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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-30931
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OPNET TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1483235
(State or other
jurisdiction of (I.R.S. Employer
Incorporation or
organization) Identification No.)
7255 Woodmont Avenue, Bethesda, Maryland 20814-2959
(Address of principal executive offices) (Zip Code)
Registrant's telephone number; including area code: (240) 497-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $ .001 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed using the closing sale price of the registrant's Common
Stock on May 22, 2002, as reported on the Nasdaq National Market, was
approximately $100.3 million.
The number of shares of the registrant's Common Stock outstanding on May 22,
2002 was 19,179,103.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on September 10, 2002, are
incorporated by reference into Part III of this Form 10-K.
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OPNET TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2002
Page
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Item PART I
1. -- Business............................................................................. 1
2. -- Properties........................................................................... 10
3. -- Legal Proceedings.................................................................... 10
4. -- Submission of Matters to a Vote of Security Holders.................................. 10
Executive Officers and Directors of the Registrant................................... 10
PART II
5. -- Market for Registrant's Common Stock and Related Stockholder Matters................. 12
6. -- Selected Consolidated Financial Data................................................. 13
7. -- Management's Discussion and Analysis of Financial Condition and Results of Operations 14
7a. -- Quantitative and Qualitative Disclosures About Market Risk........................... 27
8. -- Financial Statements and Supplementary Data.......................................... 27
9. -- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 27
PART III
10. -- Directors and Executive Officers of the Registrant................................... 28
11. -- Executive Compensation............................................................... 28
12. -- Equity Compensation Plans and Security Ownership of Certain Beneficial Owners and
Management......................................................................... 28
13. -- Certain Relationships and Related Transactions....................................... 28
PART IV
14. -- Exhibits, Financial Statements and Reports on Form 8-K............................... 29
SIGNATURES.................................................................................... 30
This Annual Report contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "plan," "potential," "should," "will," and "would"
or similar words. You should read statements that contain these words carefully
because they discuss our future expectations, contain projections of our future
results of operations or of our financial position, or state other
forward-looking information. We believe that it is important to communicate our
future expectations to our investors. However, there may be events in the
future that we are not able to predict or control accurately. The factors
listed in this Annual Report under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors That May Affect
Future Results," as well as any cautionary language in this Annual Report,
provide examples of risks, uncertainties, and events that may cause our actual
results to differ materially from the expectations we describe in our
forward-looking statements. You should also carefully review the risks outlined
in other documents that we file from time to time with the Securities and
Exchange Commission, including our Quarterly Reports on Form 10-Q that we will
file in fiscal 2003.
IT Guru(TM), Netbiz(TM), OPNET(R), OPNET Modeler(R), SP Guru(TM), OPNET WDM
Guru, OPNET Technologies(TM), and OPNETWORK(R) are trademarks or service marks
of OPNET. Other trademarks or service marks appearing in this Annual Report are
the property of their respective holders.
We are a Delaware corporation, and our principal executive offices are
located at 7255 Woodmont Avenue, Bethesda, Maryland 20814-2959 and our
telephone number is (240) 497-3000. Our web site address is www.opnet.com. The
information on our web site is not incorporated by reference into this Annual
Report and should not be considered to be a part of this Annual Report. Our web
site address is included in this Annual Report as an inactive textual reference
only.
PART I
ITEM 1. BUSINESS
Overview
Founded in 1986, OPNET Technologies, Inc. ("OPNET", "we" or "us") is the
pioneer and leading provider of intelligent network management software. OPNET
software embeds expert knowledge about how network devices, network protocols,
applications and servers operate. This intelligence enables users in network
operations, engineering, planning, and application development to be far more
effective in optimizing performance and availability of their networks and
applications. We believe our software solutions generate significant return on
investment to a broad customer base, including corporate enterprises,
government and defense agencies, network service providers, and network
equipment manufacturers by empowering them to rapidly make better use of
resources, reduce operational problems and improve competitiveness.
We market focused software solutions for each of our target markets. OPNET
IT Guru, which was launched in August 1998 and OPNET SP Guru, which was
launched in June 2001, are our platform intelligent network management products
for enterprises and service providers, respectively. OPNET WDM Guru, which was
launched in December 2001, is a new optical network planning product for
equipment manufacturers and service providers. OPNET Modeler, our first product
which was launched in 1987, is a modeling and simulation product for network
R&D, mainly sold to network equipment manufacturers. OPNET Netbiz applications
are custom solutions developed with the OPNET Development Kit (ODK), which were
launched in August 1998, and are sold primarily to network equipment
manufacturers. An additional software solution, OPNET VNE Server, is expected
to be generally commercially available at the end of June 2002. VNE Server will
be sold primarily to enterprises and service providers.
Since inception, we have sold our products to enterprises such as Enterprise
Rent-a-Car, FleetBoston Financial, IBM Global Services, RR Donnelley and Texas
Utilities; service providers such as AT&T, British Telecom, France Telecom,
NTT, SBC Communications and Sprint; network equipment manufacturers such as
3Com, Cisco Systems, Ericsson, Motorola, Nokia, and Nortel Networks; and
government agencies such as the Coast Guard, FAA, FBI, NASA, Department of
State and Department of Defense.
Industry Background
Growth and Increased Complexity of Networks
Organizations are increasingly reliant upon their communications networks
and data applications to successfully execute their business strategies. The
increasing use of business applications, such as enterprise resource planning,
corporate intranets, online transaction processing, e-mail, and streaming
multimedia, has expanded the amount of network traffic within organizations,
and has resulted in significant growth in underlying network infrastructures.
In addition, the proliferation and widespread adoption of the Internet has
expanded the role of networks beyond organizational boundaries, and these
networks now represent the fundamental infrastructure of business. As a result,
organizations are recognizing that managing the growth and operation of their
communications networks is critical to business success.
To support the rapidly expanding size and scope of communications
requirements, network infrastructures have been developed based on a wide range
of equipment, technologies, protocols, and network services. As a result, the
operation of these networks is becoming increasingly complex. Enterprises and
service providers must now manage the convergence of voice, data and video
traffic over traditional, wireless and optical architectures by integrating
numerous existing and emerging technologies. The growth of networks, network
complexity and network data traffic has forced organizations to confront
significant challenges in the cost-effective management of networks and
applications.
Communications networks are sophisticated, dynamic systems that evolve on a
daily basis. Applications are typically distributed across many clients,
servers and network segments. New and enhanced business applications are
regularly being deployed and re-deployed. Because traffic levels rise steadily,
constant evaluation of and improvements to the network are essential to
maintaining business and application performance. However, due to the
dependencies among network, server, and application configurations, it is very
difficult for networking professionals to identify the true root cause of
end-to-end performance problems when they occur. The data required to diagnose
end-to-end problems is often not available, and when it is, specialists are
required to perform manual analysis that is time consuming, and sometimes
impractical. Consider the challenge facing a typical network manager when an
end-user experiences performance problems with an important business
application: Is there enough bandwidth available? Does the database server have
enough capacity? What about the application server? Are network routing
protocols tuned properly? What about protocols on the client and server? Was
the application designed and configured properly?
Without a clear understanding of where problems are and what specific
changes are required to solve them, network managers resort to uninformed
decision-making that translates into wasteful spending on unnecessary server
and network upgrades. Due to the distributed nature of enterprise applications,
network professionals need solutions that enable them to focus their time and
resources in the right places when problems occur to maximize the use of
existing infrastructure. Since modifications to infrastructure are costly and
have the potential to result in network failures or service level degradation,
there is a growing need to plan and implement network changes in a controlled
manner, taking into account the potential consequences of each action.
Inadequacy of Traditional Network Management Solutions
To date, network management systems have primarily played a reporting role.
These systems typically collect, store and analyze data about the traffic on
the network, the status and performance of network devices and links, and the
availability of network services and applications. While these traditional
network management products play an important role in managing performance and
availability, they are limited by their lack of understanding of the underlying
technologies that support applications, and the relationships among these
technologies.
Traditional network management solutions do not adequately support key
network management functions, including network design and deployment,
applications troubleshooting and deployment, capacity planning, contingency
planning, traffic engineering, budgeting and deployment of network policies.
Each of these functions depends on a significant amount of expertise, manual
effort and multiple sources of data to be done properly without the support of
intelligent network management. Traditional network management products lack an
operational knowledge of how network devices, applications, and traffic behave
together, and are thus limited both in their ability to diagnose complex
problems and also their ability to provide quantitative insight into how
changes will affect performance.
In general, the troubleshooting support available from traditional products
is focused on monitoring an individual data source, such as traffic volume, or
application response time. The support available from traditional tools for
future planning is limited to trend analysis and simple projections based on
historical information, again, often from a single source. These solutions do
not generally take into account the network as a whole, the interaction among
network components, and the complex behaviors that are inherent to modern
networks and distributed applications.
Market Opportunity for Intelligent Network Management
Organizations need intelligent network management solutions that possess an
operational understanding of network devices, protocols and applications to
enable them to rapidly diagnose complex problems from live operational data
sources, and to predict the impact of changes. A predictive capability allows
network professionals not only to test network and application performance
under a wide range of operating conditions, but also to determine which network
technologies are best suited to ultimately solve business problems. We
2
believe business executives and network professionals need a comprehensive
network management solution that enhances their ability to:
. generate revenue;
. reduce operating and capital costs;
. increase business productivity;
. improve operational efficiency;
. reduce time-to-market; and
. manage risk.
Enterprises require intelligent network management solutions for more
effectively identifying the root causes of end-to-end application performance
problems, troubleshooting device configurations, validating changes, and for
critical operational and strategic planning functions.
Government and defense agencies have needs similar to enterprises, service
providers, and network equipment manufacturers. These agencies also sometimes
require specialized services to support large projects that incorporate
intelligent network management technology.
