UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Commission file number: 000-30931)
OPNET TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 7373 52-1483235
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
7255 Woodmont Avenue
Bethesda, MD 20814
(Address of principal executive office)
(240) 497-3000
(Registrant's telephone number, including area code)
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
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
At February 5, 2002, there were outstanding 19,023,898 shares of common
stock of the registrant.
================================================================================
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of December 31 and March 31, 2001 3
Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2001 and
2000 4
Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Exhibit Index 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
OPNET Technologies, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)
December 31, March 31,
2001 2001
----------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 60,883 $ 62,623
Accounts receivable, net of $589 and $113 in allowance for doubtful
accounts at December 31 and March 31, 2001, respectively 7,065 4,515
Unbilled accounts receivable 885 1,406
Refundable income taxes 874 332
Deferred income taxes 477 546
Prepaid expenses and other current assets 1,802 2,486
----------------- ------------------
Total current assets 71,986 71,908
Deferred income taxes 104 -
Property and equipment, net 7,138 6,891
Investment in affiliate 429 -
Intangible assets, net 1,700 2,000
Goodwill and assembled workforce 10,921 10,704
Other assets:
Deposits 57 75
Loan to officer - 231
Purchased software, net 527 464
----------------- ------------------
Total assets $ 92,862 $ 92,273
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 206 $ 514
Accrued liabilities 2,612 7,146
Accrued income taxes - 93
Deferred revenue 7,737 7,681
----------------- ------------------
Total current liabilities 10,555 15,434
Note payable 150 -
Deferred rent 309 59
Deferred revenue 414 311
Deferred taxes - 15
----------------- ------------------
Total liabilities 11,428 15,819
----------------- ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock- par value $0.001; 5,000 shares authorized, no shares
issued and outstanding at December 31 and March 31, 2001 - -
Common stock-par value $0.001; 100,000 authorized; 25,158 and 24,901
shares issued at December 31 and March 31, 2001, respectively; 19,024
and 18,767 shares outstanding at December 31 and March 31, 2001,
respectively 25 25
Additional paid-in capital 72,151 70,708
Deferred compensation (92) (180)
Retained earnings 13,458 9,999
Accumulated other comprehensive (loss) income (8) 2
Treasury stock - 6,134 shares at December 31 and March 31, 2001 (4,100) (4,100)
----------------- ------------------
Total stockholders' equity 81,434 76,454
----------------- ------------------
Total liabilities and stockholders' equity $ 92,862 $ 92,273
================= ==================
See accompanying notes to consolidated financial statements.
3
OPNET Technologies, Inc.
Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(in thousands, except per share data)
Revenues:
Software licenses $ 6,807 $ 5,106 $ 19,922 $ 13,073
Services 4,166 3,629 13,456 9,866
---------- ---------- ---------- ----------
Total revenues 10,973 8,735 33,378 22,939
---------- ---------- ---------- ----------
Cost of revenues:
Software licenses 84 56 354 357
Services 1,415 1,215 4,374 3,329
---------- ---------- ---------- ----------
Total cost of revenues 1,499 1,271 4,728 3,686
---------- ---------- ---------- ----------
Gross profit 9,474 7,464 28,650 19,253
---------- ---------- ---------- ----------
Operating expenses:
Research and development 2,913 2,175 9,365 5,803
Sales and marketing 4,086 3,648 12,409 9,645
General and administrative 1,233 883 3,308 2,335
Amortization of acquired technology 118 - 330 -
---------- ---------- ---------- ----------
Total operating expenses 8,350 6,706 25,412 17,783
---------- ---------- ---------- ----------
Income from operations 1,124 758 3,238 1,470
Interest and other income 331 1,064 1,499 1,877
---------- ---------- ---------- ----------
Income before provision for income taxes 1,455 1,822 4,737 3,347
Provision for income taxes 233 678 1,278 1,238
---------- ---------- ---------- ----------
Net income 1,222 1,144 3,459 2,109
Accretion of transaction costs on redeemable convertible
preferred stock - - - (6)
---------- ---------- ---------- -----------
Net income applicable to common shares $ 1,222 $ 1,144 $ 3,459 $ 2,103
========== ========== ========== ===========
Basic net income applicable per common share $ 0.06 $ 0.06 $ 0.18 $ 0.13
========== ========== ========== ==========
Diluted net income per common share $ 0.06 $ 0.06 $ 0.17 $ 0.12
========== ========== ========== ==========
Weighted average common shares outstanding (basic) 18,995 18,062 18,919 15,892
========== ========== ========== ==========
