-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Op7BS+/HN8TtyFjE4XkVY9Vw8HqWEgs0DhKyY5rUIlMLw3UnuZ+oCZMC/H+edimy 6A1JoAvbPTf+Is2CF5uwGQ== /in/edgar/work/20000920/0000912057-00-042007/0000912057-00-042007.txt : 20000924 0000912057-00-042007.hdr.sgml : 20000924 ACCESSION NUMBER: 0000912057-00-042007 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000707 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20000920 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETSCOUT SYSTEMS INC CENTRAL INDEX KEY: 0001078075 STANDARD INDUSTRIAL CLASSIFICATION: [7373 ] IRS NUMBER: 042837575 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-26251 FILM NUMBER: 725819 BUSINESS ADDRESS: STREET 1: 4 TECHNOLOGY PARK DR CITY: WESTFORD STATE: MA ZIP: 01886 BUSINESS PHONE: 9786144000 MAIL ADDRESS: STREET 1: 4 TECHNOLOGY PARK DRIVE CITY: WESTFORD STATE: MA ZIP: 01886 8-K/A 1 a2026065z8-ka.txt 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 8-K/A AMENDMENT NO. 1 TO FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): July 7, 2000 NETSCOUT SYSTEMS, INC. ---------------------------------------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 0000-26251 04-2837575 - ------------------------------- ----------------------- ------------------- (State of other jurisdiction of (Commission File number) (IRS Employer Incorporation) Identification No.) 4 TECHNOLOGY PARK DRIVE, WESTFORD, MA 01886 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (978) 614-4000 -------------------- ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On July 7, 2000, NetScout Systems, Inc., a Delaware corporation, completed its 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 a wholly-owned subsidiary of NetScout, pursuant to an Agreement and Plan of Reorganization dated as of June 13, 2000. The Merger was effected by the filing of a Certificate of Merger with the Secretary of State of Delaware on July 7, 2000. NextPoint was a provider of integrated application and network management software solutions to traditional enterprises, e-businesses and application and management services providers. Upon the effective time of the Merger on July 7, 2000, NetScout issued an aggregate of 2,099,120 shares of NetScout common stock, par value $0.001 per share and $19,532,517 in cash in exchange for all of the outstanding shares of capital stock of NextPoint. Pursuant to the terms of the Merger Agreement, upon the effective time of the Merger, each outstanding share of capital stock of NextPoint converted into the right to receive the number of shares NetScout common stock and the amount of cash as follows: - Each outstanding share of NextPoint Series A Convertible Preferred Stock as converted into the right to receive .277 shares of NetScout Common Stock and $2.59 in cash. - Each outstanding share of NextPoint Series B Convertible Preferred Stock was converted into the right to receive .477 shares of NetScout Common Stock and $4.45 in cash. - Each outstanding share of NextPoint Series C Convertible Preferred Stock was converted into the right to receive .640 shares of NetScout Common Stock and $5.97 in cash. - Each outstanding share of NextPoint Common Stock was converted into the right to receive .233 shares of NetScout Common Stock and $2.17 in cash. Each holder of NextPoint capital stock who is otherwise entitled to a fraction of a share of NetScout common stock will receive cash in lieu thereof, equal to a fraction multiplied by $13.32. In accordance with the terms of the Merger Agreement and an escrow agreement, 314,887 shares of NetScout common stock and $2,936,267 in cash have been placed in an escrow account to secure certain indemnification obligations of NextPoint under the Merger Agreement. In addition, pursuant to the terms of the Merger Agreement, NetScout assumed outstanding warrants to purchase shares of NextPoint Series C Convertible Preferred Stock. NetScout has reserved an aggregate of 24,741 shares of its common stock and $230,732.72 in cash for issuance upon the exercise of these warrants. NetScout also assumed outstanding options to purchase shares of NextPoint common stock pursuant to NextPoint's 1997 Stock Incentive Plan and 2000 Stock Incentive Plan. NetScout has reserved an aggregate of 273,906 shares of its common stock for issuance upon exercise of these options. The NetScout common stock issued in connection with the merger was issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 as amended. NetScout used proceeds raised by NetScout in its initial public offering of common stock, which was consummated in August 1999, to pay for the cash portion of the merger consideration. 2 The purchase price and terms for the transaction were determined in arms-length negotiations. The acquisition of NextPoint is intended to qualify a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended. NetScout will account for the transaction under the purchase method of accounting. The terms of the Merger are more fully described in the Merger Agreement and the Registration Rights Agreement, which are each filed as Exhibit 2.1 and 10.1, respectively, and incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
NEXTPOINT NETWORKS, INC. INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Accountants F-1 Consolidated Balance Sheets at December 31, 1999 and 1998 F-2 Consolidated Statements of Operations for the years ended December 31, 1999 and 1998 F-3 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit for the years ended December 31, 1999 and 1998 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 F-5 Notes to Financial Statements F-6 Unaudited Condensed Consolidated Balance Sheet at June 30, 2000 and December 31, 1999 F-20 Unaudited Condensed Consolidated Statements of Operations for six months ended June 30, 2000 and 1999 F-21 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 F-22 Notes to Unaudited Condensed Consolidated Financial Statements F-23 (b) PRO FORMA FINANCIAL INFORMATION. Unaudited Pro Forma Combined Financial Information F-24 Unaudited Pro Forma Combined Balance Sheet as of June 30, 2000 F-25 Unaudited Pro Forma Combined Statement of Operations for the years ended March 31, 2000 and December 31, 1999 F-26 Unaudited Pro Forma Combined Statement of Operations for the three months ended June 30, 2000 and March 31, 2000 F-27 Notes to Unaudited Pro Forma Combined Financial Information F-28
3 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of NextPoint Networks, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of redeemable preferred stock and stockholders' deficit and of cash flows present fairly, in all material respects, the financial position of NextPoint Networks, Inc. and its subsidiary at December 31, 1998 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts June 9, 2000, except as to Note 13 for which the date is July 7, 2000 F-1 NEXTPOINT NETWORKS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1999
1998 1999 ASSETS Current assets: Cash and cash equivalents $ 9,404,330 $ 950,173 Accounts receivable, net of allowance for doubtful accounts of $0 and $80,000 at December 31, 1998 and 1999, respectively 164,331 730,296 Prepaid expenses and other current assets 192,587 107,254 ---------------- ---------------- Total current assets 9,761,248 1,787,723 ---------------- ---------------- Note receivable from stockholder 35,000 35,000 Fixed assets, net 578,367 784,208 Other assets 15,211 29,442 ---------------- ---------------- Total assets $ 10,389,826 $ 2,636,373 ================ ================= LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Current portion of note payable to bank $ 91,033 $ 85,040 Current portion of note payable - other 19,270 19,270 Accounts payable 500,226 536,060 Accrued expenses 491,648 350,686 Deferred revenue 56,483 453,083 ---------------- ---------------- Total current liabilities 1,158,660 1,444,139 ---------------- ---------------- Long-term portion of note payable to bank 236,958 218,673 Long-term portion of note payable - other 68,150 51,580 ---------------- ---------------- Total liabilities 1,463,768 1,714,392 ---------------- ---------------- Commitments (Note 10) Series A redeemable convertible preferred stock, $0.01 par value; 1,100,000 shares authorized, issued and outstanding at December 31, 1998 and 1999 (liquidation preference of $1,100,000) 1,100,000 1,100,000 ---------------- ---------------- Series B redeemable convertible preferred stock, $0.01 par value; 542,495 shares authorized, issued and outstanding at December 31, 1998 and 1999 (liquidation preference of $2,999,997) 2,999,997 2,999,997 ---------------- ---------------- Series C redeemable convertible preferred stock, $0.01 par value; 1,295,177 shares authorized, 1,289,749 shares issued and outstanding at December 31, 1998 and 1999 (liquidation preference of $11,878,588) 11,878,588 11,878,588 ---------------- ---------------- Stockholders' deficit: Common stock, $0.0001 par value; 7,000,000 shares authorized, 2,428,200 and 2,437,599 shares issued and outstanding at December 31, 1998 and 1999, respectively 243 244 Additional paid-in capital 4,439 1,106,493 Treasury stock, at cost, 30,750 and 44,000 shares at December 31, 1998 and 1999, respectively (1,208) (1,340) Deferred compensation - (954,295) Accumulated deficit (7,056,001) (15,207,706) ---------------- ---------------- Total stockholders' deficit (7,052,527) (15,056,604) ---------------- ---------------- Total liabilities, redeemable convertible preferred stock and stockholders' deficit $ 10,389,826 $ 2,636,373 ================ =================
The accompanying notes are an integral part of these consolidated financial statements. F-2 NEXTPOINT NETWORKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
