Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 31, 2004

OR

For the transition period from                      to                     

Commission file number: 000-32377

OPSWARE INC.

(Exact name of registrant as specified in its charter)

599 N. Mathilda Avenue, Sunnyvale, California 94085

(Address, including zip code, of Registrant’s principal executive offices)

(408) 744-7300

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share

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 the 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.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    YES  x    NO  ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price as reported by the NASDAQ National Market of the registrant’s Common Stock on July 31, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $259.5 million. Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of April 1, 2004, 83,275,225 shares of the registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K incorporates certain information by reference from the registrant’s definitive proxy statement for the registrant’s Annual Meeting of Stockholders, tentatively scheduled for June 22, 2004.

Table of Contents

TABLE OF CONTENTS

- i -

Table of Contents

Cautionary Statement Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements. These statements relate to our, and in some cases our customers’ or partners’, future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to, statements regarding anticipated market trends and uncertainties, revenue generated from the sale of our Opsware System software, development of our indirect channels, investment in building our brand recognition, operating expenses, the impact of the acquisition of Tangram on our cash flow, anticipated capital expenditures and lease commitments, the adequacy of our capital resources to fund our operations, operating losses and cash flow, the anticipated increase in customers and expansion of our product offerings and target markets, our expectations regarding ongoing development of our Opsware System software and other technical capabilities, formation of strategic partnerships, and potential expansion in our direct and indirect sales organizations.

These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from the outcomes expressed or implied by these statements. These factors include those listed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we will not necessarily update any of the forward-looking statements after the date of this Annual Report on Form 10-K whether as a result of new information, future events or otherwise. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report on Form 10-K.

The consolidated financial statements and related information contained in this Annual Report on Form 10-K reflect our results as they existed for the fiscal year ended January 31, 2004. On August 15, 2002, we completed the sale of our Managed Services Business to EDS and are now focused solely on our Software Business. As a result, the historical financial information relating to the periods prior to August 15, 2002 is not related to our Software Business and is not indicative of future results from our Software Business.

1

Table of Contents

PART I

ITEM 1.    BUSINESS

Overview

We are a provider of data center automation software for enterprises, government agencies and service providers seeking to reduce costs and increase the quality and security of data center operations. In this annual report, we refer to this business as our Software Business. Our software, which we refer to as the Opsware System, automates key server and software operations in large data centers, including provisioning, changing, patching, reporting, configuring, scaling, securing, recovering, auditing, and reallocating servers and business applications. The Opsware System works across geographically disparate locations and heterogeneous data center environments consisting of UNIX, Linux and Windows servers and a wide range of software infrastructure and applications. By using the Opsware System, our customers can lower their IT operational costs, more quickly deploy new servers and applications, speed operations to respond quickly to changing business needs, and increase the efficiency and security of their data center operations. The Opsware System enables our customers to reduce labor costs associated with operating data centers, better utilize server and software assets, achieve greater visibility into their IT environment, increase IT efficiencies and achieve higher service quality and security.

Demand for our software products is driven by the rapid growth of servers that results from the migration from client-server based applications to web-based applications, the rapid adoption of Windows servers in data centers, the growing adoption of Linux in data centers, and the growth of Intel-based servers. In addition, the need to protect systems from security vulnerabilities, to quickly and more cost-effectively deploy servers and applications, to track hardware and software assets and labor costs, and to manage frequent changes and ensure application reliability also drives the demand for our software products. Server growth and complexity within the data center environment have caused an escalation in labor costs, a degradation in operations quality and a security crisis.

As a result, businesses and government agencies are increasingly turning to IT automation technologies to automate operations and increase IT efficiency to provide continuous operation of their IT infrastructure and reduce operational expenses. The Opsware System is designed to effectively manage the increasing complexity of IT operations, by offering a reliable, secure, scalable and cost-effective software solution that allows our customers to focus on their core competencies and achieve greater efficiency and flexibility than they could otherwise attain in the absence of such technology.

Products and Services

The Opsware System automates key server and software operations in data centers, including provisioning, changing, patching, reporting, configuring, scaling, securing, recovering, auditing, and reallocating servers and business applications across geographically disparate locations and heterogeneous data center environments. We released Opsware System 4.0 in September 2003. In addition, in December 2003, we announced the limited release of our first product that runs on the Linux platform, Opsware System 4.0: Linux Edition. In February 2004, we announced the limited release of our first product for the Japanese market, Opsware System 4.0: Japanese Edition.

