<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to ______________
Commission file number 0000-26251
------------------------------
NETSCOUT SYSTEMS, INC.
(Exact name of registrant as specified in charter)
Delaware 04-2837575
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
4 Technology Park Drive, Westford, MA 01886
(978) 614-4000
------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
---------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
The number of shares outstanding of the registrant's common stock as of
November 7, 2000 was 29,303,706.
<PAGE>
NETSCOUT SYSTEMS, INC.
FORM 10Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements 3
a.) Consolidated Balance Sheets:
As of September 30, 2000 and March 31, 2000
b.) Condensed Consolidated Statements of Income:
For the three and six months ended September 30, 2000
and September 30, 1999
c.) Consolidated Statements of Cash Flows:
For the six months ended September 30, 2000 and
September 30, 1999
d.) Notes to the Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBIT INDEX 26
<PAGE>
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
NetScout Systems, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................................................................... $37,204 $48,515
Marketable securities ................................................................................... 17,785 21,807
Accounts receivable, net of allowance for doubtful accounts and returns of $809 and $754 at September 30,
2000 and March 31, 2000, respectively ................................................................. 13,237 10,390
Inventories ............................................................................................. 3,634 3,131
Refundable income taxes ................................................................................. 274 1,899
Deferred income taxes ................................................................................... 1,164 1,022
Prepaids and other current assets ....................................................................... 3,878 3,728
----------------------
Total current assets ............................................................................. 77,176 90,492
Fixed assets, net ....................................................................................... 6,887 5,657
Intangible assets, net .................................................................................. 46,442 --
Deferred income taxes ................................................................................... 4,652 599
----------------------
Total assets ..................................................................................... $135,157 $96,748
======================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ........................................................................................ $3,417 $2,789
Accrued compensation .................................................................................... 3,631 3,673
Accrued other ........................................................................................... 2,295 2,448
Customer deposits ....................................................................................... 24 78
Deferred revenue ........................................................................................ 8,608 6,638
----------------------
Total current liabilities ........................................................................ 17,975 15,626
----------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
5,000,000 shares authorized, no shares issued or outstanding at
September 30, 2000 and March 31, 2000 ............................................................... -- --
Common stock, $0.001 par value:
150,000,000 shares authorized, 33,173,765 shares issued and 29,196,511 shares outstanding
at September 30, 2000; 30,697,697 shares issued and 26,720,443
shares outstanding at March 31, 2000 ................................................................ 33 31
Additional paid-in capital .............................................................................. 104,045 67,366
Deferred compensation ................................................................................... (4,800) (636)
Treasury stock .......................................................................................... (25,306) (25,306)
Retained earnings ....................................................................................... 43,210 39,667
----------------------
Total stockholders' equity ....................................................................... 117,182 81,122
----------------------
Total liabilities and stockholders' equity ....................................................... $135,157 $96,748
======================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
NetScout Systems, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Product ................................ $20,790 $13,541 $38,551 $26,355
Service ................................ 4,427 3,099 8,404 5,564
License and royalty .................... 3,602 3,664 7,033 7,456
-----------------------------------------
Total revenue .................. 28,819 20,304 53,988 39,375
-----------------------------------------
Cost of revenue:
Product ................................ 7,262 5,086 13,356 9,900
Service ................................ 857 397 1,451 801
-----------------------------------------
Total cost of revenue .......... 8,119 5,483 14,807 10,701
-----------------------------------------
Gross margin ................................ 20,700 14,821 39,181 28,674
-----------------------------------------
Operating expenses:
Research and development ............... 3,818 2,386 6,380 4,604
Sales and marketing .................... 10,197 6,644 18,864 12,629
General and administrative ............. 2,347 1,146 3,939 2,079
Stock-based compensation ............... 576 155 649 246
Amortization of intangible assets ...... 2,666 -- 2,666 --
In-process research and development .... 268 -- 268 --
-----------------------------------------
Total operating expenses ....... 19,872 10,331 32,766 19,558
-----------------------------------------
Income from operations ...................... 828 4,490 6,415 9,116
Interest income, net ........................ 1,108 504 2,142 776
-----------------------------------------
Income before provision for income taxes .... 1,936 4,994 8,557 9,892
Provision for income taxes .................. 2,697 1,800 5,014 3,564
-----------------------------------------
Net income (loss) ........................... ($761) $3,194 $3,543 $6,328
=========================================
Basic net income (loss) per share ........... ($0.03) $0.16 $0.13 $0.36
Diluted net income (loss) per share ......... ($0.03) $0.12 $0.12 $0.25
Shares used in computing :
Basic net income (loss) per share ...... 28,585 20,556 27,561 17,461
Diluted net income (loss) per share .... 28,585 26,575 28,955 25,749
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
NetScout Systems, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $3,543 $6,328
Adjustments to reconcile net income to net cash provided by
operating activities net of effects of acquisition of
NextPoint:
Depreciation and amortization ............................... 1,753 1,254
Amortization of intangible assets ........................... 2,666 --
In-process research and development ......................... 268 --
Loss on disposal of fixed assets ............................ 55 43
Compensation expense associated with equity awards .......... 649 246
Deferred income taxes ....................................... 431 --
Changes in assets and liabilities:
Accounts receivable .................................... (1,635) (2,879)
Inventories ............................................ (503) 386
Refundable income taxes ................................ 1,625 148
Prepaids and other current assets ...................... 33 (1,879)
Accounts payable ....................................... 199 (417)
Accrued expenses ....................................... (1,098) 245
Customer deposits ...................................... (54) --
Deferred revenue ....................................... 1,676 817
-------------------
Net cash provided by operating activities .............. 9,542 4,292
-------------------
Cash flows from investing activities:
Purchase of marketable securities ................................ (18,577) (14,622)
Proceeds from maturity of marketable securities .................. 22,599 --
Purchase of fixed assets ......................................... (2,397) (2,494)
Cash paid for acquisition of NextPoint, net of cash received ..... (22,914) --
-------------------
Net cash used in investing activities ................... (21,289) (17,116)
-------------------
Cash flows from financing activities:
Proceeds from issuance of common stock ........................... 1,655 29,901
Purchase of treasury stock ....................................... -- 2,000
Repayment of notes payable ....................................... 1,219 --
-------------------
Net cash provided by financing activities................ 436 31,901
-------------------
Net increase (decrease) in cash and cash equivalents ............. (11,311) 19,077
Cash and cash equivalents, beginning of year ..................... 48,515 25,477
-------------------
Cash and cash equivalents, end of period ......................... $37,204 $44,554
===================
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................... $35 $3
Cash paid for income taxes ....................................... 2,400 3,429
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
NetScout Systems, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements as of September 30,
2000 and for the three and six months ended September 30, 2000 and 1999 are
unaudited. In the opinion of NetScout's management, the September 30, 2000 and
1999 unaudited interim consolidated financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for that
period. The results of operations for the three and six month periods ended
September 30, 2000 are not necessarily indicative of the results of operations
for the year ended March 31, 2001.
