<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 1999
REGISTRATION NO. 333-76843
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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>
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 MAY 4, 1999
Shares
[LOGO]
Common Stock
---------------------
We are selling shares of common stock and the selling stockholders
identified on page 50 are selling shares of common stock. We will not
receive any of the proceeds from the shares of common stock sold by the selling
stockholders. Prior to this offering, there has been no public market for the
common stock. The initial public offering price is expected to be between $
and $ per share.
Application has been made to list the common stock on The Nasdaq Stock
Market's National Market under the symbol "NTCT."
We and the selling stockholders have granted the underwriters an option to
purchase a maximum of additional shares of common stock to cover
over-allotments of shares.
Investing in the common stock involves certain risks. See "Risk Factors"
beginning on page 5.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions NetScout Stockholders
--------- ---------------- ---------------- ----------------
<S> <C> <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.
Credit Suisse First Boston
Bear, Stearns & Co. Inc.
BT Alex. Brown
Dain Rauscher Wessels
a
division of Dain Rauscher Incorporated
The date of this prospectus is , 1999
<PAGE>
DESCRIPTION OF INSIDE COVER OF THE PROSPECTUS FOR NETSCOUT SYSTEMS, INC.
Application Flow Management
Aligns computer network resources with business strategies by providing:
- - Application Response Time Measurement
- - Monitoring and Troubleshooting
- - Capacity Planning
- - Policy Enforcement
- - Accounting and Chargeback
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
The graphic in the center of the two-page inside spread consists of multiple
servers labeled "SAP R/3", "Custom", and "Notes", 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 showing representative graphs
from NetScout's software products.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................ 3
Risk Factors.................................. 5
Special Note Regarding Forward-Looking
Statements.................................. 15
Use Of Proceeds............................... 16
Dividend Policy............................... 16
Capitalization................................ 17
Dilution...................................... 18
Selected Consolidated Financial Data.......... 19
Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations.................................. 20
Business...................................... 30
<CAPTION>
PAGE
---------
<S> <C>
Management.................................... 41
Certain Transactions.......................... 48
Principal And Selling Stockholders............ 50
Description Of Capital Stock.................. 52
Shares Eligible For Future Sale............... 56
Underwriting.................................. 58
Notice To Canadian Residents.................. 60
Legal Matters................................. 61
Experts....................................... 61
Where You Can Find More Information........... 61
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.
------------------------
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;
- ASSUMES A THREE-FOR-TWO STOCK SPLIT OF OUR COMMON STOCK PRIOR TO THE
EFFECTIVENESS OF THIS OFFERING;
- 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; AND
- REFLECTS THE ADOPTION OF NEW STOCK PLANS, WHICH OCCURRED IN APRIL 1999.
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."
------------------------
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.
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.
2
<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
We design, develop, manufacture, market and support an integrated family of
products that enable businesses and service providers to manage the performance
of computer networks and important business software applications. Our
Application Flow Management ("AFM") solution consists of data collection devices
as well as analysis and presentation software. AFM collects, aggregates and
analyzes network and application data from a wide range of network technologies.
Using this data, AFM provides real-time information regarding the performance of
computer networks and software applications, such as e-mail, order entry and
Web-based applications. Our solution presents this information to computer
network and business managers in a user-friendly, 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, multi-vendor computer
networks, which are more difficult to manage.
Our solution provides a proactive approach to network and application
performance management that enables managers to anticipate and address network
and application performance problems and align their computer resources with
their business strategies. AFM provides the following key functions:
- APPLICATION RESPONSE TIME MEASUREMENT. AFM provides detailed, real-time
information on application response time which can be used to optimize
network configuration and prioritize applications.
- MONITORING AND TROUBLESHOOTING. AFM allows real-time monitoring and trend
analysis of network usage, performance and error conditions which helps
network managers prevent network malfunctions and expedite
troubleshooting.
- CAPACITY PLANNING. AFM measures trends in network usage by individual
software application to enable informed network spending decisions.
- POLICY ENFORCEMENT. AFM helps network managers identify inappropriate or
wasteful usage of the computer network to ensure adherence to corporate
policies and guidelines.
- ACCOUNTING AND CHARGE-BACK. AFM provides network usage information by
user, department or application, which can be used to charge for internal
network usage.
Our AFM solution is used by businesses and organizations with large and
medium-sized computer networks, as well as service providers that offer computer
network infrastructure 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.
3
<PAGE>
THE OFFERING
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<S> <C>
Common stock offered by NetScout................... shares
Common stock offered by the selling stockholders... shares
Common stock to be outstanding after the 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 33,843,258 shares of common stock
outstanding as of March 31, 1999 and excludes 4,640,438 shares issuable upon the
exercise of outstanding stock options as of March 31, 1999 and 7,500,000 shares
available for future grant under our stock plans.
SUMMARY CONSOLIDATED FINANCIAL DATA
The pro forma data in the tables below 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. The
pro forma as adjusted balance sheet data as of March 31, 1999 also give effect
to the sale of shares of common stock that we are offering under this
prospectus at an assumed initial public offering price of $ per share, after
deducting estimated underwriting discounts and commissions and offering
expenses. See "Capitalization."
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenue............................................... $ 5,877 $ 15,683 $ 30,648 $ 42,829 $ 67,551
Total cost of revenue....................................... 1,962 6,035 9,955 13,422 20,485
Gross margin................................................ 3,915 9,648 20,693 29,407 47,066
Total operating expenses.................................... 3,214 6,287 11,596 21,662 31,705
Income from operations...................................... 701 3,361 9,097 7,745 15,361
Provision for income taxes.................................. 136 1,355 3,640 3,056 5,823
Net income.................................................. $ 555 $ 2,003 $ 5,918 $ 5,432 $ 10,464
Basic net income per share.................................. $ 0.02 $ 0.07 $ 0.21 $ 0.19 $ 0.38
Diluted net income per share................................ $ 0.02 $ 0.06 $ 0.17 $ 0.16 $ 0.29
Shares used in computing:
Basic net income per share................................ 27,064 27,814 28,514 28,934 27,879
Diluted net income per share.............................. 28,982 33,690 34,378 34,748 35,559
Pro forma basic net income per share........................ $ 0.31
Pro forma diluted net income per share...................... $ 0.29
Shares used in computing:
Pro forma basic net income per share...................... 33,451
Pro forma diluted net income per share.................... 35,559
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
MARCH 31, PRO FORMA
1998 ACTUAL PRO FORMA AS ADJUSTED
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 6,341 $ 25,477 $ 25,477 $
Working capital.................................................. 14,163 24,681 24,681
Total assets..................................................... 31,220 43,866 43,866
Class B redeemable convertible common stock...................... -- 44,161 --
Total stockholders' equity (deficit)............................. 20,400 (12,932) 31,229
</TABLE>
4
<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. THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW ARE NOT THE ONLY RISKS WE FACE. 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. For the fiscal years ended March 31, 1997, 1998
and 1999, Cisco accounted for 24%, 40% and 51% of our
total revenue. 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>
5
<PAGE>
<TABLE>
<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;
- 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, including the network interface cards, are
AFFECT OUR BUSINESS obtained from separate sole source suppliers or a limited
group of suppliers. 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>
6
<PAGE>
<TABLE>
<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 OEMs,
INDIRECT DISTRIBUTION distributors, resellers, systems integrators and service
CHANNELS 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.
During these periods, Cisco accounted for 24%, 40% and 51%
of our total revenue. 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.
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;
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
- 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 important
COMMERCIAL ACCEPTANCE OF business software applications. The market for network and
NETWORK AND APPLICATION application performance management solutions is in an
PERFORMANCE MANAGEMENT early stage of development. Therefore, we cannot
SOLUTIONS accurately assess the size of the market and may be unable
to predict the appropriate features and prices for
products to address the market, the optimal distribution
strategy and the competitive environment that will
develop. In order for us to be successful, our potential
customers must recognize the value of more sophisticated
network and application performance management solutions,
decide to invest in the management of their networks and
the performance of important business 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.
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.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
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>
9
<PAGE>
<TABLE>
<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>
10
<PAGE>
<TABLE>
<S> <C>
OUR SUCCESS DEPENDS ON OUR In each of the three fiscal years ended March 31, 1997,
ABILITY TO EXPAND AND MANAGE 1998 and 1999, 12% of our total revenue was from sales
OUR INTERNATIONAL OPERATIONS outside North America. 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.
In addition, international operations 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 vendors;
- 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.
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.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
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 OEM 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.
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 % 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.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
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
- 83,100 additional shares may be sold immediately after
this offering;
- 392,974 additional shares may be sold 90 days after the
effective date of this offering;
- 20,901,303 additional shares may be sold upon the
expiration of 180-day lock-up agreements; and
- 10,465,881 additional shares may be sold commencing on
January 15, 2000.
Credit Suisse First Boston Corporation, as representative
of the underwriters, may release any or all shares from
the lock-up agreements at any time and without notice.