1998 1999 Revenues: Licenses $ 387,037 $ 1,535,323 Services 22,749 55,896 ---------------- ---------------- 409,786 1,591,219 ---------------- ---------------- Cost of revenues: Licenses 3,900 24,050 Services 60,827 162,481 ---------------- ---------------- 64,727 186,531 ---------------- ---------------- Gross profit 345,059 1,404,688 ---------------- ---------------- Operating expenses: Research and development 2,215,527 2,630,913 Sales and marketing 2,313,589 5,370,761 General and administrative 1,105,197 1,563,298 Stock-based compensation - 142,061 ---------------- ---------------- Total operating expenses 5,634,313 9,707,033 ---------------- ---------------- Loss from operations (5,289,254) (8,302,345) Interest income, net 115,967 150,640 ---------------- ---------------- Net loss $ (5,173,287) $ (8,151,705) =============== ================
The accompanying notes are an integral part of these consolidated financial statements. F-3 NEXTPOINT NETWORKS, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
- ---------------------------------------------------------------------------------------------------------------------- SERIES A SERIES B SERIES C REDEEMABLE CONVERTIBLE REDEEMABLE CONVERTIBLE REDEEMABLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT Balance at December 31, 1997 1,100,000 $1,100,000 542,495 $2,999,997 -- $ -- Issuance of Series C redeemable convertible preferred stock 1,289,749 11,878,588 Repurchase of common stock Net loss ---------- ---------- -------- ---------- ---------- ------------ Balance at December 31, 1998 1,100,000 1,100,000 542,495 2,999,997 1,289,749 11,878,588 Issuance of common stock upon exercise of stock options Repurchase of common stock Deferred compensation Amortization of deferred compensation Net loss ---------- ---------- -------- ---------- ---------- ------------ Balance at December 31, 1999 1,100,000 $1,100,000 542,495 $2,999,997 1,289,749 $ 11,878,588 ========== ========== ======== ========== ========== ============ - ----------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL COMMON STOCK PAID-IN TREASURY STOCK DEFERRED ACCUMULATED SHARES PAR VALUE CAPITAL SHARES AMOUNT COMPENSATION DEFICIT TOTAL Balance at December 31, 1997 2,428,200 $ 243 $ 4,439 -- $ -- $ -- $ (1,785,464) $(1,780,782) Issuance of Series C redeemable convertible preferred stock (97,250) (97,250) Repurchase of common stock 30,750 (1,208) (1,208) Net loss (5,173,287) (5,173,287) ---------- ------- --------- -------- ------- ------------ ------------ ----------- Balance at December 31, 1998 2,428,200 243 4,439 30,750 (1,208) -- (7,056,001) (7,052,527) Issuance of common stock upon 9,399 1 5,698 5,699 exercise ofstock options Repurchase of common stock 13,250 (132) (132) Deferred compensation 1,096,356 (1,096,356) -- Amortization of deferred 142,061 142,061 compensation Net loss (8,151,705) (8,151,705) ---------- ------- --------- -------- ------- ------------ ------------ ----------- Balance at December 31, 1999 2,437,99 $ 244 $1,106,493 44,000 $(1,340) (954,295) $(15,207,706) $(15,056,604) ========== ======= ========= ======== ======= ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 NEXTPOINT NETWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
1998 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,173,287) $ (8,151,705) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation 124,070 279,230 Compensation expense for stock options granted - 142,061 Changes in assets and liabilities: Accounts receivable (164,331) (565,965) Prepaid expenses and other current assets (147,081) 85,333 Accounts payable 431,236 133,994 Accrued expenses 370,495 (239,122) Deferred revenue 56,483 396,600 ---------------- ---------------- Net cash used in operating activities (4,502,415) (7,919,574) ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (444,055) (485,071) Increase in other assets (2,100) (14,231) ---------------- ---------------- Net cash used in investing activities (446,155) (499,302) ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable 327,991 - Repayments of notes payable (8,930) (40,848) Proceeds from Series C redeemable convertible preferred stock, net of issuance costs 11,781,338 - Proceeds from stock option exercises - 5,699 Purchase of treasury stock, at cost (1,208) (132) ---------------- ---------------- Net cash (used in)/provided by financing activities (12,099,191) (35,281) ---------------- ---------------- Net increase in cash and cash equivalents 7,150,621 (8,454,157) Cash and cash equivalents, beginning of period 2,253,709 9,404,330 ---------------- ---------------- Cash and cash equivalents, end of period $9,404,330 $ 950,173 ================ =============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 17,170 $ 41,479 Notes payable issued for fixed assets 96,350 -
The accompanying notes are an integral part of these consolidated financial statements. F-5 1. NATURE OF THE BUSINESS NextPoint Networks, Inc. (the "Company") was incorporated as a Delaware corporation in November 1996. The Company develops, markets and supports a family of software products for monitoring and reporting network and application performance. Providing both network and end-user views of network performance data, the Company's products enable real-time management of distributed networks varying in size. The Company was considered a development stage enterprise, as defined in Statement of Financial Accounting Standards ("SFAS") No. 7, during the year ended December 31, 1998. In 1999, principal operations have commenced and, accordingly, the Company's consolidated financial statements are no longer presented as those of a development stage enterprise. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed in the preparation of the financial statements are as follows: PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements of the Company include the accounts of NextPoint Networks, Inc. and its wholly-owned subsidiary, NextPoint Networks Securities Corporation, a Delaware corporation. All significant intercompany transactions and balances have been eliminated in consolidation. CASH AND CASH EQUIVALENTS All highly liquid investments with an initial maturity of three months or less are considered to be cash equivalents. The Company invests excess cash primarily in money market funds of major financial institutions. Accordingly, these investments are subject to minimal credit and market risk. At December 31, 1998 and 1999, the Company's cash equivalents were $8,893,920 and $927,389, respectively. These investments are carried at cost, which approximates fair value. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, notes payable, and other accrued expenses. The carrying amounts of these instruments at December 31, 1998 and 1999 approximates their fair values. ACCOUNTS RECEIVABLE, CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS Financial instruments that potentially expose the Company to concentrations of credit risk include cash and cash equivalents and accounts receivable. The Company maintains substantially all of its money market funds with one financial institution which management believes has a high credit standing. To minimize credit risk related to accounts receivable, ongoing credit evaluations of customers' financial condition are performed. Revenue of $132,000 (36% of total revenue), $60,000 (15% of total revenue), $69,000 (18% of total revenue) and $46,000 (11% of total revenue) was attributable to individual customers in the year ended December 31, 1998. Revenue of $161,000 (10% of total F-6 revenue) was attributable to one customer in the year ended December 31, 1999. At December 31, 1998, accounts receivable from four customers were $154,000 (94% of gross accounts receivable). At December 31, 1999, accounts receivable from one customer was $128,000 (16% of gross accounts receivable). FIXED ASSETS Fixed assets are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Repair and maintenance costs are charged to expense as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in income. LONG-LIVED ASSETS In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company periodically evaluates the net realizable value of its long-lived assets and records impairment losses on those assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. Through December 31, 1999, the Company has not recognized an impairment loss on its long-lived assets. REVENUE RECOGNITION Revenue is derived from the licensing of computer software products and from maintenance and support services. The Company has adopted the guidelines of Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions" ("SOP 98-9"), both which provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. Purchasers of the Company's software licenses generally enter an initial annual maintenance and support contract, and, as such, the Company considers these multiple elements of a single arrangement. As software licenses are not sold individually, the Company employs the "residual method" of accounting for revenue recognition, as defined by SOP 98-9. The residual method requires that the portion of the total arrangement fee attributable to undelivered elements, as indicated by vendor specific objective evidence of fair value ("VSOE"), is deferred and subsequently recognized in accordance with SOP 97-2. