-----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, JFw4cx4CUVFvrct3nOu7wqmExeqIk0dEUedIKDF2Mnqp/YvQd/f8BpqLlHN48A6p Ps6/1jcquL5Fip+BpRNq8Q== 0001047469-99-015896.txt : 19990423 0001047469-99-015896.hdr.sgml : 19990423 ACCESSION NUMBER: 0001047469-99-015896 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 32 FILED AS OF DATE: 19990422 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETSCOUT SYSTEMS INC CENTRAL INDEX KEY: 0001078075 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 042837575 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-76843 FILM NUMBER: 99599195 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 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NETSCOUT SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 7373 04-2837575 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification organization) Number)
------------------------ NETSCOUT SYSTEMS, INC. 4 TECHNOLOGY PARK DRIVE WESTFORD, MASSACHUSETTS 01886 (978) 614-4000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------ ANIL K. SINGHAL, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER NARENDRA POPAT, PRESIDENT AND CHIEF OPERATING OFFICER NETSCOUT SYSTEMS, INC. 4 TECHNOLOGY PARK DRIVE WESTFORD, MASSACHUSETTS 01886 (978) 614-4000 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: JOHN A. MELTAUS, ESQ. PHILIP P. ROSSETTI, ESQ. MIGUEL J. VEGA, ESQ. MICHAEL D. BAIN, ESQ. TESTA, HURWITZ & THIBEAULT, LLP HALE AND DORR LLP 125 High Street 60 State Street Boston, Massachusetts 02110 Boston, Massachusetts 02109 (617) 248-7000 (617) 526-6000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. ------------------------------ If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE Common Stock, $.001 par value $103,500,000 $28,773
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number of shares of common stock being registered and the proposed maximum offering price per share are not included in this table. Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED April 22, 1999 Shares [LOGO] Common Stock --------------------- We are selling shares of common stock and the selling stockholders identified on page 50 are selling shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders. Prior to this offering, there has been no public market for the common stock. The initial public offering price is expected to be between $ and $ per share. Application has been made to list the common stock on The Nasdaq Stock Market's National Market under the symbol "NSCT." We and the selling stockholders have granted the underwriters an option to purchase a maximum of additional shares of common stock to cover over-allotments of shares. Investing in the common stock involves certain risks. See "Risk Factors" beginning on page 5.
Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions NetScout Stockholders --------- ---------------- ---------------- ---------------- Per Share...................................... $ $ $ $ Total.......................................... $ $ $ $
Delivery of the shares of common stock will be made on or about , 1999. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston Bear, Stearns & Co. Inc. BT Alex. Brown Dain Rauscher Wessels a division of Dain Rauscher Incorporated The date of this prospectus is , 1999 TABLE OF CONTENTS
PAGE --------- Prospectus Summary............................ 3 Risk Factors.................................. 5 Special Note Regarding Forward-Looking Statements.................................. 15 Use Of Proceeds............................... 16 Dividend Policy............................... 16 Capitalization................................ 17 Dilution...................................... 18 Selected Consolidated Financial Data.......... 19 Management's Discussion And Analysis Of Financial Condition And Results Of Operations.................................. 20 Business...................................... 31 PAGE --------- Management.................................... 41 Certain Transactions.......................... 48 Principal And Selling Stockholders............ 50 Description Of Capital Stock.................. 52 Shares Eligible For Future Sale............... 56 Underwriting.................................. 58 Notice To Canadian Residents.................. 60 Legal Matters................................. 61 Experts....................................... 61 Where You Can Find More Information........... 61 Index To Consolidated Financial Statements.... F-1
------------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. ------------------------ EXCEPT AS SET FORTH IN THE CONSOLIDATED FINANCIAL STATEMENTS OR AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS: - ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED; - REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR SERIES A PREFERRED STOCK, NON-VOTING COMMON STOCK AND CLASS B CONVERTIBLE COMMON STOCK INTO SHARES OF OUR COMMON STOCK UPON THE CLOSING OF THIS OFFERING; - ASSUMES A THREE-FOR-TWO STOCK SPLIT OF OUR COMMON STOCK PRIOR TO THE EFFECTIVENESS OF THIS OFFERING; - REFLECTS THE FILING, AS OF THE CLOSING OF THIS OFFERING, OF OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND THE ADOPTION OF OUR AMENDED AND RESTATED BY-LAWS IMPLEMENTING CERTAIN PROVISIONS DESCRIBED BELOW UNDER "DESCRIPTION OF CAPITAL STOCK," AND THE RECEIPT OF STOCKHOLDER APPROVAL THEREFOR; AND - REFLECTS THE ADOPTION OF NEW STOCK PLANS, WHICH OCCURRED IN APRIL 1999. OUR VOTING COMMON STOCK WILL BE RENAMED UPON THE CLOSING OF THIS OFFERING, AND IS REFERRED TO HEREIN AS "COMMON STOCK." SEE "MANAGEMENT--STOCK PLANS," "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING." ------------------------ DEALER PROSPECTUS DELIVERY OBLIGATION Until , 1999 (25 days after the commencement of this offering), all dealers that effect transactions in the common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. NetScout is a registered trademark and the NetScout logo, AppScout, WebCast, NetScout Server, NetFlow Monitor, Resource Monitor, VLAN Monitor, NetScout Manager Plus and ART MIB are trademarks of NetScout. TrafficDirector and SwitchProbe are trademarks of Cisco Systems, Inc. All other trade names and trademarks referred to in this prospectus are the property of their respective owners. 2 PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. NETSCOUT We design, develop, manufacture, market and support an integrated family of products that enable businesses and service providers to manage the performance of computer networks and important business software applications. Our Application Flow Management ("AFM") solution consists of data collection devices and analysis and presentation software. AFM collects, aggregates and analyzes network and application data from a wide range of network technologies. Using this data, AFM provides real-time information regarding the performance of computer networks and software applications, such as e-mail, order entry and Web-based applications. Our solution provides this information to computer network and business managers in a user-friendly, graphical format. Business enterprises increasingly rely on their software applications and computer networks as strategic assets that are essential to business operations. Even minor computer network malfunctions can result in significant business interruptions, lost revenue, decreased productivity and customer dissatisfaction. As a result, businesses are recognizing the critical importance of effective network and application performance management. To support the growing number of users and demand for faster and more reliable computer network access, new network technologies and products have been introduced. This has resulted in highly-complex, multi-vendor computer networks, which are more difficult to manage. Our solution provides a proactive approach to network and application performance management that enables managers to anticipate and address network and application performance problems and align their computer resources with their business strategies. AFM provides the following key functions: - APPLICATION RESPONSE TIME MEASUREMENT. AFM provides detailed, real-time information on application response time which can be used to optimize network configuration and prioritize applications. - MONITORING AND TROUBLESHOOTING. AFM allows real-time monitoring and trend analysis of network usage, performance and error conditions which helps network managers prevent network malfunctions and expedite troubleshooting. - CAPACITY PLANNING. AFM measures trends in network usage by individual software application to enable informed network spending decisions. - POLICY ENFORCEMENT. AFM helps network managers identify inappropriate or wasteful usage of the computer network to ensure adherence to corporate policies and guidelines. - ACCOUNTING AND CHARGE-BACK. AFM provides network usage information by user, department or application, which can be used to charge for internal network usage. Our AFM solution is used by businesses and organizations with large and medium-sized computer networks, as well as service providers that offer computer network infrastructure and software application management services. We sell our products through indirect distribution channels and a direct sales force. Cisco Systems, Inc. is our largest indirect channel partner and sells our products under its private label. NetScout was incorporated in Massachusetts in June 1984 under the name Frontier Software Development, Inc. We were primarily an engineering consulting company until 1992 when we began developing the NetScout family of products. In April 1993, we reincorporated in Delaware and, in March 1997, we changed our name to NetScout Systems, Inc. Our principal offices are located at 4 Technology Park Drive, Westford, Massachusetts 01886, and our telephone number is (978) 614-4000. 3 THE OFFERING Common stock offered by NetScout................... shares Common stock offered by the selling stockholders... shares Common stock to be outstanding after the shares offering......................................... Use of proceeds.................................... For general corporate purposes, including working capital. Proposed Nasdaq National Market symbol............. NSCT
Common stock outstanding is based on 33,843,258 shares of common stock outstanding as of March 31, 1999 and excludes 4,640,438 shares issuable upon the exercise of outstanding stock options as of March 31, 1999 and 7,500,000 shares available for future grant under our stock plans. SUMMARY CONSOLIDATED FINANCIAL DATA The pro forma data in the tables below give effect to (1) our issuance of shares of Class B Convertible Common Stock and our repurchase of shares of common stock, Non-Voting Common Stock and Series A Preferred Stock in the fourth quarter of fiscal 1999 and (2) the conversion of all outstanding shares of Series A Preferred Stock, Class B Convertible Common Stock and Non-Voting Common Stock into common stock upon the closing of this offering. The pro forma as adjusted balance sheet data as of December 31, 1998 also give effect to the sale of shares of common stock that we are offering under this prospectus at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses. See "Capitalization."
NINE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------------------------------------ -------------------- 1995 1996 1997 1998 1997 1998 --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Total revenue.................................... $ 5,877 $ 15,683 $ 30,648 $ 42,829 $ 29,171 $ 48,880 Total cost of revenue............................ 1,962 6,035 9,955 13,422 8,809 14,452 Gross margin..................................... 3,915 9,648 20,693 29,407 20,362 34,428 Total operating expenses......................... 3,214 6,287 11,596 21,662 14,833 22,779 Income from operations........................... 701 3,361 9,097 7,745 5,529 11,649 Provision for income taxes....................... 136 1,355 3,640 3,056 2,191 4,435 Net income....................................... $ 555 $ 2,003 $ 5,918 $ 5,432 $ 3,893 $ 7,881 Basic net income per share....................... $ 0.02 $ 0.07 $ 0.21 $ 0.19 $ 0.13 $ 0.27 Diluted net income per share..................... $ 0.02 $ 0.06 $ 0.17 $ 0.16 $ 0.11 $ 0.22 Shares used in computing: Basic net income per share..................... 27,064 27,814 28,514 28,934 28,909 29,353 Diluted net income per share................... 28,982 33,690 34,378 34,748 34,450 35,694 Pro forma basic net income per share............. $ 0.17 $ 0.24 Pro forma diluted net income per share........... $ 0.16 $ 0.22 Shares used in computing: Pro forma basic net income per share........... 32,723 33,142 Pro forma diluted net income per share......... 34,748 35,694
DECEMBER 31, 1998 ----------------------------------- MARCH 31, PRO FORMA 1998 ACTUAL PRO FORMA AS ADJUSTED ----------- --------- ----------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents........................................ $ 6,341 $ 22,024 $ 21,614 $ Working capital.................................................. 14,163 21,830 21,420 Total assets..................................................... 31,220 40,195 39,785 Class B redeemable convertible common stock...................... -- -- -- Total stockholders' equity....................................... 20,400 28,518 28,108
4 RISK FACTORS THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY RISKS WE FACE. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT. PLEASE ALSO SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." RISKS RELATED TO OUR BUSINESS A REDUCTION IN ORDERS FROM Our operating results and financial condition for a CISCO SYSTEMS, INC. WOULD particular fiscal period would be materially adversely MATERIALLY ADVERSELY AFFECT affected if there is a substantial reduction in orders OUR BUSINESS from Cisco Systems, Inc. or if we are unable to complete one or more Cisco orders planned for that period. We derive a significant portion of our revenue from Cisco, which distributes some of our products under its private label and incorporates some of our software in its products. For the fiscal years ended March 31, 1997 and 1998 and the nine months ended December 31, 1998, Cisco accounted for 24%, 40% and 49% of our total revenue. Our future performance is significantly dependent upon Cisco's continued promotion of our products. Cisco has no obligation to purchase any products from us. Further, we do not control Cisco's distribution of our products, whether incorporated into Cisco's products or sold under private label. Finally, Cisco may decide to internally develop products that compete with our solution or partner with our competitors or bundle or resell competitors' solutions, possibly at lower prices. If our relationship with Cisco were terminated or adversely affected for any reason, our business, operating results and financial condition would be materially adversely affected. DISAPPOINTING QUARTERLY Our quarterly revenue and operating results are difficult OPERATING RESULTS COULD CAUSE to predict and may fluctuate significantly from quarter to OUR COMMON STOCK PRICE TO quarter. If our quarterly revenue or operating results DECREASE fall below the expectations of investors or securities analysts, the price of our common stock could decrease substantially. Most of our expenses, such as employee compensation and rent, are relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is below our expectations, we may not be able to reduce operating expenses proportionately for that quarter, and therefore this revenue shortfall would have a disproportionately negative effect on our operating results for that quarter.
5 Our quarterly revenue may fluctuate as a result of a variety of factors, many of which are outside our control, including the following: - the market for network and application performance management solutions is in an early stage of development and therefore demand for our solutions may be uneven; - the timing and receipt of orders from customers, particularly Cisco, especially in light of our lengthy sales cycle; - the timing and market acceptance of new products or product enhancements by us or our competitors; - distribution channels through which our products are sold could change; - we may not be able to anticipate or adapt effectively to developing markets and rapidly changing technologies; and - our prices or the prices of our competitors' products may change. We operate with minimal backlog because our products typically are shipped shortly after orders are received. Therefore, product revenue in any quarter is substantially dependent on orders booked and shipped in that quarter, and revenue for any future quarter is not predictable to any degree of certainty. Therefore, any significant deferral of orders for our products would cause a shortfall in revenue for that quarter. OUR RELIANCE ON SOLE SOURCE Many components that are necessary for the assembly of our SUPPLIERS COULD ADVERSELY probes, including the network interface cards, are AFFECT OUR BUSINESS obtained from separate sole source suppliers or a limited group of suppliers. Our reliance on sole or limited suppliers involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing, quality and timely delivery of components. We do not generally maintain long-term agreements with any of our suppliers or large volumes of inventory. Our inability to obtain adequate deliveries or the occurrence of any other circumstance that would require us to seek alternative sources of these components would affect our ability to ship our products on a timely basis. This could damage relationships with current and prospective customers, cause shortfalls in expected revenue and materially adversely affect our business, operating results and financial condition.
6 OUR CONTINUED GROWTH DEPENDS We must increase the size of our sales force in order to ON OUR ABILITY TO EXPAND OUR increase our direct sales and support our indirect sales SALES FORCE channels. Because our products are very technical, sales people require a long period of time to become productive, typically three to six months. This lag in productivity, as well as the challenge of attracting qualified candidates, may make it difficult to meet our sales force growth targets. Further, we may not generate sufficient sales to offset the increased expense resulting from growing our sales force or we may be unable to manage a larger sales force. If we are unable to successfully expand our sales capability, our business, operating results and financial condition could be materially adversely affected. OUR SUCCESS DEPENDS ON OUR To increase our sales, we must further expand and manage ABILITY TO EXPAND AND MANAGE our indirect distribution channels, including OEMs, INDIRECT DISTRIBUTION distributors, resellers, systems integrators and service CHANNELS providers. Sales to our indirect distribution channels accounted for 76% and 82% of our total revenue for the fiscal year ended March 31, 1998 and the nine months ended December 31, 1998. During these periods, Cisco accounted for 40% and 49% of our total revenue. Our indirect channel partners have no obligation to purchase any products from us. In addition, they could internally develop products which compete with our solutions or partner with our competitors or bundle or resell competitors' solutions, possibly at lower prices. Our inability to expand and manage our relationships with our partners, the inability or unwillingness of our partners to effectively market and sell our products or the loss of existing partnerships could have a material adverse effect on our business, operating results and financial condition. IF WE FAIL TO INTRODUCE NEW The market for network and application performance PRODUCTS AND ENHANCE OUR management solutions is relatively new and is EXISTING PRODUCTS TO KEEP UP characterized by rapid changes in technology, evolving WITH RAPID TECHNOLOGICAL industry standards, changes in customer requirements and CHANGE, DEMAND FOR OUR frequent product introductions and enhancements. Our PRODUCTS MAY DECLINE success is dependent upon our ability to meet our customers' needs, which are driven by changes in computer networking technologies and the emergence of new industry standards. In addition, new technologies may shorten the life cycle for our products or could render our existing or planned products obsolete. If we are unable to develop and introduce new network and application performance management products or enhancements to existing products in a timely and successful manner, it would have a material adverse effect on our business, operating results and financial condition. WE FACE SIGNIFICANT The market for network and application performance COMPETITION FROM OTHER management solutions is intensely competitive. We believe TECHNOLOGY COMPANIES customers make network management system purchasing decisions based primarily upon the following factors: - product performance, functionality and price;
7 - name and reputation of vendor; - distribution strength; and - alliances with industry partners. We compete with probe vendors, such as Hewlett-Packard Company, providers of network performance management solutions, such as Concord Communications, Inc. and Micromuse, Inc., providers of application performance management solutions, such as International Network Services, and providers of portable network traffic analyzers, such as Network Associates, Inc. In addition, leading network equipment providers could offer their own or competitors' solutions in the future. Many of our current and potential competitors have longer operating histories, greater name recognition and substantially greater financial, management, marketing, service, support, technical, distribution and other resources than we do. Therefore, they may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements. As a result of these and other factors, we may not be able to compete effectively with current or future competitors, which would have a material adverse effect on our business, operating results and financial condition. THE SUCCESS OF OUR BUSINESS We derive all of our revenue from the sale of products and DEPENDS ON THE CONTINUED services that are designed to allow our customers to GROWTH IN THE MARKET FOR AND manage the performance of computer networks and important COMMERCIAL ACCEPTANCE OF business software applications. The market for network and NETWORK AND APPLICATION application performance management solutions is in an PERFORMANCE MANAGEMENT early stage of development. Therefore, we cannot SOLUTIONS accurately assess the size of the market and may be unable to predict the appropriate features and prices for products to address the market, the optimal distribution strategy and the competitive environment that will develop. In order for us to be successful, our potential customers must recognize the value of more sophisticated network and application performance management solutions, decide to invest in the management of their networks and the performance of important business software applications and, in particular, adopt our management solution. Any failure of this market to continue to develop would materially adversely affect our business, operating results and financial condition. Businesses may choose to outsource the management of their networks and applications to service providers. Our business may depend on our ability to develop relationships with these service providers and successfully market our products to them.
8 FAILURE TO PROPERLY MANAGE We have been experiencing a period of rapid growth over GROWTH COULD ADVERSELY AFFECT the past several years. We plan to continue to expand our OUR BUSINESS business by hiring additional personnel. The growth in size and complexity of our business and our customer base has been and will continue to be a significant challenge to our management and operations. To manage future growth effectively we must enhance our financial and accounting systems and controls, integrate new personnel and manage expanded operations. We anticipate that our financial and accounting systems will be upgraded during the third calendar quarter in 1999. If we are unable to successfully integrate these systems and controls and to effectively manage our growth, our costs, the quality of our products, the effectiveness of our sales organization, our ability to retain key personnel and our business, operating results and financial condition could be materially adversely affected. LOSS OF KEY PERSONNEL COULD Our future success depends to a significant degree on the ADVERSELY AFFECT OUR BUSINESS skills, experience and efforts of Anil Singhal, our Chairman of the Board, Chief Executive Officer and co-founder, and Narendra Popat, our President, Chief Operating Officer and co-founder. We also depend on the ability of our other executive officers and senior managers to work effectively as a team. The loss of one or more of our key personnel could have a material adverse effect on our business, operating results and financial condition. WE MUST HIRE AND RETAIN Qualified personnel are in great demand throughout the SKILLED PERSONNEL IN A TIGHT computer software, hardware and networking industries. The LABOR MARKET demand for qualified personnel is particularly acute in the New England area due to the large number of software and other high technology companies and the low unemployment in the region. Our success depends in large part upon our ability to attract, train, motivate and retain highly-skilled employees, particularly sales and marketing personnel, software engineers, and technical support personnel. We have had difficulty hiring and retaining these highly-skilled employees in the past. If we are unable to attract and retain the highly-skilled technical personnel that are integral to our sales, marketing, product development and customer support teams, the rate at which we can generate sales and develop new products or product enhancements may be limited. This inability could have a material adverse effect on our business, operating results and financial condition.
9 OUR SUCCESS DEPENDS ON OUR Our business is heavily dependent on our intellectual ABILITY TO PROTECT OUR property. We rely upon a combination of copyright, INTELLECTUAL PROPERTY RIGHTS trademark and trade secret laws and non-disclosure and other contractual arrangements to protect our proprietary rights. The reverse engineering, unauthorized copying or other misappropriation of our intellectual property could enable third parties to benefit from our technology without compensating us. Legal proceedings to enforce our intellectual property rights could be burdensome and expensive and could involve a high degree of uncertainty. In addition, legal proceedings may divert management's attention from growing our business. There can be no assurance that the steps we have taken to protect our intellectual property rights will be adequate to deter misappropriation of proprietary information, or that we will be able to detect unauthorized use by third parties and take appropriate steps to enforce our intellectual property rights. Further, we also license software from third parties for use as part of our products, and if any of these licenses were to terminate, we may experience delays in product shipment until we develop or license alternative software. OTHERS MAY CLAIM THAT WE We may be subject to claims by others that our products INFRINGE ON THEIR infringe on their intellectual property rights. These INTELLECTUAL PROPERTY RIGHTS claims, whether or not valid, could require us to spend significant sums in litigation, pay damages, delay product shipments, reengineer our products or acquire licenses to such third-party intellectual property. We may not be able to secure any required licenses on commercially reasonable terms or at all. We expect that these claims will become more frequent as more companies enter the market for network and application performance management solutions. Any of these claims or resulting events could have a material adverse effect on our business, operating results and financial condition. IF OUR PRODUCTS CONTAIN Despite testing by us and our customers, errors may be ERRORS, THEY MAY BE COSTLY TO found in our products after commencement of commercial CORRECT, REVENUE MAY BE shipments. If errors are discovered, we may not be able to DELAYED, WE COULD GET SUED successfully correct them in a timely manner or at all. In AND OUR REPUTATION COULD BE addition, we may need to make significant expenditures of HARMED capital resources in order to eliminate errors and failures. Errors and failures in our products could result in loss of or delay in market acceptance of our products and could damage our reputation. If one or more of our products fails, a customer may assert warranty and other claims for substantial damages against us. The occurrence or discovery of these types of errors or failures could have a material adverse effect on our business, operating results and financial condition.
10 OUR SUCCESS DEPENDS ON OUR In the fiscal year ended March 31, 1998 and the nine ABILITY TO EXPAND AND MANAGE months ended December 31, 1998, 12% and 11% of our total OUR INTERNATIONAL OPERATIONS revenue were from sales outside North America. We currently expect international revenue to continue to account for a significant percentage of total revenue in the future. We believe that we must continue to expand our international sales activities in order to be successful. Our international sales growth will be limited if we are unable to: - expand international indirect distribution channels; - hire additional sales personnel; - adapt products for local markets; or - manage geographically dispersed operations. In addition, international operations are generally subject to a number of risks, including: - failure of local laws to provide the same degree of protection against infringement of our intellectual property; - protectionist laws and business practices that favor local competitors; - dependence on local vendors; - multiple, conflicting and changing governmental laws and regulations; - longer sales cycles; - greater difficulty in collecting accounts receivable; - foreign currency exchange rate fluctuations; and - political and economic instability. OUR BUSINESS MAY BE AFFECTED Many existing computer systems and software products do BY UNEXPECTED YEAR 2000 not properly recognize dates after December 31, 1999. This PROBLEMS "Year 2000" problem could result in miscalculations, data corruption, system failures or disruptions of operations. Our products, our internal systems, our customers' systems, our distributors' systems and our suppliers' systems may experience Year 2000 problems, any of which could have a material adverse effect on our business, operating results and financial condition.
11 Year 2000 errors or defects in our products could give rise to warranty and other claims by our customers. In addition, there can be no assurance that Year 2000 errors or defects will not be discovered in our internal software systems and, if errors or defects are present, there can be no assurance that the costs of making such systems Year 2000 compliant will not be material. We have determined that some of our products and internal systems are not Year 2000 compliant, and other of our products or internal systems may contain undetected errors or defects. If we are unable to make our products and internal systems Year 2000 compliant in a timely manner, our business, operating results and financial condition could be materially adversely affected. Changing purchasing patterns of customers impacted by Year 2000 issues may result in reduced purchases of our solutions. Any Year 2000 errors or defects in our distributors' systems or the products of our OEM partners could cause a reduction in their orders from us. Finally, Year 2000 errors or defects in the internal systems of our suppliers, including our sole and limited source suppliers, could require us to incur significant unanticipated expenses to remedy any problems or replace affected vendors and could cause cancellations or delays in product shipments. RISKS ASSOCIATED WITH THIS OFFERING OF OUR COMMON STOCK THE PRICE OF OUR COMMON STOCK Prior to this offering, there has been no public market AFTER THIS OFFERING MAY BE for our common stock. After this offering, an active LOWER THAN THE PRICE YOU PAY trading market in our common stock might not develop or IN THIS OFFERING continue. If you purchase shares of our common stock in the offering, you will pay a price that was not established in a competitive market. Rather, you will pay a price that we negotiated with the representatives of the underwriters based upon several factors. See "Underwriting." The price of our common stock that will prevail in the market after the offering may be higher or lower than the price you pay. The stock market in general has recently experienced extreme price and volume fluctuations. In addition, the market prices of securities of technology companies have been extremely volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our common stock.
12 Recently, when the market price of a stock has been volatile, holders of that stock have occasionally instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought such a lawsuit against us, even if the lawsuit is without merit, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management. OUR EXECUTIVE OFFICERS AND After this offering, our executive officers and directors DIRECTORS WILL BE ABLE TO and their affiliates will together control approximately CONTROL ALL MATTERS REQUIRING % of the outstanding common stock. As a result, these STOCKHOLDER APPROVAL stockholders, if they act together, will be able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of NetScout, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of NetScout and might affect the market price of our common stock. CERTAIN PROVISIONS OF OUR Our corporate documents and Section 203 of the Delaware CHARTER AND OF DELAWARE LAW General Corporation Law could discourage, delay or prevent MAKE A TAKEOVER OF NETSCOUT a third party or a significant stockholder from acquiring MORE DIFFICULT control of NetScout. In addition, provisions of our certificate of incorporation may have the effect of discouraging, delaying or preventing a merger, tender offer or proxy contest involving NetScout. Any of these anti-takeover provisions could lower the market price of the common stock and could deprive our stockholders of the opportunity to receive a premium for their common stock that they might otherwise receive from the sale of NetScout. FUTURE SALES BY EXISTING If our existing stockholders sell a large number of shares SECURITY HOLDERS COULD of our common stock or the public market perceives that DEPRESS THE MARKET PRICE OF existing stockholders might sell shares of common stock, THE COMMON STOCK the market price of the common stock could significantly decline. All of the shares offered under this prospectus will be freely tradable in the open market, and - 83,100 additional shares may be sold immediately after this offering; - 392,974 additional shares may be sold 90 days after the effective date of this offering; - 20,901,303 additional shares may be sold upon the expiration of 180-day lock-up agreements; and - 10,465,881 additional shares may be sold commencing on January 15, 2000. Credit Suisse First Boston Corporation, as representative of the underwriters, may release any or all shares from the lock-up agreements at any time and without notice.
13 Existing stockholders holding an aggregate of 10,465,881 shares of common stock have the right to require us to register their shares of common stock with the Securities and Exchange Commission. If we register their shares of common stock, they can sell those shares in the public market. After this offering, we intend to register approximately 12,140,438 shares of our common stock that we have issued or may issue under our stock plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the "lock-up" agreements described above. WE WILL HAVE BROAD DISCRETION We have not identified specific uses for our proceeds from IN USING OUR PROCEEDS FROM this offering, and we will have broad discretion in how we THIS OFFERING use them. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use these proceeds. INVESTORS WILL EXPERIENCE If you purchase shares of our common stock in this IMMEDIATE AND SUBSTANTIAL offering, you will experience immediate and substantial DILUTION IN THE BOOK VALUE OF dilution of $ in the pro forma net tangible book value THEIR INVESTMENT per share of common stock. You will experience additional dilution upon the exercise of outstanding stock options to purchase common stock. See "Dilution."
14 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus constitute forward-looking statements. These statements relate to future events or our future financial performance and are identified by terminology such as "may," "will," "could," "should," "expects," "plans," "intends," "seeks," "anticipates," "believes," "estimates," "potential," or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various important factors, including the risks outlined under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results. 15 USE OF PROCEEDS We estimate that our net proceeds from the sale of the shares of common stock that we are offering hereby will be approximately $ , at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses. If the underwriters' over-allotment option is exercised in full, we estimate that such net proceeds will be approximately $ . We will not receive any proceeds from the sale of common stock by the selling stockholders. See "Principal and Selling Stockholders." The principal purposes of this offering are to obtain additional working capital, create a public market for our common stock, increase our visibility in the marketplace, facilitate future access to public capital markets and provide liquidity to existing stockholders. We intend to use our net proceeds for general corporate purposes, including working capital, product development and expansion of our international operations and sales and marketing capabilities. We may also use a portion of our net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. We have no specific understandings, commitments or agreements with respect to any such acquisition or investment. Pending such uses, we intend to invest our net proceeds from this offering in short-term, interest-bearing, investment-grade securities, certificates of deposit or direct or guaranteed obligations of the United States. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock and we do not anticipate paying cash dividends in the foreseeable future. In addition, the terms of our bank loan agreement prohibit the payment of cash dividends on our capital stock. We currently intend to retain future earnings, if any, to fund the expansion and growth of our business. Payment of future cash dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. 16 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1998: - on an actual basis; - on a pro forma basis giving effect to (1) our issuance of shares of Class B Convertible Common Stock and our repurchase of shares of common stock, Non-Voting Common Stock and Series A Preferred Stock in the fourth quarter of fiscal 1999, and (2) the conversion of all outstanding shares of Series A Preferred Stock, Non-Voting Common Stock and Class B Convertible Common Stock into common stock upon the closing of this offering; and - on a pro forma as adjusted basis to reflect the sale by us of shares of common stock offered under this prospectus at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses. This information should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this prospectus. This information excludes 4,620,544 shares of common stock issuable upon exercise of outstanding options as of December 31, 1998, of which options to purchase 1,816,654 shares were then exercisable, and 1,773,425 shares of common stock reserved for future issuance under our 1990 Stock Option Plan. An additional 7,500,000 shares of common stock have been reserved for issuance under our 1999 Stock Option and Incentive Plan and our 1999 Employee Stock Purchase Plan. See "Management--Stock Plans" and Note 9 to the consolidated financial statements.
DECEMBER 31, 1998 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Redeemable convertible common stock: Class B redeemable convertible common stock, $.001 par value; no shares authorized, issued and outstanding, actual; 6,977,254 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted.... $ -- $ -- $ -- ---------- ----------- ----------- Stockholders' equity: Series A convertible preferred stock, $0.001 par value; 631,579 shares authorized, issued and outstanding, actual; no shares issued or outstanding, pro forma and pro forma as adjusted........................ 5,964 -- -- Common stock, $0.001 par value: Voting, 39,918,273 shares authorized, 24,000,000 shares issued and outstanding, actual; 50,384,154 shares authorized, 43,990,185 and shares issued and 33,524,304 and shares outstanding, pro forma and pro forma as adjusted, respectively........ 24 44 Non-voting, 39,918,273 shares authorized, 5,734,830 shares issued and outstanding, actual; no shares issued or outstanding, pro forma and pro forma as adjusted................................................. 6 -- -- Additional paid-in capital.............................................. 1,010 51,121 Deferred compensation..................................................... (550) (550) (550) Treasury stock............................................................ -- (44,394) (44,394) Retained earnings......................................................... 22,064 21,887 21,887 ---------- ----------- ----------- Total stockholders' equity.............................................. 28,518 28,108 ---------- ----------- ----------- Total capitalization................................................ $ 28,518 $ 28,108 $ ---------- ----------- ----------- ---------- ----------- -----------
17 DILUTION The pro forma net tangible book value of NetScout at December 31, 1998 was $28,108,000, or $0.84 per share of common stock, assuming the conversion of all outstanding shares of Series A Preferred Stock, Class B Convertible Common Stock and Non-Voting Common Stock into shares of common stock (giving effect to the issuance of shares of Class B Convertible Common Stock and the related repurchase of shares of Series A Preferred Stock, Non-Voting Common Stock and Voting Common Stock in the fourth quarter of fiscal 1999). Pro forma net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the pro forma number of outstanding shares of common stock. After giving effect to the sale of shares of common stock offered hereby by NetScout at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and offering expenses, NetScout's pro forma net tangible book value as of December 31, 1998 would have been approximately $ , or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution: Assumed initial public offering price per share.............. $ Pro forma net tangible book value per share at December 31, 1998................................... $ 0.84 Increase attributable to this offering................... Pro forma net tangible book value per share after this offering................................................... --------- Net tangible book value dilution per share to new investors in this offering........................................... $ --------- ---------
The following table summarizes, as of December 31, 1998, on the pro forma basis described above, the total number of shares of common stock purchased, and the consideration paid to NetScout and the average price per share paid by the existing stockholders for their shares and by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $ per share (before deducting estimated underwriting discounts and commissions and offering expenses payable by us):
SHARES PURCHASED TOTAL CONSIDERATION ------------------------- -------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ ----------- ------------- ----------- ------------- Existing stockholders.......... 33,843,258 % $ 50,241,000 % $ 1.48 New investors.................. $ ------------ ----- ------------- ----- Totals................... 100.0% $ 100.0% ------------ ----- ------------- ----- ------------ ----- ------------- -----
The sales by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to , or approximately % of the total shares of common stock outstanding immediately after this offering, and will increase the number of shares of common stock held by new investors to , or % of the total number of shares of common stock outstanding immediately after this offering. See "Principal and Selling Stockholders." The foregoing discussion and tables assume no exercise of any stock options after December 31, 1998. As of December 31, 1998, there were 4,620,544 shares of common stock issuable upon exercise of outstanding stock options, at a weighted average exercise price of $1.58 per share; and 1,773,425 shares of common stock reserved for issuance under NetScout's 1990 Stock Option Plan. To the extent that these options are exercised, there will be further dilution to new investors. In addition, in April 1999, we adopted our 1999 Stock Option and Incentive Plan, pursuant to which 6,750,000 shares of common stock are reserved for issuance, and our 1999 Employee Stock Purchase Plan, pursuant to which 750,000 shares of common stock are reserved for issuance. See "Management-Stock Plans" and Note 9 to the consolidated financial statements. 18 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated statement of income data for the years ended March 31, 1996, 1997 and 1998, and the consolidated balance sheet data as of March 31, 1997 and 1998, are derived from and are qualified by reference to the audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of income data for the years ended March 31, 1994 and 1995, and the consolidated balance sheet data as of March 31, 1994, 1995 and 1996, have been derived from audited consolidated financial statements of NetScout that do not appear in this prospectus. The consolidated statement of income data for the nine months ended December 31, 1997 and 1998 and the consolidated balance sheet data as of December 31, 1998 are derived from unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information set forth therein. The historical results are not necessarily indicative of the operating results to be expected in the future. The pro forma data in the following tables give effect to (1) our issuance of shares of Class B Convertible Common Stock and our repurchase of shares of Series A Preferred Stock, Non-Voting Common Stock and common stock in the fourth quarter of fiscal 1999 and (2) the conversion of Series A Preferred Stock, Class B Convertible Common Stock and Non-Voting Common Stock into common stock upon the closing of this offering.
YEAR ENDED MARCH 31, ----------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenue: Product................................................................... $ 1,416 $ 4,035 $ 13,276 $ 25,159 $ 34,990 Service................................................................... 68 341 1,521 3,888 5,143 License and royalty....................................................... 1,009 1,501 886 1,601 2,696 --------- --------- --------- --------- --------- Total revenue........................................................... 2,493 5,877 15,683 30,648 42,829 --------- --------- --------- --------- --------- Cost of revenue: Product................................................................... 687 1,962 5,897 9,427 12,638 Service................................................................... -- -- 138 528 784 --------- --------- --------- --------- --------- Total cost of revenue................................................... 687 1,962 6,035 9,955 13,422 --------- --------- --------- --------- --------- Gross margin................................................................ 1,806 3,915 9,648 20,693 29,407 --------- --------- --------- --------- --------- Operating expenses: Research and development.................................................. 369 1,008 1,208 3,003 5,129 Sales and marketing....................................................... 744 1,765 4,384 6,778 13,583 General and administrative................................................ 181 441 695 1,815 2,950 --------- --------- --------- --------- --------- Total operating expenses................................................ 1,294 3,214 6,287 11,596 21,662 --------- --------- --------- --------- --------- Income from operations...................................................... 512 701 3,361 9,097 7,745 Interest income (expense), net.............................................. (2) (10) (3) 461 743 --------- --------- --------- --------- --------- Income before provision for income taxes.................................... 510 691 3,358 9,558 8,488 Provision for income taxes.................................................. 66 136 1,355 3,640 3,056 --------- --------- --------- --------- --------- Net income.................................................................. $ 444 $ 555 $ 2,003 $ 5,918 $ 5,432 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic net income per share.................................................. $ 0.02 $ 0.02 $ 0.07 $ 0.21 $ 0.19 Diluted net income per share................................................ $ 0.01 $ 0.02 $ 0.06 $ 0.17 $ 0.16 Shares used in computing: Basic net income per share................................................ 24,215 27,064 27,814 28,514 28,934 Diluted net income per share.............................................. 28,890 28,982 33,690 34,378 34,748 Pro forma basic net income per share........................................ $ 0.17 Pro forma diluted net income per share...................................... $ 0.16 Shares used in computing: Pro forma basic net income per share...................................... 32,723 Pro forma diluted net income per share.................................... 34,748 NINE MONTHS ENDED DECEMBER 31, -------------------- 1997 1998 --------- --------- STATEMENT OF INCOME DATA: Revenue: Product................................................................... $ 23,944 $ 36,737 Service................................................................... 3,455 6,329 License and royalty....................................................... 1,772 5,814 --------- --------- Total revenue........................................................... 29,171 48,880 --------- --------- Cost of revenue: Product................................................................... 8,299 13,614 Service................................................................... 510 838 --------- --------- Total cost of revenue................................................... 8,809 14,452 --------- --------- Gross margin................................................................ 20,362 34,428 --------- --------- Operating expenses: Research and development.................................................. 3,543 5,295 Sales and marketing....................................................... 9,378 14,726 General and administrative................................................ 1,912 2,758 --------- --------- Total operating expenses................................................ 14,833 22,779 --------- --------- Income from operations...................................................... 5,529 11,649 Interest income (expense), net.............................................. 555 667 --------- --------- Income before provision for income taxes.................................... 6,084 12,316 Provision for income taxes.................................................. 2,191 4,435 --------- --------- Net income.................................................................. $ 3,893 $ 7,881 --------- --------- --------- --------- Basic net income per share.................................................. $ 0.13 $ 0.27 Diluted net income per share................................................ $ 0.11 $ 0.22 Shares used in computing: Basic net income per share................................................ 28,909 29,353 Diluted net income per share.............................................. 34,450 35,694 Pro forma basic net income per share........................................ $ 0.24 Pro forma diluted net income per share...................................... $ 0.22 Shares used in computing: Pro forma basic net income per share...................................... 33,142 Pro forma diluted net income per share.................................... 35,694
MARCH 31, ----------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................................. $ 358 $ 346 $ 7,797 $ 6,514 $ 6,341 Working capital........................................................... 125 324 7,837 11,140 14,163 Total assets.............................................................. 1,100 2,781 14,328 21,703 31,220 Class B redeemable convertible common stock............................... -- -- -- -- -- Total stockholders' equity................................................ 322 878 8,848 14,809 20,400 DECEMBER 31, 1998 ---------------------- ACTUAL PRO FORMA --------- ----------- BALANCE SHEET DATA: Cash and cash equivalents................................................. $ 22,024 $ 21,614 Working capital........................................................... 21,830 21,420 Total assets.............................................................. 40,195 39,785 Class B redeemable convertible common stock............................... -- -- Total stockholders' equity................................................ 28,518 28,108
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NETSCOUT SHOULD BE READ IN CONJUNCTION WITH "SELECTED CONSOLIDATED FINANCIAL DATA" AND NETSCOUT'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN IMPORTANT FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW NetScout designs, develops, manufactures, markets and supports an integrated family of products that enable businesses and service providers to manage the performance of computer networks and important business software applications. Our products include data collection devices, consisting of probes and software agents, which collect, aggregate and perform detailed analysis of computer network and application data, and analytical software, which provides real-time network and application performance information in an user-friendly, graphical format. We were incorporated in 1984 and primarily provided consulting services until 1992, when we began to develop and market our first computer network performance management products. Our operations have been financed principally through cash provided by operations and we have been profitable for the last 20 quarters. Product revenue consists of sales of our network and application performance management products. Product revenue is recognized upon shipment, provided that fees are fixed and determinable and collection of the related receivable is probable. Sales to indirect channel partners that are subject to return privileges are recognized upon shipment, net of an allowance for estimated product returns which is based on our return policy and historical experience. Customer payments received in advance of product shipments are recorded as customer deposits. Service revenue consists primarily of customer fees from support agreements, installation and training. We generally provide three-months software and service support and 12-months hardware support as part of our product sales. In addition, customers can elect to purchase extended support agreements, typically for 12-month periods. Revenue from support agreements is deferred and recognized ratably over the support period. Revenue from installation and training is recognized as the work is performed. License and royalty revenue consists primarily of royalties paid under license agreements by OEMs who incorporate components of our data collection technology in their own products or who reproduce and sell our software products. License revenue is recognized when we become contractually entitled to receive license fees, provided that such fees are fixed and determinable and collection is probable. Royalty revenue is recognized based upon product shipment by the license holder. Revenue from indirect distribution channels, including OEMs, distributors, resellers, system integrators and service providers, represented 73%, 76% and 82% of total revenue for the fiscal years ended March 31, 1997 and 1998 and the nine months ended December 31, 1998. Cisco resells our products to customers under its own private label and incorporates components of our technology into its products. Our revenue from Cisco represented 24%, 40% and 49% of our total revenue in the fiscal years ended March 31, 1997 and 1998 and the nine months ended December 31, 1998. We expect revenue from Cisco to account for a significant portion of our revenue for the foreseeable future. Network Associates, a reseller, accounted for 12% of our total revenue in the fiscal year ended March 31, 1998. No other customer or indirect channel partner accounted for 10% or more of our total 20 revenue during the fiscal years ended March 31, 1997 or 1998 or the nine months ended December 31, 1998. Revenue from sales outside North America represented 12%, 12% and 11% of our total revenue in the fiscal years ended March 31, 1997 and 1998 and the nine months ended December 31, 1998. Sales outside North America are primarily to indirect channel partners, which are generally responsible for importing products and providing installation and technical support and service to customers within their territory. Our reported international revenue does not include any revenue from sales to customers outside North America made by any of our North American-based indirect channel partners, including Cisco. We expect revenue from sales outside North America to continue to account for a significant portion of our revenue in the future. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of total revenue of certain line items included in our statement of income:
NINE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------------------------- -------------------- 1996 1997 1998 1997 1998 --------- --------- --------- --------- --------- Revenue: Product.............................................................. 84.7% 82.1% 81.7% 82.1% 75.2% Service.............................................................. 9.7 12.7 12.0 11.8 12.9 License and royalty.................................................. 5.6 5.2 6.3 6.1 11.9 --------- --------- --------- --------- --------- Total revenue...................................................... 100.0 100.0 100.0 100.0 100.0 --------- --------- --------- --------- --------- Cost of revenue: Product.............................................................. 37.6 30.8 29.5 28.5 27.9 Service.............................................................. 0.9 1.7 1.8 1.7 1.7 --------- --------- --------- --------- --------- Total cost of revenue.............................................. 38.5 32.5 31.3 30.2 29.6 --------- --------- --------- --------- --------- Gross margin........................................................... 61.5 67.5 68.7 69.8 70.4 --------- --------- --------- --------- --------- Operating expenses: Research and development............................................. 7.7 9.8 12.0 12.1 10.8 Sales and marketing.................................................. 28.0 22.1 31.7 32.1 30.1 General and administrative........................................... 4.4 5.9 6.9 6.6 5.7 --------- --------- --------- --------- --------- Total operating expenses........................................... 40.1 37.8 50.6 50.8 46.6 --------- --------- --------- --------- --------- Income from operations................................................. 21.4 29.7 18.1 19.0 23.8 Interest income, net................................................... -- 1.5 1.7 1.9 1.4 --------- --------- --------- --------- --------- Income before provision for income taxes............................... 21.4 31.2 19.8 20.9 25.2 Provision for income taxes............................................. 8.6 11.9 7.1 7.5 9.1 --------- --------- --------- --------- --------- Net income............................................................. 12.8% 19.3% 12.7% 13.4% 16.1% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1998 REVENUE Total revenue increased 68% from $29.2 million for the nine months ended December 31, 1997 to $48.9 million for the nine months ended December 31, 1998. PRODUCT. Product revenue increased 53% from $23.9 million for the nine months ended December 31, 1997 to $36.7 million for the nine months ended December 31, 1998. This increase was primarily due to growth in unit sales attributable to an increase in the number of sales personnel, an 21 increase in shipments to existing indirect channel partners and, to a lesser extent, an expansion of indirect distribution channels. This increase was also due to an increase in average selling price due to larger volumes of WAN, ATM and Fast Ethernet probes. SERVICE. Service revenue increased 83% from $3.5 million for the nine months ended December 31, 1997 to $6.3 million for the nine months ended December 31, 1998. This increase was primarily due to growth in sales of support agreements to new and existing customers attributable to increased sales and marketing efforts and a reduction of our software and service support period accompanying product sales from 12 months to three months in January 1998. LICENSE AND ROYALTY. License and royalty revenue increased 228% from $1.8 million for the nine months ended December 31, 1997 to $5.8 million for the nine months ended December 31, 1998. This increase was primarily due to a growth in unit sales of our software and embedded software products by Cisco. COST OF REVENUE PRODUCT. Cost of product revenue consists primarily of components, personnel costs, media duplication, manuals, packaging materials, licensed technology fees and overhead. Cost of product revenue increased 64% from $8.3 million for the nine months ended December 31, 1997 to $13.6 million for the nine months ended December 31, 1998. This increase was primarily due to an increase in unit sales and a shift in product mix. Product gross margins decreased from 65% for the nine months ended December 31, 1997 to 63% for the nine months ended December 31, 1998. This decrease was primarily due to a shift toward indirect sales which tend to have lower gross margins than direct sales and, to a lesser extent, the pricing of larger direct sales transactions, partially offset by a decrease in component costs and an increase in operating efficiencies. SERVICE. Cost of service revenue consists primarily of personnel costs. Cost of service revenue increased 64% from $510,000 for the nine months ended December 31, 1997 to $838,000 for the nine months ended December 31, 1998. This increase was primarily due to the hiring of additional service personnel to support an increase in our customer base. Service gross margins increased from 85% for the nine months ended December 31, 1997 to 87% for the nine months ended December 31, 1998. This increase was primarily due to timing of personnel replacements and additions. We anticipate that service gross margins will decrease as a percentage of service revenue as staffing reaches planned levels. Overall gross margins are primarily affected by the mix of product, service and license and royalty revenue and by the proportion of sales through direct versus indirect distribution channels. We typically realize higher gross margins on license and royalty revenue relative to product and service revenue and on direct sales relative to indirect distribution channel sales. OPERATING EXPENSES RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of personnel costs, fees for outside consultants and related costs associated with the development of new products, the enhancement of existing products, quality assurance and testing. Research and development expenses increased 49% from $3.5 million for the nine months ended December 31, 1997 to $5.3 million for the nine months ended December 31, 1998. This increase was primarily due to the hiring of additional research and development personnel and higher consulting costs. We anticipate that research and development expenses will increase in absolute dollars and as a percentage of total revenue as staffing reaches planned levels. SALES AND MARKETING. Sales and marketing expenses consist primarily of personnel costs and costs associated with marketing programs such as trade shows, seminars, advertising and new product launch activities. Sales and marketing expenses increased 57% from $9.4 million for the nine months ended 22 December 31, 1997 to $14.7 million for the nine months ended December 31, 1998. This increase was primarily due to costs associated with hiring of additional sales and marketing personnel and an increase in marketing programs. We anticipate that sales and marketing expenses will increase in absolute dollars and as a percentage of total revenue as we expand our sales force and marketing programs to support international expansion, increased sales efforts to major accounts, brand awareness and product launches. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of personnel costs for executive, financial, information services and human resource employees. General and administrative expenses increased 44% from $1.9 million for the nine months ended December 31, 1997 to $2.8 million for the nine months ended December 31, 1998. This increase was primarily due to the hiring of additional general and administrative personnel and costs associated with our growth. We expect that our general and administrative expenses will increase in absolute dollars as we continue to expand our staff to support expanded operations and facilities, and incur expenses relating to our new responsibilities as a public company. INTEREST INCOME, NET. Interest income, net of interest expense, increased 20% from $555,000 for the nine months ended December 31, 1997 to $667,000 for the nine months ended December 31, 1998. This increase was primarily due to an increase in our cash balances. PROVISION FOR INCOME TAXES. The provision for income taxes increased from $2.2 million for the nine months ended December 31, 1997 to $4.4 million for the nine months ended December 31, 1998, primarily due to higher pre-tax income. Our effective tax rate remained constant at 36% for the nine months ended December 31, 1997 and for the nine months ended December 31, 1998. YEARS ENDED MARCH 31, 1997 AND 1998 REVENUE Total revenue increased 40% from $30.6 million for the fiscal year ended March 31, 1997 to $42.8 million for the fiscal year ended March 31, 1998. PRODUCT. Product revenue increased 39% from $25.2 million for the fiscal year ended March 31, 1997 to $35.0 million for the fiscal year ended March 31, 1998. This increase was primarily due to growth in unit sales attributable to an increase in the number of sales personnel and an increase in shipments to existing indirect channel partners and, to a lesser extent, an expansion of indirect distribution channels. This increase was also due to an increase in the average selling price attributable to an increase in the sale of WAN, Fast Ethernet and multi-port probes and the introduction of the HSSI probe. SERVICE. Service revenue increased 32% from $3.9 million for the fiscal year ended March 31, 1997 to $5.1 million for the fiscal year ended March 31, 1998. This increase was primarily due to growth in sales of support agreements to new and existing customers attributable to increased sales and marketing efforts. LICENSE AND ROYALTY. License and royalty revenue increased 68% from $1.6 million for the fiscal year ended March 31, 1997 to $2.7 million for the fiscal year ended March 31, 1998. This increase was primarily due to a growth in unit sales of our software and embedded software products by Cisco. COST OF REVENUE PRODUCT. Cost of product revenue increased 34% from $9.4 million for the fiscal year ended March 31, 1997 to $12.6 million for the fiscal year ended March 31, 1998. The increase was primarily due to an increase in unit sales and a shift in product mix. Product gross margins increased from 63% 23 for the fiscal year ended March 31, 1997 to 64% for the fiscal year ended March 31, 1998. This was primarily due to a decrease in component costs and an increase in operational efficiencies. SERVICE. Cost of service revenue increased 48% from $528,000 for the fiscal year ended March 31, 1997 to $784,000 for the fiscal year ended March 31, 1998. This increase was primarily due to the hiring of additional service personnel to support an increase in the customer base. Service gross margins decreased from 86% for the fiscal year ended March 31, 1997 to 85% for the fiscal year ended March 31, 1998. This was primarily due to the increase in service personnel. OPERATING EXPENSES RESEARCH AND DEVELOPMENT. Research and development expenses increased 71% from $3.0 million for the fiscal year ended March 31, 1997 to $5.1 million for the fiscal year ended March 31, 1998. This increase was primarily due to the hiring of additional research and development personnel and higher consulting costs related to development of new products and enhancements to existing products. SALES AND MARKETING. Sales and marketing expenses increased 100% from $6.8 million for the fiscal year ended March 31, 1997 to $13.6 million for the fiscal year ended March 31, 1998. This increase was primarily due to the hiring of additional sales and marketing personnel and an increase in marketing programs, including trade shows, seminars and advertising. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 63% from $1.8 million for the fiscal year ended March 31, 1997 to $3.0 million for the fiscal year ended March 31, 1998. This increase was primarily due to the hiring of additional general and administrative personnel and costs to support our growth and the related move to new facilities in November 1997. INTEREST INCOME, NET. Interest income, net of interest expense, increased 61% from $461,000 for the fiscal year ended March 31, 1997 to $743,000 for the fiscal year ended March 31, 1998. The increase was primarily due to an increase in our cash balances. PROVISION FOR INCOME TAXES. The provision for income taxes decreased from $3.6 million for the fiscal year ended March 31, 1997 to $3.1 million for the fiscal year ended March 31, 1998. This decrease was primarily due to lower pre-tax income and, to a lesser degree, a decrease in our effective tax rate. Our effective tax rate decreased from 38% for the fiscal year ended March 31, 1997 to 36% for the fiscal year ended March 31, 1998 primarily due to the reinstatement of the Research and Development Tax Credit in 1998. INCOME FROM OPERATIONS. Income from operations decreased 15% from $9.1 million for the fiscal year ended March 31, 1997 to $7.7 million for the fiscal year ended March 31, 1998. Income from operations during the fiscal year ended March 31, 1997 was favorably impacted by higher than anticipated revenue coupled with expenses that did not increase proportionately. YEARS ENDED MARCH 31, 1996 AND 1997 REVENUE Total revenue increased 95% from $15.7 million for the fiscal year ended March 31, 1996 to $30.6 million for the fiscal year ended March 31, 1997. PRODUCT. Product revenue increased 90% from $13.3 million for the fiscal year ended March 31, 1996 to $25.2 million for the fiscal year ended March 31, 1997. This increase was primarily due to growth in unit sales which was attributable to an increase in shipments to existing indirect channel partners and an increase in the number of sales personnel and, to a lesser extent, an expansion of indirect distribution channels. This increase was also due to an increase in the average selling price attributable to an increase in the sale of FDDI and Fast Ethernet probes. 24 SERVICE. Service revenue increased 156% from $1.5 million for the fiscal year ended March 31, 1996 to $3.9 million for the fiscal year ended March 31, 1997. This increase was primarily due to growth in sales of support agreements to new and existing customers attributable to increased sales and marketing efforts. LICENSE AND ROYALTY. License and royalty revenue increased 81% from $886,000 for the fiscal year ended March 31, 1996 to $1.6 million for the fiscal year ended March 31, 1997. This increase was primarily due to a growth in unit sales of our software and embedded software products by Cisco. COST OF REVENUE PRODUCT. Cost of product revenue increased 60% from $5.9 million for the fiscal year ended March 31, 1996 to $9.4 million for the fiscal year ended March 31, 1997. This increase was primarily due to an increase in unit sales and a shift in product mix. Product gross margins increased from 56% for the fiscal year ended March 31, 1996 to 63% for the fiscal year ended March 31, 1997. This increase was primarily due to a shift in product mix to higher margin products, a decrease in component costs and increases in operating efficiencies. SERVICE. Cost of service revenue increased 283% from $138,000 for the fiscal year ended March 31, 1996 to $528,000 for the fiscal year ended March 31, 1997. This increase was primarily due to the hiring of additional service personnel to support an increase in the customer base. Service gross margins decreased from 91% for the fiscal year ended March 31, 1996 to 86% for the fiscal year ended March 31, 1997. This decrease was primarily due to the increase in service personnel. OPERATING EXPENSES RESEARCH AND DEVELOPMENT. Research and development expenses increased 149% from $1.2 million for the fiscal year ended March 31, 1996 to $3.0 million for the fiscal year ended March 31, 1997. This increase was primarily due to the hiring of additional research and development personnel and higher consulting costs related to development of new products and enhancements to existing products. SALES AND MARKETING. Sales and marketing expenses increased 55% from $4.4 million for the fiscal year ended March 31, 1996 to $6.8 million for the fiscal year ended March 31, 1997. This increase was primarily due to the hiring of additional sales and marketing personnel and increases in marketing programs, including trade shows, direct mail programs and seminars. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 161% from $695,000 for the fiscal year ended March 31, 1996 to $1.8 million for the fiscal year ended March 31, 1997. This increase was primarily due to the hiring of additional general and administrative personnel and costs to support our growth. INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense, increased from an expense of $3,000 for the fiscal year ended March 31, 1996 to income of $461,000 for the fiscal year ended March 31, 1997. This increase was primarily due to an increase in our cash balances. PROVISION FOR INCOME TAXES. The provision for income taxes increased from $1.4 million for the fiscal year ended March 31, 1996 to $3.6 million for the fiscal year ended March 31, 1997. This increase was primarily due to higher pre-tax income. Our effective tax rate decreased from 40% for the fiscal year ended March 31, 1996 to 38% for the fiscal year ended March 31, 1997 primarily due to the reduction of non-deductible expenses. 25 QUARTERLY RESULTS OF OPERATIONS The following tables set forth a summary of NetScout's unaudited quarterly operating results for each of the seven quarters included in the period ended December 31, 1998. This information has been derived from unaudited interim consolidated financial statements that, in the opinion of management, have been prepared on a basis consistent with the audited consolidated financial statements contained elsewhere in this prospectus and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such information when read in conjunction with our audited consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED ------------------------------------------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1997 1997 1998 1998 1998 1998 ----------- ----------- --------- --------- --------- --------- --------- (IN THOUSANDS) STATEMENT OF INCOME DATA: Revenue: Product........................................ $ 6,512 $ 7,710 $ 9,722 $ 11,046 $ 11,547 $ 11,863 $ 13,327 Service........................................ 1,192 1,033 1,230 1,688 1,873 2,284 2,172 License and royalty............................ 298 788 686 924 1,843 1,999 1,972 ----------- ----------- --------- --------- --------- --------- --------- Total revenue................................ 8,002 9,531 11,638 13,658 15,263 16,146 17,471 ----------- ----------- --------- --------- --------- --------- --------- Cost of revenue: Product........................................ 2,162 2,649 3,488 4,339 4,340 4,347 4,927 Service........................................ 136 152 222 274 296 320 222 ----------- ----------- --------- --------- --------- --------- --------- Total cost of revenue........................ 2,298 2,801 3,710 4,613 4,636 4,667 5,149 ----------- ----------- --------- --------- --------- --------- --------- Gross margin..................................... 5,704 6,730 7,928 9,045 10,627 11,479 12,322 ----------- ----------- --------- --------- --------- --------- --------- Operating expenses: Research and development....................... 1,070 1,196 1,277 1,586 1,732 1,760 1,803 Sales and marketing............................ 2,557 2,984 3,837 4,205 5,008 4,527 5,191 General and administrative..................... 580 586 746 1,038 815 913 1,030 ----------- ----------- --------- --------- --------- --------- --------- Total operating expenses..................... 4,207 4,766 5,860 6,829 7,555 7,200 8,024 ----------- ----------- --------- --------- --------- --------- --------- Income from operations........................... 1,497 1,964 2,068 2,216 3,072 4,279 4,298 Interest income, net............................. 185 176 194 188 200 243 224 ----------- ----------- --------- --------- --------- --------- --------- Income before provision for income taxes......... 1,682 2,140 2,262 2,404 3,272 4,522 4,522 Provision for income taxes....................... 606 771 814 865 1,178 1,628 1,629 ----------- ----------- --------- --------- --------- --------- --------- Net income....................................... $ 1,076 $ 1,369 $ 1,448 $ 1,539 $ 2,094 $ 2,894 $ 2,893 ----------- ----------- --------- --------- --------- --------- --------- ----------- ----------- --------- --------- --------- --------- ---------
26 AS A PERCENTAGE OF TOTAL REVENUE:
QUARTER ENDED ---------------------------------------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1997 1997 1997 1998 1998 1998 ----------- ----------- ----------- ----------- ----------- ----------- Revenue: Product............................................ 81.4% 80.9% 83.5% 80.9% 75.7% 73.5% Service............................................ 14.9 10.8 10.6 12.4 12.3 14.1 License and royalty................................ 3.7 8.3 5.9 6.7 12.0 12.4 ----- ----- ----- ----- ----- ----- Total revenue.................................... 100.0 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- ----- Cost of revenue: Product............................................ 27.0 27.8 30.0 31.8 28.4 26.9 Service............................................ 1.7 1.6 1.9 2.0 2.0 2.0 ----- ----- ----- ----- ----- ----- Total cost of revenue............................ 28.7 29.4 31.9 33.8 30.4 28.9 ----- ----- ----- ----- ----- ----- Gross margin......................................... 71.3 70.6 68.1 66.2 69.6 71.1 ----- ----- ----- ----- ----- ----- Operating expenses: Research and development........................... 13.4 12.5 11.0 11.6 11.4 10.9 Sales and marketing................................ 31.9 31.3 33.0 30.8 32.8 28.0 General and administrative......................... 7.3 6.1 6.4 7.6 5.3 5.7 ----- ----- ----- ----- ----- ----- Total operating expenses......................... 52.6 49.9 50.4 50.0 49.5 44.6 ----- ----- ----- ----- ----- ----- Income from operations............................... 18.7 20.7 17.7 16.2 20.1 26.5 Interest income, net................................. 2.3 1.8 1.7 1.4 1.3 1.5 ----- ----- ----- ----- ----- ----- Income before provision for income taxes............. 21.0 22.5 19.4 17.6 21.4 28.0 Provision for income taxes........................... 7.6 8.1 7.0 6.3 7.7 10.1 ----- ----- ----- ----- ----- ----- Net income........................................... 13.4% 14.4% 12.4% 11.3% 13.7% 17.9% ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- DEC. 31, 1998 ----------- Revenue: Product............................................ 76.3% Service............................................ 12.4 License and royalty................................ 11.3 ----- Total revenue.................................... 100.0 ----- Cost of revenue: Product............................................ 28.2 Service............................................ 1.3 ----- Total cost of revenue............................ 29.5 ----- Gross margin......................................... 70.5 ----- Operating expenses: Research and development........................... 10.3 Sales and marketing................................ 29.7 General and administrative......................... 5.9 ----- Total operating expenses......................... 45.9 ----- Income from operations............................... 24.6 Interest income, net................................. 1.3 ----- Income before provision for income taxes............. 25.9 Provision for income taxes........................... 9.3 ----- Net income........................................... 16.6% ----- -----
NetScout's total revenue has increased each of the seven consecutive quarters in the period ended December 31, 1998. Product revenue increased in each quarter due to increased market acceptance of our products and diversification of our sales channels, including expansion of our sales force and relationships with indirect channel partners. Service revenue generally increased due to the growth in our customer base and new initiatives to sell extended support agreements. License and royalty revenue generally increased but fluctuated due to variability in the sale of software products by Cisco. Cost of product revenue increased in absolute dollars each quarter primarily due to higher unit volumes but fluctuated as a percentage of product revenue primarily due to changes in the distribution channel and, to a lesser degree, variability of component costs. Cost of service revenue generally increased in absolute dollars primarily due to the hiring of additional support personnel and related costs for customer support with the exception of the quarter ended December 31, 1998, when timing of personnel replacements and additions resulted in lower expenses. Cost of service revenue fluctuated as a percentage of service revenue primarily due to variability in staffing levels. Operating expenses generally increased in absolute dollars primarily due to increased spending in all areas. Operating expenses generally declined as a percentage of total revenue primarily due to our limited ability to hire research and development personnel as well as sales and marketing personnel. Research and development expenses increased in absolute dollars each quarter primarily due to the hiring of additional research and development personnel and higher consulting costs associated with enhancing existing products and developing new products. Research and development expenses generally declined as a percentage of total revenue primarily due to research and development staffing. Sales and marketing expenses generally increased in absolute dollars each quarter primarily due to the hiring of additional sales and marketing personnel and an increase in marketing program activities. A reduction in marketing activities for the quarter ended September 30, 1998 resulted in a decrease in 27 overall sales and marketing expenses for that quarter. Sales and marketing expenses fluctuated as a percentage of total revenue primarily due to variability in marketing expenditures and our internal hiring cycles for sales and marketing personnel. General and administrative expenses generally increased in absolute dollars primarily due to the hiring of additional financial, information services and human resources personnel, as well as increased use of outside services. General and administrative expenses were unusually high in the quarter ended March 31, 1998 primarily due to expenses related to our move to a new facility. General and administrative expenses have fluctuated as a percentage of total revenue primarily due to variability in purchases of outside services. Our operating results have varied on a quarterly basis during our operating history and are expected to fluctuate significantly in the future. A variety of important factors, many of which are outside of our control, may affect our quarterly operating results. See "Risk Factors--Disappointing quarterly operating results could cause our common stock price to decrease." LIQUIDITY AND CAPITAL RESOURCES Since inception, we have funded operations primarily through cash provided by operating activities. At December 31, 1998, we had cash and cash equivalents totaling $22.0 million. In March 1999, we extended and increased our line of credit with a bank which allows us to borrow up to $5.0 million for working capital purposes and to obtain of letters of credit. The line of credit expires in March 2000. Amounts available under the line of credit are a function of eligible accounts receivable and bear interest at the bank's prime rate, which was 7.75% on March 31, 1999. At March 31, 1999, we had letters of credit outstanding under the line aggregating $561,000. The bank line of credit is secured by our inventory and accounts receivable. Cash provided by operating activities was $2.3 million, $8.4 million, $6.7 million and $8.8 million for the fiscal years ended March 31, 1996, 1997 and 1998 and for the nine months ended December 31, 1998. Cash provided by operating activities was primarily derived from net income generated and, to a lesser degree, increases in deferred revenue, accrued expenses, and depreciation and amortization in each period. This was partially offset by increases in accounts receivable in fiscal 1996 and fiscal 1998 and for the nine months ended December 31, 1998 and increases in inventories in fiscal 1996, fiscal 1997 and fiscal 1998. All of these increases were due to the growth of our business. Cash used by investing activities was $788,000, $9.7 million and $6.9 million for the fiscal years ended March 31, 1996, 1997 and 1998. Cash used by investing activities in fiscal 1996, fiscal 1997 and fiscal 1998 was primarily due to purchases of marketable securities and purchases of fixed assets and, in fiscal 1997, also due to loans that were made to stockholders. Cash provided by investing activities was $6.9 million for the nine months ended December 31, 1998, which was primarily due to the maturity of marketable securities, partially offset by purchases of fixed assets. Cash provided by financing activities was $5.9 million for the fiscal year ended March 31, 1996, which represent the net proceeds derived from the sale of Series A Preferred Stock. In January 1999, we received gross proceeds of $44.5 million from the sale of Class B Convertible Common Stock and all of the proceeds were used to redeem shares of Series A Preferred Stock, Non-Voting Common Stock and common stock. Cash provided by financing activities was $2,000, $22,000 and $43,000 for the fiscal years ended March 31, 1997 and 1998 and for the nine months ended December 31, 1998, which was primarily due to proceeds received upon the exercise of stock options. As of December 31, 1998, our primary commitments consisted of obligations outstanding under operating leases. Future noncancelable minimum lease commitments are $861,000, $959,000, $1.0 million, and $683,000 for fiscal years 2000, 2001, 2002 and 2003. We expect to experience growth in our working capital needs for the foreseeable future in order to execute our business plan. We anticipate that operating activities, as well as planned capital 28 expenditures, will constitute a material use of our cash resources. In addition, we may utilize cash resources to fund acquisitions or investments in complementary businesses, technologies or products. We believe that the net proceeds from this offering, together with our current cash and cash equivalents and cash generated from operations, will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next 12 months. YEAR 2000 READINESS DISCLOSURE Many computers and software products accept only two digit entries in date fields which could cause problems distinguishing 21st century dates from 20th century dates. The use of computers and software products that are not "Year 2000" compliant could result in system failures or miscalculations causing business disruptions including the inability to process transactions, send invoices or perform other business activities. As a result, many computers and software products may need to be upgraded or replaced in order to meet Year 2000 requirements. We have reviewed our products to determine whether they are Year 2000 compliant. Based on this review, we believe that most of our products are Year 2000 compliant. The NetScout WebCast Unix and Windows NT products are not currently Year 2000 compliant but are expected to be made Year 2000 compliant in the next product release (version 2.1), which is planned for the third calendar quarter of 1999. We believe our current financial and accounting system is Year 2000 compliant. We anticipate that our financial and accounting systems will be upgraded during the third calendar quarter of 1999 and that such systems will also be Year 2000 compliant. All other commercially available internal systems used in our daily operations including our computers, software packages, telephones, security systems, and shipping systems have either been determined to be compliant, have been certified compliant by the commercial provider, or are in the process of being tested and upgraded. We expect that our internal systems will be fully compliant by the end of the third calendar quarter of 1999. Purchasing patterns of our customers or potential customers may be affected by Year 2000 issues. They may expend significant resources to correct their current systems for Year 2000 compliance which could result in reduced funds available for network management products. Year 2000 complications could also disrupt the operations of our customers which could delay purchases of network management products. Reduced funds or delayed purchases could have a material adverse effect on our business, operating results and financial condition. In addition, we rely on suppliers and indirect channel partners who may be impacted by Year 2000 complications. To date, we have not conducted a Year 2000 review of our suppliers or indirect channel partners. We are currently evaluating the need to conduct a review of our suppliers' and indirect channel partners' Year 2000 compliance issues. Failure of our suppliers' systems to operate properly could require us to incur significant expenses to remedy problems or replace suppliers. Failure of our indirect channel partners' systems to operate properly could reduce our revenue from indirect distribution channels. Problems with our suppliers or indirect channel partners could have a material adverse effect on our business, operating results and financial condition. Some of our products are sold to OEMs who incorporate them into their own product offerings. We do not know whether OEM products incorporating our products are or will be Year 2000 complaint. If such OEM products are not Year 2000 complaint, their customers could cancel or delay orders which, in time, would affect the orders that we receive from our OEM partners. Therefore, the failure of our OEM partners to be Year 2000 complaint could have a material adverse effect on our business, results of operations and financial condition. To date, we have not incurred significant incremental costs in order to comply with Year 2000 requirements and do not expect to incur significant incremental costs in the foreseeable future. However, there can be no assurance that Year 2000 errors or defects will not be discovered in our products or our internal software systems. If such errors or defects are discovered, there can be no 29 assurance that the costs of making such systems Year 2000 compliant will not have a material adverse effect on our business, operating results and financial condition. We do not currently have any Year 2000 contingency plans. If we discover Year 2000 compliance issues, we intend to evaluate the need for one or more contingency plans relating to such issues. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We consider all highly-liquid investments purchased with a maturity of three months or less to be cash equivalents, and those with maturities greater than three months are considered to be marketable securities. Cash equivalents and marketable securities are stated at amortized cost plus accrued interest, which approximates fair value. Cash equivalents and marketable securities consist primarily of money market instruments and U.S. Treasury bills. We currently do not hedge interest rate exposure, but do not believe that an increase in interest rates would have a material effect on the value of our marketable securities. EUROPEAN MONETARY UNION On January 1, 1999, eleven of the existing members of the European Union ("EU") joined the European Monetary Union. Ultimately, there will be a single currency within certain countries of the EU, known as the Euro, and one organization, the European Central Bank, responsible for setting European monetary policy. We have reviewed the impact the Euro will have on our business and whether this will give rise to a need for significant changes in our commercial operations or treasury management functions. Because our transactions are denominated in U.S. dollars, we do not believe that the Euro conversion will have any material effect on our business, financial condition or result of operations. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes the accounting for costs of software products developed or purchased for internal use, including when such costs should be capitalized. We do not expect SOP 98-1, which is effective for us beginning April 1, 1999, to have a material effect on our financial condition or results of operations. In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." Start-up activities are defined broadly as those one-time activities relating to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer, commencing some new operation or organizing a new entity. Under SOP 98-5, the cost of start-up activities should be expensed as incurred. SOP 98-5 is effective for our fiscal year 2000 financial statements and we do not expect its adoption to have a material effect on our financial condition or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal year quarters of fiscal years beginning after June 15, 1999. We do not expect SFAS No. 133 to have a material effect on our financial condition or results of operations. 30 BUSINESS INTRODUCTION We design, develop, manufacture, market and support an integrated family of products that enable businesses and service providers to manage the performance of computer networks and important business software applications. Our Application Flow Management ("AFM") solution consists of data collection devices and analysis and presentation software. AFM collects, aggregates and analyzes network and application data from a wide range of network technologies. Using this data, AFM provides real-time information regarding the performance of computer networks and individual software applications, such as e-mail, order entry and Web-based applications. Our solution provides this information to computer network and business managers in a user-friendly, graphical format. INDUSTRY BACKGROUND Business enterprises increasingly rely on software applications and computer networks as strategic assets that are essential to business operations. Computer networks are being expanded to deliver important software applications, such as enterprise resource planning, e-mail, order entry, accounting and Web-based applications, to employees, suppliers, distributors and customers. Because of the dramatic increase in the number of users who depend on fast and reliable computer network access, even minor computer network malfunctions can result in significant business interruptions, lost revenue, decreased productivity and customer dissatisfaction. As a result, businesses are recognizing the critical importance of effective network and application performance management. To support the growing number of users and demand for faster and more reliable network access, both business enterprises and service providers are making significant investments in advanced networking technology. The Gartner Group, a leading networking industry research company, estimates that the world-wide enterprise networking equipment market, excluding Internet remote access equipment, was $37.4 billion in 1998, growing at a five-year compounded annual rate of 28.2%. This growth has resulted in the introduction of new technologies addressing network speed and access, such as Fast Ethernet, Gigabit Ethernet, ATM and IP/Internet, and new network products addressing quality of service and security. The implementation of these new technologies and products has resulted in highly-complex, multi-vendor computer networks, which are more difficult to manage. Traditional network performance management is a reactive process in which computer network managers respond to problems only after computer network performance has been impacted. This type of network performance management is based on receiving alerts from malfunctioning computer network devices or calls from computers network users indicating that performance has degraded. Highly-skilled technicians with portable network traffic analyzers are then dispatched to diagnose and resolve the computer network problems. While this approach helps computer network managers respond to technical problems, it does not provide sufficient information to proactively manage the overall computer network, measure the performance of applications, or address issues with computer network design. A further drawback of this approach is that network problems are often addressed by adding costly network capacity instead of identifying and correcting inefficiencies. A new, proactive approach is emerging that is designed to anticipate and help prevent computer network problems before performance is degraded. This approach is based on analytical software that retrieves and analyzes information from data sources located on the computer network. These data sources include existing computer network devices, such as routers, switches and hubs, data collection software agents, and dedicated data collection devices, known as probes. One class of proactive network management products relies on retrieving data from existing computer network devices. These products generally report on computer network utilization for use in network capacity planning and device status monitoring which can help prevent certain types of failures. 31 Because this class of products relies on limited, predefined data, originally intended for device management, it provides minimal information regarding network users or application performance. These solutions typically provide only historical and end-of-period reports because providing real-time information would significantly increase network traffic. A second class of proactive network management products relies on retrieving data from proprietary software installed on users' desktop computers. These solutions provide information regarding application performance, but offer limited insight into the performance of the network. In addition, these solutions can be difficult to administer and can burden the processing power of desktop computers. A third class of proactive network management products relies on placing probes on key parts of the computer network to provide continuous monitoring of computer network traffic. Comprised of dedicated computer hardware and software, most probes are based on the remote monitoring ("RMON") standard. In contrast with approaches that utilize existing network devices, probes contain proprietary software which allows the capture of a richer set of network information. In contrast with approaches that require the installation of software on desktop computers, probes contain processors which can capture, store and analyze traffic data on a computer network segment without impacting any existing devices on the computer network. Although probes provide the most robust data about network performance, most probes are unable to provide information regarding application performance, such as response time. Business and computer network managers need a comprehensive approach to network and application performance management that enables them to anticipate and address network performance problems and align their computer resources to their business strategies. Although each of the new, proactive network management approaches provides better solutions than the traditional reactive approach, none of these approaches provides the ability to manage both network and application performance. NETSCOUT SOLUTION We design, develop, manufacture, market and support an integrated family of products to enable business managers to manage both network and application performance, which together comprise our Application Flow Management ("AFM") solution. AFM uses proprietary technology to deliver more functionality than other solutions. Our probes collect, aggregate and perform detailed analysis on a wide range of computer network data, including data from individual software applications. We believe that we currently offer the industry's most extensive family of probes, with models for a wide range of network technologies. In addition, our robust analytical software provides real-time network and application performance information in a user-friendly, graphical format. AFM addresses the following key aspects of network management: - APPLICATION RESPONSE TIME MEASUREMENT. AFM measures and provides detailed, real-time information on application response time over the computer network. This information enables network managers to optimize application configuration, prioritize applications and proactively manage the computer network. - MONITORING AND TROUBLESHOOTING. AFM allows real-time monitoring and trend analysis of network usage, performance and error conditions which help network managers prevent network malfunctions. When network problems do occur, detailed information expedites troubleshooting to minimize the impact. - CAPACITY PLANNING. AFM measures trends in network usage by individual software application. Helps network managers make informed network spending decisions. 32 - POLICY ENFORCEMENT. AFM allows network managers to identify inappropriate or wasteful usage of the computer network. Network managers can use this information to ensure adherence to corporate policies and guidelines. - ACCOUNTING AND CHARGE-BACK. AFM provides network usage information by user, department or application. When used in conjunction with accounting software packages, it allows customers to charge for internal network usage. STRATEGY Our objective is to enhance our leadership position in the network and application performance management market. Key elements of our strategy include: EXTEND TECHNOLOGY LEADERSHIP IN INSTRUMENTATION. We intend to continue to devote significant resources to the development of new and innovative products, capitalizing on our extensive experience with large computer networks and our understanding of customer needs. As computer networks evolve, we intend to incorporate new technologies and provide solutions to enable businesses to manage and optimize the performance of their computer networks and critical software applications. We have an extensive track record of innovation, including the introduction of Ethernet probes in 1992, WAN probes in 1993, switch embedded probes and CDDI/FDDI probes in 1995, Fast Ethernet probes in 1996, WAN (T3) probes in 1997, ATM probes in 1998, and Channelized WAN and Fast EtherChannel probes in 1999. We are currently developing a Gigabit Ethernet probe that is planned for release later in 1999. EXPAND REPORTING AND ANALYSIS SOFTWARE SUITE. We plan to develop new analysis, presentation and reporting software to leverage the extensive information collected by our probes. Our product family is designed to permit easy integration of enhanced analysis and reporting functions, as demonstrated by the release of Resource Monitor in 1994, NetScout Server and WebCast in 1997 and AppScout in 1999. LEVERAGE INSTALLED BASE OPPORTUNITIES. We have sold a majority of our products through indirect distribution channels and have also sold our products directly to over 600 customers. Our installed base consists of over 25,000 hardware probes and over 50,000 switch-embedded agents. We intend to target existing users of our products with marketing and sales programs designed to promote the more extensive use of our data collection devices throughout their computer networks and the adoption of our management software options. TARGET NEW MARKET OPPORTUNITIES. We market our products to potential customers in markets which we believe have the potential for growth. We have identified the following markets as having the potential for strong demand for our products: - network management outsourcing companies, such as Compaq and WANG Global; - connectivity service providers, such as MCI Worldcom and Concert Communications Company; and - application service providers, which we believe is an emerging market. CONTINUE TO LEVERAGE CISCO RELATIONSHIP. Since 1994, we have had a strategic relationship with Cisco. Our strategy is to further synchronize our product development and marketing activities with Cisco's business strategy, and to support Cisco's distribution of our products. Through our relationship with this computer networking industry leader, we have significantly increased the sale of our products and enhanced the market acceptance of our network and application performance management solutions. EXPAND DISTRIBUTION CHANNELS. We plan to substantially increase the number of our field sales representatives. We also seek to develop additional indirect distribution channels to promote our 33 products, including computer networking equipment and software application vendors, system integrators, distributors, resellers and service providers. We have strategic relationships with Paradyne Corporation, WaveTek Wandel Goltermann, Inc., FORE Systems, Inc. and Compaq Computer Corporation designed to facilitate the distribution and market acceptance of our solutions. We are striving to increase sales outside of North America through the addition of sales personnel and increased marketing activities to support our indirect channel partners, including Cisco. FACILITATE DEVELOPMENT OF COMPLEMENTARY THIRD-PARTY PRODUCTS. Our probes provide a rich source of data that can be used by third-party software products. As a means to increase demand for our products, we encourage the development of applications that leverage our solutions. For example, we have partnered with Concord Communications, Inc., DeskTalk Systems, Inc. and Apogee Networks, Inc. to develop interoperable, expanded solutions. We supply a developer's toolkit, which includes interfaces to our products, to enable the development of complementary products. PRODUCTS AND TECHNOLOGY Our AFM solution provides computer network and application performance management through three layers of products: Graphic depicting the three layers of our products: Data Collection, Data Aggregation and Information and Presentation Analysis Our products are generally purchased as a complete system, consisting of multiple data sources, presentation and analysis software and optional data aggregation software for larger networks. A representative new customer would be a multinational corporation that deploys 25 to 50 probes, data aggregation software and our full suite of presentation and analysis software over a 12-month period. Depending on the type of network, such a deployment would typically cost between $100,000 and $300,000. After initial deployment of our solution, a customer can add additional probes and management software options on an individual basis. Our solution has been deployed in networks employing more than 500 probes. DATA COLLECTION Our data sources are based on the RMON standard and implement proprietary enhancements for additional functionality, such as application response time and switched network monitoring. We offer the following family of data sources: PROBES. NetScout probes are dedicated data collection devices comprised of a standard hardware platform and proprietary software. Probes contain processors that capture, store and analyze data on a computer network. Our probes are best suited for parts of the computer network that require continuous monitoring and support a wide range of computer network technologies, including the following: - Ethernet, Fast Ethernet, Fast EtherChannel and Token Ring; - Sub-rate, T1/E1, T3/E3 WAN and Frame Relay; - FDDI/CDDI; and - Oc3 ATM. 34 SOFTWARE AGENTS. NetScout software agents are software-only data sources that run on server or desktop computers running the Windows NT operating system. This lower-cost alternative is best suited for parts of the computer network with lower traffic volume, such as branch office networks and remote user links. SWITCH EMBEDDED AGENTS. Switch embedded agents are data sources operating in third-party network switches. One version of our switch embedded agent consists of our software embedded into the switch operating system. Because the switch embedded agent must utilize the switch's processor, it offers only a limited subset of our data collection functionality. Another version which has been implemented with Cisco requires the installation of a dedicated interface module into the switch. Because the module has its own processor, it can offer the full range of our data collection functionality. DATA COLLECTION AGENT OPTIONS. Our data collection agent options are proprietary software enhancements for our probes and software agents. These options consist of: - NetFlow Monitor. This enhancement allows certain types of our probes to collect traffic information stored in Cisco routers in order to provide a single, consolidated view of all traffic information to the network manager. - Resource Monitor. With this option, our probes are enabled to collect information from network devices, including servers, to offer a more complete, end-to-end view of the network. - Application Response Time Management Information Base (ART MIB). This option enables our probes or agents to monitor application response times on a given part of the network. - VLAN Monitor. With this option, users can collect traffic information pertaining to a given subset of users within a switched network, giving additional flexibility to the network manager for troubleshooting and traffic accounting. DATA AGGREGATION NETSCOUT SERVER. NetScout Server is an optional data aggregation software package that enables our AFM solution to effectively manage large computer networks. NetScout Server reduces overall computer network and application performance management traffic by aggregating, sorting, simplifying and storing data collected at remote sites. It then transmits only relevant periodic reports and real-time alarms through the WAN to the presentation and analysis software. This reduces consumption of costly WAN bandwidth. NetScout Server runs on the Microsoft Windows NT, Sun Solaris, HP-UNIX and IBM AIX operating platforms. INFORMATION PRESENTATION AND ANALYSIS Our presentation and analysis software provides clear, meaningful, real-time displays of relevant network and application performance data to network and business managers in easy-to-read, graphical formats. We offer the following family of data presentation and analysis software: NETSCOUT MANAGER PLUS. NetScout Manager Plus presents management reports based on data gathered from probes, embedded agents, software agents and NetScout Server. NetScout Manager Plus provides a suite of over 40 integrated functions, which include application-level management, monitoring and troubleshooting, capacity planning, policy enforcement and accounting. APPSCOUT. AppScout uses our data sources to monitor the performance of applications over the network, including response time and bandwidth utilization by application or by user. 35 AppScout is a real-time, browser-based reporting solution that is especially useful when measuring service level conformance or deploying new applications. WEBCAST. WebCast works in conjunction with NetScout Manager Plus and provides a portfolio of secure, easy-to-access reports viewable by authorized users from any Web browser. SALES AND MARKETING We sell our products through indirect distribution channels and a direct sales force. Our indirect channel partners include OEMs, distributors, resellers, system integrators and service providers. For the fiscal years ended March 31, 1997 and 1998 and the nine months ended December 31, 1998, revenue from indirect channels represented 73%, 76% and 82%, respectively, of total revenue. Sales to Cisco, our largest indirect channel partner, represented 24%, 40% and 49%, respectively, of our total revenue during the same periods. Our direct sales force works in cooperation with our indirect channel partners and devotes significant efforts to support sales through indirect distribution channels. We plan to substantially increase the number of our field sales representatives, which we believe will promote additional direct and indirect sales. We use a consultative sales approach. Our inside sales representatives pre-qualify opportunities and set up appointments for members of the field sales team. An initial sales meeting will generally consist of a review of the prospect's specific computer network and application performance management needs and a demonstration of our products' capabilities. Often, the demonstration will be followed by a product evaluation on the customer's network. Our sales representative will often encourage one of our indirect channel partners to participate in the sales process. In addition, our indirect channel partners often request that we participate in sales presentations to their customers. International sales are accomplished primarily through indirect distribution channels. Revenues from sales outside North America represented 12%, 12% and 11% of total revenue for the fiscal years ended March 31, 1997 and 1998 and the nine months ended December 31, 1998, respectively. We believe that our North American indirect channel partners also resell a significant amount of our products internationally. As of March 31, 1999, our North American field sales organization consisted of 43 employees. Our international field sales organization consisted of 10 employees with an office in the United Kingdom. In addition, we had 16 employees responsible for providing telesales and sales and administrative support. In addition to our Westford, Massachusetts headquarters, we have sales offices in Maryland, North Carolina, Texas, Minnesota, Illinois, California, Oregon, and Ontario, Canada. A key element of our market penetration strategy is the formation of strategic relationships with industry-leading network equipment vendors and software suppliers in various complementary areas. We believe these relationships increase our market presence and generate qualified opportunities to sell our solutions. As of March 31, 1999, our business development organization consisted of 10 employees. Our marketing organization utilizes a variety of programs to promote the sale and acceptance of our solutions. As of March 31, 1999, our marketing organization consisted of 19 employees. Our marketing programs include: - advertising; - trade shows; - public relations activities; - direct mail; - seminars and speaking engagements; - brochures, data sheets and white papers; and - Web marketing. 36 STRATEGIC RELATIONSHIP WITH CISCO Cisco is a significant distributor of our products under its private label. We sell NetScout Manager and NetScout probes to Cisco, which are resold by Cisco under the names TrafficDirector and SwitchProbes. We also license versions of our software for use in a range of Cisco switches for which we receive royalty payments and we provide development services to Cisco for which we receive engineering fees. Cisco has a worldwide, non-exclusive right to market and resell our products on a stand-alone basis and to incorporate certain components of our technology into its products. This relationship is governed by a project development and license agreement dated as of January 13, 1994 and a private labeling agreement dated as of May 15, 1996. These agreements have been amended and were extended until October 2000. We work closely with Cisco on joint sales and marketing efforts. These include collaboration on product marketing, our participation in Cisco seminars, joint customer presentations, introductions to Cisco's international distributors and links between our web sites. We devote significant time and attention of senior management, as well as resources throughout our company, to making this partnership successful and believe that we have a strong business relationship. CUSTOMERS We sell our products to businesses and organizations with large and medium-sized computer networks. We have sold a majority of our products through indirect distribution channels and have also sold our products directly to over 600 customers. Our customers operate in a wide variety of industries, such as financial services, transportation, manufacturing, insurance, retail and software development. The following is a partial list of our customers: 3M Corporation Los Alamos National Laboratory Amoco Corporation Lotus Development Corp. AT&T Mid America Energy Co. Cargill Financial Services Merrill Corporation CIGNA Corporation Morgan Stanley Consumers Energy Company NationsBank Deutsche Bank AG London NCR Donaldson, Lufkin & Jenrette Northwest Airlines The GAP, Inc. Providian Financial Corp Fidelity Investments State Street Bank and Trust Goldman Sachs & Co. Sun Microsystems, Inc. Harvard Pilgrim Health Care Teradyne Lehman Brothers Toys-R-Us Liberty Mutual Group Xerox Lockheed Martin Financial Services
37 The following are examples of selected client applications of our products:
THE PROBLEM NETSCOUT'S SOLUTION THE RESULT Troubleshooting A manufacturing firm with 8,400 Using our AFM solution, the The WAN was properly employees at 75 networked company monitored its network reconfigured and, as a result, locations in 23 countries was and identified a configuration order entry response times experiencing sluggish order problem that originated with returned to normal, and users entry response times which the WAN service provider. stopped complaining of slow compromised the quality of service. customer service. Capacity Planning A leading financial services Using our AFM solution, the The company identified baseline company with 10,000 employees company was able to understand usage patterns, which helped at 350 sites depended on its current and profile future them to intelligently plan and network to process 200,000 capacity requirements for their implement infrastructure online financial trades and network. expenditures. Our AFM solution support up to 20 million Web also identified remnants of a site hits a day. This volume software test that was slowing caused business-critical down a remote server. As a applications to slow down. result, the company avoided purchasing $90,000 in unnecessary bandwidth capacity. Usage-based Accounting A technology enterprise had a Using our AFM solution, the The program has just been network with 12,500 users network operations center implemented in Europe and is spanning 715 sites. The CEO designed a charge-back program expected to be rolled out in wanted to economize and for network usage. The program the U.S. in June 1999. The challenged the network was based on quantifying company anticipates substantial operations center to control bandwidth usage and response reductions in overhead with network costs. times by user and by network access tied to business application throughout the goals. network. Application Deployment A large aerospace defense Our AFM solution was installed The network team was able to contractor wanted to move its to provide both confirm that the WAN had email system from a local application-level data and adequate capacity. Our solution server to a remote server. This network-wide bandwidth usage minimized the risks involved in critical application had to information. The company was a major application continue running smoothly, and able to determine the current re-deployment. the network team was unsure if local server load and calculate the WAN could handle the how much data would flow across additional load. the WAN to the remote server.
38 SUPPORT SERVICES We believe that providing a high level of customer service and technical support is critical to achieving effective product implementation and ensuring customer satisfaction. We offer a broad range of support and training services to our customers and work closely with our indirect channel partners to provide pre-sales and post-sales support. We offer a toll-free technical support hotline to our customers under support agreements and to our indirect channel partners. This hotline is staffed by customer support engineers from 8:00 a.m. to 8:00 p.m., Eastern time, Monday through Friday, from our corporate headquarters in Westford, Massachusetts. As of March 31, 1999, our support services organization consisted of 11 employees. RESEARCH AND DEVELOPMENT We devote substantial resources to developing new products and enhancing existing products. Our market is characterized by rapid technological change, frequent product introductions and enhancements, evolving industry standards and rapidly changing customer requirements. We have a long record of product innovation, including:
INFORMATION AGGREGATION CALENDAR YEAR AND INTRODUCED PROBES AND AGENTS PRESENTATION SOFTWARE 1992 Ethernet, Token Ring NetScout Manager 1993 -- -- 1994 WAN Resource Monitor 1995 CDDI/FDDI, Switch Embedded 1996 Fast Ethernet NetScout Manager Plus 1997 WAN (T3) NetScout Server, WebCast 1998 ATM -- 1999 Channelized WAN, AppScout Fast EtherChannel -- 1999 (Planned) Gigabit Ethernet --
As of March 31, 1999, our research and development organization consisted of 52 employees. In addition, we contract with third parties to perform specific development projects. Research and development expenditures for the fiscal years ended March 31, 1997 and 1998 and for the nine months ended December 31, 1998 were approximately $3.0 million, $5.1 million and $5.3 million. To date, all research and development expenses have been expensed as incurred. COMPETITION The market for our products is new and rapidly evolving, and is expected to become increasingly competitive as current competitors expand their product offerings and new companies enter the market. Our principal competitors include a number of companies offering one or more solutions for the network and applications performance management market, some of which compete directly with our products. For example, we compete with probe vendors, such as Hewlett-Packard, providers of network performance management solutions, such as Concord Communications and Micromuse, providers of application performance management solutions, such as International Network Services, and providers of portable network traffic analyzers, such as Network Associates. In addition, leading network equipment providers could offer their own or competitors' solutions in the future. We believe that the principal competitive factors in the network and applications performance management solutions market include: - product performance, functionality and price; - name and reputation of vendor; 39 - distribution strength; and - alliances with industry partners. Although we believe that we currently compete favorably with respect to these factors, there can be no assurance that we can maintain our competitive position against current and potential competitors, especially those with greater financial, management, marketing, service, support, technical, distribution and other resources. MANUFACTURING Our manufacturing operations consist primarily of final product assembly, configuration and testing. We purchase components and subassemblies from suppliers and configure our hardware products to individual customer requirements. We inspect, test and use statistical process control to ensure the quality and reliability of our products. In February 1998, we obtained ISO 9001 quality systems registration, a certification showing that our procedures and manufacturing facilities comply with standards for quality assurance and manufacturing process control. As of March 31, 1999, our manufacturing organization consisted of 20 employees. Although we generally use standard parts and components for our products, each of the computer network interface cards used in our probes is currently available only from separate single source suppliers. We have generally been able to obtain adequate supplies of components in a timely manner from current suppliers. We have no supply commitments with our suppliers but believe that, in most cases, alternate suppliers can be identified if current suppliers are unable to fulfill our needs. INTELLECTUAL PROPERTY RIGHTS Our success and competitiveness are dependent to a significant degree on the protection of our proprietary technology. We rely primarily on a combination of copyrights, trademarks, licenses, trade secret laws and restrictions on disclosure to protect our intellectual property and proprietary rights. We also enter into confidentiality agreements with our employees and consultants, and generally control access to and distribution of our documentation and other proprietary information. We pursue registration of some of our trademarks in the U.S. and in other countries. We have registered the trademark NetScout in the U.S. and the European Union. We have filed applications for the NetScout trademark in Canada and Japan, and those applications are still pending. In addition, we have applications pending for the NetScout Logo and AppScout, in the U.S., Canada, Europe and Japan. We are also pursuing registration in the U.S. for the marks ART MIB, FrameScout and WebScout. EMPLOYEES As of March 31, 1999, we had 209 employees, 160 of whom were based at our headquarters in Westford, Massachusetts. None of our employees is subject to a collective bargaining agreement. We believe that our relations with our employees are good. FACILITIES We lease approximately 97,500 square feet of space in an office building in Westford, Massachusetts for our headquarters. The lease expires in November 2002, and we have an option to extend the lease for an additional five-year term. We also lease office space in nine other cities for our sales and support personnel. We believe that these existing facilities are adequate to meet our foreseeable requirements or that suitable additional or substitute space will be available on commercially reasonable terms. LEGAL PROCEEDINGS From time to time we may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of third party trademarks and other intellectual property rights by us. We are not aware of any legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations. 40 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of NetScout are as follows:
NAME AGE POSITION - ----------------------------------------------- --- ----------------------------------------------------------- Anil K. Singhal................................ 45 Chairman of the Board, Chief Executive Officer and Treasurer Narendra Popat(1).............................. 50 President, Chief Operating Officer, Secretary and Director Charles W. Tillett............................. 42 Vice President, Finance and Administration and Chief Financial Officer Nathan Kalowski................................ 53 Vice President, Business Development Ashwani Singhal................................ 38 Vice President, Engineering Gerald Stabile................................. 39 Vice President, Worldwide Sales and Services Tracy Steele................................... 39 Vice President, Manufacturing Michael Szabados............................... 47 Vice President, Marketing Richard J. Egan(1)............................. 63 Director Joseph G. Hadzima, Jr.(1)(2)................... 47 Director Kenneth T. Schiciano(2)........................ 36 Director
- ------------------------ (1) Member of the Compensation Committee (2) Member of the Audit Committee ANIL K. SINGHAL co-founded NetScout in June 1984 and has served as NetScout's Chairman of the Board, Chief Executive Officer and Treasurer since July 1993. From NetScout's inception until July 1993, Mr. Singhal was President of NetScout. Mr. Singhal has served as a director of NetScout since inception. Prior to founding NetScout, he was a Senior Architect and Project Manager at Wang Laboratories, a provider of computer systems, from 1979 until June 1984. Mr. Singhal is the brother of Ashwani Singhal, NetScout's Vice President, Engineering. NARENDRA POPAT co-founded NetScout in June 1984 and has served as NetScout's President, Chief Operating Officer and Secretary since July 1993. From NetScout's inception until July 1993, Mr. Popat was Chairman of the Board and Treasurer of NetScout. Mr. Popat has served as a director of NetScout since inception. Prior to founding NetScout, he was a Senior Software Engineer at Wang Laboratories from 1980 until June 1984. CHARLES W. TILLETT has served as NetScout's Vice President, Finance and Administration since May 1995 and Chief Financial Officer since April 1999. Mr. Tillett joined NetScout in July 1991 and served as Director, Finance and Administration from July 1991 until May 1995. Prior to joining NetScout, he served Fidelity Investments, a financial services firm, in various capacities, most recently as Project Manager. NATHAN KALOWSKI has served as NetScout's Vice President, Business Development since August 1997. Mr. Kalowski joined NetScout in July 1993 and served as Vice President, Marketing from July 1993 until August 1997. Prior to joining NetScout, he was Vice President, Marketing for Proteon, a computer networking company, from 1988 until May 1993. He has also held various engineering, product management, marketing and executive positions at Texas Instruments, a diversified electronics company, General Electric, a diversified electronics company, and Digital Equipment Corporation, a computer hardware company. ASHWANI SINGHAL has served as NetScout's Vice President, Engineering since October 1998. Mr. Singhal joined NetScout in 1987 and served as a Senior Software Engineer and Project Manager 41 from 1987 until February 1997 and as Director of Engineering from February 1997 until October 1998. Prior to joining NetScout, he was a Senior Software Engineer at Symmetrix, an artificial intelligence systems company, from 1984 until 1987. Mr. Singhal is the brother of Anil Singhal, NetScout's Chairman of the Board and Chief Executive Officer. GERALD STABILE has served as NetScout's Vice President, Worldwide Sales and Services since October 1998. Mr. Stabile joined NetScout in September 1997 and served as Vice President, Worldwide Sales from March 1998 until October 1998 and as Vice President, North American Sales from September 1997 until March 1998. Prior to joining NetScout, he served Olicom (formerly CrossComm Corporation), a developer of networking software, as Vice President, Americas from 1996 until September 1997 and as Sales Director from 1992 through 1995. TRACY STEELE has served as NetScout's Vice President, Manufacturing since May 1997. Mr. Steele joined NetScout in November 1995 and served as Director of Manufacturing from November 1995 until May 1997. Prior to joining NetScout, he served as Director of Manufacturing for Scope Communications, a developer of hand-held network tools, from 1993 until November 1995. MICHAEL SZABADOS has served as NetScout's Vice President, Marketing since August 1997. Prior to joining NetScout, he served as Chief Executive Officer of Jupiter Technology, Inc., a developer of frame relay access devices, from March 1997 until August 1997. He also served as Vice President, Product Management/Marketing at UB Networks, a computer networking company, from July 1994 until March 1997 and served as Director of Marketing at SynOptics Communications, a computer networking company, from 1991 until July 1994. RICHARD J. EGAN has served as a director of NetScout since January 1999. Mr. Egan is a founder of EMC Corporation, a provider of computer storage systems and software. Mr. Egan has served EMC Corporation, a publicly-held company, as Chairman of the Board since January 1988, as a director since inception in 1979, as Chief Executive Officer from 1979 until January 1992 and as President from 1979 until January 1988. Mr. Egan is also a director of BEC Energy Company, a public utility. JOSEPH G. HADZIMA, JR. has served as a director of NetScout since July 1998. Mr. Hadzima has been a Managing Director of Technology Enabling Company, LLC, a venture capital investment and technology commercialization company, since April 1998. Since June 1996, he has also served as Of Counsel at Sullivan & Worcester LLP, a law firm where he was a partner from October 1987 until June 1996. Mr. Hadzima served as Senior Vice President and General Counsel of Quantum Energy Technologies Corporation, an energy and environmental products research and development company, from June 1996 until December 1998. Mr. Hadzima is also a Senior Lecturer at MIT Sloan School of Management. KENNETH T. SCHICIANO has served as a director of NetScout since January 1999. Mr. Schiciano has been a Principal of TA Associates, Inc., a venture capital firm, since December 1994. Mr. Schiciano served as a Vice President of TA Associates from August 1989 until December 1994. Prior to that, Mr. Schiciano was a member of the technical staff of AT&T Bell Laboratories, a telecommunications company. Mr. Schiciano is also a director of Galaxy Telecom L.P. and several privately-held companies. The Board of Directors is currently fixed at five members. NetScout's amended and restated certificate of incorporation, as in effect immediately following this offering, divides the Board of Directors into three classes. The members of each class of directors serve for staggered three-year terms. The Board of Directors is composed of (i) one Class I director (Mr. Schiciano), whose term expires upon the election and qualification of directors at the annual meeting of stockholders to be held in 2000, (ii) two Class II directors (Messrs. Singhal and Egan), whose terms expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2001 and (iii) two Class III directors (Messrs. Popat and Hadzima), whose terms expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2002. 42 Our executive officers are elected by and serve at the discretion of the Board of Directors. Except as noted above, there are no family relationships among any of our executive officers and directors. COMMITTEES OF THE BOARD OF DIRECTORS We have a standing Compensation Committee and Audit Committee of the Board of Directors. The current members of the Compensation Committee are Messrs. Egan, Hadzima and Popat. The Compensation Committee's duties are to review and evaluate the salaries and incentive compensation of our management and employees and administer our 1990 Stock Option Plan, 1999 Stock Option and Incentive Plan and 1999 Employee Stock Purchase Plan. The current members of the Audit Committee are Messrs. Hadzima and Schiciano. The Audit Committee is responsible for reviewing the results and scope of audits and other services provided by our independent public accountants and reviewing our system of internal accounting and financial controls. The Audit Committee also reviews such other matters with respect to our accounting, auditing and financial reporting practices and procedures as it may find appropriate or as may be brought to its attention. DIRECTOR COMPENSATION After this offering, non-employee directors will be reimbursed for their reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors or of any committee thereof. On July 14, 1998, we granted to Joseph Hadzima, a member of the board of directors, an option to purchase 90,000 shares of common stock vesting over a four-year period, at an exercise price of $2.67 per share. No director who is an employee of NetScout will receive separate compensation for services rendered as a director. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In January 1999, NetScout's Board of Directors established the Compensation Committee and appointed Messrs. Popat, Egan and Hadzima to serve on the Compensation Committee. Messrs. Popat, Egan and Hadzima each had certain transactions with NetScout which we described in the "Certain Transactions" section of this prospectus. The Compensation Committee evaluates the salaries and incentive compensation of management and employees of NetScout and administers our equity incentive plans. Other than Mr. Popat and as described under "Certain Transactions," no member of this committee was at any time during the past year an officer or employee of NetScout, was formerly an officer of NetScout or any of its subsidiaries, or had any relationship with NetScout. During the last year, none of our executive officers served as: - a member of the compensation committee (or other committee of the Board of Directors performing equivalent functions or, in the absence of any such committee, the entire Board of Directors) of another entity, one of whose executive officers served on the Compensation Committee of NetScout; - a director of another entity, one of whose executive officers served on the Compensation Committee of NetScout; or - a member of the compensation committee (or other committee of the Board of Directors performing equivalent functions or, in the absence of any such committee, the entire Board of Directors) of another entity, one of whose executive officers served as a director of NetScout. See "Certain Transactions." 43 EXECUTIVE COMPENSATION The following summary compensation table sets forth the total compensation paid or accrued for the fiscal year ended March 31, 1999 for (i) the Chief Executive Officer of NetScout and (ii) the four other most highly compensated executive officers of NetScout other than the Chief Executive Officer (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) -------------------- ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(2) - --------------------------------------------------------------------- --------- --------- ------------------- Anil K. Singhal...................................................... 250,000 325,000 2,144 Chairman of the Board and Chief Executive Officer Narendra Popat....................................................... 250,000 325,000 2,144 President and Chief Operating Officer Charles W. Tillett................................................... 150,000 100,000 2,462 Vice President, Finance and Administration and Chief Financial Officer Gerald Stabile....................................................... 136,800 152,500 -- Vice President, Worldwide Sales and Services Michael Szabados..................................................... 137,500 75,000 2,452 Vice President, Marketing
- ------------------------ (1) NetScout did not make any restricted stock awards, grant any stock appreciation rights or stock options or make any long-term incentive payments during the fiscal year ended March 31, 1999 to its Named Executive Officers. In accordance with the rules of the Securities and Exchange Commission, the compensation set forth in the table does not include certain perquisites and other benefits which do not exceed the lesser of $50,000 or 10% of the person's salary and bonus shown in the table. (2) Composed of contributions to a defined contribution plan. OPTION GRANTS IN LAST FISCAL YEAR No stock option or stock appreciation rights were granted to any of the Named Executive Officers during the fiscal year ended March 31, 1999. YEAR-END OPTION TABLE The following table sets forth information regarding exercisable and unexercisable stock options held as of March 31, 1999 by each of the Named Executive Officers. There was no public trading market for our common stock as of March 31, 1999. Accordingly, the value of unexercised in-the-money options has been calculated by determining the difference between the exercise price per share and an assumed initial public offering price of $ . 44 AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($) ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------- ------------ ------------ ------------ ------------- ------------ ------------- Anil K. Singhal............ -- -- -- -- -- -- Narendra Popat............. -- -- -- -- -- -- Charles W. Tillett......... 175,312 1,043,107(1) -- 79,687 -- Gerald Stabile............. 21,900 56,721(2) 90,600 187,500 Michael Szabados........... 33,000 85,470(2) 102,000 225,000
- ------------------------ (1) Calculated by determining the difference between the exercise price per share and the fair market value on the date of exercise. (2) Calculated by determining the difference between the exercise price per share and the fair market value of $4.26 on the date of exercise, which was also the redemption date for these shares. STOCK PLANS 1990 STOCK OPTION PLAN. The 1990 Stock Option Plan (the "1990 Stock Option Plan"), was adopted by the Board of Directors and approved by the stockholders on October 4, 1990. Under the 1990 Stock Option Plan, we are authorized to grant options to purchase shares of common stock intended to qualify as incentive stock options as defined under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to our employees. In addition, we are authorized to grant non-qualified stock options to purchase shares of common stock to employees, consultants and directors. In general, options granted pursuant to the 1990 Stock Option Plan are exercisable within ten years of the original grant date and become exercisable over a period of four years from a specific date, and an additional 25% of the unexercisable options shall become exercisable immediately prior to the closing of a merger, acquisition, business combination or similar transaction which results in our existing stockholders owning less than 50% of NetScout's equity securities or assets. Options are not assignable or transferable except by will or the laws of descent or distribution. We have a right of repurchase for shares issued upon the exercise of options under certain circumstances, including unauthorized transfers of the shares and termination of the optionee's relationship with NetScout in certain situations. As of March 31, 1999, an aggregate of 4,640,438 shares of common stock at a weighted average exercise price of $1.90 per share were outstanding under the 1990 Stock Option Plan. No additional option grants will be made under the 1990 Stock Option Plan. 1999 STOCK OPTION AND INCENTIVE PLAN. Our 1999 Stock Option and Incentive Plan ("1999 Stock Option Plan") was adopted by our Board of Directors and is expected to be approved by our stockholders in April 1999. The 1999 Stock Option Plan provides for the grant of stock-based awards to our employees, officers and directors, consultants or advisors. Under the 1999 Stock Option Plan, we may grant options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code, options not intended to qualify as incentive stock options, restricted stock and other stock-based awards. Incentive stock options may be granted only to employees of NetScout. A total of 6,750,000 shares of common stock have been reserved for issuance under the 1999 Stock Option Plan. The maximum number of shares with respect to which awards may be granted to any employee under the 1999 Stock Option Plan shall not exceed 1,000,000 shares of common stock during any calendar year. The 1999 Stock Option Plan is administered by the Compensation Committee. Subject to the provisions of the 1999 Stock Option Plan, the Compensation Committee has the authority to select the persons to whom awards are granted and determine the terms of each award, including the number of 45 shares of common stock subject to the award. Payment of the exercise price of an award may be made in cash or, if approved by the Compensation Committee, shares of common stock, a combination of cash and stock, a promissory note or by any other method approved by the Compensation Committee. Unless otherwise permitted by the Compensation Committee, awards are not assignable or transferable except by will or the laws of descent and distribution, and, during the participant's lifetime, may be exercised only by the participant. The 1999 Stock Option Plan provides, subject to certain conditions, that upon an acquisition of NetScout the vesting of all awards will accelerate by a period of one year. The Compensation Committee may, in its sole discretion, amend, modify or terminate any award granted or made under the 1999 Stock Option Plan, so long as such amendment, modification or termination would not materially and adversely affect the participant. The Compensation Committee may also provide that any option shall become immediately exercisable, in full or in part, or that any restricted stock granted under the 1999 Stock Option Plan shall be free of some or all restrictions. 1999 EMPLOYEE STOCK PURCHASE PLAN. The 1999 Employee Stock Purchase Plan (the "1999 Purchase Plan") was adopted by our Board of Directors and is expected to be approved by our stockholders in April 1999, to be effective upon the closing of this offering. The 1999 Purchase Plan provides for the issuance of a maximum of 750,000 shares of common stock. The 1999 Purchase Plan will be administered by the Compensation Committee. All employees of NetScout whose customary employment is for more than 20 hours per week and for more than three months in any calendar year are eligible to participate in the 1999 Purchase Plan. Employees who would own 5% or more of the total combined voting power or value of NetScout's stock immediately after the grant of the option may not participate in the 1999 Purchase Plan. To participate in the 1999 Purchase Plan, an employee must authorize us to deduct an amount (not less than one percent nor more than 10 percent of a participant's total cash compensation) from his or her pay during six-month payment periods (each, a "Payment Period"). The first Payment Period will commence on the earlier to occur of (1) October 1, 1999 and (2) the first day of the first calendar month following the effective date of the Registration Statement on Form S-8 filed with respect to the shares issued under the 1999 Purchase Plan and shall end March 31, 2000. Thereafter, the Payment Periods will commence on the six-month periods commencing on April 1 and October 1, respectively, and ending on the following September 30 and March 31, respectively, of each year. In no case shall an employee be entitled to purchase more than 500 shares in any one Payment Period. The exercise price for the option granted in each Payment Period is 85% of the lesser of the last reported sale price of the common stock on the first or last business day of the Payment Period, in either event rounded up to the nearest cent. If an employee is not a participant on the last day of the Payment Period, such employee is not entitled to exercise his or her option, and the amount of his or her accumulated payroll deductions will be refunded. Options granted under the 1999 Purchase Plan may not be transferred or assigned. An employee's rights under the 1999 Purchase Plan terminate upon his or her voluntary withdrawal from the plan at any time or upon termination of employment. No options have been granted to date under the 1999 Purchase Plan. 401(K) PLAN We maintain a 401(k) plan qualified under Section 401 of the Code. All of our employees who are at least 21 years of age are eligible to participate in the 401(k) plan. Under the 401(k) plan, a participant may contribute a maximum of 15% of his or her pre-tax salary, commissions and bonuses through payroll deductions (up to the statutorily prescribed annual limit of $10,000 in calendar year 1999) to the 401(k) plan. The percentage elected by more highly compensated participants may be required to be lower. At the discretion of the Board of Directors, we may make matching contributions to the 401(k) plan. During the plan year ending December 31, 1998, we matched $.25 for each $1.00 of 46 employee contributions up to 6% of salary. In addition, at the discretion of the Board of Directors, we may make profit-sharing contributions to the 401(k) plan for all eligible employees. During the plan year ending December 31, 1998, we made no profit-sharing contributions to the 401(k) plan. EMPLOYMENT AGREEMENTS Anil Singhal and Narendra Popat entered into employment agreements with NetScout on June 1, 1994, which were amended on January 14, 1999. Under the terms of these employment agreements, each of Messrs. Singhal and Popat receive a base salary of at least $250,000 and a year-end, non-discretionary bonus of at least $250,000. In the event that either Mr. Singhal or Mr. Popat is terminated without cause, or either decides to terminate his own employment for "good reason" each is entitled to receive severance benefits for three years as follows: - for the first twelve months following termination, the greater of $175,000 or base salary as of the date of termination; and - for each of the following twelve month periods, an amount equal to 120% of the amount received in the immediately preceding twelve months. "Good reason" means a change in executive responsibilities or a reduction in salary or benefits. Severance benefits will be discontinued if the executive secures alternative employment that is comparable as to position and pay. During any period in which Mr. Singhal or Mr. Popat is entitled to receive severance benefits, he shall also continue to receive all other benefits under the employment agreements including life insurance, medical insurance, and reimbursement for company car expenses. Each of Messrs. Singhal and Popat are also entitled to reimbursement of job placement expenses of up to $25,000 plus related travel expenses. If either Mr. Singhal or Mr. Popat is terminated with cause, he will not be entitled to any severance or other benefits, except as required by law. Each employment agreement provides for a five-year term commencing June 1, 1994 with automatic one-year renewals. 47 CERTAIN TRANSACTIONS In February 1996, NetScout issued 631,579 shares of its Series A Preferred Stock to Greylock Equity Limited Partnership ("Greylock"), at a purchase price of $9.50 per share, for an aggregate of $6,000,000. Roger Evans, a general partner of the general partner of Greylock, served as a member of the Board of Directors of NetScout from February 1996 until January 1999. In January 1999, we redeemed 315,789 shares of Series A Preferred Stock as described below. Upon the closing of this offering, the 315,790 outstanding shares of Series A Preferred Stock will automatically convert into 1,894,740 shares of common stock. In January 1999, NetScout issued 6,977,254 shares of its Class B Convertible Common Stock at a purchase price of $6.388051 per share to certain affiliates of TA Associates, Inc. (the "TA Entities") for an aggregate consideration of $42,571,057 and to Egan-Managed Capital, L.P. for an aggregate consideration of $1,999,997. In connection with this transaction, Kenneth Schiciano and Richard Egan were elected to the Board of Directors. Mr. Schiciano is a Principal of TA Associates, Inc., which is either the manager or the general partner of the general partner of the TA Entities. Mr. Egan and his children own substantially all of the equity interests in Egan-Managed Capital, L.P. All of the proceeds from the Class B Convertible Common Stock financing were used to redeem shares of Series A Preferred Stock, Non-Voting Common Stock and common stock from the officers, directors and 5% stockholders and certain other persons as set forth below:
TYPE OF NUMBER OF SECURITY SHARES AGGREGATE NAME POSITION REDEEMED REDEEMED REDEMPTION PAYMENT - ------------------------ ------------------------ ------------------------ ------------- ------------------- Greylock Equity Limited 5% stockholder and Series A Preferred Stock 315,789 $ 8,069,105 Partnership formerly represented on (1,894,734 the Board of Directors common stock equivalents) Anil K. Singhal Chairman of the Board, Voting Common Stock 3,562,124 $ 15,170,018 Chief Executive Officer and Treasurer Narendra Popat President, Chief Voting Common Stock 3,562,124 $ 15,170,018 Operating Officer, Secretary and Director Charles W. Tillett Vice President, Finance Non-Voting Common Stock 285,000 $ 1,213,730 and Administration and Chief Financial Officer Nathan Kalowski Vice President, Business Non-Voting Common Stock 285,000 $ 1,213,730 Development Ashwani Singhal Vice President, Non-Voting Common Stock 528,000 $ 2,248,594 Engineering Gerald Stabile Vice President, Non-Voting Common Stock 21,900 $ 93,266 Worldwide Sales and Services
48
TYPE OF NUMBER OF SECURITY SHARES AGGREGATE NAME POSITION REDEEMED REDEEMED REDEMPTION PAYMENT - ------------------------ ------------------------ ------------------------ ------------- ------------------- Tracy Steele Vice President, Non-Voting Common Stock 9,000 $ 38,328 Manufacturing Michael Szabados Vice President, Non-Voting Common Stock 33,000 $ 140,537 Marketing Ralph Lowry Former Vice President, Non-Voting Common Stock 285,000 $ 1,213,730 International Sales
Anil K. Singhal and Ashwani Singhal are brothers. Upon closing of the offering, all of the 6,977,254 outstanding shares of Class B Convertible Common Stock will automatically convert into an aggregate of 10,465,881 shares of common stock. The holders of shares of common stock issuable upon conversion of the Class B Convertible Common Stock have certain rights with respect to the registration by NetScout of their shares. See "Description of Capital Stock--Registration Rights." On June 28, 1996, Anil K. Singhal borrowed $1,100,000 and Narendra Popat borrowed $900,000 from NetScout. In connection with the loans, Mr. Singhal pledged 851,616 shares of Voting Common Stock, and Mr. Popat pledged 696,780 shares of Voting Common Stock to NetScout. Each loan is evidenced by a promissory note and bears interest at 6.48% per annum, compounded semi-annually. Accrued interest is payable on an annual basis. Each of Mr. Singhal and Mr. Popat have agreed to repay the entire outstanding principal and interest on these loans upon the closing of this offering. Joseph G. Hadzima, Jr., a member of the Board of Directors since July 1998, was a partner at the law firm of Sullivan & Worcester LLP until June 1996 and since June 1996 has served as Of Counsel at Sullivan & Worcester. Sullivan & Worcester was NetScout's counsel until October 1996. Anil K. Singhal and Narendra Popat each own one-third ( 1/3) of the voting capital stock of Frontier Software Development Pvt. Ltd., a private company located in Bombay, India ("Frontier India"). Shirish Deodhar, a holder of 300,000 shares of Non-Voting Common Stock, oversaw the day-to-day operations of Frontier India. Frontier India provided engineering consulting services to NetScout from 1988 through 1999. Our payments to Frontier India were approximately $20,000 during fiscal year 1996 (which represented 3% of Frontier India's revenue), $352,000 during fiscal year 1997 (which represented 33% of Frontier India's revenue), $315,000 during fiscal year 1998 (which represented 19% of Frontier India's revenue) and $470,000 during fiscal year 1999. In 1991, the Industrial Credit and Investment Corporation of India Limited (the "ICICI") loaned $387,000 to NetScout and Frontier India to help finance the NetScout-Frontier India engineering consulting services arrangement. The amounts due to the ICICI have been paid in full. In February 1999, Frontier India sold substantially all of its assets to Veritas Software Corporation USA, a Delaware corporation, and the Board of Directors of NetScout fully accelerated the vesting schedule applicable to Mr. Deodhar's 300,000 shares of Non-Voting Common Stock. In May 1996, NetScout Systems (UK) Limited ("NetScout UK") was organized under the laws of England and Wales to serve as a wholly-owned subsidiary of NetScout. Messrs. Popat and Singhal were issued the outstanding shares of stock of NetScout UK. The shares are currently in the process of being transferred to NetScout. NetScout believes that all transactions described above were made on terms no less favorable to it than would have been obtained from unaffiliated third parties. All future transactions, if any, with our executive officers, directors and affiliates will be on terms no less favorable to us than could be obtained from unrelated third parties and will be approved by a majority of the Board of Directors and by a majority of the disinterested members of the Board of Directors. 49 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of our common stock as of March 31, 1999, and as adjusted to reflect the sale of the shares of common stock offered hereby, by: (a) each beneficial owner of more than 5% of our common stock; (b) each Named Executive Officer; (c) each director; (d) all executive officers and directors as a group; and (e) the selling stockholders. The address of each person listed on the table is c/o NetScout Systems, Inc., 4 Technology Park Drive, Westford, MA 01886, and each person has sole voting and investment power over the shares shown as beneficially owned, except to the extent authority is shared by spouses under applicable law unless otherwise noted below. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Shares of common stock issuable by NetScout to a person or entity named below pursuant to options which may be exercised within 60 days after March 31, 1999 are deemed to be beneficially owned and outstanding for purposes of calculating the number of shares and the percentage beneficially owned by that person or entity. However, these shares are not deemed to be beneficially owned and outstanding for purposes of computing the percentage beneficially owned by any other person or entity.