Service providers require intelligent network management solutions for
optimizing their investments in network infrastructure, more effectively
troubleshooting network configurations, planning for services based on new
technologies including wireless and optical, and making better use of network
resources to increase competitiveness.
Network equipment manufacturers require intelligent network management
solutions for accelerating network R&D, reducing time-to-market for new
technologies, developing custom network design and analysis software, and for
reducing sales cycles for sophisticated technology products.
The OPNET Solution and Products
OPNET software solutions directly address the intelligent network management
needs of enterprises, service providers, equipment manufacturers, and
government agencies. Our intelligent network management solutions use a variety
of advanced technologies to support the assessment of network, application, and
server performance under a wide range of current and future operating
conditions. Our products include model libraries that permit the simulation and
analysis of major network technologies and communication protocols, such as
Transmission Control Protocol/Internet Protocol, or TCP/IP, IP-QoS, Voice over
IP, SONET, CDMA, Virtual Local Area Networks, or VLANs, Frame Relay, data over
cable, and ATM. We sell both off-the-shelf and customized products that offer
interfaces to third party network management solutions, including those from
Concord, Infovista, Network Associates, and Netscout. All of the OPNET products
share a significant amount of core software based on an open architecture. Our
product architecture enables us to create new products more efficiently, to
foster interoperability of our products, and to provide interfaces to a wide
range of external data sources including third party management tools and
network topology, traffic, and configuration information.
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The following chart summarizes our OPNET product suite:
Product Description Target Customers
------- ----------- ----------------
OPNET IT Guru An intelligent network Large and medium
management platform enterprises, and
product for enterprises. government and defense
Enables users to agencies.
troubleshoot and predict
the performance of
networks and applications.
OPNET SP Guru An intelligent network Network service
management platform providers. Networking
product for service professionals that focus
providers. Enables on planning, operations,
network providers to design, and architecture.
troubleshoot, validate,
plan and design networks.
OPNET Modeler A modeling and simulation Network equipment
product for network R&D. manufacturers and R&D
Enables designers to organizations.
evaluate how networking
equipment, technologies
and protocols will
perform under simulated
network conditions.
OPNET Netbiz and OPNET Custom applications for Network equipment
Development Kit ("ODK") automating network manufacturers, service
design, planning, providers and government
provisioning, proposals, contractors.
and analyses.
OPNET WDM Guru Optical network planning Network equipment
product for designing manufacturers and service
resilient, cost-efficient providers. Optical
optical networks. transport layer design
and planning engineers.
OPNET Modules Provides enhanced Entire customer base.
functionality for our
primary software products.
OPNET Model Libraries Libraries of models that Entire customer base.
simulate the behavior of
networking technologies
and communication
protocols.
OPNET VNE Server Currently in development Entire customer base.
with an expected release
in June 2002. Maintains a
comprehensive view of a
customer's network. Used
as a front end for OPNET
IT Guru and SP Guru.
OPNET IT Guru
We began commercial distribution of OPNET IT Guru in August 1998. OPNET IT
Guru uses a variety of advanced technologies, including troubleshooting and
predictive simulation, to analyze many aspects of network behavior. IT Guru
enables our customers to identify current problems related to application
performance and network configurations, and also to predict the impact of
changes to their networks, applications, and servers under a wide range of
scenarios. OPNET IT Guru allows users to identify the root-cause of end-to-end
4
performance problems and to make comparisons among alternative approaches to
solving them. IT Guru's predictive component supports managing change within
customers' networks, such as adopting new technologies, increasing capacity,
and reorganizing assets. OPNET IT Guru also provides detailed views of an
application's performance within a network. This enables network managers and
application deployment teams to understand the impact of implementing a new
application on existing applications, as well as the ability of a network to
support the resulting traffic. OPNET IT Guru supports many popular
communication protocols and networking technologies that operate within
wireline and wireless networks.
OPNET SP Guru
We began general commercial distribution of OPNET SP Guru in June 2001.
OPNET SP Guru enables service providers to manage networks cost-effectively and
improve network efficiency. Its advanced configuration troubleshooting and
operational validation capabilities enable network operators to identify
problems sooner and reduce mistakes. OPNET SP Guru uses our predictive modeling
and diagnostic technology to characterize and forecast many aspects of network
behavior. In addition, OPNET SP Guru provides sophisticated design and
optimization capabilities that enable service providers to automatically
produce more efficient, less costly network designs. Using OPNET SP Guru,
network operators are able to maintain a reliable infrastructure with high
availability and superior service quality, accelerate deployment of new
services, differentiate services from competitors, reduce capital and operating
costs, and manage risk.
OPNET Modeler
OPNET Modeler was our first product and was introduced in 1987. OPNET
Modeler uses our device and protocol design environment, as well as our
predictive simulation technology, to enable our customers to build software
models of a broad range of network devices, communication protocols, and
applications, and to combine these models to run simulations in order to
predict network behavior and performance. These capabilities support the
design, modeling, and development of network equipment and protocols. OPNET
Modeler enables network equipment manufacturers to test product designs in a
wide variety of scenarios prior to manufacturing. Using OPNET Modeler, network
technology and equipment designers gain a better understanding of design
tradeoffs earlier in the product development process, reducing the need for
time-intensive and expensive hardware prototyping.
OPNET Netbiz and ODK
We began commercial distribution of OPNET Netbiz in August 1998.OPNET Netbiz
provides network equipment manufacturers and service providers a platform for
automating network design, provisioning, proposals, and analyses. OPNET Netbiz
can incorporate customers' proprietary algorithms and business policies to
automatically produce and optimize network configurations and designs. OPNET
Netbiz enables network equipment manufacturers to provide vendor-specific
planning solutions to their service provider customers, and enables service
providers to differentiate service offerings from competitors, improve proposal
quality, and accelerate business cycles.
OPNET WDM Guru
We began commercial distribution of OPNET WDM Guru in December 2001. This
product is an advanced network planning solution that enables service providers
and network equipment manufacturers to create cost-effective optical networks.
Its extensive, built-in network expertise provides powerful capabilities for
routing, grooming and dimensioning networks to meet current and future traffic
demands. Users can create and test different "what-if" scenarios with varying
topologies, traffic loads and configurations. OPNET WDM Guru's reporting
features allows users to compare the results of different scenarios, and
thereby determine the most cost-effective designs to meet future demands.
5
OPNET Modules
We develop and sell a variety of software modules that provide enhanced
functionality to our intelligent network management software products.
Currently available OPNET modules include:
. Application Characterization Environment ("ACE"), for analyzing,
diagnosing, and simulating the performance of applications within a
network based on network traffic samples;
. ACE Decode Module, for enhancing ACE's visualizations and diagnoses using
a comprehensive application and protocol decode engine;
. Expert Service Prediction, for the definition and compliance testing of
service level agreements;
. High-Level Architecture, to support building and running a federation of
many simulators, each modeling some aspect of a composite system; and
. Flow Analysis, for determining the route taken by each circuit or traffic
flow, as well as the resulting traffic loads on links, and investigating
the impact of failure in selected devices or links. This module has two
versions: the Service Provider version and the Enterprise version.
. Multi-Vendor Import, for importing network infrastructure and traffic
information from other network management software applications;
. NetDoctor, for automatic validation of network and protocol
configurations; and
. Wireless, for modeling wireless networks and the effects of terrain on
those networks;
OPNET Model Libraries
The model libraries are used by OPNET IT Guru, OPNET SP Guru, and OPNET
Modeler to simulate and analyze major networking technologies and communication
protocols. These libraries provide the building blocks used to generate models
of networks. A network model consists of software objects that correspond to
the devices, computers, and links that constitute the actual network of
interest. The behavior of these objects is controlled by models of devices,
computers, applications, communication protocols, and links. OPNET IT Guru,
OPNET SP Guru, and OPNET Modeler include extensive libraries of popular and
emerging networking technologies and communication protocols, such as TCP/IP,
hypertext transfer protocol, or HTTP, Open Shortest Path First routing, or
OSPF, ATM, frame relay, and IP-QoS. Some of our model libraries are included in
our base products and others are available for an additional fee.
OPNET VNE Server
We expect to commercially distribute OPNET VNE Server in June 2002. This is
an on-line continuously operating software product that maintains a valid
comprehensive view of the network, including infrastructure, configuration and
performance data. It will be able to merge and validate multiple sources of
information into a cohesive model. OPNET VNE Server will be used as a front end
for OPNET IT Guru, OPNET SP Guru and OPNET Modeler.
Customers
Our customers include:
. large and medium-sized enterprises that rely on networks to conduct
business;
. service providers, including telecommunications carriers and ISPs;
. network equipment manufacturers; and
6
. government agencies.
Our software license agreements provide our customers with perpetual and
annual licenses for use by a specified number of concurrent users.
For the year ended March 31, 2002, we generated 22.6% of our total revenues
from customers located outside the United States. For fiscal 2002, revenues
from transactions with U.S. government agencies were approximately 23% of our
total revenues. No single customer accounted for more than 10% of our total
revenues in fiscal 2001 or 2000. Note 16 to our financial statements presents
information regarding revenues generated in the United States and
internationally.
Sales and Marketing
We sell our software through our direct sales force, our international
subsidiaries, third-party distributors, and a number of original equipment
manufacturers and value-added resellers. To date, original equipment
manufacturers have not accounted for a material portion of our revenues. In
North America, the majority of our sales are made by our direct sales force. As
of March 31, 2002, our sales and marketing organization consisted of 90
employees, which comprised 48 sales teams, located in our headquarters in
Bethesda, Maryland and our domestic offices in Cary, North Carolina, Dallas,
Texas and Santa Clara, California, and our overseas offices in France, the
United Kingdom, and Australia. We intend to expand our sales and marketing
organization through aggressive recruiting of qualified individuals.