Weighted average common shares outstanding (diluted) 19,956 19,788 20,017 17,476
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
OPNET Technologies, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
December 31,
---------------------------------
2001 2000
------------- --------------
(in thousands)
Cash flows from operating activities:
Net income $ 3,459 $ 2,109
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,504 1,064
Deferred income taxes (50) (124)
Expense related to employee stock options 65 166
Equity in net loss of affiliate 3 -
Changes in assets and liabilities:
Accounts receivable (2,260) (1,080)
Prepaid expenses and other current assets 840 (661)
Loans to officer 231 -
Refundable income taxes 165 476
Deposits 18 (204)
Accounts payable (308) 387
Accrued liabilities (2,502) 1,133
Accrued income taxes (40) 337
Deferred revenue 159 3,589
Deferred rent 250 1
-------------- --------------
Net cash provided by operating activities
1,534 7,193
-------------- --------------
Cash flows from investing activities:
Acquisition (1,156) -
Investment in affiliate (461) -
Purchase of software (141) (120)
Purchase of property and equipment (2,363) (2,842)
-------------- --------------
Net cash used in investing activities (4,121) (2,962)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of note payable 150 -
Proceeds from sale of common stock - 59,800
Costs incurred for initial public offering - (5,673)
Proceeds from exercise of common stock options 328 219
Proceeds from issuance of common stock under employee stock
purchase plan 379 67
-------------- --------------
Net cash provided by financing activities 857 54,413
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents (10) 5
-------------- --------------
Net (decrease) increase in cash and cash equivalents (1,740) 58,649
Cash and cash equivalents, beginning of
period 62,623 8,765
-------------- --------------
Cash and cash equivalents, end of period $ 60,883 $ 67,414
============== ==============
See accompanying notes to consolidated financial statements.
5
OPNET Technologies, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Nature of Operations
OPNET Technologies, Inc. ("OPNET", "we" or "us") provides intelligent
network management software solutions that enable organizations to optimize the
performance and maximize the availability of communications networks and
networked applications. The OPNET product suite combines predictive modeling and
a comprehensive understanding of networking technologies to enable network
professionals to more effectively design and deploy networks, provision
services, diagnose network and application performance problems, predict the
impact of network changes, and efficiently plan capital investments. OPNET is
headquartered in Bethesda, Maryland and has offices in Boston, Cary, Dallas,
Santa Clara, Paris, France, Oxford, United Kingdom, Sydney, Australia and Ghent,
Belgium.
The accompanying consolidated financial statements include our results and
the results of our wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The interim
financial statements included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles ("GAAP") and applicable
rules and regulations of the Securities and Exchange Commission (the "SEC")
regarding interim financial reporting. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to such rules and regulations.
Accordingly, these interim financial statements should be read in conjunction
with the audited consolidated financial statements and accompanying notes
thereto contained in the Company's Annual Report on Form 10-K for the year ended
March 31, 2001, filed with the SEC. The March 31, 2001 consolidated balance
sheet included herein was derived from the audited financial statements as of
that date, but does not include all disclosures including notes required by
GAAP. In the opinion of management, these interim financial statements reflect
all adjustments of a normal and recurring nature necessary to present fairly our
results for the interim periods. The preparation of financial statements in
conformity with GAAP requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities as of the date of the financial statements, as well as
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. In addition, our operating results
for the three and nine months ended December 31, 2001 may not be indicative of
the operating results for the full fiscal year or any other future period.
On March 30, 2001, OPNET Development Corp., a wholly owned subsidiary of
ours, acquired substantially all of the assets and operations of the NetMaker
Division of Make Systems, Inc. ("NetMaker") using the purchase method of
accounting. NetMaker offers a sophisticated suite of products that address the
operational and engineering needs of traditional and next-generation network
service providers. The results of NetMaker's operations have been included in
the accompanying consolidated statements of operations from the date of
acquisition.