Some of the key capabilities and benefits of the Opsware System include the following:

2

Table of Contents

Structure of the Opsware System

The Opsware System is comprised of two primary layers, the Automation Platform and Automation Applications. Users access and interact with the Opsware System through the Opsware Command Center, a secure web-based console.

Automation Platform

The Opsware System’s Automation Platform controls and automates operations in single locations and across geographically disparate application environments. The Automation Platform provides the operations knowledge for a variety of operating systems and software applications and utilizes this knowledge to model the impact of proposed operations on production servers and applications before these operations are actually executed in the operations environment. In addition to helping ensure accurate and efficient operations, the Automation Platform helps reduce the need for IT organizations to maintain a significant number of IT personnel with deep expertise across a broad range of technologies. The Automation Platform also enables IT organizations to easily integrate and extend the Opsware System to support a wide variety of technologies and applications that are specific to their particular IT environment. The Automation Platform is comprised of three primary components: the Software Tree, the Environment Tree and the Change Modeling Engine. The Software Tree provides knowledge on a variety of software products and operating systems and maps relationships between these products and systems to facilitate key operations like installation, patch deployment and updates. The Environment Tree captures characteristics about a customer’s unique data center environment. The Change Modeling Engine enables users to first model and preview desired operational changes to their environment

3

Table of Contents

before propagating these changes to production servers and applications, thereby minimizing the risk of downtime in the production environment. The Automation Platform is designed to ensure operations are executed accurately and consistently. Customers benefit from higher operations quality, improved security, higher first-try success rates and, consequently, reduced downtime.

Automation Applications

The Opsware System’s Automation Applications are the modules that automate particular IT processes performed by users in the operational environment. The Automation Applications are designed to replace and automate ad hoc, error-prone, manual processes such as the provisioning of operating systems and applications and the management of changes to existing servers. Automation Applications support multiple platforms and are designed to automate both new and existing data center environments. The Automation Applications available with Opsware System 4.0 include:

Operating System Provisioning.    The Operating System Provisioning Automation Application enables customers to automate the process of deploying, installing and configuring operating systems across many geographically disparate servers.

Software Provisioning.    The Software Provisioning Automation Application enables customers to automate the process of deploying, installing and configuring software applications, such as databases, application servers, web servers, directories, messaging products and enterprise integration products, across many geographically disparate servers.

Patch Management.    The Patch Management Automation Application allows customers to quickly and accurately identify managed servers that need to be patched and automates the process of deploying and installing patches across a large number of servers. The Patch Management Automation Application is designed to enable customers to dramatically reduce exposures related to security breaches within their IT environment.

Configuration Tracking.    The Configuration Tracking Automation Application allows customers to track, store and recover critical software configuration information on each server within their environment. This subsystem provides customers with the ability to correct inadvertent configuration mistakes, more easily recover from a system failure, diagnose configuration-related problems and track security breaches.

Code and Content Deployment and Rollback.    The Code and Content Deployment and Rollback Automation Application enables customers to deploy software code or content that often sits on top of traditional third-party software application as part of a multi-server, multi-tier application. In addition, this subsystem enables customers to quickly rollback the code or content to the last known good state of operations in the event that the new code or content introduces vulnerabilities or performance degradation to the environment. This subsystem is designed to simplify the process of moving applications from development organization to live operations.

Distributed Script Execution.    The Distributed Script Execution Automation Application enables customers to consistently and securely execute scripts to make specific changes across a large number of servers at once, track the output from the execution of scripts and share scripts between administrators located across different IT groups and different physical locations.

Data Center Intelligence.    The Data Center Intelligence Automation Application provides customers with information on the state of their data center environments, how software and hardware assets are being utilized, and detailed information on operations activity. This enables customers to more accurately track their assets, understand how assets are allocated across applications and business units and gain visibility into the costs associated with updating and managing their critical business applications and IT assets.