Our direct sales force concentrates on sales opportunities in the United
States. Our international sales activities are primarily conducted by our
France, United Kingdom, and Australia offices and our 16 distributors that
resell our products in Germany, Scandinavia, the Middle East, India, Pakistan,
China, Japan, Korea, and Singapore. International sales activities are managed
by our vice president of international sales. Our marketing division works
internally with our engineering and sales teams to develop customer value
propositions, and externally to raise awareness of our company and products in
order to generate leads for sales. Our external marketing activities are aimed
at existing customers, new customer and partner prospects, the media, and
industry analysts. These include:
. participation in industry tradeshows;
. product seminars;
. advertisements in trade journals and websites;
. direct mailings;
. product collateral development;
. strategic support for sales teams;
. briefings with industry analysts; and
. a variety of public relations activities, including our annual
international technology conference, OPNETWORK.
For each of the last five years, we have sponsored OPNETWORK, an annual
international technology conference convened in Washington, D.C. that focuses
on intelligent network management for professionals in all areas of networking
and information technology. OPNETWORK 2001, held in August 2001, included more
than 450 hours of classes, labs and panels led by OPNET experts. Approximately
1,000 people from over 30 countries attended OPNETWORK 2001.
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Service and Support
Our service and support offerings include:
. consulting and customization services;
. software maintenance, which includes providing software updates for major
and minor revisions;
. technical support by telephone, e-mail, or fax; and
. training, which includes courses that enable our customers to more
effectively use our products.
We offer consulting services to assist our clients in customizing their
OPNET products. In particular, our customers typically buy customization
services with their purchase of OPNET Netbiz. Customization services are
performed by our consulting staff, which consists of software development
engineers, quality assurance engineers, technical documentation specialists,
and product managers. Some customers also choose to engage our consulting
services for troubleshooting application performance problems, network
planning, network design, and communication protocol design.
Software maintenance and technical support may be purchased by our
customers, generally on an annual basis. Purchasers of maintenance are provided
with unspecified updates to the software they license from us as the
unspecified updates are released. The fee for this service is generally
determined as a percentage of the current price of product licenses. Beginning
in July 2001, our customers have been able to separately purchase periodic
unspecified product upgrades without purchasing technical support. Customers
purchasing technical support are still required to purchase periodic
unspecified product upgrades.
We provide customer support from our support center at our headquarters in
Bethesda, Maryland, as well as from support staff in France, the United
Kingdom, and Australia. Our technical support services are supported by a
comprehensive information system that ensures that customer inquiries are
addressed promptly, tracked until fully resolved, and recorded for future
reference. Reports on the overall responsiveness of the technical support
infrastructure, and the status of pending customer inquiries, are provided
regularly to our technical support staff, technical support management, and
executive management.
We have a core team of technical support staff supplemented by a number of
product developers and consultants who perform technical support on a
rotational basis. This staffing approach ensures that customers have access to
the best available product expertise, while simultaneously providing product
developers with direct customer feedback, which in turn helps us improve our
products.
We regularly offer training courses to our customers to assist them in
maximizing the benefit they receive from using our products. Our training
classes cover a broad range of topics. Training classes are offered at our
headquarters in Bethesda, Maryland, our facilities in Santa Clara, California,
Cary, North Carolina, France, the United Kingdom, and at our customers'
locations. As of March 31, 2002, our full time training staff consisted of 4
employees.
Research and Development
We believe that our ability to enhance our current products, and create new
products in response to the needs of our customer base will be an important
factor for our future success. Accordingly, we intend to continue to commit
significant resources to product research and development. We expect to
accomplish a large part of our product improvements and new product development
through internal development efforts. New capabilities may also be integrated
into our product lines through the acquisition of technologies or businesses,
or the licensing of externally developed technologies.
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Our total expenses for research and development for fiscal 2002, 2001, and
2000 were $12.3 million, $8.3 million, and $5.7 million, respectively. Our
research and development efforts to date have been conducted at our offices in
Bethesda, Maryland, Cary, North Carolina and Ghent, Belgium. All related costs
have been expensed as incurred. As of March 31, 2002, our research and
development staff consisted of 94 engineers and technical professionals.
Our research and development efforts are directed at increasing our revenues
by expanding the scope of our solutions to address additional customer
requirements. Our existing customers provide a meaningful source of
information, which we use, and expect to continue to use, in order to guide our
future product development. In addition, we invest, and intend to continue to
invest, in research and analysis of trends in our industry and our product
markets, and we expect that our future products will reflect the results of
these analyses.
Competition
The market for our products is evolving rapidly and is highly competitive.
We believe that this market is likely to become more competitive as the demand
for intelligent network management solutions continues to increase. Although
none of our competitors offers a solution that is identical to ours, we are
subject to current and potential competition from:
. software vendors with networked application troubleshooting and
predictive analysis offerings, such as Compuware;
. consultants who offer advisory services related to intelligent network
management; and
. customers who develop their own intelligent network management
capabilities, either internally or through outsourcing.
OPNET Netbiz also competes with solutions designed to facilitate and
automate sales processes in general.
In addition, it is possible that other vendors as well as some of our
customers or distributors will develop and market competitive solutions in the
future. Many of our current and potential competitors are larger and have
substantially greater financial and technical resources than we do.
We believe the principal competitive factors affecting the market for our
software products are the following:
. scope, quality, and cost-effectiveness of network management solutions;
. industry knowledge and expertise embedded in the software;
. the interoperability of solutions with existing network management
solutions;
. product performance, accuracy, technical features, ease of use, and
price; and customer service and support.
Intellectual Property
We rely on a combination of copyright, trademark, patent, and trade secret
laws, confidentiality agreements, and contractual provisions to protect our
intellectual property. However, we believe that these laws and agreements
afford us only limited protection. Despite our efforts to protect our
intellectual property, unauthorized parties may infringe upon our proprietary
rights. In addition, the laws of some foreign countries do not provide as much
protection of our proprietary rights as do the laws of the United States.
We currently hold registered trademarks in the United States for OPNET and
OPNET Modeler. We have pending applications in the United States for the
trademark registrations of IT Guru, Netbiz, SP Guru and
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OPNET WDM Guru. We also hold additional registered trademarks in the United
States and have additional pending applications. If not renewed, our registered
trademarks will expire at various times between April 2007 and August 2010. We
have applied for trademark protection in a number of international
jurisdictions, and hold a registered trademark in France for OPNET that will
expire in 2010, if not renewed. In addition, we have one patent for technology
related to the OPNET product suite that will expire in 2018, and two pending
patent applications that if granted would expire in 2019 and 2021. We believe
that, because of the rapid pace of change in our industry, the intellectual
property protection for our products will be a less significant factor for our
future success than the knowledge, abilities, and experience of our employees.
Employees
As of March 31, 2002, we had 268 full-time employees, 253 of whom were
located in the United States. These included 90 in sales and marketing, 48 in
professional services, 94 in engineering, research, and development, and 36 in
finance and administration. Our employees are not represented by a collective
bargaining agreement and we consider our relations with our employees to be
good.
ITEM 2. PROPERTIES
Our corporate office and principal facility is located in Bethesda, Maryland
and consists of approximately 60,000 square feet of office space held under a
lease that expires on January 31, 2011, exclusive of renewal options. We also
lease office space in Cary, Dallas and Santa Clara in the United States and
Paris, France, and Oxen,United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and legal proceedings arising from our
normal operations. Management does not regard any of those matters to be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of fiscal 2002.
Executive Officers and Directors of the Registrant
Our executive officers and directors, and their ages as of May 31, 2002, are
as follows:
Name Age Position
---- --- --------
Marc A. Cohen........... 38 Chairman of the Board and Chief Executive
Officer
Alain J. Cohen.......... 35 President, Chief Technology Officer and
Director
Joseph W. Kuhn.......... 42 Vice President and Chief Financial Officer
Pradeep K. Singh........ 33 Senior Vice President of Engineering, Model
Research and Development
Bruce R. Evans(1)(2).... 43 Director
Steven G. Finn, PhD(1).. 55 Director
William F. Stasior(1)(2) 61 Director
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Set forth below is certain information regarding the professional experience
for each of the above-named persons. These executive officers and directors
were elected to serve until their successors have been elected.
10
Marc A. Cohen and Alain J. Cohen are brothers. There is no other family
relationship between any of our other executive officers or between any of
these officers and any of our directors.
Marc A. Cohen, one of our founders, has served as our chairman of the board
since our inception in 1986 and as our chief executive officer since 1994. From
1986 to 1992, Mr. Cohen was also a consultant with Booz(up arrow)Allen &
Hamilton, an international management and consulting company. Mr. Cohen
received a bachelor's degree in engineering science from Harvard University and
a master's degree in electrical engineering from Stanford University.
Alain J. Cohen, one of our founders, has served as our president and chief
technology officer and as a member of our board of directors since our
inception in 1986. Mr. Cohen received a bachelor's degree in electrical
engineering from the Massachusetts Institute of Technology ("M.I.T.").
Joseph W. Kuhn has served as vice president and our chief financial officer
since January 2002. From March 2001 until joining OPNET, Mr. Kuhn served as
executive vice president and chief financial officer of Wisor Telecom
Corporation, a provider of communications software systems. From April 1997 to
March 2001, Mr. Kuhn served as executive vice president, chief financial and
operating officer and a member of the board of directors of Ciraden, Inc., a
provider of business services and software systems to dental practices. Prior
to April 1997, Mr. Kuhn served as an officer at Alaris Medical, Inc., a
publicly traded corporation that develops, manufacturers and provides
integrated intravenous infusion therapy and patient monitoring instruments and
related disposables. Mr. Kuhn is a graduate of Rutgers University and a
certified public accountant.