PERCENTAGE OF COMMON STOCK OUTSTANDING NUMBER OF SHARES ----------------------- BENEFICIALLY NUMBER OF SHARES BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED BEING OFFERED* OFFERING OFFERING - ---------------------------------------------------- ----------------- ----------------- ----------- ---------- Anil K. Singhal(1).................................. 7,844,250 * 23.2% * Narendra Popat(2)................................... 7,844,251 * 23.2 * Charles W. Tillett(3)............................... 675,750 * 2.0 * Nathan Kalowski(4).................................. 651,279 * 1.9 * Ashwani Singhal(5).................................. 1,272,000 * 3.8 * Gerald Stabile(6)................................... 90,600 * * * Tracy Steele(7)..................................... 77,250 * * * Michael Szabados(8)................................. 124,500 * * * Richard J. Egan(9).................................. -- * * * c/o Egan-Managed Capital, L.P. 30 Federal Street Boston, MA 02110-2508 Joseph G. Hadzima, Jr.(10).......................... 944,892 * 2.8 * c/o Technology Enabling Company, LLC 238 Main Street, Suite 400 Cambridge, MA 02142 Kenneth T. Schiciano(11)............................ 25,021 * 29.5 * c/o TA Associates, Inc. 125 High Street Boston, MA 02110 TA Entities(12)..................................... 9,996,255 * 29.5 * c/o TA Associates, Inc. 125 High Street Boston, MA 02110 Greylock Equity Limited Partnership................. 1,894,740 * 5.6 * c/o Greylock Management Corporation One Federal Street Boston, MA 02110 All executive officers and directors as a group (11 persons)(13)...................................... 19,549,793 57.8% * -----------------
- ------------------------ * The number of shares to be sold in this offering and the selling stockholders have not yet been determined. 50 (1) Includes an aggregate of 23,024 shares held in trust for the benefit of Mr. Singhal's children; Mr. Singhal's wife is one of two trustees of each such trust. Includes 510,000 shares held by a family limited partnership of which Mr. and Mrs. Singhal are the general and limited partners. Does not include 593,625 shares held in a grantor retained annuity trust for the benefit of Mr. Singhal. (2) Includes 204,084 shares held in trust for the benefit of Mr. Popat's children; Mr. Popat's wife and Mr. Hadzima are the two trustees of such trust. Includes 510,000 shares held by a family limited partnership of which Mr. and Mrs. Popat are the general and limited partners. Does not include 593,625 shares held in a grantor retained annuity trust for the benefit of Mr. Popat; Mr. Hadzima is the sole trustee of such trust. (3) Includes 15,938 shares issuable upon exercise of options exercisable within 60 days of March 31, 1999. Excludes 63,750 shares issuable upon the exercise of options that become exercisable upon the closing of this offering. (4) Does not include 88,221 shares held in trusts for the benefit of Mr. Kalowski's children. (5) Includes 60,450 shares owned by Mr. Singhal's wife. (6) Consists of shares issuable upon the exercise of options exercisable within 60 days of March 31, 1999. Excludes 18,750 shares issuable upon the exercise of options that become exercisable upon the closing of this offering. (7) Consists of shares issuable upon the exercise of options exercisable within 60 days of March 31, 1999. (8) Consists of shares issuable upon the exercise of options exercisable within 60 days of March 31, 1999. (9) Egan-Managed Capital, L.P. owns 469,626 shares. Although Mr. Egan does not have any voting or investment powers over the shares, Mr. Egan and his children own substantially all of the equity interest of Egan-Managed Capital, L.P. (10) Includes 16,875 shares issuable upon the exercise of options exercisable within 60 days of March 31, 1999. Includes 204,084 shares held in trust for the benefit of Mr. Popat's children; Mrs. Popat and Mr. Hadzima are the two trustees of such trust. Includes 593,625 shares held in a grantor retained annuity trust for the benefit of Mr. Popat; Mr. Hadzima is the sole trustee of such trust. Mr. Hadzima disclaims beneficial ownership of all shares held in trust for the benefit of either Mr. Popat's children or Mr. Popat. The shares deemed to be beneficially owned by Mr. Hadzima does not include 79,992 shares held in trust for the benefit of Mr. Hadzima's children. (11) Consists of shares in TA Executives Fund, LLC beneficially owned by Mr. Schiciano. Mr. Schiciano is a Principal of TA Associates, Inc. Mr. Schiciano disclaims beneficial ownership of the shares held by the TA Entities, except to the extent of his pecuniary interest therein. (12) Includes 8,150,220 shares held by TA/Advent VIII, L.P., of which shares are being offered hereby; 1,528,176 shares held by Advent Atlantic & Pacific III, L.P., of which shares are being offered hereby; 154,854 shares held by TA Executives Fund, LLC, of which shares are being offered hereby; and 163,005 shares held by TA Investors, LLC, of which shares are being offered hereby. TA/Advent VIII, L.P., Advent Atlantic & Pacific III, L.P., TA Executives Fund, LLC and TA Investors, LLC are part of an affiliated group of investment partnerships referred to, collectively, as the "TA Entities." The general partner of TA/Advent VIII, L.P. is TA Associates VIII, LLC. The general partner of Advent Atlantic & Pacific III, L.P. is TA Associates AAP III, L.P. TA Associates, Inc. is the general partner of TA Associates AAP III, L.P. and is the sole manager of TA Associates VIII, LLC, TA Executives Fund, LLC and TA Investors, LLC. In such capacity, TA Associates, Inc. exercises sole voting and investment power with respect to all shares held of record by the named investment partnerships; individually, no stockholder, director or officer of TA Associates, Inc. is deemed to have or share such voting or investment power. (13) Includes an aggregate of 325,162 shares issuable upon exercise of options exercisable within 60 days of March 31, 1999. Excludes 82,500 shares issuable upon exercise of options that become exercisable upon the closing of this offering. If the underwriter's over-allotment option is exercised in full, NetScout will sell an additional shares and the following selling stockholders will sell an additional shares: 51 DESCRIPTION OF CAPITAL STOCK Effective upon the closing of this offering and the filing of NetScout's Third Amended and Restated Certificate of Incorporation, the authorized capital stock of NetScout will consist of 150,000,000 shares of common stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per share. The following summary description of NetScout's capital stock, as of the closing of this offering, is not intended to be complete and is qualified by reference to the provisions of applicable law and to NetScout's Third Amended and Restated Certificate of Incorporation and Amended and Restated By-laws filed as exhibits to the registration statement of which this prospectus is a part. COMMON STOCK As of March 31, 1999, there were 33,843,258 shares of common stock outstanding and held of record by 66 stockholders, after giving effect to the conversion of all outstanding shares of Non-Voting Common Stock, Class B Common Stock and Series A Preferred Stock upon the closing of this offering. Based upon the number of shares outstanding as of March 31, 1999 and giving effect to the issuance of the shares of common stock offered by NetScout hereby, there will be shares of common stock outstanding upon the closing of this offering. In addition, as of March 31, 1999, there were outstanding stock options for the purchase of a total of 4,640,438 shares of Non-Voting Common Stock which upon the closing of the offering will be automatically converted into options to purchase an aggregate of 4,640,438 shares of common stock. Holders of common stock are entitled to one vote per share for each share held of record on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Directors are elected by a plurality of the votes of the shares present in person or by proxy at the meeting. The holders of common stock are entitled to receive ratably such lawful dividends as may be declared by the Board of Directors. However, such dividends are subject to preferences that may be applicable to the holders of any outstanding shares of preferred stock. In the event of a liquidation, dissolution or winding up of the affairs of NetScout, whether voluntarily or involuntarily, the holders of common stock will be entitled to receive pro rata all of the remaining assets of NetScout available for distribution to its stockholders. Any such pro rata distribution would be subject to the rights of the holders of any outstanding shares of preferred stock. The common stock has no preemptive, redemption, conversion or subscription rights. All outstanding shares of common stock are fully paid and non-assessable. The shares of common stock to be issued by NetScout in this offering will be fully paid and non-assessable. The rights, powers, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which NetScout may designate and issue in the future. Upon the closing of this offering, there will be no shares of preferred stock outstanding. PREFERRED STOCK The Board of Directors will be authorized, subject to any limitations prescribed by Delaware law, without further stockholder approval, to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock, in one or more series. The Board of Directors is also authorized, subject to the limitations prescribed by Delaware law, to establish the number of shares to be included in each series and to fix the voting powers, preferences, qualifications and special or relative rights or privileges of each series. The Board of Directors is authorized to issue preferred stock with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of common stock. NetScout has no current plans to issue any preferred stock. However, the issuance of preferred stock or of rights to purchase preferred stock could have the effect of making it more difficult for a 52 third party to acquire, or of discouraging a third party from attempting to acquire, a majority of the outstanding common stock of NetScout. REGISTRATION RIGHTS The Amended and Restated Rights Agreement dated as of January 15, 1999, provides that the holders (the "Registration Rights Holders") of 10,465,881 shares of common stock (after giving effect to the conversion of the Class B Common Stock) (the "Registrable Shares") are entitled to certain rights with respect to the registration of such shares under the Securities Act. If NetScout proposes to register any of its securities under the Securities Act, either for its own account or for the account of another securityholder, the Registration Rights Holders are entitled to notice of such registration and to include such Registrable Shares in such registration. However, in the event of a registration pursuant to an underwritten public offering of common stock, the underwriters shall have the right, subject to certain conditions, to limit the number of shares included in such registration. In addition, after six months after this offering, the holders of at least 40% of the then outstanding Registrable Shares issued are entitled to request that NetScout file a registration statement under the Securities Act covering the sale of some or all of the shares held by the requesting holder or holders. Upon the receipt of such a request, NetScout is required to use its reasonable best efforts to effect such registration, subject to certain conditions and limitations. NetScout is not required to effect more than two such demand registrations for the Registration Rights Holders, and each such demand registration must have an offering value of at least $2,500,000. Once NetScout has qualified to use Form S-3 to register securities under the Securities Act, the Registration Rights Holders have the right to request that NetScout file a registration statement on Form S-3 or any successor thereto for a public offering of all or any portion of their Registrable Shares, provided that the reasonably anticipated aggregate price to the public of such offering would not be less than $1,000,000. NetScout is not required to effect a registration in this manner more than once in any twelve-month period. In general, all fees, costs and expenses of such registrations (other than underwriting discounts and commissions and fees and disbursements of counsel to the Registration Rights Holders) will be borne by NetScout. We have agreed to indemnify the Registration Rights Holders against, and provide contribution with respect to, certain liabilities relating to any registration in which any Registrable Shares of Registration Rights Holders are sold under the Securities Act. The previously described registration rights shall terminate for a Registration Rights Holder at such time as such particular holder could sell all of such holder's shares under the terms of Rule 144(k) under the Securities Act. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF NETSCOUT'S THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BY-LAWS AND DELAWARE LAW NetScout's Third Amended and Restated Certificate of Incorporation (the "Charter"), NetScout's Amended and Restated By-Laws (the "By-Laws") and the Delaware General Corporation Law contain certain provisions that could discourage, delay or prevent a change in control of NetScout or an acquisition of NetScout at a price which many stockholders may find attractive. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of common stock. THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS The Charter provides for the division of the Board of Directors into three classes as nearly as equal in size as possible with staggered three-year terms. In addition, the Charter provides that directors may be removed only for cause by the affirmative vote of the holders of 75% of the shares of capital stock of NetScout entitled to vote. The By-Laws provide that, except as otherwise provided by 53 law or the Charter, newly created directorships resulting from an increase in the authorized number of directors or vacancies on the Board may be filled only by: - a majority of the directors then in office, even though less than a quorum may then be in office; or - the sole remaining director. These provisions prevent a stockholder from enlarging the Board and filling the new directorships with such stockholder's own nominees without Board approval. These provisions of the By-Laws may have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to gain control of NetScout, or attempting to change the composition or policies of the Board, even though such attempts might be beneficial to NetScout or its stockholders. The Charter and By-Laws provide that, unless otherwise prescribed by law, only a majority of the Board, the Chairman of the Board or the President is able to call a special meeting of stockholders. The Charter and the By-Laws also provide that, unless otherwise prescribed by law, stockholder action may be taken only at a duly called and convened annual or special meeting of stockholders and may not be taken by written consent. These provisions, taken together, prevent stockholders from forcing consideration by the stockholders of stockholder proposals over the opposition of the Board, except at an annual meeting. The By-Laws provide that any action required or permitted to be taken by the stockholders of NetScout at an annual meeting or special meeting of stockholders may only be taken if NetScout is given proper advance notice of the action (the "Notice Procedure"). The Notice Procedure affords the Board an opportunity to consider the qualifications of proposed director nominees or the merit of stockholder proposals, and, to the extent deemed appropriate by the Board, to inform stockholders about such matters. The Notice Procedure also provides a more orderly procedure for conducting annual meetings of stockholders. The By-Laws do not give the Board any power to approve or disapprove stockholder nominations for the election of directors or proposals for action. However, the Notice Procedure may prevent a contest for the election of directors or the consideration of stockholder proposals. This could deter a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal if the proper advance notice procedures are not followed, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to NetScout and its stockholders. The General Corporation Law of Delaware provides generally that the affirmative vote of a majority of the shares issued and outstanding is required to amend a corporation's certificate of incorporation or by-laws, unless a corporation's certificate of incorporation or by-laws, as the case may be, requires a greater percentage. The By-Laws require the affirmative vote of the holders of at least 75% of the issued and outstanding shares of capital stock of NetScout entitled to vote to amend or repeal any of the foregoing provisions of the By-Laws. The 75% stockholder vote would be in addition to any separate class vote that might be required pursuant to the terms of any series of preferred stock that might be outstanding at the time any such amendments are submitted to stockholders. DELAWARE LAW NetScout is subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder. 54 Section 203 does not apply if: - prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; - upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder. The application of Section 203 may limit the ability of stockholders to approve a transaction that they may deem to be in their best interests. Section 203 defines "business combination" to include: - any merger or consolidation involving the corporation and the interested stockholder; - any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation to or with the interested stockholder; - subject to certain exceptions, any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; - any transaction involving the corporation which has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an "interested stockholder" as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the past three years, and any entity or person associated with, affiliated with or controlling or controlled by such entity or person. LIMITATION OF LIABILITY The Charter provides that no director of NetScout shall be personally liable to NetScout or to its stockholders for monetary damages for breach of fiduciary duty as a director, except that the limitation shall not eliminate or limit liability to the extent that the elimination or limitation of such liability is not permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended. The Charter further provides for the indemnification of NetScout's directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, including circumstances in which indemnification is otherwise discretionary. A principal effect of these provisions is to limit or eliminate the potential liability of NetScout's directors for monetary damages arising from breaches of their duty of care, subject to certain exceptions. These provisions may also shield directors from liability under federal and state securities laws. STOCK TRANSFER AGENT The transfer agent and registrar for the common stock is ChaseMellon Shareholder Services, L.L.C. 55 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for NetScout's stock. Future sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after the offering because of certain contractual and legal restrictions on resale (as described below), sales of substantial amounts of common stock of NetScout in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of NetScout to raise equity capital in the future. Upon completion of this offering (based on shares outstanding as of March 31, 1999), NetScout will have outstanding an aggregate of shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options. Of these shares, the shares sold in the offering will be freely tradable without restrictions or further registration under the Securities Act, unless such shares are purchased by an "affiliate" of NetScout as that term is defined in Rule 144 under the Securities Act (an "Affiliate"). The remaining shares of common stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares") or are subject to the contractual restrictions described below. Of these restricted securities: - 83,100 shares may be sold immediately after completion of this offering; - 392,974 additional shares may be sold 90 days after the effective date of this offering; - 20,901,303 additional shares may be sold upon expiration of the 180-day lock-up agreement; and - 10,465,881 additional shares may be sold commencing on January 15, 2000. All of the officers and directors and certain stockholders and optionholders of NetScout have signed lock-up agreements in favor of the underwriters. As a result, these individuals are not permitted to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of common stock, other than shares purchased by certain securityholders of NetScout in the open market post-offering or shares sold as part of this offering, for a period of 180 days after the date of this prospectus, without the prior written consent of Credit Suisse First Boston Corporation. Credit Suisse First Boston Corporation currently has no plans to release any portion of the securities subject to lock-up agreements, but may do so without notice. When determining whether or not to release shares from the lock-up agreements, Credit Suisse First Boston Corporation will consider, among other factors, the stockholder's reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year (including the holding period of any prior owner except when purchased from an Affiliate) would be entitled to sell a certain number of shares within any three-month period. That certain number of shares cannot exceed the greater of one percent of the number of shares of common stock then outstanding (which will equal approximately shares immediately after the offering), or the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about NetScout. Rule 144 also provides that Affiliates of NetScout who are selling shares of common stock that are not Restricted Shares must nonetheless comply with the same restrictions applicable to Restricted Shares with the exception of the holding-period requirement. 56 Under Rule 144(k), a person who is not deemed to have been an Affiliate of NetScout at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except when purchased from an Affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Accordingly, unless otherwise restricted, "144(k) shares" may therefore be sold immediately upon the completion of this offering. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from NetScout by its employees, directors, officers, consultants or advisors prior to the date the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). To be eligible for resale under Rule 701, shares must have been issued pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Securities and Exchange Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options (including exercises after the date of the offering). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than Affiliates, subject only to the manner of sale provisions of Rule 144, and by Affiliates, under Rule 144 without compliance with its one-year minimum holding period requirements. NetScout has agreed not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, for a period of 180 days after the date of this prospectus, without the prior written consent of Credit Suisse First Boston, subject to certain limited exceptions. Following the offering, NetScout intends to file registration statements under the Securities Act covering approximately 12,140,438 shares of common stock issued pursuant to the exercise of stock options, subject to outstanding options or reserved for issuance under NetScout's 1990 Stock Option Plan, 1999 Stock Option and Incentive Plan and 1999 Employee Stock Purchase Plan. Accordingly, shares registered under such registration statements will, subject to Rule 144 provisions applicable to Affiliates, be available for sale in the open market, except to the extent that such shares are subject to NetScout's vesting or exercise restrictions or the contractual restrictions described above. See "Management--Stock Plans." 57 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 1999, the underwriters named below, for whom Credit Suisse First Boston Corporation, Bear, Stearns & Co. Inc., BT Alex. Brown Incorporated and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, are acting as representatives, have severally but not jointly agreed to purchase from NetScout and the selling stockholders the following respective number of shares of common stock:
UNDERWRITERS NUMBER OF SHARES - --------------------------------------------------------------------------- ----------------- Credit Suisse First Boston Corporation..................................... Bear, Stearns & Co. Inc.................................................... BT Alex. Brown Incorporated................................................ Dain Rauscher Wessels...................................................... ----------------- Total.................................................................. ----------------- -----------------
The underwriting agreement provides that the obligations of the underwriters are subject to approval of certain conditions precedent and that the underwriters will be obligated to purchase all of the shares of the common stock offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The underwriting agreement provides that, in the event of a default by an underwriter, in certain circumstances the purchase commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated. The following table summarizes the compensation to be paid to the underwriters by NetScout and the selling stockholders and the expenses payable by NetScout:
TOTAL -------------------------------------------- WITHOUT WITH PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT ----------------- --------------------- --------------------- Underwriting discounts and commissions payable by NetScout......................................... Expenses payable by NetScout....................... Underwriting discounts and commissions payable by the selling stockholders.........................
NetScout and certain of the selling stockholders have granted to the underwriters an option expiring on the 30th day after the date of this prospectus to purchase up to additional shares of common stock at the initial public offering price, less the underwriting discounts and commissions. Such option may be exercised only to cover over-allotments in the sale of shares of common stock. To the extent such option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of common stock as it was obligated to purchase pursuant to the underwriting agreement. NetScout and the selling stockholders have been advised by the representatives that the underwriters propose to offer the shares of common stock to the public initially at the public offering price set forth on the cover page of this prospectus and, through the representatives, to selling group members (who may include the underwriters) at such price less a concession of $ per share, and the underwriters and such selling group members may allow a discount of $ per share on sales to certain other broker-dealers. After the offering, the public offering price and concession and discount to dealers may be changed by the representatives. The representatives have informed NetScout that they do not expect discretionary sales by the underwriters to exceed 5% of the shares being offered hereby. 58 NetScout, its officers and directors, and certain other existing stockholders and optionholders of NetScout have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of or transfer, directly or indirectly, or, in the case of NetScout, file with the Securities and Exchange Commission a registration statement relating to, any shares of common stock or securities exchangeable or exercisable for or convertible into shares of common stock or publicly disclose the intention to do any of the foregoing without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus, except under certain circumstances. The underwriters have reserved for sale, at the initial public offering price, up to shares of the common stock for employees, directors and certain other persons associated with NetScout who have expressed an interest in purchasing such shares of common stock in the offering. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as other shares offered hereby. NetScout and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments which the underwriters may be required to make in respect thereof. NetScout has applied for listing of the common stock on The Nasdaq Stock Market's National Market under the symbol "NSCT." Prior to the offering, there has been no public market for the common stock. The initial public offering price will be determined by negotiation between NetScout and the representatives. The principal factors to be considered in determining the initial public offering price include: - the information set forth in this prospectus and otherwise available to the representatives; - the history of, and the prospects for, NetScout and the industry in which it competes; - an assessment of NetScout's management; - the prospects for, and the timing of, future earnings of NetScout; - the present state of NetScout's development and its current financial condition; - the general condition of the securities markets at the time of the offering; - the recent market prices of, and the demand for, publicly-traded common stock of companies in businesses similar to those of NetScout; - market conditions for initial public offerings; and - other relevant factors. There can be no assurance that an active trading market will develop for the common stock or that the common stock will trade in the market subsequent to the offering at or above the initial public offering price. The representatives, on behalf of the underwriters, may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of shares of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when shares of the common stock originally sold by such syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 59 NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that NetScout prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. REPRESENTATIONS OF PURCHASERS Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to NetScout and the dealer from whom such purchase confirmation is received that (1) such purchaser is entitled under applicable provincial securities laws to purchase such common stock without the benefit of a prospectus qualified under such securities laws, (2) where required by law, that such purchaser is purchasing as principal and not as agent, and (3) such purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION (ONTARIO PURCHASERS) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by section 32 of the Regulation under the Securities Act (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. ENFORCEMENT OF LEGAL RIGHTS All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by such purchaser pursuant to the offering. Such a report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from NetScout. Only one such report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian Legislation. 60 LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for NetScout by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Additional legal matters will be passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts. EXPERTS The consolidated financial statements of NetScout Systems, Inc. as of March 31, 1997 and 1998, and for each of the three years in the period ended March 31, 1998, included in this prospectus, have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION NetScout has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement. For further information with respect to NetScout and the common stock, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and, in each instance, reference is made to the copy of the contract or document filed as an exhibit to the registration statement, and each such statement is qualified in all respects by reference to such exhibit. Copies of the registration statement may be examined without charge at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of the Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of all or any portion of the registration statement may be obtained from the Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The Commission also maintains a Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants, such as NetScout, that make electronic filings with the Commission. NetScout intends to furnish to its stockholders annual reports containing financial statements audited by an independent public accounting firm. 61 NETSCOUT SYSTEMS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- Report of Independent Accountants.......................................................................... F-2 Consolidated Balance Sheet as of March 31, 1997 and 1998 and December 31, 1998 (unaudited).............................................................................................. F-3 Consolidated Statement of Income for the years ended March 31, 1996, 1997 and 1998 and the nine months ended December 31, 1997 and 1998 (unaudited)............................................................. F-4 Consolidated Statement of Redeemable Convertible Common Stock and Stockholders' Equity for the years ended March 31, 1996, 1997 and 1998 and the nine months ended December 31, 1998 (unaudited).................... F-5 Consolidated Statement of Cash Flows for the years ended March 31, 1996, 1997 and 1998 and the nine months ended December 31, 1997 and 1998 (unaudited)............................................................. F-6 Notes to Consolidated Financial Statements................................................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of NetScout Systems, Inc. The three-for-two stock split authorized on April 14, 1999 described in Note 8 to the consolidated financial statements has not been consummated at April 21, 1999. When it has been consummated, we will be in a position to furnish the following report: "In our opinion, the accompanying consolidated balance sheet and the related statements of income, of redeemable convertible common stock and stockholders' equity and of cash flows present fairly, in all material respects, the financial position of NetScout Systems, Inc. and its subsidiaries at March 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above." PricewaterhouseCoopers LLP Boston, Massachusetts June 2, 1998, except for Note 8, as to which the date is April 14, 1999 F-2 NETSCOUT SYSTEMS, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, PRO FORMA -------------------- DECEMBER 31, DECEMBER 31, 1997 1998 1998 1998 --------- --------- ------------- ------------- (UNAUDITED) (NOTE 2) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents....................................... $ 6,514 $ 6,341 $ 22,024 $ 21,614 Marketable securities........................................... 5,841 8,834 -- -- Accounts receivable, net of allowance for doubtful accounts and returns of $1,693, $1,063 and $1,021 at March 31, 1997 and 1998 and December 31, 1998 (unaudited), respectively.......... 2,192 4,295 7,118 7,118 Inventories..................................................... 2,274 3,054 2,632 2,632 Refundable income taxes......................................... -- 708 -- -- Deferred income taxes........................................... 1,010 1,191 1,191 1,191 Prepaids and other current assets............................... 203 560 542 542 --------- --------- ------------- ------------- Total current assets.......................................... 18,034 24,983 33,507 33,097 Fixed assets, net................................................. 1,596 3,841 4,292 4,292 Notes receivable--stockholders.................................... 2,000 2,000 2,000 2,000 Deferred income taxes............................................. 73 396 396 396 --------- --------- ------------- ------------- Total assets.................................................. $ 21,703 $ 31,220 $ 40,195 $ 39,785 --------- --------- ------------- ------------- --------- --------- ------------- ------------- LIABILITIES, REDEEMABLE CONVERTIBLE COMMON STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................ $ 1,183 $ 2,951 $ 2,635 $ 2,635 Accrued compensation............................................ 1,758 2,690 2,938 2,938 Accrued other................................................... 369 403 711 711 Income tax payable.............................................. 84 -- 306 306 Customer deposits............................................... 1,262 1,246 1,129 1,129 Deferred revenue................................................ 2,238 3,530 3,958 3,958 --------- --------- ------------- ------------- Total current liabilities..................................... 6,894 10,820 11,677 11,677 --------- --------- ------------- ------------- Commitments and contingencies (Note 12) Redeemable convertible common stock: Class B redeemable convertible common stock, $.001 par value; No shares authorized, issued or outstanding at March 31, 1997 and 1998 and December 31, 1998 (unaudited); 6,977,254 shares authorized, no shares issued or outstanding at December 31, 1998 on a pro forma basis (unaudited)......................... -- -- -- -- --------- --------- ------------- ------------- Stockholders' equity: Series A convertible preferred stock, $0.001 par value; 1,263,158 shares authorized, 631,579 shares issued and outstanding at March 31, 1997 and 1998 and December 31, 1998 (unaudited); no shares issued and outstanding at December 31, 1998 on a pro forma basis (unaudited)......................... 5,964 5,964 5,964 -- Common stock, $0.001 par value: Voting, 39,918,273 shares authorized, 24,000,000 shares issued and outstanding at March 31, 1997 and 1998 and December 31, 1998 (unaudited); 50,384,154 shares authorized, 43,990,185 shares issued and 33,524,304 shares outstanding at December 31, 1998 on a pro forma basis (unaudited)................... 24 24 24 44 Non-voting, 39,918,273 shares authorized, 5,383,200, 5,412,000 and 5,734,830 shares issued and outstanding at March 31, 1997 and 1998 and December 31, 1998 (unaudited), respectively; no shares issued and outstanding at December 31, 1998 on a pro forma basis (unaudited)................... 5 5 6 -- Additional paid-in capital.................................... 238 896 1,010 51,121 Deferred compensation........................................... (173) (672) (550) (550) Treasury stock.................................................. -- -- -- (44,394) Retained earnings............................................... 8,751 14,183 22,064 21,887 --------- --------- ------------- ------------- Total stockholders' equity.................................... 14,809 20,400 28,518 28,108 --------- --------- ------------- ------------- Total liabilities, redeemable convertible common stock and stockholders' equity........................................ $ 21,703 $ 31,220 $ 40,195 $ 39,785 --------- --------- ------------- ------------- --------- --------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-3 NETSCOUT SYSTEMS, INC. CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ---------------------------------------- -------------------------- 1996 1997 1998 1997 1998 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Revenue: Product.................................. $ 13,276 $ 25,159 $ 34,990 $ 23,944 $ 36,737 Service.................................. 1,521 3,888 5,143 3,455 6,329 License and royalty...................... 886 1,601 2,696 1,772 5,814 ------------ ------------ ------------ ------------ ------------ Total revenue.......................... 15,683 30,648 42,829 29,171 48,880 ------------ ------------ ------------ ------------ ------------ Cost of revenue: Product.................................. 5,897 9,427 12,638 8,299 13,614 Service.................................. 138 528 784 510 838 ------------ ------------ ------------ ------------ ------------ Total cost of revenue.................. 6,035 9,955 13,422 8,809 14,452 ------------ ------------ ------------ ------------ ------------ Gross margin............................... 9,648 20,693 29,407 20,362 34,428 ------------ ------------ ------------ ------------ ------------ Operating expenses: Research and development................. 1,208 3,003 5,129 3,543 5,295 Sales and marketing...................... 4,384 6,778 13,583 9,378 14,726 General and administrative............... 695 1,815 2,950 1,912 2,758 ------------ ------------ ------------ ------------ ------------ Total operating expenses............... 6,287 11,596 21,662 14,833 22,779 ------------ ------------ ------------ ------------ ------------ Income from operations..................... 3,361 9,097 7,745 5,529 11,649 Interest income............................ 23 471 750 561 669 Interest expense........................... (26) (10) (7) (6) (2) ------------ ------------ ------------ ------------ ------------ Income before provision for income taxes... 3,358 9,558 8,488 6,084 12,316 Provision for income taxes................. 1,355 3,640 3,056 2,191 4,435 ------------ ------------ ------------ ------------ ------------ Net income................................. $ 2,003 $ 5,918 $ 5,432 $ 3,893 $ 7,881 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic net income per share................. $ 0.07 $ 0.21 $ 0.19 $ 0.13 $ 0.27 Diluted net income per share............... $ 0.06 $ 0.17 $ 0.16 $ 0.11 $ 0.22 Shares used in computing: Basic net income per share............... 27,813,702 28,514,402 28,933,752 28,909,404 25,352,740 Diluted net income per share............. 33,689,729 34,377,926 34,748,294 34,450,260 35,694,174 Unaudited pro forma basic net income per share.................................... $ 0.17 $ 0.24 Unaudited pro forma diluted net income per share.................................... $ 0.16 $ 0.22 Shares used in computing: Unaudited pro forma basic net income per share.................................. 32,723,226 33,142,214 Unaudited pro forma diluted net income per share.............................. 34,748,294 35,694,174
The accompanying notes are an integral part of these consolidated financial statements. F-4 NETSCOUT SYSTEMS, INC. CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE COMMON STOCK AND STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMMON STOCK CLASS B REDEEMABLE -------------------------------------------------- CONVERTIBLE COMMON SERIES A CONVERTIBLE STOCK PREFERRED STOCK VOTING NON-VOTING -------------------- ---------------------- ------------------------ ------------------------ SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE SHARES PAR VALUE --------- --------- --------- ----------- --------- ------------- --------- ------------- Balance, March 31, 1996....... -- $ -- 631,579 $ 5,964 24,000,000 $ 24 5,356,800 $ 5 Deferred compensation related to stock options granted.... Issuance of common stock pursuant to exercise of options..................... 26,400 -- Amortization of deferred compensation................ Net income.................... --------- --------- --------- ----------- --------- --- --------- --- Balance, March 31, 1997....... -- -- 631,579 5,964 24,000,000 24 5,383,200 5 Deferred compensation related to stock options granted.... Issuance of common stock pursuant to exercise of options..................... 28,800 -- Amortization of deferred compensation................ Net income.................... --------- --------- --------- ----------- --------- --- --------- --- Balance, March 31, 1998....... -- -- 631,579 5,964 24,000,000 24 5,412,000 5 Deferred compensation related to stock options granted.... Issuance of common stock pursuant to exercise of options..................... 322,830 1 Amortization of deferred compensation................ Net income.................... --------- --------- --------- ----------- --------- --- --------- --- Balance, December 31, 1998 (unaudited)................. -- -- 631,579 5,964 24,000,000 24 5,734,830 6 Issuance of Class B redeemable convertible common stock, net of issuance costs of $410 (unaudited)............ 6,977,254 44,161 Purchase of treasury stock (unaudited)................. Conversion of outstanding shares into voting common stock (unaudited)........... (6,977,254) (44,161) (631,579) (5,964) 19,990,185 20 (5,734,830) (6) --------- --------- --------- ----------- --------- --- --------- --- Balance, December 31, 1998 on a pro forma basis (unaudited)................. -- $ -- -- $ -- 43,990,185 $ 44 -- $ -- --------- --------- --------- ----------- --------- --- --------- --- --------- --------- --------- ----------- --------- --- --------- --- ADDITIONAL TOTAL PAID-IN DEFERRED TREASURY RETAINED STOCKHOLDERS' CAPITAL COMPENSATION STOCK EARNINGS EQUITY ----------- ------------- ---------- ----------- ----------- Balance, March 31, 1996....... $ 70 $ (47) $ -- $ 2,833 $ 8,849 Deferred compensation related to stock options granted.... 166 (166) -- Issuance of common stock pursuant to exercise of options..................... 2 2 Amortization of deferred compensation................ 40 40 Net income.................... 5,918 5,918 ----------- ----- ---------- ----------- ----------- Balance, March 31, 1997....... 238 (173) -- 8,751 14,809 Deferred compensation related to stock options granted.... 636 (636) -- Issuance of common stock pursuant to exercise of options..................... 22 22 Amortization of deferred compensation................ 137 137 Net income.................... 5,432 5,432 ----------- ----- ---------- ----------- ----------- Balance, March 31, 1998....... 896 (672) -- 14,183 20,400 Deferred compensation related to stock options granted.... 72 (72) -- Issuance of common stock pursuant to exercise of options..................... 42 43 Amortization of deferred compensation................ 194 194 Net income.................... 7,881 7,881 ----------- ----- ---------- ----------- ----------- Balance, December 31, 1998 (unaudited)................. 1,010 (550) -- 22,064 28,518 Issuance of Class B redeemable convertible common stock, net of issuance costs of $410 (unaudited)............ 44,161 Purchase of treasury stock (unaudited)................. (44,394) (177) (44,571) Conversion of outstanding shares into voting common stock (unaudited)........... 50,111 -- ----------- ----- ---------- ----------- ----------- Balance, December 31, 1998 on a pro forma basis (unaudited)................. $ 51,121 $ (550) $ (44,394) $ 21,887 $ 28,108 ----------- ----- ---------- ----------- ----------- ----------- ----- ---------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-5 NETSCOUT SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------------------------- -------------------- 1996 1997 1998 1997 1998 --------- --------- --------- --------- --------- (UNAUDITED) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................... $ 2,003 $ 5,918 $ 5,432 $ 3,893 $ 7,881 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................... 382 1,171 1,470 969 1,454 Loss on disposal of fixed assets............................ 26 78 171 95 50 Compensation expense associated with equity awards.......... 3 40 137 67 194 Deferred income taxes....................................... (68) (848) (504) -- -- Changes in assets and liabilities: Accounts receivable....................................... (2,466) 1,480 (2,103) (1,891) (2,823) Inventories............................................... (1,114) (773) (780) (164) 422 Refundable income taxes................................... -- -- (708) (975) 708 Prepaids and other current assets......................... (91) (82) (357) (195) 18 Accounts payable.......................................... 1,169 (405) 1,768 670 (316) Accrued expenses.......................................... 590 1,022 966 134 556 Income taxes payable...................................... 1,024 (1,122) (84) (84) 306 Customer deposits......................................... (133) 1,227 (16) (123) (117) Deferred revenue.......................................... 1,003 693 1,292 716 428 --------- --------- --------- --------- --------- Net cash provided by operating activities................. 2,328 8,399 6,684 3,112 8,761 --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities............................. -- (5,841) (2,993) (1,910) -- Proceeds from maturity of marketable securities............... -- -- -- -- 8,834 Issuance of notes receivable--stockholders.................... -- (2,000) -- -- -- Purchase of fixed assets...................................... (788) (1,844) (3,886) (3,092) (1,955) --------- --------- --------- --------- --------- Net cash (used) provided by investing activities.......... (788) (9,685) (6,879) (5,002) 6,879 --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Series A convertible preferred stock, net of issuance costs................................ 5,964 -- -- -- -- Proceeds from issuance of common stock........................ -- 2 22 22 43 Repayments of mortgages payable............................... (52) -- -- -- -- --------- --------- --------- --------- --------- Net cash provided by financing activities................. 5,912 2 22 22 43 --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents............ 7,452 (1,284) (173) (1,868) 15,683 Cash and cash equivalents, beginning of year.................... 346 7,798 6,514 6,514 6,341 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period........................ $ 7,798 $ 6,514 $ 6,341 $ 4,646 $ 22,024 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest........................................ $ 22 $ 10 $ 7 $ 6 $ 2 Cash paid for income taxes.................................... 400 4,340 4,351 3,250 3,421
The accompanying notes are an integral part of these consolidated financial statements. F-6 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION NetScout Systems, Inc. ("NetScout") designs, develops, manufactures, markets and supports an integrated family of products that enable businesses and service providers to manage the performance of computer networks and important business software applications. NetScout's principal markets are the domestic and international business markets. NetScout manages its business as a single segment. The consolidated financial statements include the accounts of NetScout and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FINANCIAL INSTRUMENTS The carrying value of NetScout's financial instruments, which include cash and cash equivalents, marketable securities, accounts receivable, notes receivable, accounts payable and accrued expenses, approximate their fair values. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES NetScout considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents, and those with maturities greater than three months are considered to be marketable securities. Cash equivalents and marketable securities are stated at amortized cost plus accrued interest, which approximates fair value. Cash equivalents and marketable securities consist primarily of money market instruments and U.S. Treasury bills. NetScout accounts for its investments in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under the provision of SFAS No. 115, NetScout has classified its investments as "available-for-sale" and any associated unrealized gains or losses, if material, are recorded as a separate component of stockholders' equity until realized. At March 31, 1997 and 1998, any unrealized gains or losses were immaterial. At March 31, 1998 and periodically throughout the year, NetScout has maintained cash balances in various operating accounts in excess of federally insured limits. NetScout limits the amount of credit exposure with any one financial institution by evaluating the credit worthiness of the financial institutions with which it invests. REVENUE RECOGNITION Product revenue is recognized upon shipment, provided that fees are fixed and determinable and collection of the related receivable is probable. Sales to indirect channel partners that are subject to return privileges are recognized upon shipment, net of an allowance for estimated product returns which is based on NetScout's return policy and historical experience. Customer payments received in advance of product shipments are recorded as customer deposits. Service revenue consists primarily of customer fees from support agreements, installation and training. Revenue from support agreements is deferred and recognized ratably over the support period. Revenue from installation and training is recognized as the work is performed. F-7 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) License and royalty revenue consists primarily of royalties paid under license agreements by OEMs who incorporate components of NetScout's data collection technology in their own products or who reproduce and sell NetScout's software products. License revenue is recognized when NetScout becomes contractually entitled to receive license fees, provided that such fees are fixed and determinable and collection is probable. Royalty revenue is recognized based upon product shipment by the license holder. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS Concentration of credit risk is limited as NetScout sells its products to a large number of customers in many different industries and geographic areas. At March 31, 1998, two customers accounted for approximately 21% and 19%, respectively, of NetScout's accounts receivable. Management believes its credit policies are prudent and reflect normal industry terms and business risk. In addition, NetScout maintains reserves for potential credit losses, and such losses historically have been minimal and within management's expectations. NetScout does not anticipate non-performance by counterparties and, accordingly, does not require collateral. During the year ended March 31, 1996, three customers accounted for approximately 17%, 14% and 10%, respectively, of NetScout's total revenue. During the year ended March 31, 1997, one customer accounted for approximately 24% of NetScout's total revenue. During the year ended March 31, 1998, two customers accounted for approximately 40% and 12%, respectively, of NetScout's total revenue. (Unaudited) During the nine months ended December 31, 1998, one customer accounted for 49% of NetScout's total revenue. INVENTORIES AND CONCENTRATIONS OF SUPPLIERS Inventories are stated at the lower of cost or market with cost being determined on the first-in, first-out method. NetScout purchases the majority of its product components from a limited number of vendors. Although there is a concentration of sources of supply, management believes that the nature of its business requires sourcing and marketing products from the limited number of vendors who have expertise in manufacturing the components for NetScout's products. A change in or loss of one or more of these vendors could cause a delay in filling customer orders and a possible loss of sales, which could adversely affect results of operations. FIXED ASSETS Fixed assets are stated at cost and depreciated using the straight-line method over their estimated useful lives. F-8 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT AND COMPUTER SOFTWARE DEVELOPMENT COSTS Costs incurred in the research and development of NetScout's products are expensed as incurred, except for certain software development costs. Costs associated with the development of computer software are expensed prior to establishment of technological feasibility (as defined by SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed") and capitalized thereafter when material to NetScout's financial position or results of operations. No software development costs were capitalized during the years ended March 31, 1996, 1997 and 1998, since costs incurred subsequent to establishment of technological feasibility were not material. ACCOUNTING FOR STOCK-BASED COMPENSATION NetScout accounts for stock-based awards to employees using the intrinsic value method as prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employes," and related interpretations. NetScout has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," through disclosure only (Note 9). All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123 and, for awards made after November 16, 1998, in accordance with Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18"). ADVERTISING EXPENSE NetScout recognizes advertising expense as incurred. Advertising expense was approximately $13, $70 and $146 for the years ended March 31, 1996, 1997 and 1998, respectively. UNAUDITED PRO FORMA BALANCE SHEET AND UNAUDITED PRO FORMA STATEMENT OF REDEEMABLE CONVERTIBLE COMMON STOCK AND STOCKHOLDERS' EQUITY As discussed in Note 8, NetScout issued 6,977,254 shares of Class B Redeemable Convertible Common Stock ("Class B Convertible Common Stock") at $6.39 per share in January 1999. NetScout used the proceeds from this financing to repurchase 7,124,247, 1,446,900 and 315,789 shares of Voting Common Stock, Non-Voting Common Stock and Series A Convertible Preferred Stock ("Series A Preferred Stock"), respectively. Upon the closing of NetScout's initial public offering, all of the outstanding shares of Class B Convertible Common Stock, Series A Preferred Stock and Non-Voting Common Stock will automatically convert into 10,465,881, 3,789,474 and 5,734,830 shares, respectively, of Voting Common Stock (Note 8). These transactions have been reflected in the unaudited pro forma balance sheet and unaudited pro forma statement of redeemable convertible common stock and stockholders' equity as of December 31, 1998. NET INCOME PER SHARE Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period, excluding shares of common stock subject to repurchase. Diluted net income per share is computed by dividing F-9 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) income available to common stockholders by the sum of the weighted average number of shares of common stock outstanding during the period and the weighted average number of potential common stock from the assumed exercise of stock options and common stock subject to repurchase using the "treasury stock" method and the assumed conversion of the Series A Convertible Preferred Stock. UNAUDITED PRO FORMA NET INCOME PER SHARE Pro forma basic and diluted net income per share have been computed assuming the conversion of all outstanding shares of Class B Convertible Common Stock, Series A Preferred Stock and Non-Voting Common Stock into common stock, as if the shares had converted immediately upon their issuance. UNAUDITED INTERIM FINANCIAL STATEMENTS Data and information as of December 31, 1998 and for the nine months ended December 31, 1997 and 1998 is unaudited. In the opinion of NetScout's management, the December 31, 1997 and 1998 unaudited interim consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and result of operations for that period. The results of operations for the nine month period ended December 31, 1998 are not necessarily indicative of the results of operations for the year ended March 31, 1999. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at March 31, 1997 and 1998 and the reported amounts of revenues and expenses during fiscal 1996, 1997 and 1998. Actual results could differ from those estimates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes the accounting for costs of software products developed or purchased for internal use, including when such costs should be capitalized. NetScout does not expect SOP 98-1, which is effective for NetScout beginning April 1, 1999, to have a material effect on its financial condition or results of operations. In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." Start-up activities are defined broadly as those one-time activities relating to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer, commencing some new operation or organizing a new entity. Under SOP 98-5, the cost of start-up activities should be expensed as incurred. SOP 98-5 is effective for NetScout's fiscal year 2000 financial statements and NetScout does not expect its adoption to have a material effect on its financial condition or results of operations. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard establishes accounting and reporting F-10 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. NetScout does not expect SFAS No. 133 to have a material effect on its financial condition or results of operations. 3. INVENTORIES Inventories consist of the following:
MARCH 31, -------------------- DECEMBER 31, 1997 1998 1998 --------- --------- ------------- (UNAUDITED) Raw materials............................................... $ 1,503 $ 2,482 $ 1,862 Work-in-process............................................. 229 259 317 Finished goods.............................................. 542 313 453 --------- --------- ------ $ 2,274 $ 3,054 $ 2,632 --------- --------- ------ --------- --------- ------
4. FIXED ASSETS Fixed assets consist of the following:
ESTIMATED USEFUL MARCH 31, LIFE -------------------- IN YEARS 1997 1998 --------- --------- --------- Furniture and fixtures......................................... 3-7 $ 286 $ 788 Computer equipment and purchased software...................... 3 1,737 2,815 Demonstration units............................................ 2 756 971 Leasehold improvements......................................... 5 244 1,815 --------- --------- 3,023 6,389 Less--accumulated depreciation and amortization................ 1,427 2,548 --------- --------- $ 1,596 $ 3,841 --------- --------- --------- ---------
5. NOTES RECEIVABLE--STOCKHOLDERS In June 1996, the Board of Directors approved $1,100 and $900 loans to two voting stockholders ($2,000 in the aggregate). The loans are collateralized by 1,548,396 shares of Voting Common Stock of NetScout. The loans have five-year terms with an interest rate of 6.48%, compounded semi-annually and payable annually. 6. LINE OF CREDIT At March 31, 1998, NetScout had a revolving line of credit with a bank under which it can borrow up to $3,000 based upon a percentage of eligible accounts receivable. This line of credit was set to expire on March 11, 1999. Borrowings under the line are payable on demand and bear interest at the bank's prime rate. Under the terms of the agreement, NetScout is required to comply with certain F-11 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 6. LINE OF CREDIT (CONTINUED) restrictive covenants, which require that NetScout maintain minimum amounts of profitability and liquidity. The line of credit is secured by NetScout's accounts receivable and inventory. NetScout was in compliance with all restrictive covenants at March 31, 1998. No borrowings were outstanding under the line of credit at March 31, 1998 (Note 12). (Unaudited) In March 1999, the revolving line of credit was modified to allow NetScout to borrow up to $5,000 based on a percentage of eligible accounts receivable and to extend the expiration date to March 2000. 7. NET INCOME PER SHARE Below is a summary of the shares used in computing basic and diluted net income per share for the years indicated:
NINE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ---------------------------------------- -------------------------- 1996 1997 1998 1997 1998 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Weighted average number of shares outstanding.............................. 27,813,702 28,514,402 28,933,752 28,909,404 29,352,740 Shares attributable to Series A Preferred Stock.................................... 3,789,474 3,789,474 3,789,474 3,789,474 3,789,474 Shares attributable to restricted Non- Voting Common Stock...................... 1,258,602 823,104 440,430 456,174 232,613 Stock options.............................. 827,951 1,250,946 1,584,638 1,295,208 2,319,347 ------------ ------------ ------------ ------------ ------------ Shares used in computing diluted net income per share................................ 33,689,729 34,377,926 34,748,294 34,450,260 35,694,174 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Stock options to purchase 185,400, 98,051, 11,798 and 141,644 shares of Non-Voting Common Stock for the years ended March 31, 1997 and 1998 and for the nine months ended December 31, 1997 and 1998 (unaudited), respectively, were outstanding at period end but were not included in the computation of diluted net income per share because the exercise prices of the options were greater than the average fair value of the common stock for the respective period. 8. CAPITAL STOCK In January 1999, NetScout issued 6,977,254 shares of Class B Convertible Common Stock to independent financial investors at $6.39 per share ($4.26 per common equivalent) for net proceeds of $44,161. NetScout used the proceeds from this financing to repurchase shares of the Company's capital stock--see Treasury Stock below. The Class B Convertible Common Stock and Series A Preferred Stock have the following characteristics: F-12 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 8. CAPITAL STOCK (CONTINUED) VOTING RIGHTS The holders of the Class B Convertible Common Stock shall be entitled to that number of votes equal to the number of shares of Voting Common Stock into which each share could be converted with regard to any matter submitted to the shareholders for a vote. The holders of the Series A Preferred Stock have no voting rights, except rights to elect board directors. DIVIDEND RIGHTS The holders of the Class B Convertible Common Stock and Series A Preferred Stock are entitled to receive, when and as declared by the Board of Directors and out of funds legally available, noncumulative dividends at the rate of $.64 and $.95, respectively, per share per annum, payable in preference and priority to any payment of any dividend on common stock. No dividends or other distributions shall be made with respect to the common stock, until all declared dividends on the Class B Convertible Common Stock and Series A Preferred Stock have been paid. Through March 31, 1998, no cash dividends have been declared or paid by NetScout. LIQUIDATION PREFERENCE In the event of any liquidation, dissolution or winding up of the affairs of NetScout, the holders of the then outstanding Class B Convertible Common Stock and Series A Preferred Stock shall receive for each share an amount equal to the sum of $6.39 and $9.50 per share of Class B Convertible Common Stock and Series A Preferred Stock, respectively, plus all declared but unpaid dividends, payable in preference and priority to any payments made to the holders of the then outstanding common stock. CONVERSION Each share of Class B Convertible Common Stock shall be convertible at any time, at the option of the stockholder, into one and one-half shares of Voting Common Stock. Each share of Class B Convertible Common Stock shall automatically be convertible (i) into shares of Voting Common Stock upon the closing of an initial public offering in which gross proceeds are at least $40,000 and in which the price per common share to the public is at least $8.53 or (ii) into Voting Common Stock upon the written election of holders of not less than a majority of the then outstanding shares of Class B Convertible Common Stock, voting as a class, at any other time. Each share of Series A Preferred Stock may be converted at any time, at the option of the stockholder, into six shares of Non-Voting Common Stock. Each share of Series A Preferred Stock shall automatically be converted (i) into shares of Voting Common Stock upon the closing of an initial public stock offering in which gross proceeds are at least $10,000, and in which the price per common share to the public is at least $3.17, or (ii) into Voting Common Stock at such time upon the election of holders of not less than two-thirds of the then outstanding shares of Series A Preferred Stock, when NetScout's common stock is registered under Section 12(g) of the Securities Exchange Act of 1934 or (iii) into Non-Voting Common Stock upon the election of holders of not less than two-thirds of the then outstanding shares of Series A Preferred Stock. F-13 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 8. CAPITAL STOCK (CONTINUED) REDEMPTION The holders of not less than a majority of the outstanding shares of Class B Convertible Common Stock may require NetScout to redeem 33.3%, 66.7% and 100% of their outstanding shares on January 15, 2004, 2005 and 2006, respectively. The redemption amount per share will be equal to the sum of $6.39 plus all declared but unpaid dividends. NON-VOTING COMMON STOCK Shares of Non-Voting Common Stock are automatically convertible to shares of Voting Common Stock upon the closing of an initial public stock offering. RESTRICTION AGREEMENT In August 1995, NetScout issued 300,000 shares of restricted Non-Voting Common Stock to a related party in exchange for services to be performed. The shares were scheduled to become unrestricted in August 2005. The fair value ascribed to the shares was $50 which was recorded as deferred compensation and was being charged to NetScout's results of operations ratably over the service period of the related party. In February 1999, NetScout terminated the restriction agreement allowing the shares to become unrestricted and recognized the remaining balance of deferred compensation as a charge to options at that time. STOCK SPLIT In December 1998, NetScout authorized and effected a two-for-one stock split on the voting and non-voting common stock. As a result, all common stock share data included in the accompanying financial statements and notes have been retroactively restated for the split. On April 14, 1999, NetScout authorized a three-for-two stock split on the voting and non-voting common stock. As a result, all common stock share data included in the accompanying financial statements and notes have been retroactively restated for the split. TREASURY STOCK In January 1999, NetScout repurchased 7,124,247 shares of Voting Common Stock and 1,446,900 shares of Non-Voting Common Stock for $4.26 per share and 315,789 shares of Series A Preferred Stock for $25.55 per share ($4.26 per common equivalent) for a total of $44,571. Of this amount, $44,394 was recorded as treasury stock and $177 was recorded as a charge to operations. The amount charged to operations was for 63,900 shares of Non-Voting Common Stock repurchased from employees who acquired the stock under NetScout's stock option plan and did not hold such stock for at least six months. RESERVED SHARES NetScout has reserved 4,710,084 shares of Non-Voting Common Stock for issuance under the 1990 Stock Option Plan (Note 9). NetScout has also reserved 13,911,558 shares of Voting Common Stock for issuance upon conversion of NetScout's Series A Preferred Stock and Non-Voting Common Stock. In F-14 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 8. CAPITAL STOCK (CONTINUED) addition, NetScout has reserved 3,789,474 shares of Non-Voting Common Stock for issuance upon conversion of NetScout's Series A Preferred Stock. 9. 1990 STOCK OPTION PLAN In October 1990, NetScout adopted the 1990 Stock Option Plan (the "Plan"). The Plan provides for the granting of incentive and non-qualified stock options to employees, directors and consultants of NetScout. The Plan, as amended, allows for the issuance of options to purchase up to 4,776,084 shares of Non-Voting Common Stock. The Board of Directors determines the term of each option, option price, number of shares for which each option is granted and the rate at which each option is exercisable. The exercise price of incentive stock options shall not be less than 100% of the fair market value of the common stock at the date of grant (110% for incentive stock options granted to holders of more than 10% of the voting stock of NetScout). The term of options granted cannot exceed ten years (five years for incentive stock options granted to holders of more than 10% of the voting stock of NetScout). In April 1998, NetScout increased the shares available under the Plan to 6,771,999 shares of Non-Voting Common Stock. Transactions under the Plan during the years ended March 31, 1996, 1997 and 1998 are summarized as follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE ---------- ----------- Outstanding--March 31, 1995............................................ 833,850 $ .01 Granted (weighted average fair value of $.05 per share).............. 276,000 .21 Exercised............................................................ (10,800) .01 Canceled............................................................. (100,800) .01 ---------- Outstanding--March 31, 1996............................................ 998,250 .07 Granted (weighted average fair value of $.29 per share).............. 2,106,750 .94 Exercised............................................................ (26,400) .08 Canceled............................................................. (81,000) .32 ---------- Outstanding--March 31, 1997............................................ 2,997,600 .67 Granted (weighted average fair value of $.53 and $1.09 per share for options with exercise prices equal to and less than the market price, respectively, at the date of grant)......................... 1,794,000 1.91 Exercised............................................................ (28,800) .87 Canceled............................................................. (345,900) 1.45 ---------- Outstanding--March 31, 1998............................................ 4,416,900 1.11 ---------- ----------
F-15 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 9. 1990 STOCK OPTION PLAN (CONTINUED) The following tables summarize information about employee options outstanding and exercisable at March 31, 1998:
WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE NUMBER CONTRACTUAL EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE - ------------------------------------------------------ ----------- -------------- ----------- (YEARS) $.002 to .50......................................... 1,835,250 7.2 $ .29 1.00 to 1.33......................................... 505,500 8.3 1.03 1.67................................................. 1,669,650 9.2 1.67 2.67................................................. 406,500 9.8 2.67 ----------- 4,416,900 8.4 1.11 ----------- -----------
WEIGHTED AVERAGE NUMBER EXERCISE RANGE OF EXERCISE PRICES EXERCISABLE PRICE - ----------------------------------------------------------------------- ---------- ----------- $.002 to .50.......................................................... 768,510 $ .17 1.00 to 1.33.......................................................... 101,100 1.03 1.67.................................................................. 166,350 1.67 ---------- 1,035,960 .49 ---------- ----------
As of March 31, 1996 and 1997, 198,570 and 406,140 options were exercisable, respectively, under the Plan. As of March 31, 1998, there were 293,184 shares of Non-Voting Common Stock available for grant under the Plan. FAIR VALUE DISCLOSURES As discussed in Note 2, NetScout has adopted SFAS No. 123 through disclosure only. Had compensation cost for NetScout's option plan been determined based on the fair value at the grant dates, as prescribed in SFAS No. 123, NetScout's net income and basic and diluted net income per share on a pro forma basis would have been as follows:
YEAR ENDED MARCH 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Net income: As reported.................................................... $ 2,003 $ 5,918 $ 5,432 Pro forma...................................................... $ 2,000 $ 5,824 $ 5,208 Basic net income per share: As reported.................................................... $ .07 $ .21 $ .19 Pro forma...................................................... $ .07 $ .20 $ .18 Diluted net income per share: As reported.................................................... $ .06 $ .17 $ .16 Pro forma...................................................... $ .06 $ .17 $ .15
F-16 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 9. 1990 STOCK OPTION PLAN (CONTINUED) The fair value of each option grant is estimated on the date of grant using the minimum value method with the following assumptions for grants in 1996, 1997 and 1998: dividend yield of 0.0%; risk-free interest rates of 5.9%, 6.4% and 6.0% for 1996, 1997 and 1998, respectively; and a weighted-average expected option term of 5 years. Because options granted after the initial filing for NetScout's initial public offering must contain a volatility factor under SFAS No. 123, additional option grants are expected to be made each year and options vest over several years, the above pro forma disclosures are not representative of pro forma effects of reported net income for future years. In May 1996, NetScout granted 498,000 options to purchase Non-Voting Common Stock to a consultant in exchange for services to be performed. The fair value ascribed to the shares was $166 which was recorded as deferred compensation and is being charged to NetScout's results of operations ratably over the service period. In September 1997, NetScout granted 60,000 options to purchase Non-Voting Common Stock to consultants for services to be performed. In November 1997, the EITF finalized Issue No. 96-18. Under EITF 96-18, the compensation expense that will ultimately be recognized for options issued to these consultants will be measured at the vesting dates of the underlying options. NetScout has recorded deferred compensation at a preliminary value of $118 of these options which have not vested as of March 31, 1998. As these options vest over five years, NetScout will be required to remeasure the fair value of these options at each reporting period prior to vesting and then finally at the vesting dates of the options. Changes in the estimated fair value of these options will be recognized as compensation expense in the period of the change. For the year ended March 31, 1998, NetScout recorded $27 of compensation expense related to these options. In September 1997, NetScout granted 777,000 options to purchase Non-Voting Common Stock at $1.67 per share to employees. At the grant date, NetScout estimated the fair value of the common stock to be $2.33 per share. In accordance with APB No. 25, NetScout recorded $518 of deferred compensation which will be charged to NetScout's results of operations over the vesting period of the options, generally four years. For the year ended March 31, 1998, NetScout recorded $66 of compensation expense related to these options. (Unaudited) In March 1999, NetScout terminated the agreement with the consultants and a total of 24,000 options vested. As a result, NetScout recorded an additional $105 of compensation expense related to these options. In February 1999, NetScout granted 458,250 options to purchase Non-Voting Common Stock to employees. At the date of grant, NetScout estimated the fair value of the common stock to be $6.45 per share. In accordance with APB No. 25, NetScout recorded $968 of deferred compensation which will be charged to NetScout's results of operations over the vesting period of the options, generally four years. 10. RETIREMENT PLAN In 1996, NetScout established a 401(k) plan, which is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, pursuant to which NetScout matches 25% of the employee's contribution up to 6% of the employee's salary. NetScout contributions vest at a rate of 20% per year F-17 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 10. RETIREMENT PLAN (CONTINUED) of service. NetScout made matching contributions of $35, $57 and $121 to the plan for the years ended March 31, 1996, 1997 and 1998, respectively. 11. INCOME TAXES The components of the provision for income taxes are as follow:
YEAR ENDED MARCH 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Current provision: Federal........................................................ $ 1,111 $ 3,438 $ 2,859 State.......................................................... 312 1,050 701 --------- --------- --------- 1,423 4,488 3,560 --------- --------- --------- Deferred tax benefit: Federal........................................................ (58) (721) (426) State.......................................................... (10) (127) (78) --------- --------- --------- (68) (848) (504) --------- --------- --------- $ 1,355 $ 3,640 $ 3,056 --------- --------- --------- --------- --------- ---------
The components of deferred tax assets are as follows:
MARCH 31, -------------------- 1997 1998 --------- --------- Deferred tax assets: Reserves................................................................. $ 713 $ 486 Accrued expenses......................................................... 275 226 Fixed assets............................................................. 52 335 Deferred revenue......................................................... 22 479 Other.................................................................... 21 61 --------- --------- $ 1,083 $ 1,587 --------- --------- --------- ---------
F-18 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 11. INCOME TAXES (CONTINUED) The income tax provision computed using the federal statutory income tax rate differs from NetScout's effective tax rate primarily due to the following:
YEAR ENDED MARCH 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Statutory U.S. federal tax rate................................ 34.0% 34.0% 34.0% State taxes, net of federal tax benefit........................ 6.2 6.4 4.8 Foreign sales corporation exempt income........................ (1.0) (.8) (1.5) Research and development tax credits........................... (.9) (1.3) (1.7) Nondeductible expenses......................................... 2.1 (.2) .4 --------- --------- --------- 40.4% 38.1% 36.0% --------- --------- --------- --------- --------- ---------
12. COMMITMENTS AND CONTINGENCIES LEASES NetScout leases office space under operating leases. Total rent expense under the leases was $50, $198 and $942 for the years ended March 31, 1996, 1997 and 1998, respectively. Future noncancelable minimum lease commitments are as follows:
YEAR ENDING MARCH 31, - ------------------------------------------------------------------------------------- 1999................................................................................. $ 829 2000................................................................................. 861 2001................................................................................. 959 2002................................................................................. 1,024 2003................................................................................. 683 --------- Total minimum lease payments......................................................... $ 4,356 --------- ---------
Under the terms of its principal office lease, NetScout is required to maintain a letter of credit totaling $561 under its $3,000 revolving line of credit (Note 6). Pursuant to a product development arrangement, NetScout pays royalties on certain network management and monitoring software it developed and is selling. Royalties accrue at rates ranging from 2% to 4% of gross product and contract sales, up to a maximum of $992. Royalty expense under the agreement was $260, $451 and $16 for the years ended March 31, 1996, 1997 and 1998, respectively. (Unaudited) CONTINGENCIES In August 1998, a former employee made claims against NetScout and an employee stockholder and alleged unspecified damages. The former employee filed a related claim with the Massachusetts Commission Against Discrimination in December 1998. Based on the information available to date, NetScout believes that the claim is without merit and intends to vigorously defend this claim. As this F-19 NETSCOUT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) matter is at a preliminary stage, NetScout is unable to predict the outcome or the amount of related expense or loss, if any. In addition to the matter noted above, from time to time NetScout is subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any other current legal proceedings and claims will not have a material adverse effect on NetScout's financial position or results of operations. EMPLOYMENT AGREEMENT In January 1999, NetScout amended an employee agreement with two employee stockholders to provide that each employee stockholder will receive a base salary of at least $250 and a year-end, non-discretionary bonus of at least $250. The employment agreement is terminable at will, but provides that if either employee's employment is terminated by NetScout without cause, or either decides to terminate his own employment for "good reason", as defined, each is entitled to receive severance benefits for three years as follows: (i) for the first twelve months following termination, the greater of $175 or base salary as of the date of termination; and (ii) for each subsequent twelve-month period, an amount equal to 120% of the amount received in the immediately preceding twelve months. Each employment agreement provides for a five-year term commencing June 1, 1994 with automatic one-year renewals. 13. RELATED PARTY TRANSACTIONS For the years ended March 31, 1996, 1997 and 1998, NetScout paid approximately $20, $352 and $315, respectively, to an affiliate, which is two-thirds owned by the two voting common stockholders of NetScout, for consulting services. 14. GEOGRAPHIC INFORMATION Revenue was distributed geographically as follows:
YEAR ENDED MARCH 31, ------------------------------- 1996 1997 1998 --------- --------- --------- North America................................................ $ 12,106 $ 26,823 $ 37,518 Other international.......................................... 3,577 3,825 5,311 --------- --------- --------- $ 15,683 $ 30,648 $ 42,829 --------- --------- --------- --------- --------- ---------
Substantially all of NetScout's identifiable assets are located in the United States. F-20 NETSCOUT SYSTEMS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BALANCE AT BEGINNING OF CHARGED TO DEDUCTIONS END OF DESCRIPTION PERIOD OPERATIONS (1) PERIOD - ------------------------------------------------------- ------------ ------------ ------------- ------------ Year ended March 31, 1996 Reserves and allowances deducted from asset accounts Allowance for doubtful accounts and returns........ $ 178,000 845,000 826,000 $ 197,000 Year ended March 31, 1997 Reserves and allowances deducted from asset accounts Allowance for doubtful accounts and returns........ $ 197,000 3,019,000 1,523,000 $1,693,000 Year ended March 31, 1998 Reserves and allowances deducted from asset accounts Allowance for doubtful accounts and returns........ $ 1,693,000 (249,000) 381,000 $1,063,000
- ------------------------ (1) Doubtful accounts written off, net of recoveries S-1 [LOGO] PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Estimated expenses (other than underwriting discounts and commissions) payable in connection with the sale of the common stock offered hereby are as follows: SEC registration fee.............................................. $ 28,773 NASD filing fee................................................... 10,850 Nasdaq National Market listing fee................................ 95,000 Printing and engraving expenses................................... 120,000 Legal fees and expenses........................................... 300,000 Accounting fees and expenses...................................... 225,000 Blue Sky fees and expenses (including legal fees)................. 5,000 Transfer agent and registrar fees and expenses.................... 5,000 Miscellaneous..................................................... 10,377 --------- Total........................................................... $ 800,000 --------- ---------
NetScout will bear all expenses shown above. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Delaware General Corporation Law and the Company's charter and by-laws provide for indemnification of the Company's directors and officers for liabilities and expenses that they may incur in such capacities. In general directors and officers are indemnified with respect to actions taken in good faith in a manner reasonably believed to be in, or not opposed to, the best interests of the Company and, with respect to any criminal action or proceeding, actions that the indemnitee had no reasonable cause to believe were unlawful. Reference is made to the Company's charter and by-laws filed as Exhibits 3.3 and 3.5 hereto, respectively. The Underwriting Agreement provides that the Underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1 hereto. In addition, the Company has an existing directors and officers liability insurance policy. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In the three fiscal years preceding the filing of this registration statement, the Company has issued the following securities that were not registered under the Securities Act: (a) Issuances of Capital Stock. In January 1999, the Company issued 6,977,254 shares of its Class B Convertible Common Stock, par value $.001 per share (the "Class B Common Stock"), to certain affiliates of TA Associates, Inc. and to Egan-Managed Capital, L.P., at $6.388051 per share, for aggregate consideration of $44,571,054. All of the proceeds from the Class B Common Stock financing were used to redeem shares of the Company's Series A Preferred Stock, Non-Voting Common Stock and common stock held by certain persons, including certain officers and directors of NetScout. Upon closing of this offering, the 6,977,254 outstanding shares of Class B Common Stock will automatically convert into 10,465,881 shares of common stock. In February 1996, NetScout issued 631,579 shares of its Series A Preferred Stock, par value $.001 per share (the "Series A Preferred"), to Greylock Equity Limited Partnership ("Greylock"), at purchase price II-1 of $9.50 per share, for an aggregate of $6,000,000. Roger Evans, a general partner of the general partner of Greylock, served as a member of the Board of Directors of NetScout from February 1996 until January 1999. Upon closing of this offering, the 315,790 shares of outstanding Series A Preferred will automatically convert into an aggregate of 1,894,740 shares of common stock. (b) Grants and Exercises of Stock Options As of March 31, 1999, the Company has outstanding options to purchase an aggregate of 4,640,438 shares of Non-Voting Common Stock under the 1990 Stock Option Plan exercisable at a weighted average exercise price of $1.90 per share. From April 1, 1996 to March 31, 1999, the Company issued 696,986 shares of Non-Voting Common Stock for an aggregate purchase price of $278,982 pursuant to exercise of employee options. Upon closing of this offering, each share of Non-Voting Common Stock will convert into one share of common stock. No underwriters were involved in the foregoing sales of securities. Such sales were made in reliance upon an exemption from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering or the rules and regulations thereunder, or, in the case of options to purchase common stock, Rule 701 under the Securities Act. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS:
EXHIBIT NO. EXHIBIT - ----------- ----------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 3.1 Second Amended and Restated Certificate of Incorporation of NetScout. 3.2 Form of Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of NetScout. 3.3, 4.1 Form of Third Amended and Restated Certificate of Incorporation of NetScout. 3.4 By-laws of NetScout. 3.5, 4.2 Form of Amended and Restated By-laws of NetScout. 4.3* Specimen Certificate for shares of NetScout's Common Stock. 5.1* Legal Opinion of Testa, Hurwitz & Thibeault, LLP. 10.1** 1990 Stock Option Plan, as amended. 10.2** 1999 Stock Option and Incentive Plan. 10.3** 1999 Employee Stock Purchase Plan. 10.4 Stock Purchase and Redemption Agreement dated December 31, 1999 by and among NetScout, Greylock Equity Limited Partnership, certain affiliates of TA Associates, Inc. and Egan-Managed Capital, L.P. 10.5 Amended and Restated Rights Agreement entered into as of January 15, 1999 by and among NetScout, Greylock Equity Limited Partnership, certain affiliates of TA Associates, Inc. and Egan-Managed Capital, L.P. 10.6 Lease dated August 18, 1997 between NetScout and Michelson Farm-Westford Technology Park Limited Partnership. 10.7 Amended and Restated Loan and Security Agreement dated March 12, 1998 by and between NetScout and Silicon Valley Bank.
II-2
EXHIBIT NO. EXHIBIT - ----------- ----------------------------------------------------------------------------------------------------- 10.8 Loan Modification Agreement entered into March 11, 1999 between NetScout and Silicon Valley Bank. +10.9 OEM Agreement dated as of February 3, 1998 by and between SDL Communications, Inc. and NetScout. +10.10 Project Development and License Agreement dated as of July 13, 1994 by and between Cisco Systems, Inc. ("Cisco") and NetScout. +10.11 Amendment No. 1 to the Project Agreement and Design License Agreement dated as of January 4, 1995 by and between Cisco and NetScout. +10.12 Private Label Agreement effective as of October 17, 1995 by and between Cisco and NetScout. +10.13 Amendment to Private Label Agreement and Project Development and License Agreement dated May 15, 1996 by and between Cisco and NetScout. +10.14 Amendment No. 3 to the Private Label Agreement and Project Development and License Agreement by and between Cisco and NetScout. +10.15 Amendment No. 4 to Private Label Agreement and Project Development and License Agreement effective as of February 23, 1998 by and between Cisco and NetScout. 10.16** Agreement Relating to Employment dated June 1, 1994 by and between NetScout and Anil Singhal. 10.17** Amendment No. 1 to Agreement Relating to Employment dated January 14, 1999 by and between NetScout and Anil Singhal. 10.18** Agreement Relating to Employment dated June 1, 1994 by and between NetScout and Narendra Popat. 10.19** Amendment No. 1 to Agreement Relating to Employment dated January 14, 1999 by and between NetScout and Narendra Popat. 10.20 Secured Term Note for $1,100,000, Partially Non-Recourse, dated June 28, 1996, Payable to NetScout by Anil Singhal. 10.21 Stock Pledge Agreement, made as of June 28, 1996, between Anil Singhal and NetScout. 10.22 Secured Term Note for $900,000, Partially Non-Recourse, dated June 28, 1996. Payable to NetScout by Narendra Popat. 10.23 Stock Pledge Agreement, made as of June 28, 1996, between Narendra Popat and NetScout. 21.1 Subsidiaries of NetScout. 23.1* Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit 5.1). 23.2 Consent of PricewaterhouseCoopers LLP. 24.1 Power of Attorney (contained on page II-5). 27.1 Financial Data Schedule.