Multimaster Replication.    The Multimaster Replication Automation Application facilitates rapid disaster recovery by replicating the Opsware System’s underlying configuration database across multiple data centers in which the Opsware System is located. In the event that any given data center is rendered

4

Table of Contents

non-operational because of a disaster, this configuration information can be utilized by an Opsware System located in a separate data center to automate the rebuilding of servers and applications. This subsystem is designed to reduce the costs of recovering from a disaster and speed recovery of the environment. It also allows customers to share operations knowledge among their geographically distributed environments and manage applications across these distributed environments.

In February 2004, we completed our acquisition of Tangram Enterprise Solutions, a software and services provider based in North Carolina. As a result of the acquisition, we now offer three additional software products:

Opsware Automation: Asset Tracking Edition.    The Opsware Automation: Asset Tracking Edition enables IT organizations to reduce asset expenses resulting from excess hardware and software purchases, unnecessary maintenance renewals, and underutilization of idle and redundant assets. The Asset Tracking Edition also enables IT organizations to accurately track and report on enterprise-wide hardware and software asset deployment and utilization, and provides help desk staff with detailed visibility into current and historical hardware and software configuration and usage information, aiding in rapid problem diagnosis, troubleshooting and resolution. It also enables IT organizations to develop disaster recovery contingency plans and quickly rebuild the enterprise by providing detailed visibility into key assets, their location, configuration and replacement in the event of a disaster.

Opsware OverSight.    Opsware OverSight enables IT departments to reduce the legal, security and productivity risks created by viruses and worms, peer-to-peer, spyware, instant messaging applications and pirated software. It also provides IT departments with an enterprise-wide security policy mechanism that controls permitted and prohibited applications, file types, and system configuration changes and enables immediate lockdown of all desktops and servers, which prevents the spread of viruses and worms before anti-virus definitions can be updated.

Opsware Enterprise Insight.    Opsware Enterprise Insight is a full lifecycle asset management solution that enables customers to manage the financial, physical, and contractual data associated with enterprise IT assets. This information is essential for making strategic decisions that leverage information technology assets, optimize the return on investment, maximize corporate productivity, and ensure assets are meeting corporate objectives. Opsware Enterprise Insight includes three modules that, in accordance with our phased asset management strategy, are marketed separately to meet the individual business demands of each customer.

Maintenance and Technical Support

We offer telephone, email and remote access maintenance and support packages to our customers. Our maintenance and support package entitles customers to unspecified future maintenance releases, updates and upgrades to the current version of the Opsware System used by them, if and when commercially released. From time to time, our customers request additional support services on a time and materials basis.

Professional Services

Our professional services organization provides product training, consulting and implementation services to assist customers in maximizing the benefits of the Opsware System.

Customers

We sell our Opsware System software to enterprises, government agencies and service providers seeking to reduce costs and increase the quality of data center operations. We have a limited number of customers including Allmerica Financial, Comcast, EDS, Hartford Insurance, Inflow, Inc., Lehman Brothers, Metlife, New Breed, NTT, Visa/Inovant LLC and certain agencies of the U.S. government. For the fiscal year ended January 31, 2004, EDS accounted for 83% of our net revenues. We expect that our operating results will be largely dependent on our relationship with EDS for the foreseeable future. The loss of EDS as a customer would have a material adverse effect upon our business and financial condition.

5

Table of Contents

Industry Relationships

NEC Corporation.    We have entered into a software distribution license agreement with NEC pursuant to which NEC may use, market, sell, and support our Opsware System software in Japan. NEC will sell the Opsware System in connection with its VALUMO Platform technology, as both a standalone product or integrated with other VALUMO products that support mission critical systems.

Hewlett-Packard.    We have entered into a software distribution license with Hewlett-Packard pursuant to which Hewlett-Packard will distribute our Opsware System software with its HP Utility Data Center solution. In addition, Hewlett-Packard will provide consulting and implementation services related to our Opsware System software in conjunction with its HP Utility Data Center solution.

Research and Development

Our research and development organization designs, develops and releases the technologies that we offer to our customers as well as the services that we use internally to streamline customer deployment and support. The goal of this organization is to bring new products and new versions of existing products to market quickly in order to keep pace with customer demands. In this way, our research and development organization is responsible for the extension of our technology’s capabilities. During the fiscal years ended January 31, 2004, 2003 and 2002, our research and development expense was $8.7 million, $12.7 million and $21.0 million, respectively.

