are secure.
18) Ensure that the DIP switches are set correctly.
19) Make sure the top and bottom covers of the chassis are clean and
without scratches or marks.
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Frontier Software - Company Confidential
<PAGE>
PROCEDURE FOR BURNING EPROM - 60XX
The EPROM contains the entire agent software that runs on the system. There is
one EPROM on every PCC card. These EPROMs need to preprogrammed before they are
inserted on the card. This programming is done using an EPROM programmer. A gang
programmer is the ideal choice for such purposes.
NOTE: Use the anti-static band while assembling the system.
1) Change directory to NSAGENT\REL.
C:\Greater than cd nsagent\rel
2) Make sure that the EPROM is of the right type. The one to be used is
27C2001-15 (size: 256Kx8, speed: 120ns, manufacturer: SGS-Thomson).
3) Place the EPROM in the programmer making sure the orientation is
correct.
4) Execute the batch file REL lesser than 60xx greater than.BAT
C:\NSAGENT\REL greater than REL6010 for 6010
C:\NSAGENT\REL greater than REL6020 for 6020
C:\NSAGENT\REL greater than REL6040 for 6040
C:\NSAGENT\REL greater than REL6050 for 6050
5) Wait until the software completes the programming and verifying of
the chip. It takes about 45 minutes for the procedure to complete.
6) Remove the EPROM and place the label on it, making sure the
orientation of the label is right.
7) After the EPROM is programmed and verified, the software would wait
for another programming session to start. Repeat steps 2 and 3 and
then press lesser than CR greater than three times. This would
start the programming process for the new EPROM.
8) Repeat the above procedure for as many EPROMs as needed.
9) You have now programmed all your EPROMS. Take a break.
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Frontier Software - Company Confidential
<PAGE>
PROCEDURE FOR BURNING NVRAM
The NVRAM is the chip that stores the serial number (and therefore the MAC
address) of the system. This information is preprogrammed into the chip using an
EPROM programmer before it is inserted into the PCC card. A unique serial number
has to be generated for each NVRAM before programming it in. Every PCC card has
one NVRAM on it. The procedure for updating and burning the NVRAM has been
automated through software. The procedure to be followed is as follows:
NOTE: Use the anti-static band while assembling the system.
1) Change Directory in the PC to NSAGENT\SERNO.
C:\greater than cd\nsagent\serno
2) Make sure the NVRAM is of the right type. The one to be used is
DS1225Y-200 (size: 8KBx8, speed: 200ns).
3) Ensure the orientation of the NVRAM in the programmer is correct.
4) Execute the batch file S.BAT.
C:\NSAGENT\SERNO greater thans
5) Note the serial number that flashes on the screen while the program
is running.
6) Remove the NVRAM from the programmer.
7) Place the label corresponding to the number that was burned in,
keeping in mind the correct orientation.
8) Repeat the procedure (2 through 8) for as many NVRAMs that need to
be burned.
9) Your NVRAMs are now ready. Take a break.
Page 21
Frontier Software - Company Confidential
<PAGE>
TEST REPORT - NETscout 6010/6020/6040/6050
Tests performed: Pass (Y/N)
Motherboard tests
Memory tests
Power Supply tests
Network card tests
PCC tests
System power up tests
Network tests Flash tests
Serial port tests
Burn-in tests
Page 22
Frontier Software - Company Confidential
<PAGE>
CHECKLIST FOR SHIPPING UNITS
The following is a list of items to be inspected before a unit is shipped out of
Frontier's premises.
NOTE: Use the anti-static band while assembling the system.
1) Check to see if all the labels are appropriately placed.
2) Check to see if the FCC and UL label are placed correctly.
3) Ensure there are no visible marks or scratches on the surface of the
unit.
4) Shake the box thoroughly to ensure that there are no loose parts in
the box.
5) Make sure the serial number and MAC address labels are placed
appropriately.
6) Ensure that the product and Company logo labels on the front of the
box match the type of unit and are placed correctly.
7) Ensure that the external screws are tight.
8) The following items form part of the unit being shipped:
The unit itself
The packing carton with related padding material
Two styrofoam strips for cushion
A power cord
Appropriate manual
The WAN cable (in case of 6040/6050)
Page 23
Frontier Software - Company Confidential
<PAGE>
FILLING ORDERS AND SHIPPING
The following procedure describes how purchase and evaluation orders are to be
filled and units shipped to customers. The procedures are similar for software
and hardware products.
1) Receive the order and note the type of order - evaluation or
purchase.
2) Make a special note of the comments section to see if any special
requirements are to be met.
3) Note the courier to be used for dispatch.
4) Pick up the unit to be shipped and pack it up. Note that the
following items form part of the shipment
Model 60xx:
a. The unit
b. The power cord
c. The manual
d. The WAN cable (in case of 6040/6050)
Model 9xxx/80xx:
a. The binders
b. The manuals and addenda
c. The password document
d. The floppies/tape
5) Enter the date of shipment on the order and initial the order.
6) The serial number of Model 60xx units should be pasted on each copy
of the order.
7) One copy of the order should be returned to Accounting (Pale
yellow). One copy should be maintained by the manufacturing group
(Pink). One copy goes with the shipment as packing list (Amber).
The packing list is to be pasted on the outside cover of the
shipment. All password documents should be attached to the
Accounting copy.
Page 24
Frontier Software - Company Confidential
<PAGE>
RMA PROCEDURE
The following is the procedure that is adopted to accept returned material from
customers, diagnose problems, identify solutions and incorporate back into the
production stream.
1) RMA numbers are issued by the Customer support group and the
manufacturing/testing group informed of the pending arrival of the
unit.
2) Support group to keep track of returned materials.
3) The returned units will be received by the manufacturing/testing
group.
4) Testing group to identify the problem.
5) Testing group to fill out the RMA test form before and after
diagnosing the problem and identifying solutions.
6) If the problem is found to be epidemic, necessary action to be
suggested to support group.
7) If the solution has to be incorporated into the manufacturing
procedure, take appropriate action.
8) Reuse the unit if possible after adequate testing.
Page 25
Frontier Software - Company Confidential
<PAGE>
PROCEDURE FOR REPAIR/RETURN OF SUB-ASSEMBLIES
NOTE: Use the anti-static band while assembling the system.
Motherboard/Memory/Power Supply:
Minor problems repairable at Frontier's site shall be done by Frontier (problems
like incorrect setup, incorrect jumper settings etc.). All major problems shall
be reported to WIN Enterprises and the unit returned to them for replacement.
Network Card:
AJI problems not addressable by Frontier shall be reported to the
distributor/manufacturer and the card returned.
PCC card:
Cards detected to be having problems shall be kept aside for repair and further
testing and a new card used in its place. The bad cards shall be debugged by
Frontier and roused if they are found to be redeemable. All cards that need an
extra jumper or other bodily repair to the PCB shall not be used as part of
NETscount products. They shall be used only for internal purposes. The problem
if found to be due to a vendor of one of the components on the card, shall duly
be reported and action taken.
Page 26
Frontier Software - Company Confidential
<PAGE>
INSERT GRAPH
<PAGE>
RMA PROCEDURES (1/18/95)
Accounting
- -- Create an "Open and Closed RMAS" Binder
- -- All units received without an RMA will be investigated promptly
- -- Pink Copy - Stays with Jeanne/Sue in "Open and Closed RMAS" Binder
- -- White/Yellow copies Always sent to Receiving
- -- Repair & Returns Create folder with shipping paperwork & send to receiving,
Use RMA
EVALUATION RETURNS:
Yellow and White copies will be returned from "Repair Dept." together
REPAIR AND RETURN:
Yellow and White copies will be returned from "Repair Dept." together
REPLACEMENT RETURNS:
Yellow copy will be returned before White copy
- -- Put Yellow copy in customer file
- -- Match White copy with Pink copy, put in "Closed" section of RMA binder,
Compile RMA statistics
RECEIVING/MANUFACTURING AND SHIPPING:
- -- Create Binder of "Open RMAs"
- -- Units received without RMA will be set aside in Copy Room & Sue/Jeanne will
be notified
EVALUATION RETURN:
WHEN RECEIVED:
Fill in date received on RMA form Send BOTH copies of RMA form to
Accounting Place unit back into Inventory
REPAIR AND RETURN:
WHEN RECEIVED:
Fill in date received on RMA form Put BOTH copies of RMA form on
unit as work order Notify Girvan/Jim that unit has been received
Move RMA folder from "Incoming" to "In Process"
WHEN REPAIRED:
Fill in Repair information on RMA form and move unit & folder to
Shipping
WHEN SHIPPED:
Fill in ship date and information
Return BOTH copies of RMA form to accounting
REPLACEMENT RETURN:
<PAGE>
WHEN RECEIVED:
Fill in date received on RMA form
Send Yellow copy to accounting & put White copy on unit as work
order
Notify Girvan/Jim that unit has been received
WHEN REPAIRED:
Fill in Repair information on RMA form and send White (only) copy
to accounting
Place unit back into inventory
<PAGE>
ENGINEERING CHANGES AND DEVIATIONS
Vendor maintains a documented process for the incorporation of
engineering changes into the product and for the temporary deviation of product
structure, specifications, or processes. The controlling document for this
process is Vendor's document #00000-00. All engineering changes and product
deviations within seven days. Non-response within the allotted time shall
constitute approval of the request.
STOP SHIP PROCEDURES
In the event that it is demonstrated that the product fails to meet its
functional or quality objectives, either Vendor or Customer may issue a stop
ship request. The process for a stop ship is defined in Customers procedure
#RA.xx.00xx and outlined below.
a) The initiating QE notifies Vendors and Customer's program management and
quality departments explaining the problem, exposure, and possible recovery
plan.
b) The receiving party will acknowledge receipt of the stop ship request within
one work day.
c) Vendor will withhold product shipments to Customer.
d) Corrective action will be agreed to by both Vendor and Customer and
implemented by Vendor.
e) Upon successful execution of the corrective action, Customer QE will clear
the stop ship and grant permission then resume shipments of product to
customer.