Existing stockholders holding an aggregate of 10,465,881
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
12,140,438 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.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
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 $ in the pro forma net tangible book value
THEIR INVESTMENT per share of common stock. You will experience additional
dilution upon the exercise of outstanding stock options to
purchase common stock. See "Dilution."
</TABLE>
14
<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. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. 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.
15
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of
common stock that we are offering hereby will be approximately $ , at
an assumed initial public offering price of $ per share, after deducting
estimated underwriting discounts and commissions and offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that such
net proceeds will be approximately $ . 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 or
to 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.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 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
shares of common stock offered under this prospectus at an assumed initial
public offering price of $ 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 4,640,438 shares of common stock issuable upon exercise of outstanding
options as of March 31, 1999, of which options to purchase 1,773,942 shares were
then exercisable. An additional 7,500,000 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>
MARCH 31, 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, 24,000,000 shares issued and
16,875,751 shares outstanding, actual; 44,309,142 shares issued and
33,843,258 shares outstanding, pro forma; and shares issued
and shares outstanding, pro forma as adjusted................. 24 44
Non-voting, 21,224,364 shares authorized, 6,053,787 shares issued and
4,606,886 shares outstanding, actual; no shares issued or outstanding,
pro forma and pro forma as adjusted................................... 6 -- --
Additional paid-in capital.............................................. 2,133 52,244
Deferred compensation..................................................... (1,312) (1,312) (1,312)
Treasury stock............................................................ (44,394) (44,394) (44,394)
Retained earnings......................................................... 24,647 24,647 24,647
---------- ----------- -----------
Total stockholders' equity (deficit).................................... (12,932) 31,229
---------- ----------- -----------
Total capitalization................................................ $ 31,229 $ 31,229 $
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
17
<PAGE>
DILUTION
The pro forma net tangible book value of NetScout at March 31, 1999 was
$31,229,000, or $0.92 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 shares of common stock offered
hereby by NetScout at an assumed initial public offering price of $ per
share and after deducting estimated underwriting discounts and commissions and
offering expenses, NetScout's pro forma net tangible book value as of March 31,
1999 would have been approximately $ , or $ per share. This represents
an immediate increase in pro forma net tangible book value of $ per share
to existing stockholders and an immediate dilution of $ 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.............. $
Pro forma net tangible book value per share
at March 31, 1999...................................... $ 0.92
Increase attributable to this offering...................
Pro forma net tangible book value per share after this
offering...................................................
---------
Net tangible book value dilution per share to new investors
in this offering........................................... $
---------
---------
</TABLE>
The following table summarizes, as of March 31, 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
$ 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.......... 33,843,258 % $ 50,453,000 % $ 1.49
New investors.................. $
------------ ----- ------------- -----
Totals................... 100.0% $ 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
The sales by the selling stockholders in this offering will reduce the
number of shares of common stock held by existing stockholders to , or
approximately % 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 , or % 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 March 31, 1999. As of March 31, 1999, there were 4,640,438 shares of
common stock issuable upon exercise of outstanding stock options, at a weighted
average exercise price of $1.90 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 6,750,000 shares of common stock are reserved for issuance, and our 1999
Employee Stock Purchase Plan, pursuant to which 750,000 shares of common stock
are reserved for issuance. See "Management-Stock Plans" and Note 9 to the
Consolidated Financial Statements.
18
<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 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>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Product.......................................................... $ 4,035 $ 13,276 $ 25,159 $ 34,990 $ 50,374
Service.......................................................... 341 1,521 3,888 5,143 8,710
License and royalty.............................................. 1,501 886 1,601 2,696 8,467
--------- --------- --------- --------- ---------
Total revenue.................................................. 5,877 15,683 30,648 42,829 67,551
--------- --------- --------- --------- ---------
Cost of revenue:
Product.......................................................... 1,962 5,897 9,427 12,638 19,250
Service.......................................................... -- 138 528 784 1,235
--------- --------- --------- --------- ---------
Total cost of revenue.......................................... 1,962 6,035 9,955 13,422 20,485
--------- --------- --------- --------- ---------
Gross margin....................................................... 3,915 9,648 20,693 29,407 47,066
--------- --------- --------- --------- ---------
Operating expenses:
Research and development......................................... 1,008 1,208 3,003 5,129 7,526
Sales and marketing.............................................. 1,765 4,384 6,778 13,583 20,375
General and administrative....................................... 441 695 1,815 2,950 3,804
--------- --------- --------- --------- ---------
Total operating expenses....................................... 3,214 6,287 11,596 21,662 31,705
--------- --------- --------- --------- ---------
Income from operations............................................. 701 3,361 9,097 7,745 15,361
Interest income (expense), net..................................... (10) (3) 461 743 926
--------- --------- --------- --------- ---------
Income before provision for income taxes........................... 691 3,358 9,558 8,488 16,287
Provision for income taxes......................................... 136 1,355 3,640 3,056 5,823
--------- --------- --------- --------- ---------
Net income......................................................... $ 555 $ 2,003 $ 5,918 $ 5,432 $ 10,464
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic net income per share......................................... $ 0.02 $ 0.07 $ 0.21 $ 0.19 $ 0.38
Diluted net income per share....................................... $ 0.02 $ 0.06 $ 0.17 $ 0.16 $ 0.29
Shares used in computing:
Basic net income per share....................................... 27,064 27,814 28,514 28,934 27,879
Diluted net income per share..................................... 28,982 33,690 34,378 34,748 35,559
Pro forma basic net income per share............................... $ 0.31
Pro forma diluted net income per share............................. $ 0.29
Shares used in computing:
Pro forma basic net income per share............................. 33,451
Pro forma diluted net income per share........................... 35,559
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, 1999
------------------------------------------ ----------------------
1995 1996 1997 1998 ACTUAL PRO FORMA
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 346 $ 7,797 $ 6,514 $ 6,341 $ 25,477 $ 25,477
Working capital........................................ 324 7,837 11,140 14,163 24,681 24,681
Total assets........................................... 2,781 14,328 21,703 31,220 43,866 43,866
Class B redeemable convertible common stock............ -- -- -- -- 44,161 --
Total stockholders' equity (deficit)................... 878 8,848 14,809 20,400 (12,932) 31,229
</TABLE>
19
<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 an integrated
family of products that enable businesses and service providers to manage the
performance of computer networks and important business 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 software, which provides real-time
network and application performance information in an user-friendly, 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 network and application performance
management 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. In
addition, customers can elect to purchase extended support agreements, typically
for 12-month periods. Revenue from support 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 OEMs 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 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 OEMs, 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.
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, 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.
20
<PAGE>
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. 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>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1997 1998 1999
--------- --------- ---------
Revenue:
Product................................................................................ 82.1% 81.7% 74.6%
Service................................................................................ 12.7 12.0 12.9
License and royalty.................................................................... 5.2 6.3 12.5
--------- --------- ---------
Total revenue........................................................................ 100.0 100.0 100.0
--------- --------- ---------
Cost of revenue:
Product................................................................................ 30.8 29.5 28.5
Service................................................................................ 1.7 1.8 1.8
--------- --------- ---------
Total cost of revenue................................................................ 32.5 31.3 30.3
--------- --------- ---------
Gross margin............................................................................. 67.5 68.7 69.7
--------- --------- ---------
Operating expenses:
Research and development............................................................... 9.8 12.0 11.1
Sales and marketing.................................................................... 22.1 31.7 30.2
General and administrative............................................................. 5.9 6.9 5.7
--------- --------- ---------
Total operating expenses............................................................. 37.8 50.6 47.0
--------- --------- ---------
Income from operations................................................................... 29.7 18.1 22.7
Interest income, net..................................................................... 1.5 1.7 1.4
--------- --------- ---------
Income before provision for income taxes................................................. 31.2 19.8 24.1
Provision for income taxes............................................................... 11.9 7.1 8.6
--------- --------- ---------
Net income............................................................................... 19.3% 12.7% 15.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 growth in unit sales attributable to an
increase in the number of sales personnel, an increase in shipments to existing
indirect channel partners and, to a lesser extent, an expansion of indirect
distribution channels. This increase was also due to an increase in average
selling price due to larger volumes of WAN, ATM and Fast Ethernet probes.
21
<PAGE>
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 growth in sales of support agreements
to new and existing customers attributable to increased sales and marketing
efforts and 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 growth in unit
sales of our software and embedded software products by Cisco.
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 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 an increase in
unit sales and a shift in product mix. 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 lower gross margins than direct sales and, to a lesser extent,
larger direct sales transactions, which tend to have higher discounts, partially
offset by a decrease in component costs and an increase in operating
efficiencies.
SERVICE. Cost of service revenue consists primarily of personnel costs.
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 the hiring of additional service personnel to
support an increase in our 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. We anticipate that service gross margins will
decrease as a percentage of service revenue as staffing reaches planned levels.
Overall gross margins are 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.