- ------------------------ * To be filed by amendment. ** Indicates a management contract or any compensatory plan, contract or arrangement. + Confidential materials omitted and filed separately with the Securities and Exchange Commission. II-3 (B) FINANCIAL STATEMENT SCHEDULES. Schedule II--Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are either not applicable or the required information is included with the Consolidated Financial Statement and Notes thereto, and therefore have been omitted. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes (1) to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser; (2) that for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and (3) that for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Westford, Massachusetts on April 22, 1999. NETSCOUT SYSTEMS, INC. By: /s/ ANIL K. SINGHAL ------------------------------------------ Anil K. Singhal CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD POWER OF ATTORNEY AND SIGNATURES We, the undersigned officers and directors of NetScout Systems, Inc., hereby severally constitute and appoint Anil K. Singhal, Narendra Popat and Charles Tillett, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, any registration statement related to the offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933 (a "462(b) Registration Statement"), any and all amendments and exhibits to this registration statement or any 462(b) Registration Statement, and any and all applications and other documents to be filed with the Securities and Exchange Commission pertaining to the registration of the securities covered hereby or thereby, and generally to do all things in our names and on our behalf in such capacities to enable NetScout Systems, Inc. to comply with the provisions of the Securities Act of 1933 and all requirements of the Securities and Exchange Commission. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE(S) DATE - ------------------------------ --------------------------- ------------------- Chief Executive Officer and April 22, 1999 /s/ ANIL K. SINGHAL Chairman of the Board - ---------------------------- (Principal Executive Anil K. Singhal Officer) /s/ NARENDRA POPAT President, Chief Operating April 22, 1999 - ---------------------------- Officer and Director Narendra Popat Vice President, Finance and April 22, 1999 /s/ CHARLES TILLETT Administration and Chief - ---------------------------- Financial Officer Charles Tillett (Principal Financial and Accounting Officer) /s/ JOSEPH G. HADZIMA, JR. Director April 22, 1999 - ---------------------------- Joseph G. Hadzima, Jr. /s/ KENNETH T. SCHICIANO Director April 22, 1999 - ---------------------------- Kenneth T. Schiciano /s/ RICHARD J. EGAN Director April 22, 1999 - ---------------------------- Richard J. Egan II-5 EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NETSCOUT SYSTEMS, INC. NetScout Systems, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Law of the State of Delaware, hereby certifies as follows: The original Certificate of Incorporation of the Corporation was filed with the Secretary of State on April 21, 1993, under the Corporation's previous name, Frontier Software Development, Inc. An Amended and Restated Certificate of Incorporation was filed with the Secretary of State on February 16, 1996 and Amendments to the Certificate of Incorporation were filed with the Secretary of State on July 11, 1996, March 31, 1997, May 4, 1998, and December 14, 1998. This Amended and Restated Certificate of Incorporation has been duly adopted by the Corporation in accordance with Sections 228, 242 and 245 of the General Corporation Law of Delaware. The text of the Certificate of Incorporation of the Corporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: FIRST. The name of the Corporation is NetScout Systems, Inc. SECOND. The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road, County of New Castle, Wilmington, Delaware. The name of its registered agent at such address is Corporation Service Company. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Series A Preferred Stock." The total number of shares which the Corporation is authorized to issue is fifty-one million eight hundred ten thousand four hundred fifty-one (51,810,451) shares. Fifty-one million one hundred seventy-eight thousand eight hundred seventy-two (51,178,872) shares shall be Common Stock and six hundred thirty-one thousand five hundred seventy-nine (631,579) shares shall be Series A Preferred Stock (hereinafter "Series A Preferred"), each of which shall have a par value of $0.001 per share. Thirty-three million five hundred eighty-nine thousand four hundred thirty-six (33,589,436) shares of the Common Stock shall be designated "Voting Common Stock" (hereinafter "Voting Common"), each of which shall have a par value of $0.001 per share. Ten million six hundred twelve thousand one hundred eighty-two (10,612,182) shares of the Common Stock shall be designated "Non-Voting Common Stock" (hereinafter "Non-Voting Common"), each of which shall have a par value of $0.001 per share. Six million nine hundred seventy-seven thousand two hundred fifty-four (6,977,254) shares of the Common Stock shall be designated "Class B Convertible Common Stock" (hereinafter "Class B Common"), each of which shall have a par value of $0.001 per share. The Voting Common and the Non-Voting Common shall hereinafter be referred to collectively as "Junior Common Stock." The rights, preferences, restrictions and other matters relating to the stock of the Corporation are as follows: 1. DIVIDENDS. (a) The holders of the Series A Preferred and Class B Common shall be entitled to receive, pari passu, when and as declared by the Board of Directors, out of funds legally available therefor, noncumulative dividends at the rate of $.95 per share and $.6388051 per share, respectively (each rate to be adjusted for any subdivisions, combinations, consolidations, or stock distributions or dividends with respect to such shares), per annum, payable in preference and priority to any payment of any dividend on Junior Common Stock of the Corporation. No dividends or other distributions shall be made with respect to the Junior Common Stock, until all declared dividends on the Series A Preferred and Class B Common have been paid or set apart. The holders of Class B Common shall be entitled to receive, out of funds legally available therefor, dividends when, if and as declared by the Board of Directors at the same rate as dividends (other than dividends paid in additional shares of Common Stock) are paid with respect to the Junior Common Stock (treating each such share of Class B Common on an as if converted to Voting Common basis). (b) Notwithstanding paragraph (a) hereof, the Corporation may, subject to Section 4(d)(ii) hereof, at any time, out of funds legally available therefor, repurchase shares of Junior Common Stock of the Corporation issued to or held by employees or consultants of the Corporation or its subsidiaries upon termination of their employment or services, pursuant to any agreement providing for such right of repurchase, whether or not dividends on the Series A Preferred and the Class B Common shall have been paid and whether or not such dividends shall have been declared and funds set aside therefor. 2. LIQUIDATION PREFERENCE. 2 (a) In the event of any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment is made to or upon any shares of Junior Common Stock, from the available net assets of the Corporation, the holders of Series A Preferred and Class B Common shall receive, on a pari passu basis, the following amounts: (A) for each share of Series A Preferred then held, property or cash in an amount equal to the sum of (i) $9.50 per share of Series A Preferred (as originally issued and appropriately adjusted for stock splits and the like) plus (ii) all declared but unpaid dividends thereon, if any, through the date of such payment and (B) for each share of Class B Common then held, property or cash in an amount equal to the sum of (i) $6.38805 per share of Class B Common (as originally issued and appropriately adjusted for stock splits and the like) plus (ii) all declared but unpaid dividends thereon, if any, through the date of such payment. If upon any dissolution, liquidation or winding up of the Corporation, the net assets available for distribution to the Corporation's shareholders pursuant to this subparagraph (a) shall be insufficient to permit payment to the holders of Series A Preferred and Class B Common of the amounts distributable as aforesaid, the entire net assets of the Corporation to be so distributed shall be distributed to the holders of Series A Preferred and Class B Common, and as among such holders, in proportion to the relative liquidation preferences owed to such holders hereunder. (b) Upon any such liquidation, dissolution or winding up, after the holders of Series A Preferred and Class B Common shall have been paid in full the amount to which they shall be entitled pursuant to subparagraph (a) above, the remaining net assets of the Corporation shall be distributed ratably among the holders of Junior Common Stock in proportion to the number of shares of such stock until the holders of Junior Common Stock have received for each share of Junior Common Stock an amount equal to the result of (x) the amount received by the holders of Class B Common pursuant to Section 2(a) divided by (y) the number of shares of Common Stock the outstanding shares of Class B Common are then convertible into, and any remaining net assets shall be distributed ratably among the holders of Series A Preferred, Class B Common and Junior Common Stock in proportion to the number of shares of such stock (on an as if converted to Common Stock basis), without distinction as to class. (c) Unless waived by vote of the holders of at least a majority of the issued and outstanding shares of Series A Preferred and Class B Common, taken together (on an as if converted to Common Stock basis) as a single class, an Exit Event shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2. As used herein, the term "Exit Event" shall mean: (i) any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) which will result in the Corporation's shareholders or their Family Members (as defined below) immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving or continuing entity (as used herein the "Family Members" of a referenced entity shall mean the immediate family (spouse, lineal ancestors or lineal descendants) of such entity and any trusts established for the benefit of such entity or its immediate family); 3 (ii) a sale of all or substantially all of the assets of the Corporation, unless the Corporation's shareholders immediately prior to such sale will, as a result of such sale, hold (by virtue of securities issued as consideration for the Corporation's sale) at least 50% of the voting power of the purchasing entity; or (iii) any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. (iv) in connection with any such transaction contemplated by this Section 2, all consideration payable to the stockholders of the Corporation, in connection with a merger or consolidation, or all consideration payable to the Corporation, together with all other available assets of the Corporation (net of obligations owed by the Corporation), in the case of an asset sale, shall be paid to and deemed (to the fullest extent permitted by law) distributed (in the case of a merger or consolidation) or available for distribution and payment as provided herein (in the case of a sale of assets), as applicable, to the holders of capital stock of the Corporation in accordance with the preference and priorities set forth in Sections 2(a) and 2(b), with such preferences and priorities specifically intended to be applicable in any such merger, consolidation or sale transaction as if the same were a liquidation, dissolution or winding up. If applicable, the Corporation shall either (i) cause the agreement and plan of merger or consolidation to provide as a consequence of such merger or consolidation for the conversion of the Series A Preferred and Class B Common into the right to receive an amount equal to the applicable amounts payable under Section 2(a) or 2(b) in the form of applicable consideration for such merger of consolidation, or (ii) immediately concurrent with the consummation of the sale of all or substantially all of the assets of the Corporation, the redemption of all outstanding shares of the Series A Preferred and the Class B Common for an amount equal to the applicable amounts payable under Section 2(a) or 2(b) in the form of the applicable consideration for such sale. In the event of the foregoing redemption, (i) the Corporation shall revalue its assets and liabilities to the fullest extent permitted by law to determine lawfully available funds for such redemption, and (ii) if the Corporation shall not have such funds available to redeem all such shares, the Corporation shall redeem such shares to the fullest extent of available funds as the same became available. (d) Any securities to be delivered to the shareholders pursuant to this Section 2 shall be valued as follows: (i) If traded on a securities exchange or the National Market System of the National Association of Securities Dealers, Inc., the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 30 trading day period ending three (3) days prior to the closing; (ii) If actively traded over the counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever are applicable) over the 30 trading day period ending three (3) days prior to the closing; and (iii) If there is no active public market, the value shall be the fair 4 market value thereof, as mutually determined by the Board of Directors of the Corporation and the holders of a majority of the then outstanding shares of Series A Preferred and Class B Common, voting together as a single class (on an as if converted to Common Stock basis), or, if they are unable to agree, by an independent appraiser mutually acceptable to the Board and to such holders. 3. VOTING RIGHTS. (a) VOTE OTHER THAN FOR DIRECTORS. Except as otherwise provided herein or required by law, the holder of (i) each share of Voting Common issued and outstanding shall have one vote with regard to any matter submitted to the shareholders for a vote and (ii) each share of Class B Common issued and outstanding shall be entitled to that number of votes equal to the number of shares of Voting Common into which each such share could be converted pursuant to Section 4 hereof with regard to any matter submitted to the shareholders for a vote. Holders of Common Stock and Series A Preferred shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation. Except as otherwise provided herein or required by law, the holders of shares of Non-Voting Common or of Series A Preferred shall have no right to vote on any matter (except to the extent that such holder may hold Voting Common or other voting securities of the Corporation). The authorized shares of any class of capital stock of the Corporation may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of Delaware. The holders of capital stock of the Corporation shall have no cumulative voting rights. (b) VOTING FOR DIRECTORS. So long as the TA Entities (as defined below) or any of their respective Affiliates hold at least 1,666,042 shares of Class B Common (appropriately adjusted for any stock split, dividend, combination, recapitalization or the like) or, if earlier, until the closing of a public offering, underwritten on a firm commitment basis by a nationally recognized investment banking organization or organizations, pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of shares of the Corporation's Voting Common (i) at a price per share of Voting Common, after underwriter discounts and commissions, of not less than $12.80 per share (appropriately adjusted for any stock split, dividend, combination, recapitalization or the like), (ii) for an aggregate offering price (after deduction of underwriter discounts and commissions) of not less than $40,000,000 and (iii) with respect to which such Voting Common is listed for trading on either the New York Stock Exchange or the Nasdaq National Market (a "Qualified Public Offering"), the number of directors of the Corporation shall be fixed at five (5) and the directors shall be elected in accordance with, and the Board of Directors shall be subject to, the following: (i) The holders of a majority of the outstanding shares of Class B Common, voting as a class, shall be entitled to elect two (2) directors (the "Class B Directors"); provided that such holders may designate one, but not more than one, individual as one of such directors who is not an Affiliate (as defined below) of such holders and who is knowledgeable in the Corporation's industry and business (the "Outside Director"); provided, further, that any such 5 Outside Director shall be subject to the initial approval of the holders of a majority of the outstanding shares of Voting Common, voting as a separate series, and PROVIDED, FURTHER, that if any such person continues to serve as such Outside Director for a period of one year after his or her initial election, at any meeting of stockholders of the Corporation at which directors of the Corporation are elected held after such one-year anniversary, such Outside Director shall continue to serve as a director of the Corporation only if the holders of a majority of the outstanding shares of Voting Common, voting as a separate series, vote in favor of the re-election of such Outside Director. Notwithstanding the foregoing, in the event that TA Advent VIII, L.P., Advent Atlantic & Pacific III, L.P., TA Executives Fund, LLC or TA Investors LLC (the "TA Entities") or any of their respective Affiliates hold less than 3,332,085 shares of Class B Common (appropriately adjusted for any stock split, dividend, combination, recapitalization or the like), the holders of a majority of the outstanding shares of Class B Common, voting as a class, shall be entitled to elect only one (1) director and the number of directors of the Corporation may be reduced from five (5) to four (4) if the holders of a majority of the outstanding shares of Voting Common, voting as a separate series, vote in favor of the elimination of such directorship. In the case of any vacancy in the office of a Class B Director, a successor shall be elected to hold office for the unexpired term of such Class B Director by the affirmative vote of the holders of a majority of the outstanding shares of Class B Common, voting as a class, represented at a duly called special or annual meeting of such shareholders or by an action by written consent for that purpose, subject, in the case of election of any Outside Director, to the initial approval of the holders of a majority of the outstanding shares of Voting Common, voting as a separate series, and PROVIDED, FURTHER, that if any such person continues to serve as such Outside Director for a period of one year after his or her initial election, at any meeting of stockholders of the Corporation at which directors of the Corporation are elected held after such one-year anniversary, such Outside Director shall continue to serve as a director of the Corporation only if the holders of a majority of the outstanding shares of Voting Common, voting as a separate series, vote in favor of the re-election of such Outside Director. Except as required by law, any Class B Director may be removed during the aforesaid term of office, either for or without cause, by, and only by, the affirmative vote of the holders of a majority of the outstanding shares of Class B Common, voting as a class, represented at a duly called special or annual meeting of such shareholders or by an action by written consent for that purpose, provided that the foregoing shall not effect the right to call a meeting for the re-election of directors at any time and the approval rights of the Voting Common with respect to the Outside Director as set forth in this Section 3(b)(i), and any such vacancy thereby created, shall be filled by the vote of the holders of a majority of the outstanding shares of Class B Common represented at such meeting or in such consent, voting as a class, subject, in the case of election of any Outside Director, to the initial approval of the holders of a majority of the outstanding shares of Voting Common, voting as a separate series, and PROVIDED, FURTHER, that if any such person continues to serve as such Outside Director for a period of one year after his or her initial election, at any meeting of stockholders of the Corporation at which directors of the Corporation are elected held after such one-year anniversary, such Outside Director shall continue to serve as a director of the Corporation only if the holders of a majority of the outstanding shares of Voting Common, voting as a separate series, vote in favor of the re-election of such Outside Director. (ii) The holders of a majority of the outstanding shares of Voting 6 Common and Class B Common, voting together as a single class, shall be entitled to elect three (3) directors (the "Common Directors"); PROVIDED, HOWEVER, that if the holders of Class B Common shall be entitled to elect only one director pursuant to Section 3(b)(i) above, then the holders of a majority of the outstanding shares of Voting Common and Class B Common, voting together as a single class, shall have the right to elect four (4) directors except when such directorship is eliminated pursuant to Section 3(b)(i) above. In the case of any vacancy in the office of a Common Director, a successor shall be elected to hold office for the unexpired term of such Common Director by the affirmative vote of the holders of a majority of the outstanding shares of Voting Common and Class B Common, voting together as a single class, represented at a duly called special or annual meeting of such shareholders or by an action by written consent for that purpose. Except as required by law, any Common Director may be removed during the aforesaid term of office, either for or without cause, by, and only by, the affirmative vote of the holders of a majority of the outstanding shares of Voting Common and Class B Common, voting together as a single class, represented at a duly called special or annual meeting of such shareholders or by an action by written consent for that purpose, and any such vacancy thereby created, shall be filled by the vote of the holders of a majority of the outstanding shares of Voting Common and Class B Common, voting together as a single class, represented at such meeting or in such consent, voting together as a single class. At any time when the holders of Class B Common, voting separately, shall not be entitled to elect any director of the Corporation, the holders of the outstanding shares of Voting Common and Class B Common, voting together as a single class, shall be entitled to fix the number of directors and elect each director of the Corporation. (iii) In the event that any two Common Directors vote at a properly held meeting of the Board of Directors of this Corporation (or by a writing signed by such Common Directors) to veto an action by the Board of Directors of this Corporation, then such vetoed action shall be null and void and without force. (iv) A quorum for the holding of a meeting of the Board of Directors shall consist of a majority of the Directors then in office notwithstanding that there may be a vacancy in the Board of Directors and action of the Board of Directors by unanimous written consent shall only require the written consent of the Directors then in office notwithstanding that there may be a vacancy in the Board of Directors. The provisions of this subparagraph (iv) shall take precedence over any inconsistent provision of the Bylaws of the Corporation. (c) PROTECTIVE PROVISIONS OF THE SERIES A PREFERRED. In addition to any other rights provided by law, so long as any shares of Series A Preferred shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding shares of the Series A Preferred, amend or repeal any provision of, or add any provision to, the Corporation's Certificate of Incorporation or Bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred, or increase or decrease the number of shares of Series A Preferred authorized hereby. (d) PROTECTIVE PROVISIONS OF THE CLASS B COMMON. In addition to any other 7 rights provided by law, so long as any shares of Class B Common shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding shares of the Class B Common, amend or repeal any provision of, or add any provision to, the Corporation's Certificate of Incorporation or Bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Class B Common, or increase or decrease the number of shares of Class B Common authorized hereby. In addition, so long as the TA Entities or any of their respective Affiliates hold 1,666,042 shares of Class B Common (appropriately adjusted for any stock split, dividend, combination, recapitalization or the like), the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding shares of the Class B Common: (i) (A) take any action or enter into any agreement to authorize, sell or issue any equity securities or bonds, certificates of indebtedness or debentures convertible or exchangeable into or for equity securities of the Corporation (x) which is senior to or has a preference or priority as to dividends or redemption rights or with respect to the distribution of assets or other amounts in connection with a liquidation, dissolution or winding up of the Corporation or an Exit Event over the Class B Common or (y) if the Corporation's pre-money valuation is less than $255 million, which is on a pari passu basis as to dividends or redemption rights or with respect to the distribution of assets or other amounts in connection with a liquidation, dissolution or winding up of the Corporation or an Exit Event with the Class B Common or (B) issue or make available for issuance (pursuant to the exercise of options or otherwise) more than 4,220,046 shares of Junior Common Stock (as appropriately adjusted for stock splits, reverse stock splits and the like) to employees, directors, and consultants in their capacities as such of the Corporation pursuant to the Corporation's stock and option plans or otherwise, provided that any options for such shares that expire or terminate unexercised or are otherwise forfeited and any such shares repurchased by the Corporation shall not be counted toward such maximum number. (ii) except as otherwise expressly provided for in the Stock Purchase and Redemption Agreement, dated as of December 31, 1998, by and among the Corporation, the holders of Class B Common and the other parties named therein and except for dividends declared or paid on the Series A Preferred or Class B Common pursuant to this Certificate of Incorporation, declare or pay any dividends or make any distributions of cash, property or securities of the Corporation with respect to any shares of its Junior Common Stock or any other class of its capital stock, or directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Junior Common Stock, or any other class of its capital stock; PROVIDED, HOWEVER, that this restriction shall not apply to (i) dividends payable by the Corporation solely in Common Stock, (ii) the repurchase of shares of Junior Common Stock, other than shares of Junior Common Stock owned by Anil Singhal and Narendra Popat, pursuant to agreements under which the Corporation has the option or obligation to repurchase such shares upon the occurrence of certain events, including termination of employment and (iii) subject to Section 12.4 of the Amended and Restated Rights Agreement, dated as of January 15, 1999, by and among the Corporation, the holders of Class B Common and the other parties named therein, 8 as the same may be amended from time to time, the purchase of shares pursuant to any right of first refusal to acquire shares in the event of certain proposed transfers; (iii) acquire any other corporation or business concern whether by acquisition of assets, capital stock or otherwise, and whether in consideration of the payment of cash, the issuance of capital stock or otherwise, or make any material investment in another business entity or any joint venture or similar arrangement in one transaction or a series of related transactions in which the value of any such acquisition or transaction or series of related acquisitions or transactions exceeds $20 million; (iv) recapitalize or reclassify any class or series of any Junior Common Stock into (x) shares which are senior to or have any preference or priority as to dividends or redemption rights or with respect to the distribution of assets or other amounts in connection with a liquidation, dissolution or winding up of the Corporation or an Exit Event over the Class B Common or (y) if the Corporation's pre-money valuation is less than $255 million, shares which are on a pari passu basis as to dividends or redemption rights or with respect to the distribution of assets or other amounts in connection with a liquidation, dissolution or winding up of the Corporation or an Exit Event with the Class B Common; (v) liquidate or dissolve the Corporation or sell, lease, convey, exchange, transfer, or otherwise dispose of all or substantially all of the assets of the Corporation unless the holders of Class B Common will receive net proceeds of at least $12.80 per share of Class B Common (as originally issued and as appropriately adjusted for stock splits, reverse stock splits and the like) as a result of such liquidation, dissolution or transaction, payable at such time and in such manner as the holders of Junior Common Stock are paid with respect to their Junior Common Stock on such liquidation, dissolution or transaction; or (vi) merge or consolidate with any other corporation unless the holders of Class B Common will receive net proceeds of at least $12.80 per share of Class B Common (as originally issued and as appropriately adjusted for stock splits, reverse stock splits and the like) as a result of such transaction, payable at such time and in such manner as the holders of Junior Common Stock are paid with respect to their Junior Common Stock on such transaction. (e) An "Affiliate" of an entity referenced herein shall mean (i) any entity who controls, is controlled by, or is under common control with such entity, or (ii) any constituent partner or stockholder of such entity. 4. CONVERSION. The holders of stock of this Corporation have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT. Each share of Series A Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Series A Preferred, into such number of fully paid and nonassessable shares of Junior Common Stock as is determined by dividing $9.50 by the Conversion Price for such series, determined as hereinafter provided, in effect at 9 the time of the conversion. The Junior Common Stock issuable upon such conversion at the option of a holder of Series A Preferred shall be Non-Voting Common, provided that, in the event that any such conversion at the option of a holder of Series A Preferred takes place at any time following such time as the Corporation shall become subject to the reporting requirements of Section 15(d) or Section 12(g) of the Securities Exchange Act of 1934, as amended (or any comparable successor law), then the Junior Common Stock issuable upon such conversion shall be Voting Common. Each share of Class B Common shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Class B Common, into such number of fully paid and nonassessable shares of Voting Common as is determined by dividing $6.388051 by the Conversion Price for such series, determined as hereinafter provided, in effect at the time of the conversion. The prices at which shares of Junior Common Stock shall be deliverable upon conversion (the "Conversion Prices" and each a "Conversion Price") shall initially be $2.375 per share of Junior Common Stock in the case of the Series A Preferred (taking into account the stock splits as stock dividends effected by the Corporation with respect to the Junior Common Stock in July 1996 and on December 14, 1998) and $6.388051 per share of Voting Common in the case of the Class B Common. Such initial Conversion Prices shall be subject to adjustment as hereinafter provided. Upon conversion, all declared and unpaid dividends on the Series A Preferred or Class B Common shall be paid, to the extent funds are legally available therefor, either in cash or in shares of Junior Common Stock of the same class as those issued upon such conversion, at the election of the Corporation, wherein the shares of such Junior Common Stock shall be valued at the fair market value at the time of such conversion, as determined in good faith by the Board of Directors of the Corporation. (b) AUTOMATIC CONVERSION OF SERIES A PREFERRED. Each share of Series A Preferred shall automatically be converted into shares of (i) Voting Common at the then effective Conversion Prices upon the closing of a firm underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of shares of the Corporation's Common Stock at a price per share of Common Stock, prior to underwriter commissions and offering expenses, of not less than $4.75 per share (taking into account the stock splits as stock dividends effected by the Corporation with respect to the Junior Common Stock in July 1996 and on December 14, 1998 and as otherwise appropriately adjusted for any stock split, dividend, combination, recapitalization or the like) and an aggregate offering price (before deduction of underwriter commissions and offering expenses) of not less than $10,000,000; or (ii) Voting Common at the then effective Conversion Prices upon the written election of holders of not less than two-thirds of the then outstanding Series A Preferred at any time following such time as the Corporation shall become subject to the reporting requirements of Section 15(d) or Section 12(g) of the Securities Exchange Act of 1934, as amended (or any comparable successor law); or (iii) Non-Voting Common at the then effective Conversion Prices upon the written election of holders of not less than two-thirds of the then outstanding Series A Preferred at any other time. In the event of the automatic conversion of the Series A Preferred upon a public offering as aforesaid in subsection (i) above, the person(s) entitled to receive the Voting Common issuable upon such conversion of Series A Preferred shall not be deemed to have 10 converted such Series A Preferred until immediately prior to the closing of such sale of securities. (c) CONVERSION OF COMMON. (i) AUTOMATIC CONVERSION OF NON-VOTING COMMON. Each share of Non-Voting Common shall automatically be converted into one share of Voting Common upon such time as the Corporation shall become subject to the reporting requirements of Section 15(d) or Section 12(g) of the Securities Exchange Act of 1934, as amended (or any comparable successor law). In the event of the automatic conversion of the Non-Voting Common as aforesaid, the person(s) entitled to receive the Voting Common issuable upon such conversion of Non-Voting Common shall not be deemed to have converted such Non-Voting Common until immediately prior to the time the Corporation becomes a reporting company as aforesaid. (ii) OPTIONAL CONVERSION OF VOTING COMMON INTO NON-VOTING COMMON. A holder of a share of Voting Common may at any time convert such share into one share of Non-Voting Common by surrendering the certificate therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Voting Common and by giving written notice of such election to the Corporation at such office. The Corporation shall, as soon as practicable after such delivery, issue and deliver at such office to such holder of Voting Common, a certificate for the number of shares of Non-Voting Common to which he shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of shares to be converted and the person or persons entitled to receive the shares of Non-Voting Common issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Non-Voting Common on such date. The Corporation shall take all appropriate actions necessary to increase the number of Non-Voting Common to enable the conversion of the Voting Common as provided herein. (iii) AUTOMATIC CONVERSION OF CLASS B COMMON. Each share of Class B Common shall automatically be converted into shares of (i) Voting Common at the then effective Conversion Price upon the closing of a Qualified Public Offering; or (ii) Voting Common at the then effective Conversion Price upon the written election of holders of not less than a majority of the then outstanding Class B Common, voting as a class, at any other time. In the event of the automatic conversion of the Class B Common upon a Qualified Public Offering, the person(s) entitled to receive the Voting Common issuable upon such conversion of Class B Common shall not be deemed to have converted such Class B Common until immediately prior to the closing of such Qualified Public Offering. (d) MECHANICS OF CONVERSION. No fractional shares of Junior Common Stock shall be issued upon conversion of Series A Preferred or Class B Common. In lieu of any fractional shares to which the holder would otherwise be entitled (after aggregating all shares of Series A Preferred and Class B Common held by such holder such that the maximum number of whole shares of Junior Common Stock is issued to such holder upon 11 conversion), the Corporation shall pay cash equal to such fraction multiplied by the then effective Conversion Prices. Before any holder of Series A Preferred or Class B Common shall be entitled to convert the same into full shares of Junior Common Stock and to receive certificates therefor, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series A Preferred or Class B Common, as applicable, and shall give written notice to the Corporation at such office that he elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to paragraph (b) or (c) hereof, the outstanding shares of Series A Preferred, Class B Common and Non-Voting Common shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Voting Common issuable upon such automatic conversion unless the certificates evidencing such shares of Series A Preferred, Class B Common or Non-Voting Common are either delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall, as soon as practicable after such delivery, or after such agreement and indemnification, issue and deliver at such office to such holder of Series A Preferred, Class B Common or Non-Voting Common, a certificate or certificates for the number of shares of Junior Common Stock to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred or Class B Common to be converted, or, in the case of automatic conversion, on the date of closing of the offering or the date of written election to convert, and the person or persons entitled to receive the shares of Junior Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Junior Common Stock on such date. (e) ADJUSTMENTS OF CONVERSION PRICE FOR DILUTING ISSUES. (i) ADJUSTMENTS FOR DILUTIVE ISSUANCES. A. SPECIAL DEFINITIONS. For purposes of this Section 4(e), the following definitions shall apply: (1) "OPTIONS" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Junior Common Stock or Convertible Securities. (2) "ORIGINAL ISSUE DATE" shall mean the date on which the first share of Class B Common was first issued. 12 (3) "CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness, shares or other securities convertible into or exchangeable for Junior Common Stock. (4) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Junior Common Stock issued (or, pursuant to Section 4(e)(i)(C), deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Junior Common Stock issued or issuable: (aa) upon conversion of the Series A Preferred into Junior Common Stock or upon conversion of the Class B Common into Voting Common or upon conversion of the Non-Voting Common in Voting Common or upon conversion of the Voting Common into Non-Voting Common; (bb) to directors and employees of, consultants to, the Corporation pursuant to an option plan, purchase plan or other employee or consultant incentive plan, pursuant to stock grants or any other plan or arrangement approved by the Compensation Committee of the Board of Directors; or (cc) as a dividend or distribution on Series A Preferred or Class B Common or pursuant to any event for which adjustment is made pursuant to subparagraph (e)(ii), (iii) or (iv) hereof. (5) "ISSUE PRICE" with respect to any issuance of Additional Shares of Common Stock shall mean the price per share obtained by dividing the total consideration received by the Corporation in respect of such Additional Shares of Common Stock, computed in accordance with Section 4(e)(i)(E) hereof, by the aggregate number of shares of such Additional Shares of Common Stock issued, computed in accordance with Section 4(e)(i)(C) hereof. B. NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the Conversion Price of a particular share of Class B Common shall be made hereunder in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price in effect on the date of, and immediately prior to, such issue for such share of Class B Common. C. DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. 13 (1) OPTIONS AND CONVERTIBLE SECURITIES. Except as otherwise provided in Section 4(e)(i)(B), in the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Junior Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue of Options or Convertible Securities or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 4(e)(i)(E) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (aa) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Junior Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (bb) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (I) in the case of Convertible Securities or Options for Junior Common Stock, the only Additional Shares of Common Stock issued were shares of Junior Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon 14 such conversion or exchange, and (II) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (cc) no readjustment pursuant to clause (bb) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (dd) in the case of any Options which expire by their terms not more than thirty (30) days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. D. ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(e)(i)(C)) without consideration or for a consideration per share less than the Conversion Price of the Class B Common in effect on the date of and immediately prior to such issue, then and in such event such Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Junior Common Stock outstanding immediately prior to such issue plus the number of shares of Junior Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price, and the denominator of which shall be the number of shares of Junior Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; and provided further that, for the purposes of this Section 4(e)(i), all shares of Junior Common Stock issuable upon conversion of outstanding Options, Convertible Securities, Series A Preferred and Class B Common (but not including shares of Voting Common issuable upon conversion of Non-Voting Common) shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock are 15 deemed issued pursuant to Section 4(e)(i)(C), such Additional Shares of Common Stock shall be deemed to be outstanding. E. DETERMINATION OF CONSIDERATION. For purposes of this Section 4(e), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (1) CASH AND PROPERTY: Such consideration shall: (aa) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (bb) insofar as it consists of services or property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (cc) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (aa) and (bb) above, as determined in good faith by the Board of Directors. (2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(e)(i)(C), relating to Options and Convertible Securities, shall be determined by dividing (aa) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise in full of such Options or the conversion or exchange in full of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise in full of such Options for Convertible Securities and the conversion or exchange in full of such Convertible Securities, by (bb) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment 16 of such number) issuable upon the exercise in full of such Options or the conversion or exchange in full of such Convertible Securities. (ii) ADJUSTMENTS FOR SUBDIVISIONS, COMBINATIONS OR CONSOLIDATIONS OF COMMON STOCK. In the event the outstanding shares of Junior Common Stock shall be subdivided (by stock split, stock dividend or otherwise), into a greater number of shares of Junior Common Stock, the Conversion Prices of the Series A Preferred and the Class B Common then in effect shall, concurrently with the effectiveness of such subdivision, be proportionately decreased (it being understood that the Conversion Price for the Series A Preferred has been heretofore adjusted to take into account the stock splits as stock dividends effected by the Corporation with respect to the Junior Common Stock in July 1996 and on December 14, 1998). In the event the outstanding shares of Junior Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Junior Common Stock, the Conversion Prices of the Series A Preferred and the Class B Common then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. The Corporation shall not subdivide, combine or consolidate any series of Junior Common Stock without effecting a proportional subdivision, combination or consolidation of all other series of Junior Common Stock. (iii) ADJUSTMENTS FOR OTHER DISTRIBUTIONS. In the event the Corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Junior Common Stock entitled to receive, any distribution payable in securities of the Corporation other than shares of Junior Common Stock and other than as otherwise adjusted in this Section 4, then and in each such event provision shall be made so that the holders of Series A Preferred and Class B Common shall receive upon conversion thereof, in addition to the number of shares of Junior Common Stock receivable thereupon, the amount of securities of the Corporation which they would have received had their shares of Series A Preferred or Class B Common been converted into Junior Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 4 with respect to the rights of the holders of the Series A Preferred or Class B Common. The Corporation shall not distribute securities of the Corporation to holders of any series of Junior Common Stock without effecting a proportional and equivalent distribution to the holders of all other series of Junior Common Stock. (iv) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If the Junior Common Stock issuable upon conversion of the Series A Preferred or the Class B Common shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision, combination or consolidation of shares provided for above), the Conversion Prices of the Series A Preferred and the Class B Common then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Series A Preferred and the Class B Common shall be convertible into, in lieu of the number of shares of Junior Common Stock which the holders would otherwise have been 17 entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Junior Common Stock that would have been subject to receipt by the holders upon conversion of such shares of Series A Preferred or the Class B Common immediately before that change. No series of Junior Common Stock shall be so changed into shares of any other class or classes of stock unless a proportional and equivalent change shall be made with respect to all other series of Junior Common Stock. (f) NO IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Non-Voting Common, Series A Preferred and Class B Common against impairment. (g) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Non-Voting Common, Series A Preferred and Class B Common a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Non-Voting Common, Series A Preferred or Class B Common, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Prices at the time in effect, and (iii) the number of shares of Junior Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of such holder's shares of Non-Voting Common, Series A Preferred or Class B Common. 5 STATUS OF CONVERTED STOCK. In case any shares of Series A Preferred or Class B Common shall be converted pursuant to Section 4 hereof, the shares so converted shall be canceled and shall not be issuable by the Corporation. From time to time, the Certificate of Incorporation of the Corporation shall be appropriately revised to reflect the corresponding reduction in the Corporation's authorized capital stock. 18 6 REDEMPTION. (a) REDEMPTION UPON REQUEST. At any time following January 15, 2003, the holders of not less than a majority of the outstanding shares of Class B Common shall have the right to require the Corporation to redeem up to the Redemption Percentage (as set forth below) of the Class B Common held by all holders of Class B Common at the Redemption Price. The foregoing election shall be made by such holders giving the Corporation and each of the other holders of Class B Common not less than thirty (30) days prior written notice, setting forth the date for such redemption, which redemption date shall be no earlier than sixty (60) days after the expiration of such 30-day notice period. The "Redemption Percentage" for each holder of Class B Common shall equal the following cumulative percentage of each such holder's Class B Common for the applicable time periods set forth below, in each case reduced by the cumulative percentage of each such holder's Class B Common previously redeemed pursuant to this Section 6(a):
TIME PERIODS REDEMPTION PERCENTAGE ------------ --------------------- One year period following January 15, 2003 33.3% One year period following January 15, 2004 66.7% One year period following January 15, 2005 and each year thereafter 100.0%
(b) REDEMPTION DATE; REDEMPTION PRICE. Upon the election of the holders of not less than a majority the outstanding Class B Common to require the Corporation to redeem the Class B Common pursuant to Section 6(a), all holders of Class B Common shall be deemed to have elected to require the Class B Common to be so redeemed in accordance with the terms thereof. The date upon which a redemption is to occur (whether or not such redemption actually does occur) in accordance with Section 6(a) shall be referred to as a "Redemption Date." The redemption price for each share of Class B Common redeemed hereunder shall be equal to the sum of (i) $6.388051 per share (as originally issued and appropriately adjusted for stock splits and the like) plus (ii) all declared but unpaid dividends thereon, if any, through the Redemption Date (the "Redemption Price"). If at Redemption Date shares of Class B Common are unable to be redeemed (as contemplated by Section 6(c) below), then holders of Class B Common shall also be entitled to dividends and interest pursuant to Sections 6(c) and (d). The aggregate Redemption Price shall be payable in cash in immediately available funds to the respective holders of the Class B Common on the Redemption Date (subject to Section 6(c)). Upon any redemption of the Class B Common as provided herein, holders of fractional shares shall receive proportionate amounts in respect thereof. Until the aggregate Redemption Price has been paid for all shares of Class B Common being redeemed pursuant to this Section 6(a): (A) no dividend whatsoever shall be 19 paid or declared, and no distribution shall be made, on any capital stock of the Corporation ranking on liquidation junior to the Class B Common; and (B) no shares of capital stock of the Corporation (other than the Class B Common in accordance with this Section 6) shall be purchased, redeemed or acquired by the Corporation and no monies shall be paid into or set aside or made available for a sinking fund for the purchase, redemption or acquisition thereof. (c) REDEMPTION PROHIBITED. If, at a Redemption Date, the Corporation is prohibited under the General Corporation Law of the State of Delaware from redeeming, or otherwise fails to redeem, all shares of Class B Common for which redemption is required hereunder, then it shall redeem such shares on a pro-rata basis among the holders of Class B Common in proportion to the full respective redemption amounts to which they are entitled hereunder to the extent possible and shall redeem the remaining shares to be redeemed as soon as the Corporation is not prohibited from redeeming some or all of such shares under the General Corporation Law of the State of Delaware. Any shares of Class B Common not redeemed shall remain outstanding and entitled to all of the rights and preferences provided in this Article Fourth. Subject to the Corporation's fulfillment of its fiduciary duties to all constituencies of the Corporation, the Corporation shall take such action as shall be reasonable under the circumstances to review and promptly remove any impediment to its ability to redeem Class B Common under the circumstances contemplated by this Section 6(c). In the event that the Corporation fails for any reason to redeem shares for which redemption is required pursuant to this Section 6, including without limitation due to a prohibition of such redemption under the General Corporation Law of the State of Delaware, then during the period from the applicable Redemption Date through the date on which such shares are redeemed, the Redemption Price of such shares that the Corporation has failed to redeem shall bear interest, with such interest to accrue daily in arrears and to be compounded annually, at the rate of fifteen percent (15%) per annum. (d) DIVIDEND AFTER REDEMPTION DATE. From and after a Redemption Date, no shares of Class B Common subject to redemption shall be entitled to dividends, if any, as contemplated by Section 1; PROVIDED, HOWEVER, that in the event that shares of Class B Common are unable to be redeemed and continue to be outstanding in accordance with Section 6(c), such shares shall continue to be entitled to dividends and interest thereon as provided in Sections 1 and 6(c) until the date on which such shares are actually redeemed by the Corporation. (e) SURRENDER OF CERTIFICATES. Upon receipt of the Redemption Price by certified check or wire transfer, each holder of shares of Class B Common to be redeemed shall surrender the certificate or certificates representing such shares to the Corporation, duly assigned or endorsed for transfer (or accompanied by duly executed stock powers relating thereto), or, in the event the certificate or certificates are lost, stolen or missing, shall deliver an affidavit or agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith with respect to such certificates at the principal executive office of the Corporation or the office of the transfer agent for the Class B Common and each surrendered certificate shall be canceled and retired; PROVIDED, HOWEVER, that if the Corporation is prohibited from redeeming shares of Class B Common as provided in Section 20 6(c), the holder shall not be required to surrender said certificate(s) to the Corporation until such holder has received a new stock certificate for those shares of Class B Common not so redeemed. FIFTH. The Board of Directors of the Corporation is expressly authorized to make, alter or repeal Bylaws of the Corporation, but the stockholders may make additional Bylaws and may alter or repeal any Bylaw whether adopted by them or otherwise. SIXTH. Elections of directors need not be by written ballot except and to the extent provided in the Bylaws of the Corporation. SEVENTH. 1. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, trustee, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 2. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, trustee, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery 21 of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court Chancery of the State of Delaware or such other court shall deem proper. 3. To the extent that any person referred to in Paragraphs (1) and (2) of this Article SEVENTH has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to therein, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 4. Any indemnification under paragraphs (1) and (2) of this Article SEVENTH (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in such paragraphs (1) and (2) of this Article SEVENTH. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. 5. Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of any undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article SEVENTH. Such expenses (including attorneys' fees) incurred by other employees and agents of the Corporation may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. 6. The indemnification and advancement of expenses provided by, or granted pursuant to, the other Paragraphs of this Article SEVENTH shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 7. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, trustee, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another Corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred 22 by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article SEVENTH. 8. For purposes of this Article SEVENTH, references to "the Corporation" include, in addition to the resulting Corporation, any constituent Corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued would have had power and authority to indemnify its directors, officers and employees or agents so that any person who is or was a director, trustee, officer, employee or agent of such constituent Corporation, or is or was serving at the request of such constituent Corporation as a director, trustee, officer, employee or agent of another Corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article SEVENTH with respect to the resulting or surviving Corporation as he would have with respect to such constituent Corporation if its separate existence had continued. 9. For purposes of this Article SEVENTH, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, trustee, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, trustee, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article SEVENTH. 10. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article SEVENTH shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. EIGHTH. A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that exculpation from liability is not permitted under the General Corporation Law of the State of Delaware as in effect when such breach occurred. No amendment or repeal of this Article EIGHTH shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. 23 IN WITNESS WHEREOF, NetScout Systems, Inc. has caused this certificate to be executed by Narendra Popat, its President, this 15th day of January, 1999. NETSCOUT SYSTEMS, INC., a Delaware corporation By: /S/ NARENDRA POPAT -------------------------------------------- Narendra Popat, President 24 EX-3.2 3 EXHIBIT 3.2 Exhibit 3.2 FORM OF CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NETSCOUT SYSTEMS, INC. NetScout Systems, Inc.(the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the Corporation adopted resolutions proposing and declaring advisable the following amendments to the Amended and Restated Certificate of Incorporation of the Corporation: RESOLVED: That the first two paragraphs of Article FOURTH of the Corporation's Amended and Restated Certificate of Incorporation, as amended to date, shall be amended to read in their entirety as follows: FOURTH. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is one hundred fifty million six hundred thirty-one thousand five hundred seventy-nine (150,631,579) shares. One hundred fifty million (150,000,000) shares shall be Common Stock and six hundred thirty-one thousand five hundred seventy-nine (631,579) shares shall be Preferred Stock, each of which shall have a par value of $0.001 per share. One hundred twenty-one million seven hundred ninety-eight thousand three hundred eighty-two (121,798,382) shares of the Common Stock shall be designated "Voting Common Stock" (hereinafter "Voting Common"), which shall have a par value of $0.001 per share. Twenty-one million two hundred twenty-four thousand three hundred sixty-four (21,224,364) shares of the Common Stock shall be designated "Non-Voting Common Stock" (hereinafter "Non-Voting Common"), which shall have a par value of $0.001 per share. Six million nine hundred seventy-seven thousand two hundred fifty-four (6,977,254) shares of the Common Stock shall be designated "Class B Convertible Common Stock" (hereinafter "Class B Common"), which shall have a par value of $0.001 per share. The Voting Common and the Non-Voting Common shall hereinafter be referred to collectively as "Junior Common Stock." Six hundred thirty-one thousand five hundred seventy-nine (631,579) shares of the Preferred Stock shall be designated "Series A Preferred Stock" (hereinafter "Series A Preferred"), which shall have a par value of $0.001 per share. SECOND: The foregoing amendment to the Amended and Restated Certificate of Incorporation of the Corporation was duly adopted by vote of the stockholders of the Corporation in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be executed by Narendra Popat, its President, this ___ day of ____, 1999. NETSCOUT SYSTEMS, INC. By: --------------------------------- Narendra Popat, President EX-3.3 4 EXHIBITS 3.3 AND 4.1 Exhibits 3.3 and 4.1 FORM OF THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NETSCOUT SYSTEMS, INC. (INCORPORATED APRIL 21, 1993) * * * * * * NetScout Systems, Inc. (The "Corporation"), a corporation organized and existing under and by virtue of the General Law of the State of Delaware, hereby certifies as follows: The original Certificate of Incorporation of the Corporation was filed with the Secretary of State on April 21, 1993, under the Corporation's previous name, Frontier Software Development, Inc. This Third Amended and Restated Certificate of Incorporation has been duly adopted by the Corporation in accordance with Sections 228, 242 and 245 of the General Corporation Law of Delaware. The text of the Certificate of Incorporation of the Corporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: FIRST. The name of the Corporation is NetScout Systems, Inc. SECOND. The address of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, Wilmington, County of New Castle, Delaware. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 155,000,000 shares, consisting of 150,000,000 shares of Common Stock with a par value of $.001 per share (the "Common Stock") and 5,000,000 shares of Preferred Stock with a par value of $.001 per share (the "Preferred Stock"). -2- Immediately upon filing of this Third Amended and Restated Certificate of Incorporation, the Corporation's previously authorized, issued and outstanding Voting Common Stock shall be renamed and hereinafter known as "Common Stock." A description of the respective classes of stock and a statement of the designations, powers, preferences and rights, and the qualifications, limitations and restrictions of the Preferred Stock and Common Stock are as follows: A. COMMON STOCK 1. GENERAL. All shares of Common Stock will be identical and will entitle the holders thereof to the same rights, powers and privileges. The rights, powers and privileges of the holders of the Common Stock are subject to and qualified by the rights of holders of the Preferred Stock. 2. DIVIDENDS. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 3. DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, each issued and outstanding share of Common Stock shall entitle the holder thereof to receive an equal portion of the net assets of the Corporation available for distribution to the holders of Common Stock, subject to any preferential rights of any then outstanding Preferred Stock. 4. VOTING RIGHTS. Except as otherwise required by law or this Third Amended and Restated Certificate of Incorporation, each holder of Common Stock shall have one vote in respect of each share of stock held of record by such holder on the books of the Corporation for the election of directors and on all matters submitted to a vote of stockholders of the Corporation. Except as otherwise required by law or provided herein, holders of Common Stock shall vote together with holders of the Preferred Stock as a single class, subject to any special or preferential voting rights of any then outstanding Preferred Stock. There shall be no cumulative voting. B. PREFERRED STOCK The Preferred Stock may be issued in one or more series at such time or times and for such consideration or considerations as the Board of Directors of the Corporation may determine. Each series shall be so designated as to distinguish the shares thereof from the shares of all other series and classes. Except as otherwise provided in this Third Amended and Restated Certificate of Incorporation, different series of Preferred Stock shall not be construed to constitute different classes of shares for the purpose of voting by classes. -3- The Board of Directors is expressly authorized to provide for the issuance of all or any shares of the undesignated Preferred Stock in one or more series, each with such designations, preferences, voting powers (or special, preferential or no voting powers), relative, participating, optional or other special rights and privileges and such qualifications, limitations or restrictions thereof as shall be stated in the resolution or resolutions adopted by the Board of Directors to create such series, and a certificate of said resolution or resolutions (a "Certificate of Designation") shall be filed in accordance with the General Corporation Law of the State of Delaware. The authority of the Board of Directors with respect to each such series shall include, without limitation of the foregoing, the right to provide that the shares of each such series may be: (i) subject to redemption at such time or times and at such price or prices; (ii) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series; (iii) entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; (iv) convertible into, or exchangeable for, shares of any other class or classes of stock, or of any other series of the same or any other class or classes of stock of the Corporation at such price or prices or at such rates of exchange and with such adjustments, if any; (v) entitled to the benefit of such limitations, if any, on the issuance of additional shares of such series or shares of any other series of Preferred Stock; or (vi) entitled to such other preferences, powers, qualifications, rights and privileges, all as the Board of Directors may deem advisable and as are not inconsistent with law and the provisions of this Third Amended and Restated Certificate of Incorporation. FIFTH. The Corporation is to have perpetual existence. SIXTH. The following provisions are included for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its Board of Directors and stockholders: 1. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors of the Corporation. 2. The Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal the By-laws of the Corporation, subject to any limitation thereof contained in the By-laws. The stockholders shall also have the power to adopt, amend or repeal the By-laws of the Corporation; PROVIDED, HOWEVER, that, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Third Amended and Restated Certificate of Incorporation, the affirmative vote of the holders of at least seventy-five percent (75%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of the By-laws of the Corporation. -4- 3. Stockholders of the Corporation may not take any action by written consent in lieu of a meeting. 4. Special meetings of stockholders may be called at any time only by the President, the Chairman of the Board of Directors (if any) or a majority of the Board of Directors. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. 5. The books of the Corporation may be kept at such place within or without the State of Delaware as the By-laws of the Corporation may provide or as may be designated from time to time by the Board of Directors of the Corporation. SEVENTH. 1. NUMBER OF DIRECTORS. The number of directors which shall constitute the whole Board of Directors shall be determined by resolution of a majority of the Board of Directors, but in no event shall the number of directors be less than three. The number of directors may be decreased at any time and from time to time by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. The directors shall be elected at the annual meeting of stockholders by such stockholders as have the right to vote on such election. Directors need not be stockholders of the Corporation. 2. CLASSES OF DIRECTORS. The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III. No one class shall have more than one director more than any other class. 3. ELECTION OF DIRECTORS. Elections of directors need not be by written ballot except as and to the extent provided in the By-laws of the Corporation. 4. TERMS OF OFFICE. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided, however, that each initial director in Class I shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year ending March 31, 2000; each initial director in Class II shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year ending March 31, 2001; and each initial director in Class III shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year ending March 31, 2002. 5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as director of the class of which he or she is a member until the expiration of such director's current term or his or her prior death, removal or resignation and (ii) the -5- newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided for from time to time by resolution adopted by a majority of the directors then in office, though less than a quorum. No decrease in the number of directors constituting the whole Board of Directors shall shorten the term of an incumbent Director. 6. TENURE. Notwithstanding any provisions to the contrary contained herein, each director shall hold office until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. 7. VACANCIES. Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board of Directors, may be filled only by vote of a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office, if applicable, and a director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next election of the class for which such director shall have been chosen and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. 8. QUORUM. A majority of the total number of the whole Board of Directors shall constitute a quorum at all meetings of the Board of Directors. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified; provided, however, that in no case shall less than one-third (1/3) of the number so fixed constitute a quorum. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. 9. ACTION AT MEETING. At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law or the Corporation's By-laws. 10. REMOVAL. Any one or more or all of the directors may be removed without cause only by the holders of at least seventy-five percent (75%) of the shares then entitled to vote at an election of directors. Any one or more or all of the directors may be removed with cause only by the holders of at least a majority of the shares then entitled to vote at an election of directors. 11. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC. Advance notice of stockholder nominations for election of directors and other business to be -6- brought by stockholders before a meeting of stockholders shall be given in the manner provided in the By-laws of the Corporation. 12. RIGHTS OF PREFERRED STOCK. The provisions of this Article are subject to the rights of the holders of any series of Preferred Stock from time to time outstanding. EIGHTH. No director (including any advisory director) of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability; provided, however, that, to the extent provided by applicable law, this provision shall not eliminate the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. NINTH. The Board of Directors of the Corporation, when evaluating any offer of another party (a) to make a tender or exchange offer for any equity security of the Corporation or (b) to effect a business combination, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation as whole, be authorized to give due consideration to any such factors as the Board of Directors determines to be relevant, including, without limitation: (i) the interests of the Corporation's stockholders, including the possibility that these interests might be best served by the continued independence of the Corporation; (ii) whether the proposed transaction might violate federal or state laws; (iii) not only the consideration being offered in the proposed transaction, in relation to the then current market price for the outstanding capital stock of the Corporation, but also to the market price for the capital stock of the Corporation over a period of years, the estimated price that might be achieved in a negotiated sale of the Corporation as a whole or in part or through orderly liquidation, the premiums over market price for the securities of other corporations in similar transactions, current political, economic and other factors bearing on securities prices and the Corporation's financial condition and future prospects; and (iv) the social, legal and economic effects upon employees, suppliers, customers, creditors and others having similar relationships with the Corporation, upon the communities in which the Corporation conducts its business and upon the economy of the state, region and nation. -7- In connection with any such evaluation, the Board of Directors is authorized to conduct such investigations and engage in such legal proceedings as the Board of Directors may determine. TENTH. 1. ACTIONS, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) (all such persons being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Notwithstanding anything to the contrary in this Article, except as set forth in Section 6 below, the Corporation shall not indemnify an Indemnitee seeking indemnification in connection with a proceeding (or part thereof) initiated by the Indemnitee unless the initiation thereof was approved by the Board of Directors of the Corporation. 2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any Indemnitee who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the -8- best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses (including attorneys' fees) which the Court of Chancery of Delaware or such other court shall deem proper. 3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding the other provisions of this Article, to the extent that an Indemnitee has been successful, on the merits or otherwise, in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article, or in defense of any claim, issue or matter therein, or on appeal from any such action, suit or proceeding, he shall be indemnified against all expenses (including attorneys' fees) actually and reasonably incurred by him or on his behalf in connection therewith. Without limiting the foregoing, if any action, suit or proceeding is disposed of, on the merits or otherwise (including a disposition without prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of guilty or NOLO CONTENDERE by the Indemnitee, (iv) an adjudication that the Indemnitee did not act in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and (v) with respect to any criminal proceeding, an adjudication that the Indemnitee had reasonable cause to believe his conduct was unlawful, the Indemnitee shall be considered for the purpose hereof to have been wholly successful with respect thereto. 4. NOTIFICATION AND DEFENSE OF CLAIM. As a condition precedent to his right to be indemnified, the Indemnitee must notify the Corporation in writing as soon as practicable of any action, suit, proceeding or investigation involving him for which indemnity will or could be sought. With respect to any action, suit, proceeding or investigation of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee. After notice from the Corporation to the Indemnitee of its election so to assume such defense, the Corporation shall not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with such claim, other than as provided below in this Section 4. The Indemnitee shall have the right to employ his own counsel in connection with such claim, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and the Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel for the Indemnitee -9- shall be at the expense of the Corporation, except as otherwise expressly provided by this Article. The Corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any claim brought by or in the right of the Corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. 5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6 below, in the event that the Corporation does not assume the defense pursuant to Section 4 of this Article of any action, suit, proceeding or investigation of which the Corporation receives notice under this Article, any expenses (including attorneys' fees) incurred by an Indemnitee in defending a civil or criminal action, suit, proceeding or investigation or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter, PROVIDED, HOWEVER, that the payment of such expenses incurred by an Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article. Such undertaking may be accepted without reference to the financial ability of such person to make such repayment. 6. PROCEDURE FOR INDEMNIFICATION. In order to obtain indemnification or advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the Indemnitee shall submit to the Corporation a written request, including in such request such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification or advancement of expenses. Any such indemnification or advancement of expenses shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the Corporation determines, by clear and convincing evidence, within such 60-day period that the Indemnitee did not meet the applicable standard of conduct set forth in Section 1 or 2, as the case may be. Such determination shall be made in each instance by (a) a majority vote of the directors of the Corporation who are not at that time parties to the action, suit or proceeding in question ("disinterested directors"), even though less than a quorum, (b) by a committee of disinterested directors designated by a majority vote of disinterested directors, even though less than a quorum, (c) if there are no such disinterested directors, or if such disinterested directors so direct, by independent legal counsel (who may be regular legal counsel to the corporation) in a written opinion, (d) a majority vote of a quorum of the outstanding shares of stock of all classes entitled to vote for directors, voting as a single class, which quorum shall consist of stockholders who are not at that time parties to the action, suit or proceeding in question, or (e) a court of competent jurisdiction. 7. REMEDIES. The right to indemnification or advances as granted by this Article shall be enforceable by the Indemnitee in any court of competent jurisdiction if the Corporation denies such request, in whole or in part, or if no disposition thereof is -10- made within the 60-day period referred to above in Section 6. Unless otherwise provided by law, the burden of proving that the Indemnitee is not entitled to indemnification or advancement of expenses under this Article shall be on the Corporation. Neither the failure of the Corporation to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation pursuant to Section 6 that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. The Indemnitee's expenses (including attorneys' fees) incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. 8. SUBSEQUENT AMENDMENT. No amendment, termination or repeal of this Article or of the relevant provisions of the General Corporation Law of the State of Delaware or any other applicable laws shall affect or diminish in any way the rights of any Indemnitee to indemnification under the provisions hereof with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or repeal. 9. OTHER RIGHTS. The indemnification and advancement of expenses provided by this Article shall not be deemed exclusive of any other rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement or vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in any other capacity while holding office for the Corporation, and shall continue as to an Indemnitee who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of the Indemnitee. Nothing contained in this Article shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements with officers and directors providing indemnification rights and procedures different from those set forth in this Article. In addition, the Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article. 10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any provision of this Article to indemnification by the Corporation for some or a portion of the expenses (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with any action, suit, proceeding or investigation and any appeal therefrom but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify the Indemnitee for the portion of such expenses (including attorneys' fees), judgments, fines or amounts paid in settlement to which the Indemnitee is entitled. -11- 11. INSURANCE. The Corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) against any expense, liability or loss incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. 12. MERGER OR CONSOLIDATION. If the Corporation is merged into or consolidated with another corporation and the Corporation is not the surviving corporation, the surviving corporation shall assume the obligations of the Corporation under this Article with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the date of such merger or consolidation. 13. SAVINGS CLAUSE. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Indemnitee as to any expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by or in the right of the Corporation, to the fullest extent permitted by an applicable portion of this Article that shall not have been invalidated and to the fullest extent permitted by applicable law. 14. DEFINITIONS. Terms used herein and defined in Section 145(h) and Section 145(i) of the General Corporation Law of the State of Delaware shall have the respective meanings assigned to such terms in such Section 145(h) and Section 145(i). 15. SUBSEQUENT LEGISLATION. If the General Corporation Law of the State of Delaware is amended after adoption of this Article to expand further the indemnification permitted to Indemnitees, then the Corporation shall indemnify such persons to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. ELEVENTH. The Corporation reserves the right to amend or repeal any provision contained in this Third Amended and Restated Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation, PROVIDED, HOWEVER, that in addition to any vote of the holders of any class or series of stock of the Corporation required by law, this Third Amended and Restated Certificate of Incorporation or a Certificate of Designation with respect to a series of Preferred Stock, the affirmative vote of the holders of shares of voting stock of the Corporation representing at least seventy-five percent (75%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to (i) reduce or eliminate the number of authorized shares of Common Stock or the number of authorized shares -12- of Preferred Stock set forth in Article FOURTH or (ii) amend or repeal, or adopt any provision inconsistent with, Parts A and B of Article FOURTH and Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH, TENTH and this Article ELEVENTH of this Third Amended and Restated Certificate of Incorporation. IN WITNESS WHEREOF, the undersigned has hereunto signed his name and affirms that the statements made in this Third Amended and Restated Certificate of Incorporation are true under the penalties of perjury this ____ day of ______, 1999. ------------------------------ Narendra Popat President EX-3.4 5 EXHIBIT 3.4 Exhibit 3.4 * * * * * * * * * * * * * * * * * * * * * * * * BY LAWS of NETSCOUT SYSTEMS, INC. (a Delaware Corporation) * * * * * * * * * * * * * * * * * * * * * * * * NETSCOUT SYSTEMS, INC. (a Delaware Corporation) BY-LAWS TABLE OF CONTENTS ARTICLE 1. OFFICES............................................................4 SECTION 1.1 Registered Office............................................4 SECTION 1.2 Other Offices................................................4 ARTICLE 2. SEAL...............................................................4 ARTICLE 3. MEETINGS OF STOCKHOLDERS...........................................4 SECTION 3.1 Place of Meeting.............................................4 SECTION 3.2 Annual Meetings..............................................4 SECTION 3.3 Special Meeting..............................................4 SECTION 3.4 Notice.......................................................5 SECTION 3.5 Quorum and Adjournments......................................5 SECTION 3.6 Votes; Proxies...............................................5 SECTION 3.7 Organization.................................................6 SECTION 3.8 Consent of Stockholders in Lieu of meeting...................6 ARTICLE 4. DIRECTORS..........................................................7 SECTION 4.1 Number.......................................................7 SECTION 4.2 Term of Office...............................................8 SECTION 4.3 Vacancies....................................................8 SECTION 4.4 Removal by Stockholders......................................8 SECTION 4.5 Meetings.....................................................8 SECTION 4.6 Votes........................................................9 SECTION 4.7 Quorum and Adjournment.......................................9 SECTION 4.8 Compensation.................................................9 SECTION 4.9 Action By Consent of Directors...............................9 ARTICLE 5. COMMITTEES OF DIRECTORS............................................9 SECTION 5.1 Executive Committee..........................................9 SECTION 5.2 Audit Committee.............................................10 SECTION 5.3 Other Committees............................................11 SECTION 5.4 Term of Office..............................................12 ARTICLE 6. OFFICERS..........................................................12 SECTION 6.1 Officers....................................................12 SECTION 6.2 Vacancies...................................................12 SECTION 6.3 Chairman of the Board.......................................12 SECTION 6.4 President...................................................12 SECTION 6.5 Executive Vice Presidents and Vice Presidents...............12 SECTION 6.6 Secretary...................................................12 SECTION 6.7 Assistant Secretaries.......................................13 SECTION 6.8 Treasurer...................................................13 SECTION 6.9 Assistant Treasurers........................................13
SECTION 6.10 Controller..................................................13 SECTION 6.11 Assistant Controllers.......................................13 SECTION 6.12 Subordinate Officers........................................14 SECTION 6.13 Compensation................................................14 SECTION 6.14 Removal.....................................................14 SECTION 6.15 Bonds.......................................................14 ARTICLE 7. CERTIFICATES OF STOCK.............................................14 SECTION 7.1 Form and Execution of Certificates..........................14 SECTION 7.2 Transfer of Shares..........................................15 SECTION 7.3 Closing of Transfer Books...................................15 SECTION 7.4 Fixing Date for Determination of Stockholders of Record.....15 SECTION 7.5 Lost or Destroyed Certificates..............................16 SECTION 7.6 Uncertified Shares..........................................17 ARTICLE 8. EXECUTION OF DOCUMENTS............................................17 SECTION 8.1 Execution of Checks, Notes, etc.............................17 SECTION 8.2 Execution of Contracts, Assignments, Etc....................17 SECTION 8.3 Execution of Proxies........................................17 ARTICLE 9. INSPECTION OF BOOKS...............................................17 ARTICLE 10. FISCAL YEAR.......................................................18 ARTICLE 11. AMENDMENTS........................................................18 ARTICLE 12. INDEMNIFICATION...................................................18 SECTION 12.1 Indemnification.............................................18 SECTION 12.2 Authorization...............................................19 SECTION 12.3 Expense Advance.............................................19 SECTION 12.4 Nonexclusivity..............................................20 SECTION 12.5 Insurance...................................................20 SECTION 12.6 "The Corporation"...........................................20 SECTION 12.7 Other Indemnification.......................................20 SECTION 12.8 Other Definitions...........................................20 SECTION 12.9 Continuation of Indemnification.............................21 SECTION 12.10 Amendment or Repeal.........................................21
NETSCOUT SYSTEMS, INC. (a Delaware Corporation) ------------------------------------------------ BY-LAWS ------------------------------------------------ ARTICLE 1 OFFICES SECTION 1.1 REGISTERED OFFICE. The registered office of the Corporation shall be located in Wilmington, County of New Castle, State of Delaware, and the name of the resident agent in charge thereof shall be Corporation Service Company. SECTION 1.2 OTHER OFFICES. The Corporation may also have offices at such other places, within or without the State of Delaware, as the Board of Directors may from time to time appoint or the business of the Corporation may require. ARTICLE 2 SEAL The seal of the Corporation shall, subject to alteration by the Board of Directors, consist of a flat-faced circular die with the word "Delaware", together with the name of the Corporation and the year of incorporation, cut or engraved thereon. ARTICLE 3 MEETINGS OF STOCKHOLDERS SECTION 3.1 PLACE OF MEETING. Meetings of the stockholders shall be held either within or without the State of Delaware at such place as the Board of Directors may fix. SECTION 3.2 ANNUAL MEETINGS. The annual meeting of stockholders shall be held for the election of directors on such date and at such time as the Board of Directors may fix. Any other proper business may be transacted at the annual meeting. SECTION 3.3 SPECIAL MEETING. Special meetings of the stockholders for any purpose or purposes may be called by the Chairman of the Board of Directors, if there be one, the President, or by the directors (either by written instrument signed by a majority or by resolution adopted by a vote of the majority), and special meetings shall be called by the President or the Secretary whenever stockholders owning a majority of the capital stock issued, outstanding and entitled to vote so request in writing. Such request of stockholders shall state the purpose or purposes of the proposed meeting. SECTION 3.4 NOTICE. Written or printed notice of every meeting of stockholders, annual or special, stating the hour, date and place thereof, and the purpose or purposes in general terms for which the meeting is called shall, not less than ten (10), or such longer period as shall be provided by law, the Certificate of Incorporation, these By-Laws, or otherwise, and not more than sixty (60) days before such meeting, be served upon or mailed to each stockholder entitled to vote thereat, at his address as it appears upon the stock records of the Corporation or, if such stockholder shall have filed with the Secretary of the Corporation a written request that notices intended for him be mailed to some other address, then to the address designated in such request. Notice of the hour, date, place and purpose of any meeting of stockholders may be dispensed with if every stockholder entitled to vote thereat shall attend either in person or by proxy and shall not, at the beginning of the meeting, object to the holding of such meeting because the meeting has not been lawfully called or convened, or if every absent stockholder entitled to such notice shall in writing, filed with the records of the meeting, either before or after the holding thereof, waive such notice. SECTION 3.5 QUORUM AND ADJOURNMENTS. Except as otherwise provided by law or by the Certificate of Incorporation, the presence in-person or by proxy at any meeting of stockholders of the holders of a majority of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote thereat, shall be requisite and shall constitute a quorum. If two or more classes of stock are entitled to vote as separate classes upon any question, then, in the case of each such class, a quorum for the consideration of such question shall, except as otherwise provided by law or by the Certificate of Incorporation, consist of a majority in interest of all stock of that class issued, outstanding and entitled to vote. If a majority of the shares of capital stock of the Corporation issued and outstanding and entitled to vote thereat or, where a larger quorum is required, such quorum, shall not be represented at any meeting of the stockholders regularly called, the holders of a majority of the shares present or represented by proxy and entitled to vote thereat shall have power to adjourn the meeting to another time, or to another time and place, without notice other than announcement of adjournment at the meeting, and there may be successive adjournments for like cause and in like manner until the requisite amount of shares entitled to vote at such meeting shall be represented; provided, however, that if the adjournment is for more than thirty (30) days, notice of the hour, date and place of the adjourned meeting shall be given to each stockholder entitled to vote thereat. Subject to the requirements of law and the Certificate of Incorporation, on any issue on which two or more classes of stock are entitled to vote separately, no adjournment shall be taken with respect to any class for which a quorum is present unless the Chairman of the meeting otherwise directs. At any meeting held to consider matters which were subject to adjournment for want of a quorum at which the requisite amount of shares entitled to vote thereat shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed. SECTION 3.6 VOTES; PROXIES. Except as otherwise provided in the Certificate of Incorporation, at each meeting of stockholders, every stockholder of record at the closing of the transfer books, if closed, or on the date set by the Board of Directors for the determination of stockholders entitled to vote at such meeting, shall have one vote for each share of stock entitled to vote which is registered in his name on the books of the Corporation, and, in the election of directors, may vote cumulatively to the extent, if any, and in the manner authorized in the Certificate of Incorporation. At each such meeting every stockholder entitled to vote shall be entitled to do so in person, or by proxy appointed by an instrument in writing or as otherwise permitted by law subscribed by such stockholder and bearing a date not more than three (3) years prior to the meeting in question, unless said instrument provides for a longer period during which it is to remain in force. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or any interest in the Corporation generally. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing or as otherwise permitted by law revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. Voting at meetings of stockholders need not be by written ballot and, except as otherwise provided by law, need not be conducted by inspectors of election unless so determined by the Chairman of the meeting or by the holders of shares of stock having a majority of the votes which could be cast by the holders of all outstanding shares of stock entitled to vote thereon which are present in person or represented by proxy at such meeting. If it is required or determined that inspectors of election be appointed, the Chairman shall appoint two inspectors of election, who shall first take and subscribe an oath or affirmation faithfully to execute the duties of inspectors at such meeting with strict impartiality and according to the best of their ability. The inspectors so appointed shall take charge of the polls and, after the balloting, shall make a certificate of the result of the vote taken. No director or candidate for the office or director shall be appointed as such inspector. At any meeting at which a quorum is present, a plurality of the votes properly cast for election to fill any vacancy on the Board of Directors shall be sufficient to elect a candidate to fill such vacancy, and a majority of the votes properly cast upon any other question shall decide the question, except in any case where a larger vote is required by law, the Certificate of Incorporation, these By-Laws, or otherwise. SECTION 3.7 ORGANIZATION. The Chairman of the Board, if there be one, or in his absence the Vice Chairman, or in the absence of a Vice Chairman, the President, or in the absence of the President, a Vice President, shall call meetings of the stockholders to order and shall act as chairman thereof. The Secretary of the Corporation, if present, shall act as secretary of all meetings of stockholders, and, in his absence, the presiding officer may appoint a secretary. SECTION 3.8 CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted by the Delaware General Corporation Law to be taken at any annual or special meeting of the stockholders of the Corporation, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered in the manner required by this section to the corporation, written consents signed by a sufficient number of stockholders to take action are delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a Meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. In the event that the action which is consented to is such as would have required the filing of a certificate under any section of the Delaware General Corporation Law other than Section 228 thereof, if such action had been voted on by stockholders at a meeting thereof, the certificate filed under such other section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written consent has been given in accordance with Section 228 of the Delaware General Corporation Law, and that written notice has been given as provided in such Section 228. ARTICLE 4 DIRECTORS SECTION 4.1 NUMBER. The business and affairs of the Corporation shall be conducted and managed by a Board of Directors consisting of not less than one director, none of whom needs to be a stockholder. The number of directors for each year shall be fixed at each annual meeting of stockholders, but if the number is not so fixed, the number shall remain as it stood immediately prior to such meeting. At each annual meeting of stockholders, the stockholders shall elect directors. Each director so elected shall hold office, subject to the provisions of law, the Certificate of Incorporation, these By-Laws, or otherwise, until the next annual meeting of stockholders or until his successor is elected and qualified. At any time during any year, except as otherwise provided by law, the Certificate of Incorporation, these By-Laws, or otherwise, the number of directors may be increased or reduced, in each case by vote of a majority of the stock issued and outstanding and present in person or represented by proxy and entitled to vote for the election of directors or a majority of the directors in office at the time of such increase or decrease, regardless of whether such majority constitutes a quorum. SECTION 4.2 TERM OF OFFICE. Each director shall hold office until the next annual meeting of stockholders and until his successor is duly elected and qualified or until his earlier death or resignation, subject to the right of the stockholders at anytime to remove any director or directors as provided in Section 4 of this Article. SECTION 4.3 VACANCIES. If any vacancy shall occur among the directors, or if the number of directors shall at any time be increased, the directors then in office, although less than a quorum, by a majority vote may fill the vacancies or newly created directorships, or any such vacancies or newly created directorships may be filled by the stockholders at any meeting. SECTION 4.4 REMOVAL BY STOCKHOLDERS. Except as otherwise provided by law, the Certificate of Incorporation or otherwise, the holders of record of the capital stock of the Corporation entitled to vote for the election of directors may, by a majority vote, remove any director or directors, with or without cause, and, in their discretion, elect a new director or directors in place thereof. SECTION 4.5 MEETINGS. Meetings of the Board of Directors shall be held at such place, within or without the State of Delaware, as may from time to time be fixed by resolution of the Board of Directors or by the Chairman of the Board, if there be one, the President and as may be specified in the notice or waiver of notice of any meeting. Meetings may be held at any time upon the call of the Chairman of the Board, if there be one, or the President or any two (2) of the directors in office by oral, telegraphic, telex, telecopy or other form of electronic transmission, or written notice, duly served or sent or mailed to each director not less than twenty-four (24) hours before such meeting, except that, if mailed, not less than forty-eight (48) hours before such meeting. Meetings may be held at any time and place without notice if all the directors are present and do not object to the holding of such meeting for lack of proper notice or if those not present shall, in writing or by telegram, telex, telecopy or other form of electronic transmission, waive notice thereof. A regular meeting of the Board may be held without notice immediately following the annual meeting of stockholders at the place where such meeting is held. Regular meetings of the Board may also be held without notice at such time and place as shall from time to time be determined by resolution of the Board. Members of the Board of Directors or any committee thereof may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and participation in a meeting pursuant to the foregoing provisions shall constitute presence in person at the meeting. SECTION 4.6 VOTES. Except as otherwise provided by law, the Certificate of Incorporation or otherwise, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. SECTION-4 7 QUORUM AND ADJOURNMENT. Except as otherwise provided by law, the Certificate of Incorporation or otherwise, a majority of the directors shall constitute a quorum for the transaction of business. If at any meeting of the Board there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time without notice other than announcement of the adjournment at the meeting, and at such adjourned meeting at which a quorum is present any business may be transacted which might have been transacted at the meeting as originally noticed. SECTION 4.8 COMPENSATION. Directors shall receive compensation for their services, as such, and for service on any Committee of the Board of Directors, as fixed by resolution of the Board of Directors and for expenses of attendance at each regular or special meeting of the Board or any Committee thereof. Nothing in this Section shall be construed to preclude a director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 4.9 ACTION BY CONSENT OF DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board, or committee. Such consent shall be treated as a vote adopted at a meeting for all purposes. Such consents may be executed in one or more counterparts and not every Director or committee member need sign the same counterpart. ARTICLE 5 COMMITTEES OF DIRECTORS SECTION 5.1 EXECUTIVE COMMITTEE. The Board of Directors may, by resolution passed by a majority of the whole Board, appoint an Executive Committee of two (2) or more members, to serve during the pleasure of the Board, to consist of such directors as the Board may from time to time designate. The Board of Directors shall designate the Chairman of the Executive Committee. (a) PROCEDURE. The Executive Committee shall, by a vote of a majority of its members, fix its own times and places of meeting, determine the number of its members constituting a quorum for the transaction of business, and prescribe its own rules of procedure, no change in which shall be made save by a majority vote of its members. (b) RESPONSIBILITIES. During the intervals between the meetings of the Board of Directors, except as otherwise provided by the Board of Directors in establishing such Committee or otherwise, the Executive Committee shall possess and may exercise all the powers of the Board in the management and direction of the business and affairs of the Corporation; provided, however, that the Executive Committee not, except to the extent the Certificate of Incorporation or the resolution providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the Delaware General Business Corporation Law, have the power: (i) to amend or authorize the amendment of the Certificate of Incorporation or these By-Laws; (ii) to authorize the issuance of stock; (iii) to authorize the payment of any dividend; (iv) to adopt an agreement of merger or consolidation of the Corporation or to recommend to the stockholders the sale, lease or exchange of all or substantially all the property and business of the Corporation; (v) to recommend to the stockholders a dissolution, or a revocation of a dissolution, of the Corporation; or (vi) to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware Business Corporation Law. (c) REPORTS. The Executive Committee shall keep regular minutes of its proceedings, and all action by the Executive Committee shall be reported promptly to the Board of Directors. Such action shall be subject to review, amendment and repeal by the Board, provided that no rights of third parties shall be adversely affected by such review, amendment or repeal. (d) APPOINTMENT OF ADDITIONAL MEMBERS. In the absence or disqualification of any member of the Executive Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. SECTION 5.2 AUDIT COMMITTEE. The Board of Directors may, by resolution passed by a majority of the whole Board, appoint an Audit Committee of two (2) or more members who shall not be officers or employees of the Corporation to serve during the pleasure of the Board. The Board of Directors shall designate the Chairman of the Audit Committee. (a) PROCEDURE. The Audit Committee, by a vote of a majority of its members, shall fix its own times and places of meeting, shall determine the number of its members constituting a quorum for the transaction of business, and shall prescribe its own rules of procedure, no change in which shall be made save by a majority vote of its members. (b) RESPONSIBILITIES. The Audit Committee shall review the annual financial statements of the Corporation prior to their submission to the Board of Directors, shall consult with the Corporation's independent auditors, and may examine and consider such other matters in relation to the internal and external audit of the Corporation's accounts and in relation to the financial affairs of the Corporation and its accounts, including the selection and retention of independent auditors, as the Audit Committee may, in its discretion, determine to be desirable. (c) REPORTS. The Audit Committee shall keep regular minutes of its proceedings, and all action by the Audit Committee shall, from time to time, be reported to the Board of Directors as it shall direct. Such action shall be subject to review, amendment and repeal by the Board, provided that no rights of third parties shall be adversely affected by such review, amendment or repeal. (d) APPOINTMENT OF ADDITIONAL MEMBERS. In the absence or disqualification of any member of the Audit Committee The member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. SECTION 5.3 OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, at any time appoint one or more other committees from and outside of its own number. Every such committee must include at least one member of the Board of Directors. The Board may from time to time designate or alter, within the limits permitted by law, the Certificate of Incorporation and this Article, if applicable, the duties, powers and number of members of such other committees or change their membership, and may at any time abolish such other committees or any of them. (a) PROCEDURE. Each committee, appointed pursuant to this Section, shall, by a vote of a majority of its members, fix its own times and places of meeting, determine the number of its members constituting a quorum for the transaction of business, and prescribe its own rules of procedure, no change in which shall be made save by a majority vote of its members. (b) RESPONSIBILITIES. Each committee, appointed pursuant to this Section, shall exercise the powers assigned to it by the Board of Directors in its discretion. (c) REPORTS. Each committee appointed pursuant to this Section shall keep regular minutes of proceedings, and all action by each such committee shall, from time to time, be reported to the Board of Directors as it shall direct. Such action shall be subject to review, amendment and repeal by the Board, provided that no rights of third parties shall be adversely affected by such review, amendment or repeal. (d) APPOINTMENT OF ADDITIONAL MEMBERS. In the absence or disqualification of any member of each committee, appointed pursuant to this Section, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors (or, to the extent permitted, another person) to act at the meeting in place of any such absent or disqualified member. SECTION 5.4 TERM OF OFFICE. Each member of a committee shall hold office until the first meeting of the Board of Directors following the annual meeting of stockholders (or until such other time as the Board of Directors may determine, either in the vote establishing the committee or at the election of such member or otherwise) and until his successor is elected and qualified or until he sooner dies, resigns, is removed, is replaced by change of membership or becomes disqualified by ceasing to be a Director (where membership on the Board is required), or until the committee is sooner abolished by the Board of Directors. ARTICLE 6 OFFICERS SECTION 6.1 OFFICERS. The Board of Directors shall elect a President, a Secretary and a Treasurer, and, in their discretion, may elect a Chairman of the Board, a Vice Chairman of the Board, a Controller, and one or more Executive Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers and Assistant Controllers as deemed necessary or appropriate. Such officers shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders (or at such other meeting as the Board of Directors determines), and each shall hold office for the term provided by the vote of the Board, except that each will be subject to removal from office in the discretion of the Board as provided herein. The powers and duties of more than one office may be exercised and performed by the same person. SECTION 6.2 VACANCIES. Any vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors, at any regular or special meeting. SECTION 6.3 CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors, if elected, shall be a member of the Board of Directors and shall preside at its meetings. He shall advise and counsel with the President, and shall perform such duties as from time to time may be assigned to him by the Board of Directors. SECTION 6.4 PRESIDENT. The President shall be the chief executive officer of the Corporation. Subject to the directions of the Board of Directors, he shall have and exercise direct charge of and general supervision over the business and affairs of the Corporation and shall perform all duties incident to the office of the chief executive officer of a corporation and such other duties as from time to time may be assigned to him by the Board of Directors. The President may, but need not, be a member of the Board of Directors. SECTION 6.5 EXECUTIVE VICE PRESIDENTS AND VICE PRESIDENTS. Each Executive Vice President and Vice President shall have and exercise such powers and shall perform such duties as from time to time may be assigned to him by the Board of Directors or the President. SECTION 6.6 SECRETARY. The Secretary shall keep the minutes of all meetings of the stockholders and of the Board of Directors in books provided for the purpose; he shall see that all notices are duly given in accordance with the provisions of law and these .By-Laws; he shall be custodian of the records and of the corporate seal or seals of the Corporation; he shall see that the corporate seal is affixed to all documents the execution of which, on behalf of the Corporation under its seal, is duly authorized, and, when the seal is so affixed, he may attest the same he may sign, with the President, an Executive Vice President or a Vice President, certificates of stock of the Corporation; and, in general, he shall perform all duties incident to the office of secretary of a Corporation, and such other duties as from time to time may be assigned to him by the Board of Directors. SECTION 6.7 ASSISTANT SECRETARIES. The Assistant Secretaries in order of their seniority shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties as the Board of Directors shall prescribe or as from time to time may be assigned by the Secretary. SECTION 6.8 TREASURER. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit, or cause to be deposited, in the name of the Corporation, all monies or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Board of Directors; he may endorse for collection on behalf of the Corporation checks, notes and other obligations; he may sign receipts and vouchers for payments made to the Corporation; he may sign checks of the Corporation, singly or jointly with another person as the Board of Directors may authorize, and pay out and dispose of the proceeds under the direction of the Board; he shall render to the President and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation; he may sign, with the President, or an Executive Vice President or a Vice President, certificates of stock of the corporation; and in general, shall perform all the duties incident to the office of treasurer of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors. SECTION 6.9 ASSISTANT TREASURERS. The Assistant Treasurers in order of their seniority shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as the Board of Directors shall prescribe or as from time to time may be assigned by the Treasurer. SECTION 6.10 CONTROLLER. The Controller, if elected, shall be the chief accounting officer of the Corporation, in general, he shall perform all duties incident to the office of a controller of a corporation, and, in the absence of or disability of the Treasurer or any Assistant Treasurer, perform the duties and exercise, the powers of the Treasurer and shall perform such other duties as the Board of Directors shall prescribe or as from time to time may be assigned by the President or the Treasurer. SECTION 6.11 ASSISTANT CONTROLLERS. The Assistant Controllers in order of their seniority shall, in the absence or disability of the Controller, perform the duties and exercise the powers of the Controller and shall perform such other duties as the Board of Directors shall prescribe or as from time to time may be assigned by the Controller. SECTION 6.12 SUBORDINATE OFFICERS. The Board of Directors may appoint such subordinate officers as it may deem desirable. Each such officer shall hold office for such period, have such authority and perform such duties as the Board of Directors may prescribe. The Board of Directors may, from time to time, authorize any officer to appoint and remove subordinate officers and to prescribe the powers and duties thereof. SECTION 6.13 COMPENSATION. The Board of Directors shall fix the compensation of all officers of the Corporation. It may authorize any officer, upon whom the power of appointing subordinate officers may have been conferred, to fix the compensation of such subordinate officers. SECTION 6.14 REMOVAL. Any officer of the Corporation may be removed, with or without cause, by action of the Board of Directors. SECTION 6.15 BONDS. The Board of Directors may require any officer of the Corporation to give a bond to the Corporation, conditional upon the faithful performance of his duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors. ARTICLE 7 CERTIFICATES OF STOCK SECTION 7.1 FORM AND EXECUTION OF CERTIFICATES. The interest of each stockholder of the Corporation shall be evidenced by a certificate or certificates for shares of stock in such form as the Board of Directors may from time to time prescribe. The certificates of stock of each class shall be consecutively numbered and signed by the Chairman or Vice Chairman of the Board, if any, the President, an Executive Vice President or a Vice President and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer of the Corporation, and may be countersigned and registered in such manner as the Board of Directors may by resolution prescribe, and shall bear the corporate seal or a printed or engraved facsimile thereof. Where any such certificate is signed by a transfer agent or transfer clerk acting on behalf of the Corporation, the signatures of any such Chairman, Vice Chairman, President, Executive Vice President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be facsimiles, engraved or printed. In case any officer or officers, who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates, shall cease to be such officer or officers, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be issued and delivered by the Corporation as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not ceased to be such officer or officers. In case the corporate seal which has been affixed to, impressed on, or reproduced in any such certificate or certificates shall cease to be the seal of the Corporation before such certificate or certificates have been delivered by the Corporation, such certificate or certificates may nevertheless be issued and delivered by the Corporation as though the seal affixed thereto, impressed thereon or reproduced therein had not ceased to be the seal of the corporation. Every certificate for shares of stock which are subject to have restriction on transfer pursuant to law, the Certificate of Incorporation, these By-Laws, or any agreement to which the corporation is a party, shall have the restriction noted conspicuously on the certificate, and shall also set forth, on the face or back either the full text of the restriction or a statement of the existence of such restriction and (except if such restriction is imposed by law) a statement that the Corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. Every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall set forth on its face or back either the full text of the preferences, voting powers, qualifications, and special and relative rights of the shares of each class and series authorized to be issued, or a statement of the existence of such preferences, powers, qualifications and rights, and a statement that the Corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. SECTION 7.2 TRANSFER OF SHARES. The shares of the stock of the Corporation shall be transferred on the books of the Corporation by the holder thereof in person or by his attorney lawfully constituted, upon surrender for cancellation of certificates for the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof or guaranty of the authenticity of the signature as the Corporation or its agents may reasonably require. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, save as expressly provided by law or by the Certificate of Incorporation. It shall be the duty of each stockholder to notify the Corporation of his post office Address. SECTION 7.3 CLOSING OF TRANSFER BOOKS. The stock transfer books of the Corporation may, if deemed appropriate by the Board of Directors, be closed for such length of time not exceeding fifty (50) days as the Board may determine, preceding the date of any meeting of stockholders or the date for the payment of any dividend or the date for the allotment of rights or the date when any issuance, change, conversion or exchange of capital stock shall go into effect, during which time no transfer of stock on the books of the Corporation may be made. SECTION 7.4 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of directors and which record date: (a) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, the Certificate of Incorporation or otherwise, not be more than sixty (60) nor less than ten (10) days before the date of such meeting; (b) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall, unless otherwise required by law, the Certificate of Incorporation or otherwise, not be more than ten (10) days from the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (c) in the case of any other action, shall not be more than sixty days prior to such other action. If no record date is fixed: (a) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (b) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action of the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in accordance with applicable law, or, if prior action by the Board of Directors is required by law, shall be at the-close of business on the day on which the Board of Directors adopts the resolution taking such prior action; and (c) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 7.5 LOST OR DESTROYED CERTIFICATES. In case of the loss or destruction of any certificate of stock, a new certificate may be issued under the following conditions: (a) The owner of said certificate shall file with the Secretary or any Assistant Secretary of the Corporation an affidavit giving the facts in relation to the ownership, and in relation to the loss or destruction of said certificate, stating its number and the number of shares represented thereby; such affidavit shall be in such form and contain such statements as shall satisfy the President, any Executive Vice President, Vice President, the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer, that said certificate has been accidentally destroyed or lost, and that a new certificate ought to be issued in lieu thereof. Upon being so satisfied, any such officer may require such owner to furnish the Corporation a bond in such penal sum and in such form as he may deem advisable, and with a surety or sureties approved by him, to indemnify and save harmless the Corporation from any claim, loss, damage or liability which may be occasioned by the issuance of a new certificate in lieu thereof. Upon such bond being so filed, if so required, a new certificate for the same number of shares shall be issued to the owner of the certificate so lost or destroyed; and the transfer agent and registrar, if any, of stock shall countersign and register such new certificate upon receipt of a written order signed by any such officer, and thereupon the Corporation will save harmless said transfer agent and registrar in the premises. In case of the surrender of the original certificate, in lieu of which a new certificate has been issued, or the surrender of such new certificate, for cancellation, the bond of indemnity given as a condition of the issue of such new certificate may be surrendered; or (b) The Board of Directors of the Corporation may by resolution authorize and direct any transfer agent or registrar of stock of the Corporation to issue and register respectively from time to time without further action or approval by or on behalf of the Corporation new certificates of stock to replace certificates reported lost, stolen or destroyed upon receipt of an affidavit of loss and bond of indemnity in form and amount and with surety satisfactory to such transfer agent or registrar in each instance or upon such terms and conditions as the Board of Directors may determine. SECTION 7.6 UNCERTIFIED SHARES. The Board of Directors of the Corporation may by resolution provide that one or more of any or all classes or series of the stock of the Corporation shall be uncertified shares, subject to the provisions of section 158 of the Delaware General Corporation Law. ARTICLE 8 EXECUTION OF DOCUMENTS SECTION 8.1 EXECUTION OF CHECKS, NOTES, ETC. All checks and drafts on the corporation's bank accounts and all bills of exchange and promissory notes, and all acceptances, obligations and other instruments for the payment of money, shall be signed by such officer or officers, or agent or agents, as shall be thereunto authorized from time to time by the Board of Directors, which many in its discretion authorize any such signatures to be facsimile. SECTION 8.2 EXECUTION OF CONTRACTS, ASSIGNMENTS, ETC. Unless the Board of Directors shall have otherwise provided generally or in a specific instance, all contracts, agreements, endorsements, assignments, transfers, stock powers, or other instruments shall be signed by the President, any Executive Vice President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer. The Board of Directors may, however, in its discretion, require any or all such instruments to be signed by any two or more of such officers, or may permit any or all of such instruments to be signed by such other officer or officers, agent or agents, as it shall be thereunto authorize from time to time. SECTION 8.3 EXECUTION OF PROXIES. The President, any Executive Vice President or any Vice President, and the Secretary, the Treasurer, any Assistant Secretary or any Assistant Treasurer, or any other officer designated by the Board of Directors, may sign on behalf of the Corporation proxies to vote upon shares of stock of other companies standing in the name of the Corporation. ARTICLE 9 INSPECTION OF BOOKS The Board of Directors shall determine from time to time whether, and if allowed, to what extent and at what time and places and under what conditions and regulations, the accounts and books of the Corporation (except such as may by law be specifically open to inspection) or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by the laws of the State of Delaware, unless and until authorized so to do by resolution of the Board of Directors or of the stockholders of the Corporation. ARTICLE 10 FISCAL YEAR The fiscal year of the Corporation shall be determined from time to time by vote of the Board of Directors. ARTICLE 11 AMENDMENTS These By-Laws may be altered, amended, changed or repealed and new By-Laws adopted by the stockholders or, to the extent provided in the Certificate of Incorporation, by the Board of Directors, in either case at any meeting called for that purpose at which a quorum shall be present. Any by-law, whether made, altered, amended, changed or repealed by the stockholders or the Board of Directors may be repealed, amended, changed, further amended, changed, repealed or reinstated, as the case may be either by the stockholders or by the Board of Directors, as herein provided; except that this Article may be altered, amended, changed or repealed only by vote of the stockholders. ARTICLE 12 INDEMNIFICATION SECTION 12.1 INDEMNIFICATION. 12.1.1 The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is a party or is threatened to be made a party or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he, or a person for whom he is the legal representative, is or was a director, trustee, partner, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or non-profit entity against all liability, losses, expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contenders or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, had reasonable Cause to believe that his conduct was unlawful. 12.1.2 The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, trustee, partner, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or non-profit entity against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper. 12.1.3 To the extent that any person referred to in paragraphs (a) or (b) has been successful on the merits or otherwise in defense of any action suit or proceeding referred to therein, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. SECTION 12.2 AUTHORIZATION. Any indemnification under Section 1 of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, partner, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 of this Article. Such determination shall be made: (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in written opinion, or (c) by the stockholders. SECTION 12.3 EXPENSE ADVANCE. Expenses (including attorneys' fees) incurred by an officer or director of the Corporation in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the manner provided in Section 2 of this Article upon receipt of an undertaking by or on behalf of such officer or director to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article. Such expenses (including attorneys' fees) incurred by other employees or agents of the Corporation may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. SECTION 12.4 NONEXCLUSIVITY. The indemnification and advancement of expenses provided by, or granted pursuant to, the other Sections of this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 12.5 INSURANCE. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, partner, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or non-profit entity against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article or Section 145 of Title 8 of the Delaware Code relating to the General Corporation Law of the State of Delaware. SECTION 12.6 "THE CORPORATION". For the purposes of this Article, references to "the Corporation" shall include the resulting corporation and, to the extent that the Board of Directors of the resulting corporation so decides, all constituent corporations (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents so that any person who is or was a director, officer, employee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation as director, trustee, partner, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or non-profit entity shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation if its separate existence had continued. SECTION 12.7 OTHER INDEMNIFICATION. The Corporation's obligation, if any, to indemnify any person who was or is serving at its request as a director, trustee, partner, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust or other enterprise or non-profit entity or from insurance. SECTION 12.8 OTHER DEFINITIONS. For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, trustee, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, trustee, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article. SECTION 12.9 CONTINUATION OF INDEMNIFICATION. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, trustee, partner, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 12.10 AMENDMENT OR REPEAL. No amendment or repeal of the provisions of this Article shall adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such amendment or repeal. EX-3.5 6 EXHIBITS 3.5 AND 4.2 Exhibits 3.5 and 4.2 FORM OF AMENDED AND RESTATED BY-LAWS OF NETSCOUT SYSTEMS, INC. BY-LAWS TABLE OF CONTENTS
PAGE ARTICLE 1 - Stockholders.................................................................................1 1.1 Place of Meetings.................................................................................1 1.2 Annual Meeting....................................................................................1 1.3 Special Meetings..................................................................................1 1.4 Notice of Meetings................................................................................1 1.5 Voting List.......................................................................................1 1.6 Quorum............................................................................................2 1.7 Adjournments......................................................................................2 1.8 Voting and Proxies................................................................................2 1.9 Action at Meeting.................................................................................3 1.10 Introduction of Business at Meetings.............................................................3 A. Annual Meetings of Stockholders.................................................................3 B. Special Meetings of Stockholders................................................................4 C. General.........................................................................................5 1.11 Action without Meeting...........................................................................6 ARTICLE 2 - Directors....................................................................................6 2.1 General Powers....................................................................................6 2.2 Number; Election and Qualification................................................................7 2.3 Classes of Directors..............................................................................7 2.4 Terms in Office...................................................................................7 2.5 Allocation of Directors Among Classes in the Event of Increases or Decreases in the Number of Directors...............................................................................7 2.6 Tenure............................................................................................7 2.7 Vacancies.........................................................................................8 2.8 Resignation.......................................................................................8 2.9 Regular Meetings..................................................................................8 2.10 Special Meetings.................................................................................8 2.11 Notice of Special Meetings.......................................................................8 2.12 Meetings by Telephone Conference Calls...........................................................8 2.13 Quorum...........................................................................................8 2.14 Action at Meeting................................................................................9 2.15 Action by Written Consent........................................................................9
2.16 Removal..........................................................................................9 2.17 Committees.......................................................................................9 2.18 Compensation of Directors.......................................................................10 2.19 Amendments to Article...........................................................................10 ARTICLE 3 - Officers....................................................................................10 3.1 Enumeration......................................................................................10 3.2 Election.........................................................................................10 3.3 Qualification....................................................................................10 3.4 Tenure...........................................................................................10 3.5 Resignation and Removal..........................................................................10 3.6 Vacancies........................................................................................11 3.7 Chairman of the Board and Vice-Chairman of the Board.............................................11 3.8 President........................................................................................11 3.9 Vice Presidents..................................................................................11 3.10 Secretary and Assistant Secretaries.............................................................11 3.11 Treasurer and Assistant Treasurers..............................................................12 3.12 Salaries........................................................................................12 3.13 Action with Respect to Securities of Other Corporations.........................................12 ARTICLE 4 - Capital Stock...............................................................................13 4.1 Issuance of Stock................................................................................13 4.2 Certificates of Stock............................................................................13 4.3 Transfers........................................................................................13 4.4 Lost, Stolen or Destroyed Certificates...........................................................13 4.5 Record Date......................................................................................14 ARTICLE 5 - General Provisions..........................................................................14 5.1 Fiscal Year......................................................................................14 5.2 Corporate Seal...................................................................................14 5.3 Notices..........................................................................................14 5.4 Waiver of Notice.................................................................................14 5.5 Evidence of Authority............................................................................15 5.6 Facsimile Signatures.............................................................................15 5.7 Reliance upon Books, Reports and Records.........................................................15 5.8 Time Periods.....................................................................................15 5.9 Certificate of Incorporation.....................................................................15 5.10 Transactions with Interested Parties............................................................15 5.11 Severability....................................................................................16 5.12 Pronouns........................................................................................16
ii ARTICLE 6 - Amendments..................................................................................16 6.1 By the Board of Directors........................................................................16 6.2 By the Stockholders..............................................................................16