<PAGE>
FRONTIER SOFTWARE
RELEASE CONTROL NOTES
<PAGE>
RELEASE CONTROL FORM
Product: (a separate form must be used for each product being released):
<TABLE>
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Client _____ Model 9250 - SunNet Manager
_____ Model 9350 - Motif
_____ Model 9450 - Windows
SPARC Agent _____ Model 9510 - SPARC software for Ethernet
_____ Model 9520 - SPARC software for Token Ring
DOS Agent _____ Model 8010 - DOS software for Ethernet
_____ Model 8020 - DOS software for Token Ring
Probe _____ Model 6010 - Hardware Probe for Ethernet
_____ Model 6020 - Hardware Probe Token Ring
_____ Model 6040 - Hardware Probe for WAN
_____ Model 6050 - Hardware Probe for WAN & Ethernet
_____ Other (specify) _____________________
- ---------------------------------------------------------------------------------------------
</TABLE>
Version Number. _____________________
Release Submitted By: _____________________
Date: _____________________
Software (submit one copy of each):
____ Source Code ____ Object Code or EPROM
Documentation (Mark "N/A" next to documentation that is NOT changing):
____ Manual (one copy) Document Ref Number _____
____ Addendum (one copy) Document Ref Number _____
____ Installation Instructions (one copy) Document Ref Number _____
____ Summary of changes from period release (One copy - REQUIRED)
Update Instructions:
_____ No - DO NOT update existing customers with this release
_____ Yes - update ALL existing customers.
_____ Yes - update SELECTED customers with release ___ or prior
Special instructions _______________________________________________
_______________________________________________
Comments: __________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
Release Authorization: ________________________________________________________
Anil Singhal Date
<PAGE>
NETSCOUT
RELEASE PROCEDURES
1) Release Schedule
The RELEASE SCHEDULE is used to coordinate all manufacturing activities
related to the release of a new product or version. Anil will revise and
distribute the Release Schedule as needed. Developers are responsible for
insuring that the Release Schedule reflects the correct release date for the
new product or version.
2) Release Package (Release Checklist attached)
The RELEASE COORDINATOR is the developer who is responsible for getting a
new product or version into production. A Release Coordinator should prepare
a RELEASE PACKAGE and give it to Anil on the day of release. Due to the lead
times for ordering manuals, etc. We may be unable to Immediately ship a
production version of releases that are unscheduled. Pre-release Procedures
should be followed until the unscheduled release has been accepted.
The RELEASE PACKAGE should include:
a) Software
- A copy of the OBJECT software or EPROM (or both)
- A copy of the SOURCE software
b) Manuals & User Documentation if required
- A copy of the updated manual
- A copy of the addendum to the manual
- A copy of the installation instructions
c) Manufacturing Instructions
- A completed Release Checklist
- A summary sheet that identifies changes from the prior release
- Hardware releases should include a list of changes affecting:
The Bill of Materials
Assemble Procedures
Testing Procedures
- Update Instructions
FOR SOFTWARE RELEASES: Once the RELEASE PACKAGE has been accepted, Charlie will
authorize the release coordinator to load the new software onto the
manufacturing SPARCstation.
SHIPPING PRE-RELEASE VERSIONS
When shipping a pre-release version of the NETscout software or hardware,
the DEVELOPER will have primary responsibility for making the diskettes or
hardware as well as preparing the requisite documentation. Accounting will
have responsibility for preparing shipping paperwork and will prepare
diskette labels when requested. Manufacturing will have responsibility for
actually shipping the order. The following steps should be followed:
<PAGE>
a) The requester completes an evaluation request and indicates that a
prerelease version to be shipped. The form should be given to
accounting.
b) Accounting will prepare the shipping papers and give a copy of this
evaluation request to the appropriate developer (the evaluation
request indicates that a copy of pre-release software or hardware is
needed). The developer will then have responsibility for preparing
this software or hardware as well as gathering the appropriate
manuals and/or installation instructions.
c) The developer will give the diskettes, documentation, and evaluation
request form to manufacturing who will then ship the completed
package.
ONCE A RELEASE IS ACCEPTED:
Manufacturing will follow these procedures once the release package is
accepted.
Update Master Copy of Software Charlie will provide Girvan with a
new Master Disk
(Object code only) or Master EPROM.
Manufacturing will archive the old
version of software and EPROMS.
Labels Jeanne will provide Girvan with new
diskette labels or EPROM
labels.
Invoice Paperwork All NEW picking lists will reflect
the new number. OLD paperwork must
be updated manually to reflect
the version that was actually
shipped.
Manuals Charlie will send a copy of the
manual to the printer and place the
initial order. Subsequent orders
will be placed by Girvan.
Off-site storage Charlie will send a copy of the
source and the manual to off-site
storage.
FRONTIER SOFTWARE
Bill-Of-Materials Procedures (6/22/95):
- -- Engineering has full responsibility for approving changes to the BOM,
including the addition of new components or the creation of new component
versions. They will also identify any specific procedures for using
components (e.g. the 6020 must use the Racore card while the 6060 can use
Racore or Madge).
- -- WIN must get prior permission from Frontier's engineering department before
changing or modifying any chassis sub-component.
- -- Receiving/Manufacturing will inform engineering whenever a new component
versions is received. The components will be segregated and will not be used
until engineering approves the use of the new component
- -- Manufacturing will not build probes with any component that is not included
on the Bill-of-Material. To request a probe with "un-authorized" components,
see the following section on Custom Work Order Procedures.
<PAGE>
MAKING CHANGES OR ADDITIONS TO THE BILLS OF MATERIAL:
- -- Engineering will notify Charlie whenever changes are made to the BOM. AJI
must be approved by Anil. Charlie will notify manufacturing and accounting.
Changes to the BOM can be made independent of a software version release.
- -- For changes that affect chassis version numbers, accounting will print
part/version number labels for WIN. The label will include a brief
description of major sub-components. WIN will label all chassis with the
correct part/version number.
- -- Accounting will insure that all NEW work orders to conform to the new BOM.
- -- Receiving will inspect all incoming chassis for valid Frontier part/version
numbers and will list part/version on packing lists. Receiving will inspect
other components for accepted version numbers. Un-approved components will
not be released to manufacturing and engineering will be notified
immediately.
- -- Manufacturing will confirm that component part/version numbers used to build
a probe match those listed on the work order.
- -- Accounting will insure that all component version listed on the work order
(including data entered by hand) are entered into the system to reflect the
part/version number of the components actually used.
- -- Accounting will record the MAC address as a probe component (manufacturing
already lists the MAC address on the work order). This will allow a MAC
address look-up on the ACCESS database in addition to a serial number
lock-up.
<PAGE>
FRONTIER SOFTWARE
BILL OF MATERIALS AUTHORIZATION
GIVE COMPLETED BILL OF MATERIALS AUTHORIZATION TO CHARLIE FOR PROCESSING
MODEL: ______________________
FIRMWARE VERSION NUMBER: ______________________
EFFECTIVE DATE: ______________________
BOM CHANGE REQUESTED BY: ______________________
COMPONENTS (SEE COMPONENTS LIST FOR EXISTING VERSION NUMBERS):
<TABLE>
<CAPTION>
<S> <C> <C>
COMPONENT VERSION # NEW VERSION*
--------- --------- ------------
--------------------------------------------- -------------- -------------
--------------------------------------------- -------------- -------------
--------------------------------------------- -------------- -------------
--------------------------------------------- -------------- -------------
* INDICATE NEW COMPONENT VERSIONS WITH A CHECK IN THIS COLUMN--
PROVIDE A DESCRIPTION OF THE CHANGES BELOW:
</TABLE>
DESCRIPTION OF COMPONENT CHANGES / SPECIAL INSTRUCTIONS:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
----------------------------------------------------------------
APPROVAL (ANIL'S APPROVAL IS REQUIRED:):
----------------------------------------------------------------
SIGNATURE:
----------------------------------------------------------------
DATE:
----------------------------------------------------------------
<PAGE>
NETSCOUT COMPONENT TABLE
<TABLE>
<CAPTION>
COMPONENT FRONTIER FRONTIER MANUFACTURER MANUFACTURER MANUFACTURER DATE DESCRIPTION
PART # VERSION # PART # REVISION # ACCEPTED
- --------- ------- --------- ------------ ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Ethernet - High End 4110
A Racal Interian Original Card
B Cogent 2 port
C Cogent Emaster+ 727001-01-00 3 port
Ethernet - Low End 4115
A Intel EtherExpress Pro ???? 1/15/95 EtherExpress Pro
Tohan Ring Card 4120
A Madge Original Card
B Madge Smart 16/4 9/1/94 Smaller Size
C Racore TR M8119-411-A 5/1/95 Original Card
FDDI-CDDI 4130
A DEC DEFPA-UA 50-22498-01 D1 5/1/95 Original Card
FDDI-SAS 4131
A DEC DEFPA-AA 50-22498-01 C1 5/1/95 Original Card
WAN Card 4150
A SDL RISCOM/H2 D Original Card
PCC Card 4210
A Qualitronics Original Card
B Qualitronics 9/1/94 Added Diodes
C Qualitronics 12/15/94 Diodes switched to capacitor
D Qualitronics 6/1/95 New board/bracket,
No jumper, same comp.
PCC Card w/o Flash 4211
D Qualitronics 6/1/95 Same as 4210-D but without
flash
</TABLE>
36
<PAGE>
NETscout Chassis 40XX-66-B Accepted 6/1/95
<TABLE>
<CAPTION>
MANUFACTURER MANUFACTURER DESCRIPTION
COMPONENT SUBCOMPONENT MANUFACTURER PART NUMBER REV $ DESCRIPTION
- --------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Box Main Unit Bytech IWM101 Pro 2
Custom Modification Conductive Painting on front
Custom Modificaiton Front bezel is 94V.0 rated
Custom Modification Copper fingers for grounding
Custom Modification TUV heat shrink protection
Power Supply Main Unit HIPro CPFO
Motherboard Main Unit WIN B4000 2.2
Processor Intel 496/66
Cache 128K
Controller Chips & Tech T1
</TABLE>
Chassis Label 40XX-66-B:B4000-2.2, CPFO, T1, 128
Description Chassis (SM): XXMB 486/66 Ver B
B4000-2.2, CPFO, T1, 128
NOTE: XX designates the memory size. There is a separate component for each
memory size.
<PAGE>
NETscout Chassis 40XXF-A Accepted 6/1/95
<TABLE>
<CAPTION>
MANUFACTURER MANUFACTURER DESCRIPTION
COMPONENT SUBCOMPONENT MANUFACTURER PART NUMBER REVISION $ DESCRIPTION
- --------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Box Main Unit TEAMMAX A1001
Power Supply Main Unit Senstron SQJ-4254CVB
Motherboard Main Unit WIN P90NG2 1A
Processor Intel Pentium 90
Cache 256K
Controller Neptune
</TABLE>
Chassis Label 40XXF-A: P90NG2-1A, SQJ-4254CBV, Neptune, 256
Description Chassis (LG): XXMB P90 Ver A
P90NG2-1A, SQJ4254CBV, Nep 256
NOTE: XX designates the memory size. There is a separate component for each
memory size.