2. Credit Agreements and Note Payable
In June 2000, we entered into a $5.0 million line of credit facility with a
commercial bank. The line of credit allowed us to use the funds for corporate
borrowings and the issuance of letters of credit up to a maximum of $5.0
million. We used the facility to issue a letter of credit for approximately $3.4
million to satisfy the security deposit requirements for our new corporate
office facilities lease. We renewed the credit facility for an additional year,
and it will now expire in June 2002. Interest is payable monthly, based on LIBOR
plus the applicable margin ranging from 2% to 2.5% as stated in the loan
agreement. The credit facility is collateralized by certain assets of ours and
there are also certain financial ratios and conditions that we must maintain
under the terms of the loan agreement, as well as certain covenants with which
we must comply. As of December 31, 2001, we had no balance outstanding under the
line of credit.
In December 2001, we received proceeds from a $150,000 loan from the
Department of Economic Development of Montgomery County, Maryland, under the
Sunny Day Fund Initiative. The loan is subject to multiple maturity dates and
has a 5% annual interest rate. The principal amount and any accrued interest
will be deferred if we meet certain conditions regarding the hiring of full time
employees. In December 2006, the principal amount and any accrued interest
outstanding may convert to a grant if we achieve certain requirements related to
employment.
6
3. Stockholders' Equity
During the nine months ended December 31, 2001, we received proceeds of
approximately $328,000 and issued 223,439 shares of Common Stock pursuant to
employee exercises of stock options. During the nine months ended December 31,
2001, employees purchased 32,969 shares of Common Stock under the 2000 Employee
Stock Purchase Plan, resulting in further proceeds to us of approximately
$379,000.
4. Net Income Per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share". This statement requires dual presentation of basic and diluted earnings
per share on the face of the income statement. In April 2001, the Emerging
Issues Task Force issued an interpretation, Topic No. D-95, "Effect of
Participating Convertible Securities on the Computation of Basic Earnings Per
Share" which stipulates that participating convertible securities should be
included in the computation of basic earnings per share. We have restated basic
earnings per share for the nine months ended December 31, 2000 in accordance
with this interpretation. The effect on basic earnings per share was a $0.01
reduction for the nine months ended December 31, 2000. Basic earnings per share
is to be computed by dividing net income available to common shareholders by the
weighted average number of common shares and participating preferred shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution that could occur if securities or other contracts to issue common
shares were exercised or converted into common shares.
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ----------- ------------
Income (Numerator): (in thousands, except per share data)
Net income applicable to common shares $ 1,222 $ 1,144 $ 3,459 $ 2,103
Plus:
Accretion of transaction costs on redeemable convertible
preferred stock - - - 6
------------ ------------ ----------- ------------
Net income (basic and diluted) $ 1,222 $ 1,144 $ 3,459 $ 2,109
============ ============ =========== ============
Shares (Denominator):
Weighted average shares outstanding 18,995 18,062 18,919 14,873
Plus:
Participating redeemable convertible preferred stock - - - 1,019
------------ ------------ ----------- ------------
Weighted average common shares outstanding (basic) 18,995 18,062 18,919 15,892
Plus:
Effect of other dilutive securities - options 961 1,726 1,098 1,584
------------ ------------ ----------- ------------
Weighted average shares outstanding (diluted) 19,956 19,788 20,017 17,476
============ ============ =========== ============
Net income per common share:
Basic net income per common share $ 0.06 $ 0.06 $ 0.18 $ 0.13
Diluted net income per common share 0.06 0.06 0.17 0.12
5. Business Segment and Geographic Area Information
We operate in one industry segment, the development and sale of computer
software programs and related services. For the nine months ended December 31,
2001, there were no sales to any customers that accounted for 10% or more of
total revenues. Substantially all assets were held in the United States at
December 31, 2001 and March 31, 2001.
7
6. Supplemental Cash Flow Information
Nine Months Ended
December 31,
-----------------------------
2001 2000
------------ -------------
Supplemental disclosure of cash flow information: (in thousands)
Cash paid for income taxes $ 871 $ 551
Supplemental disclosure of non cash activities:
Accrued tenant allowance $ 359 $ -
Post-closing acquisition adjustments $ 217 $ -
Conversion of preferred stock $ - $ 6,954
Accrued offering costs $ - $ 60
Accretion on preferred stock $ - $ 6
Purchase of treasury stock $ - $ 78
7. Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement requires us to report and display certain information
related to comprehensive income and its components. Comprehensive income
includes net income and foreign currency translation adjustments. For the three
and nine months ended December 31, 2001, our comprehensive income was $1.2
million and $3.5 million, and included accumulated foreign currency translation
losses of approximately $2,000 and $10,000, respectively.