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, the enhancement of existing
products, quality assurance and testing. 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 the hiring of additional research and development personnel and higher
consulting costs. We anticipate that research and development expenses will
increase in absolute dollars and as a percentage of total revenue as staffing
reaches planned levels.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel costs and costs associated with marketing programs such as trade
shows, seminars, advertising and new product launch activities. Sales and
marketing expenses increased 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 costs associated with hiring of additional sales
and marketing personnel and an increase in marketing programs. 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
22
<PAGE>
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 29% from
$3.0 million for the fiscal year ended March 31, 1998 to $3.8 million for the
fiscal year ended March 31, 1999. This increase was primarily due to the hiring
of additional general and administrative personnel and 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
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 $5.8 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 growth in unit sales attributable to an
increase in the number of sales personnel and an increase in shipments to
existing indirect channel partners and, to a lesser extent, an expansion of
indirect distribution channels. This increase was also due to an increase in the
average selling price attributable to an increase in the sale of WAN, 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 growth in sales 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 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 an increase in unit sales and
a shift in product mix. 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 a decrease in component costs and 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 the
23
<PAGE>
hiring of additional service personnel to support an increase in the 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 the
hiring of additional research and development personnel and higher 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 the hiring of
additional sales and marketing personnel and an 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 the
hiring of additional general and administrative personnel and 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 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
March 31, 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
24
<PAGE>
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>
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
----------- ----------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
STATEMENT OF INCOME DATA:
Revenue:
Product.............................. $ 6,512 $ 7,710 $ 9,722 $ 11,046 $ 11,547 $ 11,863 $ 13,327 $ 13,637
Service.............................. 1,192 1,033 1,230 1,688 1,873 2,284 2,172 2,381
License and royalty.................. 298 788 686 924 1,843 1,999 1,972 2,653
----------- ----------- --------- --------- --------- --------- --------- ---------
Total revenue...................... 8,002 9,531 11,638 13,658 15,263 16,146 17,471 18,671
----------- ----------- --------- --------- --------- --------- --------- ---------
Cost of revenue:
Product.............................. 2,162 2,649 3,488 4,339 4,340 4,347 4,927 5,636
Service.............................. 136 152 222 274 296 320 222 397
----------- ----------- --------- --------- --------- --------- --------- ---------
Total cost of revenue.............. 2,298 2,801 3,710 4,613 4,636 4,667 5,149 6,033
----------- ----------- --------- --------- --------- --------- --------- ---------
Gross margin........................... 5,704 6,730 7,928 9,045 10,627 11,479 12,322 12,638
----------- ----------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development............. 1,070 1,196 1,277 1,586 1,732 1,760 1,803 2,231
Sales and marketing.................. 2,557 2,984 3,837 4,205 5,008 4,527 5,191 5,649
General and administrative........... 580 586 746 1,038 815 913 1,030 1,046
----------- ----------- --------- --------- --------- --------- --------- ---------
Total operating expenses........... 4,207 4,766 5,860 6,829 7,555 7,200 8,024 8,926
----------- ----------- --------- --------- --------- --------- --------- ---------
Income from operations................. 1,497 1,964 2,068 2,216 3,072 4,279 4,298 3,712
Interest income, net................... 185 176 194 188 200 243 224 259
----------- ----------- --------- --------- --------- --------- --------- ---------
Income before provision for income
taxes................................ 1,682 2,140 2,262 2,404 3,272 4,522 4,522 3,971
Provision for income taxes............. 606 771 814 865 1,178 1,628 1,629 1,388
----------- ----------- --------- --------- --------- --------- --------- ---------
Net income............................. $ 1,076 $ 1,369 $ 1,448 $ 1,539 $ 2,094 $ 2,894 $ 2,893 $ 2,583
----------- ----------- --------- --------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- --------- --------- ---------
</TABLE>
25
<PAGE>
AS A PERCENTAGE OF TOTAL REVENUE:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997 1998 1998 1998
----------- ----------- ----------- ----------- ----------- -----------
Revenue:
Product................................... 81.4% 80.9% 83.5% 80.9% 75.7% 73.5%
Service................................... 14.9 10.8 10.6 12.4 12.3 14.1
License and royalty....................... 3.7 8.3 5.9 6.7 12.0 12.4
----- ----- ----- ----- ----- -----
Total revenue........................... 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- -----
Cost of revenue:
Product................................... 27.0 27.8 30.0 31.8 28.4 26.9
Service................................... 1.7 1.6 1.9 2.0 2.0 2.0
----- ----- ----- ----- ----- -----
Total cost of revenue................... 28.7 29.4 31.9 33.8 30.4 28.9
----- ----- ----- ----- ----- -----
Gross margin................................ 71.3 70.6 68.1 66.2 69.6 71.1
----- ----- ----- ----- ----- -----
Operating expenses:
Research and development.................. 13.4 12.5 11.0 11.6 11.4 10.9
Sales and marketing....................... 31.9 31.3 33.0 30.8 32.8 28.0
General and administrative................ 7.3 6.1 6.4 7.6 5.3 5.7
----- ----- ----- ----- ----- -----
Total operating expenses................ 52.6 49.9 50.4 50.0 49.5 44.6
----- ----- ----- ----- ----- -----
Income from operations...................... 18.7 20.7 17.7 16.2 20.1 26.5
Interest income, net........................ 2.3 1.8 1.7 1.4 1.3 1.5
----- ----- ----- ----- ----- -----
Income before provision for income taxes.... 21.0 22.5 19.4 17.6 21.4 28.0
Provision for income taxes.................. 7.6 8.1 7.0 6.3 7.7 10.1
----- ----- ----- ----- ----- -----
Net income.................................. 13.4% 14.4% 12.4% 11.3% 13.7% 17.9%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<CAPTION>
<S> <C> <C>
DEC. 31, MAR. 31,
1998 1999
----------- -----------
Revenue:
Product................................... 76.3% 73.0%
Service................................... 12.4 12.8
License and royalty....................... 11.3 14.2
----- -----
Total revenue........................... 100.0 100.0
----- -----
Cost of revenue:
Product................................... 28.2 30.2
Service................................... 1.3 2.1
----- -----
Total cost of revenue................... 29.5 32.3
----- -----
Gross margin................................ 70.5 67.7
----- -----
Operating expenses:
Research and development.................. 10.3 11.9
Sales and marketing....................... 29.7 30.3
General and administrative................ 5.9 5.6
----- -----
Total operating expenses................ 45.9 47.8
----- -----
Income from operations...................... 24.6 19.9
Interest income, net........................ 1.3 1.4
----- -----
Income before provision for income taxes.... 25.9 21.3
Provision for income taxes.................. 9.3 7.5
----- -----
Net income.................................. 16.6% 13.8%
----- -----
----- -----
</TABLE>
NetScout's total revenue has increased each of the eight consecutive
quarters in the period ended March 31, 1999. Product revenue increased in each
quarter 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. Service revenue generally increased due to the
growth in our customer base and new initiatives to sell extended 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 each quarter 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 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.
Operating expenses generally increased in absolute dollars primarily due to
increased spending in all areas. Operating expenses fluctuated as a percentage
of total revenue primarily due to timing of personnel additions in research and
development as well as sales and marketing.
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
26
<PAGE>
enhancing existing products and developing new products. Research and
development expenses fluctuated as a percentage of total revenue primarily due
to research and development staffing.
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 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 were unusually high in the quarter ended March 31,
1998 primarily due to expenses related to our move to a new facility. 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 March 31, 1999, we had cash and cash equivalents
totaling $25.5 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 of 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 March 31, 1999. At March 31, 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. Cash
provided by operating activities was primarily derived from net income generated
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 and 1999 and increases in
inventories in fiscal 1997 and 1998. All of these increases were due to the
growth of our business.
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 provided by financing activities was $2,000, $22,000 and $22,000 for
the fiscal years ended March 31, 1997, 1998 and 1999, which was 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 March 31, 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.
27
<PAGE>
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 have reviewed our products to determine whether they are Year 2000
compliant. Based on this review, we believe that most of 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 (version 2.1), which is planned for the third calendar
quarter of 1999.
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 commercially available 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 expect that our internal
systems will be fully compliant by the end of the third calendar quarter of
1999.
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.
In addition, we rely on suppliers and indirect channel partners who may be
impacted by Year 2000 complications. 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 indirect distribution
channels. Problems with our suppliers or indirect channel partners could have a
material adverse effect on our business, operating results and financial
condition.
Some of our products are sold to OEMs who incorporate them into their own
product offerings. We do not know whether OEM products incorporating our
products are or will be Year 2000 complaint. If such OEM 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 OEM partners. Therefore, the
failure of our OEM partners to be Year 2000 complaint could have a material
adverse effect on our business, results of operations and financial condition.
28
<PAGE>
To date, we have not incurred significant incremental costs in order to
comply with Year 2000 requirements and do not expect to incur significant
incremental costs in the foreseeable future. However, there can be no assurance
that Year 2000 errors or defects will not be discovered in our products or our
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.