The balance sheet at March 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information refer to the consolidated financial statements and
footnotes thereto included in NetScout's Annual Report on Form 10-K for the year
ended March 31, 2000, as filed with the Securities and Exchange Commission on
June 23, 2000.
2. 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 September 30, 2000 and
March 31, 2000, any unrealized gains or losses were not significant.
3. Inventories
Inventories consist of the following (in thousands):
September 30, March 31,
2000 2000
---- ----
Raw materials ...................... $2,668 $2,371
Work-in-process .................... 403 476
Finished goods ..................... 563 284
-----------------------------
$3,634 $3,131
=============================
<PAGE>
4. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following (in
thousands):
September 30, Estimated
2000 Lives
---- -----
Goodwill ................................. $45,142 5
Customer base ............................ 1,100 3
Assembled workforce....................... 700 2
Completed Technology ..................... 2,165 3
-------
49,107
Less accumulated amortization ............ 2,933
-------
Total .................................... $46,442
=======
Goodwill and other intangible assets will be amortized as follows (in
thousands):
Six months ending March 31, 2001 ................... $5,185
2002 ............................................. 10,467
2003 ............................................. 10,204
2004 ............................................. 9,301
2005 ............................................. 9,028
2006 ............................................. 2,257
-------
Total ............................................ $46,442
=======
5. Acquisition
In July 2000, NetScout acquired all of the outstanding common and
preferred stock of NextPoint Networks, Inc. ("NextPoint") in exchange for
1,831,518 shares of NetScout common stock and $19.6 million in cash. NetScout
also issued options and warrants exercisable for 298,647 shares of NetScout
common stock in exchange for all outstanding options and warrants exercisable
for NextPoint common stock. The value of the acquisition was $53.1 million
based on the fair value of the consideration paid plus direct acquisition
costs. The acquisition was accounted for using the purchase method. In
addition, 267,602 shares of NetScout common stock have been reserved and will
be released during a two-year period subsequent to the acquisition to two
founding shareholders of NextPoint as they continue employment by NetScout.
NetScout recorded $4.0 million as deferred compensation related to these
reserved shares, which will be amortized to stock-based compensation expense
over the two-year period of employment. Accordingly, the results of
operations of NextPoint subsequent to July 7, 2000 have been included in
NetScout's statements of operations for the three and six months ended
September 30, 2000. The preliminary purchase price allocation is as follows
(in thousands):
Tangible net assets $3,709
Intangible assets acquired:
Goodwill 45,142
Completed technology 2,165
Customer base 1,100
Assembled workforce 700
In-process research and development 268
-------
Total purchase price allocation $53,084
=======
Tangible net assets acquired include cash, accounts receivable, fixed
assets, prepaid expenses and other assets, accounts payable, accrued
expenses, deferred revenue and notes payable, in addition to net deferred tax
asset related to net operating losses carried forward from NextPoint,
partially offset by deferred tax liabilities created with the acquisition of
intangible assets other than goodwill, and deferred compensation related to
unvested options exchanged as part of the acquisition. Goodwill and other
intangible assets are being amortized on a straight-line basis over estimated
useful lives of two to five years (Note 4).
<PAGE>
A portion of the purchase price was allocated to acquired in-process
research and development ("IPR&D") and completed technology. Completed
technology and IPR&D were identified and valued through interviews and analysis
of data provided by management regarding products under development.
Developmental projects that had reached technological feasibility were
classified as completed technology and will be amortized over three years.
Projects that had not reached technological feasibility and had no future
alternative uses were classified as IPR&D and charged to expense on the day of
the acquisition. The value of IPR&D was determined considering the project's
stage of completion, the time and resources needed for completion, the
contribution of core technology, and the projected discounted cash flows of
completed products. The discount rate was determined considering weighted
average cost of capital and the risk surrounding the successful completion of
the projects under development.
The summary table below, prepared on an unaudited pro forma basis,
combines NetScout's results of operations with NextPoint's results of operations
as if NextPoint had been acquired as of April 1, 1999 (in thousands, except per
share data):
Six Months Ended
September 30,
-------------
2000 1999
---- ----
Revenue ................................ $54,990 $39,971
Net income (loss) ...................... $358 $(392)
Basic net income (loss)per share ....... $0.01 $(0.02)
Diluted net income (loss) per share .... $0.01 $(0.02)
The proforma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined operations.
Our effective tax rate before non-deductible costs related to the
acquisition of NextPoint and stock-based compensation expense was 35.5% and 36%
for the three months ended September 30, 2000 and 1999, respectively.
6. Contingencies
On November 5, 1999, a former employee of NetScout filed an action against
the Company and an employee stockholder of NetScout in the Massachusetts
Superior Court Department of the Trial Court, Middlesex County, alleging claims
of discrimination on the basis of sex and sexual harassment. On December 30,
1999, NetScout filed a Notice of Removal to the United States District Court for
the District of Massachusetts, thereby removing the action to that Court.
NetScout has filed an Answer denying these allegations and plans to vigorously
defend this matter. NetScout has recorded an accrual to address this matter.
However, since the matter is at a preliminary stage, NetScout is unable to
predict the outcome or amount of related expense, or loss, if any.
In addition to the matter noted above, from time to time NetScout is
subject to legal proceedings and claims in the ordinary course of business. In
the opinion of management, the amount of ultimate expense with respect to any
other current legal proceedings and claims will not have a material adverse
effect on NetScout's financial position or results of operations.
<PAGE>
7. Geographic Information
Revenue was distributed geographically as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30
2000 1999 2000 1999
---- ---- ---- ----
North America .............. $26,255 $17,876 $49,481 $33,318
Other international ........ 2,564 2,428 4,507 6,057
-------------------------------------
$28,819 $20,304 $53,988 $39,375
=====================================
The North America revenue figures include sales made by NetScout to
domestic resellers. These domestic resellers may sell NetScout product to
international locations. NetScout still reports these shipments as North
America revenue since NetScout ships the product to a domestic location.
Substantially all of NetScout's identifiable assets are located in the
United States.
8. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for derivative Instruments and Hedging Activities,"
as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of Effective Date of FASB Statement No. 133"
and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of FASB Statement No. 133", which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. NetScout, to date has not engaged in
derivative and hedging activities, and accordingly does not believe that the
adoption of SFAS No. 133 will have a material impact on the financial
reporting and related disclosures of the company. NetScout will adopt SFAS
No. 133 as required by SFAS No. 137 in fiscal year 2002.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No.101 "Revenue Recognition in Financial
Statements", as amended by SAB No.101A and 101B. SAB No.101 summarizes the SEC's
views in applying generally accepted accounting principles to selected revenue
recognition issues in financial statements. The application of the guidance of
SAB No. 101 will be required in the Company's fourth quarter of fiscal 2001. The
Company is currently determining the impact, if any, that SAB No. 101 will have
on its financial position and results of operations.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following information should be read in conjunction with the
consolidated historical financial information and the notes thereto included in
Item 1 of this Quarterly Report on Form 10-Q and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the year ended March 31, 2000 as filed with the
Securities and Exchange Commission on June 23, 2000.
In addition to the other information in this report, the following
Management Discussion and Analysis should be considered carefully in evaluating
the Company and our business. This Quarterly Report on Form 10-Q contains
forward-looking statements. These statements relate to future events or our
future financial performance and are identified by terminology such as "may",
"will", "could", "should", "expects," "plans," "intends," "seeks,"
"anticipates," "believes," "estimates," "potential," or "continue" or the
negative of such terms or other comparable terminology. These statements are
only predictions. You should not place undue reliance on these forward-looking
statements. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various important factors,
including the risks outlined under "Certain Factors Which May Affect Future
Results" in this section of this report and our other filings with the
Securities and Exchange Commission. These factors may cause our actual results
to differ materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this Form 10-Q to conform such
statements to actual results.
Overview
NetScout is a market leader in designing and developing integrated,
proactive infrastructure performance management, "IPM," products that improve
the performance and cost-efficiency of complex, high-speed networks. We
manufacture and market these products to enterprise and service provider
customers worldwide.
IPM is an architecture for measuring and reporting on the state of the
infrastructure's ability to fulfill its business, performance and service-level
objectives. IPM works by monitoring the key components of the infrastructure:
the application environment, the computing environment, and the network
environment.
nGenius(TM) is our family of infrastructure performance management
products. The nGenius(TM) system includes:
1. Data collection devices consisting of probes and software agents
that collect, aggregate and perform detailed analysis of performance
information, and
2. Analytical and presentation software, which generates real-time and
historical views of the performance information in easy-to-use,
graphical formats.
NetScout was incorporated in 1984 and primarily provided consulting
services until 1992 when we began to develop and market our first computer
network performance management products. Our operations have been financed
principally through cash provided by operations and we have been profitable for
each of the last seven years. On July 7, 2000, NetScout completed its
acquisition of NextPoint Networks, Inc. ("NextPoint"). The transaction was
valued at approximately $53.1 million plus $4.0 million in deferred
compensation.
Product revenue consists of sales of our hardware products and licensing
of our software products. Product revenue is recognized upon shipment, provided
that evidence of an
<PAGE>
arrangement exists, title and risk of loss have passed to the customer, fees are
fixed or determinable and collection of the related receivable is probable.
Sales to indirect channel partners that are subject to return privileges are
recognized upon shipment, net of an allowance for estimated product returns
which is based on our return policy and historical experience. Customer payments
received in advance of product shipments are recorded as customer deposits.
Service revenue consists primarily of customer fees from support
agreements, consulting and training. We generally provide three months of
software and service support and 12 months of hardware support as part of our
product sales. Revenue from software and service support is deferred and
recognized over the three-month support period. Revenue from hardware support is
deferred and recognized over the 12-month support period. In addition, customers
can elect to purchase extended support agreements, typically for 12-month
periods. Revenue from these agreements is deferred and recognized ratably over
the support period. Revenue from consulting and training is recognized as the
work is performed.
For multi-element arrangements, each element of the arrangement is
analyzed and the Company allocates a portion of the total fee under the
arrangement to the undelivered elements, primarily support agreements and
training, using vendor specific objective evidence of fair value of the element
and the remaining portion of the fee is allocated to the delivered elements
(i.e. generally hardware products and licensing software products), regardless
of any separate prices stated within the contract for each element, under the
residual method. Vendor specific objective evidence of fair value is based on
the price the customer is required to pay when the element is sold separately.
License and royalty revenue consists primarily of royalties paid under
license agreements by original equipment manufacturers who incorporate
components of our data collection technology into their own products or who
reproduce and sell our software products. License revenue is recognized when
delivery has occurred and when we become contractually entitled to receive
license fees, provided that such fees are fixed or determinable and collection
is probable. Royalty revenue is recognized based upon product shipment by the
license holder.
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage of total
revenue of certain line items included in our Statements of Income:
NetScout Systems, Inc.
Statement of Income Percentages
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Revenue:
Product 72.1% 66.7% 71.4% 66.9%
Service 15.4 15.3 15.6 14.1
License and royalty 12.5 18.0 13.0 19.0
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenue:
Product 25.2 25.0 24.7 25.2
Service 3.0 2.0 2.7 2.0
----- ----- ----- -----
Total cost of revenue 28.2 27.0 27.4 27.2
----- ----- ----- -----
Gross margin 71.8 73.0 72.6 72.8
----- ----- ----- -----
Operating expenses:
Research and development 13.2 11.8 11.8 11.7
Sales and marketing 35.4 32.7 35.0 32.1
General and administrative 8.1 5.6 7.3 5.3
Stock-based compensation 2.0 0.8 1.2 0.6
Amortization of intangible assets 9.3 0.0 4.9 0.0
In-process research and development 0.9 0.0 0.5 0.0
----- ----- ----- -----
Total operating expenses 68.9 50.9 60.7 49.7
----- ----- ----- -----
Income from operations 2.9 22.1 11.9 23.1
Interest income, net 3.8 2.5 4.0 2.0
----- ----- ----- -----
Income before provision for income taxes 6.7 24.6 15.9 25.1
Provision for income taxes 9.4 8.9 9.3 9.1
----- ----- ----- -----
Net income (loss) (2.7%) 15.7% 6.6% 16.0%
===== ===== ===== =====
Three Months Ended September 30, 2000 and 1999
Revenue
Total revenues were $28.8 million and $20.3 million for the three months
ended September 30, 2000 and 1999, respectively, representing an increase of 42%
from 1999 to 2000.
Product. Product revenues were $20.8 million and $13.5 million for the
three months ended September 30, 2000 and 1999, respectively, representing an
increase of 54% from 1999 to 2000. This increase was primarily due to a 27%
increase in average selling price attributable to larger volumes of higher speed
and multi-port probes.
<PAGE>
Service. Service revenues were $4.4 million and $3.1 million for the three
months ended September 30, 2000 and 1999, respectively, representing an increase
of 43% from 1999 to 2000. This increase was primarily due to an increase in
support agreements attributable to new product sales and an increase in the sale
of support agreements to new and existing customers attributable to increased
sales and marketing efforts.