Sales and Marketing

As of April 1, 2004, we had 29 full-time employees in sales and marketing. We sell and market our services primarily in the United States and Europe through a direct sales force and in Japan through a channel relationship with NEC. We are selectively expanding our number of direct sales representatives to enhance our geographic coverage. In addition, we intend to develop additional indirect channels with corporate partners, such as distributors, value-added resellers, hardware providers and systems integrators.

We focus our marketing efforts on increasing brand recognition, market awareness and lead generation. We intend to continue to invest in building our brand recognition through public relations programs, interactions with industry analysts, trade shows and industry conferences.

Competition

Our competitors include large software and systems companies as well as small, privately-held companies. The market for our technology is relatively new and therefore subject to rapid and significant change. While we believe our technology is more comprehensive than and superior to that of our competitors, we cannot assure you of the success of our strategy going forward. Our competitors may succeed in developing technologies and products that are more effective than our software, which could render our products obsolete and noncompetitive. Some of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater brand recognition, international presence and more established relationships in the industry than we have, each of which may allow them to gain greater market share. As a result, some of our competitors may be able to develop and expand their technology offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale, devote greater resources to the marketing and sale of their technology and adopt more aggressive pricing policies than we can. Some of our competitors have lower priced offerings and offer point solutions that may be easier to sell and demonstrate to prospective customers. In addition, certain large competitors may be able to distribute their software products at minimal cost or free of charge to customers. Furthermore, the open source community may develop competing software products which could erode our market share and force us to lower our prices.

6

Table of Contents

Because some of our current competitors have pre-existing relationships with our current and potential customers, we might not be able to achieve sufficient market penetration to achieve or sustain profitability. These existing relationships can also make it difficult for us to obtain additional customers due to the substantial investment that these potential customers might have already made based on our competitors’ technology. Furthermore, our competitors may be able to devote substantial resources aimed at preventing us from establishing or enhancing our customer relationships.

Our competitors and other companies may form strategic relationships with each other to compete with us. These relationships may take the form of strategic investments, joint-marketing agreements, licenses or other contractual arrangements, any of which may increase our competitors’ ability to address customer needs with their product offerings. Our competitors may consolidate with one another or acquire other technology providers, enabling them to more effectively compete with us. This consolidation could affect prices and other competitive factors in ways that could impede our ability to compete successfully and harm our business.

Intellectual Property

We rely on a combination of patent, trademark, trade secret, copyright and other laws and contractual restrictions to protect the proprietary aspects of our products and services. These legal provisions afford only limited protection. It is difficult to monitor unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States, and our competitors may independently develop technology similar to ours. We will continue to assess the necessity for additional intellectual property protections for those aspects of our technology that we believe constitute innovations providing significant competitive advantages.

We routinely require our employees, customers and potential business partners to enter into confidentiality and nondisclosure agreements before we disclose any sensitive aspects of our technology, services or business plans to them. In addition, we require employees to agree to assign to us any proprietary information, inventions or other intellectual property they generate while employed by us. Despite our efforts to protect our proprietary rights through confidentiality and license agreements, unauthorized parties may attempt to copy or otherwise obtain and use our services or technology. These precautions may not prevent misappropriation or infringement of our intellectual property.

Employees

As of April 1, 2004, we had 156 full-time employees. Our future success will depend upon our ability to attract, integrate, retain and motivate highly qualified technical and management personnel, for whom competition can be intense. None of our employees is covered by a collective bargaining agreement. We believe our relations with our employees are good.

Available Information

We were incorporated in September 1999 as a Delaware corporation. Our Internet website is located at http://www.opsware.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

The public may also read and copy any materials we file with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission. The Securities and Exchange Commission’s Internet website is located at http://www.sec.gov.

7

Table of Contents

ITEM 2.    PROPERTIES

Our corporate headquarters are located in Sunnyvale, California, where we rent approximately 75,000 square feet under a lease expiring in 2010, of which we sublease approximately 50,000 square feet to EDS through August 2004. We are currently under obligation for additional leased space in Sunnyvale, CA terminating in November 2005 that totals approximately 30,000 square feet, all of which are subleased. As a result of our acquisition of Tangram in February 2004, we now occupy a leased facility in Cary, North Carolina, consisting of approximately 18,500 square feet under a lease that terminates in September 2004. In addition, we have a number of operating leases for field sales offices. We believe that our facilities are adequate to meet current requirements.