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements, if all other revenue recognition criteria of SOP 97-2 are met. VSOE for maintenance and support services is determined based upon the prices charged to customers when these elements are sold separately, typically from the renewal of the annual service contracts. Software licenses are typically sold subject to a customer evaluation period, and requires some installation services prior to their effective use. In accordance with SOP 97-2, the Company does not recognize revenue from the sale of licenses until the evaluation and installation period ends, and the license is deemed delivered and accepted, provided that the Company has received a signed purchase order or contract, the license fee is fixed or determinable, and collection of the fee is probable. The Company recognizes revenue from maintenance and support services ratably over the contract period, recording any up-front payments as deferred revenue. F-7 Revenue on sales through resellers is not recognized until the end user completes the evaluation period. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income," requires a full set of general purpose financial statements to be expanded to include the reporting of "comprehensive income." Comprehensive income is comprised of two components, net income and other comprehensive income. For all periods presented, the Company's only component of comprehensive income or loss was the Company's reported net losses. RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS Costs associated with the research and development of the Company's products are expensed as incurred. Costs associated with the development of computer software are expensed prior to establishing technological feasibility, as defined by SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," and capitalized thereafter until commercial release of the software products. Software development costs eligible for capitalization have not been significant to date. ADVERTISING COSTS The Company expenses as incurred costs of producing advertising and sales-related collateral materials. Advertising expense for the periods ended December 31, 1998 and 1999, was $162,336 and $34,965, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for stock-based awards to its employees using the intrinsic value based method as prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation expense is recorded for options issued to employees in fixed amounts to the extent that the fixed exercise prices are less than the fair value of the Company's common stock at the date of the grant. The Company follows the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation." All stock-based awards to nonemployees are accounted for at their fair value. INCOME TAXES Deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided if, based upon the weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. RISKS AND UNCERTAINTIES The Company's future results of operations involve a number of risks and uncertainties that could affect the Company's future operating results and cause actual results to vary materially from expectations. Those factors include, but are not limited to, dependence on strategic partners, limited operating history, ability to fund and manage growth, and technological change. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. F-8 RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year's presentation. Such reclassifications had no effect on the Company's results of operations. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standard Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives"), and for hedging activities. SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of all years beginning after June 15, 2000, with earlier application encouraged. The Company does not currently use derivative instruments or engage in hedging activities. In November 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges" ("SAB 100"). In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB No. 100 expresses the views of the SEC staff regarding the accounting for and disclosure of certain expenses commonly reported in connection with exit activities and business combinations. The Company does not expect the provisions of SAB No. 100 to have a material impact on its financial statements. SAB No. 101 expresses the views of the SEC staff in applying generally accepted accounting principles to certain revenue recognition issues. The Company is currently determining the impact that SAB No. 101 will have on its financial position and results of operations. In March 2000, the Financial Accounting Standard Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The Company does not expect the application of FIN 44 to have a material impact on the Company's financial position or results of operations. 3. NOTE RECEIVABLE FROM STOCKHOLDER In November 1996, the Company loaned $25,000 to an employee. In July 1997, it loaned an additional $10,000 to the employee under the same agreement. The note bears interest at an annual rate of 6.6% compounded annually. The note is collateralized by the common stock owned by the employee. The principal and all unpaid accrued interest is payable on the earlier of (i) November 12, 2005, (ii) the closing of an initial public offering of the Company's common stock, (iii) the sale, transfer or assignment of substantially all the Company's assets, (iv) the liquidation of the Company or merger or consolidation of the Company into or with another entity, unless the shareholders of the Company immediately prior to such event own more than 50% of the voting power of the surviving entity immediately after the merger or consolidation, or (v) the termination of the borrower's employment. F-9 4. FIXED ASSETS Fixed assets consist of the following: ESTIMATED USEFUL LIFE DECEMBER 31, (YEARS) 1998 1999 Computer equipment 3-5 $ 470,302 $ 903,787 Furniture and fixtures 7 151,843 203,429 Leasehold improvements lease term 110,137 110,137 ---------------- ---------------- 732,282 1,217,353 Less: accumulated depreciation and amortization 153,915 433,145 ---------------- ---------------- $ 578,367 $ 784,208 ================ ================
Depreciation expense, including amortization, was $124,070 and $279,230 for the years ended December 31,1998 and 1999, respectively. 5. DEBT The Company has agreements with a bank for a revolving working capital line of credit and an equipment line of credit. Borrowings under the revolving line of credit are collateralized by substantially all of the Company's assets and may not exceed the lesser of $1,000,000 or eligible accounts receivable, as defined by the agreements. Interest is payable monthly at the bank's prime rate plus 0.5%. The revolving working capital line of credit expired unused on July 14, 1999 and was subsequently amended on January 18, 2000 (Note 13). Under the equipment line of credit, the Company may borrow up to $500,000 for the purchase of property and equipment. Interest is payable monthly at the bank's prime rate (9.25% at December 31, 1999) plus 0.75%. Drawings under this line were permitted through January 14, 1999, at which time the line converted to a term note, payable in 36 equal monthly installments of principal and interest beginning on February 14, 1999. Borrowings are secured by all assets of the Company. F-10 Under these agreements, the Company must meet certain financial and reporting covenants. The Company was in violation of certain of these covenants at December 31, 1999; however, a waiver of the violations was subsequently granted (Note 13). In connection with the revolving line of credit, the Company issued a warrant to purchase 5,428 shares of Series C Preferred Stock at $9.21 per share. The warrant was fully exercisable upon issuance and expires on July 14, 2005. The value ascribed to the warrant was not significant. In December 1997, the Company entered into a note payable with a third party related to certain leasehold improvements. The note is payable in monthly installments with a stated interest rate of 10% per year through May 2003. The note is guaranteed by the Company's landlord. At December 31, 1999, aggregate principal maturities of long-term debt are as follows: 2000 $ 104,310 2001 225,780 2002 34,488 2003 9,985 ---------------- $ 374,563 ================
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK At December 31, 1999, the Company's outstanding Series A Redeemable Convertible Preferred Stock ("Series A preferred stock"), Series B Redeemable Convertible Preferred Stock ("Series B preferred stock") and Series C Redeemable Convertible Preferred Stock ("Series C preferred stock") had the following characteristics: VOTING Holders of Series A, Series B and Series C preferred stock are entitled to the number of votes equal to the number of common shares into which the shares of preferred stock are convertible. DIVIDENDS The holders of the Series A, Series B and Series C preferred stock are entitled to cash dividends, out of funds legally available, when and if declared by the Board of Directors. In addition, the holders of the Series A, Series B and Series C preferred stock are entitled to receive a payment equal to any dividend declared or paid by the Company in respect to common stock for each share of common stock into which the convertible preferred stock is then convertible. LIQUIDATION PREFERENCE In the event of any liquidation, dissolution or winding-up of the affairs of the Company, the holders of Series A, Series B and Series C preferred stock are entitled to receive, prior to and in preference to holders of common stock, an amount equal to $1.00, $5.53 and $9.21 per share, respectively, plus any declared but unpaid dividends, or, if the remaining assets of the Company are insufficient to pay the full amounts entitled, the holders of Series A, Series B and Series C preferred stock will share ratably in the distribution of the remaining assets. F-11 The merger or consolidation of the Company into or with another corporation (except a merger or consolidation in which the holders of capital stock of the Company immediately prior to such merger or consolidation continue to hold immediately following such