Pradeep K. Singh has served as our senior vice president of engineering,
model research and development since March 2000. From March 1999 to March 2000,
Mr. Singh served as our vice president of engineering, model research and
development. From September 1995 to February 1999, he served as our director of
model research and development. From October 1994 to August 1995, he was one of
our software engineers. Mr. Singh received a bachelor's degree in electrical
engineering from Delhi College of Engineering (India) and a master's degree in
electrical engineering from Clemson University.
Bruce R. Evans has served as a member of our board of directors since
September 1997. Mr. Evans has been with Summit Partners, a venture capital
firm, since 1986, serving as a general partner since 1991 and a managing
partner since January 2001. Mr. Evans currently serves on the board of
directors of Private Business, Inc., a provider of software and services to
community banks and several private companies.
Steven G. Finn has served as a member of our board of directors since March
1998. Dr. Finn has been a principal research scientist and lecturer at M.I.T.
since 1991. Dr. Finn has also served as a consultant with Matrix Partners, a
venture capital firm, since 1991.
William F. Stasior has served as a member of our board of directors since
March 1998. Since October 1999, he has served as senior chairman of
Booz(up arrow)Allen & Hamilton. From 1991 to 1999, he served as chairman and
chief executive officer of Booz(up arrow)Allen & Hamilton. Mr. Stasior
currently serves on the boards of directors of Rare Medium Group, Inc., an
internet services company, and Emerging Vision, Inc., a retailer.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market for Common Stock
Our common stock began trading on the Nasdaq National Market on August 2,
2000, under the symbol "OPNT." The following table sets forth, on a per share
basis, for the indicated periods, the high and low sale prices of our common
stock as reported by the Nasdaq National Market.
Quarterly Common Stock-Price for
the Year Ended March 31,
------------------------------
2002 2001
-------------- ---------------
Quarter ended High Low High Low
------------- ------- ------ ------- -------
June 30...... $ 21.06 $14.44 $ -- $ --
September 30. 18.74 4.75 55.75 16.25
December 31.. 15.00 5.55 45.13 8.75
March 31..... 19.50 8.13 23.00 7.88
Number of Stockholders of Record
As of May 22, 2002, we had approximately 75 holders of record of common
stock. Because many of these shares are held by brokers and other institutions
on behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these holders of record.
Dividends
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation of our business.
Sales of Unregistered Securities
In March 2001, we issued 650,000 shares of our common stock to Make Systems,
Inc., a California corporation ("Make"), as partial consideration pursuant to
our acquisition of substantially all of the assets of Make's NetMaker division
("NetMaker"). In January 2002, we issued 25,000 shares of our common stock to
Comsof N.V., as partial consideration pursuant to our acquisition of WDM
NetDesign B.V.B.A. ("WDM NetDesign"). Make and Comsof N.V. were accredited
investors as defined in Rule 501 of the Securities Act of 1933, as amended (the
"Securities Act"), and the common stock issued in these transactions were
issued in reliance on the exemption from registration as provided in Section 4
(2) and under Rule 506 of the Securities Act. No underwriters were involved in
the foregoing sale of securities.
Use of Proceeds
In August 2000, we closed an initial public offering of our common stock.
The Registration Statement on Form S-1 (No. 333-32588) was declared effective
by the Securities and Exchange Commission on August 1, 2000 and we commenced
the offering on that date. After deducting the underwriting discounts and
commissions and the offering expenses, the net proceeds from the offering were
approximately $54.1 million.
As of March 31, 2002, the proceeds from the offering were used to fund
approximately (i) $7.6 million of general corporate expenses, working capital
and capital expenditures, including $4.8 million for capital expenditures and
leasehold improvements related to our headquarters facility in Bethesda,
Maryland, (ii) $6.2 million of acquisition and acquisition-related expenses for
the NetMaker acquisition and (iii) $1.4 million of the purchase price for WDM
NetDesign. None of these amounts were paid directly or indirectly to any
director,
12
officer, or general partner of us or their associates, persons owning 10% or
more of any class of our equity securities, or any affiliate of us. We have not
allocated any of the remaining net proceeds to any identifiable uses. We may
also use a portion of the net proceeds to acquire businesses, products, or
technologies that are complementary to our business. Pending their use, we have
invested the net proceeds in investment grade, interest-bearing securities.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report. The statement of
operations data for the years ended March 31, 2002, 2001, and 2000 (referred to
as "fiscal 2002", "fiscal 2001", and "fiscal 2000", respectively), and the
balance sheet data as of March 31, 2002 and 2001, are derived from, and are
qualified by reference to, our audited consolidated financial statements
included in this Annual Report. The balance sheet data as of March 31, 2000,
1999 and 1998, and the statement of operations data for the years ended March
31, 1999 and 1998 are derived from our audited consolidated financial
statements that are not included in this Annual Report. Historical results are
not necessarily indicative of results that may be expected for any future
period.
Year Ended March 31,
----------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
Software licenses.............................. $27,003 $18,939 $10,577 $ 6,715 $ 7,875
Services....................................... 17,753 14,005 8,658 5,288 4,054
------- ------- ------- ------- -------
Total revenues............................... 44,756 32,944 19,235 12,003 11,929
------- ------- ------- ------- -------
Cost of revenues:
Software licenses.............................. 459 395 728 133 435
Services....................................... 5,863 4,750 2,875 1,249 980
------- ------- ------- ------- -------
Total cost of revenues....................... 6,322 5,145 3,603 1,382 1,415
------- ------- ------- ------- -------
Gross profit...................................... 38,434 27,799 15,632 10,621 10,514
------- ------- ------- ------- -------
Operating expenses:
Research and development....................... 12,339 8,263 5,696 4,850 3,190
Sales and marketing............................ 16,866 13,745 7,510 4,056 3,398
General and administrative..................... 4,655 3,362 2,093 1,984 1,336
Amortization of acquired intangibles........... 434 -- -- -- --
Purchased in-process research and development.. -- 770 -- -- --
------- ------- ------- ------- -------
Total operating expenses..................... 34,294 26,140 15,299 10,890 7,924
------- ------- ------- ------- -------
Income (loss) from operations..................... 4,140 1,659 333 (269) 2,590
Interest and other income, net.................... 1,740 2,788 414 376 319
------- ------- ------- ------- -------
Income before provision for income taxes.......... 5,880 4,447 747 107 2,909
Provision (benefit) for income taxes (1).......... 1,380 1,567 172 (100) 1,134
------- ------- ------- ------- -------
Net income................................... $ 4,500 $ 2,880 $ 575 $ 207 $ 1,775
======= ======= ======= ======= =======
Basic net income applicable per common share...... $ .24 $ .18 $ .04 $ .02 $ .15
======= ======= ======= ======= =======
Diluted net income per common share............... $ .22 $ .16 $ .04 $ .02 $ .14
======= ======= ======= ======= =======
Weighted average shares outstanding (basic)....... 18,953 16,440 12,912 12,831 12,237
Weighted average shares outstanding (diluted)..... 20,014 17,977 14,367 13,626 12,897
Balance Sheet Data:
Cash and cash equivalents......................... $62,240 $62,623 $ 8,765 $ 6,414 $ 7,227
Total assets...................................... 95,156 92,180 16,828 13,205 11,833
Long-term debt.................................... 150 -- -- -- --
Redeemable convertible preferred stock............ -- -- 6,948 6,934 6,920
Total stockholders' equity........................ 82,995 76,454 3,468 2,737 2,480
- --------
(1) The provision for income taxes for the year ended March 31, 2002 includes
non-recurring tax credits for incremental research and development
expenditures totaling $372, or $.02 per common share.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our consolidated financial statements and the related notes included elsewhere
in this Annual Report. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties, and assumptions. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth under ''Certain Factors That May Affect Future Results'' and
elsewhere in this Annual Report.
Overview
Revenues. We generate revenues principally from licensing our intelligent
management software products and providing related services, including
maintenance and technical support, consulting and training. Our software
license revenues consist of perpetual and term license sales of our software
products.
Our service revenues consist of fees from maintenance and technical support
agreements, consulting services and training. The maintenance agreements
covering our products provide for technical support and periodic unspecified
product upgrades. In July 2001, we changed our business practice to allow our
customers to separately purchase periodic unspecified product upgrades without
purchasing technical support. Revenue related to periodic unspecified product
upgrades is now included in license revenue. Revenue related to technical
support is included in service revenue. License revenue from unspecified
product upgrades was approximately $1.9 million in fiscal 2002. We offer
consulting services, generally under fixed-price agreements, primarily to
provide product customization and enhancements. We provide classroom and
on-site training to our customers on a daily fee basis.
Revenues from sales outside of the United States represented 22.6%, 22.4%,
and 25.0% of our total revenues in fiscal 2002, 2001, and 2000, respectively.
In fiscal 2002, sales outside the United States were primarily made through our
Paris, France and Oxen, United Kingdom offices as well as third-party
distributors and value-added resellers, who are generally responsible for
providing technical support and service to customers within their territory.We
expect revenues from sales outside the United States to continue to account for
a significant portion of our total revenues in the future. We believe that
continued growth and profitability will require further expansion of our sales,
marketing and customer service functions in international markets. We expect to
commit additional time and development resources to customizing our products
and services for selected international markets.
Cadence Royalty Agreement. In March 1999, we entered into a two-year
non-renewable agreement with Cadence Design Systems ("Cadence"), that required
us to make an aggregate payment of $1.0 million to Cadence and to pay a 50%
royalty on specified sales of OPNET Modeler products sold to the portion of
Cadence's customer base that used an existing Cadence product. This agreement
expired in March 2001. For fiscal 2001 and 2000, Cadence royalties were
$273,000 and $595,000, respectively. We amortized the $1.0 million payment over
the two-year marketing support period as part of sales and marketing expenses,
and charged the royalty payments to cost of software license revenues as the
related revenue was recognized.