iii AMENDED AND RESTATED BY-LAWS OF NETSCOUT SYSTEMS, INC. (the "Corporation") ARTICLE 1 - STOCKHOLDERS 1.1 PLACE OF MEETINGS. All meetings of stockholders shall be held at such place within or without the State of Delaware as may be designated from time to time by the Chairman of the Board (if any), the board of directors of the Corporation (the "Board of Directors") or the President or, if not so designated, at the registered office of the Corporation. 1.2 ANNUAL MEETING. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on a date to be fixed by the Chairman of the Board (if any), Board of Directors or the President (which date shall not be a legal holiday in the place where the meeting is to be held) at the time and place to be fixed by the Chairman of the Board, the Board of Directors or the President and stated in the notice of the meeting. 1.3 SPECIAL MEETINGS. Special meetings of stockholders may be called at any time by the Chairman of the Board (if any), a majority of the Board of Directors or the President and shall be held at such place, on such date and at such time as shall be fixed by the Board of Directors or the person calling the meeting. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. 1.4 NOTICE OF MEETINGS. Except as otherwise provided by law, written notice of each meeting of stockholders, whether annual or special, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notices of all meetings shall state the place, date and hour of the meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his or her address as it appears on the records of the Corporation. 1.5 VOTING LIST. The officer who has charge of the stock ledger of the Corporation shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. 1.6 QUORUM. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the holders of a majority of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business. Shares held by brokers which such brokers are prohibited from voting (pursuant to their discretionary authority on behalf of beneficial owners of such shares who have not submitted a proxy with respect to such shares) on some or all of the matters before the stockholders, but which shares would otherwise be entitled to vote at the meeting ("Broker Non-Votes") shall be counted, for the purpose of determining the presence or absence of a quorum, both (a) toward the total voting power of the shares of capital stock of the Corporation and (b) as being represented by proxy. If a quorum has been established for the purpose of conducting the meeting, a quorum shall be deemed to be present for the purpose of all votes to be conducted at such meeting, provided that where a separate vote by a class or classes, or series thereof, is required, a majority of the voting power of the shares of such class or classes, or series, present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the voting power of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. 1.7 ADJOURNMENTS. Any meeting of stockholders may be adjourned to any other time and to any other place at which a meeting of stockholders may be held under these By-Laws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting. It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. 1.8 VOTING AND PROXIES. At any meeting of the stockholders, each stockholder shall have one vote for each share of stock entitled to vote at such meeting held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided in the Certificate of Incorporation. Each stockholder of record entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting (to the extent not otherwise prohibited by the Certificate of Incorporation or these By-laws), may vote or express such consent or dissent in person or may authorize another person or persons to vote or act for such stockholder by written proxy executed by such stockholder or his or her authorized agent or by a transmission permitted by law and delivered to the Secretary of the Corporation. No such proxy shall be voted or acted upon after three years from the date of its -2- execution, unless the proxy expressly provides for a longer period. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section 1.8 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or reproduction shall be a complete reproduction of the entire original writing or transmission. All voting or appointment of proxies, including on the election of directors but excepting where otherwise required by law or the Certificate of Incorporation, may take place via a voice vote or over the Internet. Any vote not taken by voice shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. 1.9 ACTION AT MEETING. When a quorum is present at any meeting of stockholders, the holders of a majority of the stock present or represented and voting on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of a majority of the stock of that class present or represented and voting on such matter) shall decide any matter to be voted upon by the stockholders at such meeting (other than the election of directors), except when a different vote is required by express provision of law, the Certificate of Incorporation or these By-Laws. Any election of directors by the stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote at such election, except as otherwise provided by the Certificate of Incorporation. For the purposes of this paragraph, Broker Non-Votes represented at the meeting but not permitted to vote on a particular matter shall not be counted, with respect to the vote on such matter, in the number of (a) votes cast, (b) votes cast affirmatively, or (c) votes cast negatively. 1.10 INTRODUCTION OF BUSINESS AT MEETINGS. A. ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Section 1.10, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 1.10. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 1.10, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the one hundred twentieth (120th) day nor earlier than the close -3- of business on the one hundred fiftieth (150th) day prior to the first anniversary of the date of the proxy statement delivered to stockholders in connection with the preceding year's annual meeting; provided, however, that if either (i) the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such an anniversary date or (ii) no proxy statement was delivered to stockholders in connection with the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of (x) the sixtieth (60th) day prior to such annual meeting and (y) the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of capital stock of the Corporation that are owned beneficially and held of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 1.10 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting (or, if the annual meeting is held more than thirty (30) days before or sixty (60) days after such anniversary date, at least seventy (70) days prior to such annual meeting), a stockholder's notice required by this Section 1.10 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive office of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. B. SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for -4- election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice of the special meeting, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 1.10. If the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Section 1.10 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the ninetieth (90th) day prior to such special meeting nor later than the later of (x) the close of business on the sixtieth (60th) day prior to such special meeting or (y) the close of business on the tenth (10th) day following the day on which public announcement is first made of the date of such special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. C. GENERAL. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.10 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.10. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.10 and, if any proposed nomination or business is not in compliance herewith, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Section 1.10, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 1.10, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 1.10 shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to -5- Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. 1.11 ACTION WITHOUT MEETING. Stockholders of the Corporation may not take any action by written consent in lieu of a meeting. Notwithstanding any other provision of law, the Certificate of Incorporation or these By-Laws, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Section 1.11. ARTICLE 2 - DIRECTORS 2.1 GENERAL POWERS. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the Corporation except as otherwise provided by law or the Certificate of Incorporation. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law or the Certificate of Incorporation, may exercise the powers of the full Board of Directors until the vacancy is filled. Without limiting the foregoing, the Board of Directors may: (a) declare dividends from time to time in accordance with law; (b) purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (c) authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, to borrow funds and guarantee obligations, and to do all things necessary in connection therewith; (d) remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (e) confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (f) adopt from time to time such stock option, stock purchase, bonus or other compensation plans for directors, officers, employees, consultants and agents of the Corporation and its subsidiaries as it may determine; (g) adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees, consultants and agents of the Corporation and its subsidiaries as it may determine; and -6- (h) adopt from time to time regulations, not inconsistent herewith, for the management of the Corporation's business and affairs. 2.2 NUMBER; ELECTION AND QUALIFICATION. The number of directors which shall constitute the whole Board of Directors shall be determined by resolution of the Board of Directors, but in no event shall be less than three. The number of directors may be decreased at any time and from time to time by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. The directors shall be elected at the annual meeting of stockholders (or, if so determined by the Board of Directors pursuant to Section 10 hereof, at a special meeting of stockholders), by such stockholders as have the right to vote on such election. Directors need not be stockholders of the Corporation. 2.3 CLASSES OF DIRECTORS. The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III. No one class shall have more than one director more than any other class. 2.4 TERMS IN OFFICE. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided, however, that each initial director in Class I shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year ending March 31, 2000; each initial director in Class II shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year ending March 31, 2001; and each initial director in Class III shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year ending March 31, 2002. 2.5 ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of such director's current term or his or her prior death, removal or resignation and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors, subject to the second sentence of Section 2.3. To the extent possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided for from time to time by resolution adopted by a majority of the directors then in office, although less than a quorum. No decrease in the number of directors constituting the whole Board of Directors shall shorten the term of an incumbent Director. 2.6 TENURE. Notwithstanding any provisions to the contrary contained herein, each director shall hold office until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. -7- 2.7 VACANCIES. Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement thereof, may be filled by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office, if any, and a director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next election of directors of the class for which such director was chosen and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. 2.8 RESIGNATION. Any director may resign by delivering his or her written resignation to the Corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 2.9 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination. 2.10 SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time and place, within or without the State of Delaware, designated in a call by the Chairman of the Board (if any), the President, two or more directors, or by one director in the event that there is only a single director in office. 2.11 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting of directors shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (i) by giving notice to such director in person or by telephone at least 48 hours in advance of the meeting, (ii) by sending a telegram or delivering written notice by facsimile transmission or by hand, to his or her last known business or home address at least 48 hours in advance of the meeting, or (iii) by mailing written notice to his or her last known business or home address at least 72 hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. 2.12 MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members of any committee designated by the Board of Directors may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall be deemed to constitute presence in person at such meeting. 2.13 QUORUM. A majority of the total number of the whole Board of Directors shall constitute a quorum at all meetings of the Board of Directors. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified; provided, however, that in no case shall less than one-third (1/3) of the total number of the whole Board of Directors constitute a quorum. In the -8- absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. 2.14 ACTION AT MEETING. At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law, the Certificate of Incorporation or these By-Laws. 2.15 ACTION BY WRITTEN CONSENT. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent to such action in writing, and the written consents are filed with the minutes of proceedings of the Board of Directors or committee. 2.16 REMOVAL. Unless otherwise provided in the Certificate of Incorporation, any one or more or all of the directors may be removed, only for cause, by the holders of at least seventy-five percent (75%) of the shares then entitled to vote at an election of directors. Any one or more or all of the directors may be removed with cause only by the holders of at least a majority of the shares then entitled to vote at an election of directors. 2.17 COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of a member of a committee, the member or members of such committee present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at such meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to the provisions of the General Corporation Law of the State of Delaware, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine or as provided herein, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these By-Laws for the Board of Directors. Adequate provisions shall be made for notice to members of all meeting of committees. One-third (1/3) of the members of any committee shall constitute a quorum unless the committee shall consist of one (1) or two (2) members, in which event one (1) member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. -9- 2.18 COMPENSATION OF DIRECTORS. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the Corporation or any of its parent or subsidiary corporations in any other capacity and receiving compensation for such service. 2.19 AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of law, the Certificate of Incorporation or these By-Laws, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of a least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article 2. ARTICLE 3 - OFFICERS 3.1 ENUMERATION. The officers of the Corporation shall consist of a President, a Secretary, a Treasurer and such other officers with such other titles as the Board of Directors shall determine, including, but not limited to, a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant Treasurers and Assistant Secretaries. The Board of Directors may appoint such other officers as it may deem appropriate. 3.2 ELECTION. The President, Treasurer and Secretary shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers may be appointed by the Board of Directors at such meeting or at any other meeting. 3.3 QUALIFICATION. No officer need be a stockholder. Any two or more offices may be held by the same person. 3.4 TENURE. Except as otherwise provided by law, by the Certificate of Incorporation or by these By-Laws, each officer shall hold office until his or her successor is elected and qualified, unless a different term is specified in the vote choosing or appointing such officer, or until his or her earlier death, resignation or removal. 3.5 RESIGNATION AND REMOVAL. Any officer may resign by delivering his or her written resignation to the Chairman of the Board (if any), to the Board of Directors at a meeting thereof, to the Corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any officer may be removed at any time, with or without cause, by vote of a majority of the entire number of directors then in office. -10- Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following his or her resignation or removal, or any right to damages on account of such removal, whether his or her compensation be by the month or by the year or otherwise, unless such compensation is expressly provided in a duly authorized written agreement with the Corporation. 3.6 VACANCIES. The Board of Directors may fill any vacancy occurring in any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices other than those of President, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of his predecessor and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. 3.7 CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and stockholders at which he or she is present and shall perform such duties and possess such powers as are designated by the Board of Directors. If the Board of Directors appoints a Vice-Chairman of the Board, he or she shall, in the absence or disability of the Chairman of the Board, perform the duties and exercise the powers of the Chairman of the Board and shall perform such other duties and possess such other powers as may from time to time be designated by the Board of Directors. 3.8 PRESIDENT. The President shall, subject to the direction of the Board of Directors, have general charge and supervision of the business of the Corporation. Unless otherwise provided by the Board of Directors, and provided that there is no Chairman of the Board or that the Chairman and Vice-Chairman, if any, are not available, the President shall preside at all meetings of the stockholders, and, if a director, at all meetings of the Board of Directors. Unless the Board of Directors has designated another person as the Chief Executive Officer, the President shall be the Chief Executive Officer of the Corporation. The President shall perform such other duties and shall have such other powers as the Board of Directors may from time to time prescribe. The President shall have the power to enter into contracts and otherwise bind the Corporation in matters arising in the ordinary course of the Corporation's business. 3.9 VICE PRESIDENTS. Any Vice President shall perform such duties and possess such powers as the Board of Directors or the President may from time to time prescribe. In the event of the absence, inability or refusal to act of the President, the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the President and, when so performing, shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors. Unless otherwise determined by the Board of Directors, any Vice President shall have the power to enter into contracts and otherwise bind the Corporation in matters arising in the ordinary course of the Corporation's business. 3.10 SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall perform such duties and shall have such powers as the Board of Directors or the President may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are -11- incident to the office of secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to attend all meetings of stockholders and the Board of Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents. Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the President or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary. In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the person presiding at the meeting shall designate a temporary secretary to keep a record of the meeting. 3.11 TREASURER AND ASSISTANT TREASURERS. The Treasurer shall perform such duties and shall have such powers as the Board of Directors or the President may from time to time prescribe. In addition, the Treasurer shall perform such duties and have such powers as are incident to the office of treasurer, including without limitation the duty and power to keep and be responsible for all funds and securities of the Corporation, to deposit funds of the Corporation in depositories selected in accordance with these By-Laws, to disburse such funds as ordered by the Board of Directors, to make proper accounts for such funds, and to render as required by the Board of Directors statements of all such transactions and of the financial condition of the Corporation. The Assistant Treasurers shall perform such duties and possess such powers as the Board of Directors, the President or the Treasurer may from time to time prescribe. In the event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer (or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Treasurer. 3.12 SALARIES. Officers of the Corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors. 3.13 ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which the Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. -12- ARTICLE 4 - CAPITAL STOCK 4.1 ISSUANCE OF STOCK. Unless otherwise voted by the stockholders and subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the Corporation or the whole or any part of any issued, authorized capital stock of the Corporation held in its treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such consideration and on such terms as the Board of Directors may determine. 4.2 CERTIFICATES OF STOCK. Every holder of stock of the Corporation shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, certifying the number and class of shares owned by such stockholder in the Corporation. Each such certificate shall be signed by, or in the name of the Corporation by, the Chairman or Vice-Chairman, if any, of the Board of Directors, or the President or a Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation. Any or all of the signatures on such certificate may be a facsimile. Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, the By-Laws, applicable securities laws or any agreement among any number of shareholders or among such holders and the Corporation shall have conspicuously noted on the face or back of such certificate either the full text of such restriction or a statement of the existence of such restriction. 4.3 TRANSFERS. Except as otherwise established by rules and regulations adopted by the Board of Directors, and subject to applicable law, shares of stock may be transferred on the books of the Corporation by the surrender to the Corporation or its transfer agent of the certificate representing such shares, properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the Corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these By-Laws, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the Corporation in accordance with the requirements of these By-Laws. 4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a new certificate of stock in place of any previously issued certificate alleged to have been lost, stolen, or destroyed, upon such terms and conditions as the President may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity as the President may require for the protection of the Corporation or any transfer agent or registrar. -13- 4.5 RECORD DATE. The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders or, to the extent permitted by the Certificate of Incorporation and these By-laws, to express consent (or dissent) to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. Such record date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action to which such record date relates. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting (to the extent permitted by the Certificate of Incorporation and these By-laws) when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE 5 - GENERAL PROVISIONS 5.1 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. 5.2 CORPORATE SEAL. The corporate seal shall be in such form as shall be approved by the Board of Directors. 5.3 NOTICES. Except as otherwise specifically provided herein or required by law or the Certificate of Incorporation, all notices required to be given under these By-laws shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram or facsimile transmission. Any such notice shall be addressed to the recipient thereof at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received shall be deemed to be the time of the giving of the notice. 5.4 WAIVER OF NOTICE. Whenever any notice whatsoever is required to be given by law, by the Certificate of Incorporation or by these By-Laws, a waiver of such notice either in writing signed by the person entitled to such notice or such person's duly authorized attorney, or by telegraph, facsimile transmission or any other available method, whether before, at or after the -14- time stated in such waiver, or the appearance of such person or persons at such meeting in person or by proxy, shall be deemed equivalent to such notice. 5.5 EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the Corporation shall, as to all persons who rely on the certificate in good faith, be conclusive evidence of such action. 5.6 FACSIMILE SIGNATURES. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these By-Laws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. 5.7 RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees or committees of the Board of Directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. 5.8 TIME PERIODS. In applying any provision of these By-Laws that requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. 5.9 CERTIFICATE OF INCORPORATION. All references in these By-Laws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the Corporation, as amended and in effect from time to time. 5.10 TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction between the Corporation and one or more of the directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because such director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his, her or their votes are counted for such purpose, if: (1) The material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; -15- (2) The material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board of Directors, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. 5.11 SEVERABILITY. Any determination that any provision of these By-Laws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these By-Laws. 5.12 PRONOUNS. All pronouns used in these By-Laws shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the persons or persons so designated may require. ARTICLE 6 - AMENDMENTS 6.1 BY THE BOARD OF DIRECTORS. Except as is otherwise set forth in these By-Laws, these By-Laws may be altered, amended or repealed, or new by-laws may be adopted, by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. 6.2 BY THE STOCKHOLDERS. Except as otherwise set forth in these By-Laws, these By-Laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of the holders of at least seventy-five percent (75%) of the voting power of all the then outstanding shares of the capital stock of the Corporation entitled to vote at any regular meeting of stockholders, or at any special meeting of stockholders, voting together as a single class; provided notice of such alteration, amendment, repeal or adoption of new by-laws shall have been stated in the notice of such special meeting. -16- EX-10.1 7 EXHIBIT 10.1 Exhibit 10.1 - ----------------------------------------------------------------- - ----------------------------------------------------------------- NetScout Systems, Inc. (A Delaware Corporation) 1990 STOCK OPTION PLAN - ----------------------------------------------------------------- - ----------------------------------------------------------------- NetScout Systems, Inc. 1990 STOCK OPTION PLAN TABLE OF CONTENTS
PAGE - -------------------------------------------------------------------------------- 1. PURPOSE .............................................................. 1 2. ADMINISTRATION OF THE PLAN ........................................... 1 3. OPTION SHARES ........................................................ 1 4. AUTHORITY TO GRANT OPTIONS ........................................... 2 5. WRITTEN AGREEMENT .................................................... 2 6. ELIGIBILITY .......................................................... 2 7. OPTION PRICE ......................................................... 2 8. DURATION OF OPTIONS .................................................. 3 9. AMOUNT EXERCISABLE ................................................... 4 10. EXERCISE OF OPTION ................................................... 4 11. TRANSFERABILITY OF OPTIONS ........................................... 5 12. TERMINATION OF EMPLOYMENT OR INVOLVEMENT OF OPTIONEE WITH THE COMPANY .......................................................... 5 13. REQUIREMENTS OF LAW................................................... 6 14. NO RIGHTS AS STOCKHOLDER.............................................. 7 15. EMPLOYMENT OBLIGATION ................................................ 7 16. FORFEITURE FOR DISHONESTY ............................................ 7 17. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE ........................... 7 18. AMENDMENT OR TERMINATION OF PLAN ..................................... 9 19. REPURCHASE RIGHTS OF THE COMPANY ..................................... 9 20. EFFECTIVE DATE AND DURATION OF THE PLAN ............................. 13
NetScout Systems, Inc. (A Delaware Corporation) 1990 STOCK OPTION PLAN 1. PURPOSE The purpose of this 1990 Stock Option Plan (the "PLAN") is to encourage directors, consultants and key employees of NetScout Systems, Inc. (the "COMPANY") and its Subsidiaries (as hereinafter defined) to continue their association with the Company, by providing favorable opportunities for such persons to participate in the ownership of the Company and in its future growth through the granting of stock options, some of which, as specially designated under Section 4 hereof, are designed to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "CODE"). The term "SUBSIDIARY" as used in the Plan means a corporation of which the Company owns, directly or indirectly through an unbroken chain of ownership, fifty percent (50%) or more of the total combined voting power of all classes of stock. 2. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Board Of Directors, which shall have the authority to adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan. All questions of interpretation and application of such rules and regulations, of the Plan or of options granted thereunder (the "OPTIONS") shall be subject to the determination, which shall be final and binding, of a majority of the Board of Directors. The Plan shall be administered in such a manner as to permit those Options granted hereunder and specially designated under Section 4 hereof to qualify as "incentive stock options" as described in Section 422 of the Code. 3. OPTION SHARES The stock subject to Options under the Plan shall be shares of the Company's common stock, par value $0.010 per share (the "STOCK"). The total amount of the Stock with respect to which Options may be granted shall not exceed in the aggregate 2,257,333 shares of Non-Voting Common Stock (the "Option Pool"); provided that such aggregate number of shares shall be subject to adjustment in accordance with the provisions of Section 17.1 In the event - -------- (1) The Plan was adopted initially by Frontier Software Development, Inc., a Massachusetts corporation, and was assumed by Frontier Software Development, Inc. (currently NetScout Systems, Inc.), a Delaware corporation, in connection with the reincorporating of Frontier in Delaware. Each share of Frontier Massachusetts became 50 shares of Frontier Delaware. The Option Pool reflects all stock splits effected to date. that any outstanding Option shall expire for any reason or shall terminate by reason of the death or severance of employment of the optionee, the surrender of any such Option, or any other cause, the shares of Stock allocable to the unexercised portion of such Option may again be subject to an option under the Plan. 4. AUTHORITY TO GRANT OPTIONS The Board of Directors may grant from time to time, to such eligible individuals as it shall from time to time determine, an Option or Options to buy a stated number of shares of Stock under the terms and conditions of the Plan, each of which Option or Options shall be designated at the time of grant either a nonqualified option or an "incentive stock option" within the meaning of Section 422 of the Code. Subject only to any applicable limitations set forth elsewhere in the Plan, the number of shares of Stock to be covered by any Option shall be as determined by the Board of Directors. 5. WRITTEN AGREEMENT Each Option granted hereunder shall be embodied in a written option agreement which shall be subject to the terms and conditions prescribed herein and shall be signed by the optionee and by the President or any Vice President of the Company for and in the name and on behalf of the Company. Such an option agreement shall indicate whether the subject Option has been designated a nonqualified option or an incentive stock option. The written option agreement for any Option shall contain such provisions not inconsistent with this Plan as the Board of Directors in its discretion shall deem advisable. 6. ELIGIBILITY The individuals who shall be eligible for grant of Options under the Plan shall be key employees (including officers who may be members of the Board), directors who are not employees and other individuals who render services of special importance to the management, operation, or development of the Company or a Subsidiary, and who have contributed or may be expected to contribute materially to the success of the Company or a Subsidiary. Options designated incentive stock options shall not be granted to any individual who is not an employee of the Company or a Subsidiary. 7. OPTION PRICE The price at which shares may be purchased pursuant to an Option shall be specified by the Board of Directors at the time the Option is granted, but in the case of an incentive stock option shall not be less than the fair market value of the shares of Stock on the date the Option is granted. For purposes of the Plan, the "fair market value" of a share of Stock at any particular date shall be determined according to the following rules: (i) if the Stock is not at the time listed or admitted to trading on a stock exchange, the fair market value shall be the mean between the lowest reported bid price and highest reported asked price of the Stock on the date in question in the over-the-counter market, as such prices are reported in a publication of general circulation selected by the Board of Directors and regularly reporting the price of the Stock in such market; provided, however, that if the price of the Stock is not so reported, the fair market value shall be determined by the Board of Directors, which may take into consideration (1) the price paid for the Stock in the most recent trade of a substantial number of shares known to the Board of Directors to have occurred at arm's length between willing and knowledgeable investors, or (2) an appraisal by an independent party, or (3) any other method of valuation undertaken in good faith by the Board of Directors or some or all of the above as the Board of Directors shall in its discretion elect; or (ii) if the Stock is at the time listed or admitted to trading on any stock exchange, then the fair market value shall be the mean between the lowest and highest reported sale prices of the Stock on the date in question on the principal exchange on which the Stock is then listed or admitted to trading. If no reported sale of Stock takes place on the date in question on the principal exchange, then the reported closing asked price of the Stock on such date on the principal exchange shall be determinative of fair market value. In the case of any employee of the Company or a Subsidiary who owns, directly or indirectly, Stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any corporation which on the date of grant of an Option is a Subsidiary, the price at which shares may be so purchased pursuant to an incentive stock option shall be not less than one hundred ten percent (110%) of the fair market value of the Stock on the date the Option is granted. 8. DURATION OF OPTIONS The duration of any Option shall be specified by the Board of Directors, but no Option designated an incentive stock option shall be exercisable after the expiration of ten (10) years from the date such Option is granted; and no incentive stock option granted to an employee of the Company or a Subsidiary who owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or a Subsidiary shall be exercisable after the expiration of five (5) years from the date such Option is granted. The Board of Directors, in its discretion, may provide that an Option shall be exercisable during its entire duration or during any lesser period of time. 9. AMOUNT EXERCISABLE Each Option may be exercised so long as it is valid and outstanding from time to time, in part or as a whole, in such manner and subject to such conditions as the Board of Directors in its discretion may provide in the option agreement; provided, however, that incentive stock options granted to an employee under the Plan (and any other incentive stock option plans of the Company and its Subsidiaries) shall not, in the aggregate, become exercisable for the first time in any one calendar year for shares of Stock with an aggregate fair market value (determined as of the respective date or dates of grant) of more than $100,000. 10. EXERCISE OF OPTIONS Options shall be exercised by the delivery of written notice to the Company setting forth the number of shares with respect to which the Option is to be exercised, accompanied by payment of the option price of such shares, which payment shall be made, subject to the alternative provisions of this Section, in cash or by such cash equivalents, payable to the order of the Company in an amount in United States dollars equal to the option price of such shares, as the Board of Directors in its discretion shall consider acceptable. Such notice shall be delivered in person to the Secretary of the Company or shall be sent by registered mail, return receipt requested, to the Secretary of the Company, in which case delivery shall be deemed made on the date such notice is deposited in the mail. Alternatively, payment of the option price may be made, in whole or in part, in shares of Stock previously acquired by the optionee. If payment is made in whole or in part in shares of Stock, then the optionee shall deliver to the Company in payment of the option price of the shares with respect of which such Option is exercised (i) certificates registered in the name of such optionee representing a number of shares of Stock legally and beneficially owned by such optionee, free of all liens, claims and encumbrances of every kind and having a fair market value on the date of delivery of such notice equal to the option price of the shares with respect to which such Option is to be exercised, such certificates to be accompanied by stock powers duly endorsed in blank by the record holder of the shares represented by such certificates; and (ii) if the option price of the shares with respect to which such Option is to be exercised exceeds such fair market value, cash or such cash equivalents payable to the order to the Company, in an amount in United States dollars equal to the amount of such excess, as the Board of Directors in its discretion shall consider acceptable. Notwithstanding the foregoing provisions of this Section, the Board of Directors, in its sole discretion, may refuse to accept shares of Stock in payment of the option price of the shares with respect to which such Option is to be exercised and, in that event, any certificates representing shares of Stock which were delivered to the Company with such written notice shall be returned to such optionee together with notice by the Company to such optionee of the refusal of the Board of Directors to accept such shares of Stock. Alternatively, if the option agreement so specifies, payment of the option price may be made in part by a promissory note executed by the optionee and collaterally secured by the Stock obtained upon exercise of the Option, providing for repayment at such time or times as the Board of Directors shall specify; provided, however, (a) that such promissory note shall provide for repayment no later than five (5) years from the date of exercise and for interest at a rate not less than the "base" rate announced on the date of exercise by BayBank Middlesex, N.A., (b) that in any event an amount not less than the par value of the shares of Stock with respect to which the Option is being exercised must be paid in cash, cash equivalents, or shares of Stock in accordance with this Section and (c) the payment of such exercise price by promissory note does not violate any applicable laws or regulations, including, without limitation, margin lending rules. The decision as to whether to permit partial payment by a promissory note for Stock to be issued upon exercise of any Option granted shall rest entirely in the discretion of the Board of Directors. As promptly as practicable after the receipt by the Company of (i) written notice from the optionee setting forth the number of shares with respect to which such Option is to be exercised and (ii) payment of the option price of such shares in the form required by the foregoing provisions of this Section, the Company shall cause to be delivered to such optionee certificates representing the number of shares with respect to which such Option has been so exercised. 11. TRANSFERABILITY OF OPTIONS Options shall not be transferable by the optionee otherwise than by will or under the laws of descent and distribution, and shall be exercisable during his or her lifetime only by the optionee. 12. TERMINATION OF EMPLOYMENT OR INVOLVEMENT OF OPTIONEE WITH THE COMPANY For purposes of this Section, employment by a Subsidiary shall be considered employment by the Company. Non-qualified options shall be exercisable following an optionee's termination of employment or involvement with the Company to the extent provided below with respect to incentive stock options, unless otherwise set forth in the option agreement for such non-qualified options. Except as may be otherwise expressly provided herein, Options designated incentive stock options shall be exercisable after the optionee's termination of employment with the Company only within the period of three (3) months after the date the optionee ceases to be in the employ of the Company, and only to the extent to which the optionee was entitled to exercise the Option immediately prior to the termination of his or her employment. If, before the date of expiration of the Option, the optionee shall be retired in good standing from the employ of the Company for reasons of age under the then established rules of the Company, the Option shall terminate on the earlier of such date of expiration or three (3) months after the date of such retirement. In the event of the death of the holder of an Option before the date of expiration of such Option and while in the employ of the Company or during the three (3) month period described in the preceding sentence, or in the event of the retirement of the optionee for reasons of disability (within the meaning of Section 22(e)(3) of the Code), such Option shall terminate on the earlier of such date of expiration or one (l) year following the date of such death or retirement. After the death of the optionee, his or her executors, administrators or any persons to whom his or her Option may be transferred by will or by the laws of descent and distribution shall have the right at any time prior to such termination to exercise the Option to the extent to which the optionee was entitled to exercise the Option on the date of his or her death. Authorized leave of absence or absence on military or government service shall not constitute severance of the employment relationship between the Company and the optionee for purposes of the Plan, provided that either (i) such absence is for a period of no more than ninety (90) days or (ii) the Employee's right to re-employment after such absence is guaranteed either by statute or by contract. For optionees who are not employees of the Company, options shall be exercisable for such periods following the termination of the optionee's involvement with the Company as may be set forth in the specific written option agreement with the optionee. 13. REQUIREMENTS OF LAW The Company shall not be required to sell or issue any shares upon the exercise of any Option if the issuance of such shares shall constitute or result in a violation by the optionee or the Company of any provisions of any law, statute or regulation of any governmental authority. Specifically, in connection with the Securities Act of 1933, as amended (the "SECURITIES ACT"), upon exercise of any Option the Company shall not be required to issue such shares unless the Board of Directors has received evidence satisfactory to it to the effect that the holder of such Option will not transfer such shares except pursuant to a registration statement in effect under the Securities Act or unless an opinion of counsel satisfactory to the Company has been received by the Company to the effect that such registration is not required. Any determination in this connection by the Board of Directors shall be final, binding and conclusive. The Company shall not be obligated to take any other affirmative action in order to cause the exercise of an Option or the issuance of shares pursuant thereto to comply with any law or regulations of any governmental authority, including, without limitation, the Securities Act or applicable state securities laws. The Company shall not be required to sell or issue any shares upon the exercise of any Option if the Board of Directors is advised by counsel that the issuance of such shares would result in the termination of any then effective election of the Company to be taxed as an S corporation pursuant to the Code. 14. NO RIGHTS AS STOCKHOLDER No optionee shall have rights as a stockholder with respect to shares covered by his or her Option until the date of issuance of a stock certificate for such shares; except as otherwise provided in Section 17 no adjustment for dividends or otherwise shall be made if the record date therefor is prior to the date of issuance of such certificate. 15. EMPLOYMENT OBLIGATION The granting of any Option shall not impose upon the Company or any Subsidiary any obligation to employ or continue to employ any optionee, or to engage or retain the services of any person and the right of the Company or any Subsidiary to terminate the employment or services of any person shall not be diminished or affected by reason of the fact that an Option has been granted to him or her. The existence of any Option shall not be taken into account in determining any damages relating to termination of employment for any reason. 16. FORFEITURE AS A RESULT OF TERMINATION FOR CAUSE Notwithstanding anything to the contrary in the Plan, if the Board of Directors determines, after full consideration of the facts presented on behalf of both the Company and an optionee, that (a) the optionee has been engaged in fraud, embezzlement, theft, commission of a felony or proven dishonesty in the course of his or her employment by or involvement with the Company or a Subsidiary, which damaged the Company or a Subsidiary, or has made unauthorized disclosure of trade secrets or other proprietary information of the Company or a Subsidiary or of a third party who has entrusted such information to the Company or a Subsidiary, (b) the optionee's employment or involvement was otherwise terminated for "cause", as defined in any employment agreement with the optionee, if applicable, or if there is no such agreement, as determined by the Board of Directors, which may determine that "cause" includes among other matters the failure of the optionee to carry out his or her assigned duties diligently and in a manner satisfactory to the Company, then the optionee's right to exercise an Option shall terminate as of the date of such termination and the optionee shall forfeit all unexercised Options. If an optionee whose behavior the Company asserts falls within the provisions of (a) or (b) above attempts to exercise an Option prior to a decision of the Board of Directors, the Company shall not be required to recognize such exercise until the Board of Directors has made its decision; provided, however, if the Board of Directors finds in favor of the optionee then the optionee will be deemed to have exercised such Options retroactively as of the date he or she originally gave written notice of his or her attempt to exercise. The decision of the Board of Directors as to the cause of an optionee's discharge and the damage done to the Company or a Subsidiary shall be final, binding and conclusive. No decision of the Board of Directors, however, shall affect in any manner the finality of the discharge of such optionee by the Company or a Subsidiary. 17. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE The existence of outstanding Options shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business or any merger or consolidation of the Company or any issue of bonds, debentures, preferred or preference stock, whether or not convertible into the Stock or other securities, ranking prior to the Stock or affecting the rights thereof, or warrants, rights or options to acquire the same, or the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business or any other corporate act or proceeding, whether of a similar character or otherwise. The number of shares of Stock in the Option Pool (less the number of shares theretofore delivered upon exercise of Options) and the number of shares of Stock covered by any outstanding Option and the price per share payable upon exercise thereof (provided that in no event shall the option price be less than the par value of such shares) shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Stock resulting from the subdivision, split, combination or consolidation of shares of Stock or any other capital adjustment, the payment of a Stock dividend or any other increase in such shares effected without receipt of consideration by the Company or any other decrease therein effected without a distribution of cash or property in connection therewith. In the event the Company merges or consolidates with one or more corporations and the Company is the surviving corporation, thereafter upon any exercise of an Option, the holder thereof shall be entitled to purchase in lieu of the number of shares of Stock as to which the Option shall then be exercisable, the number and class of shares of stock and securities to which the holder would have been entitled pursuant to the terms of the agreement of merger or consolidation if immediately prior to such merger or consolidation, the holder had been the holder of record of shares of Stock as to which the Option is then exercisable. In the event the Company merges or consolidates with a wholly-owned subsidiary for the purpose of reincorporating itself under the laws of another jurisdiction, the optionees will be entitled to acquire shares of the common stock of the reincorporated Company upon the same terms and conditions as were in effect immediately prior to such reincorporation (unless such reincorporation involves a change in the number of shares, in which case proportional adjustments shall be made as provided above) and the Plan, unless otherwise rescinded by the Board, will remain the Plan of the reincorporated Company. Except as otherwise provided in the preceding paragraph, if the Company is merged into or consolidated with another corporation under circumstances where the Company is not the surviving corporation, or in other circumstances in which the Board in its discretion deems it appropriate for the provisions of this paragraph to apply, or if the Company is liquidated or sells or otherwise disposes of all or substantially all of its assets to another corporation while unexercised Options remain outstanding under the Plan, (i) subject to the provisions of clause (iii) below, after the effective date of such merger, consolidation or sale, as the case may be, each holder of an outstanding Option shall be entitled, upon exercise of such Option, to receive in lieu of shares of Stock, shares of such stock or other securities as the holders of shares of Stock received pursuant to the terms of the merger, consolidation or sale; (ii) the Board may waive any limitations imposed pursuant to Section 9 or Section 19 so that all Options from and after a date prior to the effective date of such merger, consolidation, liquidation or sale, as the case may be, specified by the Board, shall be exercisable in full; and (iii) all outstanding Options may be cancelled by the Board as of the effective date of any such merger, consolidation, liquidation or sale provided that notice of such cancellation shall be given to each holder of an Option not less than thirty (30) days preceding the effective date of such merger, consolidation, liquidation, sale or disposition and provided that the Board may in its sole discretion waive any limitations imposed pursuant to Section 9 or Section 19 with respect to any Option so that such Option shall be exercisable in full or in part, as the Board may determine, during such thirty (30) day period. Except as expressly provided herein, the issue by the Company of shares of Stock or other securities of any class or securities convertible into or exchangeable or exercisable for shares of Stock or other securities of any class for cash or property or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number, class or price of shares of Stock then subject to outstanding Options. 18. AMENDMENT OR TERMINATION OF PLAN The Board may modify, revise or terminate the Plan at any time and from time to time; provided, however, that without the further approval of the holders of at least a majority of the outstanding shares of Stock having voting rights pursuant to the Company's Certificate of Incorporation, as amended from time to time, the Board may not (i) materially increase the benefits accruing to optionees under the Plan or make any "modifications" as that term is defined under Section 453(h)(3) (or its successor) of the Code if such increase in benefits or modifications would adversely affect(a) the availability to the Plan of the protections of Section 16(b) of the Securities Exchange Act of 1934, if applicable to the Company, or (b) the qualification of the Plan or any Options for Incentive Stock Option treatment under Section 422 of the Code; (ii) change the aggregate number of shares of Stock which may be issued under Options pursuant to the provisions of the Plan; (iii) reduce the option price at which incentive stock options may be granted to an amount less than the fair market value per share at the time the Option is granted; or (iv) change the class of persons eligible to receive incentive stock options. Notwithstanding the preceding sentence, the Board of Directors shall in all events have the power to make such changes in the Plan and in the regulations and administrative provisions hereunder or in any outstanding Option as, in the opinion of counsel for the Company, may be necessary or appropriate from time to time to enable any Option granted pursuant to the Plan to qualify as an incentive stock option or such other stock option as may be defined under the Code, as amended from time to time, so as to receive preferential federal income tax treatment. 19. REPURCHASE RIGHTS OF THE COMPANY Unless an optionee's option agreement specifically provides to the contrary, or an optionee has entered into an employment, stockholder or other agreement with the Company which provides for the repurchase of options or stock in the event such optionee's employment or involvement with the Company terminates, the provisions of this Section 19 shall apply to each Option granted under the Plan and to the shares of Stock acquired on exercise thereof. VOLUNTARY OR INVOLUNTARY TRANSFERS OF STOCK. Shares of Stock acquired by an optionee pursuant to the exercise of an Option or Options granted under the Plan shall not be voluntarily transferred by the optionee without the written consent of the Board which consent may be withheld or conditioned as the Board sees fit. If such Stock is subject to an involuntary transfer, including by reason of death, a divorce settlement or judicial proceeding, the Company shall have the right to repurchase all or any shares of such Stock (including any Stock subsequently acquired by the optionee upon exercise of an Option if the Stock so acquired is subject to such involuntary transfer) at a price equal to the Repurchase Price at the time of the involuntary transfer event. The Company may exercise its repurchase right no later than 180 days following the later of (a) the date of such involuntary transfer of such shares of Stock, (b) the date of any such subsequent acquisition of Stock upon exercise of an Option and (c) the Board of Director's receipt of written notice of the occurrence of such transfer event. Any such shares of Stock as to which the Company does not exercise its repurchase rights within such period shall thereafter be free of the restrictions of this Section 19. REPURCHASE PRICE. As used herein the term "REPURCHASE PRICE" shall mean the fair market value of a share of Stock as determined in good faith by a majority of the disinterested members of the Board of Directors of the Company. In making their determination of fair market value of a share of Stock the Directors will not take into account that the Stock may be illiquid or may constitute a minority interest in the Company. TERMINATION OF EMPLOYMENT OR INVOLVEMENT. If the optionee's employment by or involvement with the Company (including, for this purpose, any Subsidiary) shall terminate for any reason other than the optionee's death or a Justifiable Termination or optionee's retirement for reasons of age or disability in accordance with the then policy of the Company, the Company shall have the right to repurchase all or any of such shares of Stock at a price equal to the Repurchase Price at the time of such repurchase. In addition, if at the time of such termination an optionee holds an Option granted under the Plan which is by its terms exercisable after such termination, the Company shall have the right to repurchase all or any part of the shares of Stock acquired pursuant to the exercise of such Option, at the Repurchase Price. In the case of a Justifiable Termination (which term shall mean termination on account of the optionee's malfeasance or optionee's violation of any agreement with the Company or any similar justifiable cause) the Company shall have the right to repurchase all or any of such shares of Stock at the option exercise price per share. If the option price for any repurchased shares has been paid by the optionee's promissory note pursuant to Section 10, then the repurchase price for such shares of Stock shall be first applied to the repayment of the outstanding amount, if any, due under such note in respect of the repurchased shares, and any accrued but unpaid interest thereon. The Company's right to repurchase shares of Stock may be exercised at any time during the period beginning on the date of the optionee's termination of employment or involvement and ending ninety (90) days after the later of (i) the date of such termination and (ii) the date on which shares of Stock subject to the repurchase rights of this Section are acquired by the optionee. Any such shares of Stock as to which the Company does not exercise its repurchase rights within such period shall thereafter be free of the restrictions of this Section. SECURITIES LAWS; TRANSFERS IN VIOLATION OF PLAN. Notwithstanding any other provision of this Plan the Company may refuse to permit transfer of the Offered Shares if in the opinion of its legal counsel such transfer would violate securities laws or subject the Company to liability thereunder. Any sale, transfer, pledge or other disposition of shares of Stock which is not in accordance with the provisions of this Section 19 shall be void and of no effect and shall not be recognized by the Company. 20. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall become effective and shall be deemed to have been adopted on October 4, 1990 subject only to ratification by the holders of at least a majority of the outstanding shares of Stock within twelve (12) months after such date. Unless the Plan shall have terminated earlier, the Plan shall terminate on the tenth (10th) anniversary of its effective date, and no Option shall be granted pursuant to the Plan after the day preceding the tenth (10th) anniversary of its effective date. EX-10.2 8 EXHIBIT 10.2 Exhibit 10.2 NETSCOUT SYSTEMS, INC. 1999 STOCK OPTION AND INCENTIVE PLAN 1. PURPOSE AND ELIGIBILITY The purpose of this 1999 Stock Option and Incentive Plan (the "PLAN") of NetScout Systems, Inc. (the "COMPANY") is to provide stock options and other equity interests in the Company (each an "AWARD") to employees, officers, directors, consultants and advisors of the Company and its Subsidiaries, all of whom are eligible to receive Awards under the Plan. Any person to whom an Award has been granted under the Plan is called a "PARTICIPANT". Additional definitions are contained in Section 8. 2. ADMINISTRATION a. ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be administered by the Board of Directors of the Company (the "BOARD"). The Board, in its sole discretion, shall have the authority to grant and amend Awards, to adopt, amend and repeal rules relating to the Plan and to interpret and correct the provisions of the Plan and any Award. All decisions by the Board shall be final and binding on all interested persons. Neither the Company nor any member of the Board shall be liable for any action or determination relating to the Plan. b. APPOINTMENT OF COMMITTEES. To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "COMMITTEE"). All references in the Plan to the "BOARD" shall mean such Committee or the Board. c. DELEGATION TO EXECUTIVE OFFICERS. To the extent permitted by applicable law, the Board may delegate to one or more executive officers of the Company the power to grant Awards and exercise such other powers under the Plan as the Board may determine, PROVIDED THAT the Board shall fix the maximum number of Awards to be granted and the maximum number of shares issuable to any one Participant pursuant to Awards granted by such executive officers. 3. STOCK AVAILABLE FOR AWARDS a. NUMBER OF SHARES. Subject to adjustment under Section 3(c), the aggregate number of shares of Common Stock of the Company (the "COMMON STOCK") that may be issued pursuant to the Plan is 6,750,000 shares. If any Award expires, or is terminated, surrendered or forfeited, in whole or in part, the unissued Common Stock covered by such Award shall again be available for the grant of Awards under the Plan. If shares of Common Stock issued pursuant to the Plan are repurchased by, or are surrendered or forfeited to, the Company at no more than cost, such shares of Common Stock shall again be available for the grant of Awards under the Plan; PROVIDED, HOWEVER, that the cumulative number of such shares that may be so reissued under the Plan will not exceed 6,750,000 shares. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. b. PER-PARTICIPANT LIMIT. Subject to adjustment under Section 3(c), no Participant may be granted Awards during any one fiscal year to purchase more than 1,000,000 shares of Common Stock. c. ADJUSTMENT TO COMMON STOCK. In the event of any stock split, stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off, split-up, or other similar change in capitalization or event, (i) the number and class of securities available for Awards under the Plan and the per-Participant share limit, (ii) the number and class of securities, vesting schedule and exercise price per share subject to each outstanding Option, (iii) the repurchase price per security subject to repurchase, and (iv) the terms of each other outstanding stock-based Award shall be adjusted by the Company (or substituted Awards may be made) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is appropriate. If Section 7(e)(i) applies for any event, this Section 3(c) shall not be applicable. 4. STOCK OPTIONS a. GENERAL. The Board may grant options to purchase Common Stock (each, an "OPTION") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option and the Common Stock issued upon the exercise of each Option, including vesting provisions, repurchase provisions and restrictions relating to applicable federal or state securities laws, as it considers advisable. b. INCENTIVE STOCK OPTIONS. An Option that the Board intends to be an "incentive stock option" as defined in Section 422 of the Code (an "INCENTIVE STOCK OPTION") shall be granted only to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Board and the Company shall have no liability if an Option or any part thereof that is intended to be an Incentive Stock Option does not qualify as such. An Option or any part thereof that does not qualify as an Incentive Stock Option is referred to herein as a "NONSTATUTORY STOCK OPTION". c. EXERCISE PRICE. The Board shall establish the exercise price (or determine the method by which the exercise price shall be determined) at the time each Option is granted and specify it in the applicable option agreement. d. DURATION OF OPTIONS. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement. e. EXERCISE OF OPTION. Options may be exercised only by delivery to the Company of a written notice of exercise signed by the proper person together with payment in full as specified in Section 4(f) for the number of shares for which the Option is exercised. f. PAYMENT UPON EXERCISE. Common Stock purchased upon the exercise of an Option shall be paid for by one or any combination of the following forms of payment: (i) by check payable to the order of the Company; (ii) except as otherwise explicitly provided in the applicable option agreement, and only if the Common Stock is then publicly traded, delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; or (iii) to the extent explicitly provided in the applicable option agreement, by (x) delivery of shares of Common Stock owned by the Participant valued at fair market value (as determined by the Board or as determined pursuant to the applicable option agreement), (y) delivery of a promissory note of the Participant to the Company (and delivery to the Company by the Participant of a check in an amount equal to the par value of the shares purchased), or (z) payment of such other lawful consideration as the Board may determine. 5. RESTRICTED STOCK a. GRANTS. The Board may grant Awards entitling recipients to acquire shares of Common Stock, subject to (i) delivery to the Company by the Participant of a check in an amount at least equal to the par value of the shares purchased, and (ii) the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price from the Participant in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, a "RESTRICTED STOCK AWARD"). b. TERMS AND CONDITIONS. The Board shall determine the terms and conditions of any such Restricted Stock Award. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). After the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or, if the Participant has died, to the beneficiary designated by a Participant, in a manner determined by the Board, to receive amounts due or exercise rights of the Participant in the event of the Participant's death (the "DESIGNATED BENEFICIARY"). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 6. OTHER STOCK-BASED AWARDS The Board shall have the right to grant other Awards based upon the Common Stock having such terms and conditions as the Board may determine, including, without limitation, the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights, phantom stock awards or stock units. 7. GENERAL PROVISIONS APPLICABLE TO AWARDS a. TRANSFERABILITY OF AWARDS. Except as the Board may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. b. DOCUMENTATION. Each Award under the Plan shall be evidenced by a written instrument in such form as the Board shall determine or as executed by an officer of the Company pursuant to authority delegated by the Board. Each Award may contain terms and conditions in addition to those set forth in the Plan PROVIDED THAT such terms and conditions do not contravene the provisions of the Plan. c. BOARD DISCRETION. The terms of each type of Award need not be identical, and the Board need not treat Participants uniformly. d. TERMINATION OF STATUS. The Board shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, or the Participant's legal representative, conservator, guardian or Designated Beneficiary, may exercise rights under the Award. e. ACQUISITION OF THE COMPANY (i) CONSEQUENCES OF AN ACQUISITION. (A) ACCELERATION OF VESTING. Upon the consummation of an Acquisition, the vesting provisions of all Awards shall become accelerated by a period of one year. Unless otherwise expressly provided in the applicable Option or Award, upon the occurrence of an Acquisition, the Board or the board of directors of the surviving or acquiring entity (as used in this Section 7(e)(i)(A), also the "BOARD"), shall, as to outstanding Awards (on the same basis or on different bases, as the Board shall specify), make appropriate provision for the continuation of such Awards by the Company or the assumption of such Awards by the surviving or acquiring entity and by substituting on an equitable basis for the shares then subject to such Awards either (a) the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition, (b) shares of stock of the surviving or acquiring corporation or (c) such other securities as the Board deems appropriate, the fair market value of which (as determined by the Board in its sole discretion) shall not materially differ from the fair market value of the shares of Common Stock subject to such Awards immediately preceding the Acquisition. In addition to or in lieu of the foregoing, with respect to outstanding Options, the Board may, upon written notice to the affected optionees, provide that one or more Options must be exercised, to the extent then exercisable or to be exercisable as a result of the Acquisition, within a specified number of days of the date of such notice, at the end of which period such Options shall terminate; or terminate one or more Options in exchange for a cash payment equal to the excess of the fair market value (as determined by the Board in its sole discretion) of the shares subject to such Options (to the extent then exercisable or to be exercisable as a result of the Acquisition) over the exercise price thereof. (B) ACQUISITION DEFINED. An "ACQUISITION" shall mean: (x) any merger or consolidation after which the voting securities of the Company outstanding immediately prior thereto represent (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) less than 50% of the combined voting power of the voting securities of the Company or such surviving or acquiring entity outstanding immediately after such event; or (y) any sale of all or substantially all of the assets or capital stock of the Company (other than in a spin-off or similar transaction) or (z) any other acquisition of the business of the Company, as determined by the Board. (ii) ASSUMPTION OF OPTIONS UPON CERTAIN EVENTS. In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Board may grant Awards under the Plan in substitution for stock and stock-based awards issued by such entity or an affiliate thereof. The substitute Awards shall be granted on such terms and conditions as the Board considers appropriate in the circumstances. (iii) POOLING-OF INTERESTS-ACCOUNTING. If the Company proposes to engage in an Acquisition intended to be accounted for as a pooling-of-interests, and in the event that the provisions of this Plan or of any Award hereunder, or any actions of the Board taken in connection with such Acquisition, are determined by the Company's or the acquiring company's independent public accountants to cause such Acquisition to fail to be accounted for as a pooling-of-interests, then such provisions or actions shall be amended or rescinded by the Board, without the consent of any Participant, to be consistent with pooling-of-interests accounting treatment for such Acquisition. (iv) PARACHUTE AWARDS. Notwithstanding the provisions of Section 7(e)(i)(A), if, in connection with an Acquisition described therein, a tax under Section 4999 of the Code would be imposed on the Participant (after taking into account the exceptions set forth in Sections 280G(b)(4) and 280G(b)(5) of the Code), then the number of Awards which shall become exercisable, realizable or vested as provided in such section shall be reduced (or delayed), to the minimum extent necessary, so that no such tax would be imposed on the Participant (the Awards not becoming so accelerated, realizable or vested, the "PARACHUTE AWARDS"); PROVIDED, HOWEVER, that if the "AGGREGATE PRESENT VALUE" of the Parachute Awards would exceed the tax that, but for this sentence, would be imposed on the Participant under Section 4999 of the Code in connection with the Acquisition, then the Awards shall become immediately exercisable, realizable and vested without regard to the provisions of this sentence. For purposes of the preceding sentence, the "AGGREGATE PRESENT VALUE" of an Award shall be calculated on an after-tax basis (other than taxes imposed by Section 4999 of the Code) and shall be based on economic principles rather than the principles set forth under Section 280G of the Code and the regulations promulgated thereunder. All determinations required to be made under this Section 7(e)(iv) shall be made by the Company. f. WITHHOLDING. Each Participant shall pay to the Company, or make provisions satisfactory to the Company for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. The Board may allow Participants to satisfy such tax obligations in whole or in part by transferring shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their fair market value (as determined by the Board or as determined pursuant to the applicable option agreement). The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. g. AMENDMENT OF AWARDS. The Board may amend, modify or terminate any outstanding Award including, but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, PROVIDED THAT, except as otherwise provided in Section 7(e)(iii), the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. h. CONDITIONS ON DELIVERY OF STOCK. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. i. ACCELERATION. The Board may at any time provide that any Options shall become immediately exercisable in full or in part, that any Restricted Stock Awards shall be free of some or all restrictions, or that any other stock-based Awards may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be, despite the fact that the foregoing actions may (i) cause the application of Sections 280G and 4999 of the Code if a change in control of the Company occurs, or (ii) disqualify all or part of the Option as an Incentive Stock Option. 8. MISCELLANEOUS a. DEFINITIONS. (i) "COMPANY," for purposes of eligibility under the Plan, shall include any present or future subsidiary corporations of NetScout Systems, Inc., as defined in Section 424(f) of the Code (a "SUBSIDIARY"), and any present or future parent corporation of NetScout Systems, Inc., as defined in Section 424(e) of the Code. For purposes of Awards other than Incentive Stock Options, the term "COMPANY" shall include any other business venture in which the Company has a direct or indirect significant interest, as determined by the Board in its sole discretion. (ii) "CODE" means the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder. (iii) "EMPLOYEE" for purposes of eligibility under the Plan shall include a person to whom an offer of employment has been extended by the Company. b. NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan. c. NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder thereof. d. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective on the date on which it is adopted by the Board. No Awards shall be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but Awards previously granted may extend beyond that date. e. AMENDMENT OF PLAN. The Board may amend, suspend or terminate the Plan or any portion thereof at any time. f. GOVERNING LAW. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of Delaware, without regard to any applicable conflicts of law. Adopted by the Board of Directors on April 14, 1999 Approved by the stockholders on --------------- EX-10.3 9 EXHIBIT 10.3 EXHIBIT 10.3 NETSCOUT SYSTEMS, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN ARTICLE 1--PURPOSE. This 1999 Employee Stock Purchase Plan (the "Plan") is intended to encourage stock ownership by all eligible employees of NetScout Systems, Inc. (the "Company"), a Delaware corporation, and its participating subsidiaries (as defined in Article 17) so that they may share in the growth of the Company by acquiring or increasing their proprietary interest in the Company. The Plan is designed to encourage eligible employees to remain in the employ of the Company and its participating subsidiaries. The Plan is intended to constitute an "employee stock purchase plan" within the meaning of Section 423(b) of the Internal Revenue Code of 1986, as amended (the "Code"). ARTICLE 2--ADMINISTRATION OF THE PLAN. The Plan may be administered by a committee appointed by the Board of Directors of the Company (the "Committee"). The Committee shall consist of not less than two members of the Company's Board of Directors. The Board of Directors may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, however caused, shall be filled by the Board of Directors. The Committee may select one of its members as Chairman, and shall hold meetings at such times and places as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. The interpretation and construction by the Committee of any provisions of the Plan or of any option granted under it shall be final, unless otherwise determined by the Board of Directors. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best, provided that any such rules and regulations shall be applied on a uniform basis to all employees under the Plan. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under it. In the event the Board of Directors fails to appoint or refrains from appointing a Committee, the Board of Directors shall have all power and authority to administer the Plan. In such event, the word "Committee" wherever used herein shall be deemed to mean the Board of Directors. ARTICLE 3--ELIGIBLE EMPLOYEES. All employees of the Company or any of its participating subsidiaries whose customary employment is more than 20 hours per week and for more than five months in any calendar year shall be eligible to receive options under the Plan to purchase common stock of the Company, and all eligible employees shall have the same rights and privileges hereunder. Persons who are eligible employees on the first business day of any Payment Period (as defined in Article 5) shall receive their options as of such day. Persons who become eligible employees after any date on which options are granted under the Plan shall be granted options on the first day of the next succeeding Payment Period on which options are granted to eligible employees under the Plan. In no event, however, may an employee be granted an option if such employee, immediately after the option was granted, would be treated as owning stock possessing five percent or more of the total combined voting power or value of all classes of stock of the Company or of any parent corporation or subsidiary corporation, as the terms "parent corporation" and "subsidiary corporation" are defined in Section 424(e) and (f) of the Code. For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply, and stock which the employee may purchase under outstanding options shall be treated as stock owned by the employee. ARTICLE 4--STOCK SUBJECT TO THE PLAN. The stock subject to the options under the Plan shall be shares of the Company's authorized but unissued common stock, par value $.001 per share (the "Common Stock"), or shares of Common Stock reacquired by the Company, including shares purchased in the open market. The aggregate number of shares which may be issued pursuant to the Plan is 750,000, subject to adjustment as provided in Article 12. If any option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject thereto shall again be available under the Plan. ARTICLE 5--PAYMENT PERIOD AND STOCK OPTIONS. The first Payment Period during which payroll deductions will be accumulated under the Plan shall commence on [the later to occur of October 1, 1999 and the first day of the first calendar month following effectiveness of the Form S-8 registration statement filed with the Securities and Exchange Commission covering the shares to be issued pursuant to the Plan] and shall end on March 31, 2000. For the remainder of the duration of the Plan, Payment Periods shall consist of the six-month periods commencing on April 1 and October 1 and ending on September 30 and March 31 of each calendar year. Twice each year, on the first business day of each Payment Period, the Company will grant to each eligible employee who is then a participant in the Plan an option to purchase on the last day of such Payment Period, at the Option Price hereinafter provided for, a maximum of 500 shares, on condition that such employee remains eligible to participate in the Plan throughout the remainder of such Payment Period. The participant shall be entitled to exercise the option so granted only to the extent of the participant's accumulated payroll deductions on the last day of such Payment Period. If the participant's accumulated payroll deductions on the last day of the Payment Period would enable the participant to purchase more than 500 shares except for the 500-share limitation, the excess of the amount of the accumulated payroll deductions over the aggregate purchase price of the 500 shares shall be promptly refunded to the participant by the Company, without interest. The Option Price per share for each Payment Period shall be the lesser of (i) 85% of the average market price of the Common Stock on the first business day of the Payment Period and (ii) 85% of the average market price of the Common Stock on the last business day of the Payment Period, in either event rounded up to the nearest cent. The foregoing limitation on the number of shares subject to option and the Option Price shall be subject to adjustment as provided in Article 12. For purposes of the Plan, the term "average market price" on any date means (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the average of 2 the closing bid and asked prices last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq National Market; or (iv) if the Common Stock is not publicly traded, the fair market value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. For purposes of the Plan, the term "business day" means a day on which there is trading on the Nasdaq National Market or the aforementioned national securities exchange, whichever is applicable pursuant to the preceding paragraph; and if neither is applicable, a day that is not a Saturday, Sunday or legal holiday in Massachusetts. No employee shall be granted an option which permits the employee's right to purchase stock under the Plan, and under all other Section 423(b) employee stock purchase plans of the Company and any parent or subsidiary corporations, to accrue at a rate which exceeds $25,000 of fair market value of such stock (determined on the date or dates that options on such stock were granted) for each calendar year in which such option is outstanding at any time. The purpose of the limitation in the preceding sentence is to comply with Section 423(b)(8) of the Code. If the participant's accumulated payroll deductions on the last day of the Payment Period would otherwise enable the participant to purchase Common Stock in excess of the Section 423(b)(8) limitation described in this paragraph, the excess of the amount of the accumulated payroll deductions over the aggregate purchase price of the shares actually purchased shall be promptly refunded to the participant by the Company, without interest. ARTICLE 6--EXERCISE OF OPTION. Each eligible employee who continues to be a participant in the Plan on the last day of a Payment Period shall be deemed to have exercised his or her option on such date and shall be deemed to have purchased from the Company such number of full shares of Common Stock reserved for the purpose of the Plan as the participant's accumulated payroll deductions on such date will pay for at the Option Price, subject to the 500-share limit of the option and the Section 423(b)(8) limitation described in Article 5. If the individual is not a participant on the last day of a Payment Period, the he or she shall not be entitled to exercise his or her option. Only full shares of Common Stock may be purchased under the Plan. Unused payroll deductions remaining in a participant's account at the end of a Payment Period by reason of the inability to purchase a fractional share shall be carried forward to the next Payment Period. ARTICLE 7--AUTHORIZATION FOR ENTERING THE PLAN. An employee may elect to enter the Plan by filling out, signing and delivering to the Company an authorization: A. Stating the percentage to be deducted regularly from the employee's pay; B. Authorizing the purchase of stock for the employee in each Payment Period in accordance with the terms of the Plan; and C. Specifying the exact name or names in which stock purchased for the employee is to be issued as provided under Article 11 hereof. 3 Such authorization must be received by the Company at least ten days before the first day of the next succeeding Payment Period and shall take effect only if the employee is an eligible employee on the first business day of such Payment Period. Unless a participant files a new authorization or withdraws from the Plan, the deductions and purchases under the authorization the participant has on file under the Plan will continue from one Payment Period to succeeding Payment Periods as long as the Plan remains in effect. The Company will accumulate and hold for each participant's account the amounts deducted from his or her pay. No interest will be paid on these amounts. ARTICLE 8--MAXIMUM AMOUNT OF PAYROLL DEDUCTIONS. An employee may authorize payroll deductions in an amount (expressed as a whole percentage) not less than one percent (1%) but not more than ten percent (10%) of the employee's total compensation, including base pay or salary and any overtime, bonuses or commissions. ARTICLE 9--CHANGE IN PAYROLL DEDUCTIONS. Deductions may not be increased or decreased during a Payment Period. However, a participant may withdraw in full from the Plan. ARTICLE 10--WITHDRAWAL FROM THE PLAN. A participant may withdraw from the Plan (in whole but not in part) at any time prior to the last day of a Payment Period by delivering a withdrawal notice to the Company. To re-enter the Plan, an employee who has previously withdrawn must file a new authorization at least ten days before the first day of the next Payment Period in which he or she wishes to participate. The employee's re-entry into the Plan becomes effective at the beginning of such Payment Period, provided that he or she is an eligible employee on the first business day of the Payment Period. ARTICLE 11--ISSUANCE OF STOCK. Certificates for stock issued to participants shall be delivered as soon as practicable after each Payment Period by the Company's transfer agent. Stock purchased under the Plan shall be issued only in the name of the participant, or if the participant's authorization so specifies, in the name of the participant and another person of legal age as joint tenants with rights of survivorship. ARTICLE 12--ADJUSTMENTS. Upon the happening of any of the following described events, a participant's rights under options granted under the Plan shall be adjusted as hereinafter provided: 4 A. In the event that the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if, upon a reorganization, split-up, liquidation, recapitalization or the like of the Company, the shares of Common Stock shall be exchanged for other securities of the Company, each participant shall be entitled, subject to the conditions herein stated, to purchase such number of shares of Common Stock or amount of other securities of the Company as were exchangeable for the number of shares of Common Stock that such participant would have been entitled to purchase except for such action, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or exchange; and B. In the event the Company shall issue any of its shares as a stock dividend upon or with respect to the shares of stock of the class which shall at the time be subject to option hereunder, each participant upon exercising such an option shall be entitled to receive (for the purchase price paid upon such exercise) the shares as to which the participant is exercising his or her option and, in addition thereto (at no additional cost), such number of shares of the class or classes in which such stock dividend or dividends were declared or paid, and such amount of cash in lieu of fractional shares, as is equal to the number of shares thereof and the amount of cash in lieu of fractional shares, respectively, which the participant would have received if the participant had been the holder of the shares as to which the participant is exercising his or her option at all times between the date of the granting of such option and the date of its exercise. Upon the happening of any of the foregoing events, the class and aggregate number of shares set forth in Article 4 hereof which are subject to options which have been or may be granted under the Plan and the limitations set forth in the second paragraph of Article 5 shall also be appropriately adjusted to reflect the events specified in paragraphs A and B above. Notwithstanding the foregoing, any adjustments made pursuant to paragraphs A or B shall be made only after the Committee, based on advice of counsel for the Company, determines whether such adjustments would constitute a "modification" (as that term is defined in Section 424 of the Code). If the Committee determines that such adjustments would constitute a modification, it may refrain from making such adjustments. If the Company is to be consolidated with or acquired by another entity in a merger, a sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board") shall, with respect to options then outstanding under the Plan, either (i) make appropriate provision for the continuation of such options by arranging for the substitution on an equitable basis for the shares then subject to such options either (a) the consideration payable with respect to the outstanding shares of the Common Stock in connection with the Acquisition, (b) shares of stock of the successor corporation, or a parent or subsidiary of such corporation, or (c) such other securities as the Successor Board deems appropriate, the fair market value of which shall not materially exceed the fair market value of the shares of Common Stock subject to such options immediately preceding the Acquisition; or (ii) terminate each participant's options in exchange for a cash payment equal to the excess of (a) the fair market value on the date of the Acquisition, of the number of shares of Common Stock that the participant's accumulated payroll deductions as of the date of the Acquisition could purchase, at an option price determined with reference only to the first business day of the applicable Payment Period and subject to the 500-share, Code Section 423(b)(8) and fractional-share limitations on the amount of stock a participant would be entitled to purchase, over (b) the result of multiplying such number of shares by such option price. The Committee or Successor Board shall determine the adjustments to be made under this Article 12, and its determination shall be conclusive. 5 ARTICLE 13--NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS. An option granted under the Plan may not be transferred or assigned and may be exercised only by the participant. ARTICLE 14--TERMINATION OF EMPLOYEE'S RIGHTS. Whenever a participant ceases to be an eligible employee because of retirement, voluntary or involuntary termination, resignation, layoff, discharge, death or for any other reason, his or her rights under the Plan shall immediately terminate, and the Company shall promptly refund, without interest, the entire balance of his or her payroll deduction account under the Plan. Notwithstanding the foregoing, eligible employment shall be treated as continuing intact while a participant is on military leave, sick leave or other bona fide leave of absence, for up to 90 days, or for so long as the participant's right to re-employment is guaranteed either by statute or by contract, if longer than 90 days. ARTICLE 15--TERMINATION AND AMENDMENTS TO PLAN. The Plan may be terminated at any time by the Company's Board of Directors but such termination shall not affect options then outstanding under the Plan. It will terminate in any case when all or substantially all of the unissued shares of stock reserved for the purposes of the Plan have been purchased. If at any time shares of stock reserved for the purpose of the Plan remain available for purchase but not in sufficient number to satisfy all then unfilled purchase requirements, the available shares shall be apportioned among participants in proportion to the amount of payroll deductions accumulated on behalf of each participant that would otherwise be used to purchase stock, and the Plan shall terminate. Upon such termination or any other termination of the Plan, all payroll deductions not used to purchase stock will be refunded, without interest. The Committee or the Board of Directors may from time to time adopt amendments to the Plan provided that, without the approval of the stockholders of the Company, no amendment may (i) increase the number of shares that may be issued under the Plan; (ii) change the class of employees eligible to receive options under the Plan, if such action would be treated as the adoption of a new plan for purposes of Section 423(b) of the Code; or (iii) cause Rule 16b-3 under the Securities Exchange Act of 1934 to become inapplicable to the Plan. ARTICLE 16--LIMITS ON SALE OF STOCK PURCHASED UNDER THE PLAN. The Plan is intended to provide shares of Common Stock for investment and not for resale. The Company does not, however, intend to restrict or influence any employee in the conduct of his or her own affairs. An employee may, therefore, sell stock purchased under the Plan at any time the employee chooses, subject to compliance with any applicable federal or state securities laws and subject to any restrictions imposed under Article 21 to ensure that tax withholding obligations are satisfied. THE EMPLOYEE ASSUMES THE RISK OF ANY MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK. 6 ARTICLE 17--PARTICIPATING SUBSIDIARIES. The term "participating subsidiary" shall mean any present or future subsidiary of the Company, as that term is defined in Section 424(f) of the Code, which is designated from time to time by the Board of Directors to participate in the Plan. The Board of Directors shall have the power to make such designation before or after the Plan is approved by the stockholders. ARTICLE 18--OPTIONEES NOT STOCKHOLDERS. Neither the granting of an option to an employee nor the deductions from his or her pay shall constitute such employee a stockholder of the shares covered by an option until such shares have been actually purchased by the employee. ARTICLE 19--APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Stock pursuant to options granted under the Plan will be used for general corporate purposes. ARTICLE 20--NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By electing to participate in the Plan, each participant agrees to notify the Company in writing immediately after the participant transfers Common Stock acquired under the Plan, if such transfer occurs within two years after the first business day of the Payment Period in which such Common Stock was acquired. Each participant further agrees to provide any information about such a transfer as may be requested by the Company or any subsidiary corporation in order to assist it in complying with the tax laws. Such dispositions generally are treated as "disqualifying dispositions" under Sections 421 and 424 of the Code, which have certain tax consequences to participants and to the Company and its participating subsidiaries. ARTICLE 21--WITHHOLDING OF ADDITIONAL INCOME TAXES. By electing to participate in the Plan, each participant acknowledges that the Company and its participating subsidiaries are required to withhold taxes with respect to the amounts deducted from the participant's compensation and accumulated for the benefit of the participant under the Plan, and each participant agrees that the Company and its participating subsidiaries may deduct additional amounts from the participant's compensation, when amounts are added to the participant's account, used to purchase Common Stock or refunded, in order to satisfy such withholding obligations. Each participant further acknowledges that when Common Stock is purchased under the Plan the Company and its participating subsidiaries may be required to withhold taxes with respect to all or a portion of the difference between the fair market value of the Common Stock purchased and its purchase price, and each participant agrees that such taxes may be withheld from compensation otherwise payable to such participant. It is intended that tax withholding will be accomplished in such a manner that the full amount of payroll deductions elected by the participant under Article 7 will be used to purchase Common Stock. However, if amounts sufficient to satisfy applicable tax withholding obligations have not been withheld from compensation otherwise payable to any participant, then, notwithstanding any other provision of the Plan, the Company may withhold such taxes from the participant's accumulated payroll deductions and apply the net amount to the purchase of Common Stock, unless the participant pays to the Company, prior to the exercise date, an amount sufficient to satisfy such withholding obligations. Each 7 participant further acknowledges that the Company and its participating subsidiaries may be required to withhold taxes in connection with the disposition of stock acquired under the Plan and agrees that the Company or any participating subsidiary may take whatever action it considers appropriate to satisfy such withholding requirements, including deducting from compensation otherwise payable to such participant an amount sufficient to satisfy such withholding requirements or conditioning any disposition of Common Stock by the participant upon the payment to the Company or such subsidiary of an amount sufficient to satisfy such withholding requirements. ARTICLE 22--GOVERNMENTAL REGULATIONS. The Company's obligation to sell and deliver shares of Common Stock under the Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. Government regulations may impose reporting or other obligations on the Company with respect to the Plan. For example, the Company may be required to identify shares of Common Stock issued under the Plan on its stock ownership records and send tax information statements to employees and former employees who transfer title to such shares. ARTICLE 23--GOVERNING LAW. The validity and construction of the Plan shall be governed by the laws of Delaware, without giving effect to the principles of conflicts of law thereof. ARTICLE 24--APPROVAL OF BOARD OF DIRECTORS AND STOCKHOLDERS OF THE COMPANY. The Plan was adopted by the Board of Directors on April 14, 1999 and was approved by the stockholders of the Company on __________. 8 EX-10.4 10 EXHIBIT 10.4 EXHIBIT 10.4 NETSCOUT SYSTEMS, INC. STOCK PURCHASE AND REDEMPTION AGREEMENT AS OF DECEMBER 31, 1998 NETSCOUT SYSTEMS, INC. Stock Purchase and Redemption Agreement As of December 31, 1998
PAGE SECTION 1. PURCHASE AND SALE; REDEMPTION..........................................................................2 1.1 Description of Securities............................................................................2 1.2 Sale and Purchase; Redemption........................................................................2 1.3 Closing..............................................................................................2 1.4 Use of Proceeds by the Company; Repayment of Founder Notes...........................................3 1.5 Transfer Taxes.......................................................................................3 SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING STOCKHOLDERS.............................3 2.1 Organization and Corporate Power.....................................................................3 2.2 Authorization and Non-Contravention..................................................................4 2.3 Corporate Records....................................................................................4 2.4 Capitalization.......................................................................................5 2.5 Subsidiaries; Investments............................................................................6 2.6 Financial Statements; Projections....................................................................6 2.7 Absence of Undisclosed Liabilities...................................................................6 2.8 Absence of Certain Developments......................................................................7 2.9 Accounts Receivable; Accounts Payable................................................................9 2.10 Transactions with Affiliates........................................................................9 2.11 Title to Properties.................................................................................9 2.12 Tax Matters........................................................................................10 2.13 Certain Contracts and Arrangements.................................................................11 2.14 Intellectual Property Rights; Employee Restrictions................................................12 2.15 Litigation.........................................................................................14 2.16 Labor Matters......................................................................................14 2.17 List of Certain Employees and Suppliers............................................................15 2.18 Permits; Compliance with Laws......................................................................15 2.19 Employee Benefit Programs..........................................................................16 2.20 Environmental Matters..............................................................................16 2.21 Insurance..........................................................................................17 2.22 Investment Banking; Brokerage......................................................................17 2.23 Customers; Relationship with CISCO Systems.........................................................17 2.24 Warranty and Related Matters.......................................................................18 2.25 Solvency...........................................................................................18 2.26 Year 2000 Compliance...............................................................................18 2.27 Information Supplied by the Company................................................................19 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.......................................................19 3.1 Investment Status...................................................................................19
[Stock Purchase and Redemption Agreement] (i)
3.2 Authority...........................................................................................20 3.3 Investment Banking; Brokerage Fees..................................................................20 SECTION 4. REPRESENTATIONS OF THE SELLING STOCKHOLDERS TO THE COMPANY............................................20 4.1 Authorization and Non-Contravention.................................................................20 4.2 Title to and Validity of Redemption Shares..........................................................21 SECTION 5. CONDITIONS OF PURCHASE BY THE INVESTORS...............................................................21 5.1 Satisfaction of Conditions..........................................................................21 5.2 Opinion of Counsel..................................................................................21 5.3 Authorization.......................................................................................21 5.4 Charter Amendment...................................................................................21 5.5 Hart-Scott-Rodino...................................................................................21 5.6 Delivery of Documents...............................................................................22 5.7 Stockholders Agreement..............................................................................22 5.8 Amended and Restated Rights Agreement...............................................................22 5.9 Releases............................................................................................22 5.10 Non-Competition Agreements.........................................................................22 5.11 No Material Adverse Change.........................................................................23 5.12 All Proceedings Satisfactory.......................................................................23 5.13 Investors' Fees....................................................................................23 5.14 No Violation or Injunction.........................................................................23 5.15 Consents and Waivers...............................................................................23 5.16 Election of Directors..............................................................................23 SECTION 6. CONDITIONS TO OBLIGATIONS OF THE COMPANY AND SELLING STOCKHOLDERS.....................................24 6.1 Representations; Warranties; Covenants..............................................................24 6.2 Certain Agreements..................................................................................24 6.3 Hart-Scott-Rodino...................................................................................24 6.4 Funding.............................................................................................24 6.5 Releases............................................................................................24 6.6 No Violation or Injunction..........................................................................24 SECTION 7. TERMINATION OF AGREEMENT; RIGHTS TO PROCEED...........................................................24 7.1 Termination.........................................................................................24 7.2 Effect of Termination...............................................................................25 7.3 Right to Proceed....................................................................................25 SECTION 8. SURVIVAL; INDEMNIFICATION............................................................................25 8.1 Survival of Representations; Warranties and Covenants; Assignability of Rights.........................................................................................25 8.2 Transaction Related Indemnification.................................................................26 8.3 Indemnification for Vicarious Liability.............................................................27 8.4 Notice; Payment of Losses; Defense of Claims........................................................29
[Stock Purchase and Redemption Agreement] (ii)
8.5 Exclusive Remedy....................................................................................31 SECTION 10. DEFINITIONS.........................................................................................31 SECTION 10. GENERAL.............................................................................................33 10.1 Amendments, Waivers and Consents...................................................................33 10.2 Legend on Securities...............................................................................33 10.3 Governing Law......................................................................................33 10.4 Section Headings and Gender........................................................................33 10.5 Counterparts.......................................................................................33 10.6 Notices and Demands................................................................................34 10.7 Dispute Resolution.................................................................................34 10.8 Remedies; Severability.............................................................................35 10.9 Integration........................................................................................35 10.10 Greylock Fees.....................................................................................36 10.11 Waivers...........................................................................................36
[Stock Purchase and Redemption Agreement] (iii)
EXHIBITS Exhibit A - Selling Stockholders and Stock Ownership Exhibit B - Investors Exhibit C - Form of Amended and Restated Certificate of Incorporation Exhibit D - Opinion of Testa, Hurwitz & Thibeault, LLP Exhibit E - Opinion of Hale and Dorr LLP Exhibit F - Form of Stockholders Agreement Exhibit G - Form of Amended and Restated Rights Agreement Exhibit H - Form of Release Agreement Exhibit I - Form of Non-Competition Agreement
SCHEDULES DISCLOSURE SCHEDULE Section 2.1 - Foreign Qualification Section 2.4 - Capitalization Section 2.5 - Subsidiaries; Investments Section 2.6 - Financial Matters Section 2.7 - Undisclosed Liabilities Section 2.8 - Certain Developments Section 2.9 - Accounts Payable Section 2.10 - Transactions with Affiliates Section 2.11 - Properties Section 2.12 - Tax Matters Section 2.13 - Certain Contracts and Arrangements Section 2.14 - Intellectual Property Rights; Employee Restrictions Section 2.15 - Litigation Section 2.16 - Labor Matters Section 2.17 - List of Certain Employees and Suppliers Section 2.19 - Employee Benefit Programs Section 2.21 - Insurance Section 2.23 - Customers Section 2.26 - Product and Service Warranties Section 2.26 - Information
STOCK PURCHASE AND REDEMPTION AGREEMENT THIS STOCK PURCHASE AND REDEMPTION AGREEMENT is made as of this 31st day of December, 1998, by and among NetScout Systems, Inc., a Delaware corporation (together with any predecessors or successors thereto as the context requires, the "Company"), Narendra Popat and Anil Singhal (each a "Founder" and together, the "Founders"), Greylock Equity Limited Partnership ("Greylock"), the persons listed under the heading "Other Selling Stockholders" on the signature page hereto (collectively, the "Other Selling Stockholders" and each individually, an "Other Selling Stockholder") and the investors named in EXHIBIT B attached hereto (collectively, the "Investors" and each individually, an "Investor"). The Founders, Greylock and the Other Selling Stockholders shall be referred to herein collectively as the "Selling Stockholders" and each individually as a "Selling Stockholder." Except as otherwise indicated herein, capitalized terms used herein are defined in Section 9 hereof. WHEREAS, the Founders are the holders of shares of the Company's Voting Common Stock, $0.001 par value per share (the "Voting Common"); WHEREAS, Greylock is the holder of shares of the Company's Series A Preferred Stock, $0.001 par value per share (the "Series A Preferred"), which are convertible at the option of such holder into shares of the Company's Non-Voting Common Stock, $0.001 par value per share (the "Non-Voting Common"), in accordance with the terms of the Company's Amended and Restated Certificate of Incorporation as in effect on the date hereof; WHEREAS, the Other Selling Stockholders are the holders of shares or options to purchase shares of the Company's Non-Voting Common Stock; WHEREAS, the Company has authorized the issuance and sale to the Investors of 6,977,254 shares of Class B Convertible Common Stock, $0.001 par value per share (the "Class B Common"), having the rights and preferences set forth in EXHIBIT C attached hereto for an aggregate purchase price of $44,571,054; and WHEREAS, the Company has agreed to redeem and the Founders, Greylock and the Other Selling Stockholders severally have agreed to sell to the Company shares of Voting Common, shares of Series A Preferred and shares of Non-Voting Common in accordance with the terms and conditions contained herein (such shares shall be referred to herein collectively as the "Redemption Shares"), for an aggregate purchase price of $44,571,054 in accordance with the terms and conditions contained herein. NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: SECTION 1. PURCHASE AND SALE; REDEMPTION 1.1 DESCRIPTION OF SECURITIES. As of the Closing Date (as defined in Section 1.3 hereof), the Company's authorized capital stock consists of Voting Common, Non-Voting Common, Class B Common and Series A Preferred, with the rights, preferences and other terms set forth in EXHIBIT C attached hereto. For purposes of this Agreement, the shares of Class B Common to be acquired by the Investors from the Company hereunder are referred to as the "Class B Common Shares" and the shares of Voting Common issuable upon conversion of the Class B Common Shares are referred to as the "Conversion Shares" and the Class B Common Shares and the Conversion Shares are sometimes referred to herein together as the "Securities." The Company has authorized and reserved, and covenants to continue to reserve, a sufficient number of shares of its Voting Common necessary to satisfy the rights of conversion of the holders of Class B Common as set forth in EXHIBIT C. 1.2 SALE AND PURCHASE; REDEMPTION. Upon the terms and subject to the conditions herein, and in reliance on the representations and warranties set forth in Section 2, at the Closing (as defined in Section 1.3 hereof) each of the Investors shall purchase from the Company, and the Company shall issue and sell to each of the Investors, the number of Class B Common Shares set forth opposite the name of such Investor in EXHIBIT B for the purchase price of $6.388051 per share, or an aggregate of 6,977,254 Class B Common Shares for an aggregate purchase price of $44,571,054 (the "Purchase Price"). Concurrently therewith, the Company shall acquire from each of the Selling Stockholders, and each of the Selling Stockholders shall sell to the Company, the number of Redemption Shares set forth opposite the name of such Selling Stockholder in the section of EXHIBIT A relating to such Selling Stockholder for an aggregate redemption price of $44,571,054 (the "Redemption Price"). 1.3 CLOSING. The closing of the purchase and sale of the Class B Common Shares hereunder (the "Closing") shall take place at the offices of Goodwin, Procter & Hoar LLP, located at Exchange Place, 53 State Street, Boston, Massachusetts, at 10:00 a.m., Boston time, on the date (the "Closing Date") that is three (3) business days after all of the conditions to Closing set forth in Sections 5 and 6 hereof are satisfied or, if applicable, waived, or as otherwise mutually agreed to by the Company, the Investors, the Founders and Greylock; PROVIDED, that such date shall not be earlier than January 7, 1999. At the Closing, (i) the Company shall issue and deliver stock certificates representing the applicable number of Class B Common Shares to be sold by the Company hereunder to each of the Investors, free and clear of all liens, claims, options, charges, pledges, security interests, voting agreements, trusts, encumbrances, rights or restrictions of any nature, except as contemplated by this Agreement ("Liens"), (ii) each of the Selling Stockholders shall deliver to the Company a stock certificate or certificates representing the Redemption Shares to be sold by such Selling Stockholder hereunder, duly endorsed in blank or accompanied by duly executed stock transfer powers, together with such signature guarantees and such other documents as may be required by the Company to effect a valid transfer to the Company of good title to such Redemption Shares, free and clear of all Liens, (iii) each of the Investors shall pay to the Company the Purchase Price as set forth opposite such Investor's name under the column entitled "Purchase Price Paid at Closing" in EXHIBIT B hereto and (iv) the Company shall pay to each of the Selling Stockholders the Redemption Price as set forth opposite such Selling [Stock Purchase and Redemption Agreement] -2- Stockholder's name under the column entitled "Redemption Price to be Paid at Closing" in the section of EXHIBIT A hereto relating to such Selling Stockholder. Each Selling Stockholder shall be entitled access to only that section of EXHIBIT A which sets forth information regarding such Selling Stockholder, and shall not be entitled to any information on EXHIBIT A with respect to the other Selling Stockholders. All payments hereunder shall be made by wire transfer of next day available funds. 1.4 USE OF PROCEEDS BY THE COMPANY; REPAYMENT OF FOUNDER NOTES. Subject to the terms and conditions contained herein, the proceeds from the sale of the Class B Common Shares hereunder shall be used by the Company to repurchase the Redemption Shares from the Selling Stockholders as set forth in Sections 1.2 and 1.3 hereof. Immediately following the repurchase by the Company of the Redemption Shares held by the Founders, the Founders shall use a portion of the proceeds from such repurchase to pay in full the outstanding amounts due to the Company under the promissory notes dated June 28, 1996 in the aggregate original principal amount of $2,000,000. 1.5 TRANSFER TAXES. All transfer taxes, fees and duties under applicable law incurred in connection with the sale and transfer of the Class B Common Shares under this Agreement will be borne and paid by the Company and the Company shall promptly reimburse the Investors for any such tax, fee or duty which any of them is required to pay under applicable law. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING STOCKHOLDERS In order to induce the Investors to enter into this Agreement and consummate the transactions contemplated hereby, each of the Company and each of the Selling Stockholders hereby severally and not jointly makes to the Investors as of the date hereof the representations and warranties contained in this Section 2; provided, however, that (i) the Selling Stockholders identified with an asterisk in EXHIBIT A attached hereto shall not make the representations and warranties contained in Sections 2.4(a) and 2.17(a) hereof and (ii) Greylock shall only make the representations and warranties contained in Sections 2.2 and 2.4(b) hereof (which representations of Greylock shall apply solely to Greylock and not to the Company, any other Selling Stockholder or any other Person or entity). Such representations and warranties are subject to the qualifications and exceptions set forth in the disclosure schedule delivered to the Investors pursuant to this Agreement (the "Disclosure Schedule"); PROVIDED, HOWEVER, that any information set forth in a Section of the Disclosure Schedule shall not be incorporated (unless by specific reference) to any other Section of the Disclosure Schedule. For purposes hereof unless otherwise indicated, all references to the Company shall include all Subsidiaries of the Company. 2.1 ORGANIZATION AND CORPORATE POWER. The Company is a corporation duly organized, validly existing and in good standing under the laws of Delaware, and is duly qualified or registered to do business as a foreign corporation (a) in each jurisdiction listed in SECTION 2.1 OF THE DISCLOSURE SCHEDULE and (b) in each jurisdiction in which the failure to be so qualified or registered would have a Material Adverse Effect. The Company has all required corporate power and authority to carry on its business as presently conducted, to enter into and perform this [Stock Purchase and Redemption Agreement] -3- Agreement and the agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby. The copies of the Amended and Restated Certificate of Incorporation and By-laws of the Company, as amended to date (the "Certificate of Incorporation" and "By-laws," respectively), which have been furnished to the Investors by the Company, are correct and complete at the date hereof, and the Company is not in violation of any term of its Certificate of Incorporation or By-laws. 2.2 AUTHORIZATION AND NON-CONTRAVENTION. (a) This Agreement and all documents executed pursuant hereto are valid and binding obligations of the Company and, if applicable, such Selling Stockholder, as the case may be, enforceable in accordance with their terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditor's rights generally, and as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (ii) to the extent the indemnification provisions contained in Section 8.3 or in the Rights Agreement may be limited by applicable federal or state securities laws, or public policy considerations. The execution, delivery and performance of this Agreement and all agreements, documents and instruments contemplated hereby, the sale and delivery of the Class B Common Shares and, upon conversion of the Class B Common Shares, the Conversion Shares, have been duly authorized by all necessary corporate or other action of the Company. Such Selling Stockholder has full authority, power and capacity to enter into this Agreement and all agreements, documents and instruments contemplated hereby which are to be executed by such Selling Stockholder. (b) The execution of this Agreement, the sale and delivery of the Class B Common Shares and, upon conversion of the Class B Common Shares, the issuance of the Conversion Shares, and the performance of any transaction contemplated hereby will not (i) violate, conflict with or result in a default under any material contract or obligation to which the Company or such Selling Stockholder is a party or by which the Company or such Selling Stockholder or their assets are bound, or any provision of the Amended Charter or By-laws of the Company, or cause the creation of any encumbrance upon any of the material assets of the Company or such Selling Stockholder; (ii) violate or result in a violation of, or constitute a default (whether after the giving of notice, lapse of time or both) under, any provision of any law, regulation or rule, or any order of, or any restriction imposed by any court or other governmental agency applicable to the Company or such Selling Stockholder except for violations which, individually or in the aggregate, would not have a Material Adverse Effect; (iii) except as contemplated by Sections 5.4 and 5.5 hereof, require from the Company any notice to, declaration or filing with, or consent or approval of any governmental authority or other third party other than pursuant to state securities or blue sky laws; or (iv) accelerate any obligation under, or give rise to a right of termination of, any material agreement, permit, license or authorization to which the Company or such Selling Stockholder is a party or by which the Company or such Selling Stockholder is bound. 2.3 CORPORATE RECORDS. The corporate record books of the Company accurately record all corporate action required by law to be taken by its stockholders and board of directors [Stock Purchase and Redemption Agreement] -4- and committees. The copies of the corporate records of the Company, as made available to the Investors or their counsel for review, are true and complete copies of the originals of such documents. 2.4 CAPITALIZATION. (a) As of the Closing and after giving effect to the transactions contemplated hereby, the authorized capital stock of the Company will consist of (i) 51,178,872 shares of Common Stock, of which (A) 33,589,436 shares shall be designated as Voting Common, of which 11,250,502 shares will be issued and outstanding and 4,749,498 shares shall be held in treasury, (B) 10,612,182 shares shall be designated as Non-Voting Common, of which 2,901,220 shares will be issued and outstanding and 964,600 shares shall be held in treasury, and (C) 6,977,254 shares shall be designated as Class B Common, all of which will be issued and outstanding, and (ii) 631,579 shares of Series A Preferred, of which 315,790 shares will be issued and outstanding and 315,789 shares shall be held in treasury. The outstanding shares of Voting Common, Non-Voting Common and Series A Preferred are held beneficially and of record by the persons identified in SECTION 2.4 OF THE DISCLOSURE SCHEDULE in the amounts indicated thereon. SECTION 2.4 OF THE DISCLOSURE SCHEDULE sets forth the name of each holder of options for Non-Voting Common, the number of shares that such options are exercisable for with respect to each holder and the applicable exercise price. Except as otherwise disclosed in SECTION 2.4 OF THE DISCLOSURE SCHEDULE, there are no outstanding subscriptions, options, warrants, commitments, preemptive rights, agreements, arrangements or commitments of any kind for or relating to the issuance, or sale of, or outstanding securities convertible into or exchangeable for, any shares of capital stock of any class or other equity interests of the Company. Except as set forth in the Amended Charter, the Company has no obligation to purchase, redeem, or otherwise acquire any of its capital stock or any interests therein. As of the Closing, and after giving effect to the transactions contemplated hereby, all of the outstanding shares of capital stock of the Company will have been duly and validly authorized and issued and will be fully paid and non-assessable and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws and not subject to any preemptive rights which have not been otherwise waived. The Company has duly and validly authorized and reserved 6,977,254 shares of Voting Common for issuance upon conversion of the Class B Common and the shares of Voting Common so issued will, upon conversion as provided in the Amended Charter, be validly issued, fully paid and non-assessable. As of the Closing, the relative rights, preferences and other provisions relating to the Class B Common will be as set forth in EXHIBIT C attached hereto. Except as otherwise disclosed in SECTION 2.4 OF THE DISCLOSURE SCHEDULE, as of the Closing and after giving effect to the transactions contemplated hereby, other than rights set forth herein or in the Amended Charter or in the Rights Agreement or in the Stockholders Agreement, there are (i) no preemptive rights, rights of first refusal, put or call rights or obligations or anti-dilution rights imposed by or through the Company with respect to the issuance, sale or redemption of the Company's capital stock, (ii) no rights imposed by or through the Company to have the Company's capital stock registered for sale to the public in connection with the laws of any jurisdiction, and (iii) there are no documents, instruments or agreements, relating to the voting of the Company's voting securities or restrictions on the transfer of the Company's capital stock to which the Company is a party. [Stock Purchase and Redemption Agreement] -5- (b) Such Selling Stockholder is the sole legal and beneficial owner of, and has good, valid and marketable title to, the shares of Voting Common, Non-Voting Common and Series A Preferred, as applicable, set forth opposite his or its name on the applicable section of EXHIBIT A attached hereto, free and clear of any Liens. 2.5 SUBSIDIARIES; INVESTMENTS. Except as disclosed in SECTION 2.5 OF THE DISCLOSURE SCHEDULE, the Company does not have and has not had any direct or indirect Subsidiaries. Except as disclosed in SECTION 2.5 OF THE DISCLOSURE SCHEDULE, neither the Company nor either of the Founders has a strategic partnership or similar relationship with or owns or has any direct or indirect interest in or control over any corporation, partnership, joint venture or other entity of any kind, except for passive investments of less than 2% in publicly-traded companies. The term "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. 2.6 FINANCIAL STATEMENTS; PROJECTIONS. Included in SECTION 2.6 OF THE DISCLOSURE SCHEDULE are the following financial statements of the Company, all of which statements (including the footnotes and schedules thereto) were prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied during the periods covered thereby (subject, in the case of unaudited financial statements, to normal, recurring adjustments that would be made in the course of an audit and the absence of footnotes) and fairly present the financial condition of the Company on the dates of such statements and the results of their operations and cash flows for the periods covered thereby: (a) audited balance sheets as of March 31, 1996, 1997 and 1998 and the related statements of income and cash flows for the fiscal years then ended, certified by the independent certified public accountants of the Company (the audited balance sheet as of March 31, 1998 is hereafter referred to as the "Base Balance Sheet"); and (b) an unaudited balance sheet as of October 31, 1998 (the "Most Recent Balance Sheet") and the related statements of income and cash flows for the period ended October 31, 1998 certified by the Vice President of Finance or the Chief Financial Officer of the Company. The Company recognized all revenue reflected in the financial statements with respect to fiscal years 1996 and 1997 relating to its software products in accordance with SOP 91-1 and with respect to fiscal year 1998 relating to its software products in accordance with SOP 97-2. Nothing has come to the attention of the Company or such Selling Stockholder since such respective dates which would indicate that such financial statements were not true and correct in all material respects as of the date thereof. Included in SECTION 2.6 OF THE DISCLOSURE SCHEDULE are projections for fiscal years ending March 31, 1999 and 2000, which represent management's good faith estimates of the Company's future financial performance based on assumptions which are set forth therein and which management in good faith believes were reasonable when made and continue to believe to be reasonable as of the date hereof; PROVIDED, HOWEVER, that the foregoing is not a guarantee of the future financial performance of the Company and actual financial performance may vary significantly from such projections. 2.7 ABSENCE OF UNDISCLOSED LIABILITIES. The Company does not have any liabilities or obligations of any nature, whether accrued, absolute, contingent or otherwise, asserted or unasserted, known or unknown (including, without limitation, liabilities as guarantor or otherwise [Stock Purchase and Redemption Agreement] -6- with respect to obligations of others, or liabilities for Taxes due or then accrued or to become due, regardless of whether claims in respect thereof had been asserted as of such date), except liabilities or obligations (i) stated or adequately reserved against in the Most Recent Balance Sheet or not required under GAAP to be stated or reserved, (ii) incurred in the ordinary course of business of the Company since the date of the Most Recent Balance Sheet and which have not had a Material Adverse Effect or (iii) incurred as a result of or arising out of the transactions contemplated under this Agreement. 2.8 ABSENCE OF CERTAIN DEVELOPMENTS. Since the date of the Most Recent Balance Sheet through the date of this Agreement, the Company has conducted its business only in the ordinary course consistent with past practice and, except as contemplated herein or as set forth in SECTION 2.8 OF THE DISCLOSURE SCHEDULE, there has not been: (a) any change in the financial condition, properties, assets, liabilities, business or operations of the Company, which change by itself or in conjunction with all other such changes, whether or not arising in the ordinary course of business, has had a Material Adverse Effect; (b) any material mortgage, encumbrance or lien placed on any of the properties of the Company; (c) any material purchase, sale or other disposition, or any agreement or other arrangement for the purchase, sale or other disposition, of any properties or assets by the Company, including any of its Intellectual Property Rights, other than in the ordinary course of business; (d) any damage, destruction or loss to the Company's property or assets, whether or not covered by insurance, which has had a Material Adverse Effect; (e) any declaration, setting aside or payment of any dividend by the Company, or the making of any other distribution in respect of the capital stock of the Company, or any direct or indirect redemption, purchase or other acquisition by the Company of its own capital stock; (f) any labor trouble or claim of unfair labor practices involving the Company, any change in the compensation payable or to become payable by the Company to any of its officers or employees other than normal merit increases in accordance with its usual practices, or any bonus payment or arrangement made to or with any of such officers or employees or any establishment or creation of any employment (other than customary at-will employment), deferred compensation or severance arrangement or employee benefit plan with respect to such persons or the amendment of any of the foregoing; (g) any change in the executive officers of the Company or material loss of personnel of the Company or change in the terms and conditions of the employment of the Company's executive officers or key personnel; [Stock Purchase and Redemption Agreement] -7- (h) any payment or discharge of a material lien or liability of the Company which was not shown on the Most Recent Balance Sheet or incurred in the ordinary course of business thereafter; (i) any contingent liability incurred by the Company as guarantor or otherwise with respect to the obligations of others or any cancellation of any material debt or monetary claim owing to, or waiver of any material payment right of, the Company, including any write-off or compromise of any accounts receivable, other than in the ordinary course of business; (j) any obligation or liability incurred by the Company to any of its officers, directors, stockholders or employees, or any loans or advances made by the Company to any of its officers, directors, stockholders or employees, except normal compensation and expense allowances payable to officers, directors or employees and except for loans or advances made by the Company to its employees which are less than $10,000 individually and $50,000 in the aggregate; (k) any change in accounting methods or practices, collection policies, pricing policies or payment policies of the Company, other than changes not materially adverse to the Company; (l) any loss, or to the knowledge of the Company or such Selling Stockholder, any development that is reasonably likely to result in a loss, of any significant supplier, customer, distributor or account of the Company; (m) any amendment or termination of any material contract or agreement to which the Company is a party or by which it is bound; (n) any arrangements relating to any royalty, dividend or similar payment based on the sales volume of the Company, whether as part of the terms of the Company's capital stock or by any separate agreement, other than transactions in the ordinary course of business; (o) any agreement with respect to the endorsement of the Company's products or services, other than transactions in the ordinary course of business; (p) any transaction or agreement involving fixed price terms or fixed volume arrangements, other than transactions in the ordinary course of business; (q) any other material transaction entered into by the Company other than transactions in the ordinary course of business; or (r) any agreement or understanding whether in writing or otherwise, for the Company to take any of the actions specified in paragraphs (a) through (q) above. [Stock Purchase and Redemption Agreement] -8- 2.9 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE.. (a) All of the accounts receivable of the Company are valid and enforceable claims, are subject to no set-off or counterclaim, and are fully collectable in the normal course of business, after deducting the allowance for doubtful accounts stated in the Most Recent Balance Sheet in accordance with GAAP. Since the date of the Base Balance Sheet, the Company has collected its accounts receivable in the ordinary course and in a manner which is consistent with past practices and has not accelerated any such collections. Except as set forth in SECTION 2.9(a) OF THE DISCLOSURE SCHEDULE, as of the date hereof, the Company does not have any accounts receivable from any Person which is known by the Company to be affiliated with it or any of its directors, executive officers, employees or stockholders, except for loans or advances to employees which are less than $10,000 individually and $50,000 in the aggregate. (b) Except as set forth in SECTION 2.9(b) OF THE DISCLOSURE SCHEDULE, all accounts payable and notes payable of the Company arose in bona fide arms' length transactions in the ordinary course of business and no such account payable or note payable which is material to the Company is delinquent by more than sixty (60) days in its payment. Since the date of the Base Balance Sheet, the Company has paid its accounts payable in the ordinary course and in a manner which is consistent with its past practices. Except as set forth in SECTION 2.9(b) OF THE DISCLOSURE SCHEDULE, as of the date hereof, the Company has no account payable in excess of $10,000 individually or $100,000 in the aggregate to any Person which is known by the Company to be affiliated with it or any of its directors, officers, employees or stockholders. 2.10 TRANSACTIONS WITH AFFILIATES. Except for their ongoing, regular employment relationships with the Company, the transactions contemplated by this Agreement and the agreements related hereto, and as set forth in SECTION 2.10 OF THE DISCLOSURE SCHEDULE, there are no loans, leases or other continuing transactions between the Company and such Selling Stockholder or any present or former stockholder, director, officer or employee of the Company, or, to the knowledge of the Company and such Selling Stockholder, any member of such Selling Stockholder's, officer's, director's, employee's or stockholder's immediate family, or any person controlled by such Selling Stockholder, officer, director, employee or stockholder or his or her immediate family. Except as set forth in SECTION 2.10 OF THE DISCLOSURE SCHEDULE, no director, executive officer or employee of the Company, any of their respective spouses or immediate family members, owns directly or indirectly on an individual or joint basis any interest in, or serves as an officer or director or in another similar capacity of, any competitor, customer or supplier of the Company, or any organization which has a material contract or arrangement with the Company. Except as set forth in SECTION 2.10 OF THE DISCLOSURE SCHEDULE, neither such Selling Stockholder nor any of his spouse or immediate family members, owns directly or indirectly on an individual or joint basis any interest in, or serves as an officer or director or in another similar capacity of, any competitor, customer or supplier of the Company, or any organization which has a material contract or arrangement with the Company. 2.11 TITLE TO PROPERTIES. The Company does not own any real property. SECTION 2.11 OF THE DISCLOSURE SCHEDULE sets forth the addresses and uses of all real property that the Company leases or subleases. The Company has good, valid and (if applicable) marketable title to all of its [Stock Purchase and Redemption Agreement] -9- assets, free and clear of all liens, restrictions or encumbrances and none of such assets is subject to any mortgage, pledge, lien or conditional sale agreement. Such assets constitute all property which is necessary to the business of the Company and all equipment included therein is in good condition and repair (ordinary wear and tear excepted) and all leases of real or personal property to which the Company is a party are fully effective and afford the Company peaceful possession of the subject matter of the lease and true and complete copies thereof have been delivered to the Investors or their counsel. The Company is not in violation of any zoning, building or safety ordinance, regulation or requirement or other law or regulation applicable to the operation of its owned or leased properties which violation would have a Material Adverse Effect, nor has it received any notice of such violation. There are no defaults by the Company, or, to the knowledge of the Company and such Selling Stockholder, by any other party, which might curtail in any material respect the present use of the property of the Company. The performance by the Company of this Agreement and the transactions contemplated hereby will not result in the termination of, or in any increase of any amounts payable under, any of its leases for real property or material liens for personal property or will require the consent or approval from any other parties to such leases. 2.12 TAX MATTERS. The Company has timely and properly filed all federal, state, local and foreign tax returns required to be filed by it through the date hereof, and, subject to the following sentence, has paid or caused to be paid all Taxes required to be paid by it through the date hereof whether disputed or not, except Taxes which have not yet accrued or otherwise become due. The provisions for Taxes in the Most Recent Balance Sheet are sufficient as of its date for the payment of any accrued and unpaid Taxes of any nature of the Company. All Taxes and other assessments and levies which the Company was or is required to withhold or collect have been withheld and collected and have been paid over to the proper governmental authorities. Except as set forth in SECTION 2.12 OF THE DISCLOSURE SCHEDULE, (i) the Company has never received notice of any audit or of any proposed deficiencies from the Internal Revenue Service (the "IRS") or any other taxing authority (other than routine audits undertaken in the ordinary course and which have been resolved on or prior to the date hereof); (ii) there are in effect no waivers of applicable statutes of limitations with respect to any Taxes owed by the Company for any year; (iii) neither the IRS nor any other taxing authority is now asserting or, to the knowledge of the Company and such Selling Stockholder, threatening to assert against the Company any deficiency or claim for additional Taxes or interest thereon or penalties in connection therewith in respect of the income or sales of the Company; and (iv) the Company has never been a member of an affiliated group of corporations filing a combined federal income Tax return nor does the Company have any liability for Taxes of any other Person under Treasury Regulations ss.1.1502-6 (or any similar provision of foreign, state or local law) or otherwise. The Company is not a party to any Tax allocation or sharing arrangement. The Company is not a party to any contract, agreement, plan or arrangement covering any employee or former employee thereof, that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Section 280G or 162 of the Code. The Company is not a "foreign person" within the meaning of Section 145 of the Code and Treasury Regulations Section 1.1445-2. [Stock Purchase and Redemption Agreement] -10- 2.13 CERTAIN CONTRACTS AND ARRANGEMENTS. Except as set forth in SECTION 2.13 OF THE DISCLOSURE SCHEDULE (with true and correct copies delivered to the Investors), the Company is not a party or subject to or bound by: (a) any contract or agreement involving potential commitment or payment by the Company in excess of $200,000 or which is otherwise material and not entered into in the ordinary course of business, except for the leases described in Section 2.11; (b) any contract, lease or agreement involving potential commitment or payment by the Company in excess of $25,000 which is not cancelable by the Company without penalty on not less than 60 days notice, except for the leases described in Section 2.11 and purchase orders, contracts and agreements in the ordinary course of business; (c) any contract containing covenants directly or explicitly limiting in any material respect the freedom of the Company to compete in any line of business or with any person or entity; (d) any contract or agreement involving potential commitment or payment by the Company in excess of $25,000 relating to the licensing, distribution, development, purchase, sale or servicing of its software and hardware products, except for purchase orders, contracts and agreements in the ordinary course of business; (e) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing by the Company or any pledge or security arrangement by the Company; (f) any employment contracts, noncompetition agreements or other agreements with officers, directors, employees or stockholders of the Company or Persons related to or affiliated with such persons; (g) any stock redemption or purchase agreements or other agreements affecting or relating to the capital stock of the Company, including without limitation any agreement with any stockholder of the Company which includes, without limitation, anti-dilution rights, registration rights, voting arrangements or operating covenants; (h) any pension, profit sharing, retirement or stock options plans; (i) any royalty, dividend or similar arrangement based on the revenues or profits of the Company or any contract or agreement involving fixed price or fixed volume arrangements not executed in the ordinary course of business; (j) any joint venture, partnership, manufacturer, development or supply agreement, except any manufacturer, development or supply agreement executed in the ordinary course of business; -11- [Stock Purchase and Redemption Agreement] (k) any acquisition, merger or similar agreement; or (l) any other material contract not executed in the ordinary course of business. All such contracts, agreements, leases and instruments are valid and are in full force and effect and constitute legal, valid and binding obligations of the Company, and are enforceable in accordance with their respective terms. Neither the Company nor such Selling Stockholder has any knowledge of any notice or threat to terminate any such contracts, agreements, leases or instruments which termination would have a Material Adverse Effect. The Company is not in violation of any term or provision of, or in default in complying with any provisions of, any such contract, agreement, lease or instrument, and no condition or event or fact exists which, with notice, lapse of time or both would constitute a default thereunder on the part of the Company, except for any such violation, default, condition, event or fact that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. 2.14 INTELLECTUAL PROPERTY RIGHTS; EMPLOYEE RESTRICTIONS. SECTION 2.14 OF THE DISCLOSURE SCHEDULE sets forth a complete list and brief description of all Intellectual Property Rights owned by or registered in the name of the Company or of which the Company is the licensor or licensee or in which the Company has any material right (other than with respect to "off-the-shelf" software which is generally commercially available). Except as set forth in SECTION 2.14 OF THE DISCLOSURE SCHEDULE: (a) The Company has exclusive ownership of, free and clear of claims or rights of any other person, with full right to use, sell, license, sublicense, dispose of, and bring actions for infringement of, or possesses exclusive licenses or other rights to use, all Intellectual Property Rights listed in SECTION 2.14 OF THE DISCLOSURE SCHEDULE, which rights are sufficient for the conduct of its business as presently conducted or proposed to be conducted (other than with respect to "off-the-shelf" software which is generally commercially available). All Intellectual Property Rights that are used or incorporated into the Company's products or products actively under development and which are proprietary to the Company were developed by or for the Company by the current or former employees, consultants or independent contractors of the Company or its predecessors in interest or purchased by the Company or its predecessors in interest and are owned exclusively by the Company, free and clear of claims and rights of any other Person. (b) The business of the Company as presently conducted and the production, marketing, licensing, use and servicing of any products or services of the Company do not infringe or conflict with any patent, trademark, copyright, trade secret rights of any third parties or any other Intellectual Property Rights of any third parties and the Company has not received written notice from any third party asserting that any Intellectual Property Rights owned or licensed by the Company, or which the Company otherwise has the right to use, is invalid or unenforceable by the Company and, to the knowledge of the Company and such Selling Stockholder there is no valid basis for any such claim (whether or not pending or threatened). [Stock Purchase and Redemption Agreement] -12- (c) No claim is pending or, to the knowledge of the Company and such Selling Stockholder, threatened against the Company or such Selling Stockholders nor has the Company or such Selling Stockholder received any written notice or other written claim from any Person asserting that any of the Company's present or contemplated activities infringe or may infringe any Intellectual Property Rights of such Person nor, to the knowledge of the Company and such Selling Stockholder, is there a valid basis for any such claim (whether or not pending or threatened), and neither the Company nor such Selling Stockholder is aware of any infringement by any other Person of any rights of the Company under any Intellectual Property Rights. (d) All licenses or other agreements under which the Company is granted Intellectual Property Rights (excluding licenses to use off-the-shelf software utilized in the Company's internal operations and which is generally commercially available) are listed in SECTION 2.14 OF THE DISCLOSURE SCHEDULE. All such licenses or other agreements are in full force and effect, to the knowledge of the Company and such Selling Stockholder, there is no material default by any party thereto and, except as set forth in SECTION 2.14 OF THE DISCLOSURE SCHEDULE, to the knowledge of the Company and such Selling Stockholder, all of the rights of the Company thereunder are freely assignable. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been provided to the Investors and neither the Company nor such Selling Stockholder has any reason to believe that the licensors under such licenses and other agreements do not have and did not have all requisite power and authority to grant the Intellectual Property Rights purported to be conferred thereby. (e) All currently outstanding licenses or other agreements involving amounts in excess of $200,000 or which are otherwise material under which the Company has licensed Intellectual Property Rights to OEMs or has licensed or made available source code to others (including all end-user agreements) are listed in SECTION 2.14 OF THE DISCLOSURE SCHEDULE. All of said licenses or other agreements are in full force and effect and, to the knowledge of the Company and such Selling Stockholder, there is no material default by any party thereto. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been made available to the Investors or their counsel. (f) To the knowledge of the Company and such Selling Stockholder, the Company is not making unlawful use of any Intellectual Property Rights of any other Person, including, without limitation, any former employer of any past or present employees of the Company. Except as disclosed in SECTION 2.14 OF THE DISCLOSURE SCHEDULE, to the knowledge of the Company and such Selling Stockholder, neither the Company nor any of its employees or consultants has any agreements or arrangements with former employers of such employees or consultants relating to any Intellectual Property Rights of such employers, which materially interfere or conflict with the performance of such employee's or consultant's duties for the Company or results in any former employers of such employees and consultants having any rights in, or claims on, the Company's Intellectual [Stock Purchase and Redemption Agreement] -13- Property Rights. To the knowledge of the Company and such Selling Stockholder, the activities of the Company's employees and consultants do not violate any agreements or arrangements which any such employees have with former employers which has had a Material Adverse Effect. The Company has taken steps required in accordance with sound business practices to establish and preserve its ownership of all of its Intellectual Property Rights; except as set forth in SECTION 2.14 OF THE DISCLOSURE SCHEDULE, each current or former employee, independent contractor or consultant of the Company who had or has responsibility for coding the Company's products or who had or has access to source code or other proprietary product information of a similar nature has executed an agreement regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Company, and the Company has not received notice that any employee, consultant or independent contractor is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. Without limitation of any of the foregoing and except as otherwise expressly disclosed in SECTION 2.14 OF THE DISCLOSURE SCHEDULE: (i) the Company has taken all security measures required in accordance with sound business practices to guard against unauthorized disclosure or use of any of its Intellectual Property Rights; and (ii) neither the Company nor such Selling Stockholder has any reason to believe that any Person (including, without limitation, any former employee of the Company) has unauthorized possession of any of its Intellectual Property Rights, or any part thereof, or that any Person has obtained unauthorized access to any of its Intellectual Property Rights. 2.15 LITIGATION. Except as set forth in SECTION 2.15 OF THE DISCLOSURE SCHEDULE, there is no litigation or governmental or administrative proceeding or investigation pending or, to the knowledge of the Company and such Selling Stockholder, threatened against the Company or affecting the properties or assets of the Company, or, as to matters related to the Company, against any officer, director or stockholder or key employee of the Company, nor, to the knowledge of the Company and such Selling Stockholder, has there occurred any event nor does there exist any condition on the basis of which any such valid claim may be asserted; except in each case for litigation, proceedings, investigations or claims which individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. Since March 31, 1997, no valid claim has been asserted against the Company for renegotiation or price redetermination of any business transaction, except for any business transaction involving less than $25,000. SECTION 2.15 OF THE DISCLOSURE SCHEDULE includes a description of all known litigation, material claims, governmental proceedings or governmental investigations involving the Company or any of its officers, directors, stockholders or key employees in connection with the business of the Company occurring, arising or existing during the past three (3) years. 2.16 LABOR MATTERS. As of the date hereof, the Company employs approximately 195 full-time employees and five part-time employees and has contracts with five independent contractors. The Company is not delinquent in payments to any of its employees or independent contractors for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it to the date hereof or amounts required to be reimbursed to such employees or independent contractors. Except as set forth in SECTION 2.16 OF THE DISCLOSURE SCHEDULE or as required by law, upon termination of the employment of any of such employees or independent contractors, no severance or other payments will become due. Except as set forth in SECTION 2.16 OF THE DISCLOSURE SCHEDULE, the Company has no policy, practice, plan or program of paying severance pay or any form of severance compensation in connection with the termination of employment or services. The Company is and for the past three (3) years has been in compliance in all material respects with all applicable laws and regulations respecting labor, [Stock Purchase and Redemption Agreement] -15- employment, fair employment practices, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination, sexual harassment or unfair labor practices except as set forth in SECTION 2.16 OF THE DISCLOSURE SCHEDULE, nor are there any strikes, slowdowns, stoppages of work, or any other concerted interference with normal operations existing, pending or, to the knowledge of the Company and such Selling Stockholder, threatened against or involving the Company. There are no union organizing activities pending, or, to the knowledge of the Company and such Selling Stockholder, threatened with respect to the Company and no question concerning representation exists respecting the employees of the Company. To the knowledge of the Company and such Selling Stockholder, there are no grievances, complaints or charges that have been filed under any dispute resolution procedure (including, but not limited to, any proceedings under any dispute resolution procedure under any collective bargaining agreement) that might reasonably be expected to have a Material Adverse Effect. No arbitration or similar proceeding is pending and, to the knowledge of the Company and such Selling Stockholder, no claim therefor has been asserted against the Company. To the knowledge of the Company and such Selling Stockholder, no collective bargaining agreement is in effect or is currently being or is about to be negotiated by the Company. The Company is, and at all times the Company has been, in compliance in all material respects with the requirements of the Immigration Reform Control Act of 1986. There are no changes pending or, to the knowledge of the Company and such Selling Stockholder, threatened with respect to (including, without limitation, the resignation of senior management or any key employee or independent contractors of the Company nor has the Company received any notice or information concerning any prospective change with respect to such senior management, key employees or independent contractors. 2.17 LIST OF CERTAIN EMPLOYEES AND SUPPLIERS. (a) The Company has provided the Investors with a list of all managers, employees, consultants, independent contractors, brokers and sales persons of the Company who, individually, have received compensation for the fiscal year ended March 31, 1998 in excess of $100,000, including the current job title and aggregate annual compensation of each such individual. (b) SECTION 2.17 OF THE DISCLOSURE SCHEDULE sets forth a list of all suppliers and vendors of the Company to whom during the fiscal year ended March 31, 1998 the Company made payments aggregating $250,000 or more, showing, with respect to each, the name, address and dollar volume involved. Since March 31, 1997, no such supplier or vendor has canceled or otherwise terminated or materially reduced its business with the Company or materially and adversely modified its relationship with the Company nor to the knowledge of the Company and such Selling Stockholder does any such supplier or vendor have any plan or intention to do so. 2.18 PERMITS; COMPLIANCE WITH LAWS. The Company has all Permits necessary to permit it to own its property and to conduct its business as it is presently conducted or proposed to be conducted and all such Permits are valid and in full force and effect, except where the failure to obtain such a Permit would not have a Material Adverse Effect. No Permit is subject to termination as a result of the execution of this Agreement or consummation of the transactions [Stock Purchase and Redemption Agreement] -15- contemplated hereby. The Company is not in violation of any term or provision of any judgment, decree, order, statute, rule or government regulation applicable to it or to which it is a party and is now and has heretofore been in compliance with all applicable statutes, ordinances, orders, rules and regulations promulgated by any federal, state, municipal or other governmental authority, which apply to the conduct of its business, except for violations which, individually or in the aggregate, or where the failure to so comply, would not have a Material Adverse Effect. The Company has never entered into or been subject to any judgment, consent decree, compliance order or administrative order with respect to any aspect of the business, affairs, properties or assets of the Company or received any material request for information, notice, demand letter, administrative inquiry or formal or informal complaint or claim from any regulatory agency with respect to any aspect of the business, affairs, properties or assets of the Company. 2.19 EMPLOYEE BENEFIT PROGRAMS.. (a) SECTION 2.19 OF THE DISCLOSURE SCHEDULE sets forth a list of every Employee Program that has been maintained by the Company or to which the Company has contributed at any time during the past three (3) years and (i) is subject to ERISA, (ii) involves the issuance of options or other securities, or (iii) is otherwise material. (b) The terms and operation of each Employee Program comply in all material respects with all applicable laws and regulations relating to such Employee Program. There are no unfunded obligations of the Company under any retirement, pension, profit-sharing, deferred compensation plan or similar program. If required, each Employee Program which has been maintained by the Company and which has at any time been intended to qualify under Section 401(a) or 501(c)(9) of the Code has received a favorable determination or opinion or approval letter from the IRS regarding its qualification under such Section (or an application for such a determination or opinion or approval letter is not yet due to be filed with the IRS with respect to any "disqualifying provision" within the meaning of Treasury Regulation, Section 1.401(b)-1 or has been timely filed and is pending with the IRS) and has, in fact, been qualified under the applicable Section of the Code from the effective date of such Employee Program through and including the Closing (or, if earlier, the date that all of such Employee Program's assets were distributed). No event or omission has occurred which would cause any such Employee Program to lose its qualification under the applicable Code section. The Company is not required to make any payments or contributions to any Employee Program pursuant to any collective bargaining agreement or any applicable labor relations law, and all Employee Programs are terminable at the discretion of the Company without liability to the Company upon or following such termination. The Company has never maintained or contributed to any Employee Program providing or promising any health or other nonpension benefits to terminated employees, other than as required by Code Section 4980B. 2.20 ENVIRONMENTAL MATTERS. To the knowledge of the Company and such Selling Stockholder, no hazardous wastes, substances or materials or oil or petroleum products have been improperly generated, transported, used, disposed, stored or treated by the Company and the Company has not caused any hazardous wastes, substances or materials, or oil or petroleum products to have been released, discharged, disposed, transported, placed or otherwise caused to [Stock Purchase and Redemption Agreement] -16- enter the soil or water in, under or upon any real property owned, leased or operated by the Company. 