License and royalty. License and royalty revenues were $3.6 million and
$3.7 million for the three months ended September 30, 2000 and 1999,
respectively, representing a decrease of 2% from 1999 to 2000. License and
royalty revenues were primarily sustained by the sales of our software and
embedded software products by Cisco.
Cost of Revenue and Gross Margin
Product. Cost of product revenue consists primarily of components,
personnel costs, media duplication, manuals, packaging materials, licensed
technology fees and overhead. Cost of product revenue was $7.3 million and $5.1
million for the three months ended September 30, 2000 and 1999, respectively,
representing an increase of 43% from 1999 to 2000. This increase was primarily
due to higher sales volumes from 1999 to 2000. Product gross margins were 65%
and 62% for the three months ended September 30, 2000 and 1999, respectively.
Service. Cost of service revenue consists primarily of personnel costs.
Cost of service revenues were $857,000 and $397,000 for the three months ended
September 30, 2000 and 1999, respectively, representing an increase of 116% from
1999 to 2000. This increase was primarily due to the distribution of software
updates and material and consulting costs to support our increased installed
customer base. Service gross margins were 81% and 87% for the three months ended
September 30, 2000 and 1999, respectively.
Gross margins were $20.7 million and $14.8 million for the three months
ended September 30, 2000 and 1999, respectively, representing an increase of 40%
from 1999 to 2000. Gross margin is primarily affected by the mix of product,
service, license and royalty revenue and by the proportion of sales through
direct versus indirect distribution channels. We typically realize higher gross
margins on license and royalty revenue relative to product and service revenue
and on direct sales relative to indirect distribution channel sales. This
increase was primarily due to a 61% increase in direct sales and a 27% increase
in average selling price.
Operating Expenses
Research and development. Research and development expenses consist
primarily of personnel costs, fees for outside consultants and related costs
associated with the development of new products and the enhancement of existing
products. Research and development expenses were $3.8 million and $2.4 million
for the three months ended September 30, 2000 and 1999, respectively,
representing an increase of 60% from 1999 to 2000. This increase was primarily
due to a 40% increase in personnel costs from 1999 to 2000.
Sales and marketing. Sales and marketing expenses consist primarily of
personnel costs and costs associated with marketing programs such as trade
shows, seminars, advertising and new product launch activities. Sales and
marketing expenses were $10.2 million and $6.6 million for the three month ended
September 30, 2000 and 1999, respectively, representing an increase of 54% from
1999 to 2000. This increase was primarily due to a 43% increase in sales and
marketing personnel costs from 1999 to 2000.
General and administrative. General and administrative expenses consist
primarily of personnel costs for executive, financial, information services and
human resource employees. General and administrative expenses were $2.3 million
and $1.1 million for the three months ended September 30, 2000 and 1999,
respectively, representing an increase of 105% from 1999 to 2000. This increase
was primarily due to a 42% increase in personnel costs from 1999 to 2000 and an
increase in expenses related to our continuing responsibilities as a public
company.
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Stock-based compensation. Stock-based compensation consists of charges
related to the granting of stock to employees and affiliates. Stock-based
compensation expenses was $576,000 and $155,000 for the three months ended
September 30, 2000 and 1999, respectively, representing an increase of 272% from
1999 to 2000. This increase was primarily due to equity awards related to the
acquisition of NextPoint.
Amortization of intangible assets. Amortization of intangible assets was
$2.7 million for the three months ended September 30, 2000 due to the
acquisition of NextPoint.
In-process research and development. In-process research and
development was $268,000 for the three months ended September 30, 2000 due to
the acquisition of NextPoint. Completed technology and in-process research
and development were identified and valued through interviews and analysis of
data provided by management regarding products under development.
Interest income, net. Interest income, net of interest expense, was $1.1
million and $504,000 for the three months ended September 30, 2000 and 1999,
respectively, representing an increase of 120% from 1999 to 2000. This increase
was primarily due to an increase in our cash balances related to the proceeds
from our initial public offering and cash generated by operations slightly
offset by cash used to acquire NextPoint.
The provision for income taxes was $2.7 million and $1.8 million for
the three months ended September 30, 2000 and 1999, respectively,
representing an increase of 50% from 1999 to 2000. NetScout's effective tax
rate increased to 139% from 36% for the three months ended September 30, 2000
and 1999, respectively, as a result of non-deductible amortization of
intangible assets, in-process research and development expenses, and
stock based compensation related to the acquisition of NextPoint Networks,
Inc., which occurred during the second quarter of fiscal 2001.
Net income (loss). Net loss was $761,000 and net income was $3.2 million
for the three months ended September 30, 2000 and 1999, respectively,
representing a decrease of 124% from 1999 to 2000. This decrease was the result
of amortization of intangible assets, in-process research and development and
stock-based compensation expense related to the acquisition of NextPoint. When
excluding non-cash amortization of intangible assets, in-process research and
development and stock based compensation and using a 35.5% effective tax rate
before factoring in non-deductible costs related to the acquisition of NextPoint
and stock based compensation expense, net income was $3.5 million and $3.3
million for the three months ended September 30, 2000 and 1999, respectively,
representing a 5% increase from 1999 to 2000. This increase was primarily due to
revenue growth offset by additional operating expenses resulting from the
acquisition of NextPoint.
Six Months Ended September 30, 2000 and 1999
Revenue
Total revenues were $54.0 million and $39.4 million for the six months
ended September 30, 2000 and 1999, respectively, representing an increase of 37%
from 1999 to 2000.
Product. Product revenues were $38.6 million and $26.4 million for the six
months ended September 30, 2000 and 1999, respectively, representing an increase
of 46% from 1999 to 2000. This increase was primarily due to a 32% increase in
average selling price attributable to larger volumes of higher speed and
multi-port probes.
Service. Service revenues were $8.4 million and $5.6 million for the six
months ended September 30, 2000 and 1999, respectively, representing an increase
of 51% from 1999 to 2000. This increase was primarily due to an increase in
support agreements attributable to new product sales and an increase in the sale
of support agreements to new and existing customers attributable to increased
sales and marketing efforts.
<PAGE>
License and royalty. License and royalty revenues were $7.0 million and
$7.5 million for the six months ended September 30, 2000 and 1999, respectively,
representing a decrease of 6% from 1999 to 2000. For the six months ended
September 30, 1999, we received a large royalty from a small partner.
Thereafter, due to changing product lines at the small partner, royalty from
them decreased substantially. Beyond this, license and royalty was primarily
sustained by the sales of our software and embedded software products by Cisco.