NetMaker Acquisition. In March 2001, we acquired the NetMaker division of
Make Systems, Inc. ("NetMaker") for consideration of $5.0 million and 650,000
shares of our common stock. NetMaker offered a sophisticated suite of products
that address the operational and engineering needs of traditional and
next-generation network service providers. The acquisition contributed key
components that enabled us to broaden our product suite for the service
provider market. The acquisition was accounted for using the purchase method.
See Note 2 to our consolidated financial statements for additional information
related to our acquisition of NetMaker.
WDM NetDesign Acquisition. In July 2001, we acquired a 20% interest in WDM
NetDesign B.V.B.A. ("WDM NetDesign") for consideration of $399,000 and
purchased an option for consideration of $1,000 to
14
acquire all remaining shares of WDM NetDesign. Through this acquisition, we
collaborated on the development of optical network planning products with
Comsof N.V., the owner of WDM NetDesign.In December 2001, we exercised our
option to purchase the remaining shares of WDM NetDesign for approximately $1.3
million. In January 2002, we purchased these shares by paying Comsof N.V.
$925,000 and issuing them 25,000 shares of our common stock. As a result of
this acquisition, we now own WDM NetDesign's core technology in optical
networking design and engineering depth and expertise. See Note 2 to our
consolidated financial statements for additional information related to our
acquisition of WDM NetDesign.
Results of Operations
The following table sets forth items from our statements of operations
expressed as a percentage of total revenues for the periods indicated:
Year Ended March 31,
-------------------
2002 2001 2000
----- ----- -----
Revenues:
Software licenses.................... 60.3% 57.5% 55.0%
Services............................. 39.7 42.5 45.0
----- ----- -----
Total revenues................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Software licenses.................... 1.0 1.2 3.8
Services............................. 13.1 14.4 14.9
----- ----- -----
Total cost of revenues........... 14.1 15.6 18.7
----- ----- -----
Gross profit............................ 85.9 84.4 81.3
----- ----- -----
Operating expenses:
Research and development............. 27.5 25.1 29.6
Sales and marketing.................. 37.7 41.7 39.1
General and administrative........... 10.4 10.2 10.9
Amortization of acquired intangibles. 1.0 -- --
Purchased research and development... -- 2.4 --
----- ----- -----
Total operating expenses......... 76.6 79.4 79.6
----- ----- -----
Income from operations.................. 9.3 5.0 1.7
Interest and other income, net.......... 3.9 8.5 2.2
----- ----- -----
Income before provision for income taxes 13.2 13.5 3.9
Provision for income taxes.............. 3.1 4.8 0.9
----- ----- -----
Net income.............................. 10.1% 8.7% 3.0%
===== ===== =====
The following table sets forth, for each component of revenues, the cost of
these revenues as a percentage of the related revenues for the periods
indicated:
Year Ended March 31,
-------------------
2002 2001 2000
---- ---- ----
Cost of software license revenues....... 1.7% 2.1% 6.9%
Cost of service revenues................ 33.0 33.9 33.2
Revenues
Software License Revenues. Software license revenues were $27.0 million,
$18.9 million and $10.6 million in fiscal 2002, 2001 and 2000, respectively,
representing increases of 42.6% in fiscal 2002 from fiscal
15
2001 and 79.1% in fiscal 2001 from fiscal 2000. This growth is primarily due to
increased overall demand for our products, revenue contribution from new
products, increased penetration of international markets, expansion of
marketing and direct sales force and increased average transaction size.
Approximately $1.9 million of the increase in fiscal 2002 was due to the change
in business practice in July 2001 to allow customers to separately purchase
unspecified product upgrades without purchasing technical support. For fiscal
2002, a substantial growth in sales to enterprises of OPNET IT Guru,
Application Characterization Environment, and new modules, such as ACE Decode
Module, NetDoctor and Flow Analysis, combined with sales to service providers
of two products launched in fiscal 2002, OPNET SP Guru and OPNET WDM Guru,
offset a significant decline in sales to network equipment manufacturers of
OPNET Modeler. The increase in demand for our products during fiscal 2001was
primarily for OPNET Modeler, OPNET Netbiz, OPNET IT Guru and Application
Characterization Environment.We may experience a slower rate of growth in
overall software license revenues in the near-term due to potentially lower
spending levels by enterprise IT organizations, service providers and network
equipment manufacturers as a result of a challenging economy.
Service Revenues. Service revenues were $17.8 million, $14.0 million and
$8.7 million in fiscal 2002, 2001 and 2000, respectively, representing
increases of 26.8% in fiscal 2002 from fiscal 2001 and 61.8% in fiscal 2001
from fiscal 2000. The increases in service revenues are primarily due to
growing demand for our consulting services, increased renewals for maintenance
contracts by our installed base of customers, and additional technical support
contracts related to new license sales. For fiscal 2002, these increases were
partially offset by our change in business practices in July 2001 to allow
customers to purchase unspecified periodic product upgrades (license revenue)
and technical support (service revenue) separately. Engagements with U.S.
government agencies and customization of our OPNET Netbiz product contributed
to the growing demand for our consulting services in fiscal 2002 and 2001,
respectively. We expect that service revenues will continue to increase in
absolute dollars as long as our customer base continues to grow and we maintain
several large consulting contracts with U.S. government agencies.
Cost of Revenues
Cost of software license revenues consists primarily of royalties, media,
manuals, and distribution costs. Cost of service revenues consists primarily of
personnel-related costs in providing maintenance and technical support,
consulting and training to customers. Gross margin on software license revenues
is substantially higher than gross margin on service revenues, due to the low
materials, packaging and other costs of software products compared with the
relatively high personnel costs associated with providing services.
Cost of Software License Revenues. Cost of software license revenues were
$459,000, $395,000 and $728,000 in fiscal 2002, 2001 and 2000, respectively.
The 16.2% increase in fiscal 2002 from fiscal 2001 is primarily due to an
increase in royalty costs for licensing agreements entered into since March
2001, partially offset by the decrease in royalty payments under our March 1999
agreement with Cadence, which expired in March 2001. The 45.7% decrease in
fiscal 2001 from fiscal 2000 results from a reduction in the number of sales
requiring royalty payments under our agreement with Cadence.
Cost of Service Revenues. Cost of service revenues were $5.9 million, $4.7
million and $2.9 million in fiscal 2002, 2001 and 2000, respectively,
representing increases of 23.4% in fiscal 2002 from fiscal 2001 and 65.2% in
fiscal 2001 from fiscal 2000. Gross margin on service revenues increased
slightly to 67.0% in fiscal 2002 from 66.1% in fiscal 2001 due to a higher
level of profitability in consulting and training services and an increased
volume of maintenance services, which provide higher gross margins than
consulting and training services, as the maintenance services are less labor
intensive. Gross margin on service revenue decreased to 66.1% in fiscal 2001
from 66.8% in fiscal 2000 primarily due to a slightly higher proportion of
service revenues derived from consulting services, which provide lower gross
margins than maintenance services. We expect cost of service revenues as a
percentage of service revenues to vary based primarily on the profitability of
individual consulting engagements.
16
Operating Expenses
Research and Development. Research and development expenses were $12.3
million, $8.3 million and $5.7 million in fiscal 2002, 2001 and 2000,
respectively, representing increases of 49.3% in fiscal 2002 from fiscal 2001
and 45.1% in fiscal 2001 from fiscal 2000. These increases are primarily due to
increased headcount as a result of the NetMaker acquisition in March 2001 and
the WDM NetDesign acquisition in January 2002, and increased staffing levels
for developing new products as well as sustaining and upgrading existing
products. The increase in fiscal 2002 was partially offset by a decrease in
discretionary bonuses for fiscal 2002 compared to fiscal 2001.
We believe that a significant level of research and development investment
will be required to maintain our competitive position and broaden our product
lines, as well as enhance the features and functionality of our current
products. We expect the absolute dollar amount of these expenditures will
continue to grow but generally decrease as a percentage of total revenues in
future periods. Our ability to decrease these expenses as a percentage of
revenue will depend upon our revenue growth, among other factors.
Sales and Marketing. Sales and marketing expenses were $16.9 million, $13.7
million and $7.5 million in fiscal 2002, 2001 and 2000, respectively. The 22.7%
increase in fiscal 2002 from fiscal 2001 is primarily due to an increase in the
size of our direct sales force, including the addition of sales offices in the
United Kingdom and Australia in fiscal 2002, increased commissions associated
with the growth in revenues and higher conference costs. The 83.0% increase in
fiscal 2001 from fiscal 2000 is primarily due to a substantial increase in the
size of our direct sales force, increased commissions associated with the
growth in revenues and higher marketing costs.
As a percentage of total revenues, sales and marketing expenses decreased to
37.7% in fiscal 2002 from 41.7% in fiscal 2001. This decrease resulted from a
proportionally smaller increase in costs associated with developing market
awareness for our new products relative to the higher level of revenues in
fiscal 2002. As a percentage of total revenues, sales and marketing expenses
increased in fiscal 2001 from 39.1% in fiscal 2000. The increase as a
percentage of total revenues was due to our additional investment of resources
associated with developing market awareness for our OPNET IT Guru and OPNET
Netbiz products in fiscal 2001.
We anticipate that we will continue to commit substantial resources to sales
and marketing in the future and that sales and marketing expenses may increase
in absolute dollars and as a percentage of total revenue in future periods.