8. Investment in Affiliate
We apply the equity method of accounting for investments in business
entities in which we do not have significant control but have an ownership
interest between 20% and 50%. We consolidate all majority-owned and controlled
subsidiaries.
In August 2001, we entered into an agreement (the "Share Purchase
Agreement") with Comsof N.V., a Belgium company and the owner of WDM NetDesign
B.V.B.A. ("WDM NetDesign"), through which the companies will collaborate on the
development of optical network planning products. Under the Share Purchase
Agreement, OPNET acquired a 20% interest in WDM NetDesign for consideration of
$399,000 and purchased an option for consideration of $1,000 to acquire all
remaining shares of WDM NetDesign. In December 2001 we exercised our option to
purchase the remaining shares of WDM NetDesign for $1,250,000. On January 4,
2001, we paid the purchase price for these shares by paying Comsof N.V. $925,000
and issuing them 24,711 shares of Common Stock.
We accounted for our initial investment in WDM NetDesign using the equity
method. Included in the carrying amount of the WDM NetDesign investment is
assembled workforce of $68,000 and acquired technology of approximately $352,000
that is being amortized on a straight-line basis over a five-year period. The
purchase price allocation is preliminary and subject to adjustment.
Our interest in WDM NetDesign's losses for the nine months ended
December 31, 2001 was $3,000.
9. New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting, and that certain intangible assets acquired
in a business combination be separately identified and recognized as assets
apart from goodwill. SFAS No. 142 requires that goodwill and certain other
intangible assets will no longer be amortized and instead will be subject to
periodic evaluation for impairment. In addition, the SFAS No. 142 includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill.
We have elected early adoption of SFAS Nos. 141 and 142, which is permitted
for entities with fiscal years beginning after March 15, 2001. As a result, we
have not amortized approximately $10.0 million of goodwill and $1.0 million of
assembled workforce acquired in connection with the NetMaker acquisition, which
was consummated on March 30, 2001. In accordance with SFAS No. 142, we had six
months from the initial date of adoption to complete a transitional impairment
test. We have completed this test and determined that no potential impairment
existed. Goodwill, including assembled workforce, will be tested annually and
whenever events and circumstances occur indicating that goodwill might be
impaired.
8
During the nine months ended December 31, 2001, goodwill was adjusted by
approximately $217,000 for modifications to initial purchase accounting
estimates.
Acquired technology is being amortized on a straight-line basis over a
five-year period and amortization of acquired technology was $118,000 and
$330,000 for the three and nine months ended December 31, 2001, respectively. We
expect amortization expense relating to the acquired technology of approximately
$470,000 in each of the fiscal years ended March 31, 2002, 2003, 2004, 2005 and
2006.
Information regarding the our goodwill and intangible assets is as follows:
As of December 31, 2001
-----------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------- --------------
(in thousands)
Intangible assets subject to amortization:
Acquired technology $ 2,352 $ 330
========= =========
Intangible assets not subject to amortization:
Goodwill 9,971
Assembled workforce 1,018
---------
Total
$ 10,989
=========
Included in the above as components of investment in affiliate (see Note 8)
are the following: acquired technology of $352,000, accumulated amortization of
acquired technology of $30,000 and assembled workforce of $68,000.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to
have a material effect on our consolidated financial position, results of
operations, or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
of Long-Lived Assets" which supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and
the accounting and reporting provisions of APB No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of business. This Statement is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 retains many of the
provisions of SFAS No. 121, but addresses certain implementation issues
associated with that Statement. SFAS No. 144 will not have a material effect on
our consolidated financial position, results of operations, or cash flows.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis relates to our financial condition and
results of operations for the three and nine months ended December 31, 2001, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in our Annual Report on
Form 10-K for the year ended March 31, 2001, filed with the SEC.