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, 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
("EU") joined the European Monetary Union. Ultimately, there will be a single
currency within certain countries of the EU, 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 ("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. 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 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 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 ("SFAS") 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.
29
<PAGE>
BUSINESS
INTRODUCTION
We design, develop, manufacture, market and support an integrated family of
products that enable businesses and service providers to manage the performance
of computer networks and important business software applications. Our
Application Flow Management ("AFM") solution consists of data collection devices
and analysis and presentation software. AFM collects, aggregates and analyzes
network and application data from a wide range of network technologies. Using
this data, AFM provides real-time information regarding the performance of
computer networks and individual software applications, such as e-mail, order
entry and Web-based applications. Our solution provides this information to
computer network and business managers in a user-friendly, 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 network access, both business enterprises and service providers 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, ATM and IP/Internet, and new network products
addressing quality of service and security. The implementation of these new
technologies and products has resulted in highly-complex, multi-vendor 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 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.
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.
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Because this class of products relies on limited, predefined data, originally
intended for device management, it provides minimal information regarding
network users or application performance. These solutions typically provide only
historical and end-of-period reports because providing real-time 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 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 ("RMON") 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 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 an integrated family of
products to enable business managers to manage both network and application
performance, which together comprise our Application Flow Management ("AFM")
solution. AFM 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 real-time network and
application performance information in a user-friendly, graphical format. AFM
addresses the following key aspects of network management:
- APPLICATION RESPONSE TIME MEASUREMENT. AFM measures and provides detailed,
real-time information on application response time over the computer
network. This information enables network managers to optimize application
configuration, prioritize applications and proactively manage the computer
network.
- MONITORING AND TROUBLESHOOTING. AFM allows real-time 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.
- CAPACITY PLANNING. AFM measures trends in network usage by individual
software application. Helps network managers make informed network
spending decisions.
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- POLICY ENFORCEMENT. AFM 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. AFM 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 IN INSTRUMENTATION. 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, WAN probes in 1993,
switch embedded probes and CDDI/FDDI probes in 1995, Fast Ethernet probes in
1996, WAN (T3) probes in 1997, ATM probes in 1998, and Channelized WAN 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 service providers, 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.
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
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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 AFM 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 RMON 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 WAN and Frame Relay;
- FDDI/CDDI; and
- Oc3 ATM.
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
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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 (ART MIB). This
option enables our probes or agents to monitor application response
times on a given part of the network.
- VLAN 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 AFM 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 WAN to the presentation and analysis software.
This reduces consumption of costly WAN 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 OEMs, distributors,
resellers, system integrators and service providers. For the fiscal years ended
March 31, 1997, 1998 and 1999, revenue from indirect channels represented 73%,
76% and 81% of total revenue. Sales to Cisco, our largest indirect channel
partner, represented 24%, 40% and 51% of our total revenue during the same
periods.
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 substantially 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. We
believe that our North American indirect channel partners also resell a
significant amount of our products internationally.
As of March 31, 1999, our North American field sales organization consisted
of 43 employees. Our international field sales organization consisted of 10
employees with an office in the United Kingdom. In addition, we had 16 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 March 31, 1999, our business development
organization consisted of 10 employees.
Our marketing organization utilizes a variety of programs to promote the
sale and acceptance of our solutions. As of March 31, 1999, our marketing
organization consisted of 19 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 Los Alamos National Laboratory
Amoco Corporation 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 NCR
Donaldson, Lufkin & Jenrette Northwest Airlines
The GAP, Inc. Providian Financial Corp
Fidelity Investments State Street Bank and Trust
Goldman Sachs & Co. Sun Microsystems, Inc.
Harvard Pilgrim Health Care Teradyne
Lehman Brothers Toys-R-Us
Liberty Mutual Group Xerox
Lockheed Martin Financial Services
</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
A manufacturing firm with 8,400 Using our AFM solution, the The WAN was properly
employees at 75 networked company monitored its network reconfigured and, as a result,
locations in 23 countries was and identified a configuration order entry response times
experiencing sluggish order problem that originated with returned to normal, and users
entry response times which the WAN service provider. stopped complaining of slow
compromised the quality of service.
customer service.
Capacity Planning
A leading financial services Using our AFM solution, the The company identified baseline
company with 10,000 employees company was able to understand usage patterns, which helped
at 350 sites depended on its current and profile future them to intelligently plan and
network to process 200,000 capacity requirements for their implement infrastructure
online financial trades and network. expenditures. Our AFM solution
support up to 20 million Web also identified remnants of a
site hits a day. This volume software test that was slowing
caused business-critical down a remote server. As a
applications to slow down. result, the company avoided
purchasing $90,000 in
unnecessary bandwidth capacity.
Usage-based Accounting
A technology enterprise had a Using our AFM solution, the The program has just been
network with 12,500 users network operations center implemented in Europe and is
spanning 715 sites. The CEO designed a charge-back program expected to be rolled out in
wanted to economize and for network usage. The program the U.S. in June 1999. The
challenged the network was based on quantifying company anticipates substantial
operations center to control bandwidth usage and response reductions in overhead with
network costs. times by user and by network access tied to business
application throughout the goals.
network.
Application Deployment
A large aerospace defense Our AFM solution was installed The network team was able to
contractor wanted to move its to provide both confirm that the WAN had
email system from a local application-level data and adequate capacity. Our solution
server to a remote server. This network-wide bandwidth usage minimized the risks involved in
critical application had to information. The company was a major application
continue running smoothly, and able to determine the current re-deployment.
the network team was unsure if local server load and calculate
the WAN could handle the how much data would flow across
additional load. the WAN to the remote server.
</TABLE>
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SUPPORT SERVICES
We believe that providing a high level of customer service and technical
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 March 31, 1999, our support services organization consisted of 11 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 WAN Resource Monitor
1995 CDDI/FDDI, Switch Embedded --
1996 Fast Ethernet NetScout Manager Plus
1997 WAN (T3) NetScout Server, WebCast
1998 ATM --
1999 Channelized WAN, Fast EtherChannel AppScout
1999 (Planned) Gigabit Ethernet --
</TABLE>
As of March 31, 1999, our research and development organization consisted of
52 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. 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
applications 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.
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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 configure our hardware products to individual customer
requirements. We inspect, test and use statistical process control to ensure the
quality and reliability of our products. In February 1998, we obtained ISO 9001
quality systems registration, a certification showing that our procedures and
manufacturing facilities comply with standards for quality assurance and
manufacturing process control. As of March 31, 1999, our manufacturing
organization consisted of 20 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 March 31, 1999, we had 209 employees, 160 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.
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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(1).............................. 50 President, Chief Operating Officer, Secretary and Director
Charles W. Tillett............................. 42 Vice President, Finance and Administration and Chief
Financial Officer
Nathan Kalowski................................ 53 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(1)............................. 63 Director
Joseph G. Hadzima, Jr.(1)(2)................... 47 Director
Kenneth T. Schiciano(2)........................ 36 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
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
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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 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 (i) 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, (ii) 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
42
<PAGE>
(iii) 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 90,000 shares
of common stock vesting over a four-year period, at an exercise price of $2.67
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."
43
<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 (i) the Chief
Executive Officer of NetScout and (ii) the four other most highly compensated
executive officers of NetScout other than the Chief Executive Officer
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(2)
- --------------------------------------------------------------------- --------- --------- -------------------
<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>
- ------------------------
(1) NetScout did not make any restricted stock awards, grant any stock
appreciation rights or stock options or make any long-term incentive
payments during the fiscal year ended March 31, 1999 to its Named Executive
Officers. In accordance with the rules of the Securities and Exchange
Commission, the compensation set forth in the table does not include certain
perquisites and other benefits which do not exceed the lesser of $50,000 or
10% of the person's salary and bonus shown in the table.
(2) Composed of contributions to a defined contribution plan.
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.
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. 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 $ .
44
<PAGE>
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......... 175,312 1,043,107(1) -- 79,687 --
Gerald Stabile............. 21,900 56,721(2) 90,600 187,500
Michael Szabados........... 33,000 85,470(2) 102,000 225,000
</TABLE>
- ------------------------
(1) Calculated by determining the difference between the exercise price per
share and the fair market value on the date of exercise.
(2) Calculated by determining the difference between the exercise price per
share and the fair market value of $4.26 on the date of exercise, which was
also the redemption date for these shares.
STOCK PLANS
1990 STOCK OPTION PLAN. The 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 (the "Code"), 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 March 31, 1999, an aggregate of 4,640,438 shares of common
stock at a weighted average exercise price of $1.90 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 (the "1999 Stock Option Plan") was adopted by our Board of Directors and is
expected to be approved by our stockholders in April 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 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 6,750,000
shares of common stock have been reserved for issuance under the 1999 Stock
Option Plan. The maximum number of shares with respect to which awards may be
granted to any employee under the 1999 Stock Option Plan shall not exceed
1,000,000 shares of common stock during any calendar year.