<PAGE>
EXHIBIT H
LABELING REQUIREMENTS
CISCO SWITCHPROBE
<TABLE>
<CAPTION>
FRONTIER CISCO MID-SIZE LABEL PRODUCT NAME
MODEL CISCO PRODUCT MFG/STOCK LARGE FRONT LABEL (CDDI/FDDI (E&TR PROBES
NUMBER DESCRIPTION NUMBER NO. LOGO PROBES ONLY) ONLY)
- -------- ----------- ------------- --------- ----------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
6010/4 Ethemet Probe, 4MB WS-PROBE-ETH-4M 74-0508-01 ciscoSystemslogo SwitchProbe
6010E2/8 Dual Segment Ethernet WS-PROBE-DUAL-ET 74-0507-01 ciscoSystemslogo SwitchProbe
Probe, 8MB
6020/4 Token Ring Probe, 4MB WS-PROBE-TR-4M 74-0506-01 ciscoSystemslogo SwitchProbe
6020T2/8 Dual Segment Token WS-PROBE-DUAL-TR 74-0505-01 ciscoSystemslogo SwitchProbe
Ring Probe, 8MB
7101ET/8 CDDI with Ethernet WS-PROBE-SCDDI-ET 74-0504-01 ciscoSystemslogo SwitchProbe
Connection, 8MB
7101TR/8 CDDI with TR WS-PROBE-SDDI-TR 74-0503-01 ciscoSystemslogo SwitchProbe
Connection, 8MB
7102ET/16 FDDI(SAS) with WS-PROBE-SFDDI-ET 74-0502-01 ciscoSystemslogo SwitchProbe
Ethernet Connection,
16MB
7102TR/16 FDDI(SAS) with TR WS-PROBE-SFDDI-TR 74-0501-01 ciscoSystemslogo SwitchProbe
Connection, 16MB
7103ET/16 FDDI(DAS) with WS-PROBE-DFDDI-ET 74-0500 ciscoSystemslogo SwitchProbe
Ethernet Conneciton,
16MB
7103/TR/16 FDII(DAS) with TR WS-PROBE-DFDDI-TR 74-0499-01 ciscoSystemslogo SwitchProbe
Connection, 16MB
Fast Ethernet, 8MB WS-PROBE-FE
</TABLE>
<TABLE>
<CAPTION>
FRONTIER SMALL FRONT LABEL
MODEL MODEL, BELOW
NUMBER DESCRIPTION PRODUCT NAME MISC., BELOW MODEL
- -------- ----------- --------------- ------------------
<S> <C> <C> <C>
6010/4 Ethemet Probe, 4MB Ethernet
6010E2/8 Dual Segment Ethernet Dual Ethernet
Probe, 8MB
6020/4 Token Ring Probe, 4MB Token Ring
6020T2/8 Dual Segment Token Dual Token Ring
Ring Probe, 8MB
7101ET/8 CDDI with Ethernet CDDI ETHERNET SIDE-BAND
Connection, 8MB
7101TR/8 CDDI with TR CDDI TOKEN RING SIDE-BAND
Connection, 8MB
7102ET/16 FDDI(SAS) with FDDI(SAS) ETHERNET SIDE-BAND
Ethernet Connection,
16MB
7102TR/16 FDDI(SAS) with TR FDDI(SAS) TOKEN RING SIDE-BAND
Connection, 16MB
7103ET/16 FDDI(DAS) with FDDI(DAS) ETHERNET SIDE-BAND
Ethernet Conneciton,
16MB
7103/TR/16 FDII(DAS) with TR FDDI(DAS) TOKEN RING SIDE-BAND
Connection, 16MB
Fast Ethernet, 8MB
</TABLE>
37
<PAGE>
Notes:
1) a stick on a label indicating device serial number, MAC address, Cisco
Mfg/stock number and memory configuartion should be placed on the rear of
the unit.
2) The FDDI probes were orioginally configured with 8MB RAM, they will now be
offered with 16MB RAM
3) SwitchProbe (tm) should include trademark identification
Example, 60x0 series: Example, 710x series:
SWITCHPROBE
SwitchProbe FDDI(DAS)
Dual Token Ring Token Ring Side-Band
<PAGE>
EXHIBIT I
THIRD PARTY PRODUCT ROYALTIES AND LICENSES WHICH EXIST AS OF
THE EFFECTIVE DATE OF THIS AGREEMENT
Cisco shall be obligated to pay all license fees and royalties, if any, with
respect to any third party proprietary rights and technologies which are
required for the exercise of Cisco's Manufacturing Rights and which are listed
below. All other such third party royalties and licenses which are not listed
below and which are required for Cisco to exercise the Manufacturing Rights
under this Agreement shall be paid by Frontier.
38
<PAGE>
Exhibit 10.13
AMENDMENT TO
PRIVATE LABEL AGREEMENT
AND
PROJECT DEVELOPMENT AND LICENSE AGREEMENT
BETWEEN
CISCO SYSTEMS, INC.
AND
FRONTIER SOFTWARE DEVELOPMENT, INC.
This Amendment ("Amendment") is made in California by and between Cisco
Systems, Inc., a California corporation having its principal place of business
at 170 West Tasman Drive, San Jose, CA 95134-1706, U.S.A. ("Cisco"), and
Frontier Software Development, Inc., a Delaware corporation having its principal
place of business at 321 Billerica Road, Chelmsford, Massachusetts 01824
("Frontier").
WHEREAS, Cisco and Frontier entered into the Project Development and
License Agreement on July 13, 1994 ("Software Agreement") pursuant to which
Frontier licensed certain software products (as defined in the Software
Agreement) to Cisco; and
WHEREAS, Cisco and Frontier entered into the Private Label Agreement on
October 17, 1995 ("Hardware Agreement") pursuant to which Frontier would sell
certain products (as defined in the Hardware Agreement) to Cisco; and
WHEREAS, Cisco and Frontier desire to change and add certain terms to
the Software Agreement and Hardware Agreement to change pricing, add products
and to make such agreements more similar, all as specified below.
NOW THEREFORE, in consideration of the covenants and conditions
contained herein, the parties agree as follows:
1. PRODUCTS. Cisco shall have the right to purchase and resell any and all
Frontier products, both current and future (including, without limitation, all
consoles, probes, embedded agents and upgrades in the Frontier product line),
listed on Frontier's then current price list. Except as expressly and
unambiguously stated in the Software Agreement, the terms and conditions of the
sale of products by Frontier to Cisco shall be governed by the Hardware
Agreement. All products purchased by Cisco from Frontier shall be deemed
"Products" as defined in the Hardware Agreement. The parties agree that all
Products purchased or licensed by Cisco under the Hardware Agreement (including
all additional Products added by this Amendment) shall be subject to all the
terms and conditions of the Hardware Agreement.
<PAGE>
2. NETSCOUT MANAGER PRODUCT.
2.1 MANUFACTURING OF UNBOUNDED COPIES. Frontier agrees to manufacture
complete kits for copies of the NETscout Manager Product and private label such
Product as "TrafficDirector" as specified by Cisco (the "TrafficDirector
Product"). In addition, Frontier agrees to make and provide to Cisco all
documentation for the TrafficDirector Product as specified by Cisco. Frontier
will provide finished User Guides and executable copies of the TrafficDirector
Product in CD or electronic format for integration with other Cisco management
software. Frontier agrees that it shall only have the right to sell the
TrafficDirector Product to Cisco. In the event Cisco orders copies of the
TrafficDirector Product with temporary licenses (i.e. a minimum of 90 days),
Frontier agrees to mark the TrafficDirector boxes with the license expiration
date and the Cisco last ship date (which shall be 40 days before the temporary
license expiration date) as follows:
Example:
CISCO: LAST SHIP DATE
------------------------
TEMPORARY LICENSE EXPIRATION DATE
------------------------
Cisco agrees to pay Frontier a mutually agreed upon NRE charge for any
modifications and/or enhancements to the TrafficDirector documentation which
have resulted from a written request from Cisco. No substantive changes shall be
made to the documentation unless expressly agreed to/requested in writing by
Cisco.
2.2 NEW VERSIONS. Within 60 days after the release of a new version of
the NETscout Manager Product by Frontier, Frontier shall provide to Cisco a
TrafficDirector branded Product, at a mutually agreed upon [*], if any.
TrafficDirector version 3.3 will be based on NETscout Manager version 3.3.
TrafficDirector version 4.X will be based on NETscout Manager Plus, with the
switch management enhancements.
2.3 LICENSE FEES. Cisco shall pay Frontier for each copy of the
TrafficDirector Product purchased or licensed by Cisco as follows:
(a) if [*] in the [*] or any other Cisco product, the license
fee shall equal [*] of Frontier's [*]. A [*] will be due to Frontier 30 days
after product receipt. This amount will then be deducted from the license fee
payment due to Frontier;
[*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED.
2
<PAGE>
(b) if sold as an unbundled/standalone product, the license
fee shall equal [*] of Frontier's [*]. A [*] will be due to Frontier 30 days
after product receipt. This amount will then be deducted from the license fee
payment due to Frontier;
(c) the license fee for [*] shall equal [*], per [*], for the
12 months following the signing of the amendment, [*] will be negotiated in good
faith within 30 days of the signing of the amendment;
(d) the license fee for customer evaluations shall equal [*],
provided that temporary licenses for a minimum of 90 days shall be free of
charge;
(e) the license fee for sales demonstration copies shall equal
[*] and shall have a license for 180 days or more.
(f) Frontier will provide Cisco with a record and invoice
within 7 days after the end of each Cisco fiscal quarter based upon Frontier's
Web page records. Cisco will have 7 days to reconcile the invoice to its own
records. Cisco will be obligated to pay Frontier within [*] after the invoice,
unless Cisco presents in writing records showing different sales levels. In this
event, [*] would make a [*] to resolve the [*] in 7 days and payment within 30
days.
2.4 TRADEMARK. Frontier acknowledges that Cisco retains any and all
rights, title and interest to the tradename, trademark, logo or mark
"TrafficDirector" ("Traffic Director Mark") and agrees not to take any action to
challenge any rights or efforts made by Cisco to register or use the
TrafficDirector Mark, nor will Frontier lodge any filings with respect to the
TrafficDirector Mark or marks confusingly similar to the TrafficDirector Mark,
whether on behalf of Cisco or in its own name or interest, without the prior
written consent of Cisco.
Cisco acknowledges that Frontier shall retain any and all rights, title and
interest to any tradenames, trademarks or trademark logos ("Frontier Marks") in
any documentation developed by Frontier pursuant to Section 2.1, above. Cisco
agrees not to make any
[*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED.