transaction at least 50% by voting power of the capital stock of the surviving corporation), or the sale of all or substantially all the assets of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Company for the purposes of this characteristic. CONVERSION Each Series A, Series B and Series C preferred share may be converted at any time, at the option of the stockholder, into one share of common stock, subject to certain anti-dilution adjustments. The number of resulting shares of common stock is determined by dividing the original issuance price of the preferred stock, $1.00, $5.53 and $9.21 for Series A, Series B and Series C preferred stock, respectively, by the conversion price of each share of preferred stock in effect at the time of conversion. At December 31, 1999, the conversion price of Series A, Series B and Series C preferred stock was $1.00, $5.53 and $9.21, respectively. The Series A, Series B and Series C preferred stock is automatically converted into common stock upon the closing of an initial public offering with net proceeds of at least $25 million and with a price per common share of at least $23.03 or in the event that the holders of two-thirds of the total number of each class of preferred shares elects to convert. REDEMPTION At any time on or after January 24, 2004, upon the written request of any holder of Series A, Series B or Series C preferred stock, each holder of outstanding shares of Series A, Series B or Series C preferred stock shall have the right to cause the Company to redeem the then outstanding shares over a three-year period at the respective original per share purchase price plus any declared but unpaid dividends in increments as follows:
DATE PERCENTAGE AMOUNT January 24, 2004 33% $ 5,320,869 January 24, 2005 50% 2,668,423 January 24, 2006 100% 7,989,293 ----------------- $15,978,585 =================
7. COMMON STOCK Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company's stockholders. Common stockholders are entitled to receive dividends, if any, as may be declared by the Board of Directors, subject to the preferential dividend rights of the Series A, Series B and Series C preferred stockholders. At December 31, 1999, the Company had 3,495,648 shares of its common stock reserved for issuance upon conversion of the Series A, Series B and Series C preferred stock and the exercise of stock options. RESTRICTED STOCK AGREEMENTS The Company has entered into stock restriction agreements with certain common stockholders. The agreements provide that, in the event these individuals are no longer employed by the Company, the Company has the right to repurchase any or all unvested shares. Shares subject to restriction vest over a three or four year period. At F-12 December 31, 1999, 16,800 shares of common stock were subject to repurchase by the Company, at a price of $0.01 per share. The Company repurchased 30,750 and 13,250 shares of common stock from shareholders during the years ended December 31, 1998 and 1999, respectively, at a total purchase price of $1,208 and $132, respectively. At December 31, 1999, the Company's outstanding common stock is subject to certain restrictions as to sale or transfer. The Company and its stockholders are entitled to a right of first refusal on shares offered for sale at the then-current fair market value. 8. STOCK OPTION PLAN In 1997, the Company adopted the NextPoint Networks, Inc. 1997 Stock Incentive Plan (the "1997 Plan") which provides for the grant of incentive stock options and nonqualified stock options, stock awards and stock purchase rights for the purchase of up to 700,000 shares of the Company's common stock by officers, employees, consultants and directors of the Company. The Board of Directors is responsible for administration of the 1997 Plan. The Board determines the term of each option, the option exercise price, the number of shares for which each option is granted and the rate at which each option is exercisable. Incentive stock options may be granted to any officer or employee at an exercise price per share of not less than the fair value per common share on the date of the grant (not less than 110% of fair value in the case of holders of more than 10% of the Company's voting stock) and with a term not to exceed ten years from the date of the grant (five years for incentive stock options granted to holders of more than 10% of the Company's voting stock). Nonqualified stock options may be granted to any officer, employee, consultant or director at an exercise price per share of not less than the book value per share. Under the 1997 plan, all restricted stock and all other stock-based awards, other than options and stock appreciation rights, become immediately vested in full and free of all restrictions and conditions upon (i) the merger or consolidation of the Company which results in the voting securities of the Company outstanding immediately prior to such event representing less than 60% of the combined voting power of the voting securities of the surviving company or acquiring entity after such event, (ii) any sale of all or substantially all of the assets of the Company, (iii) the complete liquidation of the Company, or (iv) the acquisition of 50% or more of the voting power of the Company's then outstanding securities by another entity. Under the 1997 plan, all options and stock appreciation rights become immediately exercisable in full and free of all restrictions and conditions, at the discretion of the Board of Directors, upon (i) the merger or consolidation of the Company which results in the voting securities of the Company outstanding immediately prior to such event representing less than 60% of the combined voting power of the voting securities of the surviving company or acquiring entity after such event, (ii) any sale of all or substantially all of the assets of the Company, or (iii) the complete liquidation of the Company. All options and stock appreciation rights become immediately exercisable in full and free of all restrictions and conditions upon the acquisition of 50% or more of the voting power of the Company's then outstanding securities by another entity. During 1999, the Company granted stock options to purchase 358,000 shares of its common stock at various exercise prices. The Company recorded compensation expense and deferred compensation relating to these options totaling $127,899 and $1,053,433, F-13 respectively, representing the differences between the estimated fair market value of the common stock on the date of grant and the exercise price. Compensation relating to these options is recorded as a component of stockholders' deficit and is being amortized over the vesting periods of the related options. In May 1999, the Company granted options to purchase 1,250 shares of common stock to a consultant. The fair value ascribed to the shares was $4,300 which was recorded as deferred compensation at the date of grant, and fully amortized to expense during the year ended December 31, 1999. In September 1999, the Company granted 87,650 stock options to purchase common stock at $0.90 per share to certain employees. At the grant date, the Company estimated the fair value of its common stock to be $1.25 per share. In accordance with APB No. 25, the Company recorded $30,678 of deferred compensation which will be charged to the Company's operations over the vesting period of the options, generally four years. For the year ended December 31, 1999, the Company recorded $1,917 of compensation expense related to these options. In December 1999, the Company granted 2,500 stock options to purchase common stock to a consultant in exchange for services performed. The fair value ascribed to the shares was $7,945 which was recorded as deferred compensation at the date of grant, and fully amortized to expense during the year ended December 31, 1999. Activity under the Option Plan during 1998 and 1999 was as follows:
1998 1999 ------------------------------- ------------------------------ WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE Outstanding at beginning of year 53,300 $ 0.50 315,850 $ 0.75 Granted 286,000 0.77 358,000 0.97 Exercised - - (9,399) 0.61 Canceled (23,450) 0.50 (145,701) 0.75 -------------- --------------- Outstanding at end of year 315,850 $ 0.75 518,750 $ 0.91 ============== =============== Options exercisable at end of year 7,713 $ 0.50 61,688 $ 0.76 ============== =============== Weighted-average fair value of options granted during the year $ 0.17 $ 0.23 ============== =============== Options available for future grant 281,700 84,651 ============== ===============
The weighted-average remaining contractual life of stock options outstanding at December 31, 1999 is as follows:
WEIGHTED- AVERAGE REMAINING CONTRACTUAL EXERCISE SHARES LIFE PRICE OUTSTANDING (IN YEARS) $ 0.50 38,000 8.00 $ 0.75 37,750 8.42 $ 0.90 375,500 9.16 $ 1.25 67,500 9.67 ------------- 518,750 9.09 =============
F-14 Except as described above, no compensation costs has been recognized for employee stock-based compensation to date. Had compensation cost been determined based on the estimated fair value at the grant dates consistent with the provisions of SFAS No. 123, the Company's net loss for the years ended December 31, 1998 and 1999 would have been the pro forma amounts indicated below. Because options vest over several years and additional option grants are expected to be made in future years, the above pro forma results are not representative of the pro forma results for future years. For purposes of pro forma disclosure, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for grants in 1998 and 1999: no dividend yield; no volatility; risk-free interest rates of 4.9% and 5.7%, respectively; and expected lives of five years.