ITEM 3.    LEGAL PROCEEDINGS

On July 31, 2002, we received notice that Qwest Communications Corporation filed a demand for arbitration under the Commercial Arbitration Rules of the American Arbitration Association, claiming that we have breached our amended and restated ethernet collocation internet access service agreement, amended and restated reseller agreement and confidentiality agreement we entered into with Qwest in fiscal 2002. Qwest is seeking monetary damages, title to certain items of equipment and declaratory relief. Under the amended and restated ethernet collocation internet access service agreement, we received a $7.5 million non-refundable prepayment from Qwest in fiscal 2002 in consideration for providing services in connection with the provisioning and maintaining of three of Qwest’s data centers. The prepayment received from Qwest was originally included in deferred revenue and the residual balance as of January 31, 2004 has since been reclassified to accrued data center facility costs. We believe that we have not breached any of the agreements and continue to defend ourselves vigorously. However, the outcome of arbitration is inherently uncertain, and there can be no assurance that we will not be materially affected. We anticipate that we will incur ongoing expenses in connection with this arbitration.

In December 2003, we entered into a settlement and release agreement with Knight Ridder Digital, a former customer of ours that was transferred to EDS as part of the sale of our Managed Services Business, in connection with Knight Ridder Digital’s claim that we breached our customer service agreement with Knight Ridder Digital by assigning the agreement to EDS. Pursuant to the terms of the settlement agreement, we were not required to pay any monies or damages to Knight Ridder Digital or EDS in connection with this matter. As a result, we reversed approximately $400,000 of previously accrued expense.

In the future, we may be subject to other lawsuits. Any litigation, even if not successful against us, could result in substantial costs and divert management’s attention and other resources away from the operation of our business.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

8

Table of Contents

PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Market for Our Common Stock

Our common stock has been listed on the NASDAQ National Market under the symbol “OPSW” since our name change from Loudcloud, Inc. to Opsware Inc. in August 2002. Prior to that time, our common stock was listed on the NASDAQ National Market under the symbol “LDCL.” The following table sets forth for each of the two preceding fiscal years the high and low sales prices per share of our common stock as reported by the NASDAQ National Market for each of the two preceding fiscal years.

We have never paid cash dividends and do not plan to do so in the foreseeable future. According to the records of our transfer agent, at April 1, 2004, there were approximately 584 stockholders of record of our common stock. Because many brokers and other institutions hold stock on behalf of our stockholders, the total number of beneficial holders of our common stock is greater than that represented by these record holders.

Recent Sales of Unregistered Securities

In January 2004, we entered into a settlement agreement with Accenture pursuant to which we agreed to issue them approximately 48,000 shares of our common stock in consideration for the termination and cancellation of a warrant held by Accenture to purchase up to 250,000 shares of common stock upon the satisfaction of certain business milestones. There are currently no other outstanding warrants to purchase our common stock.

9

Table of Contents

ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data below should be read together with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto in Item 8 “Financial Statements and Supplementary Data.”

On August 15, 2002, we completed the sale of our Managed Services Business to EDS. As a result, the historical financial information relating to the periods prior to August 15, 2002 is not related to our Software Business and is not indicative of future results from our Software Business.

10

Table of Contents

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read together with the consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward- looking statements that involve risks and uncertainties. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors.” See also “Cautionary Statement Regarding Forward-Looking Statements.” The consolidated financial statements and related information contained in this Annual Report on Form 10-K reflect our results as they existed for the fiscal year ended January 31, 2004. On August 15, 2002, we completed the sale of our Managed Services Business to EDS. As a result, the historical financial information relating to the periods prior to August 15, 2002 is not related to our Software Business and is not indicative of future results from our Software Business.

Overview

We are a provider of data center automation software for enterprises, government agencies and service providers seeking to reduce costs and increase the quality and security of data center operations. We refer to this business as our Software Business. Our software, which we refer to as the Opsware System, automates key server and software operations in large data centers, including provisioning, changing, patching, reporting, configuring, scaling, securing, recovering, auditing, and reallocating servers and business applications. The Opsware System works across geographically disparate locations and heterogeneous data center environments consisting of UNIX, Linux and Windows servers and a wide range of software infrastructure and applications. By using the Opsware System, our customers can lower their information technology, or IT, operational costs, more quickly deploy new servers and applications, speed operations to respond quickly to changing business needs, and increase the efficiency and security of their data center operations. The Opsware System enables our customers to reduce labor costs associated with operating data centers, better utilize server and software assets, increase IT efficiencies and achieve higher service quality and security.