Cost of Revenue and Gross Margin
Product. Cost of product revenue was $13.4 million and $9.9 million for
the six months ended September 30, 2000 and 1999, respectively, representing an
increase of 35% from 1999 to 2000. This increase was primarily due to higher
sales volumes from 1999 to 2000. Product gross margins were 65% and 62% for the
six months ended September 30, 2000 and 1999, respectively.
Service. Cost of service revenues were $1.5 million and $801,000 for the
six months ended September 30, 2000 and 1999, respectively, representing an
increase of 81% from 1999 to 2000. This increase was primarily due to the
distribution of software updates, material and consulting costs to support our
increased installed customer base. Service gross margins were 83% and 86% for
the six months ended September 30, 2000 and 1999, respectively.
Gross margins were $39.2 million and $28.7 million for the six months
ended September 30, 2000 and 1999, respectively, representing an increase of 37%
from 1999 to 2000. This increase was primarily due to a 70% increase in direct
sales and a 32% increase in average selling price.
Operating Expenses
Research and development. Research and development expenses were $6.4
million and $4.7 million for the six months ended September 30, 2000 and 1999,
respectively, representing an increase of 39% from 1999 to 2000. This increase
was primarily due to a 30% increase in personnel costs from 1999 to 2000.
Sales and marketing. Sales and marketing expenses were $18.9 million and
$12.6 million for the six months ended September 30, 2000 and 1999,
respectively, representing an increase of 49% from 1999 to 2000. This increase
was primarily due to a 47% increase in sales and marketing personnel costs from
1999 to 2000.
General and administrative. General and administrative expenses were $3.9
million and $2.1 million for the six months ended September 30, 2000 and 1999,
respectively, representing an increase of 90% from 1999 to 2000. This increase
was primarily due to a 44% increase in personnel costs from 1999 to 2000 and an
increase in expenses related to our continuing responsibilities as a public
company.
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Stock-based compensation. Stock-based compensation expense was $649,000
and $246,000 for the six months ended September 30, 2000 and 1999, respectively,
representing an increase of 164% from 1999 to 2000. This increase was primarily
due to equity awards related to the acquisition of NextPoint.
Amortization of intangible assets. Amortization of intangible assets was
$2.7 million for the six months ended September 30, 2000 due to the acquisition
of NextPoint.
In-process research and development. In-process research and
development was $268,000 for the six months ended September 30, 2000 due to
the acquisition of NextPoint. Completed technology and in-process research
and development were identified and valued through interviews and analysis of
data provided by management regarding products under development.
Interest income, net. Interest income, net of interest expense, was $2.1
million and $776,000, for the six months ended September 30, 2000 and 1999,
respectively, representing an increase of 176% from 1999 to 2000. This increase
was primarily due to an increase in our cash balances related to the proceeds
from our initial public offering and generated by continued operations
slightly offset by cash used to acquire NextPoint.
The provision for income taxes was $5.0 million and $3.6 million for
the six months ended September 30, 2000 and 1999, respectively, representing
an increase of 41% from 1999 to 2000. NetScout's effective tax rate increased
to 59% from 36% for the six months ended September 30, 2000 and 1999,
respectively, as a result of non-deductible amortization of intangible
assets, in-process research and development expenses, and stock based
compensation related to the acquisition of NextPoint Networks, Inc., which
occurred during the second quarter of fiscal 2001.
Net income. Net income was $3.5 million and $6.3 million for the six
months ended September 30, 2000 and 1999, respectively, representing a decrease
of 44% from 1999 to 2000. This decrease was the result of amortization of
intangible assets, in-process research and development and stock-based
compensation expense related to the acquisition of NextPoint. When
excluding non-cash amortization of intangible assets, in-process research and
development and stock based compensation expense and using a 35.5% effective tax
rate before factoring in non-deductible costs related to the acquisition of
NextPoint and stock-based compensation expense, net income was $7.8 million and
$6.5 million for the six months ended September 30, 2000 and 1999, respectively,
representing a 20% increase from 1999 to 2000. This increase was primarily due
to revenue growth offset by additional operating expenses resulting from the
acquisition of NextPoint.
Liquidity and Capital Resources
As of September 30, 2000, we had $37.2 million in cash and cash
equivalents and $17.8 million in marketable securities. Prior to our initial
public offering, we financed our operations through cash provided by operating
activities. On August 17, 1999, we completed our initial public offering of
3,000,000 shares of common stock at a price of $11.00 per share. We received net
proceeds of approximately $29.6 million after underwriter discounts and
commissions and other offering expenses. We have a line of credit with a bank,
which allows us to borrow up to $5.0 million for working capital purposes and to
obtain letters of credit. The line of credit expires in March 2001. Amounts
available under the line of credit are a function of eligible accounts
receivable and bear interest at the bank's prime rate. At September 30, 2000, we
had letters of credit outstanding under the line aggregating $561,000. The bank
line of credit is secured by our inventory and accounts receivable.
Cash, cash equivalents and marketable securities were $55.0 million at
September 30, 2000. Cash provided by operating activities was $9.5 million and
$4.3 for the six months ended September 30, 2000 and 1999, respectively. Cash
provided by operating activities was primarily
<PAGE>
derived from net income and to a lesser degree, increases in deferred
revenue, depreciation and amortization, and refundable income taxes payable
for the six months ended September 30, 2000 and 1999 and also increases in
amortization of intangible assets for the six months ended September 30,
2000. This was partially offset by increases in accounts receivable, accrued
expenses and inventory for the six months ended September 30, 2000 and by
increases in accounts receivable and prepaids and other current assets for
the six months ended September 30, 1999. These changes were due to the growth
of our business and the purchase of NextPoint Networks.
Cash used by investing activities was $21.3 million and $17.1 million
for the six months ended September 30, 2000 and 1999, respectively, which
reflects the purchase of marketable securities, partially offset by proceeds
from the maturity of marketable securities or the six months ended September
30, 2000 and 1999 and also the cash paid for the acquisition of NextPoint for
the six months ended September 30, 2000.
Cash provided by financing activities was $436,000 and $31.9 million
for the six months ended September 30, 2000 and 1999, respectively, which was
primarily due to proceeds from the issuance of common stock for the six
months ended September 30, 2000 and 1999 and was offset by repayment of notes
payable for the six months ended September 30, 2000.
We believe that our current cash balances and the cash flows generated by
operations will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for the next 12 months. Thereafter, if cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or convertible debt securities. The sale
of additional equity or debt securities could result in additional dilution to
our stockholders. A portion of our cash may be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. From time to time, in the ordinary course of business, we evaluate
potential acquisitions of such businesses, products or technologies.