YEAR ENDED DECEMBER 31, 1998 1999 Net loss: As reported $5,173,287 $8,151,705 Pro forma 5,179,996 8,160,991
9. INCOME TAXES No income tax provision or benefit has been recorded as the company has incurred losses since inception. The reconciliation of the provision for income taxes computed at the U.S. federal statutory tax rate to the actual provision is as follows:
YEAR ENDED DECEMBER 31, 1998 1999 Statutory federal rate of 34% $ (1,758,918) $ (2,771,580) Research and development credit generated (107,993) (142,828) State income taxes, net of federal benefit (376,435) (570,734) Permanent differences 3,886 14,217 Change in valuation allowance 2,236,579 3,473,894 Other 2,881 (2,969) ---------------- ---------------- $ - $ - ================ ================
F-15 Deferred tax assets are comprised of the following:
DECEMBER 31, 1998 1999 Net operating loss carryforward $2,740,146 $ 5,969,697 Research and development credit carryforwards 243,194 461,113 Other 16,231 42,655 ------------ ------------ Net deferred tax assets 2,999,571 6,473,465 Deferred tax asset valuation allowance (2,999,571) (6,473,465) ------------ ------------ $ - $ - ============ ============
Under generally accepted accounting principles, the benefit associated with future deductible differences is recognized if it is more likely than not that the benefit will be realized. Management believes that, based on the Company's historical results of operations, it is more likely than not that a substantial amount of the Company's deferred tax assets will not be realized. Accordingly, the Company has recorded a valuation allowance of $2,999,571 and $6,473,465 at December 31, 1998 and 1999, respectively. Management believes that the net deferred tax asset represents management's best estimate, based upon the weight of available evidence, of the deferred tax asset that will be realized. If such evidence were to change, based upon near-term operating results and longer-term projections, the amount of the valuation allowance recorded against the gross deferred tax asset may be decreased or increased. At December 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $14,692,200 and $14,649,261, respectively, available to reduce future taxable income which expire at various dates between 2001 and 2019. The Company also has federal and state research and development tax credit carryforwards of approximately $305,051 and $232,551, respectively, available to reduce future tax liabilities which expire at various dates between 2001 and 2019. Under the provisions of the U.S. Internal Revenue Code, certain substantial changes in the Company's ownership may limit the amount of federal net operating loss carryforwards and research and development credit carryforwards which could be utilized annually to offset future federal taxable income and taxes payable. 10. COMMITMENTS The Company leases its facilities under noncancelable leases that expire in May 2001. Rent expense for the year ended December 31, 1998 and 1999 was $302,753 and $192,687, respectively. Future minimum lease commitments at December 31, 1999 are as follows: F-16
OPERATING YEAR ENDING DECEMBER 31, LEASES 2000 $ 302,753 Thereafter 142,228 ---------------- Total minimum lease payments $ 444,981 ================
11. 401(K) SAVINGS PLAN The Company has established a retirement savings plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan covers substantially all employees of the Company who meet minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the 401(k) Plan may be made at the discretion of the Board of Directors. The Company has not made any contributions to the 401(k) Plan through December 31, 1999. 12. SEGMENT AND GEOGRAPHIC INFORMATION The Company organizes itself as one segment and conducts its operations in the United States. The Company sells its software licenses and services to domestic and international customers. Revenues were generated from the following geographic regions:
YEAR ENDED DECEMBER 31, 1998 1999 United States $ 385,600 $1,188,419 Other 24,200 402,800 ---------------- ---------------- $ 409,800 $1,591,219 ================ ================
13. SUBSEQUENT EVENTS On January 18, 2000, the Company entered into a loan modification agreement with its bank, which, among other things, increased the amount available under its revolving line of credit to $1,500,000, extended the terms of its revolving line of credit and equipment credit line to January 18, 2001 and June 1, 2003, respectively, and established a committed bridge loan (the "bridge loan"). The bridge loan provided advances to the Company of up to $2,000,000, $1,000,000 of which was available to the Company through January 31, 2000, and an additional $1,000,000 of which was available to the Company contingent upon its ability to obtain a commitment to raise $2,000,000 in additional subordinated debt from a third party and the Company's receipt of a commitment to purchase certain capital stock in the Company. The bridge loan matured on April 18, 2000, and was subsequently extended to June 30, 2000 by a second loan modification agreement, dated June 9, 2000. Pursuant to the second loan modification agreement, the revolving line of credit and certain unused portions of the equipment credit line were terminated. In exchange for such extension, the Company granted warrants to purchase 15,648 shares of the Company's Series C preferred stock at an exercise price of $5.53 per share. The warrants are exercisable immediately and expire F-17 on June 9, 2005. Additional warrants are to be granted under the agreement upon the maturity of the bridge loan, and as of each 30th day thereafter, so long as the bridge loan borrowings are outstanding. The number of Series C preferred shares to be issued under each subsequent warrant is determined by multiplying the then outstanding principal amount under the bridge loan and the equipment loan by a factor of 0.025, and dividing by $9.21 per share. Borrowings under the modified equipment credit line and bridge loan accrued interest at the prime rate plus 0.75% and the prime rate plus 2.00%, respectively. The agreement for this facility requires that the Company maintain certain financial ratios and the initial loan modification agreement waives the bank's right to accelerate payments on borrowings outstanding as of December 31, 1999, due to certain violations of covenants in effect at that date. On January 27, 2000, the Company borrowed $1,000,000 under the bridge loan facility. This facility is secured by a lien against substantially all of the Company's assets, and is guaranteed by a subsidiary of the Company. In conjunction with this facility, the Company issued a warrant to purchase 17,589 shares of the Company's Series C preferred stock at an exercise price of $9.21 per share. The exercise price for such shares was reduced to $5.53 per share by the second loan modification agreement. This warrant was exercisable immediately and expires on January 18, 2005. On January 21, 2000, the Company entered into a demand convertible loan and security agreement with certain investors in the Company. The agreement establishes a $2,000,000 revolving credit loan, payable on the earlier of demand or one hundred eighty days after the initial draw under the bank bridge loan. Interest on borrowings under the revolving credit loan accrues at 10.00% per year, until notice of demand or maturity, after which, interest accrues at 15.00% per year until such borrowings are paid in full. Borrowings under this revolving credit loan were subject to the Company borrowing $1,000,000 under its bridge loan with its bank and is secured by a junior lien against substantially all the assets of the Company. Upon a qualified financing transaction, defined as a sale of the Company's common or preferred stock for at least an aggregate of $10,000,000, the outstanding principal amounts under the revolving credit loan are convertible, at the holder's option, into shares of such financing at that financing's per share price. In the event of a merger or sale of the Company, outstanding principal amounts are convertible, at the holder's option, into shares of Series C preferred stock at a per share price of the lesser of (i) $9.21 per share, (ii) 75% of the preferred stock per share price as established by the terms of the merger, or (iii) $5.53 per share if borrowings under the loan have not been repaid 60 days following its maturity date. The agreement for this facility requires that the Company maintain certain financial ratios. On March 13, 2000, the Company borrowed $1,000,000 under this facility and issued to the investors initial warrants to purchase an