3
<PAGE>
claims to Frontier Marks, or lodge any filings with respect to such Frontier
Marks or marks confusingly similar to Frontier Marks, whether on behalf of
Frontier or in its own name or interest, without the prior written consent of
Frontier.
2.5 Frontier agrees that Cisco has the right to purchase the
TrafficDirector Products as long as Cisco continues to remarket Frontier's
NETscout Probe Products.
3. SWITCHPROBE AGENTS AND EMBEDDED AGENTS.
3.1 MANUFACTURING. Frontier agrees to manufacture copies of the
Frontier SwitchProbe Product with the SwitchProbe Embedded Agent incorporated in
it for resale to Cisco pursuant to the Hardware Agreement.
3.2 LICENSE FEES. Exhibit D, Section 1, to the Software Agreement is
deleted and replaced with the following:
"Cisco agrees to pay to Frontier Software License Fees in accordance with the
following schedule:
<TABLE>
<S> <C>
[*] [*] per RMON license sold as a revenue unit by Cisco
[*] [*] per RMON license sold as a revenue unit by Cisco
[*] [*] per Resource Manager agent option license sold
as a revenue unit by Cisco
[*] [*] per Switch Monitor agent option license
(includes roving-RMON for all [*] models and
mini-RMON proxy support for the [*]series)
All Cisco platforms Agent upgrades and technical support for all
platforms will be provided under an annual
maintenance fee of [*]. Agent upgrades will
be delivered in a mutually agreed upon
format
</TABLE>
[*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED.
4
<PAGE>
3.3 PAYMENT TERMS. The payment terms for the license fees due under
this Section 3 shall be in accordance with Exhibit D of the Software Agreement.
3.4 SUPPORT. Frontier agrees to provide Cisco, at no additional charge,
hotline and technical engineering support for all Cisco network monitoring
products that use Frontier technology. Such support shall be subject to the
Customer Support requirements of Section 8.1 of the Hardware Agreement and the
Prioritization and Escalation Guidelines contained in Exhibit F of the Hardware
Agreement.
4. REVISED PRODUCT PRICES.
4.1 PRODUCTS. Exhibit A to the Hardware Agreement is deleted and
replaced with the new attached Exhibit A ("Revised Exhibit A"). Frontier agrees
that during the term of the Hardware Agreement and Software Agreement it shall
[*] its list price for hardware Products or for Software Products except in the
event of unexpected industry increases in [*] that increase the base cost of the
Product by [*] (this cost will be directly passed on without [*]) or in the
event Frontier adds significant additional functionality to a Software Product.
4.2 MOST FAVORED CUSTOMER PRICING. Frontier represents and warrants to
Cisco that the Product prices/license fees offered to Cisco under this Agreement
are no less favorable than the Product prices/license fees offered to any other
party purchasing or licensing similar quantities. In the event Frontier offers
more favorable Product prices/license fees to any other party, Frontier will
promptly notify Cisco of such event and offer such more favorable Product
prices/license fees to Cisco commencing upon the date such more favorable
Product prices/license fees were offered to the other party.
5. ESCROW. The parties agree that all Products purchased or licensed by Cisco
under the Hardware Agreement and the Software Agreement shall be subject to the
manufacturing and escrow requirements of Section 10 of the Hardware Agreement.
6. SUPPORT.
6.1 HARDWARE AGREEMENT. Section 8 of the Hardware Agreement is amended
to add the following support provisions:
[*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED.
5
<PAGE>
"8.12 LICENSE TO USE OBJECT AND SOURCE CODE FOR CUSTOMER
SUPPORT. Pursuant to the License granted herein, Cisco is licensed to use the
Software source and/or object code for the limited purpose of providing customer
support, including, without limitation, the provision of software bug fixes,
patches and maintenance releases.
"8.13 SOFTWARE SUPPORT. Frontier will support no more than [*]
provided that these releases are no more than fifteen (15) months apart.
Software releases should be downward compatible and released at a mutually
agreed upon interval.
"8.14 PRODUCT SHIPMENT PROCEDURE. In case bug fixes cannot be
transferred electronically, Frontier will ship to Cisco, and customer, at
Cisco's discretion, two (2) copies of media (i.e., CD-ROM) containing the bug
fix. Such shipment will be by overnight delivery to Cisco at Cisco's expense.
"8.15 SUPPORT DOCUMENTATION. Frontier agrees to regularly
supply Cisco with all known bug notes or other documentation defining the
relevant hardware and software information, symptoms, solutions or work-arounds
for Product problems. Frontier will keep accurate records of Product
deficiencies (bugs) and make such reports available to Cisco at least quarterly.
Frontier will maintain an electronic means (e.g., an FTP server) through which
Cisco can obtain up-to-date information on bugs, fixes, and code updates. During
the term of this Agreement, Frontier will provide such support to Cisco at no
charge."
6.2 SOFTWARE AGREEMENT. The parties agree that Software products
licensed under the Software Agreement shall be subject to all the support
provisions of the Hardware Agreement.
7. ADDITIONAL FRONTIER OBLIGATION. Frontier agrees to maintain a World
Wide Web site for Software license password generation.
8. GENERAL. Section 17 (Limitation of Liability) of the Software Agreement
is deleted and replaced with Section 13 (Limitation of Liability) of the
Hardware Agreement. Further, any provisions of the Hardware Agreement covering
subject matter which are not included in the Software Agreement are hereby
included in the Software Agreement.
9. ENTIRE AGREEMENT. The "entire agreement" paragraph of Section 14 of the
Software Agreement is deleted and replaced with the following:
[*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED.
6
<PAGE>
"This Agreement (including the Exhibits hereto) and the Private Label
Agreement entered into by Cisco and Frontier on October 17, 1995, constitutes
the entire agreement between the parties hereto concerning the subject matter of
this Agreement, and there are no conditions, understandings, agreements,
representations, or warranties, expressed or implied, which are not specified
herein. This Agreement may only be modified by a written document executed by
the parties hereto."
10. NO OTHER CHANGES. Terms capitalized shall have the meaning assigned to
them in the Hardware Agreement and the Software Agreement. All other terms and
conditions of the Hardware Agreement and Software Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized representatives.
CISCO SYSTEMS, INC. FRONTIER SOFTWARE
DEVELOPMENT, INC.
/s/ MARIO MAZZOLA /s/ NARENDRA POPAT
- --------------------------------- ---------------------------------
Signature Signature
MARIO MAZZOLA NARENDRA POPAT
- --------------------------------- ---------------------------------
Name Name
VICE PRESIDENT/GENERAL MANAGER - WBU PRESIDENT, FRONTIER SOFTWARE
- ------------------------------------ ---------------------------------
Title Title
5/15/96 5/15/96
- --------------------------------- ---------------------------------
Date Date
7
<PAGE>
REVISED EXHIBIT A
PRODUCTS/PRICING
- ---------------------------------------------------------------------
PRODUCT DISCOUNT
MODEL
NUMBER
- ---------------------------------------------------------------------
[*]
6010
6010E2
6020
6020T2
- ---------------------------------------------------------------------
When reference is made in the Agreement or any exhibit to Frontier's
published U.S. List Price of a Product specially modified for Cisco, such
reference shall mean Frontier's published U.S. List Price for Frontier standard
product upon which the Product has been based. If Frontier shall modify, update,
enhance or create a new version of a standard product upon which such a Product
is based, it shall similarly modify, update, enhance or create a new version of
the corresponding Product. Frontier will sell Products specially modified for
Cisco only to Cisco.
Except as specified above, the prices for all Products purchased by Cisco from
Frontier shall be:
(i) [*] discount off of Frontier's list price for all Frontier
hardware Products;
(ii) [*] discount off of Frontier's list price for all Frontier
software Products to be resold by Cisco unbundled;
(iii) [*] discount off of Frontier's list price for all Frontier
software Products to be resold by Cisco in a bundle.
[*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED.
8
<PAGE>
AMENDMENT NO. 3 TO
PRIVATE LABEL AGREEMENT
AND
PROJECT DEVELOPMENT AND LICENSE AGREEMENT
BETWEEN
CISCO SYSTEMS, INC.
AND
FRONTIER SOFTWARE DEVELOPMENT, INC.
This Amendment No. 3 ("Amendment #3") is made in California by and
between Cisco Systems, Inc., a California corporation having its principal place
of business at 170 West Tasman Drive, San Jose, CA 95134-1706, U.S.A. ("Cisco"),
and Frontier Software Development, Inc., a Delaware corporation having its
principal place of business at 321 Billerica Road, Chelmsford, Massachusetts
01824 ("Frontier").
WHEREAS, Cisco and Frontier entered into the Project Development and
License Agreement on July 13, 1994 ("Software Agreement"), as amended on January
4, 1995 ("Amendment #1") pursuant to which Frontier licensed certain software
products (as defined in the Software Agreement) to Cisco; and
WHEREAS, Cisco and Frontier entered into the Private Label Agreement on
October 17, 1995 ("Hardware Agreement") pursuant to which Frontier is selling
certain products (as defined in the Hardware Agreement) to Cisco; and
WHEREAS, Cisco and Frontier entered into an Amendment to the Hardware
Agreement and the Software Agreement on May 15, 1996 ("Amendment #2"); and
WHEREAS, Cisco and Frontier desire to change and add certain terms to
the Software Agreement, Hardware Agreement, Amendment #1 and Amendment #2
(collectively, the "Agreement") as specified below.
NOW THEREFORE, in consideration of the covenants and conditions
contained herein, the parties agree as follows:
1.0 DEVELOPMENT WORK. Cisco shall have the right to request that Frontier
perform independent projects specific to Cisco such as, but not limited to,
customization of an interface, addition of features, or integration of
Frontier's RMON products into Cisco products. Frontier agrees that it will not
unreasonably reject such Cisco requests. Such projects shall be subject to the
terms and negotiations agreed upon by the parties. The statement of work
("Statement of Work") for each project shall include, as required, the following
provisions: project specifications, NRE charges and payment terms, prepaid
royalties or per unit royalties, upgrade charges (if different from the policy
agreed upon in the Agreement), schedules, reschedule terms inclusive of
penalties for schedule delays, project cancellation terms inclusive of penalty
charges, acceptance criteria, project review
<PAGE>
and approval processes, ownership of the work performed, resale/license
obligations and restrictions of the parties for the modified products, and
any further obligations required by Cisco to complete the project."