General and Administrative. General and administrative expenses were $4.7
million, $3.4 million and $2.1 million in fiscal 2002, 2001 and 2000,
respectively. The 38.5% increase in fiscal 2002 from fiscal 2001 is primarily
due to higher legal, accounting and other professional fees, bad debt expense
and personnel costs. The increase in fiscal 2002 was partially offset by a
decrease in discretionary bonuses for fiscal 2002 compared to fiscal 2001. The
60.6% increase in fiscal 2001 from fiscal 2000 is primarily due to additional
personnel costs and other expenses associated with our expansion of supporting
infrastructure.
We expect the dollar amount of general and administrative expenses to
increase as we continue to expand our operations but generally decrease as a
percentage of total revenues in future periods. Our ability to decrease these
expenses as a percentage of revenues will depend upon our revenue growth, among
other factors.
Amortization of Acquired Technology. In connection with our acquisitions of
NetMaker in March 2001 and WDM NetDesign in January 2002, we recorded acquired
technology of $2.5 million. Beginning in fiscal 2002, these acquired
technologies are being amortized on a straight-line basis over five years.
Amortization of acquired technology was $434,000 in fiscal 2002.
Purchased In-Process Research and Development. In connection with the
NetMaker acquisition, we obtained an independent valuation to determine the
fair value of the net assets acquired and to allocate the
17
purchase price. As a result of the purchase price allocation, we recorded an
expense of $770,000 in the fourth quarter of fiscal 2001 representing the
write-off of the fair value of acquired in-process research and development
that had not reached technological feasibility nor had any alternative future
use.
Interest and Other Income, Net
Interest and other income, net were $1.7 million, $2.8 million and $414,000
in fiscal 2002, 2001 and 2000, respectively. The decrease of $1.1 million in
fiscal 2002 from fiscal 2001 is primarily due to a reduction in interest income
earned on our cash and cash equivalents due to the decline in interest rates
throughout fiscal 2002. The increase of $2.4 million in fiscal 2001 from fiscal
2000 is primarily attributable to the interest earned on the proceeds from our
initial public offering.
Provision for Income Taxes
Our effective tax rates were 23%, 35% and 23% for fiscal 2002, 2001 and
2000, respectively. The effective tax rate differs from the statutory tax rate
and varies from period to period due principally to growth in operating income
and the amount of tax credits available to us in each period from incremental
research expenditures. In fiscal 2002, we conducted a review of our costs to
determine their qualification for the increased research tax credit. As a
result of this review, we generated an additional $372,000 in non-recurring tax
credits resulting from incremental research expenditures.
We expect our effective tax rate in the near-term to range from 30% to 33%;
however, future provisions for taxes will depend, among other things, on the
mix and amount of worldwide income, the tax rates in effect for various tax
jurisdictions and the amount of increased research tax credits.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through cash
provided by operating activities and through the sale of equity securities. In
August 2000, we completed our initial public offering in which we raised
approximately $54.1 million, net of underwriting discounts and offering
expenses payable by us. As of March 31, 2002, we had cash and cash equivalents
totaling $62.2 million.
Cash provided by operating activities was $4.4 million, $10.5 million, and
$4.1 million for fiscal 2002, 2001 and 2000, respectively. Cash provided by
operating activities is primarily derived from net income, as adjusted for
depreciation and amortization and increases in deferred revenue, changes in
accrued liabilities and increases in accounts receivable balances. The decrease
in cash provided by operations in fiscal 2002 from fiscal 2001 was attributable
to our decreased accrued liabilities, resulting from a decrease in accrued
bonus compensation, increased billed accounts receivable due to our revenue
growth, and increased refundable income taxes, due to non-recurring tax credits
for incremental research expenditures.
Cash used in investing activities was $5.7 million, $11.1 million, and $1.9
million for fiscal 2002, 2001, and 2000, respectively. The funds were used to
purchase property and equipment for our corporate headquarters in Bethesda,
Maryland and expenditures for purchased software. Cash used in investing
activities also includes the cash portion of the purchase price of the NetMaker
acquisition in March 2001 and the purchase of WDM NetDesign, net of cash
acquired, in January 2002. In fiscal 2000 and fiscal 1999, these funds were
also used to purchase marketing support rights from Cadence.
Cash provided by financing activities was $913,000, $54.4 million, and
$88,000 for fiscal 2002, 2001, and 2000, respectively. Cash provided by
financing activities reflects the proceeds received from the exercise of stock
options, the sale of common stock under our 2000 Employee Stock Purchase Plan,
the issuance of a note payable in fiscal 2002, and the proceeds received in
fiscal 2001 from our initial public offering, net of underwriting discounts and
offering expenses.
18
We have a $5.0 million revolving line of credit with a commercial bank,
which expires in June 2002. Borrowings under this line of credit bear interest
at an annual rate equal to LIBOR plus 2% to 2.5%. We have currently used $3.4
million of this facility for a letter of credit that secures the lease for our
headquarters in Bethesda, Maryland. There was no balance outstanding on this
line of credit as of March 31, 2002. We plan to renew the line of credit upon
its expiration in June 2002.
As of March 31, 2002, we did not have any significant contractual
commitments other than operating leases for office facilities. See Note 11 to
our consolidated financial statements for information related to our operating
leases.
We expect working capital needs to increase in the foreseeable future in
order for us to execute our business plan. We anticipate that operating
activities, as well as planned capital expenditures, will constitute a material
use of our cash resources. In addition, we may utilize cash resources to fund
acquisitions or investments in complementary businesses, technologies or
products.
We believe that our current cash and cash equivalents and cash generated
from operations, along with available borrowings under our line of credit, will
be sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the next 12 months.
Critical Accounting Policies
The preparation of our financial statements in conformity with generally
accepted accounting principles requires us to utilize accounting policies and
make estimates and assumptions that affect our reported amounts. Future results
may differ from these estimates under different assumptions or conditions. We
consider the following accounting policies to be both important to the
portrayal of our financial position and results of operations and require the
exercise of significant, subjective, or complex judgment and/or estimates.
Revenue Recognition. We recognize revenue in accordance with Statement of
Position ("SOP") No. 97-2, "Software Revenue Recognition", as amended by SOP
No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, With
Respect to Certain Transactions", SOP No. 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" and the Securities and
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements."
For our software arrangements, a determination needs to be made for each
arrangement regarding whether the percentage-of-completion contract accounting
method should be used to recognize revenue or whether revenue can be recognized
when the software is delivered and all of the conditions of SOP 97-2 are met.
Contract accounting is required if our services are essential to the
arrangement. In many cases, our services are essential to the arrangement
because they involve customization and enhancements, and our fees are paid in
stages based upon the completion of defined service deliverables. As a result,
we typically recognize revenue from these arrangements using contract
accounting, which generally results in recording revenue over a longer period
of time. In other cases, our services are not essential to the arrangement and
the realization of our license fee is not dependent on the completion of such
services. In these situations, we recognize software license revenue when (1)
persuasive evidence of an arrangement exists, (2) the product has been
delivered, (3) the fee is fixed or determinable, and (4) collectibility is
probable, which generally results in recording revenue earlier than when
contract accounting is used. The determination of whether our services are
essential involves significant judgment and could have a material impact on our
results of operations from period to period to the extent that significant new
arrangements are not accounted for using contract accounting.
Under the percentage-of-completion contract accounting method, we recognize
revenue from the entire arrangement based on the percentage of hours incurred
related to our services compared to the total hours of such services. Using the
percentage-of-completion method requires us to make estimates about the future
cost of services and estimated hours to complete, which are subject to change
for a variety of internal and external
19
factors. A change in these estimates could result in a material adjustment to
the amount of revenue recorded in any period under the arrangement.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful
accounts receivable for estimated losses resulting from the inability of our
customers to make required payments and for the limited circumstances when the
customer disputes the amounts due us. Our methodology for determining this
allowance requires significant estimates. In estimating the allowance,
management considers the age of the receivable, the creditworthiness of the
customer, the economic conditions of the customer's industry and general
economic conditions. While we believe that the estimates we use are reasonable,
should any of these factors change, the estimates made by management will also
change, which could impact the amount of our future allowance for doubtful
accounts as well as future operating income. Specifically, if the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments to us, additional allowances may be required.
Valuation of Intangible Assets and Goodwill. We account for our goodwill
and intangible assets in accordance with Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets". Our intangible assets consist of acquired
technology. They are recorded at cost and amortized on a straight-line basis
over their expected useful lives of five years. We use the projected discounted
cash flow method in valuing our acquired technology, using certain assumptions
including revenue growth, cost levels, present value discount rate and working
capital requirements. While we believe the assumptions used are reasonable,
actual results will more likely than not differ from those assumptions. Future
cash flows are subject to change for a variety of internal and external
factors. We will periodically review the value of acquired technology for
reasonableness. Changes in our assumptions at the time of future periodic
reviews could result in impairment losses.
Goodwill is recorded when the consideration paid for acquisitions exceeds
the fair value of net tangible and intangible assets acquired. Goodwill is not
amortized. We perform an annual review during our fourth quarter to identify
any facts or circumstances that indicate the carrying value of goodwill is
impaired. The review is based on various analyses including cash flow and
profitability projections and the market capitalization of our common stock.
Impairment, if any, is based on the excess of the carrying amount of goodwill
over its fair value. No impairment has been indicated to date.
Accounting for Software Development Costs. Costs incurred in the research
and development of new software products are expensed as incurred until
technological feasibility is established. Development costs are capitalized
beginning when a product's technological feasibility has been established and
ending when the product is available for general release to our customers.
Technological feasibility is reached when the product reaches the working model
stage. To date, products and enhancements have generally reached technological
feasibility and have been released for sale at substantially the same time and
all research and development costs have been expensed. Consequently, no
research and development costs were capitalized in fiscal 2002.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Annual Report and presented elsewhere by management from time to time.