aggregate of 10,857 shares of the Company's Series C preferred stock at an exercise price of $9.21 per share. This warrant was exercisable immediately and expires on March 13, 2005. Additional warrants to purchase an aggregate of 21,715 shares of the Company's Series C preferred stock was issued on May 12, 2000, and further warrants are to be granted under the agreement as of each 30th day thereafter, so long as the borrowings are outstanding. The number of Series C preferred shares to be issued under each subsequent warrant is determined by multiplying the then outstanding principal amount under the revolving credit loan by a factor of 0.10, and dividing by the exercise price of the warrants. The exercise price of the warrants is the lesser of (i) $9.21 per share, or (ii) $5.53 per share if borrowings under the loan have not been repaid 60 days following its maturity date. The term of these additional warrants will be five years from the date of issuance. Total warrants to be issued under these terms cannot exceed an aggregate exercise price of $800,000. F-18 On February 9, 2000, a reseller filed suit against the Company in the Superior Court of California, seeking specific performance for certain alleged obligations of the Company or an award of actual consequential and punitive damages and recovery of all legal costs. The suit alleges, among other things, that the Company materially breached obligations under certain contractual agreements and committed acts of fraud against the plaintiff. Subsequent motions were filed and granted, moving the venue of the case to the federal courts. Motions to move the case to the Massachusetts state courts were filed on March 17, 2000. On April 10, 2000, the Company filed a motion to dismiss all claims, and on May 19,2000, the court dismissed the resellers claims for improper venue. Discovery on these claims has not yet begun, and, therefore, the Company cannot predict the outcome or range of possible loss, if any. The Company intends to vigorously defend against these claims. On February 10, 2000, the Board of Directors approved the NextPoint Networks, Inc. 2000 Stock Incentive Plan, with an authorization to grant awards of up to 750,000 shares of common stock. On July 7, 2000, the Company was acquired by NetScout Systems, Inc. F-19 NEXTPOINT NETWORKS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30, 1999 2000 (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 950,173 $ 244,688 Accounts receivable, net of allowance for doubtful accounts of $80,000 and $102,799 at December 31, 1999 and June 30, 2000 (unaudited), respectively 730,296 1,144,422 Prepaid expenses and other current assets 107,254 97,427 -------------- --------------- Total current assets 1,787,723 1,486,537 -------------- --------------- Note receivable from stockholder 35,000 35,000 Fixed assets, net 784,208 852,332 Other assets 29,442 30,597 -------------- --------------- Total assets $ 2,636,373 $ 2,404,466 ============== =============== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Current portion of note payable to bank $ 85,040 $ 89,350 Current portion of note payable - other 19,270 3,519,239 Accounts payable 536,060 516,440 Accrued expenses 350,686 776,072 Deferred revenue 453,083 785,240 -------------- --------------- Total current liabilities 1,444,139 5,686,341 -------------- --------------- Long-term portion of note payable to bank 218,673 141,472 Long-term portion of note payable - other 51,580 42,686 -------------- --------------- Total liabilities 1,714,392 5,870,499 -------------- --------------- Series A redeemable convertible preferred stock, $0.01 par value; 1,100,000 shares authorized, issued and outstanding at December 31, 1999 and June 30, 2000 (unaudited) (liquidation preference of $1,100,000) 1,100,000 1,100,000 -------------- --------------- Series B redeemable convertible preferred stock, $0.01 par value; 542,495 shares authorized, issued and outstanding at December 31, 1999 and June 30, 2000 (unaudited) (liquidation preference of $2,999,997) 2,999,997 2,999,997 -------------- --------------- Series C redeemable convertible preferred stock, $0.01 par value; 1,295,177 shares authorized, 1,289,749 shares issued and outstanding at December 31, 1999 and June 30, 2000 (unaudited) (liquidation preference of $11,878,588) 11,878,588 11,878,588 -------------- --------------- Stockholders' deficit: Common stock, $0.0001 par value; 7,000,000 shares authorized, 2,437,599 and 2,438,999 shares issued and outstanding at December 31, 1999 and and June 30, 2000 (unaudited), respectively 244 245 Additional paid-in capital 1,106,493 4,049,122 Treasury stock, at cost, 44,000 and 54,250 shares at December 31, 1999 and June 30, 2000 (unaudited), respectively (1,340) (2,163) Deferred compensation (954,295) (1,794,922) Accumulated deficit (15,207,706) (21,696,900) -------------- --------------- Total stockholders' deficit (15,056,604) (19,444,618) -------------- --------------- Total liabilities, redeemable convertible preferred stock and stockholders' deficit $ 2,636,373 $ 2,404,466 ============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements. F-20 NEXTPOINT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 1999 2000 (UNAUDITED) Revenues: Licenses $ 695,164 $ 1,993,652 Services 3,998 82,471 ---------------- ---------------- 699,162 2,076,123 ---------------- ---------------- Cost of revenues: Licenses 10,427 29,905 Services 60,482 56,739 ---------------- ---------------- 70,909 86,644 ---------------- ---------------- Gross profit 628,253 1,989,479 ---------------- ---------------- Operating expenses: Research and development 1,357,212 1,495,249 Sales and marketing 2,324,013 3,390,576 General and administrative 624,686 1,440,058 Stock-based compensation 77,803 231,021 ---------------- ---------------- Total operating expenses 4,383,714 6,556,904 ---------------- ---------------- Loss from operations (3,755,461) (4,567,425) Interest income 150,397 20,782 Interest expense (18,247) (1,942,551) ---------------- ---------------- Net loss $ (3,623,311) $ (6,489,194) ================ ================
The accompanying notes are an integral part of these condensed consolidated financial statements. F-21 NEXTPOINT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 1999 2000 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,623,311) $ (6,489,194) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation 103,363 187,718 Compensation expense for stock options granted 77,803 231,021 Interest expense related to beneficial conversion feature and warrants - 1,862,682 Changes in assets and liabilities: Accounts receivable (526,670) (414,126) Prepaid expenses and other current assets 10,651 9,827 Accounts payable and accrued expenses (246,294) 405,767 Deferred revenue 222,688 332,157 ---------------- ---------------- Net cash used in operating activities (3,981,770) (3,874,148) ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (64,350) (255,842) Increase in other assets (13,076) (1,155) ---------------- ---------------- Net cash used in investing activities (77,426) (256,997) ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable - 3,500,000 Repayments of notes payable (38,807) (81,816) Proceeds from stock option exercises 2,455 8,299 Purchase of treasury stock, at cost (67) (823) ---------------- ---------------- Net cash (used in)/provided by financing activities (36,419) 3,425,660 ---------------- ---------------- Net decrease in cash and cash equivalents (4,095,615) (705,485) Cash and cash equivalents, beginning of period 9,404,330 950,173 ---------------- ---------------- Cash and cash equivalents, end of period $ 5,308,715 $ 244,688 ================ ================