Recently Issued Accounting Pronouncements
In June 1998, the Financial/Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for derivative Instruments and Hedging Activities,"
as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of Effective Date of FASB Statement No. 133"
and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of FASB Statement No. 133", which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. NetScout, to date has not engaged in
derivative and hedging activities, and accordingly does not believe that the
adoption of SFAS No. 133 will have a material impact on the financial
reporting and related disclosures of the company. NetScout will adopt SFAS
No. 133 as required by SFAS No. 137 in fiscal year 2002.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No.101 "Revenue Recognition in Financial
Statements", as amended by SAB No.101A and 101B. SAB No. 101 summarizes the
SEC's views in applying generally
<PAGE>
accepted accounting principles to selected revenue recognition issues in
financial statements. The application of the guidance of SAB No. 101 will be
required in the Company's fourth quarter of fiscal 2001. The Company is
currently determining the impact, if any, that SAB No. 101 will have on its
financial position and results of operations.
Certain Factors Which May Affect Future Results
We do not provide financial performance forecasts. Our operating results
and financial condition have varied in the past and may in the future vary
significantly depending on a number of factors. Except for the historical
information in this report, the matters contained in this report include
forward-looking statements that involve risks and uncertainties. The following
factors, among others, could cause actual results to differ materially from
those contained in forward-looking statements made in this report. Such factors,
among others, may have a material adverse effect upon our business, results of
operations and financial condition.
A reduction in orders from Cisco Systems, Inc. would materially adversely affect
our business. Our operating results and financial condition for a particular
fiscal period would be materially adversely affected if there is a substantial
reduction in orders from Cisco Systems, Inc. or if we are unable to complete one
or more Cisco orders planned for that period. We derive a significant portion of
our revenue from Cisco, which distributes some of our products under its private
label and incorporates some of our software in its products. Cisco accounted for
56% of our total revenue for the six months ended September 30, 2000 and 47% of
our total revenue for the six months ended September 30, 1999. Our future
performance is significantly dependent upon Cisco's continued promotion of our
products. Cisco has no obligation to purchase any products from us. Further, we
do not control Cisco's distribution of our products, whether incorporated into
Cisco's products or sold under private label. Finally, Cisco may decide to
internally develop products that compete with our solution or partner with our
competitors or bundle or sell competitors' solutions, possibly at lower prices.
If our relationship with Cisco were terminated or adversely affected for any
reason, our business, operating results and financial condition would be
materially adversely affected.
Our quarterly operating results may fluctuate. Our quarterly revenue and
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. Most of our expenses, such as employee compensation and
rent, are relatively fixed in the short term. Moreover, our expense levels are
based, in part, on our expectations regarding future revenue levels. As a
result, if revenue for a particular quarter is below our expectations, we may
not be able to reduce operating expenses proportionately for that quarter, and
therefore this revenue shortfall would have a disproportionately negative effect
on our operating results for that quarter.
Our quarterly revenue may fluctuate as a result of a variety of factors, many of
which are outside our control, including the following:
o the market for network and application performance management
solutions is in an early stage of development and therefore demand
for our solutions may be uneven;
o the timing and receipt of orders from customers, particularly Cisco,
especially in light of our lengthy sales cycle;
o the timing and market acceptance of new products or product
enhancements by us or our competitors;
o distribution channels through which our products are sold could
change;
o the timing of hiring sales personnel and the speed at which such
personnel become productive;
o we may not be able to anticipate or adapt effectively to developing
markets and rapidly changing technologies; and
o our prices or the prices of our competitors' products may change.
We operate with minimal backlog because our products typically are shipped
shortly after orders are received. Therefore, product revenue in any quarter is
substantially dependent on orders
<PAGE>
booked and shipped in that quarter and revenue for any future quarter is not
predictable to any degree of certainty. Therefore, any significant deferral of
orders for our products would cause a shortfall in revenue for that quarter.
Our reliance on sole source suppliers could adversely affect our business.
Many components that are necessary for the assembly of our probes are
obtained from separate sole source suppliers or a limited group of suppliers.
These components include some of our network interface cards, which are
produced for us solely by SBS Technologies, Inc., SysKonnect, Inc. and
Adaptec, Inc. Our reliance on sole or limited suppliers involves several
risks, including a potential inability to obtain an adequate supply of
required components and reduced control over pricing, quality and timely
delivery of components. We do not generally maintain long-term agreements
with any of our suppliers or large volumes of inventory. Our inability to
obtain adequate deliveries or the occurrence of any other circumstance that
would require us to seek alternative sources of these components would affect
our ability to ship our products on a timely basis. This could damage
relationships with current and prospective customers, cause shortfalls in
expected revenue and materially adversely affect our business, operating
results and financial condition.
Our continued growth depends on our ability to expand our sales force. We must
increase the size of our sales force in order to increase our direct sales and
support our indirect sales channels. Because our products are very technical,
sales people require a long period of time to become productive, typically three
to six months. This lag in productivity, as well as the challenge of attracting
qualified candidates, may make it difficult to meet our sales force growth
targets. Further, we may not generate sufficient sales to offset the increased
expense resulting from growing our sales force. If we are unable to successfully
expand our sales capability, our business, operating results and financial
condition could be materially adversely affected.
Our success depends on our ability to expand and manage indirect distribution
channels. To increase our sales, we must further expand and manage our indirect
distribution channels, including original equipment manufacturers, distributors,
resellers, systems integrators and service providers. Sales to our indirect
distribution channels accounted for 18% and 32% of our total revenue for the six
months ended September 30, 2000 and 1999, respectively. Sales to Cisco accounted
for 56% and 47% of our total revenue for the six months ended September 30, 2000
and 1999. Our indirect channel partners have no obligation to purchase any
products from us. In addition, they could internally develop products, which
compete with our solutions or partner with our competitors or bundle or resell
competitors' solutions, possibly at lower prices. Our inability to expand and
manage our relationships with our partners, the inability or unwillingness of
our partners to effectively market and sell our products or the loss of existing
partnerships could have a material adverse effect on our business, operating
results and financial condition.
If we fail to introduce new products and enhance our existing products to keep
up with rapid technological change, demand for our products may decline. The
market for network and application performance management solutions is
relatively new and is characterized by rapid changes in technology, evolving
industry standards, changes in customer requirements and frequent product
introductions and enhancements. Our success is dependent upon our ability to
meet our customers' needs, which are driven by changes in computer networking
technologies and the emergence of new industry standards. In addition, new
technologies may shorten the life cycle for our products or could render our
existing or planned products obsolete. If we are unable to develop and introduce
new network and application performance management products or enhancements to
existing products in a timely and successful manner, it would have a material
adverse effect on our business, operating results and financial condition.