2.21 INSURANCE. The physical properties, assets, business, operations, employees, officers and directors of the Company are insured by the Company, to the extent disclosed in SECTION 2.21 OF THE DISCLOSURE SCHEDULE. Except as set forth in SECTION 2.21 OF THE DISCLOSURE SCHEDULE and claims for health care benefits in the ordinary course, there is no material claim by the Company pending under any such policies. Said insurance policies and arrangements are in full force and effect, all premiums with respect thereto are currently paid, and the Company is in compliance in all material respects with the terms thereof. Said insurance is sufficient for compliance by the Company with all requirements of applicable law and all agreements and leases to which it is a party and otherwise is of the type and in amounts customarily carried by persons conducting business similar to that conducted by the Company. Each such insurance policy shall continue to be in full force and effect immediately following consummation of the transactions contemplated by this Agreement. To the knowledge of the Company and such Selling Stockholder, there is no threatened termination of any such policies or arrangements. 2.22 INVESTMENT BANKING; BROKERAGE. There are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transactions contemplated by this Agreement payable by the Company or based on any arrangement or agreement made by or on behalf of the Company or the Selling Stockholders. 2.23 CUSTOMERS; RELATIONSHIP WITH CISCO SYSTEMS. SECTION 2.23 OF THE DISCLOSURE SCHEDULE sets forth the name of each customer of the Company who accounted for more than five percent (5%) of the revenues of the Company for the fiscal year ended March 31, 1998 and for the seven month period ended October 31, 1998 (the "Customers"). To the knowledge of the Company and such Selling Stockholder, the relationships of the Company with its Customers are good commercial working relationships. Since March 31, 1997, except as set forth in SECTION 2.23 OF THE DISCLOSURE SCHEDULE, no Customer of the Company has canceled or otherwise terminated its relationship with the Company, or has decreased materially its purchases of the services or products of the Company. No Customer, has, to the knowledge of the Company and such Selling Stockholder, any plan or intention to terminate, to cancel or otherwise materially and adversely modify its relationship with the Company or to decrease materially or limit its purchase or distribution of the services or products of the Company. To the knowledge of the Company and such Selling Stockholder, as of the date hereof, the Company has a good working commercial relationship with CISCO Systems, Inc. ("CISCO"). Since March 31, 1997, CISCO has not (i) canceled or otherwise terminated its relationship with the Company, (ii) decreased in any material manner its purchases of any of the Company's services or products or (iii) otherwise renegotiated, modified or changed in any material and adverse manner its relationship with the Company and the Company has no reasonable indication that CISCO has any plan or intention to do any of the foregoing. Neither the Company nor such Selling Stockholder makes any representation or warranty as to the commercial relationship between the Company and CISCO after the date hereof. [Stock Purchase and Redemption Agreement] -17- 2.24 WARRANTY AND RELATED MATTERS. SECTION 2.24 OF THE DISCLOSURE SCHEDULE sets forth a list of all outstanding product and service warranties and guarantees on any of the products or services that the Company distributes, services, markets, sells or produces for itself, a customer or a third party (each such product or service shall be referred to herein as a "Company Product"). There are no existing or, to the knowledge of the Company and such Selling Stockholder, threatened in writing, product liability, warranty or other similar claims against the Company alleging that any Company Product is defective or fails to meet any product or service warranties except as set forth in SECTION 2.24 OF THE DISCLOSURE SCHEDULE and to the extent of warranty reserves. There are (a) no material inherent design defects or systemic or chronic problems in any Company Product and (b) no liabilities for warranty or other claims or returns with respect to any Company Product relating to any such defects or problems. 2.25 SOLVENCY. The Company has not: (a) made a general assignment for the benefit of creditors; (b) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by its creditors; (c) suffered the appointment of a receiver to take possession of all, or substantially all, of its assets; (d) suffered the attachment or other judicial seizure of all, or substantially all, of its assets; (e) admitted in writing its inability to pay its debts as they come due; or (f) made an offer of settlement, extension or composition to its creditors generally. 2.26 YEAR 2000 COMPLIANCE. Except as set forth in SECTION 2.26 OF THE DISCLOSURE SCHEDULE, to the knowledge of the Company and such Selling Stockholder all computer software products that are (a) owned by the Company, (b) exclusively licensed to the Company (other than "off-the-shelf" software which is generally commercially available) or (c) currently licensed, sold or otherwise distributed to others by the Company and embedded in the Company's products (as opposed to products for which the Company is a reseller or a distributor) (collectively, "Software") are Year 2000 Compliant, except to the extent any failure has not had and could not reasonably be expected to have a Material Adverse Effect. As used herein, "Year 2000 Compliant" shall mean with respect to any such Software, the ability of such Software to perform the following date-related functions: (i) consistently handle date information before, during and after January 1, 2000, including, but not limited to, accepting date input, providing date output and performing calculations on dates or portions of dates; (ii) function accurately in accordance with the documentation relating to the applicable software and without interruption before, during and after January 1, 2000, without any change in operations associated with the advent of the new century; (iii) respond to two-digit date input in a way that resolves any ambiguity as to the century; and (iv) store and provide output of date information in ways that are unambiguous as to century. [Stock Purchase and Redemption Agreement] -18- 2.27 INFORMATION SUPPLIED BY THE COMPANY. (a) This Agreement, the Disclosure Schedule and the certificates and statements furnished pursuant to this Agreement by or on behalf of the Company or such Selling Stockholder, together with all other information provided by the Company and such Selling Stockholder to the Investors in connection with the transactions contemplated hereby, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading in the light of the circumstances under which they were made. To the knowledge of the Company and such Selling Stockholder, there is no material fact directly relating to the business, operations or condition of the Company (other than facts which relate to general economic or industry trends or conditions) that materially adversely affects the same that has not been set forth in this Agreement or in the Disclosure Schedule. To the knowledge of the Company or such Selling Stockholder, except as disclosed in SECTION 2.27 OF THE DISCLOSURE SCHEDULE, neither such Selling Stockholder nor any of the executive officers or directors of the Company has been (a) subject to voluntary or involuntary petition under the federal bankruptcy laws or any state insolvency law or the appointment of a receiver, fiscal agent or similar officer by a court for his business or property; (b) convicted in a criminal proceeding or named as a subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (c) subject to any order, judgment, or decree (not subsequently reversed, suspended or vacated) of any court of competent jurisdiction permanently or temporarily enjoining him from, or otherwise imposing limits or conditions on his, engaging in any securities, investment advisory, banking, insurance or other type of business or acting as an officer or director of a public company; or (d) found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated any federal or state commodities, securities or unfair trade practices law, which such judgment or finding has not been subsequently reversed, suspended, or vacated. (b) The Company or such Selling Stockholder has provided to, or made available for inspection and copying by, the Investors and their counsel true, correct and complete copies of all documents referred to in this Section 2 or in the Disclosure Schedule. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS As a material inducement to the Company and the Selling Stockholders to enter into this Agreement and consummate the transactions contemplated hereby, each Investor hereby makes to the Company and the Selling Stockholders the representation and warranties contained in this Section 3. 3.1 INVESTMENT STATUS. Each Investor represents that it is an "accredited investor" as such term is defined in Rule 501 under the Securities Act of 1933, as amended (the "Securities Act"). Each Investor represents to the Company that it is purchasing the Class B Common Shares for its own account, for investment only and not with a view to, or any present intention of, effecting a distribution of such securities or any part thereof except pursuant to a registration or an available exemption under applicable law. Each such Investor acknowledges that the Class [Stock Purchase and Redemption Agreement] -19- B Common Shares have not been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or exemption from such registration is available. 3.2 AUTHORITY. Each Investor represents that it has full right, authority and power under its charter, by-laws or governing partnership agreement, as applicable, to enter into this Agreement and each agreement, document and instrument to be executed and delivered by or on behalf of such Investor pursuant to or as contemplated by this Agreement and to carry out the transactions contemplated hereby and thereby, and the execution, delivery and performance by such Investor of this Agreement and each such other agreement, document and instrument have been duly authorized by all necessary action required by law under such Investor's charter, by-laws or governing partnership agreement, as applicable. This Agreement and each agreement, document and instrument executed and delivered by each Investor pursuant to or as contemplated by this Agreement constitute, or when executed and delivered will constitute, valid and binding obligations of each of the Investors enforceable in accordance with their respective terms. 3.3 INVESTMENT BANKING; BROKERAGE FEES. No Investor has incurred or become liable for any broker's or finder's fee, banking fees or similar compensation relating to or in connection with the transactions contemplated hereby. SECTION 4. REPRESENTATIONS OF THE SELLING STOCKHOLDERS TO THE COMPANY In order to induce the Company to enter into this Agreement and consummate the transactions contemplated hereby, each of the Selling Stockholders hereby severally and not jointly makes to the Company the representations and warranties contained in this Section 4. 4.1 AUTHORIZATION AND NON-CONTRAVENTION. Such Selling Stockholder has the legal power, right and authority to enter into and perform this Agreement and all documents executed pursuant hereto to which such Selling Stockholder is a party, and to perform each of his or its obligations hereunder. All action on such Selling Stockholder's part required for the lawful execution and delivery of this Agreement and all documents executed pursuant hereto to which such Selling Stockholder is a party have been or will have been taken prior to the Closing. The execution, delivery and performance by such Selling Stockholder of this Agreement and all documents executed pursuant hereto to which such Selling Stockholder is a party (a) require no action by or in respect of, or filing with, or consent of, any governmental body, agency or official or any other entity or individual on such Selling Shareholder's part and (b) do not contravene, or constitute a default under, any provision of applicable law or regulation or of any agreement, judgment, injunction, order, decree or any other instrument binding upon such Selling Stockholder. This Agreement and all documents executed pursuant hereto to which the Selling Stockholder is a party have been duly executed and delivered by such Selling Stockholder and constitute a valid and binding obligation of such Selling Stockholder, enforceable in accordance with their terms. [Stock Purchase and Redemption Agreement] -20- 4.2 TITLE TO AND VALIDITY OF REDEMPTION SHARES. Such Selling Stockholder is the sole record and beneficial owner of, and has good, valid and marketable title to, the Redemption Shares to be sold by such Selling Stockholder to the Company hereunder, free and clear of any and all Liens. Such Selling Stockholder has full right, power, capacity and authority to sell, transfer and deliver the Redemption Shares hereunder. Upon payment of the Redemption Price by the Company for the Redemption Shares, the Company will acquire good title to such Selling Stockholder's Redemption Shares, free and clear of any and all Liens, other than those that may be imposed under Federal or state securities laws. SECTION 5. CONDITIONS OF PURCHASE BY THE INVESTORS Each Investor's obligation to purchase and pay for the Class B Common Shares to be purchased by it shall be subject to compliance by the Company and the Selling Stockholders with the agreements herein contained and to the fulfillment to the Investors' satisfaction, or the waiver by the Investors, on or before and at the Closing Date of the following conditions: 5.1 SATISFACTION OF CONDITIONS. The representations and warranties of the Company and the Selling Stockholders contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date and each of the conditions specified in this Section 5 shall have been satisfied or waived in writing by the Investors. 5.2 OPINION OF COUNSEL. The Investors shall have received from Testa, Hurwitz & Thibeault, LLP an opinion dated as of the Closing Date substantially in the form attached hereto as EXHIBIT D and from Hale and Dorr LLP an opinion dated as of the Closing Date substantially in the form attached hereto as EXHIBIT E. 5.3 AUTHORIZATION. The Board of Directors and stockholders of the Company shall have duly adopted resolutions in the form reasonably satisfactory to the Investors and shall have taken all action necessary for the purpose of authorizing the Company to consummate all of the transactions contemplated hereby (including, without limitation, the issuance of the Class B Common Shares as contemplated by Section 1.2 hereof). 5.4 CHARTER AMENDMENT. The Company shall have duly and properly authorized and filed with the Delaware Secretary of State the Amended Charter which shall create the Class B Common, and the Amended Charter shall be in effect as of the Closing Date on the terms set forth in EXHIBIT C hereto. The Company shall have delivered to the Investors a copy of the Company's Amended Charter certified as of a recent date by the Delaware Secretary of State. 5.5 HART-SCOTT-RODINO. All required filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") shall have been made and the waiting period specified in the HSR Act, including any extensions thereof, shall have expired or otherwise terminated, and none of the Company, the Selling Stockholders or the Investors shall be subject to any injunction or temporary restraining order against consummation of the transactions contemplated hereby. [Stock Purchase and Redemption Agreement] -21- 5.6 DELIVERY OF DOCUMENTS. The Company shall have executed and/or delivered to the Investors (or shall have caused to be executed and delivered to the Investors by the appropriate Persons) the following: (a) Certificates for the Class B Common Shares; (b) Certificates issued by (i) the Secretary of State of the State of Delaware certifying that the Company has legal existence and is in good standing; (ii) the Secretary of State (or similar authority) of such jurisdictions in which the Subsidiaries are incorporated certifying that each Subsidiary has legal existence and is in good standing; and (iii) the Secretary of State (or similar authority) of each jurisdiction in which each of the Company and its Subsidiaries has qualified to do business as a foreign corporation (or is required to be so qualified) as to such foreign qualification; (c) Certificates executed by the Chief Executive Officer of the Company and each of the Selling Stockholders to the effect that the representations and warranties of the Company and such Selling Stockholder made hereunder, are true and correct in all material respects on and as of the Closing Date shall have been delivered to the Investors; (d) A certificate of the Secretary of the Company which shall certify (i) the resolutions adopted by the Board of Directors and stockholders as contemplated in Section 5.3 hereof, (ii) the Company's By-laws and (iii) the names of the officers of the Company authorized to sign this Agreement and the other documents, instruments or certificates to be delivered pursuant to this Agreement by the Company or any of its officers, together with the true signatures of such officers; and (e) Such other supporting documents and certificates as the Investors may reasonably request and as may be required pursuant to this Agreement. 5.7 STOCKHOLDERS AGREEMENT. The Company, the Investors, the Founders and Greylock shall have entered into the Stockholders Agreement in substantially the form attached hereto as EXHIBIT F. 5.8 AMENDED AND RESTATED RIGHTS AGREEMENT. The Company, the Investors, the Founders and Greylock shall have entered into the Rights Agreement in substantially the form attached hereto as EXHIBIT G. 5.9 RELEASES. Each of the Selling Stockholders shall have executed and delivered a Release Agreement in substantially the form of EXHIBIT H attached hereto. 5.10 NON-COMPETITION AGREEMENTS. Each of the Founders shall have entered into an agreement containing non-competition, non-solicitation, invention assignment and confidentiality provisions with the Company substantially in the form of EXHIBIT I hereto (the "Non-Competition Agreement"). [Stock Purchase and Redemption Agreement] -22- 5.11 NO MATERIAL ADVERSE CHANGE. There shall not have been any material adverse change in the financial condition, properties, assets, liabilities, business or operations of the Company or any of its Subsidiaries taken as a whole, whether or not in the ordinary course of business, nor any material adverse change in the United States or world financial markets. 5.12 ALL PROCEEDINGS SATISFACTORY. All corporate and other proceedings taken prior to or at the Closing in connection with the transactions contemplated by this Agreement, and all documents and instruments related thereto, shall be reasonably satisfactory in form and substance to the Investors and the issuance and sale of the Class B Common Shares shall be made in compliance with applicable federal and state laws. 5.13 INVESTORS' FEES. The Company shall have paid $165,000 in legal fees and related expenses incurred by the Investors in connection with the transactions contemplated by this Agreement. In the event that the transactions contemplated under this Agreement are not consummated due to factors which are not attributable to the Investors, the Company shall be obligated to reimburse the Investors such fees and expenses incurred by such Investors. 5.14 NO VIOLATION OR INJUNCTION. The consummation of the transactions contemplated by this Agreement shall not be in violation of any law or regulation, and shall not be subject to any injunction, stay or restraining order. 5.15 CONSENTS AND WAIVERS. The Company and the Selling Stockholders shall have made all filings with and notifications of governmental authorities, regulatory agencies and other entities required to be made prior to the Closing by such parties in connection with the execution and delivery of this Agreement, the performance of the transactions contemplated hereby and the continued operation of the business of the Company and its Subsidiaries subsequent to the Closing. The Company, the Selling Stockholders and the Investors shall have received all authorizations, waivers, consents and permits, in form and substance reasonably satisfactory to the Investors, including any and all notices, consents and waivers required from all third parties, including, without limitation, applicable governmental authorities, regulatory agencies, lessors, lenders and contract parties, required to permit the continuation of the business of the Company and its Subsidiaries subsequent to the Closing and the consummation of the transactions contemplated by this Agreement, and to avoid a breach, default, termination, acceleration or modification of any indenture, loan or credit agreement or any other material agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award as a result of, or in connection with, the execution and performance of this Agreement. 5.16 ELECTION OF DIRECTORS. The Company shall have taken proper corporate action to fix the size of the Board of Directors at five (5) members, the members of which shall be as set forth in the Amended Charter, and two designees of the holders of Class B Common shall have been elected as directors of the Company (the "Investors' Nominees") in accordance with the terms of the Amended Charter. [Stock Purchase and Redemption Agreement] -23- SECTION 6. CONDITIONS TO OBLIGATIONS OF THE COMPANY AND SELLING STOCKHOLDERS The obligation of the Company and Selling Stockholders to consummate this Agreement and the transactions contemplated hereby is subject to the fulfillment, prior to or at the Closing, of the following conditions precedent: 6.1 REPRESENTATIONS; WARRANTIES; COVENANTS. The representations and warranties of the Investors contained in Section 3 and the Selling Stockholders contained in Section 4 shall be true and correct in all material respects on and as of the Closing Date as though made on and as of the Closing and each of the conditions specified in this Section 6 shall have been satisfied or waived in writing by the Company, the Founders and Greylock. 6.2 CERTAIN AGREEMENTS. On the Closing Date, the Investors shall have executed and delivered the Stockholders Agreement and the Rights Agreement. 6.3 HART-SCOTT-RODINO. All required filings under the HSR Act shall have been contemplated and the waiting period specified in the HSR Act, including any extensions thereof, shall have expired or otherwise terminated, and none of the Company, the Selling Stockholders or the Investors shall be subject to any injunction or temporary restraining order against consummation of the transactions contemplated hereby. 6.4 FUNDING. The Company shall have received the full purchase price for the Class B Common Shares. 6.5 RELEASES. Each of the Selling Stockholders shall have executed and delivered a Release Agreement in substantially the form of EXHIBIT H attached hereto. 6.6 NO VIOLATION OR INJUNCTION. The consummation of the transactions contemplated by this Agreement shall not be in violation of any law or regulation, and shall not be subject to any injunction, stay or restraining order. SECTION 7. TERMINATION OF AGREEMENT; RIGHTS TO PROCEED 7.1 TERMINATION. At any time prior to the Closing, this Agreement may be terminated as follows: (a) by mutual written consent of the Company, the Investors, Greylock and the Founders; (b) by the Company, the Founders and Greylock, provided that none of the Company, the Founders or Greylock is in material breach of this Agreement, (i) if the Investors are in material breach of this Agreement and such breach shall remain uncured for a period of ten [Stock Purchase and Redemption Agreement] -24- (10) business days after such parties shall have given written notice of such breach to the Investors, or (ii) if the Closing has not occurred on or before February 15, 1999; or (c) by the Investors, provided that the Investors are not in material breach of this Agreement, (i) if any of the Company, the Founders or Greylock is in material breach of this Agreement and such breach shall remain uncured for a period of ten (10) business days after the Investors shall have given written notice of such breach to such parties, or (ii) if the Closing has not occurred on or before February 15, 1999. 7.2 EFFECT OF TERMINATION. All obligations of the parties hereunder shall cease upon any termination pursuant to Section 7.1; PROVIDED, HOWEVER, that (i) the provisions of Section 5.13 and this Section 7 hereof shall survive any termination of this Agreement; (ii) nothing herein shall relieve any party from any liability for any willful, material breach of this Agreement; and (iii) any party may proceed as further set forth in Section 7.3 below. 7.3 RIGHT TO PROCEED. Anything in this Agreement to the contrary notwithstanding, (i) if any of the conditions specified in Section 5 hereof have not been satisfied, the Investors shall have the right to proceed with the transactions contemplated hereby without waiving any of their rights hereunder, and (ii) if any of the conditions specified in Section 6 hereof have not been satisfied, the Company and the Selling Stockholders shall have the right to proceed with the transactions contemplated hereby without waiving any of their rights hereunder. SECTION 8. SURVIVAL; INDEMNIFICATION 8.1 SURVIVAL OF REPRESENTATIONS; WARRANTIES AND COVENANTS; ASSIGNABILITY OF RIGHTS. All covenants, agreements, representations and warranties of the Company, the Selling Stockholders and the Investors made herein and in the certificates or schedules or other written information delivered or furnished to any Investor pursuant hereto in connection herewith (a) are material, shall be deemed to have been relied upon by the party or parties to whom they are made and shall survive the Closing, provided that the representations and warranties of the Company and the Selling Stockholders made in Section 2 hereof and in the certificates or schedules or other written information delivered or furnished to the Investors pursuant hereto shall survive until September 30, 1999, except for the last sentence of Section 2.2(a) and Sections 2.4(b) and 2.12 hereof, which shall survive for the period set forth in Section 8.2(b)(i) hereof, and in respect of Litigation Claims (as defined herein), which shall survive for the period set forth in Section 8.2(b)(i) hereof, regardless of any investigation on the part of such party or its representatives, and (b) shall bind the parties' successors and assigns (including, without limitation, any successor to the Company by way of acquisition, merger or otherwise), whether so expressed or not, and, except as otherwise provided in this Agreement, all such covenants, agreements, representations and warranties shall inure to the benefit of the Investors' successors and assigns and to their transferees of Securities, whether so expressed or not. [Stock Purchase and Redemption Agreement] -25- 8.2 TRANSACTION RELATED INDEMNIFICATION. (a) Each Selling Stockholder (other than Greylock) (on its behalf and on behalf of its successors, executors, administrators, estate, heirs, and assigns) (collectively, for the purposes of this Section 8, the "Indemnifying Parties"), severally and not jointly, agrees to defend, indemnify and hold the Investors, their affiliates and respective direct and indirect partners (including partners of partners and stockholders and members of partners), members, stockholders, directors, officers, employees, attorneys and agents of each of the foregoing and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (parties receiving the benefit of the indemnification agreement herein shall be referred to collectively as "Indemnified Parties" and individually as an "Indemnified Party") harmless from and against any and all damages, liabilities, losses, obligations, deficiencies, actions, suits, proceedings, demands, assessments, orders, judgments, fines, Taxes, penalties, costs and expenses (including without limitation, reasonable fees of counsel, accountants or consultants) of any kind or nature whatsoever ("Claims") (whether or not arising out of third-party claims and including all amounts paid in defense or settlement of the foregoing) which may be sustained or suffered by any such Indemnified Party (a "Loss" or "Losses"), based upon, arising out of, by reason of or otherwise in respect of (i) any inaccuracy in or breach of any representation or warranty made by the Company and/or such Indemnifying Party in this Agreement, or in any Schedule or certificate delivered by the Company or by or on behalf of such Indemnifying Party as part of or pursuant to this Agreement, or any claim, action or proceeding asserted or instituted or arising out of any matter or thing covered by such inaccuracy in or breach of such representations or warranties (collectively, the "Warranty Claims") or (ii) the litigation matter described in Item 2 of SECTION 2.15 OF THE DISCLOSURE SCHEDULE but only to the extent Losses related to such litigation matter exceed $200,000 (the "Litigation Claims"); PROVIDED, that Loss and Losses shall not include any special, indirect, consequential or speculative damages. For purposes of clarification, losses suffered or sustained by the Company shall not give rise to indemnification hereunder unless to the extent the same results in a Loss to an Indemnified Party. (b) The right of Indemnified Parties to indemnification under Section 8.2(a) shall be subject to the following provisions: (i) Indemnification with respect to Warranty Claims shall expire on September 30, 1999; PROVIDED, HOWEVER, that the limitation of this clause (i) shall not apply to Warranty Claims involving fraud or intentional misrepresentation or under the last sentence of Section 2.2(a) and Sections 2.4(b) and 2.12 hereof (collectively, the "Primary Warranty Claims"), for which the period for making such claims shall expire on the date which is six (6) months after the termination of the applicable statute of limitations relating thereto. Following such respective dates, such representations and warranties and, subject to the next sentence, Warranty Claims shall expire. If prior to the relevant date of expiration a specific state of facts shall have become known which may constitute or give rise to any Warranty Claim as to which indemnity may be payable and an Indemnified Party shall have given reasonable notice of such facts and Warranty Claims to the Selling Stockholders then the right to indemnification with respect thereto shall remain in effect solely to the extent stated in the Warranty Claim without regard to when such matter shall [Stock Purchase and Redemption Agreement] -26- have been finally determined and disposed of, according to the date on which notice of the applicable claim is given. Indemnification with respect to Litigation Claims shall expire on the date which is six (6) months after the date such Litigation Claims are finally settled in writing or finally adjudicated and disposed of. (ii) No indemnification shall be payable with respect to Warranty Claims (other than Primary Warranty Claims) and/or Litigation Claims unless the total of all Warranty Claims and/or Litigation Claims exceeds $1,000,000 in the aggregate, whereupon the full amount of such claims shall be recoverable in accordance with the terms hereof. (iii) No Indemnifying Party shall be obligated to indemnify the Indemnified Parties for Warranty Claims (other than Primary Warranty Claims) and/or Litigation Claims in an aggregate amount which exceeds the lesser of (A) (x) the total amount received by such Indemnifying Party pursuant to the redemption of such Indemnifying Party's Redemption Shares as set forth in Sections 1.2 hereof less (y) the sum of the aggregate amount of federal and state Taxes paid by such Indemnifying Party with respect thereto and, in the case of Tracey Steele, Michael Szabados and Jerry Stabile who have acquired or are acquiring shares to be redeemed hereunder upon the exercise of stock options, the aggregate exercise price thereof or (B) such Indemnifying Party's pro rata share as set forth opposite such Indemnifying Party's name in the section of EXHIBIT A relating to such Indemnifying Party for such Warranty Claims (the aggregate amount payable under this Section 8.2(b)(iii) shall be referred to as the "Maximum Warranty Claim Amount"). (iv) The Indemnifying Parties identified with an asterisk in EXHIBIT A attached hereto shall not be obligated to indemnify the Indemnified Parties for Warranty Claims under Sections 2.4(a) and 2.17(a) hereof or with respect to Litigation Claims hereunder. (v) The amount of any Losses suffered, sustained, incurred or required to be paid by any Indemnifying Party shall be reduced (A) by the amount of any insurance proceeds paid as a result of such Loss, (B) to take account of any Tax Benefit to the Indemnified Party and (C) by the amount of any recoveries from third parties. As used herein, the term "Tax Benefit" shall mean the Federal, state and local tax savings that have resulted or will result from any tax deduction or tax credit that (x) the Indemnified Party has claimed or will claim on a Federal, state or local tax return and (y) is directly attributable to such Loss. 8.3 INDEMNIFICATION FOR VICARIOUS LIABILITY. (a) Without limitation of any other provision of this Agreement but except with respect to matters governed by Section 8.2 hereof, the Company agrees to defend, indemnify and hold each Investor and its direct and indirect partners, members, agents and representatives (collectively, the "Indemnitees" and individually an "Indemnitee") harmless from and against any [Stock Purchase and Redemption Agreement] -27- and all losses, claims, damages, obligations, liens, assessments, judgments, fines, liabilities, and other reasonable costs and expenses (including, without limitation, interest, penalties and any reasonable legal and other expenses) incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted by any third party or governmental agency based on so-called control person liability, including, without limitation, in connection with any such third party or governmental action or claim relating to any action taken or omitted to be taken or alleged to have been taken or omitted to have been taken by any Indemnitee as director or controlling person of the Company (including, to the extent not covered by the Rights Agreement, any and all losses under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, which relates directly or indirectly to the registration, purchase, sale or ownership of any securities of the Company or to any fiduciary obligation owed with respect thereto); PROVIDED, HOWEVER, that the Company will not be liable to the extent that such loss, claim, damage, obligation, lien, assessment, judgment, fine, cost, expense or liability arises from and is based on (A) an untrue statement or omission or alleged untrue statement or omission in a registration statement or prospectus which is made in reliance on and in conformity with written information furnished to the Company in an instrument duly executed by or on behalf of such Indemnitee specifically stating that it is for use in the preparation thereof, (B) a knowing and willful violation of the federal securities laws by an Indemnitee, as finally determined by the arbitrator selected pursuant to Section 10.7 hereof; (C) an Indemnitee's gross negligence or willful misconduct as finally determined by the arbitrator selected pursuant to Section 10.7 hereof; or (D) where an Indemnitee did not act in good faith and in a manner in the best interests of the Company or, with respect to a criminal matter, the Indemnitee's conduct was unlawful, in each case as finally determined by the arbitrator selected pursuant to Section 10.7 hereof; and PROVIDED FURTHER, HOWEVER, that the Company shall have no indemnification liability to the extent prohibited by law, including, without limitation, the General Corporation Laws of Delaware. (b) If the indemnification provided for in Section 8.3(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an Indemnitee in respect of any losses, claims, damages, expenses or liabilities referred to therein, then the Company, in lieu of indemnifying such Indemnitee thereunder, shall contribute to the amount paid or payable by such Indemnitee as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Investors, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Investors in connection with the action or inaction which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. Each of the Company and the Investors agrees that it would not be just and equitable if contribution pursuant to this Section 8.3(b) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be [Stock Purchase and Redemption Agreement] -28- entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. (c) The indemnification and contribution provided for in this Section 8.3 will remain in full force and effect regardless of any investigation made by or on behalf of the Indemnitees or any officer, director, partner, member, employee, agent or controlling person of the Indemnitees. The Company shall have the right to select counsel for the defense, subject to the consent of a majority-in-interest of the Indemnitees, which consent shall not be unreasonably withheld. If the Company assumes such defense in accordance with the preceding sentence, it shall have the right, with the consent of a majority-in-interest of the Indemnitees, which consent shall not be unreasonably withheld, to settle all indemnifiable matters related to claims by third parties which are susceptible to being settled provided the Company's obligation to indemnify such Indemnitees therefor will be fully satisfied by payment of money by the Company and the settlement includes a complete release of such Indemnitees. The Company shall provide such Indemnitees that information regarding the status of the claim that is reasonably requested by such Indemnitees. Notwithstanding anything herein stated, such Indemnitees shall at all times have the right to reasonably participate in such defense at its own expense directly or through counsel; PROVIDED, HOWEVER, if the named parties to the action or proceeding include both the Company and the Indemnitees and representation of both parties by the same counsel would be inappropriate under applicable standards of professional conduct, the reasonable expense of separate counsel for such Indemnitees shall be paid by the Company to the extent indemnification is required hereunder. If no such notice of intent to dispute and defend is given by the Company, or if such diligent good faith defense is not being or ceases to be conducted, such Indemnitees shall, at the expense of the Company, undertake the defense of (with counsel selected by such Indemnitees), and shall have the right to compromise or settle, such claim, liability or expense. If such claim, liability or expense is one that by its nature cannot be defended solely by the Company, then such Indemnitees shall make available all information and assistance that the Company may reasonably request and shall cooperate with the Company in such defense. (d) The provisions of this Section 8.3 are in addition to and shall supplement those set forth in the Rights Agreement. (e) Except with respect to matters governed by Section 8.2 hereof, the Company agrees to pay and hold the Investors harmless against liability for payment of all reasonable fees and disbursements of counsel in connection with the enforcement, amendment, modification or waiver of this Agreement and the agreements, documents and instruments contemplated hereby and executed pursuant hereto. 8.4 NOTICE; PAYMENT OF LOSSES; DEFENSE OF CLAIMS. (a) An Indemnified Party shall give written notice to the Indemnifying Party promptly (with a copy to the Company), and in any event not later than thirty (30) business days after assertion of any written claim by any third party, specifying in reasonable detail the amount, nature and source of the claim, and including therewith copies of any notices or other documents received from third parties with respect to such claim; PROVIDED, HOWEVER, that failure to give such [Stock Purchase and Redemption Agreement] -29- notice shall not limit the right of an Indemnified Party to recover indemnity or reimbursement except to the extent that the Indemnifying Party suffers any prejudice as a result of such failure. The Indemnified Party shall also provide the Indemnifying Party with such further information concerning any such claims as the Indemnifying Party may reasonably request by written notice. In all matters for which an Indemnified Party seeks indemnification under this Agreement or defends, contests, settles or negotiates any related claim, such Indemnified Party shall act in a manner consistent with that which a reasonably prudent person with no access to indemnity would take to mitigate any Losses it may suffer. (b) Within forty-five (45) days after receiving notice of a claim for indemnification or reimbursement, the Indemnifying Party shall, by written notice to the Indemnified Party, either (1) concede or deny liability for the claim in whole or in part, or (2) in the case of a claim asserted by a third party, advise that the matters set forth in the notice are, or will be, subject to contest or legal proceedings not yet finally resolved. If the Indemnifying Party concedes liability in whole or in part, it shall, within ten (10) business days of such concession, pay the amount of the claim to the Indemnified Party to the extent of the liability conceded. Any such payment shall be made in immediately available funds equal to the amount of such claim so payable. If the Indemnifying Party denies liability in whole or in part or advises that the matters set forth in the notice are, or will be, subject to contest or legal proceedings not yet finally resolved, then the Indemnifying Party shall make no payment until the matter is resolved in accordance with this Agreement. In the case of any third party claim, if within twenty (20) days after receiving the notice described in the preceding paragraph the Indemnifying Party or Parties give written notice to the Indemnified Party or Parties stating that they would be liable under the provisions hereof for indemnity in the amount of such indemnification claim if such indemnification claim were valid and that they dispute and intend to defend against such indemnification claim, liability or expense at their own cost and expense, then counsel for the defense shall be selected by the Company or the Indemnifying Party or Parties (subject to the consent of a majority-in-interest of the Indemnified Parties which consent shall not be unreasonably withheld) and such Indemnified Party or Parties shall not be required to make any payment with respect to such claim, liability or expense as long as the Indemnifying Party or Parties are conducting a good faith and diligent defense at their own expense; PROVIDED, HOWEVER, that the assumption of defense of any such matters by the Indemnifying Party or Parties shall relate solely to the claim, liability or expense that is subject or potentially subject to indemnification and, PROVIDED, FURTHER, that the Indemnifying Party and the Indemnified Party shall jointly control any claim which is reasonably likely to involve damages or costs which are reasonably likely to cause the Maximum Warranty Claim Amount to be exceeded. If the Indemnifying Party or Parties assume such defense in accordance with the preceding sentence, they shall have the right, with the consent of a majority-in-interest of the Indemnified Parties, which consent shall not be unreasonably withheld, to settle all indemnifiable matters related to claims by third parties which are susceptible to being settled provided the Indemnifying Party or Parties' obligation to indemnify such Indemnified Party or Parties therefor will be fully satisfied by payment of money by the Indemnifying Party and the settlement includes a complete release of such Indemnified Party or Parties. The Indemnifying Party or Parties shall provide such Indemnified Party or Parties that information regarding the [Stock Purchase and Redemption Agreement] -30- status of the claim that is reasonably requested by the Indemnified Party or Parties. Notwithstanding anything herein stated, such Indemnified Party or Parties shall at all times have the right to reasonably participate in such defense at its own expense directly or through counsel; PROVIDED, HOWEVER, if the named parties to the action or proceeding include both the Indemnifying Party or Parties and the Indemnified Party or Parties and representation of both parties by the same counsel would be inappropriate under applicable standards of professional conduct, the reasonable expense of separate counsel for such Indemnified Party or Parties shall be paid by the Indemnifying Party or Parties to the extent indemnification is required hereunder. If no such notice of intent to dispute and defend is given by the Indemnifying Party or Parties, or if such diligent good faith defense is not being or ceases to be conducted, such Indemnified Party or Parties shall, at the expense of the Indemnifying Party or Parties, undertake the defense of (with counsel selected by such Indemnified Party or Parties subject to the consent of the Indemnifying Party or Parties which consent shall not be unreasonably withheld), and shall have the right to compromise or settle, such claim, liability or expense (subject to the consent of the Indemnifying Party or Parties which consent shall not be unreasonably withheld). If such claim, liability or expense is one that by its nature cannot be defended solely by the Indemnifying Party or Parties, then such Indemnified Party or Parties shall make available all information and assistance that the Indemnifying Party or Parties may reasonably request and shall cooperate with the Indemnifying Party or Parties in such defense. 8.5 EXCLUSIVE REMEDY. The Indemnifying Parties and the Indemnified Parties agree and acknowledge that subsequent to the Closing the indemnification rights provided in this Section 8 shall be the exclusive remedy of the Indemnified Parties against the Indemnifying Parties for breaches of this Agreement and the schedules and certificates and other written information delivered as part or pursuant to or in connection with this Agreement, and shall be subject to the terms and conditions set forth herein, except with respect to (a) Claims against any Selling Stockholder involving fraud or intentional misrepresentations by such Selling Stockholder or (b) any equitable remedies to which any party may be entitled hereunder. The Indemnifying Parties shall not have any right of indemnity or contribution from the Company with respect to any Claim hereunder. SECTION 9. DEFINITIONS Unless the context specifically requires otherwise, capitalized terms used in this Agreement shall have the meaning specified below: "AMENDED CHARTER" means the Company's Amended and Restated Certificate of Incorporation in the form of EXHIBIT C hereto. "CODE" means the Internal Revenue Code of 1986, as amended. "ERISA" means the Employee Retirement Income Security Act of 1979, as amended, and the regulations promulgated thereunder. [Stock Purchase and Redemption Agreement] -31- "EMPLOYEE PROGRAM" means any employee benefit or welfare plan, stock option, bonus or incentive plan, severance pay policy or agreement, deferred compensation agreement or any similar plan or agreement. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "INTELLECTUAL PROPERTY RIGHTS" means all intellectual property rights, including all patents, patent applications, patent rights, trademarks, trademark applications, trade names, service marks, service mark applications, copyrights, copyright applications, computer programs and other computer software (including, without limitation, all source and object code, algorithms, architecture, structure, display screens, layouts and development tools), inventions, designs, samples, specifications, schematics, know-how, trade secrets, proprietary processes and formulae, and development tools, promotional materials, databases, customer lists, supplier, vendor and dealer lists and marketing research, and all documentation and media constituting, describing or relating to the foregoing, including without limitation, manuals, memoranda and records. "MATERIAL ADVERSE EFFECT" means any change or effect that is materially adverse to the properties, assets, business, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole. "PERMITS" means any franchises, authorizations, approvals, orders, consents, licenses, certificates, permits, registrations, qualifications or other rights and privileges. "PERSON" means any individual, corporation, partnership, joint venture, trust or unincorporated organization or any government or any agency or political subdivision thereof. "RIGHTS AGREEMENT" means the Amended and Restated Rights Agreement in the form of EXHIBIT G hereto to be executed by the Company, the Founders, Greylock and the Investors. "SECURITIES ACT" means the Securities Act of 1933, as amended. "STOCKHOLDERS AGREEMENT" means the Stockholders Agreement in the form of EXHIBIT F hereto to be executed by and among the Company, the Founders, Greylock and the Investors. "SUBSIDIARY" means any corporation more than 50% of the outstanding voting securities of which, or any partnership, joint venture or other entity more than 50% of the total equity interest of which, is directly or indirectly owned by the Company or any other entity otherwise controlled by or under common control with the Company; PROVIDED, that Frontier Software Development India Pvt. Ltd. shall not be deemed to be a Subsidiary. "TAXES" means any federal, state, local, foreign or other taxes, including without limitation income taxes, estimated taxes, excise taxes, sales taxes, use taxes, gross receipts taxes, franchise taxes, employment and payroll related taxes, withholding taxes, stamp taxes, transfer taxes and property taxes, whether or not measured in whole or in part by net income. [Stock Purchase and Redemption Agreement] -32- SECTION 11. GENERAL 11.1 AMENDMENTS, WAIVERS AND CONSENTS. For the purposes of this Agreement and all agreements executed pursuant hereto, no course of dealing between or among any of the parties hereto and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. No provision hereof may be waived otherwise than by a written instrument signed by the party or parties so waiving such covenant or other provision. No amendment to this Agreement may be made without the written consent of the Company, the Investors holding a majority of the outstanding Class B Common Shares, the Founders and Greylock. Any actions required to be taken or consents, approvals, votes or waivers required or contemplated to be given by the Investors herein shall require a vote of a majority of the Investors based on the relative holdings of capital stock of the Company of the Investors as a group at the relevant time and any such action by such percentage of Investors shall bind all of the Investors. 11.2 LEGEND ON SECURITIES. The Company, the Investors and the Selling Stockholders acknowledge and agree that the following legend (or one substantially similar thereto) shall be typed on each certificate evidencing any of the securities issued hereunder held at any time by an Investor: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS. 11.3 GOVERNING LAW. This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of the Commonwealth of Massachusetts, without giving effect to conflict of laws principles thereof. 11.4 SECTION HEADINGS AND GENDER. The descriptive headings in this Agreement have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction of any provision thereof or hereof. The use in this Agreement of the masculine pronoun in reference to a party hereto shall be deemed to include the feminine or neuter, and vice versa, as the context may require. 11.5 COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document. [Stock Purchase and Redemption Agreement] -33- 11.6 NOTICES AND DEMANDS. Any notice or demand which is required or provided to be given under this Agreement shall be deemed to have been sufficiently given and received for all purposes when delivered by hand, telecopy, telex or other method of facsimile, or five (5) days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two (2) days after being sent by overnight delivery providing receipt of delivery, to: (a) if to the Company, c/o NetScout Systems, Inc., 4 Technology Park Drive, Westford, MA 01886, or at such other address designated by the Company to the Investors and the other parties hereto in writing; (b) if to the Selling Stockholders, at the mailing addresses shown on EXHIBIT A attached hereto, or at such other address designated by a Selling Stockholder to the Investors and the other parties hereto in writing; and (c) if to the Investors, at the mailing addresses as shown on EXHIBIT B attached hereto, or at such other address designated by an Investor to the Company and the Selling Stockholders in writing. 11.7 DISPUTE RESOLUTION. Except as provided below, any dispute arising out of or relating to this Agreement or the breach, termination or validity hereof shall be finally settled by binding arbitration conducted expeditiously in accordance with the J.A.M.S./Endispute Comprehensive Arbitration Rules and Procedures (the "J.A.M.S. Rules"). The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Sections 1-16, and judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. The place of arbitration shall be Boston, Massachusetts. Such proceedings shall be administered by the neutral arbitrator in accordance with the J.A.M.S. Rules as he/she deems appropriate, however, such proceedings shall be guided by the following agreed upon procedures: (i) mandatory exchange of all relevant documents, to be accomplished within forty-five (45) days of the initiation of the procedure; (ii) no other discovery; (iii) hearings before the neutral arbitrator which shall consist of a summary presentation by each side of not more than three (3) hours; such hearings to take place on one or two days at a maximum; and (iv) decision to be rendered not more than ten (10) days following such hearings. [Stock Purchase and Redemption Agreement] -34- Notwithstanding anything to the contrary contained herein, the provisions of this Section 10.7 shall not apply with regard to any equitable remedies to which any party may be entitled hereunder. Each of the parties hereto (a) hereby irrevocably submits to the jurisdiction of any United States District Court of competent jurisdiction for the purpose of enforcing the award or decision in any such proceeding, (b) hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution (except as protected by applicable law), that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court, and hereby waives and agrees not to seek any review by any court of any other jurisdiction which may be called upon to grant an enforcement of the judgment of any such court. Each of the parties hereto hereby consents to service of process by registered mail at the address to which notices are to be given. Each of the parties hereto agrees that its or his submission to jurisdiction and its or his consent to service of process by mail is made for the express benefit of the other parties hereto. Final judgment against any party hereto in any such action, suit or proceeding may be enforced in other jurisdictions by suit, action or proceeding on the judgment, or in any other manner provided by or pursuant to the laws of such other jurisdiction. 11.8 REMEDIES; SEVERABILITY. Notwithstanding Section 10.7, it is specifically understood and agreed that any breach of the provisions of this Agreement by any person subject hereto will result in irreparable injury to the other parties hereto, that the remedy at law alone will be an inadequate remedy for such breach, and that, in addition to any other remedies which they may have, such other parties may enforce their respective rights by actions for specific performance (to the extent permitted by law). The Company may refuse to recognize any unauthorized transferee as one of its shareholders for any purpose, including, without limitation, for purposes of dividend and voting rights, until the relevant party or parties have complied with all applicable provisions of this Agreement, the Amended and Restated Co-Sale Agreement and the Amended and Restated Rights Agreement. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or the other provisions of this Agreement. 11.9 INTEGRATION. This Agreement, including the exhibits, documents and instruments referred to herein, constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, including, without limitation, the letter of intent dated November 8, 1998 between the Investors and the Founders in respect of the transactions contemplated herein, other than the "no-shop" provisions of such letter of intent that were extended by the letter agreement, dated as of December 10, 1998, between the Investor and the Founders, which such provisions and letter [Stock Purchase and Redemption Agreement] -35- agreement shall survive the date of this Agreement until the earlier of the Closing or termination of this Agreement. 11.10 GREYLOCK FEES. The Company shall pay the reasonable fees and expenses of Wilson, Sonsini, Goodrich & Rosati, P.C. and Hale and Dorr, LLP, counsel to Greylock, in connection with the transactions contemplated by this Agreement, provided that such fees and expenses shall not exceed $10,000 in the aggregate. 11.11 WAIVERS. The Company hereby waives compliance by the Selling Stockholders with any notice or other requirements under the Stockholders Agreement dated as of January 1, 1994 with respect of the sale by the Selling Stockholders of the Redemption Shares to the Company hereunder. Greylock hereby waives compliance by the Company and the Selling Stockholders with any notice or other requirements under the Series A Preferred Stock Purchase Agreement, the Rights Agreement and the Co-Sale Agreement, each dated as of February 20, 1996. [SIGNATURE PAGE FOLLOWS] [Stock Purchase and Redemption Agreement] -36- IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase and Redemption Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written. THE COMPANY: NETSCOUT SYSTEMS, INC. By: /s/ Narendra Popat ----------------------------- Narendra Popat, President FOUNDERS: /s/ Narendra Popat --------------------------------- Narendra Popat /s/ Anil Singhal --------------------------------- Anil Singhal GREYLOCK: GREYLOCK EQUITY LIMITED PARTNERSHIP By: Greylock Equity GP Limited Partnership By: /s/ Henry F. Mccance ----------------------------- Henry F. McCance, General Partner [Stock Purchase and Redemption Agreement] -39- OTHER SELLING STOCKHOLDERS: /s/ Charles Tillett ---------------------------------- Charles Tillett /s/ Ralph Lowry ---------------------------------- Ralph Lowry /s/ Nathan Kalowski ---------------------------------- Nathan Kalowski /s/ Ashwani Singhal ---------------------------------- Ashwani Singhal /s/ Joseph G. Hadzima, Jr. ---------------------------------- Joseph G. Hadzima, Jr. /s/ Michael Szabados ---------------------------------- Michael Szabados /s/ Jerry Stabile ---------------------------------- Jerry Stabile /s/ Tracey Steele ---------------------------------- Tracey Steele [Stock Purchase and Redemption Agreement] -40- INVESTORS: TA/ADVENT VIII, L.P. By: TA Associates VIII, LLC, its general partner By: TA Associates, Inc., its manager By: /s/ Kenneth T. Schiciano ------------------------------------- Kenneth T. Schiciano, Principal ADVENT ATLANTIC & PACIFIC III, L.P. By: TA Associates AAP III Partners, L.P., its general partner By: TA Associates, Inc., its general partner By: /s/ Kenneth T. Schiciano ------------------------------------- Kenneth T. Schiciano, Principal TA EXECUTIVES FUND, LLC By: TA Associates, Inc., its manager By: /s/ Kenneth T. Schiciano ------------------------------------- Kenneth T. Schiciano, Principal TA INVESTORS, LLC By: TA Associates, Inc., its manager By: /s/ Kenneth T. Schiciano ------------------------------------- Kenneth T. Schiciano, Principal EGAN-MANAGED CAPITAL, L.P. By: EMC Partners, L.P., its general partner By: /s/ Michael H. Shanahan ------------------------------------- Michael H. Shanahan, General Partner [Stock Purchase and Redemption Agreement] -41- EX-10.5 11 EXHIBIT 10.5 Exhibit 10.5 ------------------------------------- NETSCOUT SYSTEMS, INC. AMENDED AND RESTATED RIGHTS AGREEMENT JANUARY 15, 1999 ------------------------------------- TABLE OF CONTENTS
PAGE SECTION 1 -CERTAIN DEFINITIONS...............................................................4 SECTION 2 -PIGGYBACK RIGHTS..................................................................7 2.1 Notice of Registration................................................................7 2.2 Underwriting..........................................................................7 2.3 Right to Terminate Registration.......................................................8 2.4 Termination of Piggy-back Rights......................................................8 SECTION 3 -DEMAND REGISTRATION...............................................................8 3.1 Demand Registration...................................................................8 3.2 Underwritten Public Offering..........................................................9 3.3 Inclusion of Additional Shares........................................................9 3.4 Limitations...........................................................................9 3.5 Termination of Demand Rights.........................................................10 SECTION 4 -FORM S-3 REGISTRATION............................................................10 4.1 Registrations on Form S-3............................................................10 4.2 Termination of S-3 Rights............................................................10 SECTION 5 -OBLIGATIONS OF COMPANY...........................................................11 SECTION 6 -EXPENSES OF REGISTRATION.........................................................11 SECTION 7 -INDEMNIFICATION..................................................................12 7.1 The Company..........................................................................12 7.2 Holders..............................................................................12 7.3 Defense of Claims....................................................................13 SECTION 8 -RULE 144 REPORTING...............................................................13 SECTION 9 -STANDOFF AGREEMENT...............................................................14 SECTION 10 -LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS...................................14 SECTION 11 -INFORMATION RIGHTS..............................................................14 11.1 Delivery of Financial Statements....................................................14 11.2 Inspection..........................................................................15 SECTION 12 -COVENANTS OF THE COMPANY........................................................15 12.1 Conduct of Business.................................................................16 12.2 Insurance...........................................................................16 12.3 Key Person Insurance................................................................16 12.4 Affiliated Transactions.............................................................16 12.5 Management Compensation.............................................................16 12.6 Financings..........................................................................17
12.7 Enforcement of Certain Agreements...................................................17 12.8 Employee Confidentiality, Non-Competition and Invention Assignment Agreements.......17 12.9 Adverse Changes.....................................................................17 12.10 Meetings...........................................................................18 12.11 Committees of the Board............................................................18 12.12. No Conflicting Agreements.........................................................18 12.13 Charter and Bylaw Amendments.......................................................18 SECTION 13 -ADDITIONAL COVENANTS............................................................18 3.1 Confidentiality......................................................................18 SECTION 14 -TERMINATION OF RIGHTS...........................................................19 SECTION 15 -MISCELLANEOUS...................................................................19 15.1 Assignment.........................................................................19 15.2 Governing Law.......................................................................20 15.3 Counterparts........................................................................20 15.4 Titles and Subtitles................................................................20 15.5 Notices.............................................................................20 15.6 Attorney's Fees....................................................................20 15.7 Amendments and Waivers.............................................................20 15.8 Dispute Resolution.................................................................20 15.9 Severability........................................................................21 15.10 Delays or Omissions................................................................22 15.11 Entire Agreement...................................................................22
NETSCOUT SYSTEMS, INC. AMENDED AND RESTATED RIGHTS AGREEMENT THIS AMENDED AND RESTATED RIGHTS AGREEMENT is entered into as of January 15, 1999, by and among NetScout Systems, Inc., a Delaware corporation (the "Company"), the stockholder listed under the heading "Series A Holder" on the signature page (the "Series A Holder") and the stockholders listed under the heading "Class B Holders" on the signature page (each a "Class B Holder" and collectively the "Class B Holders"). The Series A Holder and the Class B Holders shall be referred to herein collectively as the "Holders." RECITALS A. The Series A Holder has purchased shares of Series A Preferred Stock (the "Series A Preferred") pursuant to the terms of the Series A Preferred Stock Purchase Agreement dated as of February 20, 1996 by and between the Company and the Series A Holders. B. The Class B Holders have purchased shares of Class B Convertible Common Stock, $0.001 par value per share (the "Class B Common"), pursuant to the terms of a Stock Purchase and Redemption Agreement, dated as of December 31, 1998, by and among the Company, the Class B Holders, the Series A Holder and certain other individuals named therein (the "Purchase Agreement"). C. The execution of this Agreement is a condition to the closing of the transactions contemplated by the Purchase Agreement. D. The Company desires to enter into this Agreement and grant the Holders the rights contained herein in order to fulfill such condition. NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties agree as follows: SECTION 1 CERTAIN DEFINITIONS Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: 1.1 "CERTIFICATE OF INCORPORATION" shall mean the Company's Amended and Restated Certificate of Incorporation. 1.2 "COMMON STOCK" shall mean the Voting Common Stock, $0.001 par value per share, and Non-Voting Common Stock, $0.001 par value per share, of the Company and any other shares of stock issued or issuable with respect thereto (whether by way of a stock dividend or stock split or in exchange for or in replacement of or upon conversion of such shares or otherwise in connection with a combination of shares, recapitalization, merger, consolidation or other corporate reorganization). 1.3 "CONFIDENTIALITY AGREEMENTS" shall mean the Confidentiality Agreements referred to in Section 5.10 of the Purchase Agreement. 1.4 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder, all as the same shall be in effect at that time. 1.5 "FOUNDERS" shall mean Anil Singhal and Narendra Popat. 1.6 "INITIAL PUBLIC OFFERING" or "IPO" means the Company's initial sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act. 1.7 "MATERIAL ADVERSE EFFECT" shall mean any change or effect that is materially adverse to the properties, assets, business, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole. 1.8 "MERGER" means any merger or consolidation in which the holders of Class B Common receive net proceeds of at least $12.80 per share of Class B Common (as appropriately adjusted for any stock split, dividend, combination, recapitalization or the like) as a result of such transaction, payable at such time and in such manner as the holders of Common Stock are paid with respect to their Common Stock on such transaction, or such other merger or consolidation as approved by the holders of Class B Common as set forth in Article Fourth, Section 3(d) of the Company's Certificate of Incorporation. 1.9 "NON-COMPETITION AGREEMENTS" shall mean the Non-Competition Agreement referred to in Section 5.10 of the Purchase Agreement. 1.10 "PERSON" means any individual, corporation, partnership, joint venture, trust or unincorporated organization or any government or any agency or political subdivision thereof. 1.11 "PUBLIC OFFERING" means the Company's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act. 1.12 "QUALIFIED PUBLIC OFFERING" shall mean a public offering, underwritten on a firm commitment basis by a nationally recognized investment banking organization or organizations, pursuant to an effective registration statement under the Securities Act, covering the offer and sale of shares of Common Stock (i) at a price per share of Common Stock, after underwriter discounts and commissions, of not less than $12.80 per share (appropriately adjusted for any stock split, dividend, combination, recapitalization or the like), (ii) for an aggregate offering price (after deduction of underwriter discounts and commissions) of not less than $40,000,000 and (iii) with respect to which such Common Stock is listed for trading on either the New York Stock Exchange or the Nasdaq National Market. 1.13 THE TERMS "REGISTER", "REGISTERED" AND "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act (as defined below), and the declaration or ordering of the effectiveness of such registration statement. 1.14 "REGISTRABLE SECURITIES" means (i) the shares of Common Stock of the Company issuable or issued upon conversion of the Series A Preferred or the Class B Common of the Company (the "Stock"), and (ii) any other shares of the Company's Common Stock issued as (or issuable upon conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to or exchange for or replacement of the Series A Preferred or the Class B Common of the Company or the Stock, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which a Holder's rights under this Agreement are not assigned; provided, however, that Registrable Securities shall only be treated as Registrable Securities if and so long as, they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale. 1.15 "RELEASES" shall mean the Releases referred to in Section 5.9 of the Purchase Agreement. 1.16 "SALE" shall mean the sale, exchange, transfer or other disposition of all or substantially all of the assets of the Company in which the holders of Class B Common receive net proceeds of at least $12.80 per share of Class B Common (as appropriately adjusted for any stock split, dividend, combination, recapitalization or the like) as a result of such transaction, payable at such time and in such manner as the holders of Common Stock are paid with respect to their Common Stock on such transaction, or such other sale, exchange, transfer or disposition as approved by the holders of Class B Common as set forth in Article Fourth, Section 3(d) of the Company's Certificate of Incorporation. 1.17 "SEC" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. 1.18 "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder, all as the same shall be in effect at the time. 1.19 "STOCKHOLDERS AGREEMENT" shall mean the Stockholders Agreement, dated as of the date hereof, by and among the Company, the Holders and the other parties named therein, as amended or modified from time to time. 1.20 "SUBSIDIARY" shall mean any corporation more than 50% of the outstanding voting securities of which, or any partnership, joint venture or other entity more than 50% of the total equity interest of which, is directly or indirectly owned by the Company or any other entity otherwise controlled by or under common control with the Company; PROVIDED, that Frontier India (as defined herein) shall not be deemed to be a Subsidiary. 1.21 AN "AFFILIATE" of an entity referenced herein shall mean (i) any entity who controls, is controlled by, or is under common control with such entity, or (ii) any constituent partner or stockholder of such entity. SECTION 2 PIGGYBACK RIGHTS 2.1 NOTICE OF REGISTRATION. If at any time or from time to time, the Company shall determine to register any of its equity securities for its own account or pursuant to Section 3.1 hereof on the account of any Holder in an underwritten public offering, the Company will: (i) promptly give to the Holders written notice thereof; and (i) include in such registration (and any related qualification under blue sky laws or other compliance), and underwriting, all the Registrable Securities (subject to cutback as set forth in Section 2.2) specified in a written request or requests made within thirty (30) days after receipt of such written notice from the Company by any Holder. 2.2 UNDERWRITING. The right of any Holder to registration pursuant to this Section 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. If any Holder proposes to distribute its securities through such underwriting, such Holder shall (together with the Company and any other stockholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 2, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities to be included in such registration. The Company shall so advise such Holder and the other stockholders distributing their securities through such underwriting pursuant to piggyback registration rights similar to this Section 2, and the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among such Holder and any other participating stockholders in proportion, as ready as practicable, to the respective amounts of Registrable Securities held by such Holder and other securities held by other stockholders at the time of filing the registration statement, provided such other stockholders do not have senior registration rights. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to such Holder or other stockholders to the nearest 100 shares. If any Holder or other stockholders disapprove of the terms of any such underwriting, he or she may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to ninety (90) days (or 180 days in the case of an Initial Public Offering) after the effective date of the registration statement relating thereto. 2.3 RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2 prior to the effectiveness of such registration, whether or not any Holder has elected to include securities in such registration. 2.4 TERMINATION OF PIGGY-BACK RIGHTS. The rights of any Holder to receive notice and to participate in a registration pursuant to the terms of this Section 2 shall terminate at such time as such Holder could sell all of Registrable Securities held by such Holder under the terms of Rule 144(k) under the Securities Act. SECTION 3 DEMAND REGISTRATION 3.1 DEMAND REGISTRATION. Beginning on February 20, 2001, the Series A Holders holding at least forty percent (40%) of the Registrable Securities then owned by all Series A Holders shall be entitled to have the Company effect one (1) demand registration of Registrable Securities then owned by such Series A Holders requesting such registration. Upon the earlier of (a) three (3) years from the date hereof or (b) six (6) months following the closing of the Company's Initial Public Offering, the Class B Holders holding at least forty percent (40%) of the Registrable Securities then owned by all Class B Holders shall be entitled to have the Company effect two (2) demand registrations of Registrable Securities then owned by such Class B Holders requesting such registration. Any request for a registration pursuant to the preceding two sentences (a "Registration Request") of Registrable Securities must be made in writing, and such Registrable Securities must have an offering value of at least $2,500,000. The Company shall use its reasonable best efforts to cause the Registrable Securities specified in such Registration Request to be registered as soon as reasonably practicable so as to permit the sale thereof, and in connection therewith shall prepare and file a registration statement with the SEC under the Securities Act to effect such registration. Such registration statement shall contain such required information pursuant to the rules and regulations promulgated under the Securities Act and such additional information as deemed necessary by the managing underwriter or if there is no managing underwriter, as deemed necessary by mutual agreement between the Holders requesting registration and the Company. Such Registration Request shall (i) specify the number of shares intended to be offered and sold; (ii) express the present intention of the requesting Holders to offer or cause the offering of such shares for distribution; (iii) describe the nature or method of the proposed offer and sale thereof; and (iv) contain the undertaking of the requesting Holders to provide all such information and materials and take all such action as may be required in order to permit the Company to comply with all applicable requirements of the SEC and to obtain any desired acceleration of the effective date of such registration statement. 3.2 UNDERWRITTEN PUBLIC OFFERING. If requested in the Registration Request, and provided that the underwriter or underwriters are reasonably satisfactory to the Company, the Company and the Holders including shares in such registration (together with all officers, directors and other third parties proposing to distribute their securities through such underwriting pursuant to Section 3.3 hereof) shall enter into an underwriting agreement with an investment banking firm or firms containing representations, warranties, indemnities and agreements then customarily included by an issuer in underwriting agreements with respect to secondary distributions. The Company shall not cause the registration under the Securities Act of any other shares of its Common Stock to become effective (other than registration of an employee stock plan, or registration in connection with any Rule 145 or similar transaction) during the effectiveness of a registration requested hereunder for an underwritten public offering if, in the judgment of the underwriter or underwriters, marketing factors would adversely affect the price of the Registrable Securities subject to such underwritten registration. 3.3 INCLUSION OF ADDITIONAL SHARES. The Company may include in a registration pursuant to this Section 3 securities for its own account and by other third parties (including officers and employees of the Company), in amounts as determined by the Company's Board of Directors (the "Additional Securities"). In the event that such Additional Securities are included in a registration pursuant to this Section 3, and if the underwriter of such registration advises the stockholders or the Company registering shares of Common Stock in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Registrable Securities of the Holders, the securities of the Company, the securities held by officers or directors of the Company and the securities held by other third parties shall be excluded from the underwriting by reason of the underwriter's marketing limitation to the extent so required by such limitation, PROVIDED that the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among the Holders, any other participating stockholders and the Company in proportion, as nearly as practicable, to the respective amounts of Registrable Securities or other securities proposed to be offered by each Holder, other stockholder or the Company in such registration. No securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any officer, director or other stockholder (including Holders) who has requested inclusion in such registration as provided above disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Holders requesting registration. In the event that 20% or more of the Registrable Securities proposed to be offered by any Holder in a registration pursuant to this Section 3 are excluded from such proposed registration in accordance with the terms of this Section 3.3, then the Holders as a group shall be entitled to an additional demand registration pursuant to the terms of this Section 3. 3.4 LIMITATIONS. Notwithstanding the foregoing, if at the time of any request to register Registrable Securities pursuant to this Section 3, the Company is engaged, or has fixed plans to engage within ninety (90) days of time of the request, in a registered public offering or any other activity or has material non-public information that, in the good faith determination of the Board of Directors of the Company, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may, at its option, direct that such request be delayed for a period not in excess of one hundred twenty (120) days from the effective date of such offering, or the date of commencement of such other material activity, as the case may be. Such rights to delay a request to be exercised by the Company may not be exercised more than once in any twelve month period. 3.5 TERMINATION OF DEMAND RIGHTS. The rights of any Holder to receive notice and to participate in a registration pursuant to the terms of this Section 3 shall terminate at such time as such Holder could sell all of Registrable Securities held by such Holder under the terms of Rule 144(k) under the Securities Act. SECTION 4 FORM S-3 REGISTRATION 4.1 REGISTRATIONS ON FORM S-3. Holders shall be entitled to request (an "S-3 Registration Request") an unlimited number of registrations of Registrable Securities then owned by such requesting Holders on a Form S-3 registration statement under the Securities Act (an "S-3 Registration"). The S-3 Registration Request must be made in writing and the S-3 Registration Request shall (i) specify the number of shares intended to be offered and sold; (ii) express the present intention of the requesting Holders to offer or cause the offering of such shares for distribution; (iii) describe the nature or method of the proposed offer and sale thereof and (iv) contain the undertaking of the requesting Holders to provide all such information and materials and take all such action as may be required in order to permit the Company to comply with all applicable requirements of the SEC and to obtain any desired acceleration of the effective date of such registration statement. The Company shall, as soon as practicable, file a S-3 Registration and proceed to obtain all such qualifications and compliance as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of the requesting Holders' Registrable Securities as are specified in the S-3 Registration Request, within 30 days after receipt of such written notice by the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 4 if (i) Form S-3 is not available for such offering by the requesting Holders; (ii) the requesting Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate gross price to the public of less than $1,000,000; or (iii) the Company has, within the twelve (12) month period preceding the date of such request, already effected a registration on Form S-3 for any Holder pursuant to this Section 4. 4.2 TERMINATION OF S-3 RIGHTS. The rights of any Holder to request a registration pursuant to the terms of this Section 4 shall terminate at such time as such Holder could sell all of Registrable Securities held by such Holder under the terms of Rule 144(k) under the Securities Act. SECTION 5 OBLIGATIONS OF COMPANY Whenever the Company is required by the provisions of this Agreement to use its reasonable best efforts to effect the registration of the Registrable Securities, the Company shall (i) prepare and, as soon as possible, file with the SEC a registration statement with respect to the Registrable Securities, and use its reasonable best efforts to cause such registration statement to become effective and to remain effective until the earlier of the sale of the Registrable Securities so registered or ninety (90) days subsequent to the effective date of such registration; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to make and to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities proposed to be registered in such registration statement until the earlier of the sale of the Registrable Securities so registered or ninety (90) days subsequent to the effective date of such registration statement, (iii) furnish to any Holder such number of copies of any prospectus (including any preliminary prospectus and any amended or supplemented prospectus), in conformity with the requirements of the Securities Act, as such Holder may reasonably request in order to effect the offering and sale of the Registrable Securities to be offered and sold, but only while the Company shall be required under the provisions hereof to cause the registration statement to remain current; (iv) use its commercially reasonable efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or blue sky laws of such states as Holder shall reasonably request, maintain any such registration or qualification current until the earlier of the sale of the Registrable Securities so registered or ninety (90) days subsequent to the effective date of the registration statement, and take any and all other actions either necessary or reasonably advisable to enable Holders to consummate the public sale or other disposition of the Registrable Securities in jurisdictions where such Holders desire to effect such sales or other disposition; and (v) take all such other actions either necessary or reasonably desirable to permit the Registrable Securities held by a Holder to be registered and disposed of in accordance with the method of disposition described herein. Notwithstanding the foregoing, the Company shall not be required to register or to qualify an offering of the Registrable Securities under the laws of a state if as a condition to so doing the Company is required to qualify to do business or to file a general consent to service of process in any such state or jurisdiction, unless the Company is already subject to service in such jurisdiction. SECTION 6 EXPENSES OF REGISTRATION The Company shall pay all of the reasonable out-of-pocket expenses incurred in connection with any registration statements that are initiated pursuant to this Agreement, including, without limitation, all SEC and blue sky registration and filing fees, printing expenses, transfer agent and registrar fees, the fees and disbursements of the Company's outside counsel and independent accountants and the reasonable fees and disbursements of one counsel for all of the Holders. Any underwriting discounts, fees and disbursements of counsel to the Holders, selling commissions and stock transfer taxes applicable to the Registrable Securities registered on behalf of Holders shall be borne by the Holders of the Registrable Securities included in such registration. SECTION 7 INDEMNIFICATION 7.1 THE COMPANY. The Company will indemnify Holders and each person controlling Holders within the meaning of Section 15 of the Securities Act, and each underwriter if any, of the Company's securities, with respect to any registration, qualification or compliance which has been effected pursuant to this Agreement, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse Holders and each person controlling Holders, and each underwriter, if any, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by such Holder or controlling person or underwriter seeking indemnification. 7.2 HOLDERS. Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected (the "Indemnifying Holder"), indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such registration statement and each person who controls the Company within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof), arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by such Holder of any rule or regulation promulgated under the Securities Act applicable to such Holder in connection with any such registration, qualification or compliance, and will reimburse the Company, such directors, officers or control persons or underwriters for any legal or any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Indemnifying Holder, provided that in no event shall any indemnity under this Section 7.2 exceed the lesser of (a) the net proceeds of the offering received by such Indemnifying Holder and (b) such Indemnifying Holder's pro rata share of such claims, losses, damages and liabilities 7.3 DEFENSE OF CLAIMS. Each party entitled to indemnification under this Section 7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense; provided, however, that the Indemnifying Party shall pay such expense if representation of the Indemnified Party by counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between the Indemnified Party and any other party represented by such counsel in such proceeding, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 7 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action. No Indemnifying Party, in the defense of any such claim or litigation shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. No Indemnifying Party shall be required to indemnify any Indemnified Party with respect to any settlement entered into without such Indemnifying Party's prior consent. SECTION 8 RULE 144 REPORTING With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after ninety (90) days following the effective date of the IPO; (b) File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; and (c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company, and such other reports and documents so filed as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing such Holder to sell any such securities without registration. SECTION 9 STANDOFF AGREEMENT In connection with any Public Offering by the Company, if requested by the Company and the managing underwriter, each Holder agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in such Public Offering, if any) without the prior written consent of the Company or the underwriters for such period of time (not to exceed one hundred eighty (180) days in connection with the Company's Initial Public Offering and ninety (90) days in connection with any Public Offering other than the Company's Initial Public Offering) as may be requested by the Company and the managing underwriter, provided that all officers directors and 5% stockholders of the Company enter into similar agreements. SECTION 10 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS From and after the date of this Agreement, the Company shall not, without the prior written consent of Holder(s) of at least a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights the terms of which are more favorable than the registration rights granted to Holders hereunder or to require the Company to effect a registration earlier than the date on which Holders can first require a registration under Section 3.1. SECTION 11 INFORMATION RIGHTS 11.1 DELIVERY OF FINANCIAL STATEMENTS. (a) The Company shall deliver to each Holder that holds shares of the Series A Preferred and Class B Common, as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company as of the end of such year, and a schedule as to the sources and applications of funds for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles, and audited and certified by independent public accountants of nationally recognized standing selected by the Company. (b) The Company shall deliver to each Holder for so long as the Holder is a stockholder of the Company: (i) within thirty (30) days after the end of each month and forty-five (45) days after the end of each quarter, an unaudited income statement and schedule as to the sources and applications of funds and balance sheet and comparison to budget for and as of the end of such month or quarter, as the case may be, in reasonable detail; (ii) as soon as practicable, but in any event thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets and sources and applications of funds statements for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company; and (iii) such other information relating to the financial conditions, business, prospects or corporate affairs of the Company as each Holder; or any assignee of such Holder may from time to time request; provided, however, that the Company shall not be obligated to provide information which it deems in good faith to be proprietary. 11.2 INSPECTION. The Company shall permit each Holder, at such Holder's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by such Holder; provided, however, that the Company shall not be obligated pursuant to this Section 11.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. SECTION 12 COVENANTS OF THE COMPANY The Company (which term shall be deemed to include, for purposes of this Section 12, any Subsidiary of the Company) agrees with the Class B Holders that it shall comply with the following covenants except as shall otherwise be expressly agreed pursuant to a written consent of the Class B Holders holding at least a majority of the outstanding shares of Class B Common then held by such Class B Holders; PROVIDED, HOWEVER, that the Company shall be obligated to comply with the covenants set forth in Section 12 only for so long as TA/Advent VIII, L.P., Advent Atlantic & Pacific III, L.P., TA Executives Fund, LLC or TA Investors, LLC or any of their respective Affiliates hold 1,666,042 shares of Class B Common (as appropriately adjusted for any stock split, combination, reorganizations, recapitalization, stock distribution, stock dividend or similar event). 12.1 CONDUCT OF BUSINESS. The Company will continue to engage principally in the business now conducted by the Company or a business or businesses similar thereto or reasonably compatible therewith. 12.2 INSURANCE. The Company will keep its insurable properties insured, upon reasonable business terms, by financially sound and reputable insurers against liability, and the perils of casualty, fire and extended coverage in amounts of coverage at least equal to those customarily maintained by companies in the same or similar business as the Company. The Company will also maintain with such insurers insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies engaged in the same or similar business. 12.3 KEY PERSON INSURANCE. The Company shall maintain key-man term life insurance policies in favor of the Company on the lives of Anil Singhal and Narendra Popat for so long as they are employed by the Company, each in an amount of $2,000,000. The Company hereby agrees that such policies shall not be assigned, borrowed against or pledged. 12.4 AFFILIATED TRANSACTIONS. All transactions by and between the Company and any officer, employee, director or stockholder of the Company or persons controlling, controlled by, under common control with or otherwise affiliated with such officer, employee, director or stockholder shall be conducted on an arm's-length basis, shall be on terms and conditions no less favorable to the Company than could be obtained from nonrelated persons and, with respect to any transaction or series of related transactions in which the amount involved exceeds $60,000 in any fiscal year, shall require the approval in advance by the majority of the disinterested members of the Board of Directors; PROVIDED, HOWEVER, that the Company may enter into and continue a consulting arrangement with Frontier Software Development India Pvt. Ltd. ("Frontier India") with respect to the year ending December 31, 1999 and transact business thereunder without the approval of the majority of the disinterested members of the Board of Directors so long as total expenditures by the Company with Frontier India for such year are less than $1,000,000; and PROVIDED FURTHER, that management compensation shall be governed by Section 12.5 and not this Section 12.4. In the event that the Company is offered the opportunity to purchase shares of capital stock in connection with its first refusal rights under Section 2.2 of the Stockholder Agreement, the determination of whether the Company will elect to exercise such rights shall be made by a majority of the disinterested members of the Board of Directors. 12.5 MANAGEMENT COMPENSATION. Subject to the following sentences, compensation paid by the Company to its management and other employees will be no greater than compensation paid to similarly situated employees in companies in the same or similar businesses of similar size and maturity and with comparable financial performance as the Company, as determined by the Compensation Committee. The Founders shall be paid $250,000 annually in base salary and $250,000 annually in non-discretionary bonus. No compensation (including salary and bonus, but excluding other benefits) shall be paid by the Company to either of the Founders in excess of $500,000 annually without the approval by the Class B Holders holding at least a majority of the outstanding shares of Class B Common then held by the Class B Holders; provided, that if such Class B Holders do not approve of such compensation in excess of $500,000 and the Founder believes such compensation would be comparable to compensation paid to similarly situated executives in companies in the same or similar businesses of similar size and maturity and with comparable financial performance as the Company, then such Holders and the Founder shall retain a consulting firm of national reputation which is mutually acceptable to such Holders and Founders with expertise in the area of executive compensation to make a recommendation with respect to such matter, the expense of which shall be borne by the Company (it being acknowledged and agreed that such Founder's compensation shall not be reduced below $500,000 pursuant to this proviso). To the extent that such firm recommends that a Founder's annual compensation be in excess of $500,000, the Company shall pay such Founder compensation in accordance with such recommendation. Any grants of capital stock or options to employees, officers, directors or consultants of the Company shall be made pursuant to option and stock plans adopted by the Compensation Committee of the Board of Directors and conditioned upon the grantee agreeing to be bound by the terms of an option and/or stock agreement containing first refusal rights of the Company with respect to transfers of such stock or options and such other provisions as determined by the Compensation Committee. 12.6 FINANCINGS. The Company will promptly upon availability provide to the Board of Directors the details and terms of, and any brochures or investment memoranda prepared by the Company related to, any possible financing of any nature for the Company, whether initiated by the Company or any other Person. 12.7 ENFORCEMENT OF CERTAIN AGREEMENTS. The Company agrees that it will diligently enforce all of its rights under this Agreement, the Stockholders Agreement, the Non-Competition Agreements, and the Releases and will not make any amendment or modification thereto, unless otherwise approved by a majority of the disinterested members of the Board of Directors. 12.8 EMPLOYEE CONFIDENTIALITY, NON-COMPETITION AND INVENTION ASSIGNMENT AGREEMENTS. The Company shall obtain confidentiality and invention assignment agreements in the form approved by the Board of Directors from time to time from all employees and consultants who are exposed to technical and other proprietary information of the Company and the Company will diligently enforce all of its rights under such agreements. 12.9 ADVERSE CHANGES. To the extent not disclosed in the financial statements to be provided under Section 11.1, the Company will promptly upon becoming aware of the same advise the Class B Holders of any event which represents a material adverse change in the condition (business, financial or otherwise) or prospects of the Company, and of each suit or proceeding commenced or threatened against the Company which, if adversely determined, could reasonably be expected to result in a Material Adverse Effect. The Company will also promptly notify the Class B Holders of any recall of the Company's products, any other adverse developments relating to the Company's products and any suit or proceeding commenced or known by the Company to be threatened which is related to the Company's products. 12.10 MEETINGS. The Company will ensure that meetings of the Board of Directors are held at least four (4) times each year at intervals of not more than four (4) months. The Company shall pay such Directors for their reasonable travel and other reasonable expenses incurred in connection with attending such meetings. The Company's Certificate of Incorporation and By-Laws will provide for exculpation and indemnification of the directors and limitations on the liability of the directors to the fullest extent permitted under applicable state law, and the Company shall obtain and maintain directors' and officers' liability insurance coverage, on terms satisfactory to the Company's Board of Directors covering, among other things, violations of federal or state securities laws. 12.11 COMMITTEES OF THE BOARD. The Company will establish a Compensation Committee (which shall be charged with exclusive authority over all compensation and employee stock and option matters (subject to Section 12.5 hereof)) and an Audit Committee (which shall be charged with reviewing the Company's financial statements and accounting practices). Each of the Compensation Committee and the Audit Committee shall consist of three (3) Directors, one (1) of whom shall be a Class B Director (as defined in the Company's Certificate of Incorporation), one (1) of whom shall be a Director who is not an employee of the Company and who is appointed by a majority of the members of the Board of Directors and one (1) of whom shall be a Common Director (as defined in the Company's Certificate of Incorporation). The Compensation Committee and Audit Committee shall act by majority consent of its members. 12.12. NO CONFLICTING AGREEMENTS. The Company will not enter into or amend any agreement, contract, commitment or understanding which would restrict or prohibit the exercise by the Class B Holders of any of their rights under this Agreement, the Purchase Agreement or any of the other documents, agreements or instruments contemplated hereunder or thereunder. 12.13 CHARTER AND BYLAW AMENDMENTS. The Company shall not amend or repeal any provision of, or add any provision to, the Company's Certificate of Incorporation or Bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Class B Common or increase or decrease the number of shares of authorized Class B Common. SECTION 13 ADDITIONAL COVENANTS 3.1 CONFIDENTIALITY. Each of the Holders agrees to keep confidential and not to disclose to persons other than its employees, professional consultants and advisors any information concerning the Company which is confidential or proprietary ("Confidential Information"), except as otherwise required by law or as deemed necessary by a Holder to be disclosed to its own partners. No Confidential Information shall be used or disclosed by a Holder for any purpose except in connection with the transactions contemplated by the Purchase Agreement and the agreements executed and delivered in connection with the Purchase Agreement and in the enforcement of its rights thereunder. Each Holder shall use no less a level of care with the Confidential Information than it uses with its own confidential information. Notwithstanding the foregoing, the restrictions set forth in this Section 13.1 shall not be applicable to any information that is publicly available through no fault of a Holder, any information independently developed by a Holder or its professional consultants, any information known to a Holder or its professional consultants before the disclosure thereof by the Company, or any information disclosed to a Holder by a person without any confidentiality duty to the Company. SECTION 14 TERMINATION OF RIGHTS Unless otherwise specified hereunder to terminate earlier, the rights and provisions of this Agreement shall terminate on the fifth (5th) anniversary of the date of the Company's Initial Public Offering, provided that the covenants contained in Sections 11 and 12 hereof shall terminate and be of no further force and effect upon the earlier of the consummation of (x) a Qualified Public Offering, (y) a Merger or (z) a Sale. SECTION 15 MISCELLANEOUS 15.1 ASSIGNMENT. Subject to compliance with Section 3.2 of the Stockholders Agreement by the Series A Holders, the rights to cause the Company to register Registrable Securities granted to the Holders by the Company under this Agreement may be transferred or assigned by the Holders to an Affiliate of any Holder or a transferee which acquires the greater of (i) 40% of the Registrable Securities originally purchased by such Holder or (ii) 400,000 shares of Registrable Securities (as appropriately adjusted for any stock split, combination, reorganization, recapitalization, stock distribution, stock dividend or similar event); provided that the Company is given written notice at the time of or within a reasonable time after said transfer or assignment, stating the name and address of the transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned, and, provided further, that the transferee or assignee of such rights assumes the obligations of such Holder under this Agreement. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Any transferee or assignee shall thereafter be treated as a Holder of the applicable shares as transferred, subject to the limitations herein. Until the Company receives actual notice of any transfer or assignment, it shall be entitled to rely on the then existing list of Holders and the failure to notify the Company of any transfer or assignment shall not affect the validity of a notice properly given by the Company to the Holders pursuant to lists maintained by the Company. 15.2 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the Commonwealth of Massachusetts as applied to agreements entered into solely between residents of and to be performed entirely within, such state. 15.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 15.5 NOTICES. (a) All notices, requests, demands and other communications under this Agreement or in connection herewith shall be given to or made upon any Holder at the addresses set forth in the Company's records and, if to the Company, to: NetScout Systems, Inc., 4 Technology Park Drive, Westford, MA 01886, attention: Chief Executive Officer. (b) All notices, requests, demands and other communications given or made in accordance with the provisions of this Agreement shall be in writing, and shall be sent by airmail, return receipt requested, or by facsimile with confirmation of receipt, and shall be deemed to be given or made when receipt is so confirmed. (c) Any party may, by written notice to the other, alter its address or respondent, and such notice shall be considered to have been given three (3) days after the airmailing or faxing thereof. 15.6 ATTORNEY'S FEES. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees costs and necessary disbursements in addition to any other relief to which such party may be entitled. 15.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended with the written consent of the Company and the holders of at least a majority of the outstanding Registrable Securities. Any amendment or waiver effected in accordance with this Section 15.7 shall be binding upon the Holders and each transferee of the Registrable Securities, each future holder of all such Registrable Securities, and the Company. 15.8 DISPUTE RESOLUTION. Except as provided below, any dispute arising out of or relating to this Agreement or the breach, termination or validity hereof shall be finally settled by binding arbitration conducted expeditiously in accordance with the J.A.M.S./Endispute Comprehensive Arbitration Rules and Procedures (the "J.A.M.S. Rules"). The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Section 1-16, and judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. The place of arbitration shall be Boston, Massachusetts. Such proceedings shall be administered by the neutral arbitrator in accordance with the J.A.M.S. Rules as he/she deems appropriate, however, such proceedings shall be guided by the following agreed upon procedures: (i) mandatory exchange of all relevant documents, to be accomplished within forty-five (45) days of the initiation of the procedure; (ii) no other discovery; (iii) hearings before the neutral arbitrator which shall consist of a summary presentation by each side of not more than three (3) hours; such hearings to take place on one or two days at a maximum; and (iv) decision to be rendered not more than ten (10) days following such hearings. Notwithstanding anything to the contrary contained herein, the provisions of this Section 15.8 shall not apply with regard to any equitable remedies to which any party may be entitled hereunder. Each of the parties hereto (a) hereby irrevocably submits to the jurisdiction of any United States District Court of competent jurisdiction for the purpose of enforcing the award or decision in any such proceeding, (b) hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution (except as protected by applicable law), that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court, and hereby waives and agrees not to seek any review by any court of any other jurisdiction which may be called upon to grant an enforcement of the judgment of any such court. Each of the parties hereto hereby consents to service of process by registered mail at the address to which notices are to be given. Each of the parties hereto agrees that its or his submission to jurisdiction and its or his consent to service of process by mail is made for the express benefit of the other parties hereto. Final judgment against any party hereto in any such action, suit or proceeding may be enforced in other jurisdictions by suit, action or proceeding on the judgment, or in any other manner provided by or pursuant to the laws of such other jurisdiction. 15.9 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, portions of such provisions, or such provisions in their entirety, to the extent necessary, shall be severed from this Agreement, and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 15.10 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any party to this Agreement, upon any breach or default of the other party, shall impair any such right, power or remedy of such non-breaching party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any Holder, shall be cumulative and not alternative. 15.11 ENTIRE AGREEMENT. This Agreement and the documents referred to herein constitute the entire agreement between the parties hereto pertaining to the subject matter hereof and any other written or oral agreements between the parties hereto are expressly canceled. The parties hereto acknowledge and agree that the Rights Agreement, dated as of February 20, 1996, by and among the Company and the Series A Holders is hereby amended and restated in its entirety and is of no further force and effect. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have executed this Agreement of the day and year first above written. COMPANY: NETSCOUT SYSTEMS, INC. By: /s/ Narendra Popat ------------------------------------------------- Narendra Popat, President SERIES A HOLDER: GREYLOCK EQUITY LIMITED PARTNERSHIP By: Greylock Equity GP Limited Partnership By: /s/ Henry F. McCance ------------------------------------------------- Henry F. McCance, General Partner CLASS B HOLDERS: TA/ADVENT VIII, L.P. By: TA Associates VIII, LLC, its general partner By: TA Associates, Inc., its manager By: /s/ Kenneth T. Schiciano ------------------------------------------------- Kenneth T. Schiciano, Principal ADVENT ATLANTIC & PACIFIC III, L.P. By: TA Associates AAP III Partners, L.P., its general partner By: TA Associates, Inc., its general partner By: /s/ Kenneth T. Schiciano ------------------------------------------------- Kenneth T. Schiciano, Principal TA EXECUTIVES FUND, LLC By: TA Associates, Inc., its manager By: /s/ Kenneth T. Schiciano ------------------------------------------------- Kenneth T. Schiciano, Principal TA INVESTORS, LLC By: TA Associates, Inc., its manager By: /s/ Kenneth T. Schiciano ------------------------------------------------- Kenneth T. Schiciano, Principal EGAN-MANAGED CAPITAL, L.P. By: EMC Partners, L.P., its General Partner By:/s/ Michael H. Shanahan ------------------------------------------------- Michael H. Shanahan, General Partner EX-10.6 12 EXHIBIT 10.6 Exhibit 10.6 LEASE BETWEEN MICHELSON FARM - WESTFORD TECHNOLOGY PARK IV LIMITED PARTNERSHIP AND NETSCOUT SYSTEMS, INC. FOR WESTFORD TECHNOLOGY PARK BUILDING FOUR ARTICLE I TERMS DEFINED 1.1 SUBJECTS REFERRED TO: Each reference in this Lease to any of the following terms shall mean: Landlord: Michelson Farm - Westford Technology Park IV Limited Partnership Managing Agent: The Gutierrez Company Landlord's and Managing Michelson Farm - Westford Technology Park IV Agent's Address: Limited Partnership c/o The Gutierrez Company One Wall Street Burlington, Massachusetts 01803 Landlord's Representative: John A. Cataldo Tenant: NetScout Systems, Inc. Tenant's Address: 321 Billerica Road (for Notice and Billing) Chelmsford, Massachusetts 01824 Tenant's Representative: Charles Tillett Building: The Building, commonly known as Building Four in The Michelson Farm - Westford Technology Park, containing approximately 97,500 rentable square feet on the lot (the "Lot") shown as Lot 4B on a plan entitled " Definitive Plan of Land, Westford Technology Park in Westford, Massachusetts" attached to this Lease as Exhibit "A-2" and recorded with the Middlesex County North District Registry of Deeds at Book 192, Plan 24 (Part 2 of 3) Tenant's Design Completion Date: September 1, 1997 Scheduled Term Commencement Date: December 1, 1997 Outside Delivery Date: March 1, 1998
-3- Term Expiration Date: November 30, 2002 Fixed Rent Year 1: $828,750.00/year; $69,062.50/month ($8.50/sf) Year 2: $828,750.00/year; $69,062.50/month ($8.50/sf) Year 3: $926,250.00/year; $77,187.50/month ($9.50/sf) Year 4: $1,023,750.00/year; $85,312.50/month ($10.50/sf) Year 5: $1,023,750.00/year, $85,312.50/month ($10.50/sf) Special Provisions: Option to Extend - Article III Signage - Section 12.2 Permitted Uses: Uses: Administration, sales and other general office purpose, research and development (including engineering laboratories), storage and light manufacturing (including design, assembly, reassembly and testing of electronic products and components) as long as such uses are permitted uses with respect to local zoning bylaws and ordinances. Premises: The Building and the areas which are the subject of all appurtenant rights and easements set forth or referred to in Section 2.1 below. Broker: Lynch Murphy Walsh & Partners Whittier Partners
1.2 EXHIBITS - The Exhibits listed below in this Section are incorporated in this Lease by reference and are to be construed as part of this Lease: EXHIBIT A Plan Showing Premises, Plan Showing the Lot and the Park, Plan Showing Common Easements EXHIBIT B Rules and Regulations EXHIBIT C Office Park Covenants EXHIBIT D Deed EXHIBIT E Subordination, Non-Disturbance and Attornment Agreement EXHIBIT F Complete Plans EXHIBIT G Estoppel Certificate
-4- EXHIBIT H Form of Work Change Order EXHIBIT I Certificate of Substantial Completion
ARTICLE II DESCRIPTION OF PREMISES 2.1 DEMISE OF PREMISES: In consideration of the rents and covenants herein stipulated to be paid and performed and upon the terms and conditions hereinafter specified, Landlord hereby demises and lets to Tenant, and Tenant hereby leases from Landlord, for the respective terms hereinafter described, the Premises as described in Article I hereof, which Premises include the appurtenances described below and in Section 26.10 hereof. The Premises shall be leased in "as is" condition and specifically and expressly without any warranties, representations or guarantees, either express or implied, on behalf of Landlord to Tenant, except as otherwise expressly set forth herein. Tenant shall have, as appurtenant to the Building, the right to use in common with others entitled thereto, subject to reasonable rules and regulations of general applicability to tenants and owners of other lots in Michelson Farm-Westford Technology Park (the "Office Park" or the "Park") from time to time made by Landlord according to Section 12.8 of this Lease of which Tenant is given notice: all common areas (the "Common Areas") shown on the Plan of Common Easements of the Office Park attached as part of Exhibit "A", including, without limitation, a right to access to the Premises at all times, use of all service areas, use of all utility lines including those for electricity, gas, water and sewage disposal, use of all facilities for drainage of surface water runoff, including storm drainage systems and detention areas, use of all grades, driveways, sidewalks and footways, lighting systems and traffic flow patterns and, if any, all parking areas designated as common or visitors parking areas for use of the entire Office Park, if -5- any, including, without limitation, all rights appurtenant to the Lot and the Building created in the deed (attached as Exhibit D) to Landlord. In addition, the Tenant shall have, as appurtenant to the Premises, (i) the exclusive right and easement with respect to the Lot to use all improvements thereon including, without limitation, all parking areas, loading areas, service areas and the like, (ii) the common right and easement with respect to the Lot to use all means of access to and from the Building and to the Common Areas, including, without limitation, all sidewalks, and the driveways, grades, roads and the like, (iii) the common right and easement with respect to the Lot to use all utility lines, electricity, water, sewage treatment plant, and (iv) the common right and easement with respect to the Lot to use all facilities for drainage of surface water runoff; all of the foregoing rights being subject to reasonable rules and regulations of general applicability to Tenant, tenants, and owners of lots in the Office Park from time to time made by Landlord according to Section 12.8 of this Lease. ARTICLE III TERM 3.1 ORIGINAL TERM - To have and to hold for a period (the "Term") commencing when the Premises are deemed ready for occupancy as provided in Section 9.2 or if the tenant improvement work is not to be performed by Landlord's general contractor pursuant to the provisions of Article IX, Section 9.1, on the Scheduled Term Commencement Date (whichever of said dates is appropriate being hereafter referred to as the "Commencement Date") and continuing until the Term Expiration Date, unless sooner terminated as provided in Section 9.2 or Article XIII or in Article XIX or unless extended as provided in Section 3.2. Landlord shall deliver possession of the Premises on the Commencement Date in broom -6- clean condition, free of all tenants and occupants and in accordance with the terms and provisions of Article IX and Article VII (c) of this Lease. 3.2 EXTENDED TERM - The Tenant has the option to extend this Lease for one (1) term of five (5) years ("Extended Term") provided the Tenant shall give to the Landlord written notice of the exercise of this option no later than the 30th day of November, 2001, and such Extended Term shall be upon the same terms, covenants and conditions hereof, except that the Fixed Rent for the Extended Term shall be the then Market Rent (as hereinafter defined in Section 4.3). Landlord shall, within 15 days of receipt of notice of Tenant's election to extend the Term of this Lease, provide Tenant with notice of the Market Rent in accordance with the provisions of Article IV. Landlord and Tenant shall, in accordance with the provisions of Section 4.3 of this Lease, establish the Market Rent for the Extended Term. ARTICLE IV RENT 4.1 FIXED RENT - The Fixed Rent for the Premises during the Term shall be as set forth in Article I of this Lease and shall be payable on the first day of each calendar month during the Term hereof in equal monthly installments also as set forth in said Article, except that the rent (including both said Fixed Rent and additional rent pursuant to Section 5.1 hereof) for any portion of a calendar month during the Term hereof shall be apportioned for such portions. Rental payments shall be made to the Landlord's and Landlord's Managing Agent's Address set forth in Article I of this Lease or at such other address as Landlord may from time to time designate by written notice to the Tenant. All other payments required by this Lease to be made by Tenant during the Term thereof as additional rent shall be paid as set forth elsewhere in this Lease. The term "Annual Rent" for any period of twelve calendar months shall mean Fixed Rent -7- plus any additional rent payable under the Lease with respect to such period. All rent payable by Tenant pursuant to this Lease shall be paid without setoff, adjustment, deduction or abatement, except as otherwise expressly set forth in this Lease. 4.2 PAYMENTS - All payments of Annual Rent shall be made payable to Managing Agent, or to such other person as Landlord may from time to time designate by written notice to Tenant. If any installment of Annual Rent is paid more than seven (7) business days after written notice from Landlord that such rent has not been paid, it shall bear interest at a rate equal to the prime commercial rate from time to time established by Fleet Bank, or its successor, plus 4% per annum from the date such installment was due, which interest shall be immediately due and payable as further additional rent. 4.3. MARKET RENT - The Market Rent for the Premises, during the Extended Term, shall be determined as follows: The Market Rent shall be proposed by Landlord within fifteen (15) days of receipt of Tenant's notice that it intends to exercise its option to extend the Term pursuant to Section 3.2 hereof (the "Landlord's Proposed Market Rent"). The Landlord's Proposed Market Rent shall be the Market Rent unless Tenant notifies Landlord, within fifteen (15) days of Tenant's receipt of Landlord's Proposed Market Rent, that Landlord's Proposed Market Rent is not satisfactory to Tenant and that Tenant desires to have appraisers determine the Market Rent ("Tenant's Appraisal Notice"), which notice shall specify the name and address of the appraiser designated by Tenant. 1. Landlord shall within five (5) days after receipt of Tenant's Appraisal Notice, notify Tenant of the name and address of the appraiser designated by Landlord. Such two appraisers shall, within twenty (20) days after the -8- Landlord's designation of an appraiser, make their determinations of the Market Rent in writing and give notice thereof to each other and to Landlord and Tenant. Such two (2) appraisers shall have twenty (20) days after the receipt of notice of each other's determination to confer with each other and to attempt to reach agreement as to the determination of the Market Rent. If such appraisers shall concur in such determination, they shall give notice thereof to Landlord and Tenant and such concurrence shall be final and binding upon Landlord and Tenant. If such appraisers shall fall to concur as to such determination within said twenty (20) day period, they shall give notice thereof to Landlord and Tenant and shall immediately designate a third appraiser. If the two appraisers shall fail to agree upon the designation of such third appraiser within five (5) days after said twenty (20) day period, then they or either of them shall give notice of such failure to agree to Landlord and Tenant and if Landlord and Tenant fail to agree upon the selection of such third appraiser within five (5) days after the appraiser(s) appointed by the parties give notice as aforesaid, then either party on behalf of both may apply to the American Arbitration Association or any successor thereto, or on his or her failure, refusal or inability to act, to a court of competent jurisdiction, for the designation of such third appraiser. 2. All appraisers shall be real estate appraisers or consultants who shall have had at least seven (7) years continuous experience in the business of appraising or leasing real estate in the suburban Boston area. -9- 3. The third appraiser shall conduct such hearings and investigations as he or she may deem appropriate and shall, within ten (10) days after the date of his or her designation, make an independent determination of the Market Rent. 4. If none of the determinations of the appraisers varies from the mean of the determinations of the other appraisers by more than ten (10%) percent, the mean of the determinations of the three (3) appraisers shall be the Market Rent for the Premises. If, on the other hand, the determination of any single appraiser varies from the mean of the determinations of the other two (2) appraisers by more than ten (10%) percent, the mean of the determination of the two (2) appraisers whose determinations are closest shall be the Market Rent. 5. The determination of the appraisers, as provided above, shall be conclusive upon the parties and shall have the same force and effect as a judgment made in a court of competent jurisdiction. 6. Each party shall pay fees, costs and expenses of the appraiser selected by it and its own counsel fees and one-half (1/2) of all other expenses and fees of any such appraisal. Notwithstanding the foregoing Section 4.3, Fixed Rent for the Extended Term shall not be less than the Fixed Rent for the original Term. ARTICLE V OPERATING AND MAINTENANCE COSTS AND REAL ESTATE TAXES -10- 5.1. COMMON AREA MAINTENANCE - Tenant shall pay to Landlord as additional rent an additional payment on the first day of each month occurring during the Term hereof one-twelfth (1/12) of the amount of "Common Area Maintenance Costs" (as hereinafter defined) for each twelve month period beginning on each December 1st occurring within the Term, as reasonably estimated by Landlord from time to time according to this Section 5.1 (Common Area Maintenance Costs are currently estimated at $89,000 for the year ending 12/31/97). The "Common Area Maintenance Costs" include the expenses in the following categories and shall be prorated in accordance with the prorations set forth within each category: 1. Building and Lot Related Expenses, which shall be allocated 100% to Tenant, shall include maintenance of water tight integrity of the roof walls, windows and skylights of the Building (Landlord and Tenant hereby agreeing that in the event that any item for maintenance of the water tight integrity exceeds $5,000, then Tenant shall have the right to require Landlord to obtain 3 competitive bids from a list of subcontractors mutually agreed upon by Landlord, Tenant and Landlord's manufacturer of the item so being maintained); the annual amortized portion for Landlord's cost of Capital Replacements, as defined in Section 6. 1, for any capital items purchased by Landlord in accordance with Section 6. 1, maintenance and repair of, sewer (i.e. on site sewer system), utility, fire main and fire hydrant facilities, and drainage facilities exclusively serving the Building; maintenance of the Building entrance sign; maintenance, repair and striping, snow removal and sanding of the parking and loading area(s) and driveways on the Lot; fertilization, mowing, and watering of -11- lawns on the Lot and landscaping and care of shrubbery and general grounds upkeep of the Lot; changing of street-lamp lights, walk-way lights, and parking lights, and keeping same in proper working condition, and any other services, repairs, or maintenance performed solely for the benefit of the Building; management and Building supervision fees, and insurance premiums procured by Landlord on Tenant's behalf as specified in Article XV; 2. Traffic Related Expenses, which shall be allocated on the basis of the ratio of the number of parking spaces exclusively for Tenant's use under this Lease to the aggregate total number of parking spaces within the Office Park, shall include snow removal and sanding of common drives and parking lots, maintenance and repair of the Office Park entrance signs, maintenance and repair of Office Park lighting, traffic signals, and traffic control personnel required for the Office Park, maintenance and repair of Office Park walks, and Office Park non-exclusive parking and any other traffic or common Office Park roadway or walk-way related expenses; 3. Landscaping/Drainage/Other General Office Park Related Expenses, which shall be allocated on the basis of the ratio of the square footage of the Building to the aggregate square footage of all completed buildings including the Building in the Office Park, as such buildings are completed from time to time, shall consist of the maintenance and repair of sewer, utilities, and drainage facilities, maintenance and repair of detention and fire main and fire hydrant facilities which service the Office Park generally -12- and are not exclusive to any single building within the Office Park; fertilization, mowing, and watering of lawns and landscaping and care of shrubbery and general grounds upkeep of access drives, entrance areas and other such portions of the Office Park the landscaping of which actually and substantially benefits the Premises; and liability insurance costs for the Common Areas of the Office Park; 4. Sewer Treatment Plant Expenses, including real estate taxes associated with sewer treatment plant land and buildings, shall consist of the expenses of operating, maintaining and repairing the sewage treatment plant, which expenses shall be allocated on the basis of the ratio of the square footage of the Building to the aggregate square footage of all completed buildings including the Building on all lots in the Park, as such buildings are completed and connected for service from time to time to the sewer treatment plant, and the annual amortized portion for Capital Replacements or improvements to the plant shall be allocated on the ratio of the Building square footage to the aggregate square footage of all completed buildings in the Office Park. Notwithstanding any contrary provision of this Lease, if Landlord incurs any Common Area Maintenance Cost that is properly classifiable as a capital expenditure according to generally accepted accounting principles and good building management practices and the regulations and directives of the Internal Revenue Service, then such Common Area Maintenance Cost shall be amortized over its useful life according to such principles, practices, regulations and directives, and only the annual amortized portion shall be included in Common Area -13- Maintenance Costs for any twelve month period within the Term. Notwithstanding anything to the contrary in this Lease contained, Tenant shall not be required to pay any Common Area Maintenance Costs attributable to: 1. Repairs which are the responsibility of the Landlord as set forth in Article VI, including, structural repairs, as well as repairs or other work occasioned by fire or other casualty or by the exercise of eminent domain; 2. Leasing commissions, attorneys' fees, costs and disbursements and other expenses incurred in connection with negotiations or disputes with other tenants, occupants or prospective tenants or occupants of the Office Park; 3. Interest, principal, ground rent, or other payments under any mortgage, ground lease or other financing of the Lot or the Office Park; 4. Any advertising or promotional expenditures; 5. Services or work provided for other tenants and occupants of the Office Park and not substantially benefiting Tenant on a commensurate basis and any expense for which Landlord is entitled to be reimbursed directly by any such other tenant or tenants; 6. Overhead or profit increment paid to subsidiaries or affiliates of Landlord for services on or to the Premises to the extent that the costs of such services exceed competitive costs of such services were they not so rendered by a subsidiary or affiliate. 7. Expenses related to salaries, wages, benefits and other expenses of executives, principals, administration staff and other employees of Landlord or Landlord's Management Agent not involved directly in the -14- operations of the Building or Office Park; 8. Expenses related to leasehold improvements made in connection with the preparation of any portion of the Building or Office Park or occupancy by a new or existing tenant which is not generally beneficial to all tenants of the Building; 9. Expenses related to efforts to procure new tenants for other buildings or premises located in the Office Park, including advertising expenses, leasing commissions and attorneys fees; 10. Expenses related to Landlord's general overhead not directly related to the management or operations of the Building or Office Park; 11. Expenses related to depreciation of the Building; 12. Expenses related to Landlord or Landlord's Managing Agents breach or violation of a law, lease or other obligations, including fines, penalties and attorney's fees; 13. Expenses related to compensation paid to employees or other persons in connection with commercial concessions operated by Landlord or Landlord's Managing Agent; 14. Expenses related to fees for licenses, permits or inspections resulting from the act or negligence of Landlord, Landlord's Management Agent or any other tenant of the Office Park; 15. Expenses related to any items with respect to which Landlord receives reimbursement from insurance proceeds or from a third party; -15- 16. Costs and expenses of construction related to an expansion of the rentable area of the Building or Office Park or the parking areas serving the Building or Office Park; 17. Expenses related to costs or charges properly chargeable or attributable to a particular tenant or tenants, 18. Expenses related to any utility or other service used or consumed by other tenants or occupants of the Office Park; 19. Expenses related to environmental testing, remediation and compliance, Landlord and Tenant hereby agreeing, that this exclusion is not intended to limit the provisions of Section 16.2 of this Lease; 20. Expenses related to compliance by Landlord with laws existing as of the date of this Lease, including without limitation the American with Disabilities Act and the regulations of the standards thereunder, except to the extent that any such non-compliance was created by Tenant's use of the Premises; and 21. Management and building supervision fees exceeding 2.5% of annual Fixed Rent. Tenant shall be solely responsible for paying all utilities including, but not limited to electricity, water, consumed in the Building or on the Lot, and the electrical bill shall be placed in the Tenant's name and billed directly by the utility to Tenant. If Tenant fails to pay any such bills and such failure continues after written notice to Tenant and the expiration of the applicable grace period, Landlord shall have the right to pay such bills, and to recover such payment from Tenant with any interest and/or penalties chargeable thereon as additional rent. Written notice to -16- Tenant and grace period will not be applicable in case of emergency with respect to potential damage to persons or property. Tenant recognizes that Landlord may retain the services of such independent contractors or affiliates as may be necessary for Landlord to fulfill its obligations hereunder. Landlord shall provide to Tenant within 120 days of the end of each calendar year an annual accounting, in writing, of actual Common Area Maintenance Costs for such calendar year, and Landlord shall maintain complete books and records relating to Common Area Maintenance Costs sufficient to verify these charges and Tenant, its accountants and agents shall have access to such books and records at reasonable times with prior written notice. If the total of Tenant's estimated payments on account of Common Area Maintenance Costs for such calendar year exceeds the actual Common Area Maintenance Costs for such year, Landlord shall repay to Tenant such excess thirty (30) days after the delivery to Tenant of such annual accounting. If the total of Tenant's estimated payments on account of Common Area Maintenance Costs for such calendar year falls short of the actual Common Area Maintenance Costs for such year, Tenant shall pay to Landlord such shortage thirty (30) days after Tenant's receipt of such accounting. Based on reasonable estimates of increases in costs covered by this Section, Landlord reserves the right to adjust the amount of Tenant's estimated payments on account of Common Area Maintenance Costs annually at the time of such accounting effective on the first day of each calendar year during the Term hereof upon thirty (30) days' prior written notice to Tenant and upon providing Tenant with documentation supporting such estimates. Any such change shall be effective retroactively to the first day of the calendar year during which the adjustment is made. Notwithstanding anything contained herein, Landlord reserves the right to separately invoice Tenant for Tenant's proportionate share of any actual Common Area Maintenance Costs which -17- exceeds the amount for such item in Landlord's then current estimate of Common Area Maintenance Costs by greater than five percent (5%). Any such change shall be effective retroactively to the first day of the calendar year during which the adjustment is made. None of such Common Area Maintenance Costs shall exceed amounts which are charged for such expenses in the Westford, Massachusetts area for property of the same general type and size as in the Office Park. Landlord agrees that all services to be provided as part of Common Area Maintenance Costs shall be obtained by Landlord at commercially reasonable, competitive market rates consistent with the operation of comparable office buildings in the Westford, Massachusetts area. 5.2 TAX EXPENSE Tenant shall pay directly to the relevant taxing authority (or to Landlord if required by Landlord's mortgagee) real estate taxes assessed with respect to any period included in the Term hereof (on a pro rata basis at the beginning or end of the Term) attributable to the Lot and the Building and any assessment, levy, penalty, imposition or tax (including any tax which may replace or be assessed in lieu of any of the foregoing), and any interest due thereon, assessed with respect to any period included in the Term by any authority and agency having the direct power to tax against the Lot and the Building (the "Tax Expense"); provided, however, (i) if the amount of any real estate taxes or any such assessment, levy, penalty, imposition or tax may lawfully be paid in installments, Tenant may pay such amount over the maximum period permitted by law, and only the portion of such amount required to be paid with respect to any period in the Term shall be included in the Tax Expense for such period, (ii) if the Term includes a partial fiscal tax year at its beginning or end, the real estate taxes or any such assessment, levy, penalty, imposition or tax for such tax years shall be prorated according to the satisfaction of the total number of days in such tax year that are within the Term, -18- and only such prorated portion shall be included in the Tax Expense; and (iii) Tenant shall have no obligation to pay any assessment, levy, penalty, imposition or tax arising out of a breach or violation by Landlord or any previous owner or occupancy of the Lot or the Building of any law or obligation. The term "real estate taxes" means the real estate taxes, betterment assessments, water and sewer use rents, rates or charges, and such other governmental charges and impositions which are or may be charged, levied, assessed, imposed or become due and payable with respect to the Lot, Building, and other improvements comprising the Premises. All such payments shall be made no later than ten (10) days prior to the date when interest or penalty would accrue for non-payment or ten (10) days after Landlord provides Tenant with the real estate tax bill, whichever is later. Tenant shall furnish to Landlord copies of such bills and receipts evidencing payment for Landlord's records. Real Estate Taxes are currently estimated at $51,000 for fiscal year 1998. Tenant shall also pay all personal property taxes for Tenant's personal property on the Premises or used in connection therewith. To the extent permitted by law, Tenant shall pay, when due, taxes levied or assessed against Landlord by reason of this Lease on the rental or any other payment required to be made hereunder whether said taxes are assessed solely on the rental payment hereunder or jointly with other rentals collected pursuant to any law or ordinance now existing or hereafter enacted (other than taxes levied on the net income of Landlord derived therefrom as part of a state or federal income tax law applicable to Landlord's income, and any income, franchise, gross receipts, corporation, capital levy, excess profits, revenue, rent, inheritance, devolution, gift, estate, payroll or stamp tax by whatsoever authority, imposed or howsoever designated or any tax upon the sale, transfer and/or assignment of Landlord's title or estate which at any time may be assessed against or become a lien upon all or any part of the -19- Premises or this leasehold). Notwithstanding the foregoing, Tenant shall have no responsibility for late payment penalty or interest if Tenant's payment was timely as above provided. 5.3. TAX ABATEMENT - Tenant shall have the right to contest in good faith by appropriate proceedings diligently pursued the imposition or amount of any real estate taxes assessed against the Lot or the Building or such personal property taxes payable by it hereunder, including the right on behalf of, and in the name of the Landlord, to seek abatements thereto. The Landlord shall reasonably cooperate with Tenant, at Tenant's sole expense, in any such contest or abatement proceedings. In the event that Tenant determines not to contest such taxes and Landlord desires to file such contest, Landlord shall give written notice of that fact to Tenant and shall have the sole right as to such tax bill to contest in good faith by appropriate proceedings diligently pursued the imposition or amount of any real estate taxes assessed against the Lot or the Building or such other taxes payable by Tenant hereunder, including the right to seek abatements thereto. In such event, the Tenant shall reasonably cooperate with Landlord, at Landlord's sole expense, in any such contest or abatement proceedings. Any tax abatement or rebate received shall be allocated to the parties in the same proportion as payment. If Landlord shall receive on behalf of the Lot or the Building a rebate or abatement on any tax paid by Tenant, then after deducting therefrom any costs reasonably incurred by Landlord in obtaining such rebate or abatement, all of such net rebate or abatement relating to the Lot or the Building or to personal property taxes assessed against the Tenant's personal property shall be returned to Tenant to the extent that such rebate or abatement relates to payment made by the Tenant and not reimbursed by Landlord. If Tenant shall receive on behalf of the Lot or the Building a rebate or abatement on any tax paid by Tenant, then after deducting therefrom any costs reasonably incurred by Tenant in obtaining such rebate or abatement, all of such net rebate -20- or abatement related to the Lot, the Building or to personal property taxes assessed against the Tenant's property shall be retained by Tenant, as its sole property, to the extent such rebate or abatement relates to a payment made by Tenant and not reimbursed by Landlord. The remaining portion of such net rebate or abatement shall promptly be returned to Landlord. ARTICLE VI LANDLORD'S COVENANTS 6.1 LANDLORD'S COVENANTS DURING THE TERM - Landlord shall be responsible during the Term, at Landlord's expense and not as a cost allocable to Tenant under Section 5.1, for the structural integrity of the Building and damage and destruction due to casualty or eminent domain (except as set forth in Article XIII or below in this Section 6.1 or in Section 11.1 to the contrary). Landlord shall perform necessary repairs to maintain the structural integrity of the Building (except that such repairs shall not be required in the case of settling or sagging of the above items within standard engineering tolerance provided that the settling and sagging does not affect the surface or structural integrity of the Building or render the Building unsafe or unfit for normal use, or for damage or deterioration resulting from overloading by Tenant breaching the loading provisions of this Lease, or from misuse or negligence of Tenant). Landlord shall also be responsible for (i) all exterior maintenance, repairs and replacements necessary to keep in good condition and working order the trees, shrubs, plants, landscaping, parking areas, driveways and walkways on the Lot, (ii) for such repairs as are required by Article XIII hereof, (iii) compliance with all laws applicable to the Building, the Lot or Office Park, and (iv) all Capital Replacements (as hereinafter defined) to the heating, ventilating, air conditioning, plumbing, electrical, emergency and other mechanical equipment and systems of the Building (collectively, the "Building's Systems"), so long as such -21- replacement was not required due to negligence or excessive use of such capital items by Tenant. "Capital Replacement" shall mean any replacement, the cost of which is classifiable as a capital expenditure according to generally accepted accounting principles or the regulations or directives of the Internal Revenue Service. Landlord will be commercially reasonable and shall use good building management standards in making Capital Replacement decisions. All costs and expenses under this Section 6.1 shall be chargeable to Tenant pursuant to the provisions of Article V, except as otherwise expressly provided in Section 5.1 or this Section 6.1. All other repairs and maintenance, except as specifically otherwise provided herein, shall be the responsibility of the Tenant. In the event that Tenant gives notice to Landlord of a condition which Tenant believes requires Landlord's repairs or a condition which, if left uncorrected, will necessitate Landlord's repair, then, in accordance with the terms of this Section 6.1, Landlord shall respond promptly to investigate such condition and, if such repairs are Landlord's obligation hereunder, Landlord shall commence promptly to repair same and to diligently complete said repair. Tenant agrees during the Term to provide Landlord notice as soon as reasonably possible of any condition known to Tenant which might require, or if left uncorrected will necessitate, Landlord's repair pursuant to this Section 6.1. Tenant shall have the right to require, at reasonable times and with reasonable notice, a representative of Landlord to inspect the Building for repairs which may be the responsibility of Landlord. 