The accompanying notes are an integral part of these condensed consolidated financial statements. F-22 NEXTPOINT NETWORKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Nextpoint Networks, Inc. (the "Company") at June 30, 2000 and for the six months ended June 30, 2000 and 1999 are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, the June 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 six-month period ended June 30, 2000 are not necessarily indicative of the results of operations that may be expected for any future period. The balance sheet as of December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 2. INTEREST EXPENSE Interest expense for the six-month period ended June 30, 2000 includes a $1,328,990 charge for debt discount representing the fair value of a beneficial conversion feature embedded in a $2,000,000 demand convertible loan facility entered into on January 21, 2000. Also included in interest expense for the six-month period ended June 30, 2000 is a $533,692 charge related to the amortization of debt discount resulting from detachable warrants to purchase 87,524 shares of Series C redeemable convertible preferred stock issued with various loan facilities entered into during the period. 3. SEGMENT AND GEOGRAPHIC INFORMATION The Company organizes itself as one segment and conducts its operations in the United States. The Company sells its software licenses and services to domestic and international customers. Revenues were generated from the following geographic regions: SIX MONTHS ENDED JUNE 30, 1999 2000 United States $ 504,859 $2,065,561 Other 194,303 10,562 --------------- --------------- $ 699,162 $2,076,123 =============== =============== 4. ACQUISITION On July 7, 2000, the Company was acquired by NetScout Systems, Inc. F-23 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following unaudited pro forma combined financial information gives effect to the acquisition by NetScout Systems, Inc. ("NetScout") of NextPoint Networks, Inc. ("NextPoint") on July 7, 2000 in a transaction to be accounted for using the purchase method. The unaudited pro forma combined balance sheet is based on the individual balance sheets of NetScout and NextPoint and has been prepared as if the acquisition by NetScout of NextPoint occurred on June 30, 2000. The unaudited pro forma combined statements of operations are based on the individual statements of operations of NetScout and NextPoint, and combines the results of operations of NetScout for the year ended March 31, 2000 and NextPoint for the year ended December 31, 1999 as if the acquisition occurred on April 1, 1999 and the results of operations of NetScout for the three months ended June 30, 2000 and NextPoint for the three months ended March 31, 2000 as if the acquisition occurred on April 1, 2000. The allocation of the purchase price to tangible and intangible assets, including deferred income taxes, as well as the related amortization expense, is preliminary and based on estimates only and may change materially as a result of the completion of NetScout's evaluation of the fair value of the net assets acquired. The unaudited pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the financial position or operating results that would have been achieved if the acquisition had been consummated as of the beginning of the period presented, nor are they necessarily indicative of the future financial position or operating results of NetScout. The unaudited pro forma combined financial information does not give effect to any cost savings or restructuring and integration costs which may result from the integration of NetScout and NextPoint's operations. Such costs related to restructuring and integration have not yet been determined and NetScout expects to charge such costs to operations during the quarter incurred. The unaudited pro forma combined financial information should be read in conjunction with NetScout's audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended March 31, 2000 and its quarterly report on Form 10-Q for the three months ended June 30, 2000 and NextPoint's financial statements included elsewhere in this Form 8-K/A. F-24 NETSCOUT SYSTEMS, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 2000 (IN THOUSANDS)
PRO FORMA PRO FORMA NETSCOUT NEXTPOINT ADJUSTMENTS COMBINED --------- --------- ----------- ---------- ASSETS Current assets: Cash and cash equivalents $ 56,722 $ 245 $ (19,533) A (3,293) F $ 34,141 Marketable securities 17,611 - - 17,611 Accounts receivable, net 12,604 1,145 - 13,749 Inventories 4,362 - - 4,362 Deferred income taxes 1,022 - - 1,022 Prepaids and other current assets 4,306 97 (500) D 3,903 --------- --------- ----------- ---------- Total current assets 96,627 1,487 (23,326) 74,788 Fixed assets, net 6,051 852 - 6,903 Deferred income taxes 599 - 1,000 H 1,599 Note receivable from stockholder - 35 (35) A - Other assets - 31 - 31 Intangible assets - - 51,153 A 51,153 --------- --------- ----------- ---------- Total assets $ 103,277 $ 2,405 $ 28,792 $ 134,474 ========= ========= =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 10,084 $ 1,293 $ 1,425 C $ 12,802 Deferred revenue 7,357 785 (492) A 7,650 Current portion of notes payable - 3,609 (500) D (3,109) F - --------- --------- ----------- ---------- Total current liabilities 17,441 5,687 (2,676) 20,452 Notes payable, net of current portion - 184 (184) F - --------- --------- ----------- ---------- Total liabilities 17,441 5,871 (2,860) 20,452 --------- --------- ----------- ---------- Redeemable convertible preferred stock - 15,979 (15,979) B - --------- --------- ----------- ---------- Stockholders' equity: Common stock 31 -- 2 A 33 Addition paid-in capital 67,658 4,049 (4,049) B 29,164 A 3,981 I 100,803 Deferred compensation (518) (1,795) 1,795 B (980) A (3,981) I (5,479) Treasury stock (25,306) (2) 2 B (25,306) Retained earnings 43,971 (21,697) 21,697 B 43,971 --------- --------- ----------- ---------- Total stockholders' equity 85,836 (19,445) 47,631 114,022 --------- --------- ----------- ---------- Total liabilities and stockholders' equity $ 103,277 $ 2,405 $ 28,792 $ 134,474 ========= ========= =========== ==========
See accompanying notes to the unaudited pro forma combined financial information F-25 NETSCOUT SYSTEMS, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEARS ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA)
NETSCOUT NEXTPOINT PRO FORMA PRO FORMA MARCH 31, 2000 DECEMBER 31, 1999 ADJUSTMENTS COMBINED ------------------- ------------------------ ----------------- ----------------- Revenue: Product $ 57,206 $ - $ - $ 57,206 Service 12,804 56 - 12,860 License and royalty 16,149 1,535 - 17,684 ------------------- ------------------------ ----------------- ----------------- Total revenue 86,159 1,591 - 87,750 ------------------- ------------------------ ----------------- ----------------- Cost of revenue Product 21,139 - - 21,139 Service 1,718 162 - 1,880 License - 24 - 24 ------------------- ------------------------ ----------------- ----------------- Total cost of revenue 22,857 186 - 23,043 ------------------- ------------------------ ----------------- ----------------- Gross margin 63,302 1,405 - 64,707 ------------------- ------------------------ ----------------- ----------------- Operating expenses: Research and development 9,526 2,631 122 K 12,279 Sales and marketing 27,945 5,371 131 K 33,447 General and administrative 4,631 1,563 1,915 K 8,109 Stock-based compensation - 142 (142) J - Amortization of intangibles - - 12,230 A 12,230 ------------------- ------------------------ ----------------- ----------------- Total operating expenses 42,102 9,707 14,256 66,065 ------------------- ------------------------ ----------------- ----------------- Income (loss) from operations 21,200 (8,302) (14,256) (1,358) Interest income, net 2,551 151 (1,027) E 1,675 ------------------- ------------------------ ----------------- ----------------- Income (loss) before provision for income taxes 23,751 (8,151) (15,283) 317 Provision for income taxes 8,539 - (5,138) G 3,401 ------------------- ------------------------ ----------------- ----------------- Net income (loss) $ 15,212 $ (8,151) $ (10,145) $ (3,084) =================== ======================== ================= ================= Basic net income (loss) per share $ 0.70 $ (0.13) Diluted net income (loss) per share $ 0.56 $ (0.13) Shares used in computing: Basic net income (loss) per share 21,750 1,878 L 23,628 Diluted net income (loss) per share 26,496 23,628
See accompanying notes to the unaudited pro forma combined financial information. F-26 NETSCOUT SYSTEMS, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA)