Prior to August 2002, we primarily provided managed Internet services for corporations and government agencies operating mission-critical Internet applications. We refer to this business as our Managed Services Business. We used our proprietary Opsware automation technology in the Managed Services Business, and have since developed this technology into our Opsware System software. In August 2002, we sold our Managed Services Business to EDS for a total purchase price of $63.5 million in cash. At the time that we entered into the asset purchase agreement, we also entered into a separate license and maintenance agreement with EDS pursuant to which we granted EDS a non-exclusive, worldwide hosting and integration license whereby EDS has certain rights to use our Opsware System software. Under the license and maintenance agreement, EDS is paying us a minimum license and maintenance fee of $52.0 million in the aggregate over a term of three years. The obligation of EDS to pay us was subject to our development of specified features and functions, which we delivered to EDS and for which we received acceptance from EDS during the three-month period ended April 30, 2003. We expect that our operating results will continue to be largely dependent on our relationship with EDS for the foreseeable future.

In the Software Business, we derive a significant portion of our revenue from sales of software licenses. For fiscal 2004, 83% of our revenues came from our license and maintenance agreement with EDS. We sell our products principally through our direct sales force and intend to develop additional indirect channels with corporate partners, such as distributors, value-added resellers, hardware providers and systems integrators. We also derive revenue from sales of annual support and maintenance agreements and professional services. Our revenues from these services have been insignificant to date because it was our first full year in the Software Business. Our customers in the Managed Services Business typically purchased our services through customer service agreements, which generally had terms of one to three years. Our customer service agreements were generally renewed automatically for periods ranging from three months to one year, unless terminated prior to

11

Table of Contents

the expiration of the initial term. We generally recognized revenue related to these agreements ratably over the period the managed services were provided to the respective customers.

In September 2003, we entered into a software distribution license agreement with NEC pursuant to which NEC may use, market, sell, and support our Opsware System software in Japan. NEC will sell the Opsware System in connection with its VALUMO Platform technology, as both a standalone product or integrated with other VALUMO products that support mission critical systems.

In February 2004, we completed our acquisition of all of the issued and outstanding capital stock of Tangram Enterprise Solutions, Inc. The preliminary purchase price of the acquisition was approximately $11.5 million, consisting of $10.0 million of our common stock, or approximately 1.1 million shares, and approximately $1.5 million of direct acquisition costs. The acquisition will be accounted for using the purchase accounting method in the three-month period ending April 30, 2004.

Restructuring Activities

In May 2001, while operating the Managed Services Business, we announced a restructuring program to improve utilization of our existing technology and infrastructure. This restructuring program included a worldwide workforce reduction, consolidation of the resulting excess facilities and a provision for excess and obsolete property and equipment. As a result of the restructuring program, we recorded restructuring costs of $30.2 million classified as operating expenses. Included in the $30.2 million was a non-cash charge of $2.9 million related to the acceleration of vesting of options held by certain employees. Of the total charge, $600,000 was recovered through the sale of assets and liabilities related to the Managed Services Business during the fiscal year ended January 31, 2003.

In September 2001, while operating the Managed Services Business, we announced an organizational realignment to increase operational effectiveness and reduce costs. This organizational realignment included hiring in key areas, such as direct sales representatives and specific technology positions, and the elimination of certain positions. As a result of the realignment program, we recorded reorganization costs of $1.3 million classified as operating expenses. All of the costs associated with the September 2001 organizational realignment were workforce related.

In June 2002, we announced a restructuring program in connection with our entering into an agreement to sell the assets and liabilities of our Managed Services Business to EDS, which included a worldwide workforce reduction and a provision for the impairment of excess and obsolete property and equipment. As a result of the restructuring program, we recorded restructuring costs of $7.0 million classified as operating expenses.

In August 2002, we announced a restructuring program in connection with the closing of the sale of our Managed Services Business to EDS. The restructuring program was accounted for under the provisions of Statement of Financial Accounting Standards No. 146. The restructuring program included a provision for the resultin