Cisco agrees to pay Frontier a [*] fee of [*] for development work [*] to by the
parties and completed [*] of this Amendment #3. The projects covered by this fee
include without limitation: Embedded RMON agents for the [*].
As a Statement of Work is mutually agreed upon and signed by an authorized
representative for each party it will be incorporated into the Agreement as an
amendment. A Statement of Work format is attached as Exhibit A.
2.0 AGENT ROYALTIES. Section 3.2 (License Fees) of Amendment #2 is changed
as follows: ---------------
2.1 Royalties for agents shipped prior to the effective date of this
Amendment #3 will be paid per the terms of Amendment #2.
2.2 Royalties for RMON Embedded Agent Software (as defined below in
Section 7.(d)) shipped upon the effective date of this Amendment #3 and
thereafter will be as follows:
(a) Cisco agrees to pay Frontier a [*] royalty of [*] for any and all
copies of the RMON Embedded Agent Software made and distributed by Cisco and
incorporated within [*] or within any other Cisco software environment except
the Cisco products listed in Section 2.2(b) below. Frontier warrants that the
RMON Embedded Agent Software provides, at a minimum, the full functionality to
comply with the RMON1 (RFC 1513 and 1757 specification) plus the RMON2
specification as it is released by the Internet Engineering Task Force.
(b) Subject to the conditions in Section 2.3 below, Cisco agrees to pay
Frontier a one-time royalty payment of [*] plus a per-unit royalty as specified
in this Section 2.2 below for the following Cisco Catalyst products ("Cisco
Catalyst Products"):
Catalyst [*]
Catalyst [*]
Catalyst [*] Family
Catalyst [*] Family [*]
Per Unit Royalty:
(i) Cisco will pay a per-unit royalty of [*] for each Cisco
Catalyst Product unit incorporating some or all of the
functionality specified as RMON1 (per RFCs 1513 and 1757).
2
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
(ii) Cisco will pay a per-unit royalty of [*] for each Cisco
Catalyst Product unit incorporating the functionality
specified in this Paragraph (b)(i) above plus the compete
functionality of RMON2 as it is released by the Internet
Engineering Task Force.
(iii) For a situation in which a Cisco Catalyst Product
incorporates the functionality of some but not all 9 groups
of RMON2, Cisco will pay a per-unit royalty of [*] plus [*]
for each group, or portion of a group, of RMON2 incorporated
into such product.
2.3 Conditions:
(i) One per-unit royalty payment as specified above is due for
each Cisco Catalyst Product shipped by Cisco for revenue in
which one or more instances of RMON Embedded Agent Software
are licensed for use by the licensee for some level of RMON
agent functionality whether or not Cisco explicitly charges
its customers for the RMON capability.
(ii) Cisco's obligation to pay a per-unit royalty for a Cisco
Catalyst Product under Section 2.2(b)(i) or the [*] base
royalty under Section 2.2(b)(iii) above shall terminate upon
the inclusion by Cisco of the RMON1 feature(s) as a [*] in
the base price of the respective Cisco Catalyst Product,
provided the following conditions have been met: (i) Cisco
provides evidence to Frontier that [*] for delivery of the
RMON1 feature(s) in the Cisco Catalyst Product as a standard
no charge feature(s); and (ii) such evidence indicates that
the [*] by Cisco. Frontier agrees to accept reasonable
evidence to establish the foregoing conditions.
(iii) Cisco's obligation to pay a per-unit royalty for a
particular Cisco Catalyst Product ends when such product is
shipped with Cisco's [*], or when the Agreement expires or
is terminated for cause by Cisco, or when Cisco exercises
its right to manufacture Products (in which event the
royalty will be as specified in Section 14 below).
(iv) The per-unit royalties of this Section 2.3 do not apply to
Embedded Probes as defined in Section 3 below.
3.0 EMBEDDED PROBES. For the purposes of the Agreement, "Embedded Probes"
shall mean Products in which the [*] provides RMON1, RMON2 functionality plus
extensions as then agreed to by the parties and executes on hardware which:
(i) is used primarily to execute RMON code, and (ii) such hardware is an
optional module that is inserted into a Cisco chassis.
3
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
3.1 An Embedded Probe shall include functionality for RMON1, RMON2,
[*], and shall support roving. In the event that the features agreed to for such
Products in the respective Statements of Work are significantly different from
the guidelines given herein, the parties will renegotiate in good faith the
Embedded Probe royalties of Section 3.2 below.
3.2 Per-unit royalties for Embedded Probes shall be as follows:
<TABLE>
<CAPTION>
Per-unit royalty
<S> <C>
For the first [*] revenue units shipped by Cisco [*]
For the next [*] revenue units shipped by Cisco [*]
For units shipped by Cisco for revenue beyond [*] units see below
</TABLE>
For Embedded Probe shipments for revenue beyond [*] units, the parties
agree to negotiate in good faith the royalties based upon then existing
conditions in the marketplace. Cisco agrees to pay a royalty of [*] per unit
shipped for revenue during the negotiation process. When the new royalty is
agreed to, Frontier will credit Cisco for the net difference for all units
shipped beyond [*] units.
3.3 A Product that meets the conditions for an Embedded Probe as
given in Section 3.0 above and in addition is implemented within [*] shall be
subject to the royalties per Section 3.2 above.
4.0 PROBE INVENTORY BALANCING, Frontier agrees to [*] Cisco a [*] to
balance its inventory of stand-alone under the following conditions:
4.1 Per the conditions specified in Section 4.2, Cisco can balance
up to [*] probe units as follows:
(i) Substitute alternative probe models for the [*] probes on
order but not yet delivered by Frontier, and
(ii) Return up to [*] units from [*] at a rate of up to [*]
units per month beginning on the effective date of this
Amendment #3 and continuing for [*] months.
4.2 Conditions for product rotation:
(i) Products will be swapped on a one for one basis such that
for each unit substituted or returned to Frontier by Cisco,
Frontier will ship one replacement unit of the probe model
designated by Cisco.
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
(ii) Cisco shall [*] of [*] of the original cost to Cisco for
each probe returned or substituted. Cisco will place a
purchase order for the [*] on each occasion Cisco exercises
its right to return or substitute probes.
(iii) In the event the total cost (excluding the [*]) of the new
products to be shipped to Cisco is higher than the total
original cost of the products being returned or substituted
by Cisco (i.e., the net difference), Cisco will issue a
purchase order for the net difference on each occasion
Cisco exercises its right to return probes.
(iv) In the event the total cost of the new products (excluding
the [*]) to be shipped to Cisco is lower than the total
original cost of the products being returned or substituted
by Cisco (i.e., the net difference), Cisco will issue a
purchase order to purchase additional products of a value
equal to or greater than the net difference, for delivery
within 45 days. The payment due on such purchase order is
the amount by which the new units exceed the [*].
(v) Cisco will pay the shipping costs for the returned probes.
(vi) Probe units on order as of the effective date of Amendment
#3 for products other than [*] probes are separate from
this balancing and are not to be [*] the [*] as a result of
this balancing.
5.0 PROBE DISCOUNT. The parties agree to extend the current stand-alone
probe discount structure for an additional year through October 31, 1997.
Thereafter, the discount structure will be as mutually agreed by the parties.
6.0 TRAFFICDIRECTOR UPGRADES TO REVISION 4.1. Cisco will pay the following
upgrade fee to upgrade Cisco customers of TrafficDirector 3.3 and any version of
NetScout Manager to TrafficDirector 4.1 (based upon Frontier's NetScout Manager
Plus 4.1 Software):
Standalone Unix upgrade [*]
Standalone PC/WinNT upgrade [*]
Bundled Unix upgrade [*]
Bundled PC/WinNT upgrade [*]
This upgrade fee is payable only for licenses actually upgraded to
TrafficDirector 4.1. For subsequent upgrade releases from TrafficDirector 4.1 to
later versions, Cisco shall pay a royalty fee of [*] per unit as specified in
Amendment #2 Section 2.3(c).
5
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
7.0 DEFINITIONS AND LICENSES.
7.1 Definitions.
(a) For purposes of the Agreement, and notwithstanding anything
to the contrary in the Agreement, the term "Software," as respectively defined
in Section 1.1 of the Hardware Agreement and Section 1 of the Software
Agreement, is hereby modified to collectively mean RMON Embedded Agent Software
and Other Software as defined in this Section 7.1 below.
(b) For purposes of the Agreement, and notwithstanding anything
to the contrary in the Agreement, the term "source code" shall include
sufficient information for a knowledgeable software engineer to produce
completely functional machine readable binary code for all Software, including
but not limited to, design documentation, technical documentation, design and
functional specifications, software libraries, compilers, utilities, listings,
test suites, build scripts and tools to compile, assemble and test code in
Frontier's possession or under its control . In cases where such tools are
commercially available, source code shall only include the supplier, model and
revision information to uniquely and unambiguously identify each such tool.
(c) The term "Product" shall have the definition specified in
Section 1 of Amendment #2.
(d) For purposes of the Agreement, and not withstanding anything
to the contrary in the Agreement, the term "RMON Embedded Agent Software" shall
mean software providing, the functionality of an RMON agent embedded within a
Cisco product, which agent conforms to the RMON1 specification per RFC 1513 and
RFC 1757 and the RMON2 specification as it is released by the Internet
Engineering Task Force.
(e) For purposes of the Agreement, and not withstanding anything
to the contrary in the Agreement, the term "Other Software" shall mean all
software, except RMON Embedded Agent Software, provided to Cisco by Frontier as
a Product under this Agreement, regardless of whether embedded or bundled with a
hardware product, or provided as a standalone software product. Other Software
includes, but is not limited to, stand-alone probe Products, Embedded Probes and
TrafficDirector.
(f) For purposes of the Agreement, and not withstanding anything
to the contrary in the Agreement, the term "Derivative Works" shall mean
modifications to RMON Embedded Agent Software made by or for Cisco.
(g) It is understood that RMON Extensions are limited to the
functionalities specified in RMON2.
6
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
The parties agree and acknowledge that nothing in this Amendment # 3 shall be
construed to diminish, restrict or limit any rights or privileges which Cisco is
already entitled to under the Agreement. Any ambiguity arising from the new
definitions of terms in this Section 7 will not be interpreted against Cisco to
diminish rights previously granted to Cisco under the Agreement.