This report contains forward-looking statements that involve substantial
risks and uncertainties. The statements contained in this report that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. 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 below in the section captioned "Certain
Factors That May Affect Future Results," as well as any cautionary language
contained herein, provide examples of risks, uncertainties, and events that may
cause our actual results to differ materially from the expectations we describe
in our
9
forward-looking statements. Further, any forward-looking statement speaks only
s of the date on which such statement is made, and we undertake no obligation
to publicly update or revise any forward-looking information.
Overview
We provide intelligent network management software products and related
services. Our product suite consists of five primary software products: OPNET IT
Guru, OPNET Modeler, OPNET Netbiz, and our newest products, OPNET
ServiceProvider Guru (released in June 2001) and OPNET WDM Guru (released in
December 2001). We sell our OPNET suite of products to service providers,
including telecommunications carriers, ISPs and ASPs, large and medium-sized
enterprises and network equipment manufacturers. We market our product suite in
North America primarily through a direct sales force and, to a lesser extent,
several resellers and original equipment manufacturers. Internationally, we
market our products through our subsidiaries in Australia, Belgium, France and
the United Kingdom, and through third-party distributors.
We sold our first products in 1987. Our operations, including acquisitions,
have been financed principally through cash provided by operations, a venture
financing in September 1997 and the proceeds of our initial public offering in
August 2000. In August 1998, we introduced our OPNET IT Guru and OPNET Netbiz
products. In June and December 2001, we released OPNET ServiceProvider Guru and
OPNET WDM Guru, respectively, and began new marketing and sales strategies to
focus on these products.
We generate revenues principally from licensing our software products and
providing related services, including maintenance and technical support,
consulting, and training.
Our software licenses revenue consists of perpetual and term license sales
of our software products, unspecified product upgrades and royalty income.
Software licenses revenue is recognized upon delivery, provided that fees are
fixed and determinable, no significant modifications to the product are
required, and collection of the related receivable is probable. Where
significant modifications are required, software licenses revenue is recognized
along with consulting fees on a percentage-of-completion basis as the
modifications are performed. We allow customers to evaluate our software before
purchase, and therefore it is our policy not to allow returns.
Our services revenue consists 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. 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. Revenue related to periodic
unspecified product upgrades is now classified as software licenses revenue.
Revenue related to technical support will continue to be classified as services
revenue. Revenues for both technical support and periodic unspecified product
upgrades will continue to be deferred and recognized ratably over the support
period. Revenue related to periodic unspecified product upgrades purchased by
customers since July 2001 was $601,000 and $683,000 for the three and nine
months ended December 31, 2001, respectively, and this change in business
practices is expected to favorably impact software licenses revenue in future
periods. We offer consulting services primarily to provide product customization
and enhancements. Consulting services are generally performed under fixed-price
agreements and recognized as the work is performed on a percentage-of-completion
basis. We provide classroom and on-site training to our customers on a daily fee
basis.
Software licenses revenue and services revenue for which payment has been
received, but that do not yet qualify for recognition as revenue, are reflected
as deferred revenues.
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:
10
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- ----------------------
2001 2000 2001 2000
---------- -------- --------- ---------
Revenues:
Software licenses 62.0% 58.5% 59.7% 57.0%
Services 38.0 41.5 40.3 43.0
------- ------- ------- -------
Total revenues 100.0 100.0 100.0 100.0
------- ------- ------- -------
Cost of revenues:
Software licenses 0.8 0.7 1.1 1.6
Services 12.9 13.9 13.1 14.5
------- ------- ------- -------
Total cost of revenues 13.7 14.6 14.2 16.1
------- ------- ------- -------
Gross profit 86.3 85.4 85.8 83.9
------- ------- ------- -------
Operating expenses:
Research and development 26.6 24.9 28.1 25.3
Sales and marketing 37.2 41.7 37.1 42.0
General and administrative 11.2 10.1 9.9 10.2
Amortization of acquired technology 1.1 - 1.0 -
------- ------- ------- -------
Total operating expenses 76.1 76.7 76.1 77.5
------- ------- --------- -------
Income from operations 10.2 8.7 9.7 6.4
Interest and other income 3.0 12.2 4.5 8.2
------- ------- ------- -------
Income before provision for income taxes 13.3 20.9 14.2 14.6
Provision for income taxes 2.1 7.8 3.8 5.4
------- ------- ------- -------
Net income 11.1% 13.1% 10.4% 9.2%
======= ======= ======= =======
The following table sets forth, for each component of revenue, the cost of
revenue as a percentage of the related revenue for the periods indicated:
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- ----------------------
2001 2000 2001 2000
---------- -------- --------- ---------
Cost of software licenses revenue 1.2% 1.1% 1.8% 2.7%
Cost of services revenue 34.0 33.5 32.5 33.7
Revenues
Total revenue increased 25.6% to $10,973,000 for the three months ended
December 31, 2001 from $8,735,000 for the three months ended December 31, 2000,
and increased 45.5% to $33,378,000 for the nine months ended December 31, 2001
from $22,939,000 for the nine months ended December 31, 2000. We believe that
the percentage increase in our total revenues achieved in this period is not
necessarily indicative of future results.