The 1999 Stock Option Plan is administered by the Compensation Committee.
Subject to the provisions of the 1999 Stock Option Plan, the Compensation
Committee has the authority to select the persons to whom awards are granted and
determine the terms of each award, including the number of
45
<PAGE>
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 the unvested portion of any awards will
accelerate and become exercisable, with the remaining 75% of the 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.
1999 EMPLOYEE STOCK PURCHASE PLAN. The 1999 Employee Stock Purchase Plan
(the "1999 Purchase Plan") was adopted by our Board of Directors and is expected
to be approved by our stockholders in April 1999, to be effective upon the
closing of this offering. The 1999 Purchase Plan provides for the issuance of a
maximum of 750,000 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
(each, a "Payment Period"). The first Payment Period will commence on the
earlier to occur of (1) October 1, 1999 and (2) 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.
401(K) PLAN
We maintain a 401(k) plan qualified under Section 401 of the 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
46
<PAGE>
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.
47
<PAGE>
CERTAIN TRANSACTIONS
In February 1996, NetScout issued 631,579 shares of its Series A Preferred
Stock to Greylock Equity Limited Partnership ("Greylock"), 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 into 1,894,740 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. (the "TA Entities") 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
SECURITY SHARES AGGREGATE
NAME POSITION REDEEMED REDEEMED REDEMPTION PAYMENT
- ------------------------ ------------------------ ------------------------ ------------- -------------------
<S> <C> <C> <C> <C>
Greylock Equity Limited 5% stockholder and Series A Preferred Stock 315,789 $ 8,069,105
Partnership formerly represented on (1,894,734
the Board of Directors common stock
equivalents)
Anil K. Singhal Chairman of the Board, Voting Common Stock 3,562,124 $ 15,170,018
Chief Executive Officer
and Treasurer
Narendra Popat President, Chief Voting Common Stock 3,562,124 $ 15,170,018
Operating Officer,
Secretary and Director
Charles W. Tillett Vice President, Finance Non-Voting Common Stock 285,000 $ 1,213,730
and Administration and
Chief Financial Officer
Nathan Kalowski Vice President, Business Non-Voting Common Stock 285,000 $ 1,213,730
Development
Ashwani Singhal Vice President, Non-Voting Common Stock 528,000 $ 2,248,594
Engineering
Gerald Stabile Vice President, Non-Voting Common Stock 21,900 $ 93,266
Worldwide Sales and
Services
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
TYPE OF NUMBER OF
SECURITY SHARES AGGREGATE
NAME POSITION REDEEMED REDEEMED REDEMPTION PAYMENT
- ------------------------ ------------------------ ------------------------ ------------- -------------------
<S> <C> <C> <C> <C>
Tracy Steele Vice President, Non-Voting Common Stock 9,000 $ 38,328
Manufacturing
Michael Szabados Vice President, Non-Voting Common Stock 33,000 $ 140,537
Marketing
Ralph Lowry Former Vice President, Non-Voting Common Stock 285,000 $ 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 into an aggregate of
10,465,881 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 851,616 shares of Voting Common Stock, and Mr. Popat pledged 696,780
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 India"). Frontier India
provides consulting 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 India, is a holder
of 300,000 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 300,000 shares of Non-Voting Common Stock, Frontier India sold a
majority of its assets to Veritas Software Corporation USA, a Delaware
corporation, in February 1999.
In May 1996, NetScout Systems (UK) Limited ("NetScout UK") 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 UK. 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.
49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 31, 1999, and as adjusted to reflect
the sale of the shares of common stock offered hereby, by: (a) each beneficial
owner of more than 5% of our common stock; (b) each Named Executive Officer; (c)
each director; (d) all executive officers and directors as a group; and (e) 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 March 31, 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 OF COMMON
STOCK OUTSTANDING
NUMBER OF SHARES -----------------------
BENEFICIALLY NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED BEING OFFERED OFFERING OFFERING
- ---------------------------------------------------- ----------------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
Anil K. Singhal(1).................................. 7,844,250 + 23.2% +
Narendra Popat(2)................................... 7,844,251 + 23.2 +
Charles W. Tillett(3)............................... 675,750 + 2.0 +
Nathan Kalowski(4).................................. 651,279 + 1.9 +
Ashwani Singhal(5).................................. 1,272,000 + 3.8 +
Gerald Stabile(6)................................... 90,600 + * +
Tracy Steele(7)..................................... 77,250 + * +
Michael Szabados(8)................................. 124,500 + * +
Richard J. Egan(9).................................. -- + -- --
c/o Egan-Managed Capital, L.P.
30 Federal Street
Boston, MA 02110-2508
Joseph G. Hadzima, Jr.(10).......................... 944,892 + 2.8 +
c/o Technology Enabling Company, LLC
238 Main Street, Suite 400
Cambridge, MA 02142
Kenneth T. Schiciano(11)............................ 25,021 + 29.5 +
c/o TA Associates, Inc.
125 High Street
Boston, MA 02110
TA Entities(12)..................................... 9,996,255 + 29.5 +
c/o TA Associates, Inc.
125 High Street
Boston, MA 02110
Greylock Equity Limited Partnership................. 1,894,740 + 5.6 +
c/o Greylock Management Corporation
One Federal Street
Boston, MA 02110
All executive officers and directors as a group (11
persons)(13)...................................... 19,549,793 + 57.8% +
-----------------
</TABLE>
- ------------------------
* Less than 1% of the outstanding common stock.
+ The number of shares to be sold in this offering and the selling
stockholders have not yet been determined.
50
<PAGE>
(1) Includes an aggregate of 23,024 shares held in trust for the benefit of Mr.
Singhal's children; Mr. Singhal is one of two trustees of each such trust.
Includes 510,000 shares held by a family limited partnership of which Mr.
and Mrs. Singhal are the general and limited partners. Does not include
593,625 shares held in a grantor retained annuity trust for the benefit of
Mr. Singhal.
(2) Includes 204,084 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 510,000 shares held by a family limited partnership of which
Mr. and Mrs. Popat are the general and limited partners. Does not include
593,625 shares held in a grantor retained annuity trust for the benefit of
Mr. Popat; Mr. Hadzima is the sole trustee of such trust.
(3) Includes 15,938 shares issuable upon exercise of options exercisable within
60 days of March 31, 1999. Excludes 63,750 shares issuable upon the exercise
of options that become exercisable upon the closing of this offering.
(4) Does not include 88,221 shares held in trusts for the benefit of Mr.
Kalowski's children.
(5) Includes 60,450 shares owned by Mr. Singhal's wife.
(6) Consists of shares issuable upon the exercise of options exercisable within
60 days of March 31, 1999. Excludes 18,750 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 March 31, 1999.
(8) Consists of shares issuable upon the exercise of options exercisable within
60 days of March 31, 1999.
(9) Egan-Managed Capital, L.P. owns 469,626 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 16,875 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1999. Includes 204,084 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 593,625 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
79,992 shares held in trust for the benefit of Mr. Hadzima's children.
(11) Consists of shares in 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 8,150,220 shares held by TA/Advent VIII, L.P., of which
shares are being offered hereby; 1,528,176 shares held by Advent Atlantic &
Pacific III, L.P., of which shares are being offered hereby; 154,854
shares held by TA Executives Fund, LLC, of which shares are being
offered hereby; and 163,005 shares held by TA Investors, LLC, of which
shares are being offered hereby. TA/Advent VIII, L.P., Advent Atlantic
& 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 & Pacific III,
L.P. is TA Associates AAP III, L.P. TA Associates, Inc. is the general
partner of TA Associates AAP III, 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. 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) Includes an aggregate of 325,162 shares issuable upon exercise of options
exercisable within 60 days of March 31, 1999. Excludes 82,500 shares
issuable upon exercise of options that become exercisable upon the closing
of this offering.
If the underwriter's over-allotment option is exercised in full, NetScout
will sell an additional shares and the following selling stockholders will
sell an additional shares:
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<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 March 31, 1999, there were 33,843,258 shares of common stock
outstanding and held of record by 66 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 March 31, 1999 and giving effect to the issuance of
the shares of common stock offered by NetScout hereby, there will be
shares of common stock outstanding upon the closing of this offering. In
addition, as of March 31, 1999, there were outstanding stock options for the
purchase of a total of 4,640,438 shares of Non-Voting Common Stock which upon
the closing of the offering will be automatically converted into options to
purchase an aggregate of 4,640,438 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
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<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 (the "Registration Rights Holders") of 10,465,881
shares of common stock (after giving effect to the conversion of the Class B
Common Stock) (the "Registrable Shares") 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 (the
"Charter"), NetScout's Amended and Restated By-Laws (the "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
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<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 (the
"Notice Procedure"). The 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.