NETSCOUT NEXTPOINT PRO FORMA PRO FORMA JUNE 30, 2000 MARCH 31, 2000 ADJUSTMENTS COMBINED ------------------- -------------------- ----------------- ----------------- Revenue: Product $ 17,761 $ - $ - $ 17,761 Service 3,976 21 - 3,997 License and royalty 3,432 1,031 - 4,463 ------------------- -------------------- ----------------- ----------------- Total revenue 25,169 1,052 - 26,221 ------------------- -------------------- ----------------- ----------------- Cost of revenue Product 6,094 - - 6,094 Service 595 27 - 622 License - 15 - 15 ------------------- -------------------- ----------------- ----------------- Total cost of revenue 6,689 42 - 6,731 ------------------- -------------------- ----------------- ----------------- Gross margin 18,480 1,010 - 19,490 ------------------- -------------------- ----------------- ----------------- Operating expenses: Research and development 2,572 667 30 K 3,269 Sales and marketing 8,727 1,492 33 K 10,252 General and administrative 1,594 505 449 K 2,548 Stock-based compensation - 110 (110) J - Amortization of intangibles - - 3,058 A 3,058 ------------------- -------------------- ----------------- ----------------- Total operating expenses 12,893 2,774 3,460 19,127 ------------------- -------------------- ----------------- ----------------- Income (loss) from operations 5,587 (1,764) (3,460) 363 Interest income (expense), net 1,034 (22) (257) E 755 ------------------- -------------------- ----------------- ----------------- Income (loss) before provision for income taxes 6,621 (1,786) (3,717) 1,118 Provision for income taxes 2,317 - (1,114) G 1,203 ------------------- -------------------- ----------------- ----------------- Net income (loss) $ 4,304 $ (1,786) $ (2,603) $ (85) =================== ==================== ================= ================= Basic net income (loss) per share $ 0.16 $ (0.00) Diluted net income (loss) per share $ 0.15 $ (0.00) Shares used in computing: Basic net income (loss) per share 26,762 1,832 L 28,594 Diluted net income (loss) per share 27,954 28,594
See accompanying notes to the unaudited pro forma combined financial information. F-27 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION 1. PRO FORMA BASIS OF PRESENTATION AND ADJUSTMENTS The foregoing unaudited pro forma combined financial information gives effect to the acquisition by NetScout of NextPoint in a transaction accounted for using the purchase method. The unaudited pro forma combined balance sheet is based on the individual balance sheets of NetScout and NextPoint and has been prepared as if the acquisition by NetScout of NextPoint occurred on June 30, 2000. The unaudited pro forma combined statements of operations are based on the individual statements of operations of NetScout and NextPoint, and combines the results of operations of NetScout for the year ended March 31, 2000 and NextPoint for the year ended December 31, 1999 as if the acquisition occurred on April 1, 1999 and the results of operations of NetScout for the three months ended June 30, 2000 and NextPoint for the three months ended March 31, 2000 as if the acquisition occurred on April 1, 2000. On July 7, 2000, NetScout acquired all of the outstanding common and preferred stock of NextPoint in exchange for 1,831,518 shares of NetScout common stock and $19.5 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 for NextPoint common stock. In addition, 267,602 shares of NetScout common stock have been reserved and will be issued to two founding shareholders and employees of NextPoint in accordance with the terms of the acquisition. The initial value of the F-28 acquisition was $52.9 million based on the fair value of the consideration paid plus direct acquisition costs. The allocation of the purchase price is preliminary and based on estimates only. A final allocation of the purchase price will be determined in NetScout's second quarter and changes will result in a change to the amounts allocated to tangible and intangible assets, including deferred income taxes, recorded in connection with the acquisition. 2. PRO FORMA ADJUSTMENTS TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION A. The initial purchase price of $52.9 million is based on the consideration paid to NextPoint stockholders including common stock, options, warrants and cash, plus acquisition related expenses. For the purposes of the presentation of the unaudited pro forma combined financial information, NetScout has allocated $1.8 million of the purchase price to net liabilities assumed of $0.2 million based on the book values as of June 30, 2000, deferred income taxes of $1.0 million and deferred compensation of $1.0 million. The remainder of $51.1 million has been allocated to intangible assets which are expected to include: completed technology, workforce, trademarks, noncompetition agreements and goodwill. Based on an estimated useful life of three to five years for such intangible assets, the unaudited pro forma combined financial information includes an adjustment of $12.2 million for the year ended March 31, 2000 and $3.1 million for the three months ended June 30, 2000 for amortization expense. The allocation of the purchase price to tangible and intangible asset, as well as the related amortization expense, may change materially as a result of the completion of NetScout's evaluation of the fair value of the net assets acquired. B. Elimination of NextPoint equity accounts. C. Increase in accrued expenses for estimated acquisition related expenses of $1.4 million. D. Elimination of intercompany balances between NetScout and NextPoint. E. Decrease in interest income resulting from cash payment of $19.5 million and the repayment of notes payable of $3.3 million. F. Decrease in notes payable to reflect NetScout repayment subsequent to the acquisition. G. Decrease in provision for income taxes as a result of the various pro forma adjustments. H. The net effect of an increase in deferred income tax assets for applicable net operating losses acquired from NextPoint and an increase in deferred income tax liabilities related to intangible assets, other than goodwill. F-29 I. Increase in deferred compensation and additional paid-in capital for the fair value of common stock to be issued to two founding shareholders and employees of NextPoint as they remain continuously employed by NetScout through June 30, 2002. J. Elimination of stock-based compensation expense related to options issued by NextPoint prior to the acquisition. K. Increase in research and development, sales and marketing, and general and administrative expense for the amortization of deferred compensation on unvested options issued by NetScout in exchange for unvested NextPoint options and for the amortization of deferred compensation on common stock issued to two founding shareholders and employees of NextPoint during the unaudited pro forma period presented. L. Basic and diluted net loss per share assumes that the 1,831,518 shares of NetScout's common stock issued in the acquisition were outstanding for the entire period and assumes that 46,138 and 22,097 shares of NetScout's common stock were issued to two founding shareholders and employees of NextPoint as they remained continuously employed by NetScout during the unaudited pro forma combined statements of operations for the year ended March 31, 2000 and for the three months ended June 30, 2000, respectively. All potential common stock have been excluded from the calculation of pro forma net loss per share as their inclusion would be anti-dilutive. F-30 (c) EXHIBITS. EXHIBIT NO. DESCRIPTION - ----------- ----------- *2.1 Agreement and Plan of Reorganization dated as of June 13, 2000 by and among NetScout Systems, Inc., NetScout Service Level Corporation, NextPoint Networks, Inc. and certain stockholders of NextPoint Networks, Inc. *10.1 Registration Rights Agreement dated as of July 7, 2000, by and among NetScout Systems, Inc., certain NextPoint stockholders, certain NextPoint Warrant Holders and Silicon Valley Bank. 23.1 Consent of PricewaterhouseCoopers LLP. *99.1 Press Release dated as of June 14, 2000. *99.2 Press Release dated as of July 7, 2000. - ------------------ *Previously filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned officer. NETSCOUT SYSTEMS, INC. September 20, 2000 By: /s/ Anil K. Singhal ---------------------------------------- Anil K. Singhal Chairman and Chief Executive Officer EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- *2.1 Agreement and Plan of Reorganization dated as of June 13, 2000 by and among NetScout Systems, Inc., NetScout Service Level Corporation, NextPoint Networks, Inc. and certain stockholders of NextPoint Networks, Inc. *10.1 Registration Rights Agreement dated as of July 7, 2000, by and among NetScout Systems, Inc., certain NextPoint stockholders, certain NextPoint Warrant Holders and Silicon Valley Bank. 23.1 Consent of PricewaterhouseCoopers LLP *99.1 Press Release dated as of June 14, 2000. *99.2 Press Release dated as of July 7, 2000. - ------------------ *Previously filed. EX-23.1 2 a2026065zex-23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-88131, 333-90971, 333-95647 and 333-41880) of NetScout Systems, Inc. of our report dated June 9, 2000, except as for Note 13, as to which the date is July 7, 2000, relating to the consolidated financial statements of NextPoint Networks, Inc., which appear in this Amendment No. 1 to Current Report on Form 8-K of NetScout Systems, Inc. dated September 20, 2000. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts September 20, 2000 -----END PRIVACY-ENHANCED MESSAGE-----