7.2 Licenses.
a) RMON Embedded Agent Software. The license granted in Section
4, the first paragraph, of the Software Agreement applies in its entirety to
RMON Embedded Agent Software (binary and source code form) and all related
documentation and tools . Frontier shall retain title and full ownership rights
to the RMON Embedded Agent Software as specified in Section 6 of the Software
Agreement for RMON software and RMON Extensions. Cisco shall retain title and
full ownership to the Derivative Works as specified in Section 6 of the Software
Agreement. In addition, Cisco hereby grants to Frontier a worldwide,
irrevocable, perpetual and nonexclusive license to use, modify, copy, market,
distribute or otherwise dispose of the Derivative Works, provided that such
Derivative Works which are feature enhancements to the RMON Embedded Agent
Software may not be licensed or distributed in any manner by Frontier to any
third party without Cisco's prior written consent.
(b) Other Software. Notwithstanding anything to the contrary in
the Agreement, Frontier hereby grants Cisco a worldwide, non-exclusive license
to use, modify, copy and have copies, market, distribute or otherwise dispose of
Other Software in both machine readable binary and source code form, subject to
the following restrictions:
(i) Cisco's right to modify the Other Software shall be
solely for the purpose of providing customer support
and providing software bug fixes, patches and
maintenance releases.
(ii) Frontier shall retain ownership of any modifications
that Cisco makes to the Other Software, and Cisco shall
provide to Frontier in a timely manner all such
modifications Cisco makes to the Other Software.
(iii) Cisco shall have no right to sublicense or cross
license the Other Software as a standalone product.
7.3 Source Code Restrictions. Cisco shall not have the right to
distribute or sublicense any source code owned by Frontier unless such source
code is distributed or sublicensed with or as part of Cisco source code or Cisco
hardware. In no event shall a sublicensee of the Frontier source code have the
right to sublicense such source code to other parties or to make modifications
of such source code that [*]. Cisco shall protect Software source code provided
hereunder and/or sublicensed to others to the same extent that it protects its
own source code.
7
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
7.4 Sublicense Rights. The Agreement is modified by adding the
following:
"Frontier hereby grants Cisco the right to sublicense its license
rights granted under this Agreement, and authorizes the granting of sublicenses
for, the Software, provided to Cisco by Frontier solely as part of or in
connection with Cisco's software or products. Any per copy royalty payments due
Frontier shall accrue at the time Cisco makes and distributes the copy of the
applicable Software or at the time Cisco's OEM makes and distributes the copy of
the applicable Software. Cisco is obligated to account for and make payment for
any per-unit royalties for sublicenses in the same manner it does so for other
per-unit license royalties covered under the Agreement."
7.5 Delivery. Frontier agrees to promptly deliver to Cisco the
machine readable binary and source code for the Software (including without
limitation, all new releases, bug fixes, maintenance fixes, updates and the like
for the Software) as required under the Agreement or as such Software becomes
available.
8.0 TERM OF AGREEMENT. The expiration dates of the Hardware Agreement and
the development portion of the Software Agreement are hereby extended to October
31, 2000.
9.0 LICENSE ADMINISTRATION. The parties agree to use commercially reasonable
efforts to implement a license administration system within thirty (30) days
after the effective date of this Amendment #3 that is easy and convenient for
Cisco and Cisco's customers to use and acceptable to both parties.
10. RIGHTS IN THE EVENT FRONTIER ENTERS NEGOTIATIONS TO BE ACQUIRED. In the
event that Frontier enters serious negotiations with another party for that
party to acquire Frontier, Frontier will notify Cisco it has entered serious
negotiations to be acquired ("Notification"). Within [*] Cisco will inform
Frontier in writing whether it wishes to negotiate to acquire Frontier.
If Cisco indicates it does not wish to negotiate to acquire Frontier, Frontier
is then free to execute an agreement to be acquired by another party without
constraint. If Frontier does not sign a definitive agreement to be acquired
within [*] from the date of Notification, this process restarts (i) on the next
occurrence of Frontier entering into serious negotiations to be acquired, or
(ii) at the end of such [*] if Frontier is then engaged in serious negotiations
to be acquired.
If Cisco indicates its intention to negotiate to acquire Frontier, Frontier will
negotiate in good faith with Cisco ("Cisco Negotiation"), an arrangement
pursuant to which Cisco would acquire Frontier. Frontier reserves the right to
carry on negotiations with other parties during the Cisco Negotiation.
8
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
Prior to executing an agreement to be acquired by a third party, and at the
point at which Frontier has [*] with third parties, Frontier will notify Cisco
that it [*] Frontier.
After completing this process in good faith, Frontier reserves the right to
evaluate offers for acquisition from all parties and to accept an offer or
reject all offers as it solely deems appropriate.
Notification, and Cisco's indication that is wishes to negotiate to acquire
Frontier, starts a negotiation period between Cisco and Frontier during which
Frontier will refrain from executing [*] agreement to be acquired by any third
party until after it has followed the process given above and Cisco has had a
reasonable time to submit offers including a [*]. The parties will negotiate in
good faith at the time of Notification and during this process to mutually agree
on what constitutes a reasonable time and process for Cisco to negotiate a firm
offer to acquire Frontier.
All notifications between Frontier and Cisco and all offers by Cisco within this
negotiation process shall be in writing. For purposes of notifying Cisco that
Frontier is engaged in serious negotiations, Frontier's Board of Directors shall
determine when Frontier is in serious negotiations, thereby triggering,
Frontier's obligation to provide such notice to Cisco.
The provisions of this section shall expire on the date a registration statement
filed by Frontier under the Securities Act of 1933, as amended, first becomes
effective.
11.0 PREFERRED RMON VENDOR.
11.1 Definitions:
(a) For the purposes of the Agreement, "Covered RMON" products
shall mean products providing RMON1 and RMON2 functionality plus extensions in
the form of:
(i) Standalone probes for LAN and WAN environments
similar to Frontier's NETscout probes and future
enhancements including future LAN and WAN network
topologies,
(ii) Network monitoring and analysis applications similar
to NETscout Manager Plus and future enhancements of
such products by Frontier including the support for
future LAN and WAN network topologies, and
(iii) Embedded probes for Cisco's products with features
similar to or a subset of NETscout probes for
present and future LAN and WAN network topologies.
9
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
(b) For the purposes of the Agreement, "Other RMON" products
shall mean products other than Covered RMON products which have functionality
conforming to some or all of the groups of the RMON1 or RMON2 standards or
functionality that extends RMON-like capability to new LAN or WAN media or
network environments.
11.2 Preferred RMON Vendor. Beginning on the effective date of this
Amendment #3, Cisco establishes Frontier as its Preferred RMON Vendor. For the
purposes of the Agreement, and subject to the exceptions defined herein, Cisco's
classification of Frontier as its Preferred RMON Vendor shall mean that Cisco
will incorporate in its price list, promote and offer for sale/license, both
directly and indirectly through its resale channels, Products under this
Agreement as its primary solutions to meet Cisco's RMON product needs. For the
duration of the Agreement and subject to Frontier maintaining its Preferred RMON
Vendor status per Section 11.3 below, Cisco agrees to work in good faith with
Frontier as follows:
(a) In the event Cisco identifies a need for a Covered RMON
product or Other RMON product, and a then-existing product from Frontier meets
Cisco's product requirements, Cisco will purchase such Product from Frontier
subject to Subsection 11.2(c) below.
(b) In the event Cisco identifies a need for a Covered RMON
product which is not a then-existing Frontier product, Cisco will notify
Frontier of its needs and will negotiate in good faith for a reasonable period
of time to have Frontier develop (under a Statement of Work) and supply such
Product to Cisco subject to Subsection 11.2(c) below.
(c) To be the selected vendor for a particular Covered RMON
product or Other RMON product, Frontier must meet Cisco's product functionality
and availability requirements and offer the product at a cost to Cisco
(including product cost and development cost) comparable to costs available to
Cisco from other sources for comparable products, with reasonable development
schedules, and commercially reasonable delivery and terms.
(d) After a Covered RMON product has been added as a Product
under the Agreement, Cisco shall not distribute an internally-develop product
that is substantially similar to such Product supplied by Frontier.
(e) Cisco will keep Frontier informed of its ongoing interests
and needs for RMON products and will provide Frontier the opportunity to be
Cisco's OEM supplier of such products.
(f) In the event that Cisco, having followed the process herein
defined in this Section 11.2, obtains a Covered RMON product from another OEM
supplier,
10
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
Cisco is not subsequently obligated to use a comparable Frontier product in
place of the other product.
(g) In the event Cisco decides to distribute a Covered RMON
product that is developed by Cisco pursuant to this Section 11.2 or by a company
acquired by Cisco, Cisco's then designated Project Manager shall notify Frontier
at the time Cisco makes a firm decision to implement such plans.
11.3 To maintain its status as Preferred RMON Vendor, Frontier must
continuously adhere to all of the following conditions:
(a) Frontier is not in default of any substantive terms of the
Agreement, including, but not limited to, the terms of Section 17 (Sales
activity) and Section 19 (Cost Reduction) of this Amendment #3.
(b) Frontier meets the quality standards for Products as set by
Cisco for all of Cisco's products,
(c) Frontier provides support and maintenance for Products as
reasonably requested by Cisco,
(d) Frontier develops new Products under Statements of Work in a
timely manner to meet Cisco's requirements.
Cisco will determine in it sole discretion whether Frontier is meeting all of
these conditions in this Section 11.3. In the event that Frontier ceases to meet
all of these conditions and thus is in jeopardy of losing its Preferred RMON
Vendor status, Cisco shall notify Frontier that it does not then meet the
conditions for Preferred RMON Vendor status and Cisco and Frontier management
will meet in good faith to resolve those issues which are causing Frontier not
to meet the conditions for Preferred RMON Vendor status. If issues causing
Frontier to lose its Preferred RMON Vendor status are not resolved within a
reasonable and mutually determined time frame after notification, Frontier will
lose its Preferred RMON Vendor status and Cisco is free to use alternative
vendors or to develop and supply Covered RMON products and Other RMON products
to meet Cisco's needs without violation of this Section 11.
11.4 The rights conferred to Frontier as Preferred RMON Vendor in this
Section 11 notwithstanding, Cisco reserves rights to:
(a) Acquire companies providing Covered RMON products and Other
RMON products and to use, sell or license RMON products developed by the
acquired company.
11
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
(b) Develop and distribute its own Covered RMON products or Other
RMON products subject to the limitations of Section 11.2 above,
(c) Exercise its Manufacturing Rights in accordance with the
terms of this Agreement,
(d) Develop embedded RMON agents, or make modifications to
Software as specified in this Agreement,
(e) Use, sell, or license Other RMON products from other vendors
subject to the limitations of Section 11.2 above,
(f) Use, sell or license Covered RMON products from other vendors
that are (i) incidental to other of Cisco's business relationships and which are
non-strategic product solutions that will be replaced by Products under this
Agreement within a reasonable time frame subject to Section 11.2(c) above, (ii)
needed to meet unique customer obligations, subject to notification to Frontier
per Section 11.2(e) above, and (iii) Other RMON products committed for inclusion
in Cisco's products prior to the effective date of Amendment #3.