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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 (based on shares outstanding as of March
31, 1999), NetScout will have outstanding an aggregate of shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options. Of these shares, the 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 (an "Affiliate").
The remaining shares of common stock held by existing stockholders
are "restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares") or are subject to the contractual
restrictions described below. Of these restricted securities:
- 83,100 shares may be sold immediately after completion of this offering;
- 392,974 additional shares may be sold 90 days after the effective date of
this offering;
- 20,901,303 additional shares may be sold upon expiration of the 180-day
lock-up agreement; and
- 10,465,881 additional shares may be sold commencing on January 15, 2000.
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 Credit Suisse First Boston Corporation. Credit Suisse First Boston
Corporation 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, Credit Suisse
First Boston Corporation 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 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.
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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
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 (the "Exchange Act"). 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 Exchange Act, 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 Credit Suisse
First Boston Corporation, subject to certain limited exceptions.
Following the offering, NetScout intends to file registration statements
under the Securities Act covering approximately 12,140,438 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."
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom
Credit Suisse First Boston Corporation, Bear, Stearns & Co. Inc., BT Alex. Brown
Incorporated 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>
Credit Suisse First Boston Corporation.....................................
Bear, Stearns & Co. Inc....................................................
BT Alex. Brown Incorporated................................................
Dain Rauscher Wessels......................................................
-----------------
Total..................................................................
-----------------
-----------------
</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>
NetScout and 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 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 (who may include the underwriters) 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.
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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 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 Credit Suisse First Boston Corporation 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 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 certain 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.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that NetScout prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to NetScout and the dealer from whom
such purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (2) where required
by law, that such purchaser is purchasing as principal and not as agent, and (3)
such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to the offering. Such a report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from NetScout. Only one such
report must be filed in respect of common stock acquired on the same date and
under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
Legislation.
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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 (the
"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. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of the contract
or document filed as an exhibit to the registration statement, and each such
statement is qualified in all respects by reference to such exhibit. 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.
61
<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................................................... F-3
Consolidated Statement of Income for the years ended March 31, 1997, 1998 and 1999......................... F-4
Consolidated Statement of Redeemable Convertible Common Stock and Stockholders' Equity (Deficit) for the
years ended March 31, 1997, 1998 and 1999................................................................ F-5
Consolidated Statement of Cash Flows for the years ended March 31, 1997, 1998 and 1999..................... 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.
The three-for-two stock split authorized on April 14, 1999 described in Note 8
to the consolidated financial statements has not been consummated at May 4,
1999. When it has been consummated, we will be in a position to furnish the
following report:
"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
April 27, 1999
F-2
<PAGE>
NETSCOUT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, PRO FORMA
-------------------- MARCH 31,
1998 1999 1999
--------- --------- -----------
<S> <C> <C> <C>
(NOTE 2)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 6,341 $ 25,477 $ 25,477
Marketable securities.......................................................... 8,834 -- --
Accounts receivable, net of allowance for doubtful accounts and returns of
$1,063 and $1,036 at March 31, 1998 and 1999, respectively................... 4,295 6,550 6,550
Inventories.................................................................... 3,054 3,165 3,165
Refundable income taxes........................................................ 708 217 217
Deferred income taxes.......................................................... 1,191 1,088 1,088
Prepaids and other current assets.............................................. 560 821 821
--------- --------- -----------
Total current assets......................................................... 24,983 37,318 37,318
Fixed assets, net................................................................ 3,841 4,227 4,227
Notes receivable--stockholders................................................... 2,000 2,000 2,000
Deferred income taxes............................................................ 396 321 321
--------- --------- -----------
Total assets................................................................. $ 31,220 $ 43,866 $ 43,866
--------- --------- -----------
--------- --------- -----------
LIABILITIES, REDEEMABLE CONVERTIBLE COMMON STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 2,951 $ 3,945 $ 3,945
Accrued compensation........................................................... 2,690 3,539 3,539
Accrued other.................................................................. 403 865 865
Customer deposits.............................................................. 1,246 34 34
Deferred revenue............................................................... 3,530 4,254 4,254
--------- --------- -----------
Total current liabilities.................................................... 10,820 12,637 12,637
--------- --------- -----------
Commitments and contingencies (Note 12)
Redeemable convertible common stock:
Class B redeemable convertible common stock, $0.001 par value; 6,977,254 shares
authorized, issued and outstanding at March 31, 1999; no shares issued or
outstanding at March 31, 1999 on a pro forma basis (unaudited)............... -- 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, 631,579 and 315,790 shares
outstanding at March 31, 1998 and 1999, respectively; no shares issued or
outstanding at March 31, 1999 on a pro forma basis (unaudited)............... 5,964 5,964 --
Common stock, $0.001 par value:
Voting, 33,589,436 shares authorized, 24,000,000 shares issued, and
24,000,000 and 16,875,751 shares outstanding at March 31, 1998 and 1999,
respectively; 44,309,142 shares issued and 33,843,258 shares outstanding at
March 31, 1999 on a pro forma basis (unaudited)............................ 24 24 44
Non-voting, 10,612,182 shares authorized, 5,412,000 and 6,053,787 shares
issued and 5,412,000 and 4,606,886 shares outstanding at March 31, 1998 and
1999, respectively; no shares issued or outstanding at March 31, 1999 on a
pro forma basis (unaudited)................................................ 5 6 --
Additional paid-in capital................................................... 896 2,133 52,244
Deferred compensation............................................................ (672) (1,312) (1,312)
Treasury stock................................................................... -- (44,394) (44,394)
Retained earnings................................................................ 14,183 24,647 24,647
--------- --------- -----------
Total stockholders' equity (deficit)......................................... 20,400 (12,932) 31,229
--------- --------- -----------
Total liabilities, redeemable convertible common stock and
stockholders' equity (deficit)............................................. $ 31,220 $ 43,866 $ 43,866
--------- --------- -----------
--------- --------- -----------
</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>
YEAR ENDED MARCH 31,
----------------------------------------
<S> <C> <C> <C>
1997 1998 1999
------------ ------------ ------------
Revenue:
Product............................................................... $ 25,159 $ 34,990 $ 50,374
Service............................................................... 3,888 5,143 8,710
License and royalty................................................... 1,601 2,696 8,467
------------ ------------ ------------
Total revenue....................................................... 30,648 42,829 67,551
------------ ------------ ------------
Cost of revenue:
Product............................................................... 9,427 12,638 19,250
Service............................................................... 528 784 1,235
------------ ------------ ------------
Total cost of revenue............................................... 9,955 13,422 20,485
------------ ------------ ------------
Gross margin............................................................ 20,693 29,407 47,066
------------ ------------ ------------
Operating expenses:
Research and development.............................................. 3,003 5,129 7,526
Sales and marketing................................................... 6,778 13,583 20,375
General and administrative............................................ 1,815 2,950 3,804
------------ ------------ ------------
Total operating expenses............................................ 11,596 21,662 31,705
------------ ------------ ------------
Income from operations.................................................. 9,097 7,745 15,361
Interest income......................................................... 471 750 929
Interest expense........................................................ (10) (7) (3)
------------ ------------ ------------
Income before provision for income taxes................................ 9,558 8,488 16,287
Provision for income taxes.............................................. 3,640 3,056 5,823
------------ ------------ ------------
Net income.............................................................. $ 5,918 $ 5,432 $ 10,464
------------ ------------ ------------
------------ ------------ ------------
Basic net income per share.............................................. $ 0.21 $ 0.19 $ 0.38
Diluted net income per share............................................ $ 0.17 $ 0.16 $ 0.29
Shares used in computing:
Basic net income per share............................................ 28,514,402 28,933,752 27,878,514
Diluted net income per share.......................................... 34,377,926 34,748,294 35,558,998
Unaudited pro forma basic net income per share.......................... $ 0.31
Unaudited pro forma diluted net income per share........................ $ 0.29
Shares used in computing:
Unaudited pro forma basic net income per share........................ 33,450,787
Unaudited pro forma diluted net income per share...................... 35,558,998
</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 24,000,000 $ 24 5,356,800
Deferred compensation related to
stock options granted............
Issuance of common stock pursuant
to exercise of options........... 26,400
Amortization of deferred
compensation.....................
Net income.........................
--------- --------- --------- ----------- --------- --- ---------
Balance, March 31, 1997............ -- -- 631,579 5,964 24,000,000 24 5,383,200
Deferred compensation related to
stock options granted............
Issuance of common stock pursuant
to exercise of options........... 28,800
Amortization of deferred
compensation.....................
Net income.........................
--------- --------- --------- ----------- --------- --- ---------
Balance, March 31, 1998............ -- -- 631,579 5,964 24,000,000 24 5,412,000
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........... 641,787
Amortization of deferred
compensation.....................
Net income.........................