We face significant competition from other technology companies. The market for
network and application performance management solutions is intensely
competitive. We believe customers make network management system purchasing
decisions based primarily upon product performance, functionality and price;
name and reputation of vendor; distribution strength; and alliances with
industry partners. We compete with probe vendors, such as Agilent Technologies,
providers of network performance management solutions, such as Concord
<PAGE>
Communications, Inc. and Micromuse, Inc., and providers of portable network
traffic analyzers, such as Network Associates, Inc. In addition, leading network
equipment providers could offer their own or competitors' solutions in the
future. Many of our current and potential competitors have longer operating
histories, greater name recognition and substantially greater financial,
management, marketing, service, support, technical, distribution and other
resources than we do. Therefore, they may be able to respond more quickly than
we can to new or changing opportunities, technologies, standards or customer
requirements.
As a result of these and other factors, we may not be able to compete
effectively with current or future competitors, which would have a material
adverse effect on our business, operating results and financial condition.
The success of our business depends on the continued growth in the market for
and the commercial acceptance of network and application performance management
solutions. We derive all of our revenue from the sale of products and services
that are designed to allow our customers to manage the performance of computer
networks and software applications. The market for network and application
performance management solutions is in an early stage of development. Therefore,
we cannot accurately assess the size of the market and may be unable to predict
the appropriate features and prices for products to address the market, the
optimal distribution strategy and the competitive environment that will develop.
In order for us to be successful, our potential customers must recognize the
value of more sophisticated network and application performance management
solutions, decide to invest in the management of their networks and the
performance of software applications and, in particular, adopt our management
solutions. Any failure of this market to continue to develop would materially
adversely affect our business, operating results and financial condition.
Businesses may choose to outsource the management of their networks and
applications to service providers. Our business may depend on our ability to
develop relationships with these service providers and successfully market our
products to them.
Failure to properly manage growth could adversely affect our business. We have
been experiencing a period of rapid growth over the past several years. We plan
to continue to expand our business by hiring additional personnel. The growth in
size and complexity of our business and our customer base has been and will
continue to be a significant challenge to our management and operations. To
manage further growth effectively we must enhance our financial and accounting
systems and controls, integrate new personnel and manage expanded operations. If
we are unable to effectively manage our growth, our costs, the quality of our
products, the effectiveness of our sales organization, and our ability to retain
key personnel, our business, operating results and financial condition could be
materially adversely affected.
Loss of key personnel could adversely affect our business. Our future success
depends to a significant degree on the skills, experience and efforts of Anil
Singhal, our Chairman of the Board, Chief Executive Officer and co-founder, and
Narendra Popat, our President, Chief Operating Officer and co-founder. We also
depend on the ability of our other executive officers and senior managers to
work effectively as a team. The loss of one or more of our key personnel could
have a material adverse effect on our business, operating results and financial
condition.
We must hire and retain skilled personnel in a tight labor market. Qualified
personnel are in great demand throughout the computer software, hardware and
networking industries. The demand for qualified personnel is particularly acute
in the New England area due to the large number of software and high technology
companies and the low unemployment in the region. Our success depends in large
part upon our ability to attract, train, motivate and retain highly skilled
employees, particularly sales and marketing personnel, software engineers, and
technical support personnel. We have had difficulty hiring and retaining these
highly skilled employees in the past. If we are unable to attract and retain the
highly skilled technical personnel that are integral to our sales, marketing,
product development and customer support teams, the rate at which we can
generate sales and develop new products or product enhancements may be
<PAGE>
limited. This inability could have a material adverse effect on our business,
operating results and financial condition.
Our success depends on our ability to protect our intellectual property rights.
Our business is heavily dependent on our intellectual property. We rely upon a
combination of copyright, trademark and trade secret laws and non-disclosure and
other contractual arrangements to protect our proprietary rights. The reverse
engineering, unauthorized copying or other misappropriation of our intellectual
property could enable third parties to benefit from our technology without
compensating us. Legal proceedings to enforce our intellectual property rights
could be burdensome and expensive and could involve a high degree of
uncertainty. In addition, legal proceedings may divert management's attention
from growing our business. There can be no assurance that the steps we have
taken to protect our intellectual property rights will be adequate to deter
misappropriation of proprietary information, or that we will be able to detect
unauthorized use by third parties and take appropriate steps to enforce our
intellectual property rights. Further, we also license software from third
parties for use as part of our products, and if any of these licenses were to
terminate, we may experience delays in product shipment until we develop or
license alternative software.
Others may claim that we infringe on their intellectual property rights. We may
be subject to claims by others that our products infringe on their intellectual
property rights. These claims, whether or not valid, could require us to spend
significant sums in litigation, pay damages, delay product shipments, reengineer
our products or acquire licenses to such third-party intellectual property. We
may not be able to secure any required licenses on commercially reasonable terms
or secure them at all. We expect that these claims will become more frequent as
more companies enter the market for network and application performance
management solutions. Any of these claims or resulting events could have a
material adverse effect on our business, operating results and financial
condition.
If our products contain errors, they may be costly to correct, revenue may be
delayed, we could get sued and our reputation could be harmed. Despite testing
by our customers and us errors may be found in our products after commencement
of commercial shipments. If errors are discovered, we may not be able to
successfully correct them in a timely manner or at all. In addition, we may need
to make significant expenditures of capital resources in order to eliminate
errors and failures. Errors and failures in our products could result in loss of
or delay in market acceptance of our products and could damage our reputation.
If one or more of our products fails, a customer may assert warranty and other
claims for substantial damages against us. The occurrence or discovery of these
types of errors or failures could have a material adverse effect on our
business, operating results and financial condition.
Our success depends on our ability to expand and manage our international
operations. Sales outside North America accounted for a significant percentage
of our total revenue for the three and six months ended September 30, 2000 and
1999, respectively. We currently expect international revenue to continue to
account for a significant percentage of total revenue in the future. We believe
that we must continue to expand our international sales activities in order to
be successful. Our international sales growth will be limited if we are unable
to expand international indirect distribution channels, hire additional sales
personnel, adapt products for local markets, or manage geographically dispersed
operations. The major countries outside of North America, in which we do, or
intend to do, businesses are the United Kingdom, Germany and Japan. Our
international operations, including our operations in the United Kingdom,
Germany and Japan, are generally subject to a number of risks, including failure
of local laws to provide the same degree of protection against infringement of
our intellectual property, protectionist laws and business practices that favor
local competitors, dependence on local indirect channel partners, multiple
conflicting and changing governmental laws and regulations, longer sales cycles,
greater difficulty in collecting accounts receivable, foreign currency exchange
rate fluctuations and political and economic instability.