11.5 In the event that Cisco acquires a company that is developing or
marketing Covered RMON products, the parties agree:
(a) at Frontier's request, Cisco shall relinquish its rights
under Section 7.2(b) of this Amendment #3 to source code for Other Software and
immediately return such source code to Frontier, and
(b) Cisco shall relinquish its tights under Section 10 of this
Amendment #3.
12.0 PUBLICITY ON STRATEGIC RMON RELATIONSHIP. The parties agree to
publicize the strategic nature of this relationship for RMON Products with a
joint press announcement. Each party is permitted to refer to this strategic
relationship in their sales collateral and advertising. All such references to
this strategic relationship and use of the other party's name and or logos is
subject to the prior written approval of the other party.
13. SUPPORT PAYMENTS. Section 3.4 of Amendment #2 and Section 8 of the
Software Agreement are hereby changed to include an annual support fee of [*] to
cover the following support activities: i) updates, revisions, bug fixes and new
releases of agent Software for all platforms, ii) bug, fixes for all RMON
Products; iii) on-going consulting, including architectural issues, to Cisco for
existing and future RMON Products.
14. MANUFACTURING RIGHTS AND ESCROW. Section 10 of the Hardware Agreement
is hereby changed as follows:
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
14.1 Cisco's right to manufacture is increased from [*] from the time
it is exercised. Cisco can exercise this right on a Product by Product basis and
at different times.
14.2 Cisco's right to manufacture survives termination of the
Agreement by Cisco for cause per Section 14.2 of the Hardware Agreement.
14.3 Any source code provided by Frontier to Cisco under the licenses
of the Agreement does not need to be deposited into the escrow as part of the
Escrowed Materials.
14.4 The following new paragraph is hereby added to Section 10 of the
Hardware Agreement:
"10.5 SOFTWARE LICENSE UNDER MANUFACTURING RIGHTS. In the event
Cisco exercises its Manufacturing Rights for a Product per Section 10 and
notwithstanding anything to the contrary in the Agreement, Frontier hereby
grants Cisco the additional right and license to make modifications of the Other
Software (as defined in Section 7.2(b) of this Amendment #3) for the Product
that Cisco has the right to manufacture. Cisco agrees to limit [*] within such
modifications to Other Software to those features which in Cisco's sole
discretion: (i) are required to meet committed customer requirements, (ii) are
required to maintain competitive products, or (iii) have been previously
committed for release by Cisco. Notwithstanding anything to the contrary in the
Agreement, Cisco shall retain title and full ownership to the modifications of
the Other Software made by or for Cisco for the Product that Cisco has the right
to manufacture. In addition, Cisco hereby grants to Frontier a worldwide,
irrevocable, perpetual and nonexclusive license to use, modify, copy, market,
distribute or otherwise dispose of the modifications to the Other Software made
by or for Cisco."
14.5 The following new paragraph is hereby added to Section 10 of the
Hardware Agreement:
"10.6 MINIMUM PERIOD OF MANUFACTURING RIGHTS. In the event Cisco
exercises its Manufacturing Rights for a Product per Section 10 and
notwithstanding anything to the contrary in the Agreement, such right shall
survive termination or expiration of the Agreement such that the minimum period
of Manufacturing Rights for a Product is 2 years, except that Manufacturing
Rights do not survive termination for cause by Frontier or termination for
convenience by Cisco."
13
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
14.6 Replace Section 10.2 (a) of the Hardware Agreement with the
following:
"In the event Cisco exercises its Manufacturing Rights for a
Product, Cisco agrees to pay Frontier royalties on all Products manufactured and
distributed by Cisco hereunder as follows:
(i) For Products that are solely Software with no hardware
content, Cisco shall continue to pay royalties under the
terms specified under the Agreement for such Products.
(ii) For all other Products, Cisco agrees to pay Frontier a
royalty equal to [*] of Cisco's then current [*].
(iii) All royalties will be computed on a per unit basis and paid
quarterly within forty-five (45) days following the end of
each Cisco quarter."
15. SUPPORT AFTER TERMINATION. Section 14.7 of the Hardware Agreement is
changed such that support shall be provided by Frontier for a Product until five
(5) days after the last shipment of that Product by Cisco.
16. SUPPORT REQUIREMENTS. The following support-related changes are to be
made to the Agreement:
16.1 Section 8.1 of the Hardware Agreement is changed by adding the
following:
"Frontier shall include bug fixes in all subsequent releases of the
agent software and RMON Products. Support levels are defined as follows:
Level 1 Support: [*].
Level 2 Support: All Level 1 support capabilities plus:
[*]
Level 3 Support: [*]
16.2 Section 6.1 (Paragraph 8.15) of Amendment #2 and Section 8.6 of
the Hardware Agreement are amended to add the following:
"Cisco shall work with Frontier while Frontier is developing products
for Cisco under a Statement of Work, to provide input on debugging/support tools
to help in Cisco's support efforts. For all new releases of Software or hardware
Products developed per Section 1.0 (Development Work) above or upgrades to
existing Products, Frontier
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
will provide advanced versions of Products and all supporting customer
documentation to Cisco's support organization to allow them to prepare to
support such new Products."
16.3 Section 8.9 of the Hardware Agreement is changed to add the
following:
"Upon verifying that a Product defect exists, Frontier shall initiate
work in accordance with the time frames for the assigned priority, toward
development of a fix or work around. If Frontier is not able to verify that a
Product defect exists, Frontier will work with Cisco to determine the source of
the problem until it has been determined that the cause is not related to a
problem with a Frontier Product. In all cases, Cisco shall use reasonable
efforts to identify and demonstrate such Software error prior to contacting
Frontier. If Frontier is unable to meet the time frames listed in Section 8.9
for a problem of any priority, Frontier will provide to Cisco within that time
frame, at a minimum, a written plan for addressing the problem, including an
estimate as to the reasonable time period necessary to correct the problem."
16.4 Section 8. 10 of the Hardware Agreement is changed such that
Frontier will provide training for major releases/new RMON Products prior to
initial shipment of each major release/new RMON Product, for a minimum of
twenty-five (25) people at a Frontier facility, Cisco facility or facility
mutually agreed upon.
16.5 Exhibit F of the Hardware Agreement is changed to use the
following Problem Priority Definitions:
Priority 1: Cisco customer's network is [*] or there is [*].
[*] is available. [*] are willing to commit [*] to resolve the situation.
Priority 2: Operation of Cisco customer's network is [*] are being [*]
network performance. Seller, Cisco and customer are willing to commit [*] to
resolve the situation.
Priority 3: Operational performance of Cisco customer's Network [*].
Seller, Cisco and customer are willing to [*] to restore service to satisfactory
levels.
Priority 4: Cisco or Cisco customer requires information or assistance
on Product capabilities, installation, or configuration.
17. SALES ACTIVITIES. The parties agree to conduct sales activities in
accordance with the following guidelines:
(i) The parties will identify situations in which both Cisco and
Frontier sales persons are [*] ("Common Accounts") to meet customer's needs for
RMON Products.
15
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
(ii) The two sales organizations will coordinate to determine an
effective joint selling strategy in Common Accounts. Disputes regarding joint
sales plans for Common Accounts will be resolved between the Cisco regional
sales manager and Frontier's Vice President of sales.
(iii) Cisco and Frontier will work together in good faith to set
up a reporting system such that Frontier has adequate information relating to
sales of Products by Cisco to allow Frontier to compensate its sales personnel
for such sales.
18. NETFLOW MONITOR DISCOUNT. Cisco's purchase price for NetFlow Monitor
shall be [*] of Frontier's U.S. list price.
19. COST REDUCTION. The parties agree to meet no less frequently than
semi-annually to review the prices/license fees paid by Cisco for all Products
covered by this Agreement. Frontier agrees to act in good faith to maintain
competitive OEM pricing/license fees for Products sold to Cisco considering all
of the following: (i) Pricing trends in the RMON product market place; (ii)
Reductions in Frontier's costs for Products; and, (iii) Competition from other
suppliers products. Frontier shall notify Cisco [*] prior to the public
announcement of any price change to its published list price for a Frontier
product that is equivalent to a Product.
20. NO OTHER CHANGES. Terms capitalized shall have the meaning assigned to
them in the Agreement unless specifically defined herein. All other terms and
conditions of the Agreement shall remain in full force and effect.
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treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized representatives.
CISCO SYSTEMS, INC. FRONTIER SOFTWARE
DEVELOPMENT, INC.
/s/ MARIO MAZZOLA /s/ NARENDRA POPAT
- ------------------------------------- -------------------------------
Signature Signature
MARIO MAZZOLA NARENDRA POPAT
- ------------------------------------- -------------------------------
Name Name
VICE PRESIDENT/GENERAL MANAGER - WBU PRESIDENT, FRONTIER SOFTWARE
- ------------------------------------- -------------------------------
Title Title
OCTOBER 29, 1996 OCTOBER 29, 1996
- ------------------------------------- -------------------------------
Date Date
17
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
Exhibit A
Template for Statement of Work
18
<PAGE>
STATEMENT OF WORK FOR THE CISCO-FRONTIER AGREEMENT
WHEREAS, Cisco and Frontier entered into the Project Development and License
Agreement on July 13, 1994 ("Software Agreement"), the Private Label Agreement
on October 17, 1995 ("Hardware Agreement"), and subsequent Amendments
(collectively, the "Agreement"); and
WHEREAS, the parties have agreed to use a Statement of Work to set the terms
under which new projects with be conducted and new Products brought under the
terms of the Agreement; and
WHEREAS, Cisco and Frontier desire to change and add certain terms of the
Agreement per this Statement of Work specifically relating to the project
identified as _________________________________ (the "Project").
NOW THEREFORE, effective as of _____________________, in consideration of the
covenants and conditions contained herein, the parties agree to the Statement of
Work for the Project as indicated below.
In order to bind the parties to the following Statement of Work, their duly
authorized representatives have signed their names below.
Cisco Systems Frontier Software Development
- --------------------------------- ---------------------------------
Signature Signature
- --------------------------------- ---------------------------------
Name Name
- --------------------------------- ---------------------------------
Title Title
1.0 Introduction
Cisco and Frontier agree and acknowledge that this Statement of Work ("SOW") is
an amendment to the Agreement and that the Project specified herein shall be
subject to the terms and conditions of the Agreement. In the case of conflicting
terms between this SOW and the Agreement, including all earlier-dated amendments
and Statements of Work, this SOW shall prevail. The Sections of this SOW
encompass the items usually covered in a Statement of Work under this Agreement.