6.2 INTERRUPTIONS - Landlord shall not be liable to Tenant for any compensation or reduction of rent by reason of inconvenience or annoyance or for loss of business arising from power losses or shortages to the Building or from the necessity of Landlord's entering the Premises, subject to Section 12.3, for any of the purposes in this Lease authorized, or for -22- repairing the Premises or any portion of the Building or improvements or the Lot or Park, provided, however, (i) Landlord shall use reasonable efforts to remedy such losses or shortages as quickly as possible and (ii) Landlord, in making any such entry, repairs or improvements shall not materially interfere with Tenant's use and occupancy of the Premises. In case Landlord is prevented or delayed from making any repairs, alterations or improvements, or furnishing any service or performing any other covenant or duty to be performed on Landlord's part, by reason of any cause beyond Landlord's reasonable control, Landlord shall not be liable to Tenant therefor, nor, except as expressly otherwise provided in Article XIII hereof, shall Tenant be entitled to any abatement or reduction of rent by reason thereof, nor shall the same give rise to a claim in Tenant's favor that such failure constitutes actual or constructive, total or partial, eviction from the Premises. Landlord agrees to provide Tenant with reasonable advance notice prior to entering the Premises except in the case of emergency. Landlord reserves the right to stop any service or utility system when necessary by reason of accident or emergency or until necessary repairs have been completed, provided that (i) the Landlord shall complete repairs as soon as reasonably possible and (ii) Landlord makes reasonable efforts to end the stoppage. Except in case of emergency repairs, Landlord will give Tenant reasonable advance notice of any contemplated stoppage and will use reasonable efforts to avoid interference with Tenant's use and occupancy of the Premises. ARTICLE VII LANDLORD'S WARRANTIES Landlord warrants and represents and covenants and areas as follows: (a) Fee simple title to the Premises is vested in the Landlord. (b) Landlord has the power and authority to enter into this Lease and perform the -23- obligations of Landlord hereunder. This Lease and all other documents executed and delivered by Landlord constitute legal, valid, binding and enforceable obligations of Landlord, and there are no claims or defenses, personal or otherwise, or offsets whatsoever to the enforceability or validity of the Lease. (c) Landlord agrees to put all HVAC, mechanical and electrical equipment currently in the Building in good operating condition prior to the date of Tenant's permitted access thereto as set forth in Section 9.2. ARTICLE VIII USE OF PREMISES Tenant may use the Premises for the Permitted Uses specified in Section 1.1 of this Lease. ARTICLE IX PREPARATION OF THE PREMISES 9.1 INITIAL CONSTRUCTION Tenant shall, on or before Tenant's Design Completion Date, provide to Landlord for approval: a complete set of construction drawings and specifications (collectively, the "Complete Plans"), which shall be prepared at Tenant's expense by "Tenant's Architect", (hereinafter defined) showing and listing all improvements Tenant intends to make to the Premises, (collectively, the "Tenant's Work"). The Complete Plans shall include but shall not be limited to: a. Built-in Furniture and Equipment Layout Plans b. Dimensioned Partition Plans c. Electrical and Telephone Outlet Plans -24- d. Reflected Ceiling Plans e. Door and Hardware Schedules f Room Finish Schedule including wall, carpet, and floor tile colors g. Electrical and Mechanical Engineering Plans Landlord and Tenant shall initial the Complete Plans after the same have been submitted by Tenant and approved by Landlord. At the time of such approval by Landlord, Landlord agrees to notify or indicate what items will be required to be removed by Tenant at the Term Expiration Date, or any extensions thereto. Landlord acknowledges that Tenant has selected Newbury Design Associates as "Tenant's Architect", which architect is acceptable to Landlord. Landlord and Tenant acknowledge that the Complete Plans may not be finalized at the time of Lease execution. "Tenant's Finish Work" which includes specification, coordination, supply and installation of furniture, furnishings, telephones and movable equipment will be the responsibility of Tenant. All of Tenant's Finish Work, and later changes or additions shall be coordinated with the Tenant's Work being performed by Landlord in such a manner as to maintain harmonious labor relations and not damage the Building or Lot or interfere with Building operations. Except for the Tenant's Finish Work (which such term includes as aforesaid the installation of the telephone systems, which must be performed by Tenant's telephone contractor at Tenant's direction and expense (all telephone equipment, including the telephone interface, shall be installed within the Premises), all Tenant's Work shall be performed at Tenant's expense by Landlord or a general contractor selected by Tenant, if prior written approval is granted from Landlord, which approval shall not be unreasonably withheld, -25- conditioned, or delayed. In the event Tenant elects to use a contractor other than Landlord, Tenant shall notify Landlord by September 15, 1997 and (i) Tenant agrees to pay Landlord on the Commencement Date a fee of one and one half percent (1.5%) of the cost of the Tenant's Work and (ii) Landlord may require Tenant's general contractor to use a roofing contractor selected by Landlord if any work is to be done to the roof. Notwithstanding anything contained in Section 9.2 of this Lease, in the event Tenant elects to use a general contractor other than Landlord, the Term shall commence on the Scheduled Term Commencement Date and Fixed Rent shall commence on such date, regardless of whether or not the Tenant's Work is completed by that date. In the event Tenant elects to use Landlord to perform the Tenant's Work, Tenant shall pay therefor to Landlord within ten (10) days of receipt of Landlord's Construction Statement (as defined below) (x) the cost of the Tenant's Work specified in the Complete Plans listed on the "Landlord's Construction Statement" (hereinafter defined) as completed, plus a Landlord's contractor's of six percent (6%) of such cost (collectively, the "Tenant Improvement Reimbursement" or "TIR") and (y) an additional amount equal to the cost of any changes from the Complete Plans initiated by Tenant by submission to Landlord of a Form of Work Change Order as hereinafter provided, less any holdbacks by Landlord to subcontractors or for any "Punch List Work" (as defined in Section 9.2), which amount shall be due and payable as construction of the Tenant's Work progresses, on submission by Landlord to Tenant of a statement ( the "Landlord's Construction Statement") on or about the fifth day of each month listing the Tenant's Work completed as of the date of the Landlord's Construction Statement, the construction costs incurred for the preceding month for such completed Tenant's Work, the aforementioned 6% fee and any costs related to such changes from Tenant's Work. The -26- Landlord's Construction Statement shall be accompanied by a certificate of Landlord's contractor that all payments then due to laborers, materialmen, and subcontractors have been made. Landlord shall be responsible for all payments due to laborers, materialmen, and subcontractors in connection with Tenant's Work, such that the Premises shall on the Commencement Date be free of all materialmen or mechanics liens. In no event shall any of the foregoing costs remain unpaid as of the Commencement Date. A copy of all Landlord's Construction Statements shall be sent to Tenant's Architect for approval in order to verify that all work listed therein has been satisfactory completed. Tenant's Architect shall also have the right to periodically inspect the quality and progress of Tenant's Work. If Landlord is selected by Tenant to construct the Tenant's Work, then Landlord shall provide Tenant with construction cost estimates based on the Complete Plans, including a breakdown thereof, the name of the subcontractor, if available, and the work and/or materials provided. Unless otherwise mutually agreed upon by Landlord and Tenant, in the pricing of the cost of the Tenant's Work, Landlord agrees to obtain three (3) bids from qualified subcontractors selected from a master list of subcontractors mutually prepared by Landlord and Tenant prior to the soliciting of bids for any item of the Tenant's Work, but only to the extent that the same exceeds ten thousand dollars ($10,000.00). Giving due consideration to factors such as price, delivery commitments, and to Landlords' construction experience, Landlord shall have the right to select which subcontractor shall be awarded the work. Landlord will not approve any construction, alterations, or additions requiring unusual expense to readapt the Premises so that the Premises can be used for the Permitted Uses under this Lease on lease termination or increasing, the cost of construction, insurance or taxes on the -27- Building or of Landlord's services called for by Section 5.1, unless Tenant first gives assurances acceptable to Landlord that such readaptation will be made prior to such termination without expense to Landlord and makes provisions acceptable to Landlord for payment of such increased cost. Landlord will also disapprove any alterations or additions requested by Tenant which will delay completion of the Tenant's Work. All changes and additions shall be part of the Building, except such items as Landlord determines in writing at the time of approval shall be either removed or left in the Premises or Building on termination of this Lease. The Tenant may request changes to Tenant's Work by altering, adding to, or deducting from Tenant's Work as set forth in the Complete Plans, subject to Landlord's prior written approval, which such approval shall not to be unreasonably withheld, conditioned or delayed, and in accordance with the form of Work Change Order attached hereto as Exhibit H. Any Work Change Order which constitutes a reduction or increase in the overall cost of Tenant's Work shall be credited against or added to the cost of the Tenant's Work, as the case may be. 9.2 PREPARATION OF PREMISES FOR OCCUPANCY If Landlord is obligated to perform the Tenant's Work pursuant to Section 9.1 and the Complete Plans, Landlord agrees to use reasonable efforts to have the Premises ready for occupancy on or before the Scheduled Term Commencement Date, which shall, however, be extended for a period equal to that of any delays due to governmental regulations, unusual scarcity of or inability to, obtain labor or materials, labor difficulties, casualty or other causes reasonably beyond Landlord's control. The Premises shall be deemed ready for occupancy on the earlier of: (a) The date on which Tenant occupies all or any part of the Premises for the Permitted Uses under the Lease; or -28- (b) The date on which the Tenant's Work, as specified on the Complete Plans, are Substantially Completed, as hereinafter defined, as certified by Tenant's Architect and Landlord's architect; and Landlord has delivered to Tenant copies of all permits and approvals required to be obtained from any governmental agency prior to occupancy of the Premises by Tenant, including, without limitation, a certificate of occupancy from the Town of Westford or a temporary certificate of occupancy from the Town of Westford which allows Tenant to use and occupy the Premises for the Permitted Uses (including the elevators), and which temporary certificate of occupancy is not conditional on the performance of any work other than the Punch List Work, as defined below, except that such permit(s) and approval(s) shall not be required as a condition of Substantial Completion (as hereinafter defined) if Landlord is unable to secure the same due solely to Tenant's failure to complete Tenant's Finish Work as specified in Section 9.1 above (which date, subject to additional terms and provisions of this Section 9.2, shall hereinafter be referred to as the date of "Substantial Completion". The date of "Substantial Completion" shall mean that (i) Tenant's Architect and Landlord's architect have certified that the Tenant's Work has been completed fully except for Punch List Work (as hereinafter defined), (ii) all such permits and approvals as set forth above in Section 9.2(b) have been obtained by Landlord and delivered to Tenant and (iii) Tenant can use and occupy the Premises for the Permitted Uses. "Punch List Work" shall mean those matters (x) which while incomplete do not materially interfere with Tenant's use and occupancy of the -29- Premises for the Permitted Uses and (y) the completion of which will not unreasonably interfere with Tenant's use and occupancy of the Premises for the Permitted Uses. On the date of Substantial Completion, Landlord and Tenant shall prepare a punch list signed by the Landlord and Tenant listing the Punch List Work and an agreed-upon cost therefor. One Hundred and Fifty Percent (150%) of the cost of completion of the Punch List Work shall be withheld from the last TIR; and at such time as Landlord shall complete the Punch List Work and Tenant's Architect and Landlord's architect have approved the completion of the Punch List Work, Tenant shall deliver or cause to be delivered to Landlord the amount stated in the punch list for the Punch List Work which has been completed. If completion of the Punch List Work has not been accomplished within thirty days after the date of Substantial Completion, Tenant may have the Punch List Work completed by its contractor(s) and deduct the cost of such work from the retainage from the last TIR as aforesaid. If Landlord is unable to complete construction due to delay in Tenant's compliance with the provisions of Section 9.1 of this Lease, then the Premises shall be deemed ready for occupancy no later than the Scheduled Term Commencement Date. Landlord shall permit Tenant access to the Building sixty (60) days prior to the Scheduled Term Commencement Date for the purpose of completing the Tenant's Finish Work in the Premises prior to the Term when it can be done without material interference with Landlord's remaining work or for allowing Tenant's general contractor to complete the Tenant's Work, as the case may be. All of such work to be constructed by Tenant, or its contractors, shall be completed in such manner as to not materially damage the Premises or Lot or materially interfere with the operation of the Building. In addition, such access shall be subject to the following conditions: (i) Tenant's contractors, agents or employees work in a harmonious labor -30- relationship with Landlord's general contractor, and (ii) reasonable prior written notice is given to Landlord or its general contractor specifying the work to be done and Landlord approves Tenant's construction drawings, which approval shall not be unreasonably withheld, conditioned or delayed. During the period of any preoccupancy of the Premises by Tenant (or its contractors) prior to the commencement of the Term, no Fixed Rent or additional rent or other charges shall accrue or be payable, but otherwise such pre-occupancy shall be subject to and with the benefit of all the terms, covenants and conditions contained in this Lease. In the event of Tenant's failure to comply with the provisions of Section 9.1 of this Lease, or to submit information, or to deliver construction drawings and specifications which meet Landlord's approval, Landlord shall, exercisable by notice to Tenant, deem the Commencement Date to have occurred on the Scheduled Term Commencement Date. Notwithstanding the foregoing provisions, if the Premises are not deemed ready for occupancy, as set forth above in Section 9.2, on or before the Outside Delivery Date for whatever reason, other than Tenant's default, Tenant may elect to cancel this Lease at any time after 5:00 PM on the day following the Outside Delivery Date, while the Premises are not deemed ready for occupancy, as set forth above in Section 9.2, by giving notice to Landlord of such cancellation which shall be effective when given, it being understood that said election shall be Tenant's sole remedy at law or in equity for Landlord's failure to have the Premises ready for occupancy. 9.3 GENERAL PROVISIONS APPLICABLE TO CONSTRUCTION All construction work required or permitted by this Lease, whether performed by Landlord or by Tenant shall be done in a good and workmanlike manner and in compliance with all applicable laws and all lawful ordinances, regulations and orders of governmental authority and insurers of the Building. If Landlord is selected to perform the Tenant's Work, then -31- Tenant's Architect may inspect the quality and progress of Tenant's Work at reasonable times and shall promptly give notice of observed defects. If Tenant's Work is not performed by Landlord, then Landlord's architect shall have the right to inspect Tenant's Work at reasonable times and shall promptly give notice of observed defects pertaining to the structure of the Building. 9.4 REPRESENTATIVES Each party authorizes the other to rely in connection with their respective rights and obligations under this Article IX upon approval and other actions on the party's behalf by Landlord's Representative in the case of Landlord or Tenant's Representative in the case of Tenant or by any person designated in substitution or addition by notice to the party relying. ARTICLE X COMPLIANCE WITH LAW 10.1 TENANT COMPLIANCE - Tenant shall comply, at Tenant's sole expense, with all applicable laws, ordinances, regulations and orders of any governmental authority (collectively "the Laws") if such compliance is necessitated by reason of Tenant's actual use of the Premises, which use shall in any event be in conformity with the Permitted Uses as specified in Section 1.1 of this Lease. Except for Tenant's obligations under the preceding sentence, Landlord shall comply with all Laws applicable to the Building, the Lot or the Office Park. 10.2 NOTICE - Tenant shall have the right upon giving notice to Landlord to contest any obligation imposed upon Tenant pursuant to the provisions of this Article and provided the enforcement of such requirement or law is stayed during such contest and such contest will not subject the Landlord to criminal penalty or jeopardize the title to the Premises or otherwise affect the Premises in any material adverse way. Landlord and Tenant shall each cooperate with the -32- other in any such contest and shall execute any documents reasonably required in the furtherance of such purpose. ARTICLE XI ALTERATIONS, ADDITIONS AND IMPROVEMENTS 11.1 ALTERATIONS - Tenant may, from time to time, at its own cost and expense and without the consent of Landlord, make non-structural non-roof alterations, additions or improvements to the interior of the Premises (collectively herein called "Alterations") whose cost in any one instance is Thirty Thousand Dollars and 00/100 Dollars ($30,000.00) or less, provided Tenant first notifies Landlord in writing of any such Alterations. If Tenant desires to make any non-structural non-roof Alterations costing in excess of Thirty Thousand Dollars and 00/100 Dollars ($30.000.00) in any one instance or any other alteration, Tenant must first obtain the consent of Landlord thereto, which consent shall not be unreasonably withheld, conditioned or delayed. In the instances where Landlord consent is required above, if Landlord reasonably concludes that the Alterations involve any construction, alterations or additions requiring unusual expense to readapt the Premises so that the Premises can be used for the Permitted Uses as defined in this Lease on the Term Expiration Date, then Landlord shall require by written notice to Tenant at the time of approval that such readaptation will be made prior to such Term Expiration Date without expense to Landlord. If Tenant desires to make any structural or roof alterations to the Premises, Tenant must first obtain the consent of Landlord thereto. If Landlord consents to alterations affecting such structural components or the roof, Landlord shall be relieved of further maintenance and repair responsibility for the structural components affected by such alterations, and Tenant shall assume such responsibility, with respect to that portion of the structural components (in its entirety), if -33- any, to which the consent relates, except that Landlord agrees upon request of Tenant to have such alterations be performed by Landlord or a contractor hired by Landlord, at Tenant's expense, in which event Landlord shall not be relieved of any responsibility it may have to the component to be altered. Except as permitted in Section 12.2, if Tenant desires to make any alterations to the precast panels, or to the exterior of the Building, or Lot, Tenant must first obtain the prior written consent of Landlord thereto, which may be withheld in Landlord's sole discretion. Any and all such Alterations may be done by any general contractor chosen by Tenant provided any such general contractor is reputable, bondable by reputable bonding companies, carries the kind of insurance and in the amounts set forth in Section 11.5 below. Notwithstanding the foregoing, no such bonding is required for non-structural, non-roof Alterations. 11.2 LANDLORD PERFORMANCE OF ALTERATIONS - If Tenant, in its sole discretion, wishes Landlord to perform the work of making Alterations for Tenant, other than the Tenant's Work to be completed under Article IX, such work shall be performed at actual cost, plus a fee of fifteen (15%) percent. 11.3 TENANT PERFORMANCE OF ALTERATIONS - Tenant in making any Alterations shall cause all work to be done in a good and workmanlike manner using materials equal to or better than those used in the construction of the Tenant's Work and shall comply with or cause compliance with all laws and with any direction given by any public officer pursuant to law. Tenant shall obtain or cause to be obtained and maintain in effect, as necessary, all building permits, licenses, temporary and permanent certificates of occupancy and other governmental approvals which may be required in connection with the making of the Alterations. Landlord shall cooperate with -34- Tenant in the obtaining thereof and shall execute any documents reasonably required in furtherance of such purpose, provided any such cooperation shall be without expense and/or liability to Landlord. 11.4 REMOVAL OF ALTERATIONS - At any time during the Term of this Lease, or on the Term Expiration Date, Tenant may remove any Alterations made, unless Landlord has indicated in writing at the time of approval of such Alterations that such Alterations are required to remain on the Premises. In the event of a removal of any Alterations by Tenant, Tenant shall, at its sole cost, repair any damage to the Premises caused by such removal. 11.5 GENERAL PROVISIONS At least annually if such Alterations have occurred during the past calendar year, Tenant shall furnish to Landlord as-built sepias and, if applicable, operating manuals, of the work done by Tenant during such past year and copies of all permits issued in connection therewith. For all of Tenant's Alterations, whose cost in any one instance is in excess of $30,000.00, all of Tenant's construction drawings must be prepared at Tenant's expense by an architect or engineer approved by the Landlord and Landlord's engineer, which approval shall not be unreasonably withheld or delayed. Landlord and Tenant shall initial the construction drawings after the same have been submitted by Tenant to Landlord and approved by Landlord. All of Tenant's alterations which cost in any instance is in excess of $30,000.00, shall be constructed by a reputable general contractor, and Landlord may require that the electrical, heating ventilation and air conditioning, and sprinkler subcontractors be approved by Landlord, such approval not to be unreasonably withheld or delayed. Tenant shall have its contractor procure and maintain in effect during the term of such Alterations, the following insurance coverages with an insurance company or companies authorized to do business in the Commonwealth of Massachusetts. -35- (a) Worker's Compensation and Occupational Disease Insurance in accordance with the laws of the Commonwealth of Massachusetts, along with a "All States" and "Voluntary Compensation" coverage endorsement. (b) Employees Liability insurance with a limit of $100,000.00 per person per accident, $100,000.00 per person by disease, and $500,000.00 per policy by disease. (c) Comprehensive General Liability including Personal Injury and Property Damage in the amount of a combined single limit of $2,000,000.00 each occurrence. Coverage must include the following: (1) premises - operations; (2) elevators and hoists; (3) independent contractor; (4) contractual liability assumed under this contract. (d) Comprehensive Auto Liability including Personal Injury and Property Damage in the amount of a combined single limit of $500,000.00 each occurrence. Coverage must include the following: (1) owned vehicles; (2) leased vehicles; (3) hired vehicles; (4) non-owned vehicles. (e) Owner and Contractor Protective Liability including Personal Injury and Property Damage in the amount of a combined single limit of $1,000,000.00 each occurrence. ARTICLE XII TENANT'S COVENANTS -36- 12.1 MAINTENANCE AND REPAIR - Except as provided in Sections 6.1 with respect to maintenance, repair and other such obligations of Landlord and 13.1 except with respect to repair and restoration of damage or destruction arising out of a fire or other casualty or the exercise of eminent domain, and except as to reasonable wear and tear, Tenant shall: keep the Premises and all fixtures thereon and therein in good repair, operating condition and working order; make all structural repairs necessitated by Tenant's misuse or negligence; make and perform or cause to be made or performed all interior maintenance, repairs, and replacements necessary to keep the Premises in such condition, including, without limitation, by their inclusion, interior repainting, and replacement of glass damaged or broken and of floor and wall coverings worn or damaged; keep all roof drains clear of blockage by snow and other obstructions or debris; except for Capital Replacements (except as otherwise set forth in Section 6.1), keep all plumbing, lighting, elevator, heating, ventilating, air conditioning and other utility and mechanical systems in the Premises properly maintained and operating in good operating condition; and except for Capital Replacements (except as otherwise set forth in Section 6. 1), properly maintain the plumbing, lighting, elevator, heating, ventilating, air conditioning and other utility and mechanical systems in accordance with any manufacturers warranty and product standards with fully licensed contractors and under contracts, each reasonably acceptable to Landlord, qualified to perform the service. Landlord and its agents reserve the right to inspect the systems to insure proper maintenance in accordance with Section 12.3 of this Lease. If Landlord, in Landlord's reasonable judgment, determines such systems have not been properly and adequately maintained, as herein required, then Landlord, after written notice to Tenant and the expiration of the applicable grace period, shall have the right to remedy such maintenance deficiency and -37- apportion all reasonable costs of such inspections and maintenance to Tenant's Common Area Maintenance Costs specified in Article V, Landlord and Tenant hereby agreeing that written notice or grace period not to be applicable in case of emergency with respect to persons or property. Tenant further covenants to (i) neither commit nor suffer waste and (ii) at the expiration or termination of this Lease peaceably to yield up the Premises in such order, repair and condition as Tenant is required to maintain hereunder, first removing all goods and effects of Tenant which Tenant is required to remove or which Tenant is permitted to remove and desires to remove and (iii) to repair all damage caused by such removal leaving the Premises clean and neat and in a condition as required under the terms of this Lease. 12.2 SIGNS - Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed (but may be withheld in Landlord's sole discretion if Tenant is not leasing at least sixty-six percent (66%) of the Building), (a) paint, place or replace any signs on the Lot or the Premises or anywhere on the exterior of the Building (notwithstanding the provisions of Section 11.1 to the contrary), or (b) place any curtains, blinds (other than standard vertical blinds), shades, awnings, or flagpoles, or the like, in the Premises or anywhere on or in the Building visible from outside the Building. Tenant shall pay the expenses involved in the erection of any sign and of obtaining permits therefor. Tenant warrants that it shall obtain (and furnish copies thereof to Landlord) all necessary permits and approvals in compliance with local codes and ordinances prior to erecting any such sign (s) and, at Landlord's request, Tenant shall remove said sign (s) upon the termination of this Lease. -38- 12.3 ENTRY AND INSPECTION - Tenant shall permit Landlord and Landlord's agents and invitees at reasonable times and upon reasonable advance notice except in emergency in which case notice may be given by telephone or in person, during Tenant's regular business hours: to examine the Premises, and, if Landlord shall so elect, to exercise its rights and perform its obligations under this Lease; to show the Premises to prospective purchasers, prospective or actual mortgagees, and prospective or actual institutional investors; and, at any time within twelve (12) months preceding the expiration of the Term, to show the Premises to prospective tenants, and to affix to any suitable part of the exterior of the Building and/or the Premises, but not so as to interfere unreasonably with any of the signs or the windows of the Tenant, a notice to letting or selling the Premises, and to keep the same so affixed without hindrance; provided, however, Landlord shall not unreasonably interfere with Tenant's use or occupancy of the Premises. 12.4 MISCELLANEOUS Tenant agrees during the Term and so long as Tenant's occupancy continues: (a) Not to permit its employees and officers to use any parking spaces other than those described in Exhibit "A" and in Section 2.1 of this Lease, and to make every reasonable effort to keep its invitees from using any spaces other than those on the Premises; any governmental charges or surcharges or other monetary obligations imposed by a governmental agency relative to parking rights with respect to the Premises shall be considered as a Tax Expense and shall be payable by Tenant in the manner and to the extent provided under the provisions of Article V, subject to the Tenant's right to contest the same at Tenant's expense in good faith and by appropriate proceedings. -39- (b) Not to injure or deface the Premises, or Lot; and not to permit in the Premises any public auction, nuisance or the emission from the Premises of any objectionable noise or odor; nor any use thereof which is contrary to law or ordinances or liable to invalidate or materially increase the premiums for any insurance on the Building or its contents or liable to render necessary any alteration or addition to the Premises, unless Tenant is willing to pay for, at its sole cost and expense, and conduct such alteration or addition, including obtaining any and all necessary permits and approvals in connection with such construction thereof. 12.5 SAFETY APPLIANCES - Tenant agrees to keep the interior of the Building equipped with all safety appliances, required by law or ordinance or any other regulation of any public authority and to procure all licenses and permits so required because of the Permitted Uses. 12.6 LOADING - Tenant covenants and agrees not to place a load upon the Premises exceeding 100 pound load per square foot of floor area above the first floor of which the Premises are constructed, and 200 pounds live load per square foot of floor area for at grade slab. 12.7 LABOR OR MATERIALMEN'S LIENS - Tenant covenants and agrees not to cause or permit any liens for labor or materials performed or furnished at the request of Tenant or its agents, employees or contractors to attach to the Premises, or in the event of any such lien so attached to the Premises, Tenant, within ten (10) days after receiving notice of such lien, shall discharge or bond over any such liens which may so attach. Tenant may contest any such lien in good faith at Tenant's sole expense and by appropriate proceedings so long as the Landlord's interest in the Premises is not jeopardized. 12.8 RULES AND REGULATIONS - Tenant agrees to comply with the Rules and Regulations set forth in Exhibit "B" and all other reasonable Rules and Regulations of general applicability to -40- tenants and owners of other lots in the Office Park, hereafter made by Landlord, of which Tenant has been given advance written notice, for the care and use of the Premises, the Building, the Common Areas and the Office Park and approaches as further described in the Office Park Covenants attached hereto as Exhibit "C". Such Rules and Regulations shall not unreasonably interfere with Tenant's use or occupancy of the Premises, and to the extent any such Rules and Regulations conflict with this Lease, this Lease shall control. Landlord shall enforce all such Rules and Regulations uniformly against all tenants. 12.9 TENANT'S COVENANTS - Tenant has the power and authority to enter into this Lease and perform the obligations of Tenant hereunder. This Lease and all other documents executed and delivered by Tenant constitute legal, valid, binding and enforceable obligations of Tenant. ARTICLE XIII CASUALTY AND CONDEMNATION 13.1 CASUALTY - In case during the Term all or any substantial part (i.e. requiring greater than twelve (12) months to rebuild, as reasonably determined by Landlord's architect) of the Building is damaged by fire or any other casualty ("Substantial Casualty"), then this Lease shall, except as hereinafter provided, terminate at Landlord or Tenant's election, which may be made by written notice given to the other party within thirty (30) days after the casualty, which notice of termination shall specify the effective date of termination which shall not be more than sixty (60) days after the date of receipt of notice of such termination. In the event of any such Substantial Casualty, the Fixed Rent and additional rent shall be abated entirely as of the date of such casualty. In the event of any fire or casualty to the Building, unless the Lease is so terminated, Landlord shall with reasonable diligence, repair, replace and restore the Building into substantially the same condition as it was prior to the casualty for use and occupation to the -41- extent of the proceeds of insurance, less adjuster's fees, and other reasonable expenses of collection plus insurance deductibles to be paid by Tenant as hereunder provided. However, if such damage is not repaired and the Building restored to substantially the same condition as it was prior to such damage within a period of twelve (12) full calendar months from the date of such damage, Tenant within thirty (30) days from the expiration of such period or from the expiration of any extension thereof pursuant to the terms hereof may terminate this Lease by notice to Landlord, specifying, a date not more than sixty (60) days after the giving of such notice on which the term of this Lease shall terminate. The period within which the required repairs may be accomplished shall also be extended by the number of days lost as a result of unavoidable delays, which term shall be defined to include all delays referred to as Force Majeure in 26.12. up to a maximum period of sixty (60) days. Tenant shall, in any fire or other casualty which creates a Landlord repair obligation in accordance with the terms of this Article, upon receipt of written notice and supporting back up documentation, pay to Landlord prior to Landlord commencing construction of such repair the then applicable insurance deductible. In addition, Tenant shall pay Fixed Rent as required by this Lease for any portion of the Term not covered by rent insurance as required to be obtained by Landlord in Section 15. 1. If the Premises shall be damaged by fire or other casualty, the Fixed Rent and other charges payable by Tenant under this Lease shall abate or be reduced proportionately for the period in which, by reason of such damage, there is substantial interference with Tenant's use and/or occupancy of the Premises. Such abatement or reduction shall end, if and when, Landlord shall have restored the Premises to substantially the same condition in which the Premises were prior to such damage. -42- 13.2 ADDITIONAL CASUALTY PROVISIONS (a) Landlord shall not be required to repair or replace any of Tenant's business machinery, equipment, cabinet work, furniture, personal property and no damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises, necessitated by a fire or other casualty; provided, however, Landlord shall use reasonable efforts not to interfere with Tenant's use and occupancy of the Premises. (b) In the event of any termination of this Lease pursuant to this Article XIII, the Term of this Lease shall expire as of the effective termination date as fully and completely as if such date were the date herein originally scheduled as the Term Expiration Date. Tenant shall have access to the Premises at Tenant's sole risk for a period of thirty (30) days after the date of termination in order to remove Tenant's personal property except as prohibited by any applicable Governmental agency or official. 13.3 CONDEMNATION/EMINENT DOMAIN - In the event that the whole or substantially all of the Building shall be permanently taken or appropriated by eminent domain or shall be condemned for any public or quasi-public use, then (and in any such event) this Lease and the Term hereof shall automatically be terminated as of the effective date of such taking, appropriation or condemnation. In the event that more than a material part (i.e. greater than 30%) of the floor area of the Building, or any material part of the means of access ( "material" in the case of access shall mean so as to substantially interfere with the use of the Building), or any material parking ("material" in the case of parking shall mean the reduction of parking spaces to less than three (3)parking spaces per 1,000 square feet of Building), shall be so taken, appropriated or condemned for a -43- period in excess of one year, then (and in any such event) this Lease and the Term hereof may be terminated at the election of Tenant by a notice in writing to Landlord of its election so to terminate within sixty (60) days following the effective date of such taking, appropriation or condemnation. With respect to reductions in parking, Landlord may suspend the effectiveness of such notice by giving its own notice to Tenant within five (5) days of receipt of Tenant's notice that Landlord shall either (i) remove the impairment to Tenant's use of the Building by repairing the Building as soon as practicable, or (ii) provide substitute parking spaces equal to the number taken within reasonable proximity to the Premises within a reasonable time period, it being agreed that reasonable time includes weather-related delays associated with winter and spring site work and paving. In the event of any such termination, this Lease and Term hereof shall expire as of the date specified in such notice of termination from Tenant, which date shall not be more than sixty (60) days after the date of such notice, as fully and completely as if such date were the date herein originally scheduled as the Term Expiration Date. If this Lease is not terminated as above set forth, Landlord shall, with reasonable diligence and up to the amount of the award, restore the remainder of the Premises, and the remainder of the means of access, as nearly as practicably may be to the same condition as obtained prior to such taking, appropriation or condemnation in which event (i) a just proportion of the Fixed Rent and additional rent, according to the nature and extent of the taking, appropriation or condemnation and the resulting permanent injury to the Premises and the means of access thereto and parking shall be permanently abated, and (ii) a just proportion of tile remainder of the Fixed Rent and additional rent, according to the nature and extent of the taking, appropriation or condemnation and the resultant injury sustained by the Premises and the means of access thereto and parking shall be abated until what remains of the -44- Premises and the means of access thereto and parking, shall have been restored as fully as may be for permanent use and occupation by Tenant hereunder. 13.4 RESERVATION OF AWARD - Landlord reserves to itself any and all rights to receive awards made for damages to the Premises, Building or Lot and the leasehold hereby created, or any one or more of them accruing by reason of exercise of eminent domain and Tenant hereby releases and assigns to Landlord all Tenant's rights to such awards, and covenants to deliver such further assignments and assurances thereof as Landlord may from time to time request. It is understood and agreed, however, that Landlord does not reserve to itself, and Tenant does not assign to Landlord, any damages payable for (i) Tenant's Property as defined in Section 18.1 of this Lease, or (ii) relocation expenses recoverable by Tenant from such authority in a separate action. ARTICLE XIV RIGHTS OF MORTGAGEES 14.1 PRIORITY OF LEASE - Landlord shall use reasonable efforts to provide to Tenant a Subordination Non-Disturbance and Attornment Agreement (in the form attached as Exhibit E) from any present holder (a "Mortgagee") of any mortgage (a "Mortgage") now affecting the Premises. Landlord shall use reasonable efforts to obtain from any future Mortgagee and any future lessor under any ground lease or superior lease affecting the Premises a Subordination, Non-Disturbance and Attornment Agreement (in the form attached as Exhibit E or in such other form as may be reasonably acceptable to Tenant). Provided that Landlord has delivered to Tenant such a Subordination, Non-Disturbance and Attornment Agreement from each such present or future Mortgagee, this Lease shall be subject and subordinate to the lien of any Mortgage of the Premises. -45- 14.2 LIMITATION ON MORTGAGEE'S LIABILITY - Upon entry and taking possession of the Premises for any purpose, the holder of a mortgage shall have all rights of Landlord and, during the period of such possession or ownership, the duty to perform all Landlord's obligations hereunder. Except during such period of possession and from and after Foreclosure (as defined in Exhibit E), no such holder shall be liable, either as mortgagee or as holder of a collateral assignment of this Lease, to perform, or be liable in damages for failure to perform, any of the obligations of Landlord, unless and until such holder shall enter and take possession of the Mortgaged Premises for the purpose of foreclosing a mortgage. Upon entry for the purpose of foreclosing a mortgage, such holder shall be liable to perform all of the obligations of Landlord accruing after said entry, provided that a discontinuance of any foreclosure proceeding shall terminate the liability of the holder as Landlord. 14.3 NO PREPAYMENT OR MODIFICATION, ETC. - No Fixed Rent, additional rent, or any other charge shall be paid more than thirty (30) days prior to the due dates thereof, and payments made in violation of this provision shall (except to the extent that such payments are actually received by a Mortgagee in possession or in the process of foreclosing its mortgage) be a nullity as against such Mortgagee, and, Tenant shall be liable to such Mortgagee for the amount of such advance payments made from and after a default under the applicable Mortgage. No agreement to make or accept any surrender, termination or cancellation of this Lease and no agreement to modify so as to reduce the rent, change the Term, or otherwise materially change the rights of Landlord under this Lease, or to relieve Tenant of any obligations or liability under this Lease, shall be binding on a Mortgagee unless consented to in writing by Landlord's Mortgagee of record, if any, such consent not to be unreasonably withheld or delayed. -46- 14.4 NO RELEASE OF TERMINATION - No act or failure to act on the part of Landlord which would entitle Tenant under the terms of this Lease, or by law, to be relieved of Tenant's obligations hereunder or to terminate this Lease, shall result in a release or termination of such obligations or a termination of this Lease unless (i) Tenant shall have first given written notice of Landlord's act or failure to act to Landlord's mortgagee of record, if any, of which Landlord has given written notice to Tenant of their name and address, specifying the act or failure to act on the part of Landlord which could or would give a basis to Tenant's rights and (ii) such mortgagees, after receipt of such notice, have failed or refused to correct or cure the condition complained of within thirty (30) days from receipt of such notice, or if cure cannot be effected within said thirty (30) day period thereafter due to the nature of the default, Lender shall have a reasonable time to cure, provided that it commences cure within said thirty (30) day period of time and diligently carries such cure to completion; but nothing contained in this Section 14.4 shall be deemed to impose any obligation on any such mortgagee to correct or cure any such condition. 14.5 Intentionally Deleted ARTICLE XV INSURANCE 15.1 INSURANCE - If Landlord is selected by Tenant to Construct the Tenant's Work, Landlord shall procure and continue in force during the construction of the Tenant's Work Builders Risk insurance whereby Tenant shall be named additional insured. In addition, Landlord shall procure and continue in force during the Term and the Extended Term hereof, at Tenant's expense payable in the manner set forth in Article V, fire and extended coverage insurance, including vandalism, sprinkler leakage, and malicious mischief, upon the Building on -47- a full replacement basis, agreed value endorsement with agreed values for the Building. The beginning coverage shall be in the amount as is required by Landlord and its mortgagee up to the full replacement value. The policies evidencing such insurance shall provide that loss, if any, payable thereunder shall be payable to the Landlord and/or the Tenant and/or any mortgagee of the Premises as their respective interests may appear. A certificate of insurance evidencing the foregoing shall be delivered to the Tenant prior to the execution of this Lease, and certificates evidencing the renewal of such insurance shall be delivered to Tenant, upon Tenant's request, at least thirty (30) days before the expiration of any such policies and providing that the insurance shall not be canceled within thirty (30) days prior written notice to Tenant. All such policies shall be placed with responsible companies authorized to do business in the State wherein the Premises are located. The coverages required by this Article may be provided by a single "package" policy. Tenant shall be responsible for notifying Landlord of additions, alterations and improvements completed to the interior of the Premises for which Tenant intends to insure under this Section 15.1. Notification shall include the cost and description of such work and the date on which coverage should commence. Landlord shall also procure and continue in force during the Term and Extended Term hereof, at Tenant's expense payable in the manner set forth in Article V, rental interruption insurance for twelve (12) months or the maximum obtainable. 15.2 TENANT LIABILITY INSURANCE - The Tenant shall maintain Commercial General Liability Insurance at Tenant's expense, including a standard contractual liability endorsement, with respect to the Premises throughout the Term with combined single limit coverage of Two Million Dollars ($2,000,000). The Tenant shall deliver to the Landlord within thirty (30) days of -48- Landlord's written request a certificate evidencing the aforesaid coverage issued by insurance companies authorized to do business in Massachusetts and providing that the insurance indicated therein shall not be canceled without at least thirty (30) days prior written notice to Landlord. The Landlord will be named as an additional named insured on such policy. 15.3 WAIVER OF SUBROGATION - The Landlord and Tenant hereby waive all causes and rights of recovery against each other, their agents, officers and employees for any loss occurring to the real or personal property of Landlord or Tenant, regardless of cause or origin. Landlord and Tenant agree that any policies presently existing or obtained on or after the date hereof (including renewals of present policies) shall include a clause or endorsement (a "Waiver of Subrogation") to the effect that any such release shall not adversely affect or impair said policies or prejudice the right of the insured to recover thereunder and that the insurer expressly waives its rights of subrogation against Landlord or Tenant as the case may be, with respect to any claims under any such policies. The parties further agree that if said Waiver of Subrogation shall become unobtainable or unenforceable or shall void the respective policies, then the respective insurance policies shall not be invalidated, and said waiver shall become null and void and of no further force and effect. ARTICLE XVI INDEMNIFICATION 16.1 TENANT'S INDEMNITY The Tenant shall, upon timely receipt of written notice, indemnify, defend and hold the Landlord harmless from and against any and all suits, claims, and demands arising out of injury or damage occurring at the Premises or Lot or Office Park because of the negligence or willful acts of Tenant, its agents, servants, or employees including any construction activity undertaken by Tenant pursuant to the terms of this Lease. In no event is -49- Tenant obligated to indemnify, defend or save harmless Landlord from any loss, injury, or damage, or part thereof, not attributable to Tenant's negligence or willful act or those of its agents, servants, or employees. In the event the Landlord is notified of a claim, action or proceeding, or becomes aware of an occurrence, which may result in indemnification by Tenant as provided above, the Landlord shall give prompt written notice to Tenant and provide complete particulars known by the Landlord. The Landlord shall immediately forward to the Tenant every demand, notice, summons or other process received by Landlord or its representatives. Tenant has the exclusive right and obligation to defend any claim, action, or proceeding wherein Landlord is entitled to indemnification under the provisions of this Article, and Tenant may settle any such claim, action, or proceeding, without Landlord's consent or approval. The Landlord will fully cooperate with the Tenant in the defense or settlement of any claim, action, or proceeding. 16.2 HAZARDOUS MATERIALs - Tenant shall not (either with or without negligence) cause or permit its employees, agents, contractors or invitees to cause the escape, disposal or release of any "Hazardous Substances and Materials" (as defined below) onto or in the vicinity of the Premises other than the ordinary disposal or release of customary office and cleaning supplies. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law, nor allow to be brought into the Premises any such materials or substances except to use in the ordinary course of Tenant's business, and then, except with respect to customary office and cleaning supplies, only after written notice is given to Landlord of the identity of such substances or materials. Without limitation, for purposes of this Lease, "Hazardous Substances and Materials" shall include biohazardous materials and those materials -50- or substances regulated by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., the Massachusetts Hazardous Waste Management Act, as amended, M.G.L. c.21C, the Massachusetts Oil and Hazardous Material Release Prevention and Response Act, as amended, M.G.L. c.21E, any applicable local ordinance or bylaw, and the regulations adopted under these acts (collectively, the "Hazardous Waste Laws"). If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of hazardous substances or materials, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional charges if such requirement applies to the Premises and if on such reasonable basis it is determined Tenant caused the release. If Tenant receives from any federal, state or local governmental agency any notice of violation or alleged violation of any Hazardous Waste Law, or if Tenant is obligated to give any notice under any Hazardous Waste Law, Tenant agrees to forward to Landlord a copy of any such notice within three (3) days of Tenant's receipt or transmittal thereof. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord's reasonable request concerning Tenant's best knowledge of belief regarding the presence of hazardous substances or materials on the Premises. In all events, Tenant shall indemnify Landlord in the manner provided in Section 16.1 of this Lease from any release of hazardous substances or materials on the Premises occurring while Tenant is in possession, or elsewhere if caused by Tenant, its agents, employees or contractors. Landlord retains the right to inspect the Premises at all reasonable times, upon reasonable notice to Tenant, to ensure compliance with this paragraph. The within covenants shall survive the expiration or -51- earlier termination of the Lease Term. 16.3 LANDLORD'S INDEMNIFICATION FOR HAZARDOUS MATERIALS. Landlord represents and warrants to Tenant that (i) Landlord has delivered to Tenant copies of all reports, assessments, tests, notices and other documentation in Landlord's possession relating to the presence, use, storage, release or disposal of any biologically or chemically active or other hazardous substances or materials on, in, under, onto, from or in the vicinity of the Premises, and (ii) to the best of Landlord's knowledge, no such substances or materials have been used, stored, released or disposed of on, in, under, onto, from or in the vicinity of the Premises, except for the use, storage, release or disposal of customary office and cleaning supplies in customary quantities and in accordance with all applicable laws. If Landlord receives from any federal, state or local governmental agency any notice of violation or alleged violation of any Hazardous Waste Law, or if Landlord is obligated to give any notice under any Hazardous Waste Law in connection with the Office Park, Landlord agrees to forward to Tenant a copy of any such notice within three (3) days of Landlord's receipt or transmittal thereof. Landlord shall indemnify, defend and hold harmless Tenant from all suits, claims, demands, liabilities, damages, costs and expenses arising out to the use, storage, release or disposal of any such substances or material on, in, under, onto, from or in the vicinity of the Premises because of the negligence or willful acts of Landlord, its agents, servants, or employees including any construction activity undertaken by Landlord pursuant to the terms of this Lease. In no event is Landlord obligated to defend or hold harmless Tenant from any loss, injury, or damage, or part thereof, not attributable to Landlord's negligence or willful act or those of its agents, servants, or employees. -52- In the event the Tenant is notified of a claim, action or proceeding, or becomes aware of an occurrence, which may result in indemnification by Landlord as provided above, the Tenant shall give prompt written notice to Landlord and provide complete particulars known by the Tenant. The Tenant shall immediately forward to the Landlord every demand, notice, summons or other process received by Tenant or its representatives. Landlord has the exclusive right and obligation to defend any claim, action, or proceeding wherein Tenant is entitled to indemnification under the provisions of this Article, and Landlord may settle any such claim, action, or proceeding without Tenant's consent or approval. The Tenant will fully cooperate with the Landlord in the defense or settlement of any claim, action or proceeding. ARTICLE XVII ASSIGNMENT AND SUBLETTING 17.1 TENANT SUBLET - Landlord hereby grants to Tenant the right to assign this Lease or to sublet all or any portion of the Premises throughout the Term, provided Tenant first obtains Landlord's consent to such assignment or subletting in writing. Landlord's consent shall not be unreasonably withheld, delayed, or conditioned. Landlord's consent to an assignment or subletting shall be accompanied by a statement addressed to Tenant and the assignee or subtenant, upon which statement Tenant and the assignee or subtenant may conclusively rely, stating that Tenant is not in default under the Lease (or setting forth what respects Tenant is in default), that this Lease has not been amended or modified (or setting forth such amendments or modifications), the expiration date of this Lease, and the date to which rent has been paid to Landlord hereunder. It shall not be unreasonable for Landlord to withhold its consent or disapprove a sublease or assignment if the proposed sublessee or assignee conflicts with any -53- exclusionary provision (s) of other leases in the Office Park. As additional rent, Tenant shall reimburse Landlord promptly for reasonable legal and other expenses incurred by Landlord in connection with any request by Tenant for consent to assignment or subletting. No assignment or subletting shall affect the continuing primary liability of Tenant (which, following assignment, shall be joint and several with the assignee). 17.2 CONSENT - If the Tenant requests Landlord's consent to a subletting of all of the Premises for the then balance of the Term, Landlord shall have the right to terminate this Lease. Landlord shall exercise this right, if at all, within thirty (30) days of Tenant's request for consent to the subletting. If Landlord exercises this right, the Lease shall be terminated on the effective date of the proposed subletting. Notwithstanding the foregoing, Landlord's right to terminate the Lease will be null and void if Landlord receives written notice by Tenant of its intent to withdraw its request to sublet on or before the fifth day immediately following Landlord's notice to Tenant of its intention to terminate. 17.3 LANDLORD'S RESPONSE - In the event Landlord does not respond to the written request for such consent or exercise its right of recapture within thirty (30) days of the date of such request from Tenant, Landlord's consent shall be deemed given. 17.4 SUBSIDIARY ASSIGNMENT - Notwithstanding anything to the contrary herein contained, Tenant may assign or sublet all or any portion(s) of the Premises at any time to a subsidiary of Tenant, to the entity with which or into which Tenant may merge, to any entity with which Tenant is affiliated, or to a successor to all or substantially all the assets of Tenant or a division of Tenant without the need for Landlord's consent to such assignment or subletting, so long as Tenant remains primarily liable, and without any right on the part of Landlord to suspend -54- this Lease as hereinabove set forth and without any obligation of Tenant to share Rent Differential as set forth in Section 17.5. 17.5 SUBLEASE AND ASSIGNMENT RENT DIFFERENTIAL - If Landlord consents to a sublease or assignment, and said sublease or assignment is for a greater rent than the Fixed Rent or additional rent due from Tenant to Landlord under this Lease, Tenant shall pay to Landlord (or to any mortgagee in possession or successor to Landlord through a Foreclosure) on a monthly basis during the term of any approved sublease or assignment as additional rent hereunder, in addition to the Fixed Rent and other payments due under this Lease, an amount equal to 50 % of the difference between all fixed rent and additional rent from the time actually received by Tenant under the sublease or assignment and the Fixed Rent and additional rent and other payments due under this Lease, after Tenant has recouped its out-of-pocket expenses with respect to such sublease or assignment including without limitation, reasonable real estate brokerage commissions, reasonable legal fees and the reasonable costs of refurbishment of the Premises for such sublease or assignment (the "Rent Differential"). In case any Fixed Rent or additional rent is prepaid to Tenant under the sublease or assignment, only so much as exceeds the net present value of Tenant's obligations to pay Fixed Rent and additional rent (reasonably estimated) for the balance of the Term for the portion of the Premises subject to such sublease or assignment shall be taken into account in computing the Rent Differential or the amounts due any foreclosing mortgagee or other successor landlord under the next succeeding sentence. In the event that a tax exempt entity becomes a mortgagee in possession or a landlord under this Lease through foreclosure or deed in lieu of foreclosure by reason of a default under the applicable mortgage or through a participating mortgage transaction or otherwise, in calculating the amount due in the immediately preceding sentence, there shall be no credit given to Tenant for its out-of-pocket -55- expenses involved in such assignment or subletting. In the event the sublease is for less than the full Premises hereunder, the above rent adjustment shall be pro rated on a square foot basis. Anything contained in the foregoing provisions of this Section to the contrary notwithstanding, neither Tenant nor any other person having interest in the possession, use, occupancy, or utilization of the Premises shall enter into any lease, sublease, license, concession, or other agreement for use, occupancy, or utilization of space in the Premises which provides for rental or other payment for such use, occupancy, or utilization based, in whole or in part, on the net income or profits derived by any person from the Premises leased, used, occupied, or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales), and any such purported lease, sublease, license, concession, or other agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession, use, occupancy, or utilization of any part in the Premises. ARTICLE XVIII TENANT'S PROPERTY 18.1 TENANT'S PERSONAL PROPERTY - Tenant's trade fixtures, equipment and personal property (collectively called "Tenant's Property") however installed or located on the Premises shall be and remain the property of the Tenant and may be removed. Tenant shall repair any damage caused by such removal or installation. Tenant's Property shall be at the sole risk and hazard of Tenant, and if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of water pipes, steam pipes or other pipes, by theft or from any other cause, unless caused by the negligence or intentional misconduct of Landlord, its employees, agents or contractors. No part of said loss or damage is to be charged to or be borne by Landlord. -56- 18.2 REMOVAL - Upon the expiration or termination of this Lease, the Tenant will remove Tenant's Property from the Premises; if within ten (10) days after such expiration or termination, Tenant shall not have removed same, it shall be deemed abandoned by Tenant. Tenant shall pay to Landlord upon demand the costs and expenses thereafter incurred by Landlord in removing and storing Tenant's Property and repairing any damage caused to the Premises or to the Building caused by the removal of same. 18.3 NO LIEN - In no event (including a default under this Lease) shall Landlord have any lien or other security interest in any of Tenant's Property located in the Premises or elsewhere and Landlord hereby expressly waives and releases any such lien or other security interest however created or arising. ARTICLE XIX TENANT'S DEFAULT 19.1 EVENTS OF DEFAULT: (a) If the Tenant shall default in the payment of rent or other payments required by this Lease and shall fail to cure said default within seven (7) business days after receipt of written notice of said default from the Landlord; or (b) If the Tenant shall default in the performance or observance of any other agreement or condition on its part to be performed or observed, and if the Tenant shall fail to cure said default within thirty (30) days after receipt of written notice of said default from the Landlord (or if said default shall require longer than thirty (30) days to cure and the Tenant fails to commence curing said default within thirty (30) days after receipt of written notice thereof and to prosecute the curing of the same to completion with due diligence); or (c) If the Tenant shall file a voluntary petition in bankruptcy or shall be adjudicated a -57- bankrupt or insolvent, or shall file any petition or answer seeking any arrangement, composition, liquidation or dissolution under any present or future Federal, State, or other statute, law or regulation relating, to bankruptcy, insolvency or other relief for debtors, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of the Tenant or of all or any substantial part of its properties, or of the Premises, or shall make any general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or (d) If a court shall enter an order, judgment or decree approving a petition filed against the Tenant seeking any arrangement, composition, liquidation, dissolution or similar relief under the present or future Federal, State or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, and such order, judgment or decree shall remain un-vacated or un-stayed for an aggregate of sixty (60) days (whether or not consecutive) (any of the events or conditions described in (a), (b), (c) or (d) above being called an "Event of Default" in this Lease), then, if any Event of Default has occurred, the Landlord at any time thereafter may give written notice to the Tenant specifying the occurrence giving a rise to such Event of Default and stating that this Lease and the Term hereby demised shall expire and terminate on the date specified in such notice which shall be at least ten (10) days after the giving of such notice, and upon the date specified in such notice, this Lease and the Term, estate and interest hereby demised shall expire and terminate by limitation and all rights of the Tenant under this Lease shall cease. In the event the Lease is terminated on account of an Event of Default of Tenant under any of the provisions contained in this Article, Tenant shall pay punctually to Landlord all of the sums which Tenant covenants in this Lease to pay and Landlord's reasonable costs of performing any obligations of the Tenant under this Lease that -58- Tenant fails to perform, in the same manner and to the same extent and at the same time as if this Lease had not been terminated, including all reasonable and necessary costs and expenses incurred by or on behalf of Landlord, including reasonable attorney's fees and expenses of employees, arising out of any Event of Default by the Tenant under this Lease. 19.2 REPOSSESSION - At any time after any such expiration or termination of this Lease, the Landlord, without further notice, may enter upon and reenter the Premises to repossess itself of the Premises, by summary proceedings, ejectment or otherwise, and may remove the Tenant and all other persons and any and all property from the Premises (including without limitation Tenant's Property) as hereinabove provided. ARTICLE XX NOTICES 20.1 NOTICES GENERALLY - All notices, demands, requests and other instruments which may or are required to be given by either party to the other under this Lease shall be given in writing. All notices, demands, requests and other instruments from the Landlord to the Tenant shall be deemed to have been given when mailed by United States Registered or Certified Mail, postage prepaid, return receipt requested, addressed to the Tenant at Tenant's Address with a copy to Testa, Hurwitz & Thibeault LLP, High Street Tower, 125 High Street Boston, MA 02110 Attn: Real Estate Department; and all notices, demands, requests and other instruments from Tenant to the Landlord shall be deemed to have been given when mailed by United States Registered or Certified Mail, postage prepaid, return receipt requested, addressed to the Landlord at Landlord's Address with a copy to Hinckley, Allen & Snyder, One Financial Center, Boston, Massachusetts 02111 Attn: Paul Hedstrom; except that where any period of time commences under this Lease with notice, such notice shall be deemed given, and such period shall be deemed -59- to commence, when postal records indicate delivery was first attempted or rendered for delivery if refused. 20.2 INTENTIONALLY DELETED ARTICLE XXI QUIET ENJOYMENT Landlord covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing the terms, covenants and conditions on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Premises demised hereby. ARTICLE XXII HOLDING OVER In the event that Tenant occupies any portion of the Premises beyond the Term Expiration Date, such holding over shall constitute an agreement by Tenant to pay 150% of the Fixed Rent and additional rent then applicable for each month or portion thereof in which Tenant shall retain possession of the Premises or any part there after termination of this Lease, whether by lapse of time or otherwise due hereunder. In addition, Tenant agrees to pay all damages (including consequential damages) sustained by Landlord on account of such holdover. The provisions of this subsection shall not operate as a waiver by Landlord of any right of re-entry provided in this Lease. ARTICLE XXIII MEMORANDUM OF LEASE At the time of the execution of this Lease, Landlord and the Tenant shall execute an instrument recordable in form containing those provisions including but not limited to the Term, the commencement and expiration date, and such other information as necessary or appropriate to protect the interests of Tenant hereunder and to satisfy the notice of lease statute of -60- Massachusetts. The Tenant may record the same. ARTICLE XXIV SURRENDER OF PREMISES Upon the expiration of the Term or early termination thereof, Tenant shall promptly peaceably yield up and surrender the Premises in a good and clean condition, and in the same condition as Tenant is required to maintain the Premises hereunder during the Term, reasonable wear and tear and damage by fire, casualty or eminent domain excepted. ARTICLE XXV ESTOPPEL CERTIFICATES Upon the written request of either party, at any time and from time to time, Landlord and Tenant agree to execute and deliver to the other within fifteen (15) business days after receipt of such request, a written instrument, duly executed: (1) Certifying that, if true, this Lease has not been modified and is in full force and effect or, if there has been a modification of this Lease, that this Lease is in full force and effect as modified, stating such modifications; (2) Specifying the date to which the rent has been paid; (3) Stating whether or not to the best knowledge, information and belief of the party executing such instrument, the other party hereto is in default and, if such party is in default, stating the nature of such default; (4) Stating the commencement date of the Term; and (5) Stating which options to extend the Term have been exercised, if any. ARTICLE XXVI ADDITIONAL PROVISIONS 26.1 BROKER - Landlord and Tenant warrant to each other that no Broker(s) other than -61- that specified in Section 1.1 of the Lease have been retained by the warranting party in connection with the negotiation and consummation of this Lease. Each party agrees to defend, indemnify and save the other harmless from and against any and all claims for a commission arising out of a breach of the warranty made by such party in the first sentence of this Section 26.1. This Section 26.1 shall survive the expiration or earlier termination of this Lease. 26.2 BIND AND INURE - The obligations of this Lease shall run with the land, and this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns except that only the Landlord named herein shall be liable for obligations accruing before the beginning of the Term and thereafter each successive owner of the Premises, after giving to Tenant written notice of its assumption of the obligations of Landlord under this Lease shall be liable only for obligations accruing during the period of its ownership, said liability terminating as to future liability upon termination of such ownership and passing to the successor in ownership and the giving of such notice. 26.3 PROVISIONS SEPARABLE - It is agreed that if any provisions of this Lease shall be determined to be void by any court of competent jurisdiction in Massachusetts, then such determination shall not affect any other provision of this Lease, all of which other provisions shall remain in full force and effect; and it is the intention of the parties hereto that if any provision of this Lease is capable of two constructions, one of which would render the provision void, and the other of which would render the provision valid, then the provision shall have the meaning which renders it valid. 26.4 ENTIRE AGREEMENT - This instrument contains the entire and only agreement between the parties as to the Premises, and no oral statements or representations or prior written matter not contained in this instrument shall have any force or effect. This Lease shall not be -62- modified in any way except by a writing subscribed by both parties. 26.5 GOVERNING LAW - This Lease shall be governed by and construed and enforced in accordance with the laws and courts of the Commonwealth of Massachusetts. 26.6 NO WAIVER - Failure of either party to complain of any act or omission on the part of the other party, no matter how long the same may continue, shall not be deemed to be a waiver of any rights hereunder. No waiver by either party at any time, express or implied, or any breach of any provisions of this Lease shall be deemed a waiver of a breach of any other provision of this Lease or a consent to any subsequent breach of the same or any other provision. If any action of any party shall require the consent or approval of the other party, the consent to or approval of such action on any one occasion shall not be deemed a consent to or approval of said action on any subsequent occasion or a consent to or approval of any other action on the same or any subsequent occasion, and such consent or approval shall not be unreasonably withheld or delayed. 26.7 RIGHTS SEPARATE - Any and all rights and remedies which either party may have under this Lease or by operation of law, either at law or in equity, upon any breach, shall be distinct, separate and cumulative and shall not be deemed inconsistent with each other; no one of them whether exercised by the other party or not, shall be deemed to be exclusive of any other, and any two or more of all of such rights and remedies may be exercised at the same time. 26.8 SINGULAR AND PLURAL - Words and phrases used in the singular shall be deemed to include the plural and vice versa, and nouns and pronouns used in any particular gender shall be deemed to include any other gender. 26.9 HEADINGS - The various terms which are defined in Articles of this Lease or are defined in Exhibits annexed hereto shall have the meanings specified in such Articles and such -63- Exhibits for the purposes of this Lease and all agreements supplemental thereto, unless the context clearly indicates the contrary. 26.10 PARKING - Tenant's occupancy of the Premises shall include the exclusive use of 341 parking spaces located upon the Lot. 26.11 NON-RECOURSE - Tenant agrees to look solely to Landlord's then equity interest in the Premises and the proceeds thereof at the time owned for recovery of any judgment from Landlord; it being agreed that neither Landlord (original or successor), nor any partner (general or limited), associate, participant, principal (disclosed or undisclosed), agent, employee, trustee or other fiduciary, beneficiary, officer, or other person or entity in or of any partnership, association, joint venture, corporation or other entity, trust, or estate from time to time owning Landlord's interest in this Lease, shall ever be personally liable for any such judgment or for the payment of any monetary obligation to Tenant with respect to matters arising out of this Lease (it being agreed by Tenant that such exoneration from personal liability is and shall be absolute and complete with no exception whatsoever). With respect to any services to be furnished or obligations to be performed by Landlord to Tenant, except with respect to the negligence of Landlord, its employees, agents or contractors, Landlord shall never be liable for failure to furnish or perform the same when prevented from doing so by strike or lockout (not limited to the Premises or the Office Park), breakdown, accident, order or regulation of or by any governmental authority, or failure of supply, or inability by the exercise of reasonable diligence to obtain supplies, parts or employees necessary to furnish such services, or because of war or other emergency, or for any act of God or other Force Majeure, as defined below, causes beyond Landlord's reasonable control, or for any cause due to any act or negligence of Tenant, Tenant's invitees, customers, servants, agents, employees, licensees or any person claiming by, through or -64- under Tenant. With respect to any obligations to be performed by Tenant to Landlord, other than the payment of rent and other sums due under this Lease, except with respect to the negligence Tenant, its employees, agents or contractors, Tenant shall never be liable for failure to furnish or perform the same when prevented from doing so by strike or lockout (not limited to the Premises or the Office Park), breakdown, accident, order or regulation of or by any governmental authority, or failure of supply, or inability by the exercise of reasonable diligence to obtain supplies, parts or employees necessary to furnish such services, or because of war or other emergency, or for any act of God or other Force Majeure, as defined below, causes beyond Tenant's reasonable control, or for any cause due to any act or negligence of Landlord, Landlord's invitees, customers, servants, agents, employees, licensees or any person claiming by, through or under Landlord. 26.12 FORCE MAJEURE - As used in this Article and elsewhere in this lease , "Force Majeure" shall mean a time extension equal to that of any delays due to (i) acts of God, (ii) changes in governmental regulations, (iii) casualty, (iv) strike or other labor difficulties (not limited to the Premises or the Office Park), (v) unusual weather conditions, (vi) inability despite the exercise of diligence, to obtain supplies, parts or employees to furnish services, or (vii) other acts reasonably beyond Landlord's or Tenant's control, but in no event shall the term include economic or financing difficulties. 26.13 INTENTIONALLY DELETED 26.14 CONFIDENTIALITY - This Lease document is a confidential document by and between Landlord and Tenant and shall not be disclosed, copied, distributed or circulated to any person(s) other than to such parties, and their respective employees, agents, consultants, contractors, -65- architects, brokers, lenders, shareholders, directors and investors, mortgagees, successors or assigns, or to any prospective sublessees and assignees of Tenant, and to the legal counsel and accountants of any of the foregoing persons or entities, without the prior written consent of the Landlord, which shall not be unreasonably withheld or delayed. This Section 26.14 is not applicable when disclosure, copying, distribution or circulation of this Lease document is necessitated by disclosure requirements due to Tenant's nature as a public corporation, if applicable, or by other requirements of Law or by order of the court. 26.15 SECURITY DEPOSIT Landlord acknowledges receipt of a letter of credit in the amount of $560,625 as security for Tenant's obligations under the Lease (the "Security Deposit"). The Security Deposit will decrease by one-fifth (1/5) each year during the five (5) year Lease Term, commencing on the first anniversary of the Commencement Date and on each successive anniversary of the Commencement Date (each, a "Reduction Date"). On each Reduction Date, Landlord shall return the Security Deposit to Tenant provided that Tenant has delivered a replacement (or amended) letter of credit, in an amount reduced by twenty percent (20%) from the amount of the previous letter of credit. After the reduction of the Security Deposit to $0, Tenant shall have no further obligation to maintain a Security Deposit hereunder. If all or any part of the Security Deposit is applied to an obligation of Tenant hereunder, Tenant shall immediately, upon request by Landlord, restore the Security Deposit to its original amount. Tenant shall not have the right to call upon Landlord to apply all or any part of the Security Deposit to cure any default or fulfill any obligation of Tenant, but such use shall be solely in the discretion of Landlord. Upon any conveyance by Landlord of its interest under this Lease, the Security Deposit may be delivered by Landlord to Landlord's grantee or transferee. Upon any such delivery, Tenant hereby releases Landlord herein named of any and all liability -66- with respect to the Security Deposit, its application and return, and Tenant agrees to look solely to such grantee or transferee. It is further understood that this provision shall also apply to subsequent grantees and transferees. IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of this 18TH day of AUGUST, 1997 Tenant: NetScout Systems, Inc. LANDLORD: Michelson Farm - Westford Technology Park IV Limited Partnership By: /s/ Charles Tillett By: The Gutierrez Company as the sole ------------------- General Partner Its: VP FINANCE ADMINISTRATION By: /s/ Arturo Gutierrez ------------------------- --------------------------- Its: President --------------------------- -67- EXHIBIT A [EASEMENT PLAN] -68- EXHIBIT "B" RULES AND REGULATIONS 1. Tenant must, upon the termination of its tenancy, restore to Landlord all keys of offices and toilet rooms, either furnished to or otherwise procured by Tenant, and in the event of the loss of any keys so furnished, Tenant shall pay to landlord the replacement cost. 2. Canvassing, soliciting and peddling in the Building or on the Lot or in the Office Park are prohibited, and Tenant shall cooperate to prevent the same. 3. Tenant shall comply with all reasonable security measures from time established by Landlord and of which Tenant receives written notice, for the Lot or Office Park, so long as (i) the same do not breach or violate Tenant's lights under the Lease or the requirements of any governmental security regulations to which Tenant is subject, and (ii) such reasonable security measures do not deprive Tenant of reasonable access to the Premises at all times or otherwise unreasonably interfere with Tenant's use or occupancy of the Premises. 4. Tenant shall comply with the Office Park Covenants attached hereto as Exhibit "C" to which the Lot is subject. -69- EXHIBIT "C" MICHELSON FARM - WESTFORD TECHNOLOGY PARK OFFICE/RESEARCH AND DEVELOPMENT PARK COVENANTS Landlord agrees with Tenant to enforce, or cause to be enforced, and comply with these Park Covenants with all due diligence to preserve the quality and appearance of the Park (as hereinafter defined). The land is located in an approximately 85 acre office/research and development park, commonly known as Westford Technology Park (hereinafter, together with any additions thereto, called the "Park"). All lots of land comprising the Park (which lots are individually called the "Parcel" and collectively the "Parcels") are subject to the following restrictions which shall bind Michelson Farm Westford Technology Park Trust ("Grantor") as owner of the Park and its successors in title, including but not limited to Landlord and its successor. A. All parcels shall have facilities for parking, loading and unloading sufficient to serve any uses to the Parcels without using adjacent streets for such purpose. On -street parking shall be prohibited. All parking, trucking and vehicular maneuvering areas for a Parcel shall be contained within such Parcel. B. No exterior loading platforms shall be visible from any primary way or proposed primary way serving the Park. Screening and planting may be used for this purpose. C. No open or outside storage shall be done on any Parcel. D. Signs shall conform to the sign ordinances of the Town. Any variance from such ordinance granted by the Town must also be approved by Grantor in the manner provided below in Section I. E. No condition or use of any Parcel will be permitted which is objectionable by reason of noise, odor, vibration, smoke, radiation, the hazardous nature of the use, or the violation of environmental standards adopted by the Town, the -70- Commonwealth, the Federal Government or any Court. F. All utilities serving a Parcel shall be placed underground, unless prohibited by the utility company. Any exterior lighting on a Parcel shall either be indirect or of such controlled focus and intensity as not to disturb street traffic or the occupancy of any adjacent Parcel. G. The exterior appearance of any buildings in the Park, including landscaping thereon, shall be kept neat and orderly and free from litter. H. No building, exterior sign, fence, wall, exterior lighting or other structure shall be erected or allowed to remain on any portion of the Park or exterior structural alteration or addition made, except pursuant to plans approved in writing by Grantor as to landscaping, parking and architectural conformity with existing buildings in the Park. I. The Grantor may from time to time by written instrument in recordable form grant variances from any one or more of these restrictions (except Restriction H for which variances may not be granted) where the Grantor reasonably determines that the variance can be granted without substantial detriment to the intent and purpose of the restrictions and without substantial detriment to the Land, and portions of the Park theretofore built upon. J. Written approval by the Grantor as to any buildings, signs, structures, alterations, additions and landscaping approved by Grantor in good faith shall be conclusive evidence of compliance with these restrictions. The Grantor agrees to furnish to any grantee as evidence of such compliance. K. The term "Grantor, as herein used, shall mean the Michelson Farm - Westford Technology Park Trust and any successors in title to whom the Grantor has expressly granted of record the rights to enforce these restrictions. -71- EXHIBIT "D" MICHELSON FARM-WESTFORD TECHNOLOGY PARK QUITCLAIM DEED ARTURO J. GUTIERREZ AND JOHN A. CATALDO, CLASS A TRUSTEES, AND JOHN PIKE AND THOMAS E. LEGGAT, CLASS B TRUSTEES, TRUSTEES OF THE MICHELSON FARM-WESTFORD TECHNOLOGY PARK TRUST, under Declaration of Trust dated October 1, 1984, recorded with the Middlesex North District Registry of Deeds in Book 2863, Page 235, having an address c/o The Gutierrez Company, One Wall Street, Burlington, Massachusetts 01803 (hereinafter referred to as the "Grantor"), for consideration paid and in full consideration of Ten Dollars ($10.00) grants to MICHELSON FARM - WESTFORD TECHNOLOGY PARK IV LIMITED PARTNERSHIP, a Massachusetts limited partnership, having an address c/o The Gutierrez Company, One Wall Street, Burlington, Massachusetts 01803 (hereinafter collectively, referred to as the "Grantee"), with QUITCLAIM COVENANTS, a certain parcel of land together with the buildings and improvements situated thereon, located in Westford, Middlesex County, Massachusetts, being shown as Lot 4B on a plan entitled "Definitive Plan of Land, Westford Technology Park in Westford, Massachusetts", Prepared by Howe Surveying Associates, Inc., Scale 1" = 100', dated June 3, 1996, revised July 12, 1996 and recorded with the Middlesex North Registry of Deeds on at Plan Book 192, Plan 24 (the "Plan"). Said Lot 4B contains 362,973 square feet of land, more or less, according to said Plan. Said parcel is conveyed subject to and with the benefit of all rights, easements, restrictions and reservations of record, in so far as in force and applicable. -72- For reference to Grantor's title, see deed of Michelson Farm-Westford Technology Park IV Limited Partnership Trust dated September 4, 1996, recorded herewith, and see deed of Michelson Farm-Westford Technology Park Trust, dated June 18, 1987, recorded with said Deeds in Book 4117, Page 156. EXECUTED under seal this 4th day of September, 1996. MICHELSON FARM - WESTFORD TECHNOLOGY PARK TRUST /s/ Arturo J. Gutierrez ---------------------- Arturo J. Gutierrez, as Class A Trustee and not individually /s/ John Pike ------------- John Pike, as Class B Trustee and not individually COMMONWEALTH OF MASSACHUSETTS Suffolk, ss. September 4, 1996 Then personally appeared the above-named Arturo J. Gutierrez, Class A Trustee of Michelson Farm - Westford Technology Park Trust, and acknowledged the foregoing instrument to be his free act and deed as Trustee as aforesaid, before me, /s/ A. P. Gottlieb ------------------ Notary Public My commission expires: COMMONWEALTH OF MASSACHUSETTS Suffolk, ss. September 4, 1996 Then personally appeared the above-named John Pike, Class B Trustee of Michelson Farm - Westford Technology Park Trust, and acknowledged the foregoing instrument to be his free act and deed as Trustee as aforesaid before me, -73- /s/ Marie E. Wolf Notary Public My commission expires: -74- Exhibit "E" SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT AGREEMENT made this 18th day of August, 1997 by and among THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation, with an office at One Ravinia Drive, Suite 1400, Atlanta, Georgia 30346-2110 ("Mortgagee"), NETSCOUT SYSTEMS, INC., with an address at 321 Billerica Road, Chelmsford, Massachusetts 01824 ("Tenant"), and MICHELSON FARM-WESTFORD TECHNOLOGY PARK IV LIMITED PARTNERSHIP, a Massachusetts limited partnership, with an address at c/o The Gutierrez Company, One Wall Street, Burlington, Massachusetts 01803 ("Borrower"). W I T N E S S E T H: WHEREAS, Mortgagee is the holder of a mortgage from Borrower dated March 10, 1988, and a separate assignment of lessor's interest in leases and assignment of rentals, both dated March 10, 1988, which documents are recorded with Middlesex North District Registry of Deeds in Book 4435, beginning at Page 155, and have been subsequently amended by instruments recorded in said registry (said mortgage as amended are herein collectively referred to as the "Mortgage"), which Mortgage covers certain premises in Westford, Middlesex County, Massachusetts, as more fully described therein ("Mortgaged Property"); and WHEREAS, by virtue of a lease (the "Lease") dated as of August 18, 1997, between Borrower, as Landlord therein, and Tenant, as Tenant therein, true and correct copies of which have been delivered to Mortgagee, Tenant has leased from Borrower the Premises, as defined in the Lease, which Premises form a part of the Mortgaged Property. -75- NOW THEREFORE: In consideration of the sum of One Dollar ($1.00) by each party in hand said to the other, receipt of which is hereby acknowledged, and in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto, intending to be legally bound hereby, hereby agree as follows: 1. Tenant hereby agrees; (a) subject to and to the extent not inconsistent with this Agreement, the Lease and Tenant's leasehold estate and any and all estates, options, and rights therein contained or created thereby are, and shall be and remain, subject and subordinate in all respects to the lien of the Mortgage and to all of the terms, conditions and provisions thereof, to all advances made or to be made thereunder, and to any renewals, extensions, modifications, consolidations-or replacements thereof. (b) from time to time, upon request by written notice from Mortgagee, it shall within fifteen business days of receipt of such a request provide Mortgagee with an estoppel certificate, in the form attached to the Lease as Exhibit G, certifying to the best knowledge, information and belief of Tenant that there is no default on the part of Borrower under the Lease or, if Borrower is in default, stating the nature of such default. (c) it will forward to Mortgagee in the manner provided herein for notices, copies of any notice of any default of Borrower pursuant to the Lease given or made by Tenant; (d) without the prior written consent of Mortgagee, (i) the Lease shall not be terminated by Tenant except as provided therein nor shall Tenant be released from liability thereunder in connection with any assignment or subletting in accordance with Article XVII of the Lease nor shall Tenant surrender the Lease or the Mortgaged Property except incident to a -76- termination provided for in the Lease, and (ii) the Lease shall not be subordinated to any encumbrance hereafter placed on the Mortgaged Property. Landlord shall not enforce against Tenant any obligation under the Lease so to subordinate without obtaining Mortgagee's prior written consent. (e) in the event of any default by Borrower under the Lease which would give Tenant the right to terminate the Lease, Tenant will not exercise such right until it shall have given written notice of such act or omission to Mortgagee ("Tenant's Notice"), and (ii) if it so elects, Mortgagee shall have the right (but not the obligation) to cure any default by Borrower under the Lease, including, if necessary to cure defaults, the right of access to the Mortgaged Property, subject to compliance by Mortgagee with all of the notice and other restrictions upon access by Borrower to the Mortgaged Property under the Lease, including Section 12.3 thereof. Tenant shall not take any such action to terminate the Lease thereunder unless Mortgagee, after receipt of Tenant's Notice, falls to cure, or cause to be cured, the specified default within the time allowed therefor for cure by Borrower under the Lease plus a reasonable time thereafter if Mortgagee shall within thirty days of receipt of Tenant's Notice give Tenant notice ("Mortgagee's Notice") of its intention to, and commences and continues to remedy such act or omission, or cause the same to be remedied with reasonable diligence. "Reasonable time" as used herein includes a reasonable time necessary with reasonable diligence to obtain possession of the Mortgaged Property if the default cannot be cured without such possession. Tenant shall accept such cure as if made by Borrower. Nothing in this Paragraph 1 (e) shall, however, in any way limit or affect Tenant's right at law or in equity to cure any default of Borrower and deduct the cost thereof from rent due; -77- (f) in the event that Mortgagee or Purchaser (hereinafter defined), or anyone claiming from or through Mortgagee, shall enter into and lawfully become possessed of the Mortgaged Property, or shall succeed to the rights of Borrower under the Lease, either through foreclosure of said Mortgage or otherwise, Tenant shall attorn to, and recognize, Mortgagee or Purchaser as its Landlord under the Lease for the unexpired balance of the term of the Lease and any extension thereof, subject to all of the terms and conditions of the Lease, which shall continue in full force and effect as a direct Lease between Mortgagee or Purchaser and Tenant; (g) Tenant shall make all payments payable by Tenant under the Lease directly to Mortgagee or Purchaser subsequent to receipt of Mortgagee's or Purchaser's written instructions by notice to Tenant and Borrower agrees that such payments shall be deemed paid under the Lease with the same effect as if paid directly by Tenant to Borrower. (h) Mortgagee or Purchaser shall have no responsibility, liability or obligation to cure any defaults by Borrower under the Lease, nor be subject to claims, defenses or offsets under the Lease or against Borrower possessed by Tenant and which arose or existed prior to foreclosure of the Mortgage or deed given in lieu of foreclosure or entry and taking possession of the Mortgaged Property by Mortgagee or Purchaser, except to the extent hereinafter provided. (i) the institution of any action or other proceedings by Mortgagee under the Mortgage in order to realize upon the Borrower's interest in the Mortgaged Property shall not by operation of law, or otherwise, result in the cancellation or termination of the Lease or Tenant's obligations thereunder and Mortgagee may, at its election, subordinate the Mortgage to the Lease without the consent of Borrower or Tenant. (j) during the period of time that Mortgagee has given Mortgagee's Notice of its intention, and is attempting with reasonable diligence, to effect a cure of any condition of the -78- Mortgaged Property, but is prevented by reason of operation of law or court order (the "Prevention Period") from effecting such cure, the time to remedy any such condition prior to any right of Tenant to terminate the Lease shall be extended by the number of days in the Prevention Period, unless the Prevention Period is caused by Mortgagee's negligence, willful misconduct or violation of any laws, statutes, ordinances, rules or regulations applicable to the Mortgaged Property or to the enforcement of Mortgagee's rights under the Mortgage. (k) Upon any foreclosure of the Mortgage or deed given in lieu of foreclosure or entry and taking possession of the Mortgaged Property by Mortgagee or Purchaser, Tenant agrees to reissue the letter of credit contemplated by Section 26.15 of the Lease to Mortgagee or Purchaser, provided the existing letter of credit issued to Landlord is simultaneously surrendered to Tenant or to the issuing bank or has otherwise previously expired, terminated or been so surrendered. 2. Mortgagee hereby consents to, and approves and recognizes Tenant's rights under the Lease and agrees that so long as Tenant is not in default (beyond all applicable periods given Tenant under the Lease to cure such default): (i) Tenant's possession and occupancy of the Mortgaged Property and Tenant's rights and privileges under the Lease, or any extension thereof which may be effected in accordance with the terms of the Lease, shall not be disturbed, affected or impaired by, nor will the Lease or the term of the Lease be terminated or otherwise affected by, (a) any suit, action or proceeding upon the Mortgage or the note or other obligation secured thereby, or for the foreclosure of the Mortgage or the enforcement of any rights under the Mortgage or any other documents held by Mortgagee, or by any judicial sale or execution or other sale of the Mortgaged Property, or by any deed given in lieu of foreclosure, or by the exercise of any other rights given to Mortgagee by any other documents or as a matter of law, or (b) any default under the Mortgage or the note -79- or other obligation secured thereby; (ii) Mortgagee shall not, except as required by law, name or join Tenant as party to any action, suit or proceeding brought to foreclose the Mortgage or to enforce anY rights under the Mortgage or any other documents held by Mortgagee or the note or other obligation secured thereby. (iii) the amount of any insurance proceeds, less adjusters' fees and other reasonable expenses of collection, paid or payable with respect to the Mortgaged Property and received by Mortgagee shall be applied to the repair and restoration of the Mortgaged Property, subject to reasonable construction loan type conditions, provided that Tenant has executed an agreement with Borrower and Mortgagee at or prior to the commencement of such repair or restoration, extending for a reasonable time, if necessary, the time periods for such repair or restoration set forth in Article XIII of the Lease; (iv) after a condemnation proceeding, if the Mortgaged Property is capable of being restored, in Mortgagee's reasonable discretion, to a viable economic unit, the amount of any condemnation awards, less all costs and expenses of collection, including reasonable attorneys' fees, paid or payable with respect to the Mortgaged Property and received by Mortgagee shall be applied to the repair and restoration of the Mortgaged Property, subject to reasonable construction loan type conditions, provided that Tenant has executed an agreement with Borrower and Mortgagee, at or prior to the commencement of such repair or restoration, extending for a reasonable time, if necessary, the time periods for such repair or restoration set forth in Article XIII of the Lease; (v) During any period in which Mortgagee, its successors and assigns, or -80- Purchaser, hold title and possession of the Mortgaged Premises, Mortgagee, its successors and assigns or Purchaser, shall be bound by and perform, fulfill and observe all of the agreements and obligations of Borrower under the Lease which shall continue in full force and effect as a direct Lease between Mortgagee, its successors and assigns or Purchaser, and Tenant, but Mortgagee and its successors and assigns or Purchaser shall not, however, be: (a) bound by any rent or other payment which Tenant might have paid more than thirty (30) days in advance of the time stipulated for payment under the Lease; (b) bound by any amendment or modification of the Lease made without its written consent, which Mortgagee agrees shall not be unreasonably withheld, conditioned or delayed; (c) liable for any act or omission of any prior landlord (including Borrower) unless such act or omission continues without cure within a reasonable time after Mortgagee, its successors or assigns, or Purchaser, take title and possession to the Mortgaged Premises; (d) subject to any offset or defense which Tenant might have against any prior landlord (including Borrower) except for any offset expressly permitted by the terms of the Lease; and (e) liable to Tenant for return or reduction of the letter of credit delivered to Landlord as a Security Deposit under Section 26.15 of the Lease, unless such letter of credit has been delivered to Mortgagee or Purchaser or reissued to Mortgagee or Purchaser under the provisions of Paragraph 1(k) above. (vi) Mortgagee or Purchaser shall accept attornment made by Tenant pursuant to the provisions of paragraph 1 hereof. 3. Any notice, demand or consent hereunder shall be in writing and shall be given or mailed by mailing the same by registered or certified mail, return receipt requested, addressed, if intended for Mortgagee, to The Prudential Insurance Company of America, Commercial Loan -81- Division, P.O. Box 16082, Van Nuys, California 91410-0082, Attn: Servicing Department with a copy to The Prudential Insurance Company Of America, One Ravinia Drive, Suite 1400, Atlanta, Georgia 30346 Attn: Customer Service, Re: Loan No. 7 501 325, and if intended for Tenant, addressed to Tenant at the address set forth on the first page of this Agreement with a copy to: Testa, Hurwitz and Thibeault, LLP, 125 High Street, High Street Tower, Boston, Massachusetts, 02110, Attn: Real Estate Department, and if intended for Borrower, addressed to Borrower at the address set forth in the first page of this Agreement with a copy to Hinckley, Allen & Snyder, One Financial Center, Suite 4600, Boston, Massachusetts 02108 Attn: Paul A. Headstrom, Esquire. Any party may designate a new address by notice in writing to the other parties. Any notice given in accordance herewith shall be effective upon deposit in the United States mails in accordance herewith except that where any time period commences hereunder or under the Lease from notice, such time period shall commence when postal records indicate delivery was made or first attempted. 4. Prior to foreclosure of the Mortgaged Property or any deed given in lieu of foreclosure or entry under the Mortgage and taking possession of the Mortgaged Property by Mortgagee (collectively or individually, "Foreclosure"), Mortgagee shall have only such rights of Borrower as are necessary to preserve the integrity of the Lease as security and such other rights as are set forth in this Agreement. Upon Foreclosure, Mortgagee shall have all rights of Borrower under the Lease. Notwithstanding the provisions of Paragraph 1 (a) of this Agreement but subject to all other provisions of this Agreement, in the event of any inconsistency between the Lease and the Mortgage, as between Tenant and Mortgagee, the Lease shall control and be binding upon Mortgagee, except as follows. Upon Foreclosure, Mortgagee shall not be bound by, nor have any obligations under, the environmental indemnity of Borrower contained in -82- Section 16.3 of the Lease. Mortgagee does agree upon Foreclosure, for so long as Mortgagee owns the Mortgaged Property, to comply with all Hazardous Waste Laws (as defined in the Lease). 5. All trade fixtures, equipment and other property owned by Tenant located or installed in or on the Mortgaged Property regardless of the manner or mode of attachment, shall be and remain the property of Tenant and may be removed by Tenant at any time subject to the terms of the Lease. In no event (excepting only a judgment lien following a default under the Lease at a time when Mortgagee shall have succeeded the rights of Borrower as landlord ) shall Mortgagee have any liens, rights or claim in Tenant's property; and Mortgagee expressly waives all rights of levy, distraint, or execution with respect to said property (other than a judgment lien). 6. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of each of the parties hereto, including grantees under any deed given in lieu of foreclosure, purchasers at a foreclosure sale, or any party acquiring an interest in the Mortgaged Property by any other method, and their successors and assigns (such grantees, purchasers at foreclosure and acquiring parties and their respective successors and assigns collectively referred to herein as "Purchaser"). This Agreement shall be governed by, and construed under the laws of the Commonwealth of Massachusetts. -83- IN WITNESS WHEREOF, the parties hereto have caused the execution hereof as a sealed instrument as of the day and year first written above. TENANT: NETSCOUT SYSTEMS, INC. By: /s/ Charles W. Tillett ------------------------------ Title: VP Finance & Administration MORTGAGEE: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By:[Illegible Signature] -------------------- Vice President LANDLORD/BORROWER: MICHELSON FARM-WESTFORD TECHNOLOGY PARK IV LIMITED PARTNERSHIP By: THE GUTIERREZ COMPANY, general partner By: /s/ Arturo J. Gutierrez ----------------------- Title: President -84- COMMONWEALTH OF MASSACHUSETTS Middlesex, ss: August 18, 1997 Then personally appeared before me the above-named Charles Tillett of NetScout Systems, Inc. and acknowledged the foregoing instrument to be the free act and deed of NetScout Systems, Inc. [Illegible Signature] ------------------- Notary Public My Commission expires: 6/7/02 STATE OF GEORGIA Dekalb, ss: August 26, 1997 Then personally appeared before me the above-named David A. Graham, Vice President of The Prudential Insurance Company of America and acknowledged the foregoing instrument to be the free act and deed of The Prudential Insurance Company of America [Illegible Notary Signature] -------------------------- COMMONWEALTH OF MASSACHUSETTS Middlesex, ss: August 28, 1997 Then personally appeared before me the above-named Arturo J. Gutierrez of The Gutierrez Company, General Partner of Michelson Farm-Westford Technology Park IV Limited Partnership and acknowledged the foregoing instrument to be the free act and deed of said Limited Partnership. /s/ J. Stevens -------------- Notary Public -85- EXHIBIT "F" INTENTIONALLY DELETED -86- EXHIBIT "G" ESTOPPEL CERTIFICATE THIS CERTIFICATE is made to with respect to a Lease between as Landlord and the undersigned, covering a building located in such lease being dated , as amended by (list all amendments): The undersigned has been advised that as Trustee as aforesaid (the "Bank"), is about to enter into a transaction whereby the Bank is making a loan secured by the aforesaid real estate and the Lease to the undersigned, and under which the Bank may acquire an ownership interest in such real estate. In connection with this transaction, the entire interest of the Landlord under the Lease to the undersigned will be assigned to the Bank. The undersigned acknowledges that the Bank is and will be relying upon the truth, accuracy and completeness of this letter in proceeding with the transaction described above. The undersigned, for the benefit of the Bank, their successors and assigns, hereby certifies, represents, warrants, agrees and acknowledges that: 1. The Lease is in full force and effect in accordance with its terms without modification or amendment except as noted above and the undersigned is the holder of the Tenant's interest under the Lease. 2. The undersigned is in possession of all of the Premises described in the Lease under and pursuant to the Lease and is doing business thereon; and the Premises are completed as required by the Lease. 3. The undersigned has no claims or offsets with respect to any of its obligations as Tenant under the Lease, and neither the undersigned nor the Landlord is claimed to be in default under the Lease. 4. The undersigned has not paid any rental or installments thereof in advance of the due date as set forth in the Lease. 5. The undersigned has no notice of prior assignment, hypothecation or pledge of rents of the Lease or the Landlord's interest thereunder or of the Tenant's interest thereunder. 6. The term of the Lease has commenced and is presently scheduled to expire on. If there are any rights of extension or renewal under the terms of the Lease, the same have not, as of the date of this letter, been exercised. 7. Until such time as the Bank shall become the Landlord, if the undersigned should assert a -87- claim that the Landlord has failed to perform an obligation to the undersigned under the terms of the Lease or otherwise, notice thereof shall promptly be furnished to the Bank; and the undersigned agrees that the undersigned will not exercise any rights which the undersigned might otherwise have on account of any such failure until notice thereof has been given to the Bank, and the Bank has had the same opportunity to cure any such failure as the Landlord may have under the terms of the Lease, or such additional time as may be set forth in the Lease. 8. Each of the statements set forth in Paragraphs 1 through 7 are true, accurate and complete except as follows (state specifically any exception): DATED: ATTEST: BY: By: -------------------------------- ---------------------------------- -88- EXHIBIT "H" LANDLORD, TENANT, CONTRACTOR CHANGE PROPOSAL FORM Project: --------------------------------------------- R NR --------------------------------------------- --------- ------- Proposal No. Date BB TW -------------------------- -------------- ------- ------- From: (Landlord) ----------------------------------------- To: (Contractor) ----------------------------------------- CC: (Tenant) --------------------------------------------- - -------------------------------------------------------------------------------- Step 1: Contractor: Provide an estimate for the described work. Architect: Develop proper plans and specifications to clarify described work. DESCRIPTION: (List Drawings) Landlord: Reason: ----------------------------- ----------------------- John A. Cataldo, Trustee - -------------------------------------------------------------------------------- Step 2: Contractor: Provide with work as definitive plans become available. Landlord: Date: ------------------------------- ------------------------ John A. Cataldo, Trustee - -------------------------------------------------------------------------------- Step 3: Cost of Work a. Cost of the work $ (See attached breakdown) --------------- b. Add construction fee at 4% $ --------------- Total Cost of Work $ --------------- Submitted by: ------------------------------------------ ------------------ Dennis G. Bailey, Vice President & Construction Manager Date - -------------------------------------------------------------------------------- Step 4: The submitted Cost of Work has been reviewed and is (not) approved. ----------------------------------- ---------------- Architect Date Design Fees - $ --------------- TOTAL COST OF PROPOSAL $ --------------- -89- - -------------------------------------------------------------------------------- Step 5: FINAL ACTION a. The Tenant _______________________ Hereby agrees to reimburse the Name of Firm Landlord the Total Cost of Proposal shown in Step 4 above. ---------------------------------- ---------------- Authorized Tenant's Representative Date b. This bulletin is approved (rescinded) and the work above is (not) to be performed. Cost of this work shall be included in Change Order No.________ ---------------------------------- ---------------- Landlord Date -90- EXHIBIT "I" Intentionally Deleted EX-10.7 13 EXHIBIT 10.7 Exhibit 10.7 - -------------------------------------------------------------------------------- AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE 1 ACCOUNTING AND OTHER TERMS............................................................1 2 LOAN AND TERMS OF PAYMENT.............................................................1 2.1 Credit Extensions................................................................1 2.1.1 Revolving Advances...........................................................1 2.1.2 Letters of Credit............................................................2 2.1.3 Cash Management Services Sublimit............................................2 2.2 Overadvances.....................................................................2 2.3 Interest Rate, Payments..........................................................2 2.4 Fees.............................................................................3 3 CONDITIONS OF LOANS...................................................................3 3.1 Conditions Precedent to Initial Credit Extension...............................3 3.2 Conditions Precedent to all Credit Extensions..................................3 4 CREATION OF SECURITY INTEREST.........................................................4 4.1 Grant of Security Interest.......................................................4 5 REPRESENTATIONS AND WARRANTIES........................................................4 5.1 Due Organization and Authorization...............................................4 5.2 Collateral.......................................................................4 5.3 Litigation.......................................................................4 5.4 No Material Adverse Change in Financial Statements...............................5 5.5 Solvency.........................................................................5 5.6 Regulatory Compliance............................................................5 5.7 Subsidiaries.....................................................................5 5.8 Full Disclosure..................................................................5 6 AFFIRMATIVE COVENANTS.................................................................6 6.1 Government Compliance............................................................6 6.2 Financial Statements, Reports, Certificates......................................6 6.3 Inventory; Returns...............................................................7 6.4 Taxes............................................................................7 6.5 Insurance........................................................................7 6.6 Primary Accounts.................................................................7 6.7 Financial Covenants..............................................................7 6.8 Further Assurances...............................................................7 7 NEGATIVE COVENANTS....................................................................8 7.1 Dispositions.....................................................................8 7.2 Changes in Business, Ownership, Management or Business Locations.................8 7.3 Mergers or Acquisitions..........................................................8 7.4 Indebtedness.....................................................................8 7.5 Encumbrance......................................................................8 7.6 Distributions; Investments.......................................................9 7.7 Transactions with Affiliates.....................................................9 7.8 Subordinated Debt................................................................9 7.9 Compliance.......................................................................9 8 EVENTS OF DEFAULT.....................................................................9 8.1 Payment Default..................................................................9 8.2 Covenant Default.................................................................9 8.3 Material Adverse Change.........................................................10 8.4 Attachment......................................................................10 8.5 Insolvency......................................................................10 8.6 Other Agreements................................................................10
8.7 Judgments.......................................................................11 8.8 Misrepresentations..............................................................11 9. BANK'S RIGHTS AND REMEDIES..........................................................11 9.1 Rights and Remedies.............................................................11 9.2 Power of Attorney...............................................................12 9.3 Accounts Collection.............................................................12 9.4 Bank Expenses...................................................................12 9.5 Bank's Liability for Collateral.................................................12 9.6 Remedies Cumulative.............................................................13 9.7 Demand Waiver...................................................................13 10 NOTICES.............................................................................13 11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER..........................................13 12 GENERAL PROVISIONS..................................................................14 12.1 Successors and Assigns.........................................................14 12.2 Indemnification................................................................14 12.3 Time of Essence................................................................14 12.4 Severability of Provision......................................................14 12.5 Amendments in Writing, Integration.............................................14 12.6 Counterparts...................................................................15 12.7 Survival.......................................................................15 12.8 Confidentiality................................................................15 12.9 Effect of Amendment and Restatement............................................15 12.10 Countersignatures.............................................................15 13 DEFINITIONS.........................................................................16 13.1 Definitions....................................................................16
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is dated March 12, 1998, between SILICON VALLEY BANK ("Bank"), a California-chartered bank with its principal place of 3003 Tasman Drive, Santa Clara, California 95054 with a loan production office located at 40 William St., Ste. 350, Wellesley , Massachusetts 02181 doing business as "Silicon Valley East" and NETSCOUT SYSTEMS, INC. ("Borrower"), whose address is 4 Technology Park Drive, Westford, Massachusetts 01886. RECITALS A. Bank and Borrower are parties to a Promissory Note, Commercial Security Agreement and Letter Agreement, and Commercial Security Agreement, each dated March 13, 1995, as amended (collectively, the "Original Agreement"). B. Borrower and Bank desire in this Agreement to set forth their agreement with respect to a working capital loan and to amend and restate in its entirety without novation the Original Agreement in accordance with the provisions herein. AGREEMENT The parties agree as follows: 1 ACCOUNTING AND OTHER TERMS Accounting terms not defined in this Agreement will be construed following GAAP Calculations and determinations must be made following GAAP. The term "financial statements" includes the notes and schedules. The terms "including" and "includes" always mean "including (or includes) without limitation," in this or any Loan Document. This Agreement shall be construed to impart upon Bank a duty to act reasonably at all times. 2 LOAN AND TERMS OF PAYMENT 2.1 Credit Extensions. Borrower will pay Bank the unpaid principal amount of all Credit Extensions and interest on the unpaid principal amount of the Credit Extensions. 2.1.1 Revolving Advances. (a) Bank will make Advances not exceeding (i) the lesser of (A) the Committed Revolving Line minus the Cash Management Services Sublimit or (B) the Borrowing Base, whichever is less, minus (ii) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit). Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement. -2- (b) To obtain an Advance, Borrower must notify Bank by facsimile or telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be made. Borrower must promptly confirm the notification by delivering to Bank the Payment/Advance Form attached as Exhibit B. Bank will credit Advances to Borrower's deposit account. Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any telephone notice given by a person whom Bank believes is a Responsible Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due to reliance. (c) The Committed Revolving Line terminates on the Revolving Maturity Date, when all Credit Extensions and other amounts due under this Agreement are immediately payable. 2.1.2 Letters of Credit. Bank will issue or have issued Letters of Credit for Borrower's account not exceeding (i) the lesser of the Committed Revolving Line or the Borrowing Base minus (ii) the outstanding principal balance of the Advances minus the Cash Management Sublimit; however, the face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) may not exceed $1,000,000. Each Letter of Credit will be secured by cash on terms acceptable to Bank at any time after the Revolving Maturity Date if the term of this Agreement is not extended by Bank. 2.1.3 Cash Management Services Sublimit. Borrower may use up to $100,000 for Bank's Cash Management Services, which will include PC-ACH services identified in various cash management services agreements related to such services (the "Cash Management Services"). All amounts Bank pays for any Cash Management Services will be treated as Advances under the Committed Revolving Line. 2.2 Overadvances. If Borrower's Obligations under Section 2.1.1 and 2.1.2 exceed the lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower must immediately pay Bank the excess. 2.3 Interest Rate, Payments. (a) Interest Rate. Advances accrue interest on the outstanding principal balance at a per annum rate equal to the Prime Rate. After an Event of Default, Obligations accrue interest at 5 percent above the rate effective immediately before the Event of Default. The interest rate increases or decreases when the Prime Rate changes. Interest is computed on a 360 day year for the actual number of days elapsed. (b) Payments. Interest due on the Committed Revolving Line is payable on the eleventh (11th) of each month. Bank may debit any of Borrower's deposit accounts including -3- Account Number ______________ for principal and interest payments or any amounts Borrower owes Bank. Bank will notify Borrower when it debits Borrower's accounts. These debits are not a set-off. Payments received after 12:00 noon Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue. 2.4 Fees. Borrower will pay: (a) Facility Fee. A fully earned, non-refundable Facility Fee of $5,000 due on the Closing Date; and (b) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees and expenses) incurred through and after the date of this Agreement, are payable when due. 3 CONDITIONS OF LOANS 3.1 Conditions Precedent to Initial Credit Extension. Bank's obligation to make the initial Credit Extension is subject to the condition precedent that it receive the agreements, documents and fees it requires. 3.2 Conditions Precedent to all Credit Extensions. Bank's obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following: (a) timely receipt of any Payment/Advance Form; and (b) the representations and warranties in Section 5 must be materially true on the date of the Payment/Advance Form and on the effective date of each Credit Extension and no Event of Default may have occurred and be continuing, or result from the Credit Extension. Each Credit Extension is Borrower's representation and warranty on that date that the representations and warranties of Section 5 remain true. 4 CREATION OF SECURITY INTEREST 4.1 Grant of Security Interest. Borrower continues to grant Bank a continuing security interest in all presently existing and later acquired Collateral to secure all Obligations and performance of each of Borrower's duties under the Loan Documents. Any UCC-1 financing statements, or amendments thereto, or filings with respect to Borrower's intellectual property, filed by Bank to secure the Obligations of Borrower shall remain in full force and effect. All security interests granted under the -4- Original Agreement are hereby confirmed and ratified and shall continue to secure all Obligations under this Agreement. Except for Permitted Liens, any security interest will be a first priority security interest in the Collateral. Bank may place a "hold" on any deposit account pledged as Collateral. 5 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1 Due Organization and Authorization. Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower's formation documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could cause a Material Adverse Change. 5.2 Collateral. Borrower has good title to the Collateral, free of Liens except Permitted Liens. The Accounts are bona fide, existing obligations, and the service or property has been performed or delivered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower; has no notice of any actual or imminent Insolvency Proceeding of any account debtor whose accounts are an Eligible Account in any Borrowing Base Certificate. All Inventory is in all material respects of good and marketable quality, free from material defects. 5.3 Litigation. Except as shown in the Schedule, there are no actions or proceedings pending or, to Borrower's knowledge, threatened by or against Borrower or any Subsidiary in which an adverse decision could cause a Material Adverse Change. 5.4 No Material Adverse Change in Financial Statements. All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank fairly present in all material respects Borrower's consolidated financial condition and Borrower's consolidated results of operations. There has not been any material deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements submitted to Bank. -5- 5.5 Solvency. The fair salable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 5.6 Regulatory Compliance. Borrower is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has complied with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could cause a Material Adverse Change. None of Borrower's or any Subsidiary's properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary has timely filed all required tax returns and paid, or made adequate provision to pay, all taxes, except those being contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted. 5.7 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments. 5.8 Full Disclosure. No representation, warranty or other statement of Borrower in any certificate or written statement given to Bank contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements misleading. 6 AFFIRMATIVE COVENANTS Borrower will do all of the following: 6.1 Government Compliance. Borrower will maintain its and all Subsidiaries' legal existence and good standing in its jurisdiction of formation and maintain qualification in each jurisdiction in which the failure to so qualify could have a material adverse effect on Borrower's business or operations. Borrower will comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it -6- is subject, noncompliance with which could have a material adverse effect on Borrower's business or operations or cause a Material Adverse Change. 6.2 Financial Statements, Reports, Certificates. (a) Borrower will deliver to Bank: (i) no later than 30 days after the end of each fiscal quarter, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during the period, in a form and certified by a Responsible Officer acceptable to Bank; (ii) as soon as available, but no later than 120 days after the last day of Borrower's fiscal year, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm acceptable to Bank; (iii) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $100,000 or more; and (iv) budgets, sale projections, operating plans or other financial information Bank requests. (b) Within 30 days after the last day of each fiscal quarter, Borrower will deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in the form of Exhibit C, with aged listings of accounts receivable. (c) Within 30 days after the last day of each month, if there are outstanding Advances and prior to the initial Advance when there are no outstandings, otherwise, within 30 days after the last day of each fiscal quarter, Borrower will deliver to Bank with the quarterly financial statements a Compliance Certificate signed by a Responsible Officer in the form of Exhibit D. (d) If outstanding Advances exceed $500,000, Bank has the right to audit Borrower's Accounts at Borrower's expense, but the audits will be conducted no more often than every year unless an Event of Default has occurred and is continuing. 6.3 Inventory; Returns. Borrower will keep all inventory in good and marketable condition, free from material defects. Returns and allowances between Borrower and its account debtors will follow Borrower's customary practices as they exist at execution of this Agreement. Borrower must promptly notify Bank of all returns, recoveries, disputes and claims, that involve more than $50,000. 6.4 Taxes. Borrower will make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments and will deliver to Bank, on demand, appropriate certificates attesting to the payment. 6.5 Insurance. -7- Borrower will keep its business and the Collateral insured for risks and in amounts, as Bank requests. Insurance policies will be in a form, with companies, and in amounts that are satisfactory to Bank. All property policies will have a lender's loss payable endorsement showing Bank as an additional loss payee and all liability policies will show the Bank as an additional insured and provide that the insurer must give Bank at least 20 days notice before canceling its policy. At Bank's request, Borrower will deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy will, at Bank's option, be payable to Bank on account of the Obligations. 6.6 Primary Accounts. Borrower will maintain its primary depository and operating accounts with Bank. 6.7 Financial Covenants. Borrower will maintain as of the last day of each month when there are outstanding Advances, otherwise as of the last day of each fiscal quarter: (i) Quick Ratio [Adjusted]. A ratio of Quick Assets to Current Liabilities minus Deferred Maintenance Revenue of at least 1.50 to 1.00. (ii) Profitability. Borrower will have minimum quarterly profits of $250,000. 6.8 Further Assurances. Borrower will execute any further instruments and take further action as Bank requests to perfect or continue Bank's security interest in the Collateral or to effect the purposes of this Agreement. 7 NEGATIVE COVENANTS Borrower will not do any of the following: 7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than Transfers (i) of Inventory in the ordinary course of business, (ii) of non-exclusive licenses and similar arrangements for the use of the property of Borrower, or its Subsidiaries in the ordinary course of business, or (iii) of worn-out or obsolete Equipment. 7.2 Changes in Business, Ownership, Management or Business Locations. Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or have a material change in its ownership of -8- greater than 25%. Borrower will not, without at least 30 days prior written notice, relocate its chief executive office or add any new offices or business locations. 7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, if no Event of Default has occurred and is continuing or would result from such action during the term of this Agreement or result in a decrease of more than 25% of Tangible Net Worth; or (ii) merge or consolidate a Subsidiary into another Subsidiary or into Borrower. 7.4 Indebtedness. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness. 7.5 Encumbrance. Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted here. 7.6 Distributions; Investments. Directly or indirectly acquire or own any Person, or make any Investment in any Person, other than Permitted Investments, or permit any of its Subsidiaries to do so. Pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock. 7.7 Transactions with Affiliates. Directly or indirectly enter or permit any material transaction with any Affiliate except transactions that are in the ordinary course of Borrower's business, on terms less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person. 7.8 Subordinated Debt. Make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt without Bank's prior written consent. -9- 7.9 Compliance. Become an "investment company" or a company controlled by an "investment company," under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Advance for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could have a material adverse effect on Borrower's business or operations or cause a Material Adverse Change, or permit any of its Subsidiaries to do so. 8 EVENTS OF DEFAULT Any one of the following is an Event of Default: 8.1 Payment Default. If Borrower fails to pay any of the Obligations; 8.2 Covenant Default. If Borrower does not perform any obligation in Section 6 or violates any covenant in Section 7 or does not perform or observe any other material term, condition or covenant in this Agreement, any Loan Documents, or in any agreement between Borrower and Bank and as to any default under a term, condition or covenant that can be cured, has not cured the default within 10 days after it occurs, or if the default cannot be cured within 10 days or cannot be cured after Borrower's attempts within 10 day period, and the default may be cured within a reasonable time, then Borrower has an additional period (of not more than 30 days) to attempt to cure the default. During the additional time, the failure to cure the default is not an Event of Default (but no Credit Extensions will be made during the cure period); 8.3 Material Adverse Change. (i) If there occurs a material impairment in the perfection or priority of the Bank's security interest in the Collateral or in the value of such Collateral which is not covered by adequate insurance or (ii) if the Bank determines, based upon information available to it and in its reasonable judgment, that there is a reasonable likelihood that Borrower will fail to comply with one or more of the financial covenants in Section 6 during the next succeeding financial reporting period. 8.4 Attachment. If any material portion of Borrower's assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in 10 days, or if Borrower is enjoined, restrained, or prevented by court order from conducting a material -10- part of its business or if a judgment or other claim becomes a Lien on a material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed against any of Borrower's assets by any government agency and not paid within 10 days after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit Extensions will be made during the cure period); 8.5 Insolvency. If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within 30 days (but no Credit Extensions will be made before any Insolvency Proceeding is dismissed); 8.6 Other Agreements. If there is a default in any agreement between Borrower and a third party that gives the third party the right to accelerate any Indebtedness exceeding $100,000 or that could cause a Material Adverse Change; 8.7 Judgments. If a money judgment(s) in the aggregate of at least $50,000 is rendered against Borrower and is unsatisfied and unstayed for 10 days (but no Credit Extensions will be made before the judgment is stayed or satisfied); or 8.8 Misrepresentations. If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty or representation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document 9. BANK'S RIGHTS AND REMEDIES 9.1 Rights and Remedies. When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) Declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank); (b) Stop advancing money or extending credit for Borrower's benefit under this Agreement or under any other agreement between Borrower and Bank; -11- (c) Settle or adjust disputes and claims directly with account debtors for amounts, on terms and in any order that Bank considers advisable; (d) Make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral. Borrower will assemble the Collateral if Bank requires and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank's rights or remedies; (e) Apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower, (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral; and (g) Dispose of the Collateral according to the Code. 9.2 Power of Attorney. Effective only when an Event of Default occurs and continues, Borrower irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name on any checks or other forms of payment or security; (ii) sign Borrower's name on any invoice or bill of lading for any Account or drafts against account debtors, (iii) make, settle, and adjust all claims under Borrower's insurance policies; (iv) settle and adjust disputes and claims about the Accounts directly with account debtors, for amounts and on terms Bank determines reasonable; and (v) transfer the Collateral into the name of Bank or a third party as the Code permits. Bank may exercise the power of attorney to sign Borrower's name on any documents necessary to perfect or continue the perfection of any security interest regardless of whether an Event of Default has occurred. Bank's appointment as Borrower's attorney in fact, and all of Bank's rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Bank's obligation to provide Credit Extensions terminates. 9.3 Accounts Collection. When an Event of Default occurs and continues, Bank may notify any Person owing Borrower money of Bank's security interest in the funds and verify the amount of the Account. Borrower must collect all payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in the form received from the account debtor, with proper endorsements for deposit. -12- 9.4 Bank Expenses. If Borrower fails to pay any amount or furnish any required proof of payment to third persons Bank may make all or part of the payment or obtain insurance policies required in Section 6.5, and take any action under the policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then applicable rate and secured by the Collateral. No payments by Bank are deemed an agreement to make similar payments in the future or Bank's waiver of any Event of Default. 9.5 Bank's Liability for Collateral. If Bank complies with reasonable banking practices it is not liable for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other person. Borrower bears all risk of loss, damage or destruction of the Collateral. 9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank's exercise of one right or remedy is not an election, and Bank's waiver of any Event of Default is not a continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given. 9.7 Demand Waiver. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 10 NOTICES All notices or demands by any party about this Agreement or any other related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth at the beginning of this Agreement. A Party may change its notice address by giving the other Party written notice. 11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE COMMONWEALTH OF MASSACHUSETTS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. -13- EACH OF BORROWER AND BANK HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE COMMONWEALTH OF MASSACHUSETTS, BUT IF FOR ANY REASON THE BANK IS DENIED ACCESS TO SUCH COURTS, THEN THE VENUE WILL BE IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF SANTA CLARA, STATE OF CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12 GENERAL PROVISIONS 12.1 Successors and Assigns. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights under it without Bank's prior written consent which may be granted or withheld in Bank's discretion. Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits under this Agreement. 12.2 Indemnification. Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 Time of Essence. Time is of the essence for the performance of all obligations in this Agreement. -14- 12.4 Severability of Provision. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 12.5 Amendments in Writing, Integration. All amendments to this Agreement must be in writing. This Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement merge into this Agreement and the Loan Documents. 12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement. 12.7 Survival. All covenants, representations and warranties made in this Agreement continue in full force while any Obligations remain outstanding. The obligations of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of limitations for actions that may be brought against Bank have run. 12.8 Confidentiality. In handling any confidential information, Bank will exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made (i) to Bank's subsidiaries or affiliates in connection with their business with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, (iii) as required by law, regulation, subpoena, or other order, (iv) as required in connection with Bank's examination or audit and (v) as Bank considers appropriate exercising remedies under this Agreement. Confidential information does not include information that either: (a) is in the public domain or in Bank's possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (b) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information. 12.9 Effect of Amendment and Restatement. This Agreement is intended to and does completely amend and restate, without novation, the Original Agreement. All credit extensions or loans outstanding under the Original Agreement are and shall continue to be outstanding under this Agreement. All security interests -15- granted under the Original Agreement are hereby confirmed and ratified and shall continue to secure all Obligations under this Agreement. 12.10 Countersignatures. This Agreement shall become effective only when it shall have been executed by Borrower and Bank (provided, however, in no event shall this Agreement become effective until signed by an officer of Bank in California). 13 DEFINITIONS 13.1 Definitions. In this Agreement: "Accounts" are all existing and later arising accounts, contract rights, and other obligations owed Borrower in connection with its sale or lease of goods (including licensing software and other technology) or provision of services, all credit insurance, guaranties, other security and all merchandise returned or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advance(s)" means a loan advanced under the Committed Revolving Line. "Affiliate" of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person's managers and members. "Bank Expenses" are all audit fees and expenses and reasonable costs or expenses (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings). "Borrower's Books" are all Borrowers books and records including ledgers, records regarding Borrower's assets or liabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information. "Borrowing Base" is 80% of Eligible Accounts as determined by Bank from Borrower's most recent Borrowing Base Certificate. "Business Day" is any day that is not a Saturday, Sunday or a day on which the Bank is closed. "Cash Management Services" are defined in Section 2.1.3. -16- "Closing Date" is the date of this Agreement. "Code" is the Massachusetts Uniform Commercial Code. "Collateral" is the property described on EXHIBIT A. "Committed Revolving Line" is an Advance of up to $3,000,000. "Contingent Obligation" is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to Protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but "Contingent Obligation" does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement. "Credit Extension" is each Advance, Letter of Credit, or any other extension of credit by Bank for Borrower's benefit. "Current Liabilities" are the aggregate amount of Borrower's Total Liabilities which mature within one (1) year. "Eligible Accounts" are Accounts in the ordinary course of Borrower's business that meet all Borrower's representations and warranties in Section 5.2; BUT Bank may change eligibility standards by giving Borrower notice. Unless Bank agrees otherwise in writing, Eligible Accounts will not include: (a) Accounts that the account debtor has not paid within 90 days of invoice date; (b) Accounts for an account debtor, 50% or more of whose Accounts have not been paid within 90 days of invoice date; (c) Credit balances over 90 days from invoice date; (d) Accounts for an account debtor, including Affiliates, whose total obligations to Borrower exceed 35% of all Accounts, for the amounts that exceed that percentage, unless the Bank approves in writing; -17- (e) Accounts for which the account debtor does not have its principal place of business in the United States; (f) Accounts for which the account debtor is a federal, state or local government entity or any department. agency, or instrumentality; (g) Accounts for which Borrower owes the account debtor, but only up to the amount owed (sometimes called "contra" accounts, accounts payable, customer deposits or credit accounts); (h) Accounts for demonstration or promotional equipment, or in which goods are consigned, sales guaranteed, sale or return, sale on approval, bill and hold, or other terms if account debtor's payment may be conditional; (i) Accounts for which the account debtor is Borrowers Affiliate, officer, employee, or agent; (j) Accounts in which the account debtor disputes liability or makes any claim and Bank believes there may be a basis for dispute (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business: (k) Accounts for which Bank reasonably determines collection to be doubtful. "Equipment" is all present and future machinery, equipment, tenant improvements. furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" is the Employment Retirement Income Security Act of 1974, and its regulations. "GAAP" is generally accepted accounting principles. "Indebtedness" is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations. "Insolvency Proceeding" are proceedings by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Inventory" is present and future inventory in which Borrower has any interest including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of -18- every kind and description now or later owned by or in the custody or possession, actual or constructive, of Borrower, including inventory temporarily out of its custody or possession or in transit and including returns on any accounts or other proceeds (including insurance proceeds) from the sale or disposition of any of the foregoing and any documents of title. "Investment" is any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "Lien" is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" are, collectively, this Agreement, any note, or notes or guaranties executed by Borrower or Guarantor, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated. "Material Adverse Change" is defined in Section 8.3. "Obligations" are debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, including letters of credit and Exchange Contracts and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank. "Original Agreement" has the meaning set forth in recital paragraph A. "Permitted Indebtedness" is: (a) Borrower's indebtedness to Bank under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and shown on the Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business: and (e) Indebtedness secured by Permitted Liens. "Permitted Investments" are: (a) Investments shown on the Schedule and existing on the Closing Date; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any State maturing within 1 year from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating -19- from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of deposit issued maturing no more than 1 year after issue. "Permitted Liens" are: (a) Liens existing on the Closing Date and shown on the Schedule or arising under this Agreement or other Loan Documents: (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, IF they have no priority over any of Bank's security interests; (c) Purchase money Liens (i) on Equipment acquired or held by Borrower or its Subsidiaries incurred for financing the acquisition of the Equipment, or (ii) existing on equipment when acquired, IF the Lien is confined to the property and improvements and the proceeds of the equipment; (d) Leases or subleases and licenses or sublicenses granted in the ordinary course of Borrowers business and any interest or title of a lessor, licensor or under any lease or license, if the leases, subleases, licenses and sublicenses permit granting Bank a security interest; (e) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), BUT any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase. "Person" is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. "Prime Rate" is Bank's most recently announced "prime rate," even if it is not Bank's lowest rate. "Quick Assets" is, on any date, the Borrowers consolidated, unrestricted cash, cash equivalents, net billed accounts receivable and investments with maturities of fewer than 12 months determined according to GAAP. "Responsible Officer" is each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "Revolving Maturity Date" is March 11, 1999. "Schedule" is any attached schedule of exceptions. -20- "Subordinated Debt" is debt incurred by Borrower subordinated to Borrower's debt to Bank (and identified as subordinated by Borrower and Bank). "Subsidiary" is for any Person, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person. BORROWER: NETSCOUT SYSTEMS, INC. By: /s/ Charles Tillett --------------------- Title: Vp Finance & Administration ---------------------------- BANK: SILICON VALLEY BANK, doing business as SILICON VALLEY EAST By: /s/ Mark Pasculani --------------------- Title: VP --------------------- SILICON VALLEY BANK By: /s/ Michelle Gramm --------------------- Title: AVP --------------------- -21- EXHIBIT A The Collateral consists of all of Borrowers right, title and interest in and to the following: All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrowers custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above; All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower, All documents, cash, deposit accounts, securities, securities entitlements, securities accounts, investment property, financial assets, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrowers Books relating to the foregoing; All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and All Borrowers Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. -22- EXHIBIT B LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: ____________ FAX: (408) 496-2426 TIME: ____________ - -------------------------------------------------------------------------------- FROM: NETSCOUT SYSTEMS, INC. --------------------------------------------------------------------------- CLIENT NAME (BORROWER) REQUESTED BY: ------------------------------------------------------------------- AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE: ----------------------------------------------------------- PHONE NUMBER: ------------------------------------------------------------------- FROM ACCOUNT# TO ACCOUNT # ---------------- -------------------- REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT - ---------------------------- ---------------------------------- PRINCIPAL INCREASE (ADVANCE) $ --------------------------------- PRINCIPAL PAYMENT (ONLY) $ --------------------------------- INTEREST PAYMENT (ONLY) $ --------------------------------- PRINCIPAL AND INTEREST (PAYMENT) $ --------------------------------- OTHER INSTRUCTIONS: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- All Borrower's representations and warranties in the Amended and Restated Loan and Security Agreement are true, correct and complete in all material respects on the date of the telephone request for and Advance confirmed by this Borrowing Certificate; but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of that date. BANK USE ONLY -23- TELEPHONE REQUEST: The following person is authorized to request the loan payment transfer/loan advance on the advance designated account; and is known to me. - ------------------------------------- ------------------------------------- Authorized Requester Phone # - ------------------------------------- ------------------------------------- Received By (Bank) Phone # ------------------------------------ Authorized Signature (Bank) -24- EXHIBIT C BORROWING BASE CERTIFICATE Borrower: NETSCOUT SYSTEMS, INC. Lender: Silicon Valley East 40 William St, Ste. 350 Wellesley, MA 02181 Commitment Amount: $3,000,000 ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of $____________ 2. Additions (please explain on reverse) $____________ 3. TOTAL ACCOUNTS RECEIVABLE $____________ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $____________ 5. Balance of 50% over 90 day accounts $____________ 6. Credit balances over 90 day $____________ 7. Concentration Limits* $____________ 5. Foreign Accounts $____________ 9. Governmental Accounts $____________ 10. Contra Accounts $____________ 11. Promotion or Demo Accounts $____________ 12. Intercompany/Employee Accounts $____________ 13. Other (please explain on reverse) $____________ 14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $____________ 15. Eligible Accounts,(#3 minus #14) $____________ 16. LOAN VALUE OF ACCOUNTS (80% of #15) $____________ * 35% BALANCES 17. Maximum Loan Amount $____________ 18. Total Funds Available [Lesser of #17 or #16] $____________ 19. Present balance owing on Line of Credit $____________ 20. Outstanding under Sublimits (LC/Cash Manag.) $____________ 21. RESERVE POSITION (#18 minus #19 and #20) $____________
THE UNDERSIGNED REPRESENTS AND WARRANTS THAT THIS IS TRUE, COMPLETE AND CORRECT, AND THAT THE INFORMATION IN THIS BORROWING BASE CERTIFICATE COMPLIES WITH THE REPRESENTATIONS AND WARRANTIES IN THE AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT BETWEEN THE UNDERSIGNED AND SILICON VALLEY BANK. -25- COMMENTS: BANK USE ONLY NETSCOUT SYSTEMS, INC. - ----------------------------------- Received by: Authorized Signature ----------------------- Authorized Signer Date: ------------------------------ Verified: -------------------------- Authorized Signer Date: ------------------------------ -26- EXHIBIT D COMPLIANCE CERTIFICATE TO: Silicon Valley East 40 William St, Ste. 350 Wellesley, MA 02181 FROM: NETSCOUT SYSTEMS, INC. The undersigned authorized officer of NETSCOUT SYSTEMS, INC. certifies that under the terms and conditions of the Amended and Restated Loan and Security Agreement between Borrower and Bank (the "Agreement'), (i) Borrower is in complete compliance for the period ending with all required covenants except as noted below and (ii) all representations and warranties in the Agreement are true and correct in all material respects on this date. Attached are the required documents supporting the certification. The Officer certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement and that compliance is determined not just at the date this certificate is delivered. Please indicate compliance status by circling Yes/No under "Complies" column.
REPORTING COVENANT REQUIRED COMPLIES ------------------ -------- -------- Monthly financial statements + CC Monthly within 30 days* Yes No Annual (Audited) FYE within 120 days Yes No A/P Agings + BBC Monthly within 30 days* Yes No
*If there are outstanding Advances and prior to the initial Advance, otherwise, quarterly within 30 days.