--------- --------- --------- ----------- --------- --- ---------
Balance, March 31, 1999............ 6,977,254 44,161 631,579 5,964 24,000,000 24 6,053,787
Conversion of issued shares into
voting common stock
(unaudited)...................... (6,977,254) (44,161) (631,579) (5,964) 20,309,142 20 (6,053,787)
--------- --------- --------- ----------- --------- --- ---------
Balance, March 31, 1999 on a pro
forma basis (unaudited).......... -- $ -- -- $ -- 44,309,142 $ 44 --
--------- --------- --------- ----------- --------- --- ---------
--------- --------- --------- ----------- --------- --- ---------
<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............ $ 5 $ 70 $ (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............ 5 238 (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............ 5 896 (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........... 1 254 255
Amortization of deferred
compensation..................... 343 343
Net income......................... 10,464 10,464
--- ----------- ------------- --------- ----------- -------------
Balance, March 31, 1999............ 6 2,133 (1,312) (44,394) 24,647 (12,932)
Conversion of issued shares into
voting common stock
(unaudited)...................... (6) 50,111 44,161
--- ----------- ------------- --------- ----------- -------------
Balance, March 31, 1999 on a pro
forma basis (unaudited).......... $ -- $ 52,244 $ (1,312) $ (44,394) $ 24,647 $ 31,229
--- ----------- ------------- --------- ----------- -------------
--- ----------- ------------- --------- ----------- -------------
</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>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1997 1998 1999
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 5,918 $ 5,432 $ 10,464
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 1,171 1,470 2,069
Loss on disposal of fixed assets................................................ 78 171 70
Compensation expense associated with equity awards.............................. 40 137 343
Deferred income taxes........................................................... (848) (504) 178
Changes in assets and liabilities:
Accounts receivable........................................................... 1,480 (2,103) (2,255)
Inventories................................................................... (773) (780) (111)
Refundable income taxes....................................................... -- (708) 491
Prepaids and other current assets............................................. (82) (357) (261)
Accounts payable.............................................................. (405) 1,768 994
Accrued expenses.............................................................. 1,022 966 1,311
Income taxes payable.......................................................... (1,122) (84) --
Customer deposits............................................................. 1,227 (16) (1,212)
Deferred revenue.............................................................. 693 1,292 724
--------- --------- ---------
Net cash provided by operating activities..................................... 8,399 6,684 12,805
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities................................................. (5,841) (2,993) --
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)
--------- --------- ---------
Net cash (used) provided by investing activities.............................. (9,685) (6,879) 6,309
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of non-voting common stock................................. 2 22 255
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
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents................................ (1,284) (173) 19,136
Cash and cash equivalents, beginning of year........................................ 7,798 6,514 6,341
--------- --------- ---------
Cash and cash equivalents, end of year.............................................. $ 6,514 $ 6,341 $ 25,477
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................................ $ 10 $ 7 $ 3
Cash paid for income taxes........................................................ 4,340 4,351 5,158
</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 an integrated family of products that enable businesses and service
providers to manage the performance of computer networks and important business
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 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. Revenue from support agreements is deferred and
recognized ratably over the support period. Revenue from installation and
training is recognized as the work is performed.
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)
License and royalty revenue consists primarily of royalties paid under
license agreements by OEMs 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 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
Concentration of credit risk is limited as NetScout sells its products to a
large number of customers in many different industries and geographic areas. At
March 31, 1999, two customers accounted for approximately 23% and 12%,
respectively, of NetScout's accounts receivable. 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.
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.
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.
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
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)
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 shares of
Series A Preferred Stock, Class B Convertible Common Stock and Non-Voting Common
Stock will automatically convert into 3,789,474, 10,465,881 and 6,053,787
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 March 31, 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 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.
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)
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 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,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Raw materials.............................................................. $ 2,482 $ 2,620
Work-in-process............................................................ 259 348
Finished goods............................................................. 313 197
--------- ---------
$ 3,054 $ 3,165
--------- ---------
--------- ---------
</TABLE>
F-10
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL MARCH 31,
LIFE --------------------
IN YEARS 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Furniture and fixtures......................................... 3-7 $ 788 $ 890
Computer equipment and purchased software...................... 3 2,815 4,556
Demonstration units............................................ 2 971 1,228
Leasehold improvements......................................... 5 1,815 1,831
--------- ---------
6,389 8,505
Less--accumulated depreciation and amortization................ 2,548 4,278
--------- ---------
$ 3,841 $ 4,227
--------- ---------
--------- ---------
</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
1,548,396 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.
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>
YEAR ENDED MARCH 31,
----------------------------------------
<S> <C> <C> <C>
1997 1998 1999
------------ ------------ ------------
Weighted average number of shares outstanding........................... 28,514,402 28,933,752 27,878,514
Shares attributable to Class B Convertible Common Stock................. -- -- 2,176,903
Shares attributable to Series A Preferred Stock......................... 3,789,474 3,789,474 3,395,369
Shares attributable to restricted Non-Voting Common Stock............... 823,104 440,430 34,153
Stock options........................................................... 1,250,946 1,584,638 2,074,059
------------ ------------ ------------
Shares used in computing diluted net income per share................... 34,377,926 34,748,294 35,558,998
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-11
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. NET INCOME PER SHARE (CONTINUED)
Stock options to purchase 185,400, 98,051, and 110,977 shares of Non-Voting
Common Stock for the years ended March 31, 1997, 1998 and 1999, 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 ($4.26 per common equivalent) 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:
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 and one-half shares 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 $8.53 or (ii) into
Voting Common Stock upon the
F-12
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. CAPITAL STOCK (CONTINUED)
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 six 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 $3.17, or (ii) into Voting Common Stock at such time upon
the election of holders of not less than two-thirds of the then outstanding
Series A Preferred Stock, when NetScout's common stock is registered under
Section 12(g) of the Securities Exchange Act of 1934 or (iii) into Non-Voting
Common Stock upon the election of holders of not less than two-thirds of the
then outstanding Series A Preferred Stock.
REDEMPTION
The holders of not less than a majority of the outstanding shares of Class B
Convertible Common Stock may require NetScout to redeem 33.3%, 66.7% and 100% of
their outstanding shares on January 15, 2004, 2005 and 2006, respectively. The
redemption amount per share will be equal to the sum of $6.39 plus all declared
but unpaid dividends. For the year ended March 31, 1999, accretion of the Class
B Convertible Common Stock issuance costs was not material.
NON-VOTING COMMON STOCK
Shares of Non-Voting Common Stock are automatically convertible into shares
of Voting Common Stock upon the closing of an initial public offering.
RESTRICTION AGREEMENT
In August 1995, NetScout issued 300,000 shares of restricted Non-Voting
Common Stock to a related party in exchange for services to be performed. The
shares were scheduled to become unrestricted 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
restriction agreement allowing the shares to become unrestricted 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.
In April 1999, NetScout authorized a three-for-two 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.
F-13
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. CAPITAL STOCK (CONTINUED)
TREASURY STOCK
In January 1999, NetScout repurchased 7,124,249 shares of Voting Common
Stock and 1,446,901 shares of Non-Voting Common Stock for $4.26 per share and
315,789 shares of Series A Preferred Stock for $25.55 per share ($4.26 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 63,900 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.
RESERVED SHARES
NetScout has reserved 6,053,413 shares of Non-Voting Common Stock for
issuance under the 1990 Stock Option Plan (Note 9). NetScout has also reserved
26,362,555 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 3,789,474 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 Common Stock,
$0.001 par value per share, to 150,000,000 shares.
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 6,771,999 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
F-14
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCK PLANS (CONTINUED)
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 6,750,000 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
750,000 shares of common stock.
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................................................................ 998,250 $ .07
Granted (weighted average fair value of $.29 per share).................................. 2,106,750 .94
Exercised................................................................................ (26,400) .08
Canceled................................................................................. (81,000) .32
----------
Outstanding--March 31, 1997................................................................ 2,997,600 .67
Granted (weighted average fair value of $.53 and $1.09 per share for options with
exercise prices equal to and less than the market price, respectively,
at the date of grant).................................................................. 1,794,000 1.91
Exercised................................................................................ (28,800) .87
Canceled................................................................................. (345,900) 1.45
----------
Outstanding--March 31, 1998................................................................ 4,416,900 1.11
Granted (weighted average fair value of $.66 and $3.02 per share for options with
exercise prices equal to and less than the market price, respectively, at the date of
grant)................................................................................. 1,581,000 3.34
Exercised................................................................................ (641,787) .39
Canceled................................................................................. (715,675) 1.56
----------
Outstanding--March 31, 1999................................................................ 4,640,438 1.90
----------
----------
</TABLE>
F-15
<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)
$.002 to 1.00........................................ 1,548,863 6.7 $ .51
1.17 to 1.67........................................ 1,260,544 8.2 1.66
2.67 to 3.33........................................ 1,272,281 9.1 2.80
4.00 to 4.33........................................ 558,750 9.8 4.27
-----------
4,640,438 8.1 1.90
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE PRICE
- ----------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
$.002 to 1.00......................................................... 999,752 $ .45
1.17 to 1.67......................................................... 529,488 1.65
2.67 to 3.33......................................................... 229,318 2.73
4.00 to 4.33......................................................... 15,384 4.28
----------
1,773,942
----------
----------
</TABLE>
As of March 31, 1997 and 1998, 406,140 and 1,035,960 options were
exercisable, respectively, under the 1990 Stock Option Plan. As of March 31,
1999, there were 1,412,975 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 $ 10,464
Pro forma..................................................... $ 5,824 $ 5,208 $ 10,107
Basic net income per share:
As reported................................................... $ .21 $ .19 $ .38
Pro forma..................................................... $ .20 $ .18 $ .36
Diluted net income per share:
As reported................................................... $ .17 $ .16 $ .29
Pro forma..................................................... $ .17 $ .15 $ .28
</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 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 498,000 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 60,000 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 24,000 options vested. For the year ended March 31, 1999, NetScout
recorded $105 of compensation expense related to these options.