Where an item is not relevant to this SOW, it is left as an empty section of
sub-section. All terms not specifically included in this SOW are as specified in
the Agreement.
19
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
2.0 Project Description
3.0 New and modified Products resulting from this SOW
4.0 Applicable Documents
The documents listed below are made a part of this SOW to the extent specified
within the body of this SOW. If no revision is shown, it will be the revision in
effect as of the moment.
4.1 Cisco Documents
4.2 Frontier Documents
4.3 Third Party Documents
5.0 Project Details
5.1 Software Development
5.1.1 Cisco Responsibilities
5.1.2 Frontier Responsibilities
5.1.3 Deliverable & Criteria of Acceptance
5.2 Hardware Development
5.2.1 Cisco Responsibilities
5.2.2 Frontier Responsibilities
5.2.3 Deliverable & Criteria of Acceptance
5.3 Systems Integration
5.3.1 Cisco Responsibilities
5.3.2 Frontier Responsibilities
5.3.3 Deliverable & Criteria of Acceptance
5.4 Documentation
5.4.1 Cisco Responsibilities
5.4.2 Frontier Responsibilities
5.4.3 Deliverable & Criteria of Acceptance
5.5 Customer Advocacy, Service and Support
5.5.1 Cisco Responsibilities
5.5.2 Frontier Responsibilities
5.5.3 Deliverable & Criteria of Acceptance
5.6 Other Project activities
5.6.1 Cisco Responsibilities
5.6.2 Frontier Responsibilities
5.6.3 Deliverable & Criteria of Acceptance
6.0 Schedule
20
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
7.0 Payments
7.1 Other Project activities
7.2 Schedule delay penalties
7.3 Project cancellation penalties
7.4 Prepaid royalties
7.5 Per unit royalties
7.6 Upgrade payments
7.7 Payment terms and schedule
8.0 Ownership and intellectual property rights
8.1 Ownership of Software
8.2 License restrictions
9.0 Other term of the SOW
21
[*] indicates material that has been omitted and for which confidential
treatment has been requested. All such omitted material has been filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
Exhibit 10.15
AMENDMENT NO. 4 TO
PRIVATE LABEL AGREEMENT
AND
PROJECT DEVELOPMENT AND LICENSE AGREEMENT
BETWEEN
CISCO SYSTEMS, INC.
AND
NETSCOUT SYSTEMS, INC.
This Amendment No. 4 ("Amendment #4"), having an Effective Date of
February 23, 1998, is made in California by and between Cisco Systems, Inc., a
California corporation having its principal place of business at 170 West Tasman
Drive, San Jose, CA 95134-1706, U.S.A. ("Cisco"), and NetScout Systems, Inc.,
(Formerly known as Frontier Software Development, Inc.) a Delaware corporation
having its principal place of business at 4 Technology Park Drive, Westford,
Massachusetts 01886 ("NetScout").
WHEREAS, Cisco and NetScout entered into the Project Development and
License Agreement on July 13, 1994 ("Software Agreement"), as amended on January
4, 1995 ("Amendment #1") pursuant to which NetScout licensed certain software
products (as defined in the Software Agreement) to Cisco; and
WHEREAS, Cisco and NetScout entered into the Private Label Agreement on
October 17, 1995 ("Hardware Agreement") pursuant to which NetScout is selling
certain products (as defined in the Hardware Agreement) to Cisco; and
WHEREAS, Cisco and NetScout entered into an Amendment to the Hardware
Agreement and the Software Agreement on May 15, 1996 ("Amendment #2"); and
WHEREAS, Cisco and NetScout entered into an Amendment to the Hardware
Agreement and the Software Agreement on October 29, 1996 ("Amendment #3"); and
WHEREAS, Cisco and NetScout desire to change and add certain terms to
the Software Agreement, Hardware Agreement, Amendment #1, Amendment #2 and
Amendment #3 (collectively, the "Agreement") as specified below.
NOW THEREFORE, in consideration of the covenants and conditions
contained herein, the parties agree as follows:
1.0 DEFINITIONS.
"Embedded Probes" are as defined in Section 3.0 of Amendment #3.
Cisco Systems Confidential Information Page 1
<PAGE>
"Special Pricing" shall mean a discount structure different from the normal
discounts or royalties per the Agreement and conveyed to Cisco in writing
(letter, fax, or email) to be in effect for specific products, specific
customers, and a stated time period.
"Stand-alone Probes" shall mean all RMON probe product models covered under the
Agreement except Embedded Probes.
2.0 PROBE DISCOUNTS.
Section 5.0 of Amendment #3 entitled "Probe Discount" is hereby
replaced with the following:
(a) Base Discount. The base discount ("Base Discount") for Stand-alone
Probes shall be [*] off NetScout's published U.S. List Price (U.S. List Price is
defined in the Revised Exhibit A of Amendment #2). Base Discount applies to all
Stand-alone Probes currently covered under the Agreement plus any new models of
Stand-alone Probes subsequently added under the Agreement.
(b) Incremental Volume Discount. Based upon the total dollar volume for
all Stand-alone Probes purchased by Cisco during Cisco's previous fiscal
quarter, but excluding any products purchased with Special Pricing, Cisco shall
receive an additional incremental discount ("Incremental Volume Discount") in
addition to the Base Discount as follows:
<TABLE>
<CAPTION>
- --------------------------------- ---------------------------
INCREMENTAL VOLUME
TOTAL QUARTERLY STAND-ALONE DISCOUNT IN PERCENT FOR
PROBE PURCHASES IN DOLLARS NEXT QUARTER
- --------------------------------- ---------------------------
<S> <C>
[*]
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
- --------------------------------- ---------------------------
</TABLE>
Given the need to complete the accounting for Cisco's previous fiscal
quarter to determine the Incremental Volume Discount for the current quarter,
the Incremental Volume Discount for a given quarter shall apply for all purchase
orders placed four or more weeks after the start of said Cisco fiscal quarter
and shall continue through the first four weeks of the
[*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED.
Cisco Systems Confidential Information Page 2
<PAGE>
subsequent Cisco fiscal quarter. The dollar volume shall be measured in terms of
the actual purchase prices for all purchase orders for Standalone Probes ordered
by Cisco (excluding units purchased under Special Pricing).
(c) Special Pricing. If the parties have agreed to Special Pricing for
a particular competitive situation, Cisco shall reference said Special Pricing
in its purchase orders placed with NetScout for which Special Pricing applies.
(d) Effectivity of Discounts for Stand-alone Probes. The discounts per
this Section 2 shall apply as of the Effective Date of this Amendment #4 and
shall continue in effect until the termination or expiration of the Agreement.
Any Incremental Volume Discounts shall apply beginning with the first complete
fiscal quarter after the Effective Date of this Amendment #4.
(e) Minimum purchase requirement. Should Cisco purchases of probes fall
below [*] for [*], as calculated above, Cisco's price for the subsequent quarter
shall be as specified in the Hardware Agreement, attachment A.
3.0 RMON EMBEDDED AGENT SOFTWARE FOR IOS.
The parties hereby cancel the licensing transaction agreed to in
Section 2.2 (a) of Amendment #3 such that NetScout is not obligated to deliver
or license RMON Embedded Agent Software to Cisco for inclusion in [*] software
and Cisco is not obligated to make the [*] payment to NetScout .
4.0 PROBE SALES INCENTIVE PROGRAM.
The parties hereby establish a Probe Sales Incentive Program which
shall: (a) be in effect for Cisco's [*], beginning [*] and ending on [*] (b) be
in effect only for fiscal quarters where Cisco's probe orders placed with
NetScout in that quarter meet or exceed [*], and (c) provide a credit of [*] on
the first [*] of probe-only product ordered in the quarter (a maximum credit of
[*] per quarter) at Cisco's applicable probe discount per Section 2 above. The
credit shall be calculated at the end of each quarter, apply to any open
invoice, and be issued by NetScout within 45 days of the close of each
applicable Cisco fiscal quarter.
5.0 TRAFFICDIRECTOR LICENSING.
Notwithstanding anything to the contrary in the Agreement, the
licensing practice for end users of Traffic Director 5.1, and subsequent
releases, embedded within CWSI shall be as follows:
[*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED.
Cisco Systems Confidential Information Page 3
<PAGE>
(a) Cisco shall apply the same end user license to Traffic Director
embedded within CWSI as Cisco requires of its end user customers for the rest of
the functionality of CWSI. If Cisco changes its licensing practice for CWSI, it
will apply the same new license practice to Traffic Director after consultation
with and approval by NetScout.
(b) Cisco shall apply the same diligence in protecting Traffic Director
as it does for its own intellectual property in CWSI and shall continue to meet
all conditions within existing agreements between the parties to protect
NetScout's intellectual property.
(c) In the event that Cisco becomes aware of any documented and
substantive misuse of the CWSI license as applied to TrafficDirector, Cisco
shall apply commercially reasonable efforts to assure that the licensing
requirements of CWSI as applied to Traffic Director are met by end users, and
further Cisco shall [*] to NetScout any [*] even in the case in which the [*] to
Cisco.
(d) Cisco shall continue to account for its royalties due for Traffic
Director per the process currently in place between the parties.
6.0 INVENTORY CREDIT.
The parties acknowledge that Cisco has returned to NetScout [*] units of [*]
which were [*] by Cisco at a [*] of [*]. NetScout agrees to immediately credit
Cisco for this return, in the amount of [*]. Cisco hereby transfers to NetScout
ownership of said returned Stand-alone Probes.
7.0 DOCUMENTATION.
For all new products, bug fixes and product updates provided to Cisco
for acceptance testing under this Agreement, NetScout shall apply reasonable
commercial efforts to provide the following documentation:
Functional specifications Design specifications (as available as a
standard NetScout documents)
Test plans, test cases, and test results for key features
Test plans, test cases and test results for system tests
[*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED.
Cisco Systems Confidential Information Page 4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized representatives effective as of the last date given below.
CISCO SYSTEMS, INC. NETSCOUT SYSTEMS, INC.
/s/ MARIO MAZZOLA /s/ ANIL SINGHAL
- ----------------------------------- -----------------------------------
Signature Signature
MARIO MAZZOLA ANIL SINGHAL
- ----------------------------------- -----------------------------------
Name Name
SVP ELOB CEO
- ----------------------------------- -----------------------------------
Title Title
Cisco Systems Confidential Information Page 5