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES ------------------ -------- ------ -------- Maintain on a Monthly Basis, if there are outstanding Advances, other Quarterly Basis: Minimum Quick Ration (Adjusted) 1.50:1.00 ____: 1.00 Yes No Profitability: Quarterly ** $_______ Yes No
**profits of at least $250,000. -27- Comments Regarding Exceptions: See Attached. -------------------------------- BANK USE ONLY Sincerely, NETSCOUT SYSTEMS, INC. Received by: - ------------------------------------------- -------------------- Signature Authorized Signer - ------------------------------------------- Title Date: - ------------------------------------------- --------------------------- Date Verified: ----------------------- Authorized Signer Date: -------------------------- Compliance Status: Yes No -------------------------------- EX-10.8 14 EXHIBIT 10.8 EXHIBIT 10.8 LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of March 11, 1999, by and between Netscout Systems, Inc. ("Borrower") and Silicon Valley Bank ("Bank"), a California chartered bank doing business as Silicon Valley East. 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, an Amended and Restated Loan and Security Agreement, dated March 12, 1998, as may be amended from time to time, (the "Loan Agreement'). The Loan Agreement provided for, among other things, a Committed Revolving Line in the original principal amount of Three Million Dollars ($3,000,000). Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness." 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement. Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS A. MODIFICATION(S) TO LOAN AGREEMENT 1. The dollar amount referenced in Section 2.1.2 entitled "Letters of Credit" is hereby increased from $1,000,000 to $2,000,000. 2. The dollar amount referenced in Section 2.1.3 entitled "Cash Management Services Sublimit" is hereby increased from $100,000 to $200,000. 3. Section 6.2 entitled "Financial Statements, Reports, Certificates" is hereby amended to read as follows: 6.2 Financial Statements, Reports, Certificates. (a) Borrower will deliver to Bank: (i) as soon as available, but no later than 45 days after the last day of each quarter, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during the period, in a form acceptable to Bank and certified by a Responsible Officer, (ii) as soon as available, but no later than 120 days after the end of Borrower's fiscal year, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm acceptable to Bank; (iii) (upon Borrower's successful initial public offering) within 5 days of filing, copies of all statements, reports and notices made available to Borrower's security holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (iv) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $100,000 or more; and (v) budgets, sales projections, operating plans or other financial information Bank requests. (b) Within 30 days after the last day of each month (or 45 days after the last day of each quarter if no outstanding Advances exist), Borrower will deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer with aged listings of accounts receivable. (c) Within 45 days after the last day of each quarter, Borrower will deliver to Bank with the quarterly financial statements a Compliance Certificate signed by a Responsible Officer. (d) If outstanding Advances exceed $500,000, Bank has the right to audit Borrower's Collateral at Borrower's expense, but the audits will be conducted no more often than once every year unless an Event of Default has occurred and is continuing. 4. Borrower shall maintain the financial covenants as stated in Section 6.7 entitled "Financial Covenants" on a quarterly (rather than a monthly/quarterly) basis. 5. The following terms as defined in Section 13.1 entitled "Definitions" are hereby amended to read as follows: "Committed Revolving Line" means an Advance up to $5,000,000. "Revolving Maturity Date" means March 10, 2000. 6. The Collateral as described in Exhibit "A" to the Loan Agreement is hereby amended to the Collateral described in Exhibit "A" to this Loan Modification Agreement. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount of Ten Thousand Dollars ($10,000) (the "Loan Fee") plus all out-of-pocket expenses. 6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that, as of the date hereof, it has no defenses against the obligations to pay any amounts under the Indebtedness. 7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to, this Loan Modification Agreement, but also to all subsequent loan modification agreements. 8 JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties, unconditionally, the non-exclusive jurisdiction of any state or federal court of competent jurisdiction in the Commonwealth of Massachusetts in any action, suit or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement; provided, however, that if for any reason Bank cannot avail itself of the courts of the Commonwealth of Massachusetts, then venue shall lie in Santa Clara County, California. 9. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank (provided, however, in no event shall this Loan Modification Agreement become effective until signed by an officer of Bank in California). 10. CONDITIONS. The effectiveness of this Loan Modification Agreement is conditioned upon Borrowers payment of the Loan Fee. This Loan Modification Agreement is executed as of the date first written above.
BORROWER: BANK: - --------- ----- NETSCOUT SYSTEMS, INC. SILICON VALLEY BANK doing business as SILICON VALLEY EAST By: /s/ Charles W. Tillett By: /s/ Mark Pasculani --------------------------------- --------------------------------- Name: Charles W. Tillett Name: Mark Pasculani ------------------------------- ------------------------------- Title: VP Finance & Administration Title: SVP ------------------------------ ------------------------------ SILICON VALLEY BANK By: /s/ Michelle D. Giannini --------------------------------- Name: Michelle D. Giannini ------------------------------- Title: Asst. Vice Pres. ------------------------------ (to be signed in Santa Clara County, California)
EXHIBIT A The Collateral consists of all of Borrower's right, title and interest in and to the following: All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above; All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower; and All Borrower's Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. COMPLIANCE CERTIFICATE TO: Silicon Valley East 40 William St., Ste. 350 Wellesley, MA 02181 FROM: NETSCOUT SYSTEMS, INC. The undersigned authorized officer of NETSCOUT SYSTEMS, INC. ("Borrower") certifies that under the terms and conditions of the Amended and Restated Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending ________________ with all required covenants except as noted below and (ii) all representations and warranties in the Agreement are true and correct in all material respects on this date. Attached are the required documents supporting the certification. The Officer certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES ------------------ -------- -------- Monthly financial statements + CC Quarterly within 45 days Yes No Annual (Audited) FYE within 120 days Yes No A/R Agings + BBC Monthly within 30 days* Yes No
*Or quarterly within 45 days if there are no outstanding Advances.
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES ------------------ -------- ------ -------- Maintain on a Quarterly Basis: Minimum Quick Ratio (Adjusted) 1.50 : 1.00 ____ : 1.00 Yes No Minimum Quarterly Profitability $250,000 $_________ Yes No
-------------------------------------------------- COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY Received by: ------------------------------------- AUTHORIZED SIGNER Sincerely, Date: -------------------------------------------- NETSCOUT SYSTEMS, INC. Verified: ---------------------------------------- AUTHORIZED SIGNER Date: - ------------------------------------- -------------------------------------------- SIGNATURE Compliance Status: Yes No -------------------------------------------------- - ------------------------------------- TITLE - ------------------------------------- DATE
EX-10.9 15 EXHIBIT 10.9 Exhibit 10.9 SDL Communications Effective Date: 2/3/98 46 Eastman Street Easton, Massachusetts 02375 USA SDL COMMUNICATIONS, INC. OEM AGREEMENT Dated as of February 3, 1998 between SDL Communications, Inc. with its principal place of business at 46 Eastman St., Easton, 02375 (referred to in this Agreement as SDL) and NetScout Systems, Inc. with its principal place of business at 4 Technology Park Drive, Westford, MA 01886 (referred to in this Agreement as Customer) TERMS OF AGREEMENT SECTION: 1. SCOPE OF CUSTOMER'S LICENSE 2. OBLIGATIONS OF SDL 3. OBLIGATIONS OF CUSTOMER 4. PRICING & PAYMENT TERMS 5. ORDERS, SHIPMENTS & RETURNS 6. WARRANTIES, INDEMNITIES & REMEDIES 7. CONFIDENTIAL INFORMATION 8. TERM & TERMINATION 9. GENERAL EXHIBITS: A. PRODUCT UNDER OEM AGREEMENT B. PRODUCT PRICING C. DELIVERY SCHEDULES SDL COMMUNICATIONS, INC. NETSCOUT SYSTEMS, INC. By: [ILLEGIBLE SIGNATURE] By: /S/ CHARLES TILLETT Title: SENIOR V. PRESIDENT Title: VP FINANCE & ADMINISTRATION 1. SCOPE OF CUSTOMER'S LICENSE 1.01 GRANT OF LICENSE. SDL grants to Customer a non-transferable right and OEM license to SDL's product or products listed in the statement of the Terms of Agreement beginning on the first page of this Agreement (referred to in this Agreement as the Products). The right and license granted by this Agreement is effective on the date of this Agreement and will continue in effect by this Agreement, unless terminated in accordance with Section 8. No right or license to manufacture, copy, alter, modify or repair the Products is granted to Customer under this Agreement. SDL will assist the Customer in private labeling options for the products described in Exhibit A. 1.02 NON-EXCLUSIVE LICENSE. The license granted by SDL to Customer under this Agreement is nonexclusive. This Agreement shall not limit the right of SDL to manufacture, market, distribute, sell or promote anywhere in the world, directly or indirectly, any or all of the Products being supplied to Customer under this Agreement, or to license, appoint, hire, or otherwise engage others to do so. 1.03 ESCROW ACCOUNT. SDL will maintain at SDL's expense in an escrow account, technical information relating to the products in Exhibit A, solely for the following purpose: In the event of a filing by or against SDL of a petition for relief under the United States Bankruptcy Code or similar petition under the insolvency laws of any jurisdiction, Customer shall have the right to manufacture all the products being supplied to Customer at that time under Exhibit A or other products being supplied by SDL to Customer for a license fee equal to [CONFIDENTIAL TREATMENT REQUESTED]** per unit of the most recent unit price paid by the Customer. The "technical information" will include the following: a) Manufacturing drawings and specifications of raw materials and components comprising such parts. b) Manufacturing drawings and specifications covering any special tooling and the operation thereof. c) A detailed list of all commercially available parts and components purchased by SDL on the open market, disclosing the part number, name and location of the supplier thereof and the price. d) One (1) complete copy of the then current diagnostics software source code and all tools used to build the object code from the source code used in the preparation of any software acquired by Customer by license or otherwise from SDL. **[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. e) All relevant design and user documentation. f) This information will be updated as design changes occur. 2. OBLIGATIONS OF SDL 2.01 TECHNICAL SUPPORT. Customer will be entitled to ongoing technical support from SDL, ongoing technical support will be available to Customer from SDL at no charge. Customer's technical personnel will be allowed access to all necessary technical documentation and the appropriate SDL Technical personnel. SDL will make its best efforts to respond to all technical questions within 8 (eight) business hours. If deemed necessary by Customer, Customer and SDL will establish a bug reporting and tracking mechanism that is acceptable to both parties. SDL will assist Customer with on-site service calls when mutually agreed upon. 2.02 FULFILLMENT OF PURCHASE ORDERS. SDL shall make it's best effort to fulfill Customer's purchase orders, this best effort shall be consistent with the delivery schedule outlined in Exhibit C of this agreement. In the event there is an event that forces deviation from the delivery schedule, SDL will inform Customer within 24 hours of such an event to establish a mutually agreeable next best delivery date pertaining to the specific product and quantity being delivered. SDL and Customer will mutually review the delivery schedule for adjustments, updates,, new products, and agreed upon enhancements at 6 (six) month intervals from the Effective Date of this agreement. 2.03 COMMERCIALLY AVAILABLE PRODUCTS. SDL shall make available all future non-customized and commercially available products to Customer. SDL will provide sufficient notification to Customer of the availability of such products as to allow Customer a reasonable period of time to integrate such products into Customer, s product offerings. SDL will also make the relevant technical resources available to Customer to assist Customer in this product integration process. These products will be available to Customer for the entire term of this agreement. Customer will have the right to integrate and utilize such commercially available SDL products as deemed necessary to Customer's business interest. SDL will notify Customer on all future commercially available products within 30 days of the initiation of design by SDL of all such produces. 2.04 CUSTOMIZED PRODUCTS. SDL may develop mutually defined customized products for Customer on a forward going basis. SDL and Customer will define the NRE (Non Recurring Engineering) cost SDL will charge Customer prior to initiation of the development of such products. In addition to such costs, Customer will agree to purchase [CONFIDENTIAL TREATMENT REQUESTED]** upon [CONFIDENTIAL TREATMENT REQUESTED]** of such customized products from SDL. **[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 2.05 ENGINEERING CHANGE ORDERS. In the event SDL determines an Engineering Change Order (ECO) implementation necessary that does not affect in any way Customer's end-product (finished product) reliability, functionality or performance (for all the products listed in Exhibit A, Commercially Available Products defined in Section 2.03 or Customized Products as defined in Section 2.04), SDL will inform Customer within 24 hours of the completion of such an Engineering Change Order (ECO). Whenever requested by Customer, SDL will make available to Customer, sample products with such ECO changes to allow customer to verify that such changes do not affect in any way Customer's end-product reliability, functionality or performance. SDL will forward an Electronic copy of this ECO detailing the change. Whenever possible, SDL shall make an effort to inform Customer in advance of implementation of such ECOs that do not affect the Customer's end-product reliability, functionality or performance. SDL will not implementation any ECOs that affect in any way the Customer's end-product reliability, functionality or performance without prior approval of Customer. SDL will make its technical personnel available to assist Customer in fully understanding the nature of any and all ECOs implemented to the related products. Upon Customer's request, SDL shall supply Customer sample products for acceptance testing after completion of ECOs that affect Customer's end-product reliability, functionality or performance. 2.06 FUNCTIONALITY, MANUFACTURING & QUALITY. In the event SDL is unable to meet Customer's needs on mutually agreed upon functionality, or Customer's needs in manufacturing quantity and or reasonable quality standards in light of volume and other considerations relevant to the manufacture of the nonconforming shipments of the products listed in Exhibit A. Customer and SDL will define a mutually agreeable time period in which SDL will attempt to meet Customer's requirements. If SDL is still unable to meet Customer's requirements at the end of this negotiated period, Customer will then receive the manufacturing rights for that specific nonconforming product, subject, however, to payment by Customer of a licensing fee to SDL equal to [CONFIDENTIAL TREATMENT REQUESTED]** per unit of the last purchase price paid by Customer for such product. 2.07 CONTINUITY OF PRODUCT SUPPLY. SDL will make all reasonable efforts to supply products listed in Exhibit A to Customer for a period of [CONFIDENTIAL TREATMENT REQUESTED]** . If discontinuance of a critical component from SDL's vendors deems it impossible for SDL to manufacture a specific product, SDL will inform Customer within 24 hours of receipt of such information by SDL. In this event, SDL will make all reasonable efforts, upon Customer's approval, to initiate design of a replacement product that is similar to the product in jeopardy, taking into account that the replacement product matches the form, functionality and pricing of the product being replaced. Customer will **[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. make all reasonable efforts to commit the necessary resources to integrate the replacement product into Customer's product offerings. 2.08 [CONFIDENTIAL TREATMENT REQUESTED]** CUSTOMER. SDL hereby represents that [CONFIDENTIAL TREATMENT REQUESTED]** for the entire term of this agreement will [CONFIDENTIAL TREATMENT REQUESTED]** as those that will be [CONFIDENTIAL TREATMENT REQUESTED]** to any of its other [CONFIDENTIAL TREATMENT REQUESTED]**. Further, if at any time in the future, SDL [CONFIDENTIAL TREATMENT REQUESTED]** another [CONFIDENTIAL TREATMENT REQUESTED]** , SDL shall immediately make those [CONFIDENTIAL TREATMENT REQUESTED]** to Customer. 2.09 NOTIFICATION OF CHANGE OF CONTROL. SDL will inform Customer within 24 hours of the consummation of a purchase of all or substantially all of SDL's business by a Third Party. (for purposes hereof, all or substantially all of SDL's business shall include, the sale of all or a substantial portion of SDL's right, title and interest in and to the products listed in Exhibit A or any products being supplied to Customer at that time.) 2.10 QUALITY ASSURANCE. SDL will establish within 60 days of the effective date of this Agreement documented quality assurance procedures that provide the following: a. Incoming inspection criteria for acceptance, rejection and purging of material. b. A product ship or product hold quality process. c. Minimum Statistical techniques to measure and monitor process yield.* d. A signature authority ECO process.* e. A revision control system for assembly Bill of Materials.* f. A segregated rejected material location.* g. The latest test procedures are available to operators.* * Items c through g have been in place at SDL since November 1, 1997. 2.11 COMPLIANCE. On all products that are developed under Section 2.03 Commercially Available Products and Section 2.04 Customized Products, SDL will complete the minimum FCC & CE mark Compliance tests necessary and **[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. customary in providing such products to its present OEM Customers. Wherever applicable, SDL's Engineering design methodologies incorporate consideration for the above minimum FCC & CE mark compliance tests in the design process. When requested by Customer, SDL will present a schedule that provides Customer with the expected compliance testing completion dates for the above stated compliance tests for products under Section 2.03 and 2.04. If, due to Customer's urgent need of completion of the above mentioned Compliance tests, Customer requests that such compliance test be expedited, and if such request for action is agreed to by SDL, then Customer will reimburse SDL for all related expenses specific to such compliance testing, not including the cost of utilizing SDL's technical personnel in the conducting or completion of such compliance tests. In the event, Customer requires Compliance testing for products developed under Section 2.03 and 2.04 that is above and beyond the minimum FCC and CE mark compliance testing as described above, Customer will be responsible for all costs associated with such compliance tests relating to these products. SDL will, however, provide the necessary technical personnel in assisting Customer with the completion of such compliance tests for SDL products incorporated into Customers end-products (finished products). 2.12 FORCE MAJEURE. Except as to payment due and owing under this Agreement, neither SDL nor Customer shall be liable to the other party for failure or delay in performance of any obligation hereunder or for any damage caused thereby if such delay is due to any cause beyond the reasonable control of the party. Such cause may, include but is not limited to natural disasters, war accidents, strikes or utility shortage or curtailment, governmental regulations, or to any other cause or causes beyond the control, or without the fault or negligence, of either party. 2.13 END-USER WARRANTY AND LICENSE. SDL warrants that at the time of shipment the Product shall be free from defect in material and workmanship. SDL warrants that the Product will meet the standard specifications of each product listed in Exhibit A hereto at the time of shipment. This warranty excludes damage resulting from mishandling, tampering, improper installation and misuse by the purchaser. SDL warrants all Products for a period of 12 months from the date of Invoice. 3. OBLIGATIONS OF CUSTOMER 3.01 TRADEMARKS. (a) SDL grants to Customer a nonexclusive license to use SDL's trade name and those of SDL's trademarks and service marks that pertain to any of the Products, solely in Customer's advertising and other promotion of the Products. SDL will assist the Customer in private labeling options for the prouducts described in Exhibit A. SDL will allow Customer to use its trademark for private labeling purposes. (b) Whenever Customer uses in writing a registered trademark of SDL, it shall place next to that trademark, at least the first time that it appears in any given advertisement or publication, an encircled "R" in superscript and a footnote stating that trademark is a registered trademark of SDL. Whenever Customer uses in writing a trademark of SDL for which SDL has applied for registration, it shall place next to that trademark, at least the first time that it appears in any given advertisement or publication, the letters "TNF' in superscript and a footnote stating that that trademark is a trademark of SDL. (c) This Agreement shall not provide Customer any interest in SDL's name or any of its trademarks or service marks except as expressly provided in this Agreement. Customer's license to use SDL's name and its trademarks and service marks shall cease upon the termination of this Agreement. 3.02 END-USER WARRANTY AND LICENSE. Customer shall not make or grant, orally or in writing, expressly or by implication, any other warranty or license other than that which SDL has stated in the End-user warranty and license. 3.03 COMPLIANCE WITH LAWS. Customer shall not, nor shall Customer permit any other reseller of any of the Products supplied by SDL under this Agreement, to export any of the Products, directly or indirectly, to any foreign country in violation of any United States statute or regulation in effect at the time of export. Customer shall be responsible for obtaining all required agency, governmental or safety certifications for the Products listed in Exhibit A. 4. PRICING AND PAYMENT TERMS 4.01 PRODUCT PRICING. Product Pricing to Customer shall be consistent with the pricing reflected in Exhibit B of this Agreement. Pricing and Terms for all other products to be supplied by SDL to Customer will be negotiated separately. SDL will not be responsible for any International Duties and Taxes relating to the shipment of SDL products by Customer. 4.02 PURCHASE ORDER CHANGES AND CANCELLATIONS. All changes, rescheduling of shipment, or cancellations of the Purchase Order must be made in writing. Customer will be allowed to reschedule a specific Purchase Order one-time without incurring any rescheduling penalty. Beyond this, orders rescheduled within [CONFIDENTIAL TREATMENT REQUESTED]** of shipping date are subject to a rescheduling fee of [CONFIDENTIAL TREATMENT REQUESTED]** of the net Purchase Order amount. Orders canceled within [CONFIDENTIAL TREATMENT REQUESTED]** of shipping date are subject to a restocking charge of [CONFIDENTIAL TREATMENT REQUESTED]** of the net Purchase Order amount of the items restocked. Orders that are **[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. rescheduled or canceled outside of [CONFIDENTIAL TREATMENT REQUESTED]** shall not be subject to any charges. 4.03 PRICE CHANGES. SDL may change the prices of any of the Products being supplied under this Agreement at upon [CONFIDENTIAL TREATMENT REQUESTED]** prior written notice to customer. In the event there is a price increase for a specific product or products, SDL will honor all outstanding orders on existing Purchase Orders from Customer at prices prior to any and all such price increases. 4.04 RESALE PRICES. SDL shall have no control of the price or prices at which Customer actually resells SDL's products, which Customer shall determine without the involvement of SDL. 4.05 CUSTOMER'S FAILURE TO PAY. Customer's failure to pay after a 90 day period following the due date of any undisputed Invoice shall constitute a material breach of this Agreement. Before a material breach can be declared, SDL shall notify Customer in writing of the outstanding Invoices & amounts due within 45 days after the due date of such Invoices & allow customer 30 days from date of such notice or 90 days after the due date to pay all such undisputed Invoices in full. Interest shall accrue on all unpaid amounts at the rate of [CONFIDENTIAL TREATMENT REQUESTED]** per month, compounded daily, or the highest rate then permitted by law (whichever is the lower) from the date on which payment was due through the date on which SDL receives payment and SDL, at its option, may cancel or defer shipment of any previously accepted or future orders until it has received payment in full of all amounts due from Customer, whether or not overdue. 4.06 CREDIT LIMIT. The maximum amount of credit that SDL is required to extend to Customer is [CONFIDENTIAL TREATMENT REQUESTED]**. This Credit Limit can be increased by SDL upon receipt of relevant Financial Information from Customer allowing SDL to make such a decision. 4.07 TERMS OF PAYMENT. All Products sold hereunder shall be invoiced in full upon shipment. Unless otherwise specified. terms of payment are net thirty (30) days on approved credit. Any undisputed amounts owing after thirty (30) days shall accrue interest at the rate of [CONFIDENTIAL TREATMENT REQUESTED]** per month from date of shipment. SDL shall have the right to change credit terms of the Customer with 60 days prior notice, and to hold up shipment of Products if payment for a previous order has not been received. 5. ORDERS, SHIPMENTS AND RETURNS 5.01 PURCHASE ORDERS. Purchase Orders shall specify shipment dates no later than 12 months from the issuance thereof. Customer will provide SDL with a [CONFIDENTIAL **[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. TREATMENT REQUESTED]** of products required for a given Quarter (90-Day period), no later than Forty Five (45) days before the beginning of the Quarter in which these purchases are to take place. 5.02 ACKNOWLEDGMENTS. Any terms or conditions specified in the Purchase Order which differ from or conflict with the terms of this Agreement in any material respect shall be void unless specifically accepted by SDL. 5.03 SHIPMENT AND DELIVERY. Shipment shall be F.O.B. from SDL's location in Easton. Massachusetts, by the method specified by the Customer. If any conditions arise which prevent compliance with delivery schedules, SDL will not be liable for any damage for delay in delivery. SDL will, however, use its best efforts to notify Customer of delays,. SDL will not make shipment ahead of schedule without Customer's approval. All freight charges on shipments will be billed to Customer. 5.04 RETURNS. Customer may return Products to SDL only if Customer has first requested and obtained from SDL a Return Merchandise Authorization number, to which Customer shall refer in the shipping documents accompanying the returned Products. 6. WARRANTIES, INDEMNITIES AND REMEDIES 6.01 WARRANTIES. SDL product Warranty is specified in Section 2.13 . SDL shall repair or replace free of charge any Product that does not comply with that warranty. Customer may replace any defective SDL products that it has sold, and SDL shall replace in Customer's inventory, free of charge, the same number of Products that Customer has had to replace pursuant to the Warranty specified in Section 2.13. 6.02 INDEMNITY OF SDL. Customer shall Indemnify SDL and hold it harmless from any and all actions, claims, damages. expenses (including attorney's fees) and liabilities that arise from Customer's act, omission or misrepresentation in the marketing, OEM, sale or promotion of all Products supplied under this Agreement, including particularly those that arise from Customer's breach of it's obligations. 6.03 INDEMNITY OF CUSTOMER. SDL shall indemnify and hold harmless Customer from and against any damages, liabilities, costs and expenses (including reasonable attorneys' fees and court costs) arising out third party claims alleging that the products being provided in Exhibit A or any other products supplied by SDL to Customer infringe on any Patent, Trademark, Copyright or trade secret. Should any of the products in Exhibit A or any product being supplied by SDL to Customer become the subject of a claim of infringement, SDL shall (a) obtain for SDL the right to continue using such specific products pursuant to the terms and conditions of this Agreement, or (b) replace or modify the products so that they become non-infringing but functionally equivalent. **[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 6.04 LIMITATIONS OF WARRANTY AND LIABILITY. THE WARRANTY STATED IN THIS SECTION IS A LIMITED WARRANTY AND IS THE ONLY WARRANTY, EXPRESS OR IMPLIED, MADE BY SDL. ANY AND ALL OTHER WARRANTIES, INCLUDING SPECIFICALLY WARRANTIES, OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED. NEITHER SDL NOR CUSTOMER SHALL BE LIABLE OR OBLIGATED TO THE OTHER IN ANY MANNER FOR ANY MANNER FOR ANY CONSEQUENTIAL OR INDIRECT DAMAGES EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 7. CONFIDENTIAL INFORMATION 7.01 SDL and Customer each acknowledges that, during the course of performing its duties under this agreement, it may obtain information relating to the business or products of the other that is confidential and proprietary ("Confidential Information"). Each party shall use the Confidential Information for the sole purpose of exercising its rights and performing its duties under this Agreement and shall not disclose any of the other party's Confidential Information to anyone other than those of its employees, agents or consultants who (i) have a need to know the Confidential Information in order to enable the receiving party to exercise its rights and perform its duties under this agreement; and (ii) who have signed an agreement with the receiving party obligating them (a) not to disclose any of the Confidential Information to anyone other than other employees or agents of the receiving party who have signed similar agreements with the receiving party and (b) not to use any of the Confidential Information for any purpose other than to enable the receiving party to exercise its rights and perform its duties under this Agreement. Before disclosing any of the disclosing party's Confidential Information to any of its employees or agents, the receiving party shall advise each employee or agent that the disclosing party's Confidential Information is confidential and subject to the restriction stated in this Agreement. 7.02 The receiving party and its employees and agents shall return to the disclosing party all of its Confidential Information, including the originals and copies of documents containing any of the disclosing party's Confidential Information, upon the termination of this Agreement. Nothing in this Agreement, nor the disclosure of any Confidential Information by the disclosing party, shall be construed to grant to the receiving party any rights of any kind in any of the Confidential Information. 7.03 This Agreement shall not apple to information that (I) on the date of this Agreement was already known to the receiving party or available to the public; (II) after the date of this Agreement becomes known to the receiving party or available to the public other than unauthorized disclosure; or (III) was or is developed by the receiving party Independently without any use of any of the disclosing party's Confidential Information. 7.04 The terms and conditions of this Agreement cannot be disclosed by either party to a third party entity or individual without the express written consent of the party to this agreement (either SDL or Customer) that is not initiating this disclosure. The Customer's trademark cannot be used in any shape or form by SDL without the prior written consent of the Customer. This agreement shall not provide SDL any interest in Customer's name or any of its trademarks or service marks. 8. TERM AND TERMINATION. Subject to the other provisions of this Section 8, this Agreement shall have a duration of 60 months. Either party may cancel this Agreement for breaching the obligations of this contract by giving written notice to the other party at least 60 days before effective date of the cancellation. Upon termination of this Agreement, (a) each party shall immediately return to the other all copies of Confidential Information of the other then in its possession, custody or control and shall cease to use any of the other party's Confidential Information for any purpose; and (b) the license granted by this Agreement shall be terminated Immediately. Customer shall cease to market, distribute, sell or promote any of the Products, to use SDL's name or any of its trademarks or service marks or otherwise hold itself out as a customer of SDL's Products. RIGHTS UPON TERMINATION. Termination of any Purchase Order of this Agreement shall not affect SDL's right to be paid for undisputed invoices for Products already shipped. The termination of this Agreement shall not affect any of the SDL's warranties, indemnification's or obligations relating to returns, credits or any other matters set forth in this Agreement that are to survive this termination in order to carry out their intended purpose all of which shall survive this agreement. Upon termination of this Agreement, Customer shall discontinue holding itself out as a Customer of SDL's products. The expiration of the term of this Agreement shall not affect the obligations of either party to the other party pursuant to any Purchase Order previously forwarded to SDL. 9. GENERAL 9.01 ASSIGNMENT; BINDING EFFECT. No party may assign any or all of its rights or delegate any or all of its duties under this Agreement without the written consent of the other party. A change in control of the ownership, or a transfer of all or substantially all of the assets, of SDL or the Customer shall not be deemed an assignment of this Agreement and shall not require the other party's consent. 9.02 MISCELLANEOUS. The laws of the Commonwealth of Massachusetts, excluding the conflicts-of-law principles thereof shall govern the validity and construction of this Agreement. This Agreement states the entire agreement and understanding of the parties on the subject matter of the Agreement, and supersedes all previous agreements, arrangements, communications and understanding relating to that subject matter. This Agreement may be amended, modified, superseded or canceled, and any of the terms thereof may be waived, only by a written document signed by each party to this Agreement or, in case of waiver, by the party or parties waiving compliance. No person not a party to this Agreement (including **[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. any employee of any party to this Agreement) shall have or acquire any rights by reason of this Agreement, nor shall any party by this Agreement have any obligations or liabilities to such other person by reason of this Agreement. Nothing in this Agreement shall be deemed to constitute any party a partner, joint venture, employer, employees master, servant, principal or agent of any other party or any other person. EXHIBIT A: PRODUCTS UNDER OEM AGREEMENT
SDL PRODUCTS PRODUCT DESC. SDL PART NUMBER [CONFIDENTIAL TREATMENT REQUESTED]**
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. EXHIBIT B: PRODUCT PRICING
QUANTITY (UNITS) SDL PRODUCTS PRODUCT DESC. SDL PART NUMBER 100-299 300+ [CONFIDENTIAL TREATMENT REQUESTED]**
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. EXHIBIT C: DELIVERY SCHEDULES
BASED ON PRODUCTS REQUIRED PER SHIPMENT - --------------------------------------- [CONFIDENTIAL TREATMENT REQUESTED]** Quantity(units): 1-100 101-250 251-500 501+ Delivery Schedule (in working days): 30 35 40 50 [CONFIDENTIAL TREATMENT REQUESTED]** Quantity(units): 1-100 101-250 251-500 501+ Delivery Schedule (in working days): 30 35 40 50 [CONFIDENTIAL TREATMENT REQUESTED]** Quantity(units): 1-100 101-250 251-500 501+ Delivery Schedule (in working days). 30 35 40 50 [CONFIDENTIAL TREATMENT REQUESTED]** Quantity(units): 1-100 101-250 251-500 501+ Delivery Schedule (in working days): 30 40 50 50 [CONFIDENTIAL TREATMENT REQUESTED]** Quantity(units): 1-100 101-250 251-500 501+ Delivery Schedule (in working days): 30 40 50 50 [CONFIDENTIAL TREATMENT REQUESTED]** Quantity(units): 1-100 101-250 251-500 501+ Delivery Schedule (in working days): 30 35 40 50
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. EX-10.10 16 EXHIBIT 10.10 Exhibit 10.10 CISCO SYSTEMS, INC. PROJECT DEVELOPMENT AND LICENSE AGREEMENT This Project Development and License Agreement ("Agreement") is made in California as of July 13, 1994, by and between Cisco Systems, Inc., a California corporation having its principal place of business at 1525 O'Brien Drive, Menlo Park, CA, 94025, ("Cisco"), and Frontier Software Development, Inc. ("Frontier"), a Delaware corporation having its principal place of business at 1501 Main Street, Tewksbury, 01876. The parties hereto agree as follows: 1. Definitions. "Derivative Work" means the incremental work constituting enhancements and modifications to the Software and/or works based on the source code developed as a result of a porting the Software to Cisco platforms. "Software" shall mean Frontier's RMON software and Derivative Work, in machine readable binary and source code form, and all related documentation and tools necessary to use the software listed in Exhibit A. "RMON Extensions" shall mean Frontier's proprietary RMON extensions in machine readable binary and source code form, and all related documentation and tools necessary to use the software listed in Exhibit A. "NETscout Manager" shall mean Frontier's network management application software in machine readable binary form, and all documentation and tools necessary to use the network management application software listed in Exhibit A. 2. Scope Of Work. Frontier agrees to use commercially reasonable efforts to develop the Derivative Work for Cisco's platforms and modify the NETscout Manager to incorporate Cisco's OEM labeling requirements in accordance with the Specification and Project Plan ("Specifications") attached hereto as Exhibit A and the Project Schedule set forth in Exhibit B. Material changes in the Project Schedule or the Specifications may be agreed to by both of the Project Managers in writing from time to time during the port of the Software and RMON Extensions. Each party agrees to negotiate in good faith and in a reasonable manner to reach agreement for such changes or modifications. Frontier shall provide Cisco with periodic updates of the status of the development effort in such form as Frontier and Cisco deem appropriate. Frontier designates NATE KALOWSKI as the Project Manager and Cisco designates JAYSHREE ULLAL as the Project Manager for this Agreement. Frontier designates NATE KALOWSKI as the Marketing Manager and Cisco designates MARK FARINO as the Marketing Manager for this Agreement. The Project Managers, or their representatives, shall meet on a regular basis throughout the development phase of this Agreement for the purpose of joint progress reporting and relationship/program management. The parties agree to use commercially reasonable efforts to provide appropriate test equipment and engineering assistance to the other party for development of the Software. Test equipment shall be returned upon request of the loaning party. 3. Acceptance Testing. From the date of delivery of each development milestone for the Software and RMON Extensions, Cisco will have [*] to perform the acceptance tests specified in the Specifications on the products. If the Software and RMON Extensions do not conform to the Specifications, or do not otherwise pass the acceptance tests, Frontier must deliver a detailed plan of how and when the error will be corrected within [*] and must execute the plan if approved by Cisco. At each delivery until such products pass the final acceptance tests, Cisco may re-test the Software and RMON Extensions and Frontier agrees to best efforts cure the defects. 4. License. Subject to the terms and conditions hereof including payment, Frontier grants to Cisco a worldwide, irrevocable (except for breach of the terms of this license grant), perpetual, and non-exclusive license to use, modify, copy, market, distribute or otherwise dispose of the Software and RMON Extensions. The license granted hereunder shall include rights under any applicable patents, copyrights or trade secrets necessary to use the Software and RMON Extensions. Frontier also grants Cisco a worldwide, non-exclusive license to market and distribute NETscout Manager under Cisco's label. The license granted hereunder shall include rights under any applicable patents, copyrights or trade secrets necessary to use the NETscout Manager. 5. Restrictions. In consideration of the License granted herein and a material inducement for Cisco's entering into this Agreement and paying the amounts required to be paid hereunder, Frontier agrees, that it will not, directly or indirectly, publicly announce or disclose any [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 2 agreement or undertaking relating to license or port of the Software or RMON Extensions or resale of NETscout Manager with the Cisco competitor's listed in Exhibit C. The foregoing restriction shall commence upon the execution date of this Amendment and continue for a period ending on the later of [*] after execution of this Agreement or [*] from delivery of beta Software and RMON Extensions that meets a mutually agreed upon test suite. Cisco shall have no right to sublicense or cross license the Software and RMON Extensions as a standalone product. Subject to payment of the Software License Fees set forth in Exhibit D, Cisco shall full right to sublicense, cross-license or otherwise transfer Cisco protocols that incorporate the Software and RMON Extensions to any third party; provided however, such third party is restricted from extracting the Software and RMON Extensions from the Cisco protocols or otherwise using the Software and RMON Extensions apart from its use with Cisco's protocol without obtaining a license from Frontier. 6. Title. Title and full ownership rights to the RMON software and RMON Extensions shall remain solely with Frontier. Title and full ownership rights to the Derivative Work developed hereunder shall vest solely with Cisco. All rights, whether now existing or hereafter arising, which are not specifically granted to the receiving party hereunder are retained by their respective holders. 7. Price/Delivery. Upon execution of this Agreement, Frontier shall deliver to Cisco one (1) copy of the Software and RMON Extensions in the format requested by Cisco. In consideration of the development efforts and rights and licenses granted herein by Frontier, Cisco's shall pay to Frontier the license fees set forth in Exhibit D hereto. All payments required by this Agreement are exclusive of sales, use, rental receipt, personal property or other taxes or excise taxes which may be levied or assessed in connection with this Agreement, and Cisco agrees to bear and be responsible for the payment of all such taxes, except taxes based on Frontier's income. [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 3 8. Support/Consulting. During the first year of this Agreement, Frontier shall provide to Cisco maintenance, in the form of telephone hotline support, updates, revisions, bug fixes and new releases to the Software and RMON Extensions shall be provided at no charge. Thereafter, Cisco may purchase annual maintenance services for an annual maintenance fee of [*]. All updates, revisions, bug fixes and new releases provided to Cisco by Frontier shall be subject to the terms and conditions of this Agreement. 9. Warranty. Frontier warrants that the Software and the port of the RMON Extensions wild be designed in accordance with Specifications. Frontier warrants for a period of ninety days that the software modified or delivered by it will conform to the Specifications for the Software. In the event that Cisco reports a defect to Frontier, Frontier will use its best efforts to cure the defect within the reasonable time periods requested by Cisco. Frontier warrants that it has and shall throughout the term of the Agreement have sufficient right, title and interest in the Software and RMON Extensions provided to the Cisco to enter into this Agreement and to grant the rights it has under this Agreement. Further, Frontier warrants that no additional rights or licenses will be necessary to exercise the rights granted hereunder. EXCEPT FOR THE EXPRESS WARRANTIES STATED IN THIS AGREEMENT, FRONTIER MAKES NO ADDITIONAL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO ANY MATTER WHATSOEVER. IN PARTICULAR, ANY AND ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED. 10. Confidential Information. Cisco acknowledges Frontier's representation that the Software and RMON Extensions and the design thereof constitutes a valuable trade secret to Frontier and agrees that the Software and RMON Extensions and the design thereof are provided in confidence as proprietary to Frontier, and such Software and RMON Extensions is provided solely for Cisco's and Cisco's sublicensees' nonexclusive use subject to the terms of this [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 4 Agreement. Cisco agrees to employ the same degree of care, but not less than reasonable care, to protect the Software and RMON Extensions and RMON Extensions from unauthorized disclosure or use as Cisco uses to protect its own proprietary information of a similar kind and importance. Cisco agrees that prior to disclosure of the Software, RMON Extensions or design thereof to any consultant or sublicensee it shall secure that third party's agreement to treat the Software and RMON Extensions as confidential information under restrictions at least as protective as the provisions of this Agreement. Cisco agrees that it will take appropriate action with its employees, consultants, and sublicensees by agreement or otherwise, to ensure that they will take appropriate steps to comply with their obligations with respect to use, copying, transference, protection and security of the Software and RMON Extensions.' Cisco's obligations to hold the Software and RMON Extensions in confidence shall not apply to any part of the Software or RMON Extensions which: a. is, or becomes, available to the public other than by breach of any obligation herein assumed by Cisco; or b. is furnished to a third party by Frontier without restriction of the third party's right to disseminate the Software or RMON Extensions; or c. is independently developed by Cisco without use or access to the Software, RMON Extensions and the design thereof, or d. is disclosed to Cisco by a third party having the right to make such disclosure. 11. Publicity. Neither party shall disclose, advertise or publish the existence nor the terms or conditions of this Agreement, except to auditors, counsel, financing sources and in connection with a merger or sale of all or substantially all of such parties assets, without the prior written consent of the other party. 12. Term and Termination. This development portion of this Agreement shall commence on the date first set forth above and continue until a period of three (3) years. Either party may terminate this Agreement in the event the other party breaches any term or condition of this Agreement, and the breaching party fails to cure such breach within [*] of receipt of [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 5 notice from the nonbreaching party. Except as expressly set forth below, Sections 4, 5, 6, 7, 8, 10, 11, 13, 16 and Exhibit B shall survive any termination or expiration of this Agreement. Solely in the event Frontier terminates this Agreement as a result of Cisco's unsecured breach of Section 4, 5 or Exhibit D, Cisco shall cease distributing and return the RMON Extensions and any copies thereof to Frontier within [*] of the effective date of termination. Cisco may retain a reasonable number of copies of the RMON Extensions for support purposes. In no event shall termination or expiration of this Agreement affect Cisco's customers or partners sublicense rights in the Software and RMON Extensions. 13. Intellectual Property Indemnification Frontier warrants that it owns all rights to the Software and RMON Extensions and that the Software and RMON Extensions does not infringe upon or violate any patent, copyright or trade secret of any third party. If any claim of infringement is made by any third party against Cisco or its customers, Cisco shall promptly notify Frontier, and Frontier shall indemnify, defend, and hold Cisco harmless against any and all liability, losses, claims, expenses (including reasonable attorneys' fees), demands of any kind arising out of any such claim, whether or not that claim is successful, provided that Cisco (i) gives Frontier notice of such claim, (ii) cooperates with Frontier, at Frontier's expense, in the defense of such claim, and (iii) gives Frontier the right to control the defense and settlement of any such claim, except that Frontier shall not enter into any settlement that affects Cisco's rights or interest without Cisco's prior written approval. Cisco shall have no authority to settle any claim on behalf of Frontier. If by reason of such infringement claim any patent, copyright or trade secret of any third party, Cisco or its customers shall be prevented or is likely to be prevented by legal means from selling or using the Software and RMON Extensions, or if, in Frontier's opinion, such claim is likely to occur, Frontier will use its best efforts, at its expense, to: (i) obtain all rights required to permit the sale or use of the Software and RMON Extensions by Cisco and its customers; or (ii) modify or replace such Software and RMON Extensions to make them noninfringing (and extend this indemnity thereto), provided that any such replacement or modified Software and RMON Extensions are satisfactory to Cisco. If Frontier using its best efforts, is unable to achieve either of the options set forth above within a reasonable period of time after the issuance of the injunction, Frontier shall promptly refund to Cisco all fees paid hereunder. [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 6 The foregoing indemnification shall not extend to any claim based solely upon the combination, operation or use of the Software or RMON Extensions supplied hereunder with equipment, devices or software not supplied by Frontier, or any alteration or modification of the Software and RMON Extensions supplied hereunder. THE FOREGOING STATES THE ENTIRE OBLIGATION OF FRONTIER WITH RESPECT TO INFRINGEMENT OF PATENTS, COPYRIGHTS AND TRADE SECRETS. 14. General. No waiver of rights under this agreement by either party shall constitute a subsequent waiver of this or any other right under this Agreement. Neither party shall be liable for any delay or failure in performance due to such acts of God, earthquake, labor disputes, riots, war, fire, epidemics, or transportation difficulties. The obligations and rights of the excused party shall be extended on a day to day basis for the time period equal to the period of the excusable delay. Neither this Agreement nor any rights under this Agreement, other than monies due or to become due, shall be assigned or otherwise transferred by either party without the prior written consent of the other party. This Agreement may be transferred or otherwise assigned to any company or other entity which acquires all or substantially all of the assets of such party. In the event that any of the terms of this Agreement become or are declared to be illegal by any Court or tribunal of competent jurisdiction, such term or terms shall be null and void and shall be deemed deleted from this Agreement. All the remaining terms of this Agreement shall remain in full force and effect provided, however, that if this paragraph becomes applicable and if the effect thereof is to substantially impair the value of this Agreement to either party, then the affected party may terminate this Agreement by written notice to the other. This Agreement (including the Exhibits hereto) constitutes the entire Agreement between the parties hereto concerning the subject matter of this Agreement; and there are no conditions, understandings, agreements, representations, or warranties, expressed or implied, which are not specified herein. This Agreement may only be modified by a written document executed by the parties thereto. Neither party has the right or authority to, and shall not, assume or create any obligation of any nature whatsoever on behalf of the other party or bind the other party in any respect whatsoever. 7 This Agreement shall bind and insure to the benefit of the successors and permitted assigns of the parties. This Agreement shall be interpreted and construed and legal relations created shall be determined in accordance with the Laws of the State of California. 15. Joint Marketing The parties agree to explore in good faith and, upon mutual consent of the parties, participate in appropriate marketing and sales activities to leverage each parties products. Such activities may include, but are not limited to, trade shows, product training, sales training and product literature. 16. Notice. Any notice which may be given by a party under this Agreement shall be in writing and shall be either delivered in person, U.S. Mailed, First Class, postage prepaid, air courier, or telex or facsimile to the party to be notified, at the address set forth below. If to Cisco: Cisco Systems, Inc. 170 West Tasman Drive San Jose, California 95134 Attn: Vice President - Bus Dev If to Frontier. Frontier Software Development, Inc. 1501 Main Street Tewksbury, MA 01876. Attn: President 17. Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE, EXCEPT FOR CLAIMS ARISING UNDER SECTION 13 INTELLECTUAL PROPERTY INDEMNIFICATION OR CLAIMS OF PERSONAL INJURY OR DAMAGE TO TANGIBLE PERSONAL PROPERTY RESULTING FROM HE NEGLIGENT ACTS OR OMISSIONS OF EITHER PARTY, FOR AN AMOUNT WHICH EXCEEDS [*]. [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 8 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, LOST PROFITS, OR LOST DATA, OR ANY OTHER INDIRECT DAMAGES EVEN IF SUCH PARTY HAS BEEN INFORMED OF THE POSSIBILITY THEREOF. 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first written above. CISCO SYSTEMS, INC. FRONTIER SOFTWARE DEVELOPMENT, INC. By: /s/ Mario Mazzola By: /s/ Narendra Popat ------------------------------- ------------------------------ Name: Mario Mazzola Name: Narendra Popat ----------------------------- -------------------------------- Title: V.P. WBU Title: President ---------------------------- ------------------------------ 10 Exhibit A [Insert list of deliverables/code lists] Statement of Work (This section supports Exhibit A&B) [*] [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 11 Exhibit B [Insert Software Specifications] 12 Exhibit C [*] [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 13 Exhibit D 1. Software License Fees. Cisco agrees to pay to Frontier a Software License Fee for object code copies of the Frontier's Proprietary RMON Extensions distributed to any third party coincident with the sale of Cisco technology in accordance with the following schedule:
CHASSIS type LICENSE fee [*] [*]per card running Frontier's Proprietary RMON Extensions (Not to exceed ([*] per chassis) All other Cisco platforms [*] per chassis running Frontier's Proprietary RMON Extensions
2. NETscout Manager License Fees. Frontier agrees that Cisco shall receive a [*] Frontier's published list price for NETscout Manager sold to any third party. 3. License Fees Payment Terms. Cisco shall provide Frontier with report which shall be sufficient to allow Frontier to verify the Software License Fees due and payment of such Software License Fees within [*] of the end of each calendar quarter. If at any time during the term of this Agreement Frontier enters into an agreement with any party under [*] than those provided to Cisco herein, Frontier shall within [*] its acceptance of the new agreement with the other party, notify Cisco of such agreement. Within [*] of receipt of Frontier's notice, Cisco may give written notice to Frontier that this Agreement is [*] Cisco with the [*] provided to the other party. Such [*] shall be made [*] of the other party's agreement. [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. EX-10.11 17 EXHIBIT 10.11 Exhibit 10.11 Amendment No. 1 PROJECT AGREEMENT & DESIGN LICENSE AGREEMENT This Amendment No. 1 ("Amendment") to the Project Agreement & Design License Agreement ("Agreement') is made in California as of January 4, 1995, by and between Cisco Systems, Inc., ("CISCO") a California corporation having its principal place of business at 170 West Tasman Drive, San Jose CA 95134, and Frontier Software Development, Inc. ("Frontier') a Delaware corporation having its principal place of business at 1501 Main Street, Tewksbury, MA 01876. WHEREAS, Cisco and Frontier have previously entered into the Project Agreement & Design License Agreement dated February 25,1994; and WHEREAS, Cisco and Frontier wish to amend the Agreement to clarify NETscout Manager License Fees; NOW WHEREFORE, the parties agree to amend the Agreement as follows: 2. EXHIBIT D - SOFTWARE LICENSE FEES. Replace Section 2 NETScout Manager License Fees with Supplement Exhibit D-1 attached hereto and made a part hereof. 5. All other term and conditions of the Agreement remain unchanged. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. CISCO SYSTEMS, INC. FRONTIER SOFTWARE DEVELOPMENT, INC. By: /s/ Jaysnree Ullal By: /s/ Nathan Kalowski --------------------------------- --------------------------------- (Authorized Signature) (Authrized Signature) Name: /s/ Jaysnree Ullal Name: /s/ Nathan Kalowski ------------------------------- ------------------------------- (Authorized Signature) (Authrized Signature) Title: Director, Mktg. Title: VP Marketing ------------------------------ ------------------------------ Supplement Exhibit D-1 2. NETscout Manager License Fees. A. Frontier agrees that Cisco shall receive a [*] of [*] off Frontier's published list price for NETscout Manager sold to any third party. Upon execution of this Amendment, Cisco agrees to purchase a prepaid license for fifty (50) NETscout Manager clients for [*]. B. Frontier will provide NETscout Manager clients for inventory on the following basis: i. Cisco will purchase inventory at a mutually agreed upon material cost of [*]. ii. Cisco will pay Frontier licensing fees for copies of NETscout Manager sold by Cisco during the [*]. Cisco shall provide Frontier with report which shall be sufficient to allow Frontier to verify the NETscout Manager License Fees due iii. Payment of such NETscout Manager License Fees within [*]of the end of each calendar month. C. The [*]for NETscout Manager shall [*] for a period of [*] from the date of this Amendment. Thereafter, Frontier may [*]for NETscout Manager on [*] prior written notice to Cisco. Orders placed during the notice period shall be at [*]. [*] shall be effective [*] upon notice from Frontier. D. Frontier will provide customization to the Software and Documentation that uses the title "NetScout for Cisco". E. Frontier agrees to provide Cisco with [*] Windows licenses for internal usage only at no charge. These copies will be marked for demonstration and not for resale. [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. EX-10.12 18 EXHIBIT 10.12 Exhibit 10.12 PRIVATE LABEL AGREEMENT THIS PRIVATE LABEL AGREEMENT, including the Exhibits ("Agreement"), effective as of October 17, 1995 ("Effective Date"), is hereby made by and between Cisco Systems, Inc., a California corporation, having principal offices at 170 West Tasman Drive, San Jose, California 95134-1706 ("Cisco") and Frontier Software Development, Inc., a Delaware corporation, having principal offices at 321 Billerica Road, Chelmsford, Massachusetts 01824 ("Frontier"). 1. SALES AND PURCHASES OF PRODUCTS. 1.1 PRODUCTS. Subject to the terms and conditions of this Agreement, Frontier agrees to sell to Cisco the Frontier products ("Products") which Cisco may order from Frontier, as described in the Price Schedule attached and incorporated herein as Exhibit A, as it may be amended from time to time in accordance with the terms hereof. Products include hardware products and software imbedded in hardware (or provided separately on disks or other media), user documentation, packaging and any enhancements, modifications, updates, bug fixes or releases related thereto ("Software"). Products shall be manufactured by Frontier according to the functional, technical and other specifications for each Product set forth in Exhibit C as modified from time to time by written agreement of the parties ("Specifications"). Subject to the rights and licenses granted to Cisco in this Agreement, Frontier shall retain ownership in and to all Product intellectual property that was developed or acquired by Frontier. 1.2 NEW PRODUCT INCLUSION. Frontier agrees to keep Cisco informed of any new products or improvements to existing Products. Frontier shall use best efforts to provide Cisco with ninety (90) days written notice (prior to shipment) of any upgrades to a Product that will alter the form, fit, function or price of that Product. Cisco will notify Frontier if it wishes to add a new product or series of products of Frontier's to this Agreement. Cisco and Frontier shall then proceed to establish pricing and delivery schedules for each of such new Product. Upon agreement of these items, such product(s) shall be considered Products under this Agreement, and shall be purchased and sold under the terms and conditions of this Agreement. Frontier shall notify Cisco when Frontier is first reasonably prepared to ship more advanced technology of a similar Product category to customers, and thereafter Cisco may convert any or all of its future orders of Product to the more advanced technology. 1.3 PRODUCT UPGRADES. All upgrades, Product enhancements and bug fixes for the Software will be made available to Cisco no later than the date Frontier's related standard products have been released for shipment and at no additional charge unless provided Frontier has made such Product upgrades and/or enhancements available to its general customer base free of charge. In the event Frontier has charged or plans to charge its general customer base for Product upgrades and/or enhancements, Frontier reserves the right to charge Cisco a price to be mutually determined prior to distribution of such Product upgrades and/or enhancements. 1.4 PROJECT MANAGERS. Each party will appoint a single project manager ("Project Manager") and provide written notification to the other party of the name of the Project Manager within five (5) days of the Effective Date. The Project Managers will act as liaisons between the parties with respect to their respective performances of this Agreement and shall provide the parties from time to time with the names and telephone numbers of additional specific contact persons (e.g., to communicate specific information regarding support, enhancements, etc.) when such direct contact is preferable. In the event that either party appoints a new Project Manager, such party will promptly notify the other. 2. OWNERSHIP; GRANT OF RIGHTS 2.1 OWNERSHIP. As between the parties, Frontier retains title to and ownership of, and all proprietary rights with respect to, the Software. 2.2 OEM RIGHT. Frontier hereby grants Cisco a nonexclusive, worldwide, royalty-free right and license to promote, market, resell and distribute the Products as stand-alone products or incorporated into or in connection with Cisco's products. 2.3 SOFTWARE LICENSE Frontier hereby grants Cisco a nonexclusive, worldwide, royalty-free (except as provided below) license to use the Software (in object code form) subject to the following conditions and for the following purposes: (a) For promotion, marketing and distribution to resellers and end users in connection with Cisco's distribution of the Products; and (b) To provide customer support pursuant to Section 8. 2.4 CISCO PROPERTY. (a) All property, including without limitation designs or materials, furnished to Frontier by Cisco or paid for by Cisco in connection with this Agreement (collectively "Cisco Property") shall: (i) Be clearly marked or tagged as the property of Cisco; (ii) Be and remain personal property, and not become a fixture to real property; (iii) Be subject to inspection by Cisco at a mutually agreed upon time; (iv) Be used only in filling purchase orders from Cisco and subcontractors, if any, and in providing service or support for the Products; (v) Be kept free of liens and encumbrances; 2 (vi) Be kept separate from other materials, tools, or property of Frontier or held by Frontier; and (vii) Not be modified in any manner by Frontier. (b) Cisco shall retain all rights, title and interest in the Cisco Property, and Frontier agrees to treat and maintain the Cisco Property with the same degree of care as Frontier uses with respect to its own valuable equipment. Frontier shall bear all risk of loss or damage to Cisco Property until it is returned to Cisco. Upon Cisco's request, Frontier shall deliver all Cisco Property to Cisco in good condition, normal wear and tear excepted, without cost to Cisco (exclusive of freight costs); Cisco shall determine the manner and procedure for returning the Cisco Property, and shall pay the corresponding freight costs. Frontier waives any legal or equitable right it may have to withhold Cisco Property, and Frontier agrees to execute all documents, or instruments evidencing Cisco's ownership of the Cisco Property as Cisco may from time to time request. 3. PRICES; PAYMENT 3.1 PRICES. The prices to Cisco of the Products shall be the prices contained in the attached Exhibit A less a [*] calculated in accordance with Exhibit A. Such prices shall be fixed for one (1) year, commencing with the Effective Date of this Agreement, except that if Frontier's price for a comparable standard product is reduced, such reduction shall be immediately effective and shall apply to all unshipped orders of that Product. Sixty (60) days prior to expiration of the first year an any subsequent years of the Agreement, the parties shall meet to negotiate, in good faith, pricing and [*] to be applied to the Products for the ensuing year of the Agreement. All prices are F.O.B. Frontiers facility in Chelmsford, Massachusetts. 3.2 COST REDUCTIONS. Frontier agrees to work on achieving cost savings on both materials and processes. In the event cost savings are identified, and the parties elect to institute any such savings, the parties agree to share the benefits which shall result from the instituted cost savings. Cost savings rights and obligations shall apply to materials and processes related rights and obligations shall apply to materials and processes related to Products manufactured by Frontier as well as those manufactured by Cisco upon Frontier's grant of Manufacturing Rights to Cisco pursuant to Section 10 of the Agreement. In addition, Frontier agree to institute any cost reduction proposals reasonably suggested by Cisco. 3.3 TAXES. Prices stated in Exhibit A are in U.S. dollars and do not include applicable U.S. federal or state sales or use taxes which shall be paid by Cisco if separately indicated on the invoice for the applicable Product shipment, but do include any duties, export or import charges and the like unless Cisco requests direct shipment to a non U.S. location. - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 3 3.4 PAYMENT TERMS. Frontier will invoice Cisco with each shipment and payment terms will be the full invoiced amount payable within [*] after Cisco receives the invoice and shipment [*]. Cisco shall be entitled to a [*] if payment is made within [*] after Cisco receives the invoice. No invoice shall be submitted to Cisco until shipment to Cisco of the items covered by such invoice. 4. PURCHASE ORDERS 4.1 PURCHASE ORDERS. Cisco purchase orders for Products shall be submitted to Frontier in writing. Each purchase order shall include: Identification of Products ordered; Quantity to be purchased; Price of Products ordered; Requested delivery dates; Shipping instructions. 4.2 FORECASTS. Cisco will provide Frontier with nonbinding one hundred twenty (120) day forecasts of its requirements for Products on a monthly basis. 4.3 PLACEMENT BY CISCO. All purchase orders and invoices under this Agreement shall be subject only to the terms and conditions hereof. In the event the terms of any such purchase order, confirmation or similar document conflict with or are additional to the terms of this Agreement, the terms of this Agreement alone shall apply and shall govern regardless of execution of such document by one or both parties, except that the parties may agree to negotiate non-preprinted terms which shall be effective if executed by both parties. Any other Frontier terms and conditions shall not apply to this Agreement or the purchase orders. 4.4 ACCEPTANCE BY FRONTIER. Subject to the establishment of mutually reasonably agreeable delivery dates, Frontier shall accept and acknowledge in writing all purchase orders submitted by Cisco within [*] after receipt thereof. Notwithstanding the foregoing, Frontier shall accept all Cisco purchase orders requesting shipment [*] (or greater) from the date of Frontier's receipt of the purchase order and shall keep a sufficient supply of the Products on hand to enable Frontier to timely fill all such purchase orders. Each acknowledgment shall include a firm shipping date for the Products ordered in the purchase order. "Working day" shall mean a regular week day on which Cisco is open for business. 4.5 [*]. Cisco reserves the right to [*] delivery of any purchase orders, or part of any purchase order at any time prior to [*] from the scheduled delivery - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 4 date. Cisco may [*] any purchase orders, or any part of any purchase order at any time prior to the scheduled delivery date, however, Cisco shall be limited to [*] per purchase order, and such request, if made within [*] of the initially scheduled delivery date, may not extend beyond [*] from the initially scheduled delivery date. [*] made prior to [*] of the initially scheduled delivery date shall be subject to the following limitations and/or penalties:
[*] TERMS DAYS FROM SCHEDULED DELIVERY DATE PENALTY CHARGES Less than/equal to [*], but greater than [*] [*] [*] Less than/equal to [*], but greater than [*] [*] [*] Less than/equal to [*], but greater than [*] [*] [*]
Frontier will use its best efforts to meet any scheduled ship dates, but reserves the right to schedule, reschedule or make partial shipments at its discretion. When Products are in short supply, Frontier will use its best efforts to allocate equitably among all customers. Notwithstanding anything to the contrary in this Section 4.5, in the event Frontier reschedules the delivery of any Product order, or part thereof by twenty-one (21) days or more, or if Frontier is twenty-one(21) days or more late in delivering a Product order or part thereof, Cisco shall have the right to cancel any such rescheduled or late order without penalty. 4.6 ORDER INCREASES. Upon written request from Cisco, Frontier shall use best efforts to increase the quantities of Product to be delivered to Cisco under existing purchase orders as follows: (i) from [*] prior to a scheduled shipping date, Frontier will increase quantities of Products by up to [*]; (ii) from [*] prior to a scheduled shipping date, Frontier will increase quantities of Products by up to [*]; and (iii) more than [*] prior to a scheduled shipping date, Frontier will increase quantities of Products by up to [*]. 4.7 RUSH ORDERS. Frontier shall use its best efforts to meet Cisco's requirements for reasonable rush orders for Products requiring immediate delivery within [*]. The parties will negotiate in good faith the prices for such rush orders, taking into consideration Frontier's available inventory and additional shipping and personnel expense necessary. 4.8 DISCONTINUANCE. In the event that Frontier intends to discontinue the manufacture and sale of any Product, Frontier shall give at least [*] prior written notice to Cisco. During such [*] period (the "Discontinuance Period"), Cisco may place purchase orders for such Product pursuant to this Agreement, provided however, the last delivery date for such Product shall not be more than [*] after the end of such Discontinuance Period. In no event shall Frontier sell such Product to any other of its customers after it stops selling such Product to Cisco. - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 5 5. PRODUCT ACCEPTANCE AND QUALITY 5.1 INSPECTION AND ACCEPTANCE BY CISCO. Notwithstanding any prior inspection or payment by Cisco, all Products will be subject to final inspection and acceptance at Cisco's specified destination after delivery by Frontier. If and when Frontier qualifies to bypass Cisco's incoming inspection requirement pursuant to Cisco's Quality Program described in Exhibit G, then Frontier agrees that any Product which Cisco determines to be nonoperable upon its removal from its original packaging and initial checkout ("DOA"), whether discovered by Cisco, its subcontractor or its customer, will be treated as though discovered during Cisco's final acceptance process and shall be rejectable pursuant to the terms hereof. 5.2 REJECTION. In case any Product is defective in material or workmanship, or otherwise not in conformity with the requirements of Cisco's applicable Specifications, Cisco will have the right, at its sole option, to reject such Product; to require correction of such Product; to accept such Product with an adjustment in price; or to return such Product for credit or refund. Any Product that has been rejected or required to be corrected must be replaced or corrected by and at the expense of Frontier on a best efforts basis within [*] after receipt by Frontier of the rejected material. If, after being requested by Cisco, Frontier fails to promptly replace or correct any defective item, then Cisco shall have the right, at its sole option, to (i) replace or correct such Product and charge to Frontier the cost occasioned thereby, or (ii) without further notice, cancel the applicable purchase order relative to the rejected material without penalty or this Agreement for default in accordance with Section 14 below and require refund of any payments made relative to the rejected purchase order material. In the event Cisco returns Products due to perceived defects in material and workmanship and/or nonconformity to Specifications and Frontier determines, upon its examination and testing of the Products, that Cisco has currently rejected the Products which are not defective or in conformity to the Specifications (categorized as "No Problem Found" or "NPF"), Frontier retains the right to charge Cisco a reasonable fee to cover the necessary processing and testing of the returned units. Cisco shall further credit Frontier for any reasonable fees that Frontier may have paid to deliver the replacement Products to Cisco per Cisco's request. Frontier agrees to provide Cisco with the review documentation to validate its findings with respect to NPF's. No fees or credits shall be paid by Cisco unless and until Cisco has validated Frontier's NPF findings. 5.3 PACKING. Unless otherwise specified by Cisco, Frontier will package and pack all goods in a manner which is (i) in accordance with good commercial practice, (ii) acceptable to common carriers for shipment at the lowest rate for the particular goods, (iii) in accordance with I.C.C. regulations, and (iv) adequate to insure safe arrival of the goods at the named destination. Frontier will mark all containers with necessary lifting, handling and shipping information and with purchase order numbers, date of shipment, and the names of the consignee and consignor. An itemized packing list must accompany each shipment which shall include (i) prominently the - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 6 purchase order number and (ii) the description, part number, revision level, and quantity of the Products so shipped. 5.4 LABELING. Frontier shall label and package all Products pursuant to the specifications set forth in Exhibit H, which may be amended by Cisco from time to time upon [*] notice. Frontier acknowledges and agrees that, except as necessary to fulfill its obligations under this Agreement, it obtains no rights in Cisco's trade names, trademarks, service marks or other designations and shall not use any of the Cisco material provided pursuant to this Section 5.4 other than as expressly permitted herein. 5.5 RETURN PROCEDURE. In the event Cisco rejects Product due to defects in workmanship or non-conformance to Specifications, Cisco may, at its option, return the Product to Frontier F.O.B. Cisco's location or retain such Product, at Frontier's expense, and withhold payment pending Frontier's instructions. 6. PRODUCT SPECIFICATIONS; CHANGES 6.1 SPECIFICATIONS. Frontier agrees to supply materials acceptable to Cisco's Specifications. Frontier shall not make any changes in the form, fit, function, design or appearance of the Product purchased hereunder, or to any Specifications for any Product irrespective of impact on form, fit, or function, without Cisco's prior written approval. 6.2 PRE-SHIPMENT TESTING. Prior to delivery, Frontier shall test all Products in accordance with the test procedure set forth in Exhibit D ("Test Procedure"), and shall not ship Products which fail to meet the Specifications. Cisco may from time to time and at a mutually acceptable time send its quality control personnel to Frontier's factory to assist in or observe the testing. In addition, Cisco may, from time to time, request modifications to Frontier's test procedure, where repetitive failure to meet Specifications has been noted on shipped equipment. Frontier shall not unreasonably withhold modifications of this procedure. 6.3 ENGINEERING CHANGE APPROVAL. Frontier shall not make any changes to any production process, or the controlled process parameters or sources, types or grade classifications of materials used, which alter the form, fit or function of the Product without first obtaining from Cisco an engineering change approval. Within one (1) working day after learning of any bug or other problem in a Product which will or already has resulted in an impact to the installed customer base of such Product, and in any event no later than at the time an engineering request is made, Frontier will notify Cisco of such problem. For purposes of the immediately preceding sentence in this Section 6.3, "impact" shall mean that a significant number of Frontier's customers have been affected by a bug or any other problem with the Product, and have notified Frontier of the respective bug or problem. Frontier shall submit a request to make a change containing engineering data in support of the request. Within ten (10) working days of receiving - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 7 such request, Cisco shall respond to Frontier's request and shall either (i) approve the change, (ii) disapprove the change, or (iii) extend the deadline for the approval or disapproval period for an additional twenty (20) working days. 6.4 CISCO'S ENGINEERING CHANGE REQUEST. When an engineering change is required by Cisco, Cisco shall provide Frontier all applicable documentation, specifications and requested effective date of such engineering change. Frontier will respond initially within [*], advising Cisco as to (i) implementation and the effective date of such change, (ii) associated costs and effect to on-hand materials, (iii) on order materials, work in process, and (iv) the impact of the change upon existing Product pricing and shipment schedules for the entire period for which purchase orders are outstanding. Frontier shall also identify any materials issue or process issue that modifies the shipment schedule that was in effect immediately prior to the engineering change. 6.5 Where a requested change may create scrap costs, Frontier agrees to stop work in process and/or orders for materials within [*] of notification by Cisco. Materials on-hand or on order and work in process which has become obsolete as a result of the engineering change shall be treated in the same manner as termination of a purchase order in accordance with Section 14.6 hereunder. Cisco must issue requisite documentation and purchase order release changes before Frontier will begin the change implementation. 7. END-USER DOCUMENTATION 7.1 SCOPE. Frontier agrees to develop, write, print, manufacture, maintain, and ship all Product-related end-user documentation so that it will have a Cisco "look-and-feel" (as defined below). (a) End-user Product documentation content is determined by the Product, and Cisco's documentation guidelines. Documentation will include, without limitation, user guides, hardware installation guides, software configuration and command reference guides, software release notes and hardware errata. (b) Frontier hereby grants to Cisco, for the term of the Agreement (inclusive of any extensions or associated survival periods), and pursuant to the terms and conditions of this Section 7, a royalty-free, non-exclusive, non-transferable license to use, modify and distribute any of Frontier's standard documentation which has been incorporated into the "look and feel" documentation developed by Frontier for Cisco hereunder (the "Cisco Documentation"). While Frontier shall include all proprietary rights notices on Frontier's standard documentation during the development process of the Cisco Documentation, Cisco retains the right to modify the Cisco Documentation subsequent to Frontier's delivery of the Cisco Documentation to Cisco, and, as such, shall - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 8 incorporate any such proprietary rights notices which may have been removed by Cisco during its modification of the Cisco Documentation prior to distribution of the Cisco Documentation to its end user customers. (c) Cisco "look-and-feel" means utilizing and adhering to Cisco's then current customer documentation templates, style guide, and printing standards, as defined and specified from time to time by Cisco. (d) Cisco will provide at its expense all required templates, style guides, documentation samples, and printing guidelines. (e) Frontier agrees not to modify Cisco documentation templates. (f) Frontier will develop and maintain all end-user documentation in [*] templates provided by Cisco. Frontier will provide any required technical illustrations in [*] format. Frontier will purchase and maintain the [*] and [*] tools at its own expense. (g) Cisco will provide reasonable editorial assistance at alpha, beta, and final draft stages to assist Frontier in complying with the Cisco "look and feel." (h) Frontier will provide one (1) printed copy of each end-user manual with each Product shipped. 7.2 DOCUMENTATION REVIEW CYCLES. Cisco will review all end-user documentation at alpha, beta, and final draft stages and will provide markups to Frontier in hard-copy or electronic medium for incorporation into the documentation. Cisco retains sole and final sign-off approval at the above-mentioned draft stages for all end-user documentation. 7.3 ELECTRONIC PUBLICATION. Frontier will provide an electronic copy of the end-user documentation files (including all illustrations) at alpha, beta and final sign-off stages, and prior to any subsequent revision cycle, for the life of the manual(s). Cisco shall have the exclusive right to distribute manual(s) electronically. 7.4 OWNERSHIP. Cisco shall own all right, title and interest in the Cisco Documentation provided, however, that Frontier retains all rights, title and interest in the content of Frontier's standard documentation which has been utilized in the development of the Cisco Documentation. Frontier hereby assigns to Cisco all right, title and interest to the Cisco Documentation and shall execute such instruments as Cisco may reasonably may request to effect and record such assignment. Frontier may not distribute the Cisco Documentation in any format or medium or for any purpose to any third party without prior written consent of Cisco. Upon termination or expiration of the Agreement, the Parties shall cease any development and - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 9 distribution of the Cisco Documentation, except to the extent that Cisco retains survival rights to distribute any Cisco Documentation with Products remaining in Cisco's inventory at the time of termination or expiration that are subsequently sold by Cisco during the survival period of the Agreement and for technical and support purposes for the installed base of Products. The Parties further agree, upon termination or expiration, to meet to determine the appropriate disposition for all work in process and excess, unreserved Cisco Documentation which remains in either Cisco's inventory or at Frontier's manufacturing facility awaiting completion and/or delivery to Cisco at the time of termination or expiration. 7.5 PRINT QUALITY. Cisco's written approval is required prior to printing any end-user documentation with Cisco "look-and-feel." (a) Cisco retains the right to review and approve any print vendor selected by Frontier for adherence to Cisco quality practices and competitive pricing. (b) Four-color process covers: Cisco will provide at its expense all film for four-color covers. Frontier will provide, at is expense, a trimmed composite blueline for Cisco's approval prior to printing any color process covers. (c) Self-cover manuals (one-color): Frontier will provide a trimmed blueline for Cisco approval prior to printing. (d) Cisco may, at its discretion, require a first-article prior to accepting delivery of any end-user documentation. 7.6 REVISION CYCLES. Once documentation is "in-print," Frontier will revise the printed end-user manual(s) as necessary to accurately support the Product. Frontier and Cisco will agree upon a reasonable revision cycle, determined by anticipated Product enhancements, documentation errors, and/or changes. (a) Frontier will issue Software release notes or hardware errata in a timely manner, and ship them with their related Cisco Documentation. (b) Frontier will notify Cisco within thirty (30) days of Frontier's intent to revise a printed document. (c) Document revisions will include all relevant Product enhancements and new technical information. (d) Document revisions will receive alpha, beta, and final draft reviews by Cisco. Cisco retains sole and final draft sign-off approval. (e) With each revision, Frontier will provide electronic copies of files, as specified in Section 7.3. 10 (f) Frontier will reprint revised documentation as specified in Section 7.5. 7.7 DOCUMENTATION LIFE-CYCLE. Frontier agrees to maintain end-user documentation in print until Cisco notifies Frontier it will cease distributing a particular Product. Frontier will manage the physical documentation inventory. 7.8 DOCUMENTATION NRE. In consideration of Frontier's creation of the Cisco Documentation hereunder, Cisco agrees to pay Frontier the amount of [*] upon completion and Cisco's acceptance of the Cisco Documentation. Cisco further agrees to pay for additions,/modifications to existing Cisco Documentation or for the creation of new documentation, both of which may be required as a result of Frontier's addition of new Products to the Agreement, provided, however, that (i) Cisco has requested and/or authorized the modifications of the existing documentation or the creation of any new documentation, and (ii) specification/technical requirements have been provided by Cisco to Frontier, and (iii) the Parties have reached agreement with respect to the price to be paid to Frontier for the documentation prior to Frontier's initiation of any such work. 8. SUPPORT 8.1 CUSTOMER SUPPORT. Cisco will provide all first and second level customer support in the same manner that it provides such support for its other similar products. Frontier will provide third-level or other customer support [*] to Cisco by telephone and e-mail seven days a week, twenty-four hours per day with a maximum one hour telephone response time. On-site third level problem support shall be as mutually agreed by Cisco and Frontier, but at a minimum will include troubleshooting and providing bug fixes in the Software and hardware of the Product. Cisco shall provide Frontier feedback on any software bugs and potential fixes, which will then be incorporated into the Software. 8.2 TECHNICAL SUPPORT. Frontier agrees to regularly supply Cisco with all bug notes or other documentation defining the relevant hardware and software information, symptoms, solutions or work-arounds for Product problems which affect form, fit or function. During the term of this Agreement, Frontier will provide such support to Cisco [*]. This information will be provided via an electronic means (e.g. an FTP server). 8.3 ENGINEERING CHANGES. Frontier agrees to provide Cisco, with new releases of maintenance modifications or engineering changes approved by Cisco pursuant to Section 6.3, suitable for preparation by Cisco as a Product for distribution to Cisco's customers, at Cisco's discretion. Cisco may request that Frontier update all of Cisco's customer support documentation and Product inventory to incorporate modifications or changes. In addition, if the parties mutually determine that Products or Product parts must be replaced in the field (including - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 11 without limitation to rectify epidemic failure), Frontier will, at a minimum, provide retrofit kits to Cisco [*]. 8.4 REPAIR PROCEDURE. After expiration of the Warranty Period, Frontier will continue to provide repair for Products and Product parts. Repair is defined as repairing the part or Product and bringing it up to the current engineering change. Frontier will track Products returned for repair by serial number and will ship repaired parts within five (5) days from receipt. Cisco shall be responsible for all inbound and outbound freight associated with Product repair. Each part will be individually packaged and meet Cisco packaging specifications. Frontier will provide quarterly part failure reports on a best efforts basis. Such part failure reports will include, by serial number, each part repaired, failure symptom, and determined failure. Frontier will use a [*] or better within the U.S. and [*] or better internationally (if applicable). Prices and charges for repair of parts and Products and for spare parts are set forth in Exhibit E. 8.5 EMERGENCY PART SHIPMENT PROCEDURE. In cases of emergency, as reasonably determined by Cisco, Frontier will ship (at Cisco's expense) to Cisco part(s) or Product(s) with [*] to Cisco. Such parts or Products shall only be used for service and support and may not be resold by Cisco other than as part of Cisco's customer service and support program. 8.6 SUPPORT DOCUMENTATION. Promptly upon Cisco's written request, Frontier agrees to supply Cisco with all technical documentation and resources that the Parties reasonably determine to be useful or necessary to perform customer support and troubleshooting or to analyze the technical benefits and risks of introducing new software or hardware releases of the Products into Cisco's customer base. Such support documentation will include, without limitation: (i) hardware and software specifications, (ii) information on debugging/support tools, and (iii) lists of all error messages with explanations as needed and recommended actions. 8.7 PRODUCT REPORTS. Frontier will keep accurate records of Product deficiencies (bugs) and make such reports available to Cisco at least [*] on a best efforts basis. Frontier will maintain an electronic means (e.g., an FTP server) through which Cisco can obtain up-to-date information on bugs, fixes, and code updates. 8.8 DISCONTINUED PRODUCTS. Frontier will use best efforts to provide support to Cisco, pursuant to this Section 8, for each discontinued Product for [*] after the date of such discontinuance. 8.9 SUPPORT PRIORITIZATION AND ESCALATION GUIDELINES, To ensure that all Product problems and technical inquiries are reported in a standard format, Frontier will use and comply with the problem priority definitions and escalation guidelines as set forth in Exhibit F hereto, and Cisco shall assign a priority to all problems submitted to Frontier. Based on the priority of a - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 12 Product problem, Frontier agrees to provide Cisco fixes or work-arounds in the following time frames: Priority 1: Fix or work-around within [*] of problem report to Frontier Priority 2: Fix or work-around within [*] of problem report to Frontier Priority 3: Fix of work-around within [*] of problem report to Frontier Priority 4: Fix or work-around within [*] of problem report to Frontier For Priority 3 or 4 problems, if Frontier is [*], the Frontier will provide to Cisco within [*], at a minimum, a written plan for addressing the problem. 8.10 TRAINING. Frontier shall offer, at its expense, its standard training and instruction class in the service and maintenance of the Products up to [*] during the term of this Agreement at Cisco's San Jose headquarters at times mutually reasonably agreed upon by Frontier and Cisco, such training classes to last no more than three (3) days each. In addition, this training will be offered from time to time as requested by Cisco or as otherwise needed as new Products are added to this Agreement and as existing Products are enhanced and shall also include compatibility issues, engineering debug capabilities, customer premises debug capabilities. Frontier will provide training for new Products prior to initial shipment of each new Product and for a minimum of twenty-five (25) people at a Frontier facility or a location mutually reasonably agreed upon by Frontier and Cisco. Training will be provided at no cost to Cisco, except that Cisco will bear all travel and living expenses of its employees during such training. Frontier shall pay all costs associated with shipping training materials to Cisco's San Jose facilities. Additional terms regarding training classes at Cisco sales offices will be negotiated by the parties in good faith. 8.11 SUPPORT OF CISCO ENHANCEMENTS. In the event Cisco exercises its right to make Software enhancements, Frontier is obligated to fix software bugs only if the problem can be demonstrated to exist in the Software without the Cisco enhancements. 9. REPRESENTATIONS AND WARRANTIES 9.1 WARRANTY OF TITLE. Frontier warrants and represents to Cisco that (i) Cisco shall acquire good and clear title to the Products, free and clear of all liens and encumbrances, (ii) all materials and services provided hereunder including, without limitation, the Products, are either owned or properly licensed by Frontier or are in the public domain and the use thereof by Cisco or its affiliates, customers, representatives, distributors or dealers will not infringe any proprietary rights of any third party, (iii) Frontier has the full power to enter into this Agreement, to carry out its obligations under this Agreement and to grant the rights and licenses granted to Cisco in this Agreement and (iv) Frontier's compliance with the terms and conditions of this - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 13 Agreement will not violate any Federal, state or local laws, regulations or ordinances or any third party agreements. 9.2 PRODUCT WARRANTY. To Cisco and its customers Frontier warrants the Products will be new and unused, will perform in accordance with the applicable Specifications and related documentation provided by Frontier (and will achieve any function described therein), and will be free from defects in materials, workmanship or design for a period of [*] from the date of shipment (the "Warranty Period"). Frontier further warrants that repairs will be free from defects outside the Warranty Period for a period of [*]. 9.3 During the Warranty Period, Frontier will repair or replace (at its option), and return or deliver to the location designated by Cisco within [*] from receipt, any defective Product or part, provided that the Product or part is returned to Frontier. Unless Frontier reasonably demonstrates a returned item is free from defect, Frontier shall pay the costs of all shipping and insurance of the item (including, upon repair or replacement, return of the same or replacement item to the original location) and assume the risk of loss during shipping. All replaced parts become the property of Frontier. 9.4 This limited warranty does not extend to any Products that have been misused, abused, serviced by anyone other than a Frontier authorized representative, Cisco or a party authorized by Cisco, or damaged due to accident or act of God. EXCEPT FOR THE WARRANTIES PROVIDED IN THIS AGREEMENT, NO OTHER WARRANTIES ARE EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. EXCEPT FOR THE WARRANTIES PROVIDED BY FRONTIER IN THIS AGREEMENT, NO ADDITIONAL REPRESENTATION OR WARRANTY, INCLUDING BUT NOT LIMITED TO: STATEMENTS OF CAPACITY, SUITABILITY FOR USE OR PERFORMANCE, WHETHER MADE BY FRONTIER EMPLOYEES OR CISCO SHALL BE CONSIDERED TO BE A WARRANTY BY FRONTIER FOR ANY PURPOSE OR GIVE RISE TO ANY LIABILITY OF FRONTIER WHATSOEVER. 9.5 EPIDEMIC HARDWARE FAILURE. For the purposes of this Agreement epidemic failure will be deemed to have occurred if more than [*] of the [*] total installed base of [*] Product should fail in [*] within a time period of [*]. In the case of epidemic failure Frontier and Cisco will cooperate to implement the following procedure: (a) Cisco will immediately notify Frontier upon discovery of the failure. (b) Within [*] Frontier will give an initial response indicating its preliminary plan for diagnosing the problem. - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 14 (c) [*] will [*] exert [*] efforts to diagnose the problem and plan a work-around or more permanent solution. (d) Frontier will apply its engineering change order procedure in appropriate circumstances for hardware problems originating in the manufacturing process. (e) [*] will prepare and consult with [*] regarding an appropriate [*] as well as an appropriate [*], as an [*], if one is needed. (f) [*] will [*] on a recovery plan. [*] will be responsible for [*] in rectifying any epidemic failure, including without limitation, for any solution, work-arounds, recovery plan or engineering changes. 10. MANUFACTURING RIGHTS 10.1 CISCO'S RIGHT TO MANUFACTURE. Frontier grants Cisco, for a period not to exceed [*] from Cisco's exercise of such grant, a worldwide, nonexclusive, non-transferable right and license to manufacture or have manufactured the Products ("Manufacturing Rights") at any time upon occurrence of any of the events and/or circumstances defined below, provided the parties' management has met to review the event and/or circumstances causing the transfer of Manufacturing Rights to Cisco and has failed, after exhausting all reasonable efforts, to reach an alternative resolution. (a) If Frontier fails to consistently supply Cisco with Products meeting the applicable Specifications in the quantities required in accordance with Cisco purchase orders, and fails to provide Cisco with a reasonable cure and/or reasonable assurances of an expeditious cure within [*] of receipt of Cisco's notification of Frontier's failed performance. For the purposes of this section, Frontier shall have been deemed to have failed consistently in performing its obligations to supply Products if: (i) for any [*] period, Frontier fails to deliver at least [*] of the required quantities of the Product on or before the scheduled delivery dates; or, (ii) greater than [*] of the Products delivered over any [*] are defective in any material respect with regard to materials and workmanship. Cisco agrees to provide Frontier with a [*] which identifies the [*] associated with Frontier's [*] to enable Frontier to review and correct any deficiencies in its performance hereunder. In the event Cisco fails to provide the required [*] for any of the [*] which are the basis for Frontier's failed performance hereunder, Cisco may not invoke its Manufacturing Rights unless and until such time as Cisco provides Frontier with the - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 15 required [*] and notice of Frontier's failure for the specified [*], and Frontier, after receipt of the [*] and notification from Cisco, fails to provide Cisco with a reasonable cure and/or reasonable assurances of an expeditious cure within [*] of receipt of said notification. In the event Frontier cures its failed performance within the required time frame, Cisco may not invoke any Manufacturing Rights under this section until such time as Frontier fails to meet delivery or quality standards for any subsequent [*] period. (b) If Frontier discontinues manufacturing of the Product and fails to make a substitute available that, in Cisco's reasonable judgment, is equivalent in form, fit and function. (c) If Frontier becomes insolvent or seeks protection under any bankruptcy, receivership, trust, deed, deed, creditors arrangement, composition or comparable proceeding, or if such is instituted against Frontier. (d) If Frontier assigns or transfers its rights or obligations under the Agreement to a direct competitor of Cisco's without prior written consent, including, without limitation, any transfer by sale, merger or other working combination of ownership of or control over more than [*] of the voting securities or control of Frontier. (e) If Cisco terminates the Agreement by reason of any other material breach by Frontier of its obligations hereunder, and such obligations remain uncured for the later of [*] or a mutually accepted period of time after Frontier's receipt of written notice thereof from Cisco. Notwithstanding Cisco's rights with respect to termination as defined in this Section 10, Cisco agrees, in the interest of maintaining the ongoing relationship between the Parties as set forth by the Agreement, to contact Frontier to schedule a meeting with Frontier's senior management to discuss and review resolution alternatives to the material breach prior to delivery of written notice of termination to Frontier. In the event the Parties fail to identify a reasonable resolution to the breach during the management meeting, Cisco may, immediately thereafter, deliver termination notice to Frontier. 10.2 ROYALTIES AND LICENSE FEES. (a) In the event Cisco exercises its Manufacturing Rights, Cisco agrees to [*] on all Products manufactured and distributed by Cisco hereunder equal to [*] of Cisco's [*] for the Product. All royalties will be computed on a per unit basis and paid quarterly within [*] following the end of each Cisco quarter. (b) Cisco shall be obligated to pay all license fees and royalties, if any, with respect to any third party proprietary rights and technologies which are required for the - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 16 exercise of Cisco's Manufacturing Rights and which are listed in Exhibit I. All other such third party royalties and licenses which are not listed in Exhibit I and which are required for Cisco to exercise the Manufacturing Rights under this Agreement shall be paid by Frontier. 10.3 AUDIT RIGHTS. In the event Cisco exercises its Manufacturing Rights as provided hereunder, Cisco agrees to keep and maintain, for a period of [*] after the end of the year to which they pertain, complete and accurate records of the Products manufactured and distributed by Cisco in order to calculate and confirm Cisco's royalty obligations under Section 10.2 above. Upon reasonable prior notice, Frontier will have the right, exercisable not more than once every [*], to appoint an independent accounting firm reasonably acceptable to Cisco, at Frontier's expense, to examine such books, records and accounts during Cisco's normal business hours to verify the royalties due by Cisco to Frontier under Section 10.2 above, subject to such independent accounting firm's execution of Cisco's standard confidentiality agreement; provided that execution of such agreement will not preclude such firm from reporting its results to Frontier. In the event such audit discloses an underpayment or overpayment of royalties due hereunder, the appropriate party will promptly remit the amounts due to the other party. 10.4 MANUFACTURING INFORMATION ESCROW. (a) The parties agree that upon request by Cisco, Frontier will promptly place the following materials into an escrow account: (i) the source code and applicable documentation for the Products (in either electronic media form or hard copy) and (ii) certain applicable manufacturing information ("Escrowed Materials"). Cisco shall select the escrow agent (subject to Frontier's reasonable approval), and be responsible for the establishment, administration and cost of the escrow account. Immediately upon termination of this Agreement, all Escrowed Materials will be released back to Frontier. The Escrowed Materials will be released for use by Cisco, subject to the terms and conditions hereof, only after notice to Frontier and only under circumstances in which Cisco would otherwise be entitled to exercise the Manufacturing Rights. Frontier agrees to promptly deposit, at least [*] per year, into escrow any and all updates, enhancements and modifications to the Escrowed Materials. (b) In the event Cisco exercises its Manufacturing Rights hereunder, at no cost to Cisco, Frontier shall provide Cisco such technical support and assistance as Cisco may reasonably request in connection with the manufacture of the Products. (c) Cisco agrees that it will maintain the Escrowed Material delivered to it under this Agreement in strict confidence and will require its contractors to do the same. Any source code which is delivered as part of the Escrowed Material will be subject to Cisco's confidentiality obligations set forth in Section 12. - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 17 (d) Cisco's rights to use the Escrowed Materials, upon the exercise of Manufacturing Rights, shall be limited to support, maintenance and manufacture of the Products only. Cisco shall be prohibited from: (i) disclosing, selling, copying or otherwise transferring the Escrowed Materials except as necessary to carry out Cisco's right to support, maintain and manufacture the Products; or (ii) removing the Escrowed Materials from Cisco's facilities or the facilities of Cisco's authorized manufacturer(s) of the Products. Cisco further agrees, at all times while in possession of Frontier's Escrowed Materials, to protect against unlawful disclosure and ensure the integrity and protection of Frontier's proprietary rights by maintaining, as applicable, Frontier's proprietary rights notices (A) in the source code of the Escrowed Materials, in the comment lines at the beginning of each significant module; (B) on the terminal screen when each user starts that program; (C) on the label for the magnetic media that contains the program; and (D) on all technical manuals and related documentation for the program. 11. INDEMNIFICATION 11.1 PROPRIETARY RIGHTS. (a) Frontier agrees to indemnify, defend and hold harmless Cisco and its officers, directors, employees, shareholders, customers, agents, successors and assigns from and against any and all loss, damage, settlement or expense (including legal expenses), as incurred, resulting from or arising out of any claims which allege that any Products or the use or sale thereof infringe upon, misappropriate or violate any patents, copyrights, or trade secret rights or other proprietary rights of persons, firm or entities who are not parties to this Agreement except for such claims that result solely (i) from Frontier's compliance with design specifications and/or data sheets supplied by Cisco or (ii) from Cisco's alteration or modification of Products after delivery by Frontier; provided that Cisco (i) promptly notifies Frontier, in writing, of any notice or claim of such alleged infringement or misappropriation involving the Products of which it becomes aware, and (ii) permits Frontier to control, in a manner not adverse to Cisco, the defense, settlement adjustment or compromise of any such claim using counsel reasonably acceptable to Cisco. Cisco may employ counsel, at its own expense (provided that if such counsel is necessary because of a conflict of interest of either Frontier or its counsel or because Frontier does not assume control, Frontier will bear such expense), to assist it with respect to any such claim. Frontier shall not enter into any settlement that affects Cisco's rights or interest without Cisco's prior written approval. Cisco shall have no authority to settle any claim on behalf of Frontier. (b) If by reason of such infringement claim, Cisco or its customers shall be prevented or are likely to be prevented by legal means from selling or using any Products, or if, in Frontier's opinion, such claim is likely to occur, Frontier will use its best efforts, at its expense, to: (i) obtain all rights required to permit the sale or use of the Products by Cisco and its customers; or (ii) modify or replace such Products to make them non-infringing (and extend this indemnity thereto), provided that any such replacement or 18 modified Products are satisfactory to Cisco. If Frontier is unable to achieve either of the options set forth above within a reasonable period of time after the issuance of the injunction, but in no event longer than thirty (30) days after receipt of notice thereof, Frontier shall promptly refund to Cisco the invoiced purchase price, plus all shipping, storage, and associated costs, of any Products returned freight collect to Frontier which Cisco or its customers are legally prohibited from selling or using. 11.2 PRODUCT LIABILITY INDEMNIFICATION. (a) Frontier expressly and unequivocally agrees to and hereby does indemnify, release, defend and hold Cisco and its officers, directors, employees, shareholders, agents, successors and assigns harmless from and against all claims, damages, losses, costs and expenses, including attorneys' fees, arising in favor of any person, firm or corporation on account of product liability in any way relating to the Product, provided that Cisco (i) promptly notifies Frontier, in writing, of any notice or claim hereunder of which it becomes aware, and (ii) permits Frontier to control, in a manner not adverse to Cisco, the defense, settlement, adjustment or compromise of any such claim using counsel reasonably acceptable to Cisco. Cisco may employ counsel, at its own expense (provided that if such counsel is necessary because of a conflict of interest of either Frontier or its counsel or because Frontier does not assume control, Frontier will bear such expense), to assist it with respect to any such claim. Frontier shall not enter into any settlement that affects Cisco's rights or interest without Cisco's prior written approval. Cisco shall have no authority to settle any claim on behalf of Frontier. Notwithstanding the indemnification provisions of this Section 11.2, it is mutually agreed and understood that any and all obligations, commitments and liabilities with respect to Product liability as defined in this Section 11.2 shall not apply to Frontier to the extent Products are manufactured by Cisco in the event Cisco has exercised its rights to manufacture Frontier's Products pursuant to Section 10 hereunder, provided that Frontier's Product liability indemnity obligations under this Section 11.2 shall continue to apply for defects arising from the design of the Product. 12. CONFIDENTIALITY Any proprietary information exchanged by the Parties during the term of this Agreement shall be treated pursuant to the Non-Disclosure Agreement, dated July 10, 1995. 13. LIMITATION OF LIABILITY EXCEPT UNDER SECTIONS [*], UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE OTHER IN CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, STRICT LIABILITY, NEGLIGENCE OR - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 19 OTHER LEGAL OR EQUITABLE THEORY, FOR (I) ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, (II) LOST PROFITS OR DATA OR (III) ANY AMOUNTS IN EXCESS OF THE [*] OR THE [*] FOR THE [*] THAT ARE THE SUBJECT OF THE CLAIM. THIS SECTION DOES NOT LIMIT EITHER PARTY'S LIABILITY FOR BODILY INJURY OF A PERSON. 14. TERM AND TERMINATION 14.1 TERM. Unless terminated earlier as provided herein, this Agreement shall have a term of three (3) years commencing from the Effective Date, unless terminated sooner by written notice given by a party pursuant to this Section 14. The parties may extend the term of this Agreement for up to additional one (1) year periods by written agreement executed no later than sixty (60) days prior to the expiration of the then current term period. Upon any expiration or termination, the rights and obligations of the parties shall continue except that Frontier will not be required to accept further orders or undertake further product development. 14.2 TERMINATION FOR CAUSE This Agreement may be terminated by a party for cause immediately by written notice upon the occurrence of any of the following events: (a) If the other ceases to do business, or otherwise terminates its business operations; or (b) If the other breaches any provision of this Agreement and fails to cure such breach within [*] (immediately in the case of a breach of Section 12) of written notice describing the breach; or (c) If the other becomes insolvent or seeks protection under any bankruptcy, receivership, trust deed, creditors arrangement, composition or comparable proceeding, or if any such proceeding is instituted against the other (and not dismissed within ninety (90) days). 14.3 TERMINATION FOR CONVENIENCE. Subject to the terms of this Section 14, Cisco may terminate this Agreement or any purchase order issued hereunder upon notice to Frontier. Both Cisco and Frontier agree to cooperate in good faith to minimize the negative impact to both parties. Cisco agrees to execute any termination for convenience in the following manner. (a) Written notice informing Frontier of Cisco's intent to terminate this Agreement or any purchase orders issued hereunder. (b) A minimum of nine (9) months lead time from the date of receipt of written notice by Cisco before full termination of Cisco's requirements. 14.4 FRONTIER'S ACTIONS. Upon receipt of written notice pursuant to Section 14.3, Frontier will, to the extent and at the times specified by Cisco, stop all work under the affected purchase order, place no further orders for materials to complete the work, orders and any 20 surviving rights under terminated subcontracts or orders, settle all claims thereunder after obtaining Cisco's approval, protect all property in which Cisco has or may acquire an interest, and transfer title and make delivery to Cisco of all completed Products, articles, raw materials, work in process, and other things held or acquired by Frontier in connection with the terminated portion of this purchase order. Frontier will proceed promptly to comply with Cisco's instructions respecting each of the foregoing without awaiting settlement of payment of its termination claim. 14.5 CLAIMS. Within [*] after termination according to Section 14.3, Frontier may submit to Cisco its written claim for any charges due to Frontier from Cisco. Failure to submit the claim within [*] will constitute a waiver of all claims and a release of all Cisco's liability arising out of the termination. 14.6 SETTLEMENT. In the event that Frontier properly files any claims under Section 14.5 above, Cisco agrees to pay to Frontier the amounts identified by Frontier in its invoice for any such termination that is promptly submitted to Cisco. Notwithstanding the foregoing, if Cisco reasonably disputes the amounts identified by Frontier in the submitted invoice and the parties fail (in good faith) to reach agreement on an adjusted invoice value, Cisco agrees to pay and Frontier shall accept the following amounts: (a) The price for all Products completed (which items were delivered or available for delivery at the time notice of termination was given) pursuant to the affected purchase order(s) and not previously paid for as specified in Exhibit A. (b) The actual, documented costs incurred by Frontier related to the terminated portion of the purchase order, including, only to the extent that any components, materials and other inventory cannot be used in any of Frontier's non-Cisco products: (i) Frontier's cost of component inventory for the terminated portion of the purchase order(s), (ii) Frontiers cost of work in process materials including manufacturing operations completed at the time of cancellation for the terminated portion of Cisco's purchase order, and (iii) reasonable cancellation charges incurred by Frontier from component suppliers for the terminated portion of Cisco's purchase order. (c) The reasonable, documented costs incurred by Frontier in protecting property in which Cisco has or may acquire an interest. (d) Notwithstanding the foregoing, payments made under this Section 14.6 shall in no event [*] in the terminated purchase order(s) less payments otherwise made or to be made. Any amounts payable for property lost, damaged, stolen or destroyed prior to delivery to Cisco win be excluded from amounts otherwise payable to Frontier under this Section 14. THIS SECTION 14.6 SETS FORTH FRONTIER'S ENTIRE REMEDIES - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 21 WITH RESPECT TO A TERMINATION OF THIS AGREEMENT BY CISCO UNDER SECTION 14.3 ABOVE. 14.7 SURVIVAL; SUPPORT AFTER TERMINATION. Sections 2, 7.4, 9, 11, 12, 13, 14, 15, 16, 17, 18 and 19 and Cisco's right to distribute Products in inventory or subject to any pending purchase order shall survive termination or expiration of this Agreement. In the event of any termination or expiration of this Agreement, Frontier shall continue to provide maintenance support and hardware repair to Cisco at Frontier's prevailing rates. The support shall be provided a minimum of three (3) years after termination or expiration. 14.8 Subject to Cisco's Manufacturing Rights under Section 10, upon Frontier's request, Cisco shall deliver to Frontier all Frontier property loaned to Cisco under this Agreement, without cost to Frontier (exclusive of freight costs). Frontier shall determine the manner and procedure for returning the Frontier property, and shall pay the corresponding freight costs. 15. FORCE MAJEURE Neither party shall be considered in default of performance of its obligations under this Agreement to the extent that performance of such obligations is delayed by force majeure or contingencies or causes beyond the reasonable control of such party or its suppliers. In the event Frontier fails to deliver product due to such causes, Cisco may either: (a) Terminate this Agreement or any part hereof as to Product(s) not shipped; or (b) Suspend this Agreement in whole or in part for the duration of the delaying cause, and at Cisco's option, buy the Product(s) elsewhere and deduct from any commitment to Frontier the quantity so purchased. Frontier shall resume performance under this Agreement immediately after the delaying cause ceases and, at Cisco's option, extend the then current term period for a period equivalent to the length of time the excused delay endured. 16. ASSIGNMENT This Agreement shall be binding on the parties hereto and their successors and assigns; provided, however, that Frontier shall not assign or transfer, in whole or in part, this Agreement or any of its rights or obligations arising hereunder without the prior written consent of Cisco, except that Frontier may assign this Agreement to a party that acquires all or substantially all of Frontier's business, stock or assets. Any purported assignment without such consent shall be null and void. Cisco may freely transfer, in whole or part, this Agreement and its rights and obligations hereunder. 22 17. NONSOLICITATION During the term of this Agreement and for one (1) year thereafter, each party will refrain from (i) soliciting the other party's employees or consultants for employment or other service or (ii) encouraging the other party's employees or consultants to leave the such other party for any reason. 18. COMPLIANCE WITH LAWS; IMPORT/EXPORT 18.1 COMPLIANCE WITH LAWS. Frontier warrants that in performance of work under this Agreement it has complied with or will comply with all applicable federal, state, local laws and ordinances now or hereafter enacted including, but not limited to OSHA, the Fair Labor Standards Act of 1938 (29 U.S.C. 201-219), the 8-Hour Law (40 U.S.C. 327-332), the Equal Opportunity and Affirmative Action Regulations, and laws restraining the use of convict labor. Frontier warrants that in performance of work under this Agreement it has complied with all laws, regulations, statutes and ordinances of all governmental entities including local, state, federal or international, now or hereafter enacted, which regulate any material because it is radioactive, toxic, hazardous or otherwise a danger to health, reproduction or the environment including but not limited to the Comprehensive Environmental Response Compensation and Liability Act of 1980, the Resource Conservation Recovery Act, the Federal Water Pollution Control Act, the Clean Air Act, the Montreal Protocol, the Toxic Substances Control Act and similar laws, rules, statutes, treaties or orders and international understandings. In addition, Frontier shall secure and maintain adequate workmen's compensation insurance in accordance with the laws of the state or states from which Frontier shall furnish Product and/or services for Cisco. Upon request, Frontier agree to issue certificates certifying compliance with any of the aforementioned laws or regulations as may be applicable to the Product and/or services being furnished hereunder. 18.2 IMPORT AND EXPORT. Frontier shall provide all information under its control which is necessary or useful for Cisco to obtain any export or import licenses required for Cisco to ship or receive Products, including, but not limited to, U.S. customs certificates of delivery, affidavits or origin, and U.S. Federal Communications Commissions identifier, if applicable. 19. GENERAL 19.1 NOTICES. All notices shall be sufficient only if personally delivered, delivered by telecopy, delivered by a major commercial rapid delivery courier service or mailed by certified or registered mail, return receipt requested, to either party at its address set forth below (or such other address as such party may provide by notice pursuant to this Section): Cisco Systems, Inc. Frontier Software Development, Inc. 170 West Tasman Drive 321 Billerica San Jose, CA 95134-1706 Chelmsford, MA 01824 23 If not received sooner, notice by mail shall be deemed received five (5) days after deposit in the U.S. mails, properly addressed, with first class postage prepaid. Notice by telecopy shall be deemed received at the time sent or the next working day if such time is not during a working day. 19.2 CONTROLLING LAW AND JURISDICTION. This Agreement shall be governed, controlled, interpreted and defined by and under the laws of the State of California and the United States, without regard to the conflicts of laws provisions thereof. Unless waived by Cisco (which it may do in its sole discretion) the exclusive jurisdiction and venue of any action with respect to the subject matter of this Agreement shall be the Superior Court of California for the County of Santa Clara or the United States District Court for the Northern District of California and each of the parties hereto submits itself to the exclusive jurisdiction and venue of such courts for the purpose of any such action. Service of process in any such action may be effected in the manner provided in Section 19.1 for delivery of notices. 19.3 WAIVERS AND AMENDMENTS. No failure or delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial waiver thereof include any other right, power or privilege. This Agreement may not be amended, changed, discharged or terminated except by a written document signed by duly authorized officers of the parties. 19.4 SEVERABILITY. In the event that any provision of this Agreement shall be unenforceable or invalid under any applicable law or be so held by applicable court decision, such unenforceability or invalidity shall only apply to such provision and shall not render this Agreement unenforceable or invalid as a whole; and, in such event, such provision shall be modified or interpreted so as to best accomplish the objective of such unenforceable or invalid provision within the limits of applicable law or applicable court decision and the manifest intent of the parties hereto. 19.5 RELATIONSHIP OF THE PARTIES. In fulfilling its obligations under this Agreement, each party shall be acting as an independent contractor. This Agreement does not make either party the employee, agent or legal representative of the other. 19.6 BASIS OF BARGAIN. EACH PARTY RECOGNIZES AND AGREES THAT THE WARRANTY DISCLAIMERS AND LIABILITY AND REMEDY LIMITATIONS IN THIS AGREEMENT ARE MATERIAL BARGAINED FOR BASES OF THIS AGREEMENT AND THAT THEY HAVE BEEN TAKEN INTO ACCOUNT AND REFLECTED IN DETERMINING THE CONSIDERATION TO BE GIVEN BY EACH PARTY UNDER THIS AGREEMENT AND IN THE DECISION BY EACH PARTY TO ENTER INTO THIS AGREEMENT. 19.7 ENTIRE AGREEMENT. This Agreement (including the Exhibits hereto) constitutes the entire Agreement between the parties hereto concerning the subject matter of this Agreement; and there are no conditions, understandings, agreements, representations, or warranties, expressed or implied, which are not specified herein. 24 IN WITNESS WHEREOF, the parties hereto have executed this Agreement by persons duly authorized as of the date and year first above written. CISCO SYSTEMS, INC. By: /s/ MARIO MAZZOLA ------------------- Title: V.P. AND G.M. WBU ----------------- FRONTIER SOFTWARE DEVELOPMENT, INC. By: /s/ NARENDRA POPAT ------------------- Title: PRESIDENT 25 EXHIBIT A PRODUCTS/PRICING
- ------------------------- ---------------------- --------------------------------------------------------------------- PRODUCT U.S. [*] MODEL LIST NUMBER PRICE - ------------------------- ---------------------- --------------------------------------------------------------------- [*] --------------------------------------------------------------------- [*] [*] [*] - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- [*] [*] [*] [*] [*] - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- [*] [*] [*] [*] [*] - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- [*] [*] [*] [*] [*] - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- [*] [*] [*] [*] [*] - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- [*] [*] [*] [*] [*] - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- [*] [*] [*] [*] [*] - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- [*] [*] [*] [*] [*] - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- [*] [*] [*] [*] [*] - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- [*] [*] [*] [*] [*] - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- [*] [*] [*] [*] [*] - ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
When reference is made in the Agreement or any exhibit to Frontier's published U.S. List Price of a Product specially modified for Cisco, such reference shall mean Frontier's published U.S. List Price for Frontier standard product upon which the Product has been based. If Frontier shall modify, update, enhance or create a new version of a standard product upon which such a Product is based, it shall similarly modify, update, enhance or create a new version of the corresponding Product. Frontier will sell Products specially modified for Cisco only to Cisco. - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 26 EXHIBIT B NOT USED 27 EXHIBIT C PRODUCT SPECIFICATIONS 28 INTELLIGENT RMON PROBES FOR FDDI/CDDI BACKBONES - - Cost effective RMON probes for 62.5/125 micron multimode FDDI and for CDDI - - High Performance 90 Mhz Pentium processor - - RMON MIB and SMT support FDDI/CDDI for enterprise wide standard diagnostics - - Support for Single and Dual attached physical connections - - Virtual analyzer for 7 layer EnterpriseRMON-TM- monitoring of multiple network parameters concurrently - - In Band/Out of band configuration support via BootP, TFTP, and NSlogin - - Resource Manager-TM- option provides proactive monitoring of SNMP devices - - Ethernet or Token Ring interface connections for management communications - - Full packet capture and seven level protocol decode for FDDI/CDDI traffic - - Integrates with NETscout Manager for comprehensive mutli-topology monitoring