Our operating results may fluctuate significantly as a result of factors
outside of our control, which could cause the market price of our stock to
decline
Our operating results have fluctuated in the past, and are likely to
fluctuate significantly in the future. Our financial results may as a
consequence fall short of the expectations of public market analysts or
investors, which could cause the price of our common stock to decline. Our
revenues and operating results may vary significantly
20
from quarter to quarter due to a number of factors, many of which are beyond
our control. Factors that could affect our operating results include:
. the timing of large orders;
. software arrangements requiring contract accounting;
. changes in the mix of our sales, including the mix between higher margin
software products and somewhat lower margin services and maintenance, and
the proportion of our license sales requiring us to make royalty payments;
. the timing and amount of our marketing, sales, and product development
expenses;
. the cost and time required to develop new software products;
. the introduction, timing, and market acceptance of new products
introduced by us or our competitors;
. changes in network technology or in applications, which could require us
to modify our products or develop new products;
. general economic conditions, which can affect our customers' purchasing
decisions and the length of our sales cycle;
. changes in our pricing policies or those of our competitors; and
. the timing and size of potential acquisitions by us.
We expect to make significant expenditures in all areas of our business,
particularly sales and marketing operations, in order to promote future growth.
Because the expenses associated with these activities are relatively fixed in
the short term, we may be unable to adjust spending quickly enough to offset
any unexpected shortfall in revenue growth or any decrease in revenue levels.
In addition, our revenues in any quarter depend substantially on orders we
receive and ship in that quarter. We typically receive a significant portion of
orders in any quarter during the last month of the quarter, and we cannot
predict whether those orders will be placed and shipped in that period. If we
have lower revenues than we expect, we probably will not be able to reduce our
operating expenses quickly in response. Therefore, any significant shortfall in
revenues or delay of customer orders could have an immediate adverse effect on
our operating results in that quarter.
For all of these reasons, quarterly comparisons of our financial results are
not necessarily meaningful and you should not rely on them as an indication of
our future performance.
The market for intelligent network management software is new and evolving,
and if this market does not develop as anticipated, our revenues could decline
We derive all of our revenues from the sale of products and services that
are designed to allow our customers to manage the performance of networks and
applications. Accordingly, if the market for intelligent network management
software does not continue to grow, we could face declining revenues, which
could ultimately lead to our becoming unprofitable. The market for intelligent
network management software solutions is in an early stage of development.
Therefore, we cannot accurately assess the size of the market and may be unable
to identify an effective distribution strategy, the competitive environment
that will develop, and the appropriate features and prices for products to
address the market. If we are to be successful, our current and potential
customers must recognize the value of intelligent network management software
solutions, decide to invest in the management of their networks, and, in
particular, adopt and continue to use our software solutions.
Our customers are primarily in four target markets and our operating results
may be adversely affected by changes in one or more of these markets
As part of our focus on four targeted markets, our financial results depend,
in significant part, upon the economic conditions of enterprise, U.S.
government agencies, service provider and network equipment
21
manufacturer markets. An economic downturn or adverse change in the regulatory
environment or business prospects for one or more of these markets may decrease
our revenues or lower our growth rate.
A decline in information technology spending may result in a decrease in our
revenues or lower our growth rate
A decline in the demand for information technology among our current and
prospective customers may result in decreased revenues or a lower growth rate
for us because our sales depend, in part, on our customers' level of funding
for new or additional information technology systems and services. A continued
economic downturn may cause our customers to reduce or eliminate information
technology spending and cause price erosion for our solutions, which would
substantially reduce the number of new software licenses we sell and the
average sales price for these licenses. Accordingly, we cannot assure you that
we will be able to increase or maintain our revenues.
If our newest products, particularly those targeted primarily for
enterprises, do not gain widespread market acceptance, our revenues might not
increase and could even decline
We expect to derive a substantial portion of our revenues in the future from
sales to enterprises of version 8.1 of OPNET IT Guru, which was released in May
2002, Application Characterization Environment, which was released in fiscal
2000, products released in fiscal 2002, such as ACE Decode Module, NetDoctor
and Flow Analysis, and OPNET VNE Server, which is expected to be released in
June 2002. Our business depends on customer acceptance of these products and
our revenues may not increase, or may decline, if our target customers do not
adopt and expand their use of our products. To date, we have not achieved
widespread market acceptance of our products. In addition, if our OPNET Modeler
product, which we have been selling since 1987, continues to encounter
declining sales, which could occur for a variety of reasons, including market
saturation and the financial condition of network equipment manufacturers, and
sales of our newer products do not grow at a rate sufficient to offset the
shortfall, our revenues would decline.
We may not be able to grow our business if service providers do not buy our
products
A key element of our strategy is to increase sales to service providers, and
our future performance will be significantly dependent upon increased adoption
by service providers of our software products, including OPNETSP Guru and OPNET
WDM Guru, both launched in fiscal 2002. Accordingly, if our products fail to
perform favorably in the service provider environment or to gain wider adoption
by service providers, our business and future operating results could suffer.
Our lengthy and variable sales cycle makes it difficult to predict operating
results
It is difficult for us to forecast the timing and recognition of revenues
from sales of our products because prospective customers often take significant
time evaluating our products before licensing them. The period between initial
customer contact and a purchase by a customer may vary from three months to
more than a year. During the sales process, the customer may decide not to
purchase or may scale down proposed orders of our products for various reasons,
including changes in budgets and purchasing priorities. Our prospective
customers routinely require education regarding the use and benefit of our
products. This may also lead to delays in receiving customers' orders.
If we do not successfully expand our sales force, we may be unable to
increase our sales
We sell our products primarily through our direct sales force, and we must
expand the size of our sales force to increase revenues. If we are unable to
hire or retain qualified sales personnel, if newly hired personnel fail to
develop the necessary skills to be productive, or if they reach productivity
more slowly than anticipated, our ability to increase our revenues and grow our
business could be compromised. Our sales people require a long
22
period of time to become productive, typically three to six months. The time
required to reach productivity, as well as the challenge of attracting,
training, and retaining 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.
Our ability to increase our sales will be impaired if we do not expand and
manage our indirect distribution channels
To increase our sales, we must, among other things, further expand and
manage our indirect distribution channels, which consist primarily of
international distributors and original equipment manufacturers and resellers.
If we are unable to expand and manage our relationships with our distributors,
our distributors are unable or unwilling to effectively market and sell our
products, or we lose existing distributor relationships, we might not be able
to increase our revenues. Our international distributors and original equipment
manufacturers and resellers have no obligation to market or purchase our
products. In addition, they could partner with our competitors, bundle or
resell competitors' products, or internally develop products that compete with
our products.
We may not be able to successfully manage our expanding operations, which
could impair our ability to operate profitably
We may be unable to operate our business profitably if we fail to manage our
growth. Our rapid growth has sometimes strained, and may in the future continue
to strain, our managerial, administrative, operational, and financial resources
and controls. We plan to continue to expand our operations and increase the
number of our full-time employees. Our ability to manage growth will depend in
part on our ability to continue to enhance our operating, financial, and
management information systems. Our personnel, systems, and controls may not be
adequate to support our growth. In addition, our revenues may not continue to
grow at a sufficient rate to absorb the costs associated with a larger overall
employee base.
If we are unable to introduce new and enhanced products on a timely basis
that respond effectively to changing technology, our revenues may decline
Our market is characterized by rapid technological change, changes in
customer requirements, frequent new product and service introductions and
enhancements, and evolving industry standards. If we fail to develop and
introduce new and enhanced products on a timely basis that respond to these
changes, our products could become obsolete, demand for our products could
decline and our revenues could fall. Advances in network management technology,
software engineering, simulation technology, or the emergence of new industry
standards, could lead to new competitive products that have better performance,
more features, or lower prices than our products and could render our products
unmarketable. In addition, the introduction and adoption of future network
technologies or application architectures could reduce or eliminate the need
for predictive network management software.
Our future revenue is substantially dependent upon our installed customer
base continuing to license additional products, renew maintenance agreements
and purchase additional services
Our installed customer base has traditionally generated additional revenue
from consulting services, renewed maintenance agreements and license of other
products. The maintenance agreements are generally renewable at the option of
the customers and there are no mandatory payment obligations or obligations to
license additional software. In addition, customers may decide not to purchase
additional products or services. If our customers fail to renew their
maintenance agreements or purchase additional products or services, our
revenues could decrease.
23
Increases in service revenues as a percentage of total revenues could
decrease overall margins and adversely affect our operating results
We realize lower margins on service revenues than on software license
revenues. As a result, if service revenues increase as a percentage of total
revenues, our gross margins will be lower and our operating results may be
adversely affected.
If we fail to retain our key personnel and attract and retain additional
qualified personnel, we might not be able to sustain our revenue growth
Our future success and our ability to sustain our revenue growth depend upon
the continued service of our executive officers and other key sales and
research and development personnel. The loss of any of our key employees, in
particular Marc A. Cohen, our chairman of the board and chief executive
officer, and Alain J. Cohen, our president and chief technology officer, could
adversely affect our ability to pursue our growth strategy. We do not have
employment agreements or any other agreements that obligate any of our officers
or key employees to remain with us.
We must also continue to hire large numbers of highly qualified individuals,
particularly software engineers and sales and marketing personnel. Our failure
to attract and retain technical personnel for our product development,
consulting services, and technical support teams may limit our ability to
develop new products or product enhancements. Competition for these individuals
is intense, and we may not be able to attract and retain additional highly
qualified personnel in the future. In addition, limitations imposed by federal
immigration laws and the availability of visas could impair our ability to
recruit and employ skilled technical professionals from other countries to work
in the United States.