Software Licenses Revenue. Software licenses revenue increased 33.3% to
$6,807,000 for the three months ended December 31, 2001 from $5,106,000 for the
three months ended December 31, 2000, and increased 52.4% to $19,922,000 for the
nine months ended December 31, 2001 from $13,073,000 for the nine months ended
December 31, 2000. The increase was primarily attributable to the substantial
growth in overall demand for our suite of products, revenue contribution by our
new product, OPNET ServiceProvider Guru which was released in June 2001, revenue
related to our broadening portfolio of modules for OPNET IT Guru and OPNET
Modeler products, and license revenue from the change in business practice in
July 2001 to allow customers to separately purchase unspecified product upgrades
without purchasing technical support. Additional contributors to the growth in
software license revenues include an increase in the average transaction size,
expansion of our marketing and direct sales force and the continued growth of
our international presence.
Services Revenue. Services revenue increased 14.8% to $4,166,000 for the
three months ended December 31, 2001 from $3,629,000 for the three months ended
December 31, 2000, and increased 36.4% to $13,456,000 for the nine months ended
December 31, 2001 from $9,866,000 for the nine months ended December 31, 2000.
This growth in services revenue was
11
primarily a result of increased renewals of technical support contracts by our
installed base of customers, increased technical support contracts related to
new license sales, and growing demand for consulting services, primarily for the
customization of our OPNET Netbiz product, and was partially offset by a change
in business practices in July 2001 to allow customers to purchase unspecified
product upgrades (licenses revenue) and technical support (services revenue)
separately.
Cost of Revenues
Cost of software licenses revenue consists primarily of royalties, media,
manuals, and distribution costs. Cost of services revenue consists primarily of
personnel-related costs in providing technical support, consulting, and training
to customers. Gross margin on software licenses revenue is substantially higher
than gross margin on services revenue, reflecting the low materials, packaging,
and other costs of software products compared with the relatively high personnel
costs associated with providing services. Cost of services revenue varies based
upon the relative mix of technical support, consulting, and training services.
Cost of Software Licenses Revenue. Cost of software licenses revenue
increased to $84,000 for the three months ended December 31, 2001 from $56,000
for the three months ended December 31, 2000, and decreased to $354,000 for the
nine months ended December 31, 2001 from $357,000 for the nine months ended
December 31, 2000. Gross margin on software licenses revenue decreased to 98.8%
for the three months ended December 31, 2001 from 98.9% for the three months
ended December 31, 2000. The small decrease in margin was primarily due to an
increase in royalty costs for licensing agreements entered into since March 31,
2001 partially offset by a reduction in the level of sales requiring royalty
payments under our March 1999 agreement with Cadence Design Systems ("Cadence").
This agreement required us to pay a 50% royalty for specified sales of OPNET
Modeler to the portion of Cadence's customer base that was using an existing
Cadence product. The agreement expired on March 31, 2001. Gross margins on
software licenses revenue increased to 98.2% for the nine months ended December
31, 2001 from 97.3% for the nine months ended December 31, 2000. We expect that
gross margin on software licenses revenue will decline slightly in future
periods due to anticipated royalty costs for new licensing arrangements entered
into during the three months ended December 31, 2001.