- ------------------------------------------------------------ NETscout FDDI/CDDI Probes - ------------------------------------------------------------ ---------------------------------- - ------------------------- ---------------------------------- ---------------------------------- MODEL DESCRIPTION TOPOLOGY - ------------------------- ---------------------------------- ---------------------------------- - ------------------------- ---------------------------------- ---------------------------------- 7101ET CDDI Probe CDDI/Ethernet 7101TR Single Attached CDDI/Token Ring - ------------------------- ---------------------------------- ---------------------------------- - ------------------------- ---------------------------------- ---------------------------------- 7102ET FDDI Probe FDDI/Ethernet 7102TR Single Attached FDDI/Token Ring - ------------------------- ---------------------------------- ---------------------------------- - ------------------------- ---------------------------------- ---------------------------------- 7103ET FDDI Probe FDDI/Ethernet 7103TR Dual Attached FDDI/Token Ring - ------------------------- ---------------------------------- ----------------------------------
NETSCOUT FDDI/CDDI PROBES PROVIDE FULL RMON CAPABILITIES FOR HIGH SPEED BACKBONES Distributed networks use a variety of topologies in order to maximize network performance and utilization. In many cases FDDI and/or CDDI technologies have been applied to needs for a high speed, high performance backbone connecting the variety of Ethernet, Token Ring, and WAN segments which typically integrate to form enterprise wide communications. Since the development of the RMON standard, first for Ethernet and then extended to Token Ring, users have quickly adopted this standards based technology to provide both pro-active as well as reactive diagnostic operations for increasingly complex network configurations. However, no cost effective mechanism has exited to address the needs of users to understand the operation and diagnose problems associated with high speed backbone segments. The NETscout 7100 Series EnterpriseProbe for FDDI/CDDI networks fills this major hole in diagnostic capabilities. Depending on the model selected, users may connect to both FDDI and CDDI network segments in either single or 29 dual attached configurations. The NETscout's high performance Pentium processor allows users to gather RMON based statistics for all ring traffic activity. NETscout's Domain View architecture provides the same capability to subdivide traffic on the ring and effectively operate multiple concurrent RMON probes on a single platform. Management from the NETscout RMON management package presents FDDI/CDDI information in exactly the same forms as for Ethernet and Token Ring thus presenting a complete and uniform diagnostic mechanism for multi-media enterprise networks. 30 INTELLIGENT RMON PROBES AND AGENTS - - High Performance 486 based multisegment probes and cost effective software agents - - Support for Ethernet, Token Ring, FDDI, and WAN - - Compatible with RMON standards for Ethernet (RFC 1271) and Token Ring (RFC 1513) - - Compatible with any SNMP based Network Management System - - Virtual analyzer for 7 layer EnterpriseRMON-TM- monitoring of multiple network parameters concurrently - - Selective packet capture and seven level protocol decode software - - In Band/Out of Band configuration support via BootP, TFTP, and Nslogin - - Support for duplicate IP address detection - - Provides accounting statistics for utilization/bandwidth cost analysis - - Resource Manager-TM- software option supports proxy SNMP
- ------------------------------------------------------------ NETscout Product Family - ------------------------------------------------------------ ---------------------------------- - ------------------------- ------------------------------------- -------------------------------------- MODEL DESCRIPTION TOPOLOGY - ------------------------- ------------------------------------- -------------------------------------- - ------------------------- ------------------------------------- -------------------------------------- 6010 High performance 486 based Ethernet 6020 intelligent probes Token Ring 6040 WAN (E connection) 6050 Ethernet/WAN 6060 WAN (TR Connection) 6070 Token Ring/WAN - ------------------------- ------------------------------------- -------------------------------------- - ------------------------- ------------------------------------- -------------------------------------- 9510 SPARC based software agents Ethernet 9530 FDDI - ------------------------- ------------------------------------- --------------------------------------
A COMPLETE FAMILY OF HIGH PERFORMANCE PROBES AND SOFTWARE AGENTS Frontier offers the industry's broadest product lines of RMON base hardware probes and software ______. _______________ family supports Ethernet, Token Ring, FDDI and WAN. This family of integrated products are fully compatible and supported from a single monitoring environment. NETscout is also compatible with any SNMP based network management system. With the NETscout family, the network administrator can choose different price points matching the performance needs of the network. The NETscout 6000 series utilizes a high-performance 486 processor and real time operating system delivering excellent price performance. The NETscout 6000 series has a scaleable architecture that will consistently ________ in performance in __________________________ technology. _____________________ NETscout ___________ and high ______________ monitoring. For those users who want to utilize existing SPARC platforms Frontier offers the NETscout 9500 series and DOS software agents for a cost-effective way to add RMON to LAN segments. The Ethernet probes and agents support all 9 RMON groups (RFC 1271). The Token Ring probes and agents support ten groups (RFC 1513). The WAN probe is ideal for monitoring bandwidth utilization and providing accounting information. The WAN 31 probe supports encapsulation and is compatible with Cisco, Wellfleet, 3COM, DEC, Proteon and other routers. The new Resource Manager Option lets a single probe proactively monitor both LAN/WAN traffic and any SNMP device. 32 NETSCOUT: UNBEATABLE SCALABILITY, FLEXIBLE FOR ENTERPRISE NETWORKS A typical network can be equipped with multiple Frontier NETscout probes and agents with one agent or probe connected to each individual network segment. The agents are managed and controlled from a centrally located network management console, called the NETscout Manager. The network management console consists of a number of analysis tools which permit the user to request and examine data provided by the selected agent. NETscout probes and agents are supported by Frontier's SNMP compatible management console analysis software which runs with SunNet Manager, IBM NetView 6000, HP Openview, AT&T and MS Windows. With Frontier NETscout probes and agents, it is possible to have multiple clients active so that network diagnostic functions may be performed from multiple locations such as from primary and secondary network management centers. Also with NETscout probes multiple segments can be monitored. PLUG AND PLAY INSTALLATION NETscout probes can be easily installed by simply typing in the IP address and connecting the probe to the network. Once connected, NETscout immediately begins collecting RMON statistics. INDEPENDENT OPERATION Frontier's intelligent probes/agents collect statistics continuously, even when not communicating with the management station. Fault, performance, and configuration information is accumulated and communicated to the management station upon a fault or administrators request. PROACTIVE MONITORING NETscout intelligent probes/agents are constantly "watching" the network traffic conditions which can lead to failures. The probes/agents can be configured to automatically detect error conditions and log these errors upon occurrence. They will not only notify the management station of the failure, but also provide historical data for analysis. VALUE ADDED DATA Frontier's intelligent probes/agents add significant value to the data it collects. With the Domain View-TM- architecture NETscout probes and agents can be directed to focus and "zoom" in on a particular segment, node and type of traffic in real time and report all RMON statistics to a management station. This data can be viewed graphically, all from a single screen for easy diagnosis of a problem. MULTIPLE MANAGERS Distributed network environments utilize multiple management stations. NETscout probes/agents are concurrently accessible from more than one management station. MULTISEGMENT MONITORING Frontier's RMON based diagnostics architecture has the capability to monitor more than one segment at a time. For example, the Model 6010 can monitor two Ethernet segments concurrently. This provides a cost-effective way to deploy diagnostic probes. 33 EXHIBIT D PRODUCT TEST PROCEDURE THIS EXHIBIT IS COMBINED WITH EXHIBIT G 34 EXHIBIT E REPAIR CHARGES Maintenance (single repair) [*] Replacement Units as Spares: [*] Maintenance Agreement (Hardware and Software): [*] Spare Part: This is not applicable since all repairs are done on a factory repair basis. - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 35 EXHIBIT F PRIORITIZATION AND ESCALATION GUIDELINES PROBLEM PRIORITIES DEFINITIONS: Priority 1: Cisco customer's production network is [*]. [*] is available. [*] are willing to commit [*] to resolve the situation. Priority 2: Cisco customer's production network is [*]. [*] is available. [*] are willing to commit [*] to resolve the situation. Priority 3: Cisco customer's Network performance is [*]. Network functionality is [*] but [*] continue. Priority 4: [*] requires information or assistance on [*]. ESCALATION GUIDELINE: [Note: these titles need to be adjusted for each Frontier.] Elapsed Time Priority 1 Priority 2 Priority 3 Priority 4 [*] Frontier manager to whom the problem is escalated to will take ownership of the problem and ensure that updates are provided to the appropriate Cisco personnel. Cisco-initiated escalations will begin at the [Technical Group Leader level] and proceed upward using the escalation guideline shown above for reference. This will allow those most closely associated with the support resources to correct any service problems quickly. - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 36 EXHIBIT G CISCO QUALITY PROGRAM [*] - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 37 EXHIBIT H LABELING REQUIREMENTS [*] - -------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 38 EXHIBIT I THIRD PARTY PRODUCT ROYALTIES AND LICENSES WHICH EXIST AS OF THE EFFECTIVE DATE OF THIS AGREEMENT Cisco shall be obligated to pay all license fees and royalties, if any, with respect to any third party proprietary rights and technologies which are required for the exercise of Cisco's Manufacturing Rights and which are listed below. All other such third party royalties and licenses which are not listed below and which are required for Cisco to exercise the Manufacturing Rights under this Agreement shall be paid by Frontier. 39 EX-10.13 19 EXHIBIT 10.13 Exhibit 10.13 AMENDMENT TO PRIVATE LABEL AGREEMENT AND PROJECT DEVELOPMENT AND LICENSE AGREEMENT BETWEEN CISCO SYSTEMS, INC. AND FRONTIER SOFTWARE DEVELOPMENT, INC. This Amendment ("Amendment") is made in California by and between Cisco Systems, Inc., a California corporation having its principal place of business at 170 West Tasman Drive, San Jose, CA 95134-1706, U.S.A. ("Cisco"), and Frontier Software Development, Inc., a Delaware corporation having its principal place of business at 321 Billerica Road, Chelmsford, Massachusetts 01824 ("Frontier"). WHEREAS, Cisco and Frontier entered into the Project Development and License Agreement on July 13, 1994 ("Software Agreement") pursuant to which Frontier licensed certain software products (as defined in the Software Agreement) to Cisco; and WHEREAS, Cisco and Frontier entered into the Private Label Agreement on October 17, 1995 ("Hardware Agreement") pursuant to which Frontier would sell certain products (as defined in the Hardware Agreement) to Cisco; and WHEREAS, Cisco and Frontier desire to change and add certain terms to the Software Agreement and Hardware Agreement to change pricing, add products and to make such agreements more similar, all as specified below. NOW THEREFORE, in consideration of the covenants and conditions contained herein, the parties agree as follows: 1. PRODUCTS. Cisco shall have the right to purchase and resell any and all Frontier products, both current and future (including, without limitation, all consoles, probes, embedded agents and upgrades in the Frontier product line), listed on Frontier's then current price list. Except as expressly and unambiguously stated in the Software Agreement, the terms and conditions of the sale of products by Frontier to Cisco shall be governed by the Hardware Agreement. All products purchased by Cisco from Frontier shall be deemed "Products" as defined in the Hardware Agreement. The parties agree that all Products purchased or licensed by Cisco under the Hardware Agreement (including all additional Products added by this Amendment) shall be subject to all the terms and conditions of the Hardware Agreement. 2. NETSCOUT MANAGER PRODUCT. 2.1 MANUFACTURING OF UNBOUNDED COPIES. Frontier agrees to manufacture complete kits for copies of the NETscout Manager Product and private label such Product as "TrafficDirector" as specified by Cisco (the "TrafficDirector Product"). In addition, Frontier agrees to make and provide to Cisco all documentation for the TrafficDirector Product as specified by Cisco. Frontier will provide finished User Guides and executable copies of the TrafficDirector Product in CD or electronic format for integration with other Cisco management software. Frontier agrees that it shall only have the right to sell the TrafficDirector Product to Cisco. In the event Cisco orders copies of the TrafficDirector Product with temporary licenses (i.e. a [*]), Frontier agrees to mark the TrafficDirector boxes with the license expiration date and the Cisco last ship date (which shall be 40 days before the temporary license expiration date) as follows: Example: CISCO: LAST SHIP DATE _______________ TEMPORARY LICENSE EXPIRATION DATE _______________ Cisco agrees to pay Frontier a mutually agreed upon NRE charge for any modifications and/or enhancements to the TrafficDirector documentation which have resulted from a written request from Cisco. No substantive changes shall be made to the documentation unless expressly agreed to/requested in writing by Cisco. 2.2 NEW VERSIONS. Within [*] after the release of a new version of the NETscout Manager Product by Frontier, Frontier shall provide to Cisco a TrafficDirector branded Product, at a [*] upon [*], if any. TrafficDirector version 3.3 will be based on NETscout Manager version 3.3. TrafficDirector version 4.X will be based on NETscout Manager Plus, with the switch management enhancements. 2.3 LICENSE FEES. Cisco shall pay Frontier for each copy of the TrafficDirector Product purchased or licensed by Cisco as follows: (a) if [*] in the [*] or any other [*], the license fee shall equal [*] of Frontier's [*]. A [*] will be due to Frontier [*] after product receipt. This amount will then be [*] from the license fee payment due to Frontier; [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 2 (b) if sold as an [*], the license fee shall equal [*] of Frontier's [*]. A [*] will be due to Frontier [*] after product receipt. This amount will then be [*] from the license fee payment due to Frontier; (c) the license fee for [*] shall equal [*], per [*], for the [*] following the signing of the amendment, [*] will be [*] within [*] of the signing of the amendment; (d) the license fee for [*] shall equal [*], provided that [*] licenses for a minimum of [*] shall be [*]; (e) the license fee for [*] shall equal [*] and shall have a license for [*] or more. (f) Frontier will provide Cisco with a record and invoice within [*] after the end of each Cisco fiscal quarter based upon Frontier's Web page records. Cisco will have [*] to reconcile the invoice to its own records. Cisco will be obligated to pay Frontier within [*] after the invoice, unless Cisco presents in writing records showing different sales levels. In this event, [*] would make a [*] to [*] the [*] in [*] and payment within [*]. 2.4 TRADEMARK. Frontier acknowledges that Cisco retains any and all rights, title and interest to the tradename, trademark, logo or mark "TrafficDirector" ("Traffic Director Mark") and agrees not to take any action to challenge any rights or efforts made by Cisco to register or use the TrafficDirector Mark, nor will Frontier lodge any filings with respect to the TrafficDirector Mark or marks confusingly similar to the TrafficDirector Mark, whether on behalf of Cisco or in its own name or interest, without the prior written consent of Cisco. Cisco acknowledges that Frontier shall retain any and all rights, title and interest to any tradenames, trademarks or trademark logos ("Frontier Marks") in any documentation developed by Frontier pursuant to Section 2. 1, above. Cisco agrees not to make any [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 3 claims to Frontier Marks, or lodge any filings with respect to such Frontier Marks or marks confusingly similar to Frontier Marks, whether on behalf of Frontier or in its own name or interest, without the prior written consent of Frontier. 2.5 Frontier agrees that Cisco has the right to purchase the TrafficDirector Products as long as Cisco continues to remarket Frontier's NETscout Probe Products. 3. SWITCHPROBE AGENTS AND EMBEDDED AGENTS. 3.1 MANUFACTURING. Frontier agrees to manufacture copies of the Frontier SwitchProbe Product with the SwitchProbe Embedded Agent incorporated in it for resale to Cisco pursuant to the Hardware Agreement. 3.2 LICENSE FEES. Exhibit D, Section 1, to the Software Agreement is deleted and replaced with the following: "Cisco agrees to pay to Frontier Software License Fees in accordance with the following schedule: [*] [*] per RMON license sold as a revenue unit by Cisco [*] [*] per RMON license sold as a revenue unit by Cisco [*] [*] per Resource Manager agent option license sold as a revenue unit by Cisco [*] [*] per Switch Monitor agent option license (includes roving-RMON for all [*] models and mini-RMON proxy support for the [*]series) [*] Agent upgrades and technical support for all platforms will be provided under [*] maintenance fee of [*]. Agent upgrades will be delivered in a [*] format [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 4 3.3 PAYMENT TERMS. The payment terms for the license fees due under this Section 3 shall be in accordance with Exhibit D of the Software Agreement. 3.4 SUPPORT. Frontier agrees to provide Cisco, at no additional charge, hotline and technical engineering support for all Cisco network monitoring products that use Frontier technology. Such support shall be subject to the Customer Support requirements of Section 8.1 of the Hardware Agreement and the Prioritization and Escalation Guidelines contained in Exhibit F of the Hardware Agreement. 4. REVISED PRODUCT PRICES. 4.1 PRODUCTS. Exhibit A to the Hardware Agreement is deleted and replaced with the new attached Exhibit A ("Revised Exhibit A"). Frontier agrees that during the term of the Hardware Agreement and Software Agreement it [*] its list price for hardware Products or for Software Products [*] in the event of [*] in [*] that [*] the [*] of the Product by [*] (this [*] will be directly passed on without [*]) or in the event Frontier adds [*] to a Software Product. 4.2 [*] PRICING. Frontier represents and warrants to Cisco that the Product prices/license fees offered to Cisco under this Agreement are [*] than the Product prices/license fees [*] quantities. In the event Frontier [*] Product prices/license fees to [*], Frontier will promptly notify Cisco of such event and [*] Product prices/license fees to Cisco commencing upon the date such [*] prices/license fees were [*]. 5. ESCROW. The parties agree that all Products purchased or licensed by Cisco under the Hardware Agreement and the Software Agreement shall be subject to the manufacturing and escrow requirements of Section 10 of the Hardware Agreement. 6. SUPPORT. 6.1 HARDWARE AGREEMENT. Section 8 of the Hardware Agreement is amended to add the following support provisions: [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 5 "8.12 LICENSE TO USE OBJECT AND SOURCE CODE FOR CUSTOMER SUPPORT. Pursuant to the License granted herein, Cisco is licensed to use the Software source and/or object code for the limited purpose of providing customer support, including, without limitation, the provision of software bug fixes, patches and maintenance releases. "8.13 SOFTWARE SUPPORT. Frontier will support no more than [*] provided that these releases are no more than [*] apart. Software releases should be [*] and released at a [*] interval. "8.14 PRODUCT SHIPMENT PROCEDURE. In case bug fixes cannot be transferred electronically, Frontier will ship to Cisco, and customer, at Cisco's discretion, two (2) copies of media (i.e., CD-ROM) containing the bug fix. Such shipment will be by overnight delivery to Cisco at Cisco's expense. "8.15 SUPPORT DOCUMENTATION. Frontier agrees to regularly supply Cisco with all known bug notes or other documentation defining the relevant hardware and software information, symptoms, solutions or work-arounds for Product problems. Frontier will keep accurate records of Product deficiencies (bugs) and make such reports available to Cisco at least quarterly. Frontier will maintain an electronic means (e.g., an FTP server) through which Cisco can obtain up-to-date information on bugs, fixes, and code updates. During the term of this Agreement, Frontier will provide such support to Cisco at no charge." 6.2 SOFTWARE AGREEMENT. The parties agree that Software products licensed under the Software Agreement shall be subject to all the support provisions of the Hardware Agreement. 7. ADDITIONAL FRONTIER OBLIGATION. Frontier agrees to maintain a World Wide Web site for Software license password generation. 8. GENERAL. Section 17 (Limitation of Liability) of the Software Agreement is deleted and replaced with Section 13 (Limitation of Liability) of the Hardware Agreement. Further, any provisions of the Hardware Agreement covering subject matter which are not included in the Software Agreement are hereby included in the Software Agreement. 9. ENTIRE AGREEMENT. The "entire agreement" paragraph of Section 14 of the Software Agreement is deleted and replaced with the following: [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 6 "This Agreement (including the Exhibits hereto) and the Private Label Agreement entered into by Cisco and Frontier on October 17, 1995, constitutes the entire agreement between the parties hereto concerning the subject matter of this Agreement, and there are no conditions, understandings, agreements, representations, or warranties, expressed or implied, which are not specified herein. This Agreement may only be modified by a written document executed by the parties hereto." 10. NO OTHER CHANGES. Terms capitalized shall have the meaning assigned to them in the Hardware Agreement and the Software Agreement. All other terms and conditions of the Hardware Agreement and Software Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized representatives. CISCO SYSTEMS, INC. FRONTIER SOFTWARE DEVELOPMENT, INC. /s/ Mario Mazzola /s/ Narendra Popat - ------------------------------------------ ------------------------------- Signature Signature Mario Mazzola Narendra Popat - ------------------------------------------ ------------------------------- Name Name Vice President/General Manager - WBU President, Frontier Software - ------------------------------------------ ------------------------------- Title Title 5/15/96 5/15/96 - ------------------------------------------ ------------------------------- Date Date 7 REVISED EXHIBIT A PRODUCTS/PRICING
- -------------------- -------------------------------------------------- PRODUCT [*] MODEL NUMBER - -------------------- -------------------------------------------------- [*] [*] [*] [*] [*] [*] - -------------------- ---------------------------------- ---------------
When reference is made in the Agreement or any exhibit to Frontier's [*] of a Product specially modified for Cisco, such reference shall mean Frontier's [*] for Frontier standard product upon which the Product has been based. If Frontier shall modify, update, enhance or create a new version of a standard product upon which such a Product is based, it shall similarly modify, update, enhance or create a new version of the corresponding Product. Frontier will sell Products specially modified for Cisco only to Cisco. Except as specified above, the prices for all Products purchased by Cisco from Frontier shall be: (i) [*] of Frontier's [*] for all Frontier hardware Products; (ii) [*] of Frontier's [*] for all Frontier software Products to be resold by Cisco unbundled; (iii) [*] of Frontier's [*] for all Frontier software Products to be resold by Cisco in a bundle. [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 8 EX-10.14 20 EXHIBIT 10.14 Exhibit 10.14 AMENDMENT NO. 3 TO PRIVATE LABEL AGREEMENT AND PROJECT DEVELOPMENT AND LICENSE AGREEMENT BETWEEN CISCO SYSTEMS, INC. AND FRONTIER SOFTWARE DEVELOPMENT, INC. This Amendment No. 3 ("Amendment #3") is made in California by and between Cisco Systems, Inc., a California corporation having its principal place of business at 170 West Tasman Drive, San Jose, CA 95134-1706, U.S.A. ("Cisco"), and Frontier Software Development, Inc., a Delaware corporation having its principal place of business at 321 Billerica Road, Chelmsford, Massachusetts 01824 ("Frontier"). WHEREAS, Cisco and Frontier entered into the Project Development and License Agreement on July 13, 1994 ("Software Agreement"), as amended on January 4, 1995 ("Amendment #1") pursuant to which Frontier licensed certain software products (as defined in the Software Agreement) to Cisco; and WHEREAS, Cisco and Frontier entered into the Private Label Agreement on October 17, 1995 ("Hardware Agreement") pursuant to which Frontier is selling certain products (as defined in the Hardware Agreement) to Cisco; and WHEREAS, Cisco and Frontier entered into an Amendment to the Hardware Agreement and the Software Agreement on May 15, 1996 ("Amendment #2"); and WHEREAS, Cisco and Frontier desire to change and add certain terms to the Software Agreement, Hardware Agreement, Amendment #1 and Amendment #2 (collectively, the "Agreement") as specified below. NOW THEREFORE, in consideration of the covenants and conditions contained herein, the parties agree as follows: 1.0 DEVELOPMENT WORK. Cisco shall have the right to request that Frontier perform independent projects specific to Cisco such as, but not limited to, customization of an interface, addition of features, or integration of Frontier's RMON products into Cisco products. Frontier agrees that it will not unreasonably reject such Cisco requests. Such projects shall be subject to the terms and negotiations agreed upon by the parties. The statement of work ("Statement of Work") for each project shall include, as required, the following provisions: project specifications, NRE charges and payment terms, prepaid royalties or per unit royalties, upgrade charges (if different from the policy agreed upon in the Agreement), schedules, reschedule terms inclusive of penalties for schedule delays, project cancellation terms inclusive of penalty charges, acceptance criteria, project review 1 and approval processes, ownership of the work performed, resale/license obligations and restrictions of the parties for the modified products, and any further obligations required by Cisco to complete the project." Cisco agrees to pay Frontier a [*] fee of [*] for development work [*] to by the parties and completed [*] of this Amendment #3. The projects covered by this fee include without limitation: Embedded RMON agents for the [*]. As a Statement of Work is mutually agreed upon and signed by an authorized representative for each party it will be incorporated into the Agreement as an amendment. A Statement of Work format is attached as Exhibit A. 2.0 AGENT ROYALTIES. Section 3.2 (License Fees) of Amendment #2 is changed as follows: 2.1 Royalties for agents shipped prior to the effective date of this Amendment #3 will be paid per the terms of Amendment #2. 2.2 Royalties for RMON Embedded Agent Software (as defined below in Section 7.(d)) shipped upon the effective date of this Amendment #3 and thereafter will be as follows: (a) Cisco agrees to pay Frontier a [*] royalty of [*] for any and all copies of the RMON Embedded Agent Software made and distributed by Cisco and incorporated within [*] or within any other Cisco software environment except the Cisco products listed in Section 2.2(b) below. Frontier warrants that the RMON Embedded Agent Software provides, at a minimum, the full functionality to comply with the [*] specification) plus the [*] specification as it is released by the [*]. (b) Subject to the conditions in Section 2.3 below, Cisco agrees to pay Frontier a one-time royalty payment of [*] plus a [*] royalty as specified in this Section 2.2 below for the following Cisco [*] products ("Cisco [*] Products"): [*] [*] Royalty: (i) Cisco will pay a [*] royalty of [*] for each Cisco [*] Product unit incorporating some or all of the functionality specified as [*]. - ------------------------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 2 (ii) Cisco will pay a [*] royalty of [*] for each Cisco [*] Product unit incorporating the functionality specified in this Paragraph (b)(i) above plus the compete functionality of [*] as it is released by the [*]. (iii) For a situation in which a Cisco [*] Product incorporates the functionality of [*] groups of [*], Cisco will pay a per-unit royalty of [*] plus [*] for each group, or portion of a group, of [*] incorporated into such product. 2.3 Conditions: (i) [*] royalty payment as specified above is due for each Cisco [*] Product shipped by Cisco for revenue in which one or more instances of RMON Embedded Agent Software are licensed for use by the licensee for some level of RMON agent functionality whether or not Cisco explicitly charges its customers for the RMON capability. (ii) Cisco's obligation to pay a [*] royalty for a Cisco Catalyst Product under Section 2.2(b)(i) or the [*] base royalty under Section 2.2(b)(iii) above shall terminate upon the inclusion by Cisco of the [*] feature(s) as a [*] in the [*] of the respective Cisco [*] Product, provided the following conditions have been met: (i) Cisco provides evidence to Frontier that [*] for delivery of the [*] feature(s) in the Cisco [*] Product as a standard no charge feature(s); and (ii) such evidence indicates that the [*] by Cisco. Frontier agrees to accept reasonable evidence to establish the foregoing conditions. (iii) Cisco's obligation to pay a [*] royalty for a particular Cisco [*] Product ends when such product is shipped with Cisco's [*], or when the Agreement expires or is terminated for cause by Cisco, or when Cisco exercises its right to manufacture Products (in which event the [*] will be as specified in Section 14 below). (iv) The per-unit royalties of this Section 2.3 do not apply to Embedded Probes as defined in Section 3 below. 3.0 EMBEDDED PROBES. For the purposes of the Agreement, "Embedded Probes" shall mean [*]in which the [*] provides [*] functionality plus extensions as then agreed to by the parties and executes on hardware which: (i) is used primarily to execute RMON code, and (ii) such hardware is an optional module that is inserted into a Cisco chassis. 3.1 An Embedded Probe shall include functionality for [*], and shall [*]. In the event that the features agreed to for such Products in the respective Statements of - ---------------------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 3 Work are significantly different from the guidelines given herein, the parties will renegotiate in good faith the Embedded Probe royalties of Section 3.2 below. 3.2 [*] royalties for Embedded Probes shall be as follows:
Per-unit royalty For the first [*] revenue units shipped by Cisco [*] For the next [*] revenue units shipped by Cisco [*] For units shipped by Cisco for revenue beyond [*] units [*]
For Embedded Probe shipments for revenue beyond [*] units, the parties agree to negotiate in good faith the royalties based upon then existing conditions in the marketplace. Cisco agrees to pay a royalty of [*] per unit shipped for revenue during the negotiation process. When the new royalty is agreed to, Frontier will credit Cisco for the net difference for all units shipped beyond [*] units. 3.3 A Product that meets the conditions for an Embedded Probe as given in Section 3.0 above and in addition is implemented within [*] shall be subject to the royalties per Section 3.2 above. 4.0 PROBE INVENTORY BALANCING, Frontier agrees to [*] Cisco a [*] to balance its inventory of [*] under the following conditions: 4.1 Per the conditions specified in Section 4.2, Cisco can balance up to [*] probe units as follows: (i) [*] models for the [*] probes on order but not yet delivered by Frontier, and (ii) [*]up to [*] units from [*] at a rate of up to [*] units per month beginning on the effective date of this Amendment #3 and continuing for [*] months. 4.2 Conditions for product rotation: (i) [*] on a one for one basis such that for each unit [*] or [*] to Frontier by Cisco, Frontier will [*] one [*] unit of the probe model designated by Cisco. (ii) Cisco shall [*] of [*] of the original cost to Cisco for each probe [*]. Cisco will place a [*] on each occasion Cisco exercises its right to [*] probes. - ---------------------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 4 (iii) In the event the total cost [*] of the new products to be shipped to Cisco is [*] than the [*] of the products being [*] by Cisco (i.e., the [*]), Cisco will issue a purchase order for the [*] on each occasion Cisco exercises its right [*]. (iv) In the event the total cost of the new products (excluding the [*]) to be shipped to Cisco is [*] than the [*] of the products being [*] by Cisco (i.e., the [*]), Cisco will issue a purchase order to purchase [*] of a value [*] than the [*], for delivery within [*]. The payment due on such purchase order is the amount by which the new units exceed the [*]. (v) Cisco will pay the shipping costs for the [*]. (vi) Probe units on order as of the effective date of Amendment #3 for products other than [*] probes are separate from this balancing and are not to be [*] the [*] as a result of this balancing. 5.0 PROBE [*]. The parties agree to extend the current standalone probe [*] structure for an [*] through [*]. Thereafter, the [*] structure will be as mutually agreed by the parties. 6.0 TRAFFICDIRECTOR UPGRADES TO REVISION 4.1. Cisco will pay the following upgrade fee to upgrade Cisco customers of TrafficDirector 3.3 and any version of NetScout Manager to TrafficDirector 4.1 (based upon Frontier's NetScout Manager Plus 4.1 Software): [*] This upgrade fee is payable only for licenses actually upgraded to TrafficDirector [*]. For subsequent upgrade releases from TrafficDirector [*] to later versions, Cisco shall pay a royalty fee of [*] per unit as specified in Amendment #2 Section 2.3(c). 7.0 DEFINITIONS AND LICENSES. 7.1 Definitions. (a) For purposes of the Agreement, and notwithstanding anything to the contrary in the Agreement, the term "Software," as respectively defined in Section 1.1 of the Hardware Agreement and Section 1 of the Software Agreement, is hereby modified to collectively mean RMON Embedded Agent Software and Other Software as defined in this Section 7.1 below. - ---------------------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 5 (b) For purposes of the Agreement, and notwithstanding anything to the contrary in the Agreement, the term "source code" shall include sufficient information for a knowledgeable software engineer to produce completely functional machine readable binary code for all Software, including but not limited to, design documentation, technical documentation, design and functional specifications, software libraries, compilers, utilities, listings, test suites, build scripts and tools to compile, assemble and test code in Frontier's possession or under its control . In cases where such tools are commercially available, source code shall only include the supplier, model and revision information to uniquely and unambiguously identify each such tool. (c) The term "Product" shall have the definition specified in Section 1 of Amendment #2. (d) For purposes of the Agreement, and not withstanding anything to the contrary in the Agreement, the term "RMON Embedded Agent Software" shall mean software providing, the functionality of an RMON agent embedded within a Cisco product, which agent conforms to the [*] specification per [*] and the [*] specification as it is released by the [*]. (e) For purposes of the Agreement, and not withstanding anything to the contrary in the Agreement, the term "Other Software" shall mean all software, except RMON Embedded Agent Software, provided to Cisco by Frontier as a Product under this Agreement, regardless of whether embedded or bundled with a hardware product, or provided as a standalone software product. Other Software includes, but is not limited to, stand-alone probe Products, Embedded Probes and TrafficDirector. (f) For purposes of the Agreement, and not withstanding anything to the contrary in the Agreement, the term "Derivative Works" shall mean modifications to RMON Embedded Agent Software made by or for Cisco. (g) It is understood that RMON Extensions are limited to the functionalities specified in [*]. The parties agree and acknowledge that nothing in this Amendment # 3 shall be construed to diminish, restrict or limit any rights or privileges which Cisco is already entitled to under the Agreement. Any ambiguity arising from the new definitions of terms in this Section 7 will not be interpreted against Cisco to diminish rights previously granted to Cisco under the Agreement. - ---------------------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 6 7.2 Licenses. (a) RMON Embedded Agent Software. The license granted in Section 4, the first paragraph, of the Software Agreement applies in its entirety to RMON Embedded Agent Software (binary and source code form) and all related documentation and tools . Frontier shall retain title and full ownership rights to the RMON Embedded Agent Software as specified in Section 6 of the Software Agreement for RMON software and RMON Extensions. [*] shall retain title and full ownership to the Derivative Works as specified in Section 6 of the Software Agreement. In addition, [*] hereby grants to [*] a worldwide, [*] and nonexclusive license to [*] of the Derivative Works, provided that such Derivative Works which are feature enhancements to the RMON Embedded Agent Software may not be [*] in any manner by [*] to any third party without [*] prior written consent. (b) Other Software. Notwithstanding anything to the contrary in the Agreement, Frontier hereby grants Cisco a [*] license to [*] of [*] in both machine readable binary and source code form, subject to the following restrictions: (i) Cisco's right to [*] the Other Software shall be [*] for the purpose of [*] and providing software [*]. (ii) [*] shall retain ownership of any [*] that Cisco makes to the Other Software, and Cisco shall provide to Frontier in a timely manner all such [*] Cisco makes to the Other Software. (iii) Cisco shall have [*] to sublicense or cross license the Other Software as a standalone product. 7.3 Source Code Restrictions. Cisco shall [*] distribute or sublicense any source code owned by Frontier unless such source code is distributed or sublicensed with or as part of Cisco source code or Cisco hardware. In [*] shall a [*] of the Frontier source code have the right to [*] such source code to [*] or to [*] of such source code that [*]. Cisco shall protect Software source code provided hereunder and/or sublicensed to others to the same extent that it protects its own source code. 7.4 Sublicense Rights. The Agreement is modified by adding the following: "Frontier hereby grants Cisco the right to sublicense its license rights granted under this Agreement, and authorizes the granting of sublicenses for, the Software, provided to Cisco by Frontier solely as part of or in connection with Cisco's software or - ---------------------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 7 products. Any per copy royalty payments due Frontier shall accrue at the time Cisco makes and distributes the copy of the applicable Software or at the time Cisco's OEM makes and distributes the copy of the applicable Software. Cisco is obligated to account for and make payment for any per-unit royalties for sublicenses in the same manner it does so for other per-unit license royalties covered under the Agreement." 7.5 Delivery. Frontier agrees to promptly deliver to Cisco the machine readable binary and source code for the Software (including without limitation, all new releases, bug fixes, maintenance fixes, updates and the like for the Software) as required under the Agreement or as such Software becomes available. 8.0 TERM OF AGREEMENT. The expiration dates of the Hardware Agreement and the development portion of the Software Agreement are hereby extended to October 31, 2000. 9.0 LICENSE ADMINISTRATION. The parties agree to use commercially reasonable efforts to implement a license administration system within [*] after the effective date of this Amendment #3 that is easy and convenient for Cisco and Cisco's customers to use and acceptable to both parties. 10. RIGHTS IN THE EVENT FRONTIER [*]. In the event that Frontier enters [*] with another party for that party [*], Frontier will notify Cisco it has [*] to be acquired [*]. Within [*] Cisco will inform Frontier in writing whether [*]. If Cisco indicates it does [*], Frontier is then [*] to execute an agreement [*] by another party [*]. If Frontier does not sign a [*] within [*] from the date of [*], this process restarts (i) on the [*] of Frontier entering into [*], or (ii) at the end of such [*] if Frontier is then engaged in [*]. If Cisco indicates its [*], Frontier will negotiate in good faith with [*], an arrangement pursuant to which [*]. Frontier [*] to carry on [*] with other parties during the [*]. Prior to executing an agreement [*], and at the point at which Frontier has [*] with third parties, Frontier will notify Cisco that it [*] Frontier. After completing this process in good faith, Frontier reserves the right to evaluate [*] from all parties and to [*] as it solely deems appropriate. [*], and Cisco's [*], starts a [*] between Cisco and Frontier during which Frontier will [*] from [*] agreement [*] by any third party until [*] it has followed the [*] and Cisco has - ---------------------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 8 had a [*] to [*] including a [*]. The parties will negotiate in good faith at the time of [*] and during this process to [*] on what constitutes a reasonable time and process for Cisco to [*]. All [*] between Frontier and Cisco and all offers by Cisco within this [*] shall be in writing. For purposes of notifying Cisco that Frontier [*], Frontier's Board of Directors shall determine when Frontier is [*], thereby triggering, Frontier's obligation to provide such notice to Cisco. The provisions of this section shall expire on the date a registration statement filed by Frontier under the Securities Act of 1933, as amended, first becomes effective. 11.0 PREFERRED RMON VENDOR. 11.1 Definitions: (a) For the purposes of the Agreement, "Covered RMON" products shall mean products providing RMON1 and RMON2 functionality plus extensions in the form of: (i) Standalone probes for LAN and WAN environments similar to Frontier's NETscout probes and future enhancements including future LAN and WAN network topologies, (ii) Network monitoring and analysis applications similar to NETscout Manager Plus and future enhancements of such products by Frontier including the support for future LAN and WAN network topologies, and (iii) Embedded probes for Cisco's products with features similar to or a subset of NETscout probes for present and future LAN and WAN network topologies. (b) For the purposes of the Agreement, "Other RMON" products shall mean products other than Covered RMON products which have functionality conforming to some or all of the groups of the RMON1 or RMON2 standards or functionality that extends RMON-like capability to new LAN or WAN media or network environments. 11.2 Preferred RMON Vendor. Beginning on the effective date of this Amendment #3, Cisco establishes Frontier as its Preferred RMON Vendor. For the purposes of the Agreement, and subject to the exceptions defined herein, Cisco's classification of Frontier as its Preferred RMON Vendor shall mean that Cisco will incorporate in its price list, promote and offer for sale/license, both directly and indirectly through its resale channels, Products under this Agreement as its primary solutions to meet Cisco's RMON product needs. For the duration of the Agreement and subject to 9 Frontier maintaining its Preferred RMON Vendor status per Section 11.3 below, Cisco agrees to work in good faith with Frontier as follows: (a) In the event Cisco identifies a need for a Covered RMON product or Other RMON product, and a then-existing product from Frontier meets Cisco's product requirements, Cisco will purchase such Product from Frontier subject to Subsection 11.2(c) below. (b) In the event Cisco identifies a need for a Covered RMON product which is not a then-existing Frontier product, Cisco will notify Frontier of its needs and will negotiate in good faith for a reasonable period of time to have Frontier develop (under a Statement of Work) and supply such Product to Cisco subject to Subsection 11.2(c) below. (c) To be the selected vendor for a particular Covered RMON product or Other RMON product, Frontier must meet Cisco's product functionality and availability requirements and offer the product at a cost to Cisco (including product cost and development cost) comparable to costs available to Cisco from other sources for comparable products, with reasonable development schedules, and commercially reasonable delivery and terms. (d) After a Covered RMON product has been added as a Product under the Agreement, Cisco shall not distribute an internally-develop product that is substantially similar to such Product supplied by Frontier. (e) Cisco will keep Frontier informed of its ongoing interests and needs for RMON products and will provide Frontier the opportunity to be Cisco's OEM supplier of such products. (f) In the event that Cisco, having followed the process herein defined in this Section 11.2, obtains a Covered RMON product from another OEM supplier, Cisco is not subsequently obligated to use a comparable Frontier product in place of the other product. (g) In the event Cisco decides to distribute a Covered RMON product that is developed by Cisco pursuant to this Section 11.2 or by a company acquired by Cisco, Cisco's then designated Project Manager shall notify Frontier at the time Cisco makes a firm decision to implement such plans. 11.3 To maintain its status as Preferred RMON Vendor, Frontier must continuously adhere to all of the following conditions: (a) Frontier is not in default of any substantive terms of the Agreement, including, but not limited to, the terms of Section 17 (Sales activity) and Section 19 (Cost Reduction) of this Amendment #3. 10 (b) Frontier meets the quality standards for Products as set by Cisco for all of Cisco's products, (c) Frontier provides support and maintenance for Products as reasonably requested by Cisco, (d) Frontier develops new Products under Statements of Work in a timely manner to meet Cisco's requirements. Cisco will determine in it sole discretion whether Frontier is meeting all of these conditions in this Section 11.3. In the event that Frontier ceases to meet all of these conditions and thus is in jeopardy of losing its Preferred RMON Vendor status, Cisco shall notify Frontier that it does not then meet the conditions for Preferred RMON Vendor status and Cisco and Frontier management will meet in good faith to resolve those issues which are causing Frontier not to meet the conditions for Preferred RMON Vendor status. If issues causing Frontier to lose its Preferred RMON Vendor status are not resolved within a reasonable and mutually determined time frame after notification, Frontier will lose its Preferred RMON Vendor status and Cisco is free to use alternative vendors or to develop and supply Covered RMON products and Other RMON products to meet Cisco's needs without violation of this Section 11. 11.4 The rights conferred to Frontier as Preferred RMON Vendor in this Section 11 notwithstanding, Cisco reserves rights to: (a) Acquire companies providing Covered RMON products and Other RMON products and to use, sell or license RMON products developed by the acquired company. (b) Develop and distribute its own Covered RMON products or Other RMON products subject to the limitations of Section 11.2 above, (c) Exercise its Manufacturing Rights in accordance with the terms of this Agreement, (d) Develop embedded RMON agents, or make modifications to Software as specified in this Agreement, (e) Use, sell, or license Other RMON products from other vendors subject to the limitations of Section 11.2 above, (f) Use, sell or license Covered RMON products from other vendors that are (i) incidental to other of Cisco's business relationships and which are non-strategic product solutions that will be replaced by Products under this Agreement within a reasonable time frame subject to Section 11.2(c) above, (ii) needed to meet 11 unique customer obligations, subject to notification to Frontier per Section 11.2(e) above, and (iii) Other RMON products committed for inclusion in Cisco's products prior to the effective date of Amendment #3. 11.5 In the event that Cisco acquires a company that is developing or marketing Covered RMON products, the parties agree: (a) at Frontier's request, Cisco shall relinquish its rights under Section 7.2(b) of this Amendment #3 to source code for Other Software and immediately return such source code to Frontier, and (b) Cisco shall relinquish its tights under Section 10 of this Amendment #3. 12.0 PUBLICITY ON STRATEGIC RMON RELATIONSHIP. The parties agree to publicize the strategic nature of this relationship for RMON Products with a joint press announcement. Each party is permitted to refer to this strategic relationship in their sales collateral and advertising. All such references to this strategic relationship and use of the other party's name and or logos is subject to the prior written approval of the other party. 13. SUPPORT PAYMENTS. Section 3.4 of Amendment #2 and Section 8 of the Software Agreement are hereby changed to include an annual support fee of [*] to cover the following support activities: i) updates, revisions, bug fixes and new releases of agent Software for all platforms, ii) bug, fixes for all RMON Products; iii) on-going consulting, including architectural issues, to Cisco for existing and future RMON Products. 14. MANUFACTURING RIGHTS AND ESCROW. Section 10 of the Hardware Agreement is hereby changed as follows: 14.1 Cisco's right to manufacture is increased from [*] from the time it is exercised. Cisco can exercise this right on a Product by Product basis and at different times. 14.2 Cisco's right to manufacture survives termination of the Agreement by Cisco for cause per Section 14.2 of the Hardware Agreement. 14.3 Any source code provided by Frontier to Cisco under the licenses of the Agreement does not need to be deposited into the escrow as part of the Escrowed Materials. - ---------------------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 12 14.4 The following new paragraph is hereby added to Section 10 of the Hardware Agreement: "10.5 SOFTWARE LICENSE UNDER MANUFACTURING RIGHTS. In the event Cisco exercises its Manufacturing Rights for a Product per Section 10 and notwithstanding anything to the contrary in the Agreement, Frontier hereby grants Cisco the additional right and license to [*] of the Other Software (as defined in Section 7.2(b) of this Amendment #3) for the Product that Cisco has the right to manufacture. Cisco agrees to limit [*] within such modifications to Other Software to those features which in Cisco's sole discretion: (i) are [*], (ii) are [*] competitive products, or (iii) have been previously [*] by Cisco. Notwithstanding anything to the contrary in the Agreement, [*] shall retain title and full ownership to the [*] of the Other Software made by or for Cisco for the Product that Cisco has the right to manufacture. In addition, [*] hereby grants to [*] a worldwide, [*] and nonexclusive license to [*] of the [*] to the Other Software made by or for Cisco." 14.5 The following new paragraph is hereby added to Section 10 of the Hardware Agreement: "10.6 MINIMUM PERIOD OF MANUFACTURING RIGHTS. In the event Cisco exercises its Manufacturing Rights for a Product per Section 10 and notwithstanding anything to the contrary in the Agreement, such right shall survive termination or expiration of the Agreement such that the minimum period of Manufacturing Rights for a Product is 2 years, except that Manufacturing Rights do not survive termination for cause by Frontier or termination for convenience by Cisco." 14.6 Replace Section 10.2 (a) of the Hardware Agreement with the following: "In the event Cisco exercises its Manufacturing Rights for a Product, Cisco agrees to pay Frontier royalties on all Products manufactured and distributed by Cisco hereunder as follows: (i) For Products that are [*] with no [*] content, Cisco shall [*] under the terms specified under the Agreement for such Products. (ii) For all other [*], Cisco agrees to pay Frontier a [*] equal to [*] of Cisco's then current [*]. (iii) All [*] will be computed on a [*] basis and paid quarterly within [*] following the end of each Cisco quarter." 13 15. SUPPORT AFTER TERMINATION. Section 14.7 of the Hardware Agreement is changed such that support shall be provided by Frontier for a Product until [*] after the last shipment of that Product by Cisco. 16. SUPPORT REQUIREMENTS. The following support-related changes are to be made to the Agreement: 16.1 Section 8.1 of the Hardware Agreement is changed by adding the following: "Frontier shall include bug fixes in all subsequent releases of the agent software and RMON Products. Support levels are defined as follows: Level 1 Support: [*]. Level 2 Support: All Level 1 support capabilities plus: [*] Level 3 Support: [*] 16.2 Section 6.1 (Paragraph 8.15) of Amendment #2 and Section 8.6 of the Hardware Agreement are amended to add the following: "Cisco shall work with Frontier while Frontier is developing products for Cisco under a Statement of Work, to provide input on debugging/support tools to help in Cisco's support efforts. For all new releases of Software or hardware Products developed per Section 1.0 (Development Work) above or upgrades to existing Products, Frontier will provide advanced versions of Products and all supporting customer documentation to Cisco's support organization to allow them to prepare to support such new Products." 16.3 Section 8.9 of the Hardware Agreement is changed to add the following: "Upon verifying that a Product defect exists, Frontier shall initiate work in accordance with the time frames for the assigned priority, toward development of a fix or work around. If Frontier is not able to verify that a Product defect exists, Frontier will work with Cisco to determine the source of the problem until it has been determined that the cause is not related to a problem with a Frontier Product. In all cases, Cisco shall use reasonable efforts to identify and demonstrate such Software error prior to contacting Frontier. If Frontier is unable to meet the time frames listed in Section 8.9 for a problem of any priority, Frontier will provide to Cisco within that time frame, at a minimum, a - ---------------------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 14 written plan for addressing the problem, including an estimate as to the reasonable time period necessary to correct the problem." 16.4 Section 8. 10 of the Hardware Agreement is changed such that Frontier will provide training for major releases/new RMON Products prior to initial shipment of each major release/new RMON Product, for a minimum of twenty-five (25) people at a Frontier facility, Cisco facility or facility mutually agreed upon. 16.5 Exhibit F of the Hardware Agreement is changed to use the following Problem Priority Definitions: Priority 1: Cisco customer's network is [*] or there is [*]. [*] is available. [*] are willing to commit [*] to resolve the situation. Priority 2: Operation of Cisco customer's network is [*] are being [*] network performance. [*] are willing to commit [*] to resolve the situation. Priority 3: Operational performance of Cisco customer's Network [*]. Seller, Cisco and customer are willing to [*] to restore service to satisfactory levels. Priority 4: [*] requires [*] on [*]. 17. SALES ACTIVITIES. The parties agree to conduct sales activities in accordance with the following guidelines: (i) The parties will identify situations in which both [*] are [*] to meet customer's needs for RMON Products. (ii) The two sales organizations [*] in [*]. [*] regarding joint sales plans for [*] between the Cisco regional sales manager and Frontier's Vice President of sales. (iii) Cisco and Frontier will [*] to [*] such that Frontier has [*] relating to [*] to allow Frontier to [*] for such sales. 18. NETFLOW MONITOR [*]. Cisco's purchase price for NetFlow Monitor shall be [*] of Frontier's U.S. list price. 19. COST REDUCTION. The parties agree to meet no less frequently than semi-annually to review the prices/license fees paid by Cisco for all Products covered by this Agreement. Frontier agrees to act in good faith to maintain competitive OEM - ---------------------------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. 15 pricing/license fees for Products sold to Cisco considering all of the following: (i) Pricing trends in the RMON product market place; (ii) Reductions in Frontier's costs for Products; and, (iii) Competition from other suppliers products. Frontier shall notify Cisco [*] prior to the public announcement of any price change to its published list price for a Frontier product that is equivalent to a Product. 20. NO OTHER CHANGES. Terms capitalized shall have the meaning assigned to them in the Agreement unless specifically defined herein. All other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized representatives. CISCO SYSTEMS, INC. FRONTIER SOFTWARE DEVELOPMENT, INC. /s/ Mario Mazzola /s/ Narendra Popat - -------------------------------------- -------------------------------- Signature Signature Mario Mazzola Narendra Popat - -------------------------------------- -------------------------------- Name Name Vice President/General Manager - Wbu President, Frontier Software - -------------------------------------- -------------------------------- Title Title October 29, 1996 October 29, 1996 - -------------------------------------- -------------------------------- Date Date 16 Exhibit A Template for Statement of Work [*] - -------- [*] indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. EX-10.15 21 EXHIBIT 10.15 Exhibit 10.15 AMENDMENT NO. 4 TO PRIVATE LABEL AGREEMENT AND PROJECT DEVELOPMENT AND LICENSE AGREEMENT BETWEEN CISCO SYSTEMS, INC. AND NETSCOUT SYSTEMS, INC. This Amendment No. 4 ("Amendment #4"), having an Effective Date of February 23, 1998, is made in California by and between Cisco Systems, Inc., a California corporation having its principal place of business at 170 West Tasman Drive, San Jose, CA 95134-1706, U.S.A. ("Cisco"), and NetScout Systems, Inc., (Formerly known as Frontier Software Development, Inc.) a Delaware corporation having its principal place of business at 4 Technology Park Drive, Westford, Massachusetts 01886 ("NetScout"). WHEREAS, Cisco and NetScout entered into the Project Development and License Agreement on July 13, 1994 ("Software Agreement"), as amended on January 4, 1995 ("Amendment #1") pursuant to which NetScout licensed certain software products (as defined in the Software Agreement) to Cisco; and WHEREAS, Cisco and NetScout entered into the Private Label Agreement on October 17, 1995 ("Hardware Agreement") pursuant to which NetScout is selling certain products (as defined in the Hardware Agreement) to Cisco; and WHEREAS, Cisco and NetScout entered into an Amendment to the Hardware Agreement and the Software Agreement on May 15, 1996 ("Amendment #2"); and WHEREAS, Cisco and NetScout entered into an Amendment to the Hardware Agreement and the Software Agreement on October 29, 1996 ("Amendment #3"); and WHEREAS, Cisco and NetScout desire to change and add certain terms to the Software Agreement, Hardware Agreement, Amendment #1, Amendment #2 and Amendment #3 (collectively, the "Agreement") as specified below. NOW THEREFORE, in consideration of the covenants and conditions contained herein, the parties agree as follows: 1.0 DEFINITIONS. "Embedded Probes" are as defined in Section 3.0 of Amendment #3. "Special Pricing" shall mean a [*] structure different from the normal [*] or royalties per the Agreement and conveyed to Cisco in writing (letter, fax, or email) to be in effect for specific products, specific customers, and a stated time period. "Stand-alone Probes" shall mean all RMON probe product models covered under the Agreement except Embedded Probes. 2.0 PROBE [*]. Section 5.0 of Amendment #3 entitled "Probe [*]" is hereby replaced with the following: (a) [*]. The [*] ("[*]") for Stand-alone Probes shall be [*] off NetScout's published U.S. List Price (U.S. List Price is defined in the Revised Exhibit A of Amendment #2). [*] applies to all Stand-alone Probes currently covered under the Agreement plus any new models of Stand-alone Probes subsequently added under the Agreement. (b) Incremental Volume [*]. Based upon the total dollar volume for all Stand-alone Probes purchased by Cisco during Cisco's previous fiscal quarter, but excluding any products purchased with Special Pricing, Cisco shall receive an additional incremental [*] ("Incremental Volume [*]") in addition to the [*] as follows:
- ----------------------------------- -------------------------- Total Quarterly Stand-alone Probe Incremental Volume [*] Purchases in Dollars in Percent for Next Quarter - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- [*] - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- - ----------------------------------- -------------------------- - ----------------------------------- --------------------------
Given the need to complete the accounting for Cisco's previous fiscal quarter to determine the Incremental Volume [*] for the current quarter, the Incremental Volume [*] for a given quarter shall apply for all purchase orders placed four or more weeks after the start of said Cisco fiscal quarter and shall continue through the first four weeks of the [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. Page 2 subsequent Cisco fiscal quarter. The dollar volume shall be measured in terms of the actual purchase prices for all purchase orders for Standalone Probes ordered by Cisco (excluding units purchased under Special Pricing). (c) Special Pricing. If the parties have agreed to Special Pricing for a particular competitive situation, Cisco shall reference said Special Pricing in its purchase orders placed with NetScout for which Special Pricing applies. (d) Effectivity of [*] for Stand-alone Probes. The [*] per this Section 2 shall apply as of the Effective Date of this Amendment #4 and shall continue in effect until the termination or expiration of the Agreement. Any Incremental Volume [*] shall apply beginning with the first complete fiscal quarter after the Effective Date of this Amendment #4. (e) Minimum purchase requirement. Should Cisco purchases of probes fall below [*] for [*], as calculated above, Cisco's price for the subsequent quarter shall be as specified in the Hardware Agreement, attachment A. 3.0 RMON EMBEDDED AGENT SOFTWARE FOR IOS. The parties hereby cancel the licensing transaction agreed to in Section 2.2 (a) of Amendment #3 such that NetScout is not obligated to deliver or license RMON Embedded Agent Software to Cisco for inclusion in [*] software and Cisco is not obligated to make the [*] payment to NetScout . 4.0 PROBE SALES INCENTIVE PROGRAM. The parties hereby establish a [*] which shall: (a) be in effect for Cisco's [*], beginning [*] and ending on [*] (b) be in effect only for [*] where Cisco's [*] placed with NetScout in that quarter meet or exceed [*], and (c) provide a [*] of [*] on the first [*] of [*] product ordered in the quarter (a maximum [*] of [*] per quarter) at Cisco's applicable [*] per Section 2 above. The [*] shall be calculated at the end of each quarter, apply to any open [*], and be issued by NetScout within 45 days of the close of each applicable Cisco fiscal quarter. 5.0 TRAFFIC DIRECTOR LICENSING. Notwithstanding anything to the contrary in the Agreement, the licensing practice for end users of Traffic Director 5.1, and subsequent releases, embedded within CWSI shall be as follows: [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. Page 3 (a) Cisco shall apply the same end user license to Traffic Director embedded within CWSI as Cisco requires of its end user customers for the rest of the functionality of CWSI. If Cisco changes its licensing practice for CWSI, it will apply the same new license practice to Traffic Director after consultation with and approval by NetScout. (b) Cisco shall apply the [*] in protecting Traffic Director as it does for [*] in [*] and shall continue to meet all conditions within existing agreements between the parties to protect NetScout's [*]. (c) In the event that Cisco becomes aware of any [*] of the [*] as applied to TrafficDirector, Cisco shall apply commercially reasonable efforts to assure that the [*] of [*] as applied to Traffic Director are met by [*], and further Cisco shall [*] to NetScout any [*] even in the case in which the [*] to Cisco. (d) Cisco shall continue to account for its royalties due for Traffic Director per the process currently in place between the parties. 6.0 INVENTORY CREDIT. The parties acknowledge that Cisco [*] NetScout [*] units of [*] which were [*] by Cisco at a [*] of [*]. NetScout agrees to immediately [*] Cisco for this [*], in the amount of [*]. Cisco hereby [*] to NetScout [*] of said [*]. 7.0 DOCUMENTATION. For all new products, bug fixes and product updates provided to Cisco for acceptance testing under this Agreement, NetScout shall apply reasonable commercial efforts to provide the following documentation: Functional specifications Design specifications (as available as a standard NetScout documents) Test plans, test cases, and test results for key features Test plans, test cases and test results for system tests [*]INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. Page 4 IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized representatives effective as of the last date given below. CISCO SYSTEMS, INC. NETSCOUT SYSTEMS, INC. /S/ MARIO MAZZOLA /S/ ANIL SINGHAL - ------------------------------- ---------------------------------- Signature Signature MARIO MAZZOLA ANIL SINGHAL - ------------------------------- ---------------------------------- Name Name SVP ELOB CEO - ------------------------------- ---------------------------------- Title Title Page 5 EX-10.16 22 EXHIBIT 10.16 Exhibit 10.16 AGREEMENT RELATING TO EMPLOYMENT Agreement dated June 1, 1994, by and between Frontier Software Development, Inc., a Delaware corporation ("Frontier") and Anil Singhal, a founder of Frontier ("Mr. Singhal"). INTRODUCTION AND BACKGROUND Mr. Singhal is one of the founders of Frontier and in that capacity over the past ten years has worked diligently, for long hours and for relatively low pay. As a result of Mr. Singhal's efforts, in the past year Frontier has begun to experience growth and income as its products have started to become sought after in the marketplace. In recognition of Mr. Singhal's efforts and desiring to continue to retain Mr. Singhal's services, the Board of Directors of Frontier has authorized the granting of the benefits described in this Agreement. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties, intending to be legally bound, agree as follows: 1. TITLE AND DUTIES. Frontier hereby employs Mr. Singhal to serve Frontier in the capacities of Chairman and Chief Executive Officer. In accordance with such position Mr. Singhal will have appropriate responsibilities, duties and authority for the management of Frontier, sufficient for the accomplishment of the goals set for him by the Board of Directors to whom he shall be responsible. Mr. Singhal shall use his best efforts in directing the business of Frontier with the objective of providing maximum profit and return on invested capital; establishing current and long-range objectives, plans and policies subject to the approval of the Board, and representing Frontier with its major customers, the financial community and the public. The term of this Agreement will be for five (5) years commencing on June 1, 1994 and shall be automatically renewed for additional one-year periods thereafter unless either Frontier of Mr. Singhal gives the other written notice of non-renewal at least twelve (12) months prior to the expiration of the original term or any renewal term hereof. Mr. Singhal's salary and bonuses will be determined by the Board of Directors on an annual basis based on the condition and prospects of Frontier and the achievements of Mr. Singhal. Mr. Singhal will be eligible for annual merit increases in accordance with Frontier's compensation plan. 2. BONUS PLAN. Mr. Singhal will participate in Frontier's executive incentive plan with a target level bonus of 40% and a maximum bonus of 50% of base salary as outlined in Frontier's executive incentive plan as from time to time in effect. 3. BENEFITS. Frontier will provide Mr. Singhal with and shall pay for $2,000,000 in life insurance. In addition Mr. Singhal will be eligible for and receive all Frontier benefits, including but not limited to, disability insurance at no less than 100% of salary, eight (8) weeks of paid vacation, and Frontier's medical, dental and vision care plans providing for family coverage as from time to time in effect. 4. DEATH OF MR. SINGHAL. If Mr. Singhal's employment terminates by reason of death, Frontier will have no severance obligations to Mr. Singhal aside from the foregoing Frontier provided life insurance; provided, however, if the proceeds of such life insurance are not available to Mr. Singhal's beneficiaries for any reason, then Frontier will pay such beneficiaries an amount which is equivalent to Mr. Singhal's Severance Pay (as defined below) as if Mr. Singhal were terminated without Due Cause. 5. DISABILITY. If Mr. Singhal's employment terminates because Mr. Singhal is Disabled, then Frontier will pay Mr. Singhal an amount equal to (a) his base salary minus (b) any payments he actually receives under the disability policy provided for him by Frontier. This amount will be paid monthly until he is no longer Disabled. In addition during such period Frontier will provide Mr. Singhal with all benefits in effect prior to his termination. As used herein the terms "Disabled" and "Disability" shall have the meanings set forth in the disability income insurance policy provided for Mr. Singhal by Frontier. 6. TERMINATION WITHOUT DUE CAUSE. In the event that Mr. Singhal is terminated by Frontier without Due Cause, as defined herein, Frontier's sole liability to Mr. Singhal will be to pay the amounts set forth in this Section. Specifically Frontier will pay Mr. Singhal Severance Pay for a period of three (3) years as follows: (a) for the first twelve (12) month period following such termination an amount equal to the greater of (i) $175,000 and (ii) Mr. Singhal's base salary as of the date of termination, and (b) for each subsequent period of twelve (12) months an amount equal to 120% of the amount of Mr. Singhal's Severance Pay for the immediately preceding twelve (12) months. Payments of Severance Pay will be made at such time as Frontier makes its normal payroll payments. Notwithstanding the foregoing, Mr. Singhal's Severance Pay will be discontinued if Mr. Singhal secures comparable alternative employment as to position and pay. During the period in which Frontier is required to make payments of Severance Pay to Mr. Singhal Frontier will continue to provide to Mr. Singhal all benefits, reimbursement of expenses for his company car, reimbursement for full out-placement assistance by a counselor of Mr. Singhal's choice up to a maximum of $25,000 reimbursement, and reimbursement for reasonable travel and expenses (to the extent not reimbursed by others) connected with Mr. Singhal's efforts to seek comparable employment. 7. TERMINATION FOR DUE CAUSE. In the event that Mr. Singhal is terminated for Due Cause he will not be entitled to any severance payment and Frontier will have all of the rights and remedies available to it at law and in equity. "Due Cause", as used herein, shall mean that (a) Mr. Singhal has committed a willful, serious act, such as embezzlement, against Frontier intending to enrich himself at the expense of Frontier or, (e) the conviction of Mr. Singhal of a felonious crime, but not a -2- misdemeanor, involving moral turpitude. For purposes of this paragraph, no act, or failure to act, on Mr. Singhal's part shall be considered "willful" unless done, or omitted to be done, by Mr. Singhal, not in good faith and without reasonable belief that Mr. Singhal's action or omission was in the best interest of Frontier. Notwithstanding the foregoing, Mr. Singhal shall not be deemed to have been terminated for Due Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the unanimous affirmative vote of all of the members of the Board of Directors (exclusive of Mr. Singhal) at a meeting of the Board called and held for the purpose (after reasonable notice to Mr. Singhal and an opportunity for Mr. Singhal, together with his counsel, to be heard before the Board) finding that in the good faith opinion of the Board Mr. Singhal was guilty of conduct set forth above and specifying the particulars thereof in detail. 8. TERMINATION BY MR. SINGHAL FOR GOOD REASON. If in anticipation of or following a Change in Control of Frontier, or following an investment of at least $1,000,000 by investors in Frontier or following an initial public offering of Frontier's stock, Mr. Singhal terminates his employment for Good Reason he shall be paid the Severance Pay described above. As used herein the term "Change in Control" shall mean any event as a result of which the stockholders of Frontier immediately prior to such Change in Control would not immediately after such Change in Control beneficially own voting securities representing in the aggregate more than 50% of the combined voting power of the voting securities of the surviving entity, by the members of the Board of Directors of Frontier immediately prior to the Change in Control would not immediately after the Change in Control constitute a majority of the Board of Directors of the subsequent corporation or entity. As used herein the term "Good Reason" shall mean: (a) Without Mr. Singhal's express written consent, the assignment to Singhal of any duties inconsistent with his positions, duties, responsibilities and status with Frontier immediately prior to a Change in Control, as defined above, or a change in his reporting responsibilities, title or offices as in effect immediately prior to a Change in Control, or a reduction in job responsibilities or authority to a position subordinate to that provided for in this Agreement or any removal of Mr. Singhal from or any failure to re-elect him to any of such positions, except in connection with the termination of his employment for Due Cause, disability or retirement or as a result of his death or by Mr. Singhal other than for Good Reason; (b) A reduction in Mr. Singhal's base salary or benefits or a breach of Frontier's obligations undertaken in this Agreement. 9. COMPANY CAR. Frontier will provide Mr. Singhal with or will reimburse Mr. Singhal for the cost of leasing a company car of make and model comparable to that provided to senior executives of companies in the computer hardware or software industries. Frontier will reimburse Mr. Singhal for all operating expenses, maintenance and fees, including automobile insurance. In the event Mr. Singhal's employment is terminated Frontier will at its expense purchase and transfer to Mr. Singhal title to such company car. -3- 10. Frontier shall require any successor to all or substantially all of the business or assets of Frontier to assume and agree to perform this agreement in the same manner and to the same extent that Frontier would be required to perform it if no such succession had taken place. 11. The laws of the Commonwealth of Massachusetts shall apply to the construction, interpretation and enforcement of this Agreement. FRONTIER SOFTWARE DEVELOPMENT, INC. MR. SINGHAL: By: /s/ NARENDRA POPAT /s/ ANIL SINGHAL ------------------------------ ------------------------------ Anil Singhal Title: PRESIDENT ------------------------- -4- EX-10.17 23 EXHIBIT 10.17 Exhibit 10.17 AMENDMENT NO. 1 TO AGREEMENT RELATING TO EMPLOYMENT AMENDMENT, dated January 14, 1999, by and between NetScout Systems, Inc., a Delaware corporation ("NetScout"), and Anil Singhal, a founder of NetScout ("Mr. Singhal"). WHEREAS, the Company and Mr. Singhal entered into an Agreement Relating to Employment dated as of June 1, 1994 (the "Employment Agreement"); WHEREAS, the parties desire to amend the Employment Agreement to add provisions with respect to Mr. Singhal's compensation; NOW, THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto agree to amend the Employment Agreement as follows: 1. That Section 2 be amended by deleting it in its entirety and replacing it with the following: "BASE SALARY AND BONUS. During the term of this Agreement, the Company shall pay Mr. Singhal a base salary at an annual rate of at least $250,000 and a year-end, non-discretionary bonus of at least $250,000. The base salary shall be payable in installments in accordance with the Company's regular practices, as such practices may be modified from time to time. 2. This Amendment shall be governed by the laws of the Commonwealth of Massachusetts and shall be binding upon the heirs, personal representatives, executors, administrators, successors and assigns of the parties. 3. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, this Amendment has been executed as of the date and year first above written. NETSCOUT SYSTEMS, INC. By: /s/ NARENDRA POPAT ------------------------------------- Narendra Popat President /s/ ANIL SINGHAL ------------------------------------- Anil Singhal -2- EX-10.18 24 EXHIBIT 10.18 EXHIBIT 10.18 AGREEMENT RELATING TO EMPLOYMENT Agreement dated June 1, 1994, by and between Frontier Software Development, Inc., a Delaware corporation ("Frontier") and Narendra Popat, a founder of Frontier ("Mr. Popat"). INTRODUCTION AND BACKGROUND Mr. Popat is one of the founders of Frontier and in that capacity over the past ten years has worked diligently, for long hours and for relatively low pay. As a result of Mr. Popat's efforts, in the past year Frontier has begun to experience growth and income as its products have started to become sought after in the marketplace. In recognition of Mr. Popat's efforts and desiring to continue to retain Mr. Popat's services, the Board of Directors of Frontier has authorized the granting of the benefits described in this Agreement. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties, intending to be legally bound, agree as follows: 1. TITLE AND DUTIES. Frontier hereby employs Mr. Popat to serve Frontier in the capacities of President and Chief Operating Officer. In accordance with such position Mr. Popat will have appropriate responsibilities, duties and authority for the management of Frontier, sufficient for the accomplishment of the goals set for him by the Board of Directors to whom he shall be responsible. Mr. Popat shall use his best efforts in directing the business of Frontier with the objective of providing maximum profit and return on invested capital; establishing current and long-range objectives, plans and policies subject to the approval of the Board, and representing Frontier with its major customers, the financial community and the public. The term of this Agreement will be for five (5) years commencing on June 1, 1994 and shall be automatically renewed for additional one-year periods thereafter unless either Frontier or Mr. Popat gives the other written notice of non-renewal at least twelve (12) months prior to the expiration of the original term or any renewal term hereof. Mr. Popat's salary and bonuses will be determined by the Board of Directors on an annual basis based on the condition and prospects of Frontier and the achievements of Mr. Popat. Mr. Popat will be eligible for annual merit increases in accordance with Frontier's compensation plan. 2. BONUS PLAN. Mr. Popat will participate in Frontier's executive incentive plan with a target level bonus of 40% and a maximum bonus of 50% of base salary as outline in Frontier's executive incentive plan as from time to time in effect. 3. BENEFITS. Frontier will provide Mr. Popat with and shall pay for $2,000,000 in life insurance. In addition Mr. Popat will be eligible for and receive all Frontier benefits, including but not limited to, disability insurance at no less than 100% of salary, eight (8) weeks of paid vacation, and Frontier's medical, dental and vision care plans providing for family coverage as from time to time in effect. 4. DEATH OF MR. POPAT. If Mr. Popat's employment terminates by reason of death, Frontier will have no severance obligations to Mr. Popat aside from the foregoing Frontier provided life insurance; provided, however, if the proceeds of such life insurance are not available to Mr. Popat's beneficiaries for any reason, then Frontier will pay such beneficiaries an amount which is equivalent to Mr. Popat's Severance Pay (as defined below) as if Mr. Popat were terminated without Due Cause. 5. DISABILITY. If Mr. Popat's employment terminates because Mr. Popat is Disabled, then Frontier will pay Mr. Popat an amount equal to (a) his base salary minus (b) any payments he actually receives under the disability policy provided for him by Frontier. This amount will be paid monthly until he is no longer Disabled. In addition during such period Frontier will provide Mr. Popat with all benefits in effect prior to his termination. As used herein the terms "Disabled" and "Disability" shall have the meanings set forth in the disability income insurance policy provided for Mr. Popat by Frontier. 6. TERMINATION WITHOUT DUE CAUSE. In the event that Mr. Popat is terminated by Frontier without Due Cause, as defined herein, Frontier's sole liability to Mr. Popat will be to pay the amounts set forth in this Section. Specifically Frontier will pay Mr. Popat Severance Pay for a period of three (3) years as follows: (a) for the first twelve (12) month period following such termination an amount equal to the greater of (i) $175,000 and (ii) Mr. Popat's base salary as of the date of termination, and (b) for each subsequent period of twelve (12) months an amount equal to 120% of the amount of Mr. Popat's Severance Pay for the immediately preceding twelve (12) months. Payments of Severance Pay will be made at such time as Frontier makes its normal payroll payments. Notwithstanding the foregoing, Mr. Popat's Severance Pay will be discontinued if Mr. Popat secures comparable alternative employment as to position and pay. During the period in which Frontier is required to make payments of Severance Pay to Mr. Popat Frontier will continue to provide to Mr. Popat all benefits, reimbursement of expenses for his company car, reimbursement for full out-placement assistance by a counselor of Mr. Popat's choice up to a maximum of $25,000 reimbursement, and reimbursement for 2 reasonable travel and expenses (to the extent not reimbursed by others) connected with Mr. Popat's efforts to seek comparable employment. 7. TERMINATION FOR DUE CAUSE. In the event that Mr. Popat is terminated for Due Cause he will not be entitled to any severance payment and Frontier will have all of the rights and remedies available to it at law and in equity. "Due Cause", as used herein, shall mean that (a) Mr. Popat has committed a willful, serious act, such as embezzlement, against Frontier intending to enrich himself at the expense of Frontier or, (e) the conviction of Mr. Popat of a felonious crime, but not a misdemeanor, involving moral turpitude. For purposes of this paragraph, no act, or failure to act, on Mr. Popat's part shall be considered "willful" unless done, or omitted to be done, by Mr. Popat, not in good faith and without reasonable belief that Mr. Popat's action or omission was in the best interest of Frontier. Notwithstanding the foregoing, Mr. Popat shall not be deemed to have been terminated for Due Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the unanimous affirmative vote of all of the members of the Board of Directors (exclusive of Mr. Popat) at a meeting of the Board called and held for the purpose (after reasonable notice to Mr. Popat and an opportunity for Mr. Popat, together with his counsel, to be heard before the Board) finding that in the good faith opinion of the Board Mr. Popat was guilty of conduct set forth above and specifying the particulars thereof in detail. 8. TERMINATION BY MR. POPAT FOR GOOD REASON. If in anticipation of or following a Change in Control of Frontier, or following an investment of at least $1,000,000 by investors in Frontier or following an initial public offering of Frontier's stock, Mr. Popat terminates his employment for Good Reason he shall be paid the Severance Pay described above. As used herein the term "Change in Control" shall mean any event as a result of which the stockholders of Frontier immediately prior to such Change in Control would not immediately after such Change in Control beneficially own voting securities representing in the aggregate more than 50% of the combined voting power of the voting securities of the surviving entity, or the members of the Board of Directors of Frontier immediately prior to the Change in Control would not immediately after the change in Control constitute a majority of the Board of Directors of the subsequent corporation or entity. As used herein the term "Good Reason" shall mean: (a) Without Mr. Popat's express written consent, the assignment to Mr. Popat of any duties inconsistent with his positions, duties, responsibilities and status with frontier immediately prior to a Change in Control, as defined above, or a change in his reporting responsibilities, title or offices as in effect 3 immediately prior to a Change in Control, or a reduction in job responsibilities or authority to a position subordinate to that provided for in this Agreement or any removal of Mr. Popat from or any failure to re-elect him to any of such positions, except in connection with the termination of his employment for Due Cause, disability or retirement or as a result of his death or by Mr. Popat other than for Good Reason; (b) A reduction in Mr. Popat's base salary or benefits or a breach of Frontier's obligations undertaken in this Agreement 9. COMPANY CAR. Frontier will provide Mr. Popat with or will reimburse Mr. Popat for the cost of leasing a company car or make and model comparable to that provided to senior executives of companies in the computer hardware or software industries. Frontier will reimburse Mr. Popat for all operating expenses, maintenance and fees, including automobile insurance. In the event Mr. Popat's employment is terminated Frontier will at its expense purchase and transfer to Mr. Popat title to such company car. 10. Frontier shall require any successor to all or substantially all of the business or assets of Frontier to assume and agree to perform this agreement in the same manner and to the same extent that Frontier would be required to perform it if no such succession had taken place. 11. The laws of the Commonwealth of Massachusetts shall apply to the construction, interpretation and enforcement of this Agreement. FRONTIER SOFTWARE DEVELOPMENT, INC. MR. POPAT By: /s/ Anil Singhal /s/ Narendra Popat ------------------------------- ------------------------------- Title: Chairman Narendra Popat ----------------------- 4 EX-10.19 25 EXHIBIT 10.19 EXHIBIT 10.19 AMENDMENT NO. 1 TO AGREEMENT RELATING TO EMPLOYMENT AMENDMENT, dated January 14, 1999 by and between NetScout Systems, Inc., a Delaware corporation ("NetScout"), and Narendra Popat, a founder of NetScout ("Mr. Popat"). WHEREAS, the Company and Mr. Popat entered into an Agreement Relating to Employment dated as of June 1, 1994 (the "Employment Agreement"); WHEREAS, the parties desire to amend the Employment Agreement to add provisions with respect to Mr. Popat's compensation; NOW, THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto agree to amend the Employment Agreement as follows: 1. That Section 2 be amended by deleting it in its entirety and replacing it with the following: "BASE SALARY AND BONUS. During the term of this Agreement, the Company shall pay Mr. Popat a base salary at an annual rate of at least $250,000 and a year-end, non-discretionary bonus of at least $250,000. The base salary shall be payable in installments in accordance with the Company's regular practices, as such practices may be modified from time to time. 2. This Amendment shall be governed by the laws of the Commonwealth of Massachusetts and shall be binding upon the heirs, personal representatives, executors, administrators, successors and assigns of the parties. 3. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, this Amendment has been executed as of the date and year first above written. NETSCOUT SYSTEMS, INC. By: /s/ Anil Singhal ------------------------------- Anil Singhal Chief Executive Officer /s/ Narendra Popat ------------------------------- Narendra Popat 2 EX-10.20 26 EXHIBIT 10.20 EXHIBIT 10.20 SECURED TERM NOTE PARTIALLY NON-RECOURSE (Anil Singhal) US$1,100,000.00 Date: June 28, 1996 FOR VALUE RECEIVED, the undersigned (the "MAKER") hereby promises to pay to Frontier Software Development, Inc., a Delaware corporation, ("FRONTIER") at Frontier's principal office in Massachusetts on or before May 31, 2001 the sum of ONE MILLION ONE HUNDRED THOUSAND DOLLARS AND NO CENTS (US$1,100,000.00) with interest from the date hereof on the principal amount hereof from time to time unpaid at the rate of six and forty eight one hundredths percent (6.48%) per annum compounded semi-annually. Accrued interest hereon shall be payable annually on the anniversary date of this Note. The principal amount of this Note may be prepaid in whole or from time to time in part without premium or penalty of any type whatsoever. The obligations represented by this Note are secured by shares of Voting Common Stock of Frontier pledged to Frontier pursuant to a Stock Pledge Agreement dated as of June 28, 1996 (the "STOCK PLEDGE AGREEMENT"). With respect to amounts other than interest, the holder of this Note shall have no recourse to any of the assets of the Maker other than the shares of stock pledged pursuant to the Stock Pledge Agreement and each holder of this Note shall look solely to such shares for payment of such amounts. This Note shall be a full recourse note with respect to interest accrued and owing hereunder. The undersigned hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note and assents to extensions of the time of payment, or forbearance or other indulgence without notice. This Note shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. WITNESS MAKER: /s/ Charles Tillett /s/ Anil Singhal - ---------------------------- ---------------------- Print Name: Charles Tillett Anil Singhal EX-10.21 27 EXHIBIT 10.21 EXHIBIT 10.21 STOCK PLEDGE AGREEMENT AGREEMENT, made as of June 28, 1996, between Anil Singhal, an individual residing at the address set forth at the foot of this Agreement, (the "PLEDGOR"), and Frontier Software Development, Inc., a Delaware corporation (the "PLEDGEE"). 1. CERTAIN DEFINITIONS. a. The term "PLEDGED SHARES" as used herein means the number of shares (as determined from time to time as provided herein) of Voting Common Stock, par value $0.001 per share, of Frontier Software Development, Inc. (the "COMPANY"). The Pledged Shares shall initially be those shares represented by the following stock certificate of the Company: Certificate No. VC-13 for 141,936 shares. b. The term "OBLIGATIONS" as used herein means all indebtedness, obligations and liabilities of the Pledgor to the Pledgee, now existing or hereafter arising, direct or indirect, absolute or contingent, due or to become due, matured or unmatured, liquidated or unliquidated, arising under Pledgor's Secured Term Note (Partially Nonrecourse) dated the date hereof in the principal amount of US$1,100,000.00 payable to the order of Pledgee (the "NOTE"), as from time to time amended, revised or assigned. c. The term "COLLATERAL" as used herein means the Pledged Shares and any other property at any time, whether now or hereafter, pledged with and from time to time held by the Pledgee hereunder (whether described herein or not) and all income therefrom, increases therein and proceeds thereof. d. The term "EVENT OF DEFAULT" shall mean Pledgor's failure to pay any and all amounts due under the Note, an event of default pursuant to the terms of any of the documents or instruments evidencing any of the Obligations or the breach of a covenant or agreement herein contained. 2. SECURITY FOR OBLIGATIONS. This Agreement and the pledge of the Collateral hereunder is made with the Pledgee as security for the Obligations. 3. PLEDGE OF STOCK. For valuable consideration, receipt of which is hereby acknowledged by the Pledgor, the Pledgor hereby grants a security interest in and pledges, assigns and delivers the Pledged Shares to the Pledgee, to be held by the Pledgee subject to the terms and conditions hereinafter set forth. All of the Pledged Shares, accompanied by a stock power and assignment duly executed in blank by the Pledgor, have been delivered to the Pledgee by the Pledgor. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR. a. CAPITALIZATION, ETC., OF THE COMPANY. The Pledgor represents and warrants that the Pledged Shares are fully paid and non-assessable. b. WARRANTY OF TITLE, ETC. The Pledgor warrants that: (i) he has good and marketable title to the Pledged Shares, subject to no pledges, liens, charges, options, restrictions or other encumbrances except the lien of this Agreement, applicable securities laws restrictions and restrictions arising under or described in the investment documentation relating to the issuance of the Company's Series A Preferred Stock; (ii) he has the full right and power to enter into this Agreement, to execute in blank stock powers and assignments covering the Pledged Shares, and to deliver the Pledged Shares in pledge hereunder and the accompanying stock powers and assignments duly executed in blank by the Pledgor, and to take any actions contemplated or permitted by this Agreement to be taken by him, and pursuant to this Agreement the Pledgee has a valid, perfected, first priority security interest in the Collateral in accordance with the terms hereof; (iii) neither this Agreement, nor the pledge of the Pledged Shares hereunder, will violate any agreement or commitment to which the Pledgor is a party or by which Pledgor or any of Pledgor's property is bound or affected; and (iv) this Agreement is binding upon the Pledgor, his successors and assigns. c. GENERAL COVENANTS. The Pledgor covenants that he will defend the Pledgee's rights and security interest hereunder in the Pledged Shares and against the claims and demands of all persons whomsoever, and that the Pledgor will have the like title to and right to pledge the Collateral and will likewise defend the Pledgee's rights and security interests therein. 5. DIVIDENDS, LIQUIDATION, RECAPITALIZATION, ETC. In case any distribution of capital or stock dividend shall be made on or in respect of any of the Pledged Shares or payment of any dividend in cash or other property shall be made in respect of the Pledged Shares, or any money or property shall otherwise be distributed upon or with respect to any of the Pledged Shares, including pursuant to a recapitalization or reclassification of the capital stock of the Company or pursuant to a reorganization or liquidation or dissolution of the Company, then the capital stock, dividend, principal, interest or other money or property so distributed with respect to the Pledged Shares shall be delivered to the Pledgee to be held by it as part of the Collateral and as security for the Obligations. All capital stock, dividends, principal, interest and other sums of money and property, if any, paid or distributed in respect of the Pledged Shares, which are received by the Pledgor shall, until 2 paid or delivered to the Pledgee, be held in trust for the Pledgee as part of the Collateral and as security for the Obligations. 6. VOTING, ETC., PRIOR TO MATURITY. Unless and until an Event of Default shall have occurred and be continuing, and until notice of such Event of Default has been given by the Pledgee, the Pledgor shall be entitled to vote the Pledged Shares and to give consents, waivers and ratifications in respect of the Pledged Shares; PROVIDED, HOWEVER, that no vote shall be cast, or consent, waiver or ratification given or action taken which would be inconsistent with or violate any provisions of any of the documents or instruments evidencing any of the Obligations or of this Agreement. Until the occurrence of an Event of Default, the Pledgee shall execute and deliver to the Pledgor such proxies or other documents in writing as may be necessary to enable the Pledgor to exercise the foregoing rights. All such rights of the Pledgor to vote and give consents, waivers and ratifications shall cease forthwith in case an Event of Default shall have occurred and be continuing, without any notice (except as provided in this Section 6) or demand by the Pledgee to the Pledgor. 7. REMEDIES. If an Event of Default shall have occurred and be continuing, the Pledgee shall thereafter have the following rights and remedies (to the extent permitted by applicable law) in addition to the rights and remedies of a secured party under the Uniform Commercial Code of The Commonwealth of Massachusetts, all such rights and remedies being cumulative, not exclusive, and enforceable alternatively, successively or concurrently, at such time or times as the Pledgee deems expedient: a. The Pledgee may vote any or all of the Pledged Shares (whether or not the same shall have been transferred into its name or the name of its nominee or nominees) and give all consents, waivers and ratifications in respect of the Pledged Shares and otherwise act with respect thereto as though it were the outright owner thereof (the Pledgor hereby irrevocably constituting and appointing the Pledgee the proxy and attorney in-fact of the Pledgor, with full power of substitution, to do so); b. The Pledgee may demand, sue for, collect or make any compromise or settlement the Pledgee deems suitable in respect of any Collateral held by it hereunder; c. The Pledgee may sell, resell, assign and deliver, or otherwise dispose of any or all of the-Collateral, for cash and/or credit and upon such terms, at such place or places and at such time or times and to such persons, firms, companies or corporations as the Pledgee deems expedient, all following demand for performance by and upon notice to the Pledgor; and d. The Pledgee may cause all or any part of the Pledged Shares held by it to be transferred into its name or the name of its nominee or nominees. 3 If any of the Collateral is sold by the Pledgee upon credit or for future delivery, the Pledgee shall not be liable for the failure of the purchaser to pay for the same and in such event the Pledgee may resell such Collateral. The Pledgee may buy any part or all of the Collateral at any public sale and if any part or all of the Collateral is of a type customarily sold in a recognized market or is of the type which is the subject of widely-distributed standard price quotations, the Pledgee may, in its sole discretion, buy at private sale and may make payments therefor by any means including, without limitation, cancellation of indebtedness secured thereby. The Pledgee may, in its sole discretion, apply the cash proceeds actually received from any sale or other disposition to the reasonable expenses of retaking, holding, preparing for sale, selling and the like, to reasonable attorneys' fees, and all legal expenses, travel and other expenses which may be incurred by the Pledgee in attempting to collect the Obligations or to enforce this Agreement or any instrument evidencing the Obligations or in the prosecution or defense of any action or proceeding related to the subject matter of this Agreement or any instrument evidencing the Obligations, and then to the Obligations with respect to principal or interest, or both, or other fees and expenses, in such proportions as the Pledgee, in its sole discretion, shall determine, and any surplus shall be paid to the Pledgor. The Pledgor recognizes that the Pledgee may be unable to effect a public sale of the Pledged Shares by reason of certain prohibitions contained in the United States Securities Act of 1933, as amended, or in other applicable laws, regulations or agreements to which such Pledged Shares may be subject but may be compelled to resort to one or more private sales thereof to a restricted group of purchasers. The Pledgor agrees that any such private sales may be at prices and other terms less favorable to the seller than if sold at public sales and that such private sales shall be deemed to have been made in a commercially reasonable manner. The Pledgee shall be under no obligation to delay a sale of any of the Pledged Shares for the period of time necessary to permit the issuer of such securities to register such securities for public sale under the said Securities Act or other applicable law, even if the issuer would agree to do so. 8. MARSHALING. The Pledgee shall not be required to marshal any present or future security for (including but not limited to this Agreement and the Collateral pledged hereunder), or guaranties of, the Obligations or any of them, or to resort to such security or guaranties in any particular order; and all of the rights hereunder and in respect of such securities and guaranties shall be cumulative and in addition to all other rights, however existing or arising to the extent that it lawfully may, the Pledgor hereby agrees that it will not invoke any law relating to the marshaling of collateral which might cause delay in or impede the enforcement of the Pledgee's rights under this Agreement or under any other instrument evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or guaranteed, and to the extent that it lawfully may the Pledgor hereby irrevocably waives the benefits of all such laws. 4 9. PLEDGOR'S OBLIGATIONS NOT AFFECTED. The obligations of the Pledgor hereunder shall remain in full force and effect without regard to, and shall not be impaired by (a) any bankruptcy, insolvency, arrangement, readjustment, composition or the like of the Pledgor; (b) any exercise or non-exercise, or any waiver, by the Pledgee of any right, remedy, power or privilege under or in respect of any of the Obligations or any security therefor (including this Agreement); (c) any amendment to or modification of any of the Obligations; (d) any amendment to or modification of any instrument (other than this Agreement) evidencing or securing or guaranteeing any of the Obligations; or (e) the taking of additional security for, or any guaranty of, any of the Obligations or the release or discharge or termination of any security or guaranty for any of the Obligations; whether or not the Pledgor shall have notice or knowledge of any of the foregoing. 10. FURTHER ASSURANCES. The Pledgor will do all such acts, and will furnish to the Pledgee all such financing statements, certificates, legal opinions and other documents and will obtain such governmental consents and approvals and will do or cause to be done all such other things, including without limitation the execution and delivery of further agreements and instruments, as the Pledgee may reasonably request from time to time in order to give full effect to this Agreement and to secure the rights of the Pledgee hereunder. 11. PLEDGEE'S EXONERATION. Under no circumstances shall the Pledgee be deemed to assume any responsibility for or obligation or duty with respect to any part or all of the Collateral of any nature or kind, or any matter or proceedings arising out of or relating thereto, but the same shall be at the Pledgor's sole risk at all times. The Pledgee shall not be required to take any action of any kind to collect, preserve or protect its or the Pledgor's rights in the Collateral or against other parties thereto. The Pledgee's prior recourse to any part or all of the Collateral shall not constitute a condition of any demand, suit or proceeding for payment or collection of the Obligations. 12. NO WAIVER, ETC. No act, failure or delay by the Pledgee shall constitute a waiver of its rights and remedies hereunder or otherwise. No single or partial waiver by the Pledgee of any default or right or remedy which it may have shall operate a waiver of any other default, right or remedy or of the same default, night or remedy on a future occasion. The Pledgor hereby waives presentment, notice of dishonor and protest of all instruments, included in or evidencing any of the Obligations or the Collateral, and any and all other notices and demands whatsoever (except as expressly provided herein). 13. NOTICES, ETC. All notices, requests and other communications hereunder shall be in writing and shall be delivered in hand or by telex or telecopy or where telex or telecopy communication is not possible, by mail, return receipt requested, or by a nationally known overnight courier service addressed as follows: a. If to the Pledgor: To the address set forth at the foot of this agreement 5 with a copy to such person or persons as Pledgor may designate from time to time b. If to the Pledgee: Frontier Software Development, Inc. 321 Billerica Road Chelmsford, Massachusetts 01824 with a copy to such person or persons as Pledgee may designate from time to time or to such other address as the party to receive any such communication or notice may have designated by written notice to the other party from time to time. 14. TERMINATION. Upon payment and performance in full of the Obligations in accordance with their terms and the performance by the Pledgor of all of his covenants and agreements hereunder, this Agreement shall terminate and the Pledgor shall be entitled to the return, at the Pledgor's expense, of such of the Collateral in the possession or control of the Pledgee as has not theretofore been disposed of pursuant to the provisions hereof, together with any moneys and other property at the time held by the Pledgee hereunder. 15. MISCELLANEOUS PROVISIONS. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated except by a written instrument expressly referring to this Agreement and to the provisions so modified or limited, and executed by the party to be charged therewith. This Agreement and all obligations of the Pledgor hereunder shall be binding upon the successors and assigns of the Pledgor, and shall, together with the rights and remedies of the Pledgee hereunder, inure to the benefit of the Pledgee and the Pledgee's successors and assigns. This Agreement and the obligations of the Pledgor hereunder shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. The descriptive section headings herein have been inserted for convenience of reference only and do not define or limit the provisions hereof. If any terms of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall be in no way affected thereby, and this Agreement shall be construed and be enforceable as if such invalid, illegal or unenforceable term had not been included herein. The Pledgor acknowledges receipt of a copy of this Agreement. Terms used herein without definition which are defined in the Uniform Commercial Code of The Commonwealth of Massachusetts have such defined meanings herein, unless the context otherwise indicate or requires. IN WITNESS WHEREOF, the Pledgor and the Pledgee have caused this Agreement to be duly executed, as an instrument under seal, as of the date first above written. 6 PLEDGOR: /s/ Anil Singhal ---------------------------------- Anil Singhal Address: 61 CHIVAS CIRCLE ------------------------- Tewksbury, MA 01876 ------------------------- PLEDGEE: FRONTIER SOFTWARE DEVELOPMENT, INC. By: /s/ Charles W. Tillett ------------------------------- Title: VP Finance ---------------------------- 7 EX-10.22 28 EXHIBIT 10.22 Exhibit 10.22 SECURED TERM NOTE PARTIALLY NON-RECOURSE (Narendra Popat) US$900,000.00 Date: June 28, 1996 FOR VALUE RECEIVED, the undersigned (the "MAKER") hereby promises to pay to Frontier Software Development, Inc., a Delaware corporation, ("FRONTIER") at Frontier's principal office in Massachusetts on or before May 31, 2001 the sum of NINE HUNDRED THOUSAND DOLLARS AND NO CENTS (US$900,000.00) with interest from the date hereof on the principal amount hereof from time to time unpaid at the rate of six and forty eight one hundredths percent (6.48%) per annum compounded semi-annually. Accrued interest hereon shall be payable annually on the anniversary date of this Note. The principal amount of this Note may be prepaid in whole or from time to time in part without premium or penalty of any type whatsoever. The obligations represented by this Note are secured by shares of Voting Common Stock of Frontier pledged to Frontier pursuant to a Stock Pledge Agreement dated as of June 28, 1996 (the "STOCK PLEDGE AGREEMENT"). With respect to amounts other than interest, the holder of this Note shall have no recourse to any of the assets of the Maker other than the shares of stock pledged pursuant to the Stock Pledge Agreement and each holder of this Note shall look solely to such shares for payment of such amounts. This Note shall be a full recourse note with respect to interest accrued and owing hereunder. The undersigned hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note and assents to extensions of the time of payment, or forbearance or other indulgence without notice. This Note shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. WITNESS MAKER: /s/ Charles Tillett /s/ Narendra Popat - ------------------------------------ ---------------------------------- Print Name: Charles Tillett Narendra Popat EX-10.23 29 EXHIBIT 10.23 EXHIBIT 10.23 STOCK PLEDGE AGREEMENT AGREEMENT, made as of June 28, 1996, between Narendra Popat, an individual residing at the address set forth at the foot of this Agreement, (the "PLEDGOR"), and Frontier Software Development, Inc., a Delaware corporation (the "Pledgee"). 1. CERTAIN DEFINITIONS. a. The term "PLEDGED SHARES" as used herein means the number of shares (as determined from time to time as provided herein) of Voting Common Stock, par value $0.001 per share, of Frontier Software Development, Inc. (the "COMPANY"). The Pledged Shares shall initially be those shares represented by the following stock certificate of the Company: Certificate No. VC-11 for 116,130 shares. b. The term "OBLIGATIONS" as used herein means all indebtedness, obligations and liabilities of the Pledgor to the Pledgee, now existing or hereafter arising, direct or indirect, absolute or contingent, due or to become due, matured or unmatured, liquidated or unliquidated, arising under Pledgor's Secured Term Note (Partially Nonrecourse) dated the date hereof in the principal amount of US$900,000.00 payable to the order of Pledgee (the "NOTE"), as from time to time amended, revised or assigned. c. The term "COLLATERAL" as used herein means the Pledged Shares and any other property at any time, whether now or hereafter, pledged with and from time to time held by the Pledgee hereunder (whether described herein or not) and all income therefrom, increases therein and proceeds thereof. d. The term "EVENT OF DEFAULT" shall mean Pledgor's failure to pay any and all amounts due under the Note, an event of default pursuant to the terms of any of the documents or instruments evidencing any of the Obligations or the breach of a covenant or agreement herein contained. 2. SECURITY FOR OBLIGATIONS. This Agreement and the pledge of the Collateral hereunder is made with the Pledgee as security for the Obligations. 3. PLEDGE OF STOCK. For valuable consideration, receipt of which is hereby acknowledged by the Pledgor, the Pledgor hereby grants a security interest in and pledges, assigns and delivers the Pledged Shares to the Pledgee, to be held by the Pledgee subject to the terms and conditions hereinafter set forth. All of the Pledged Shares, accompanied by a stock power and assignment duly executed in blank by the Pledgor, have been delivered to the Pledgee by the Pledgor. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR. a. CAPITALIZATION, ETC., OF THE COMPANY. The Pledgor represents and warrants that the Pledged Shares are fully paid and non-assessable. b. WARRANTY OF TITLE, ETC. The Pledgor warrants that: (i) he has good and marketable title to the Pledged Shares, subject to no pledges, liens, charges, options, restrictions or other encumbrances except the lien of this Agreement, applicable securities laws restrictions and restrictions arising under or described in the investment documentation relating to the issuance of the Company's Series A Preferred Stock; (ii) he has the full right and power to enter into this Agreement, to execute in blank stock powers and assignments covering the Pledged Shares, and to deliver the Pledged Shares in pledge hereunder and the accompanying stock powers and assignments duly executed in blank by the Pledgor, and to take any actions contemplated or permitted by this Agreement to be taken by him, and pursuant to this Agreement the Pledgee has a valid, perfected, first priority security interest in the Collateral in accordance with the terms hereof; (iii) neither this Agreement, nor the pledge of the Pledged Shares hereunder, will violate any agreement or commitment to which the Pledgor is a party or by which Pledgor or any of Pledgor's property is bound or affected; and (iv) this Agreement is binding upon the Pledgor, his successors and assigns. c. GENERAL COVENANTS. The Pledgor covenants that he will defend the Pledgee's rights and security interest hereunder in the Pledged Shares and against the claims and demands of all persons whomsoever, and that the Pledgor will have the like title to and right to pledge the Collateral and will likewise defend the Pledgee's rights and security interests therein. 5. DIVIDENDS, LIQUIDATION, RECAPITALIZATION, ETC. In case any distribution of capital or stock dividend shall be made on or in respect of any of the Pledged Shares or payment of any dividend in cash or other property shall be made in respect of the Pledged Shares, or any money or property shall otherwise be distributed upon or with respect to any of the Pledged Shares, including pursuant to a recapitalization or reclassification of the capital stock of the Company or pursuant to a reorganization or liquidation or dissolution of the Company, then the capital stock, dividend, principal, interest or other money or property so distributed with respect to the Pledged Shares shall be delivered to the Pledgee to be held by it as part of the Collateral and as security for the Obligations. All capital stock, dividends, principal, interest and other sums of money and property, if any, paid or distributed in respect of the Pledged Shares, which are received by the Pledgor shall, until 2 paid or delivered to the Pledgee, be held in trust for the Pledgee as part of the Collateral and as security for the Obligations. 6. VOTING, ETC., PRIOR TO MATURITY. Unless and until an Event of Default shall have occurred and be continuing, and until notice of such Event of Default has been given by the Pledgee, the Pledgor shall be entitled to vote the Pledged Shares and to give consents, waivers and ratifications, in respect of the Pledged Shares; PROVIDED, HOWEVER, that no vote shall be cast, or consent, waiver or ratification given or action taken which would be inconsistent with or violate any provisions of any of the documents or instruments evidencing any of the Obligations or of this Agreement. Until the occurrence of an Event of Default, the Pledgee shall execute and deliver to the Pledgor such proxies or other documents in writing as may be necessary to enable the Pledgor to exercise the foregoing rights. All such rights of the Pledgor to vote and give consents, waivers and ratifications shall cease forthwith in case an Event of Default shall have occurred and be continuing, without any notice (except as provided in this Section 6) or demand by the Pledgee to the Pledgor. 7. REMEDIES. If an Event of Default shall have occurred and be continuing, the Pledgee shall thereafter have the following rights and remedies (to the extent permitted by applicable law) in addition to the rights and remedies of a secured party under the Uniform Commercial Code of The Commonwealth of Massachusetts, all such rights and remedies being cumulative, not exclusive, and enforceable alternatively, successively or concurrently, at such time or times as the Pledgee deems expedient: a. The Pledgee may vote any or all of the Pledged Shares (whether or not the same shall have been transferred into its name or the name of its nominee or nominees) and give all consents, waivers and ratifications in respect of the Pledged Shares and otherwise act with respect thereto as though it were the outright owner thereof (the Pledgor hereby irrevocably constituting and appointing the Pledgee the proxy and attorney in-fact of the Pledgor, with full power of substitution, to do so); b. The Pledgee may demand, sue for, collect or make any compromise or settlement the Pledgee deems suitable in respect of any Collateral held by it hereunder; c. The Pledgee may sell, resell, assign and deliver, or otherwise dispose of any or all of the-Collateral, for cash and/or credit and upon such terms, at such place or places and at such time or times and to such persons, firms, companies or corporations as the Pledgee deems expedient, all following demand for performance by and upon notice to the Pledgor; and d. The Pledgee may cause all or any part of the Pledged Shares held by it to be transferred into its name or the name of its nominee or nominees. 3 If any of the Collateral is sold by the Pledgee upon credit or for future delivery, the Pledgee shall not be liable for the failure of the purchaser to pay for the same and in such event the Pledgee may resell such Collateral. The Pledgee may buy any part or all of the Collateral at any public sale and if any part or all of the Collateral is of a type customarily sold in a recognized market or is of the type which is the subject of widely-distributed standard price quotations, the Pledgee may, in its sole discretion, buy at private sale and may make payments therefor by any means including, without limitation, cancellation of indebtedness secured thereby. The Pledgee may, in its sole discretion, apply the cash proceeds actually received from any sale or other disposition to the reasonable expenses of retaking, holding, preparing for sale, selling and the like, to reasonable attorneys' fees, and all legal expenses, travel and other expenses which may be incurred by the Pledgee in attempting to collect the Obligations or to enforce this Agreement or any instrument evidencing the Obligations or in the prosecution or defense of any action or proceeding related to the subject matter of this Agreement or any instrument evidencing the Obligations, and then to the Obligations with respect to principal or interest, or both, or other fees and expenses, in such proportions as the Pledgee, in its sole discretion, shall determine, and any surplus shall be paid to the Pledgor. The Pledgor recognizes that the Pledgee may be unable to effect a public sale of the Pledged Shares by reason of certain prohibitions contained in the United States Securities Act of 1933, as amended, or in other applicable laws, regulations or agreements to which such Pledged Shares may be subject but may be compelled to resort to one or more private sales thereof to a restricted group of purchasers. The Pledgor agrees that any such private sales may be at prices and other terms less favorable to the seller than if sold at public sales and that such private sales shall be deemed to have been made in a commercially reasonable manner. The Pledgee shall be under no obligation to delay a sale of any of the Pledged Shares for the period of time necessary to permit the issuer of such securities to register such securities for public sale under the said Securities Act or other applicable law, even if the issuer would agree to do so. 8. MARSHALING. The Pledgee shall not be required to marshal any present or future security for (including but not limited to this Agreement and the Collateral pledged hereunder), or guaranties of, the Obligations or any of them, or to resort to such security or guaranties in any particular order; and all of the rights hereunder and in respect of such securities and guaranties shall be cumulative and in addition to all other rights, however existing or arising to the extent that it lawfully may, the Pledgor hereby agrees that it will not invoke any law relating to the marshaling of collateral which might cause delay in or impede the enforcement of the Pledgee's rights under this Agreement or under any other instrument evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or guaranteed, and to the extent that it lawfully may the Pledgor hereby irrevocably waives the benefits of all such laws. 4 9. PLEDGOR'S OBLIGATIONS NOT AFFECTED. The obligations of the Pledgor hereunder shall remain in full force and effect without regard to, and shall not be impaired by (a) any bankruptcy, insolvency, arrangement, readjustment, composition or the like of the Pledgor; (b) any exercise or non-exercise, or any waiver, by the Pledgee of any right, remedy, power or privilege under or in respect of any of the Obligations or any security therefor (including this Agreement); (c) any amendment to or modification of any of the Obligations; (d) any amendment to or modification of any instrument (other than this Agreement) evidencing or securing or guaranteeing any of the Obligations; or (e) the taking of additional security for, or any guaranty of, any of the Obligations or the release or discharge or termination of any security or guaranty for any of the Obligations; whether or not the Pledgor shall have notice or knowledge of any of the foregoing. 10. FURTHER ASSURANCES. The Pledgor will do all such acts, and will furnish to the Pledgee all such financing statements, certificates, legal opinions and other documents and will obtain such governmental consents and approvals and will do or cause to be done all such other things, including without limitation the execution and delivery of further agreements and instruments, as the Pledgee may reasonably request from time to time in order to give full effect to this Agreement and to secure the rights of the Pledgee hereunder. 11. PLEDGEE'S EXONERATION. Under no circumstances shall the Pledgee be deemed to assume any responsibility for or obligation or duty with respect to any part or all of the Collateral of any nature or kind, or any matter or proceedings arising out of or relating thereto, but the same shall be at the Pledgor's sole risk at all times. The Pledgee shall not be required to take any action of any kind to collect, preserve or protect its or the Pledgor's rights in the Collateral or against other parties thereto. The Pledgee's prior recourse to any part or all of the Collateral shall not constitute a condition of any demand, suit or proceeding for payment or collection of the Obligations. 12. NO WAIVER, ETC. No act, failure or delay by the Pledgee shall constitute a waiver of its rights and remedies hereunder or otherwise. No single or partial waiver by the Pledgee of any default or right or remedy which it may have shall operate a waiver of any other default, right or remedy or of the same default, night or remedy on a future occasion. The Pledgor hereby waives presentment, notice of dishonor and protest of all instruments, included in or evidencing any of the Obligations or the Collateral, and any and all other notices and demands whatsoever (except as expressly provided herein). 13. NOTICES, ETC. All notices, requests and other communications hereunder shall be in writing and shall be delivered in hand or by telex or telecopy or where telex or telecopy communication is not possible, by mail, return receipt requested, or by a nationally known overnight courier service addressed as follows: a. If to the Pledgor: To the address set forth at the foot of this agreement 5 with a copy to such person or persons as Pledgor may designate from time to time b. If to the Pledgee: Frontier Software Development, Inc. 321 Billerica Road Chelmsford, Massachusetts 01824 with a copy to such person or persons as Pledgee may designate from time to time or to such other address as the party to receive any such communication or notice may have designated by written notice to the other party from time to time. 14. TERMINATION. Upon payment and performance in full of the Obligations in accordance with their terms and the performance by the Pledgor of all of his covenants and agreements hereunder, this Agreement shall terminate and the Pledgor shall be entitled to the return, at the Pledgor's expense, of such of the Collateral in the possession or control of the Pledgee as has not theretofore been disposed of pursuant to the provisions hereof, together with any moneys and other property at the time held by the Pledgee hereunder. 15. MISCELLANEOUS PROVISIONS. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated except by a written instrument expressly referring to this Agreement and to the provisions so modified or limited, and executed by the party to be charged therewith. This Agreement and all obligations of the Pledgor hereunder shall be binding upon the successors and assigns of the Pledgor, and shall, together with the rights and remedies of the Pledgee hereunder, inure to the benefit of the Pledgee and the Pledgee's successors and assigns. This Agreement and the obligations of the Pledgor hereunder shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. The descriptive section headings herein have been inserted for convenience of reference only and do not define or limit the provisions hereof. If any terms of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall be in no way affected thereby, and this Agreement shall be construed and be enforceable as if such invalid, illegal or unenforceable term had not been included herein. The Pledgor acknowledges receipt of a copy of this Agreement. Terms used herein without definition which are defined in the Uniform Commercial Code of The Commonwealth of Massachusetts have such defined meanings herein, unless the context otherwise indicate or requires. IN WITNESS WHEREOF, the Pledgor and the Pledgee have caused this Agreement to be duly executed, as an instrument under seal, as of the date first above written. 6 PLEDGOR: /s/ Narendra Popat ----------------------------------------- Narendra Popat ----------------------------------------- Address: 14 Livery Road ------------------------------- Chelmsford, MA 01820 ------------------------------- PLEDGEE: FRONTIER SOFTWARE DEVELOPMENT, INC. By: /s/ Charles W. Tillett ------------------------------------- Title: VP Finance ------------ 7 EX-21.1 30 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF NETSCOUT
NAME JURISDICTION OF INCORPORATION - ---- ----------------------------- NetScout Systems Security Corporation Massachusetts NetScout Systems Canada Inc. Ontario, Canada NetScout Systems Foreign Sales Corporation Barbados NetScout Systems (UK) Limited* England and Wales
*The shares of NetScout Systems (UK) Limited were originally issued to Anil Singhal and Narendra Popat. Messrs. Singhal and Popat are in the process of having ownership of the shares transferred to NetScout. EX-23.2 31 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated June 2, 1998, except as to Note 8 which is as of April 14, 1999, relating to the consolidated financial statements of NetScout Systems, Inc., which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedules for the three years ended March 31, 1998 listed under Item 16(b) of this Registration Statement when such schedules are read in conjunction with the consolidated financial statements referred to in our report. The audits referred to in such report also included these schedules. We also consent to the reference to us under the heading "Experts" in such Prospectus. PricewaterhouseCoopers LLP Boston, Massachusetts April 21, 1999 EX-27.1 32 EXHIBIT 27.1
5 1,000 YEAR 9-MOS MAR-31-1998 DEC-31-1998 APR-01-1997 APR-01-1998 MAR-31-1998 DEC-31-1998 6,341 22,024 8,834 0 5,358 8,139 1,063 1,021 3,054 2,632 24,933 33,457 6,389 8,062 2,348 3,770 31,220 40,195 10,820 11,677 0 0 0 0 5,964 5,964 29 30 14,407 22,524 20,400 28,518 34,990 36,737 42,829 48,880 13,422 14,452 35,084 37,231 0 0 0 0 643 667 8,488 12,316 3,056 4,435 0 0 0 0 0 0 0 0 5,432 7,881 .19 .27 .16 .22
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