<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO 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
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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>
This Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000 (the "Report") is
being filed to make certain typographical corrections and other technical
changes to the information listed in Item 1 of the Report. The information
appearing in Item 1 below amends and restates the information appearing in
Item 1 of the Report.
<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
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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.
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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 (excluding stock-based
compensation of $0, $1, $1 and $1,
respectively, which is disclosed
separately below)...................... 7,262 5,086 13,356 9,900
Service (excluding stock-based
compensation of $1, $10, $1 and $19,
respectively, which is disclosed
separately below)...................... 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
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Operating expenses:
Research and development (excluding
stock-based compensation of $521,
$73, $531 and $95, respectively, which
is disclosed separately below)......... 3,818 2,386 6,380 4,604
Sales and marketing (excluding
stock-based compensation of $52,
$67, $112 and $123, respectively, which
is disclosed separately below)......... 10,197 6,644 18,864 12,629
General and administrative (excluding
stock-based compensation of $2,
$4, $4 and $8, respectively, which
is disclosed separately below)......... 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
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Income from operations ...................... 828 4,490 6,415 9,116
Interest income, net ........................ 1,108 504 2,142 776
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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
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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
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Net cash provided by operating activities .............. 9,542 4,292
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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.
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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 ..................... 2,166 3
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49,108
Less accumulated amortization ............ 2,666
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Total .................................... $46,442
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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
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Total ............................................ $46,442
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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 2,166
Customer base 1,100
Assembled workforce 700
In-process research and development 268
-------
Total purchase price allocation $53,085
=======
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
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$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>
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 29, 2000 /s/ Anil K. Singhal
-------------------------------------------
Name: Anil K. Singhal
Title: Chief Executive Officer and Chairman
of the Board(Principal Executive Officer)
Date: November 29, 2000 /s/ David P. Sommers
-------------------------------------------
Name: David P. Sommers
Title: Vice President and Chief Financial
Officer (Principal Financial Officer)