In September 1997, NetScout granted 777,000 options to purchase Non-Voting
Common Stock at $1.67 per share to employees. At the grant date, NetScout
estimated the fair value of the common stock to be $2.33 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 458,250 options to purchase Non-Voting
Common Stock at $4.33 per share to employees. At the grant date, NetScout
estimated the fair value of the common stock to be $6.45 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 $12.60 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-17
<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) 72
State.......................................................... (127) (78) 106
--------- --------- ---------
(848) (504) 178
--------- --------- ---------
$ 3,640 $ 3,056 $ 5,823
--------- --------- ---------
--------- --------- ---------
</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......................................................... 226 434
Fixed assets............................................................. 335 327
Deferred revenue......................................................... 479 74
Other.................................................................... 61 16
--------- ---------
$ 1,587 $ 1,409
--------- ---------
--------- ---------
</TABLE>
F-18
<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 in
December 1998. Based on the information available to date, NetScout believes
that the claim is without merit and intends to vigorously defend this claim. As
this matter is at a preliminary stage, NetScout is unable to predict the outcome
or the amount of related expense or loss, if any.
In addition to the matter noted above, from time to time NetScout is subject
to legal proceedings and claims in the ordinary course of business. In the
opinion of management, the amount of ultimate expense with respect to any other
current legal proceedings and claims will not have a material adverse effect on
NetScout's financial position or results of operations.
F-19
<PAGE>
NETSCOUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
MARCH 31,
-------------------------------
<S> <C> <C> <C>
1997 1998 1999
--------- --------- ---------
North America................................................ $ 26,823 $ 37,518 $ 59,619
Other international.......................................... 3,825 5,311 7,932
--------- --------- ---------
$ 30,648 $ 42,829 $ 67,551
--------- --------- ---------
--------- --------- ---------
</TABLE>
Substantially all of NetScout's identifiable assets are located in the
United States.
F-20
<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
Allowance for doubtful accounts and returns.......... $ 197,000 3,019,000 1,523,000 $1,693,000
Year ended March 31, 1998
Reserves and allowances deducted from asset accounts
Allowance for doubtful accounts and returns.......... $ 1,693,000 (249,000) 381,000 $1,063,000
Year ended March 31, 1999
Reserves and allowances deducted from asset accounts
Allowance for doubtful accounts and returns.......... $ 1,063,000 60,000 87,000 $1,036,000
</TABLE>
S-1
<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 (the "Securities Act"). 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 (the "Class B Common
Stock"), 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 Common Stock will automatically convert into
10,465,881 shares of common stock.
II-1
<PAGE>
In February 1996, NetScout issued 631,579 shares of its Series A Preferred
Stock, par value $0.001 per share (the "Series A Preferred"), to Greylock Equity
Limited Partnership ("Greylock"), at 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. Upon closing of this offering, the 315,790
shares of outstanding Series A Preferred will automatically convert into an
aggregate of 1,894,740 shares of common stock.
(b) Grants and Exercises of Stock Options
As of March 31, 1999, the Company has outstanding options to purchase an
aggregate of 4,640,438 shares of Non-Voting Common Stock under the 1990 Stock
Option Plan exercisable at a weighted average exercise price of $1.90 per share.
From April 1, 1996 to March 31, 1999, the Company issued 696,986 shares of
Non-Voting Common Stock for an aggregate purchase price of $278,982 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* 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, 1999 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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
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++ Project Development and License Agreement dated as of July 13, 1994 by and between Cisco Systems,
Inc. ("Cisco") and NetScout.
+10.11++ Amendment No. 1 to the Project Agreement and Design License Agreement dated as of January 4, 1995
by and between Cisco and NetScout.
+10.12++ Private Label Agreement effective as of October 17, 1995 by and between Cisco and NetScout.
+10.13++ Amendment to Private Label Agreement and Project Development and License Agreement dated May 15,
1996 by and between Cisco and NetScout.
+10.14++ Amendment No. 3 to the Private Label Agreement and Project Development and License Agreement by and
between Cisco and NetScout.
+10.15++ Amendment No. 4 to Private Label Agreement and Project Development and License Agreement effective
as of February 23, 1998 by and between Cisco and NetScout.
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.
</TABLE>
- ------------------------
* To be filed by amendment.
** 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.
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. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Westford, Massachusetts on May 4, 1999.
NETSCOUT SYSTEMS, INC.
By: /s/ Charles W. Tillett
------------------------------------------
Charles W. Tillett
VICE PRESIDENT, FINANCE AND ADMINSTRATION
AND CHIEF FINANCIAL OFFICER
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
- ------------------------------ --------------------------- -------------------
Chief Executive Officer and May 4, 1999
* Chairman of the Board
---------------------------- (Principal Executive
Anil K. Singhal Officer)
* President, Chief Operating May 4, 1999
---------------------------- Officer and Director
Narendra Popat
Vice President, Finance and May 4, 1999
/s/ CHARLES W. TILLETT Administration and Chief
---------------------------- Financial Officer
Charles W. Tillett (Principal Financial and
Accounting Officer)
* Director May 4, 1999
----------------------------
Joseph G. Hadzima, Jr.
* Director May 4, 1999
----------------------------
Kenneth T. Schiciano
* Director May 4, 1999
----------------------------
Richard J. Egan
<TABLE>
<S> <C> <C> <C>
*By: /s/ CHARLES W. TILLETT
-------------------------
Charles W. Tillett
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
1.1* 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, 1999 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++ Project Development and License Agreement dated as of July 13, 1994 by and between Cisco Systems,
Inc. ("Cisco") and NetScout.
+10.11++ Amendment No. 1 to the Project Agreement and Design License Agreement dated as of January 4, 1995
by and between Cisco and NetScout.
+10.12++ Private Label Agreement effective as of October 17, 1995 by and between Cisco and NetScout.
+10.13++ Amendment to Private Label Agreement and Project Development and License Agreement dated May 15,
1996 by and between Cisco and NetScout.
+10.14++ Amendment No. 3 to the Private Label Agreement and Project Development and License Agreement by and
between Cisco and NetScout.
+10.15++ Amendment No. 4 to Private Label Agreement and Project Development and License Agreement effective
as of February 23, 1998 by and between Cisco and NetScout.
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.
</TABLE>
- ------------------------
* To be filed by amendment.
** 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.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 27, 1999
relating to the consolidated financial statements of NetScout Systems, Inc.,
which appears in such Prospectus. We also consent to the application of such
report to the Financial Statement Schedule for the three years ended March
31, 1999 listed under Item 16(b) of this Registration Statement when such
schedule is read in conjunction with the consolidated financial statements
referred to in our report. The audits referred to in such report also
included this schedule. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 4, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> MAR-31-1999 DEC-31-1998
<PERIOD-START> APR-01-1998 APR-01-1998
<PERIOD-END> MAR-31-1999 DEC-31-1998
<CASH> 25,477 22,024
<SECURITIES> 0 0
<RECEIVABLES> 7,586 8,139
<ALLOWANCES> 1,036 1,021
<INVENTORY> 3,165 2,632
<CURRENT-ASSETS> 37,318 33,457
<PP&E> 8,505 8,062
<DEPRECIATION> 4,278 3,770
<TOTAL-ASSETS> 43,866 40,195
<CURRENT-LIABILITIES> 12,637 11,677
<BONDS> 0 0
44,161 0
5,964 5,964
<COMMON> 30 30
<OTHER-SE> (18,926) 22,524
<TOTAL-LIABILITY-AND-EQUITY> 43,866 28,518
<SALES> 50,374 36,737
<TOTAL-REVENUES> 67,551 48,880
<CGS> 20,485 14,452
<TOTAL-COSTS> 52,190 37,231
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 926 667
<INCOME-PRETAX> 16,287 12,316
<INCOME-TAX> 5,823 4,435
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,464 7,881
<EPS-PRIMARY> .38 .27
<EPS-DILUTED> .29 .22
</TABLE>