Our international operations subject our business to additional risks, which
could cause our sales or profitability to decline
We plan to increase our international sales activities, but these plans are
subject to a number of risks that could cause our sales to decline or could
otherwise cause a decline in profitability. These risks include:
. difficulty in attracting distributors that will market and support our
products effectively;
. greater difficulty in accounts receivable collection and longer
collection periods;
. the need to comply with varying employment policies and regulations that
could make it more difficult and expensive to manage our employees if we
need to establish more direct sales or support staff outside the United
States;
. potentially adverse tax consequences;
. the effects of currency fluctuations; and
. political and economic instability.
We expect to face intense competition, which could cause us to lose sales,
resulting in lower profitability
Increasing competition in our market could cause us to lose sales and become
unprofitable. The market for intelligent network management software is
evolving rapidly and is highly competitive. We believe that this market is
likely to become more competitive as the demand for intelligent network
management solutions continues to increase. Many of our current and potential
competitors are larger and have substantially greater financial and technical
resources than we do. In addition, it is possible that other vendors as well as
some of our customers or distributors will develop and market solutions that
compete with our products in the future.
24
If our products contain errors and we are unable to correct those errors our
reputation could be harmed and could cause our customers to demand refunds
from us or assert claims for damages against us
Our software products could contain significant errors or bugs that may
result in:
. the loss of or delay in market acceptance and sales of our products;
. the delay in introduction of new products;
. diversion of our resources;
. injury to our reputation; and
. increased support costs.
Bugs may be discovered at any point in a product's life cycle. We expect
that errors in our products will be found in the future, particularly in new
product offerings and new releases of our current products.
Because our customers use our products to manage networks that are critical
to their business operations, any failure of our products could expose us to
product liability claims. In addition, errors in our products could cause our
customers' networks and systems to fail or compromise their data, which could
also result in liability to us. Product liability claims brought against us
could divert the attention of management and key personnel, could be expensive
to defend, and may result in adverse settlements and judgments.
Our software products rely on our intellectual property, and any failure to
protect our intellectual property could enable our competitors to market
products with similar features that may reduce our revenues and could allow
the use of our products by users who have not paid the required license fee
If we are unable to protect our intellectual property, our competitors could
use our intellectual property to market products similar to our products, which
could reduce our revenues. In addition, we may be unable to prevent the use of
our products by persons who have not paid the required license fee, which could
reduce our revenues. Our success and ability to compete depend substantially
upon the internally developed technology that is incorporated in our products.
Policing unauthorized use of our products is difficult, and we may not be able
to prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as
those in the United States. Others may circumvent the patents, copyrights, and
trade secrets we own. In the ordinary course of business, we enter into a
combination of confidentiality, non-competition and non-disclosure agreements
with our employees. These measures afford only limited protection and may be
inadequate, especially because our employees are highly sought after and may
leave our employ with significant knowledge of our proprietary information. In
addition, any confidentiality, non-competition and non-disclosure agreements we
enter into may be found to be unenforceable, or our copy protection mechanisms
embedded in our software products could fail or could be circumvented.
Our products employ technology that may infringe on the proprietary rights of
others, and, as a result, we could become liable for significant damages
We expect that our software products may be increasingly subject to
third-party infringement claims as the number of competitors in our industry
segment grows and the functionalities of products in different industry
segments overlap. Regardless of whether these claims have any merit, they could:
. be time-consuming to defend;
. result in costly litigation;
. divert our management's attention and resources;
. cause us to cease or delay product shipments; or
. require us to enter into royalty or licensing agreements.
25
These royalty or licensing agreements may not be available on terms
acceptable to us, if at all. A successful claim of product infringement against
us or our failure or inability to license the infringed or similar technology
could adversely affect our business because we would not be able to sell the
affected product without redeveloping it or incurring significant additional
expense.
Possible adverse impact of interpretations of existing accounting
pronouncements
Based on our reading and interpretations of SOPs 81-1, 97-2 and 98-9, and
SAB 101, we believe that our current contract terms and business arrangements
have been properly reported. However, the American Institute of Certified
Public Accountants and its Software Revenue Recognition Task Force continue to
issue interpretations and guidance for applying the relevant standards to a
wide range of sales contract terms and business arrangements that are prevalent
in the software industry. Future interpretations of existing accounting
standards or changes in our business practices could result in future changes
in our revenue recognition accounting policies that could have a material
adverse effect on our business, financial condition and results of operations.
As with other software vendors, we may be required to delay revenue
recognition into future periods which could adversely impact our operating
results
We have in the past had to, and in the future may have to, defer recognition
for license fees due to several factors, including whether:
. software arrangements include undelivered elements for which we do not
have vendor specific evidence of fair value;
. we must deliver services for significant customization, enhancements and
modifications of our software;
. the transaction involves material acceptance criteria or there are other
identified product-related issues;
. the transaction involves contingent payment terms or fees;
. we are required to accept a fixed-fee services contract; or
. we are required to accept extended payment terms.
Because of the factors listed above and other specific requirements under
accounting principles generally accepted in the United States for software
revenue recognition, we must have very precise terms in our software
arrangements in order to recognize revenue when we initially deliver software
or perform services. Negotiation of mutually acceptable terms and conditions
can extend the sales cycle, and sometimes we do not obtain terms and conditions
that permit revenue recognition at the time of delivery.
If we undertake acquisitions, they may be expensive and disruptive to our
business and could cause the market price of our common stock to decline
In March 2001, we completed the NetMaker acquisition. We may continue to
acquire or make investments in companies, products or technologies if
opportunities arise. Any acquisition could be expensive, disrupt our ongoing
business, distract our management and employees, and adversely affect our
financial results and the market price of our common stock. We may not be able
to identify suitable acquisition or investment candidates, and if we do
identify suitable candidates, we may not be able to make these acquisitions or
investments on commercially acceptable terms or at all. If we make an
acquisition, we could have difficulty integrating the acquired technology,
employees, or operations. In addition, the key personnel of the acquired
company may decide not to work for us. We also expect that we would incur
substantial expenses if we acquired other businesses or technologies. We might
use cash on hand, incur debt, or issue equity securities to pay for any future
acquisitions. If we issue additional equity securities, our stockholders could
experience dilution and the market price of our stock may decline.
26
Our products are subject to changing computing environments, including
operating system software and hardware platforms, which could render our
products obsolete
The evolution of existing computing environments and the introduction of new
popular computing environments may require us to redesign our products or
develop new products. Computing environments, including operating system
software and hardware platforms, are complex and change rapidly. Our products
are designed to operate in currently popular computing environments. Due to the
long development and testing periods required to adapt our products to new or
modified computing environments, we could experience significant delays in
product releases or shipments, which could result in lost revenues and
significant additional expense.
ITEM 7a. 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 consist primarily of money
instruments and U.S. Treasury bills. The carrying value of our note payable
approximates fair value. 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 cash equivalents, marketable securities or note payable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements together with the related notes and the report of
Deloitte & Touche LLP, independent auditors, are set forth in the Index to
Financial Statements at Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
27
PART III
Certain information required by Part III is omitted from this Annual Report
as we intend to file our definitive Proxy Statement for our Annual Meeting of
Stockholders to be held on September 10, 2002, pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended, not later than 120 days after
the end of the fiscal year covered by this Annual Report, and certain
information included in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers and Directors--The information in the section
entitled "Executive Officers, Directors and Key Employees of the Registrant" in
Part I hereof is incorporated herein by reference.
(b) Directors--The information in the section entitled "Election of
Directors" in the Proxy Statement is incorporated herein by reference.
The disclosure required by Item 405 of Regulations S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information in the sections entitled "Compensation of Executive
Officers", "Compensation of Directors" and "Compensation Committee Interlocks
and Insider Participation" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. EQUITY COMPENSATION PLANS AND SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information in the sections entitled "Equity Compensation Plan
Information" and "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section entitled "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORMS 8-K
The following documents are filed as part of this Form 10-K:
1. Financial Statements. The following financial statements of OPNET
Technologies, Inc. are filed as part of this Form 10-K on the pages
indicated:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report........................................................................ 31
Consolidated Balance Sheets as of March 31, 2002 and 2001........................................... 32
Consolidated Statements of Operations for the years ended March 31, 2002, 2001, and 2000............ 33
Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2001, and 2000............ 34
Consolidated Statements of Changes in Stockholders' Equity for the years ended March 31, 2002, 2001,
and 2000.......................................................................................... 35
Notes to Consolidated Financial Statements.......................................................... 36
2. Schedules are omitted as the required information is inapplicable or
the information is presented in the financial statements or related notes.
3. Exhibits. The exhibits listed in the Exhibits Index immediately
preceding such exhibits are filed as part of this Annual Report on Form 10-K
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1932, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 20/th/ day
of June, 2002.
OPNET TECHNOLOGIES, INC.
By: /s/ MARC A. COHEN
-----------------------------
Marc A. Cohen
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1932, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the 20/th/ day of June, 2002.
Signature Title
--------- -----
/s/ MARC A. COHEN Chairman and Chief Executive
- ----------------------------- Officer (Principal
Marc A. Cohen Executive Officer)
/s/ ALAIN J. COHEN President, Chief Technology
- ----------------------------- Officer and Director
Alain J. Cohen
/s/ JOSEPH W. KUHN Vice President and Chief
- ----------------------------- Financial Officer
Joseph W. Kuhn (Principal Financial and
Accounting Officer)
/s/ BRUCE R. EVANS Director
- -----------------------------
Bruce R. Evans
/s/ STEVEN G. FINN, PHD Director
- -----------------------------
Steven G. Finn, PhD
/s/ WILLIAM F. STASIOR Director
- -----------------------------
William F. Stasior
30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
OPNET Technologies, Inc.
Bethesda, Maryland
We have audited the accompanying consolidated balance sheets of OPNET
Technologies, Inc. and its subsidiaries (the "Company"), as of March 31, 2002
and 2001, and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended March 31,
2002. 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 in accordance with auditing standards generally
accepted in the United States of America. Those standards 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 amou