The price of our common stock may decrease due to market volatility. The stock
market in general has recently experienced extreme price and volume
fluctuations. In addition, the market
<PAGE>
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 issues the stock. If any of our stockholders brought such
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 business may be negatively affected by our failure to successfully integrate
with NextPoint or to retain NextPoint employees. On July 7, 2000, we completed
our acquisition of NextPoint Nextworks, Inc., a Delaware corporation, by means
of a merger of NextPoint with and into NetScout Service Level Corporation, a
Delaware corporation and one of our wholly-owned subsidiaries pursuant to an
Agreement and Plan of Reorganization dated as of June 13, 2000. The anticipated
benefits of the merger may not be achieved unless, among other things, the
operations, products, services and personnel of NextPoint are successfully
combined with ours in a timely and efficient manner. If the anticipated benefits
of the business combination are not achieved or are not achieved in a timely
fashion, then the merger could have adverse affect on our operating results for
a significant period of time that cannot now be determined. Furthermore, the
diversion of the attention of management, and any difficulties encountered in
the transition process, could have an adverse impact on our revenues and
operating results.
Despite NetScout's efforts to retain key employees, NetScout may lose some of
NextPoint's key employees following the merger. Competition for qualified
management, engineering and technical employees in the computer software,
hardware and networking industries is intense. NextPoint employees may not want
to work for a larger, publicly-traded company instead of a smaller, private
company. In addition, competitors may recruit NextPoint employees during the
integration of NextPoint and us. We cannot provide any assurance that the
combined enterprise will be able to attract, retain and integrate key employees
following the merger.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We consider all highly liquid marketable securities purchased with a
maturity of three months or less to be cash equivalents and those with
maturities greater than three months are considered to be marketable securities.
Cash equivalents and marketable securities are stated at amortized cost plus
accrued interest, which approximates fair value. Cash equivalents and marketable
securities consist primarily of money market instruments and U.S. Treasury
bills. We currently do not hedge interest rate exposure, but do not believe that
an increase in interest rates would have a material effect on the value of our
marketable securities.
On January 1, 1999, eleven of the existing members of the European Union
joined the European Monetary Union. Ultimately there will be a single currency
within certain countries of the European Union, known as the Euro, and one
organization, the European Central Bank, responsible for setting European
monetary policy. We have reviewed the impact the Euro will have on our business
and whether this will give rise to a need for significant changes in our
commercial operations or treasury management functions. Because our transactions
are denominated in U.S. dollars, we do not believe that the Euro conversion will
have any material effect on our business, financial condition or results of
operations.
Part II - Other Information
Item 1. Legal Proceedings
On November 5, 1999, a former employee of NetScout filed an action against
the Company and an employee stockholder of NetScout in the Massachusetts
Superior Court
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Department of the Trial Court, Middlesex County, alleging claims of
discrimination on the basis of sex and sexual harassment. On December 30, 1999,
NetScout filed a Notice of Removal to the United States District Court for the
District of Massachusetts, thereby removing the action to that Court. NetScout
has filed an Answer denying these allegations and plans to vigorously defend
this matter. NetScout has recorded an accrual to address this matter. However,
since the matter is at a preliminary stage, NetScout is unable to predict the
outcome or amount of related expense, or loss, if any.
In addition to the matter noted above, from time to time NetScout is
subject to legal proceedings and claims in the ordinary course of business. In
the opinion of management, the amount of ultimate expense with respect to any
other current legal proceedings and claims will not have a material adverse
effect on NetScout's financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds
On August 17, 1999, we completed our initial public offering of three
million shares of common stock at a price of $11.00 per share. The principal
underwriters for the transaction were Deutsche Banc Alex. Brown, Bear, Stearns &
Co. Inc. and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.
The registration statement relating to this offering was declared effective by
the Securities and Exchange Commission (SEC File Number 333-76843) on August 11,
1999. We received net proceeds of $29.6 million after deducting $2.3 million in
underwriting discounts and commissions and $1.1 million in other offering
expenses.
Upon the exercise of the over allotment option by the underwriters,
certain selling security holders sold 450,000 shares of common stock for net
proceeds of approximately $4.6 million after deducting underwriting discounts
and commissions.
Approximately $22.6 million of the proceeds from our initial public
offering were used in the acquisition of NextPoint. The balance of proceeds have
been invested primarily in U.S. Treasury obligations and other interest bearing
investment grade securities.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of stockholders held September 28, 2000
(the "2000 Annual Meeting"), the Company's stockholders took the following
actions:
(1) The Company's stockholders elected Kenneth T. Schiciano, a Class I
director, to serve for a three-year term expiring at the Company's
annual meeting of stockholders in 2003 or until his successor has
been duly elected and qualified or until his early resignation or
removal. Election of the directors was determined by a plurality of
the votes cast at the 2000 Annual Meeting. With respect to such
matter, the votes were cast as follows: 25,685,213 shares voted for
the election of Mr. Schiciano; and 23,215 shares were withheld from
the election of Mr. Schiciano. The other directors of the Company
whose term of office continued after the annual meeting were: Anil
K. Singhal, Narendra Popat, Richard J. Egan, and Joseph G. Hadzima,
Jr..
(2) The Company's stockholders approved and adopted the proposal to
approve the transaction of any other business properly brought for
vote at the 2000 Annual Meeting. With respect to such matter, the
votes were cast as follows: 23,827,498 shares voted for the
proposal, 1,834,241 shares voted against the proposal and 46,689
shares abstained
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from voting on the proposal. No other business was transacted at the
2000 Annual Meeting.
Item 5. Other Information
On October 27, 2000, Richard J. Egan resigned from NetScout's Board of
Directors to pursue other interests. On October 28, 2000, John R. Egan, the son
of Richard J. Egan, joined NetScout's Board of Directors as a Class II director,
whose term expires a the annual meeting of stockholders held in 2001.
On November 13, 2000, Vincent Mullarky joined the NetScout's Board of
Directors as a Class I director, whose term expires a the annual meeting of
stockholders held in 2003.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed or incorporated by reference as part of
this Report.
11. Statement re Computation of Per Share Earnings
27. Financial Data Schedule
(b) Reports on Form 8-K.--A report on Form 8-K was filed with the
Securities and Exchange Commission with respect to:
July 7, 2000 (as amended). Item 2--Acquisition or Disposition of
Assets--to disclose the acquisition of NextPoint Networks, Inc.
("NextPoint") and Item 7--Financial Statements, Pro Forma Financial
Information and Exhibits--to disclose certain financial information
relating to the acquisition of NextPoint.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETSCOUT SYSTEMS, INC.
Date: November 14, 2000 /s/ Anil K. Singhal
-------------------------------------------
Name: Anil K. Singhal
Title: Chief Executive Officer and Chairman
of the Board(Principal Executive Officer)
Date: November 14, 2000 /s/ David P. Sommers
-------------------------------------------
Name: David P. Sommers
Title: Vice President and Chief Financial
Officer (Principal Financial Officer)