Cost of Services Revenue. Cost of services revenue increased 16.5% to
$1,415,000 for the three months ended December 31, 2001 from $1,215,000 for the
three months ended December 31, 2000, and increased 31.4% to $4,374,000 for the
nine months ended December 31, 2001 from $3,329,000 for the nine months ended
December 31, 2000. Gross margin on services revenue decreased slightly to 66.0%
for the three months ended December 31, 2001 from 66.5% for the three months
ended December 31, 2000, and increased to 67.5% for the nine months ended
December 31, 2001 from 66.3% for the nine months ended December 31, 2000. This
improvement in margin for the nine months ended December 31, 2001 is primarily
due to a higher level of profitability in consulting services, as well as
increased volume of maintenance services that provide higher gross margins than
consulting services, as the maintenance services are less labor intensive.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of salaries, related benefits, and other engineering-related costs.
Research and development expenses increased 33.9% to $2,913,000 for the three
months ended December 31, 2001 from $2,175,000 for the three months ended
December 31, 2000, and increased 61.4% to $9,365,000 for the nine months ended
December 31, 2001 from $5,803,000 for the nine months ended December 31, 2000.
As a percentage of total revenues, research and development expenses increased
to 26.6% for the three months ended December 31, 2001 from 24.9% for the three
months ended December 31, 2000, and increased to 28.1% for the nine months ended
December 31, 2001 from 25.3% for the nine months ended December 31, 2000. These
increases are primarily due to increased staffing levels as result of the
NetMaker acquisition in March 2001, increased costs of research and development
programs related to the development of new products, including the release of
OPNET ServiceProvider Guru in June 2001 and OPNET WDM Guru in December 2001, as
well as sustaining and upgrading our existing products. We believe that a
significant level of research and development investment will be required to
maintain our competitive advantage and expect that the dollar amount of these
expenditures will continue to grow in future periods.
Sales and Marketing. Sales and marketing expenses increased 12.0% to
$4,086,000 for the three months ended December 31, 2001 from $3,648,000 for the
three months ended December 31, 2000, and increased 28.7% to $12,409,000 for the
nine months ended December 31, 2001 from $9,645,000 for the nine months ended
December 31, 2000. This increase was primarily due to a substantial increase in
the size of our direct sales force, increased commissions associated with the
growth in revenues, and an overall increase in the level of advertising,
tradeshow and other marketing activities. As a percentage of total revenues,
sales and marketing expenses decreased to 37.2% for the three months ended
December 31, 2001 from 41.7% for the three months ended December 31, 2000, and
decreased to 37.1% for the nine months ended December 31, 2001 from 42.0% for
the nine months ended December 31, 2000. This decrease as a percentage of total
revenues resulted from a
12
proportionally smaller increase in costs associated with developing market
awareness for our newer products relative to the higher level of revenues for
the three months ended December 31, 2001. We intend to continue to expand our
global sales and marketing infrastructure and, accordingly, expect the dollar
amount of our sales and marketing expenses to increase in the future.
General and Administrative. General and administrative expenses consist
primarily of salaries, related benefits, bad debts costs and fees for
recruiting, legal, accounting, and other services. General and administrative
expenses increased 39.6% to $1,233,000 for the three months ended December 31,
2001 from $883,000 for the three months ended December 31, 2000, and increased
41.7% to $3,308,000 for the nine months ended December 31, 2001 from $2,335,000
for the nine months ended December 31, 2000. The increased level of spending was
primarily due to additional personnel costs and other expenses associated with
the expansion of our supporting infrastructure and an increase in costs for
potentially bad debts. As a percentage of total revenues, general and
administrative expenses increased to 11.2% for the three months ended December
31, 2001 from 10.1% for the three months ended December 31, 2000, and decreased
to 9.9% for the nine months ended December 31, 2001 from 10.2% for the nine
months ended December 31, 2000. We expect that the dollar amount of general and
administrative expenses will increase as we expand our operations.
Amortization of Acquired Technology. In connection with the NetMaker
acquisition and our investment in WDM NetDesign, we recorded acquired technology
of $2,000,000 and $352,000 respectively, which is being amortized on a
straight-line basis over a period of five years. Amortization of acquired
technology was $118,000 and $330,000 for the three and nine months ended
December 31, 2001, respectively.
Interest and Other Income
Interest and other income decreased to $331,000 for the three months ended
December 31, 2001 from $1,064,000 for the three months ended December 31, 2000,
and decreased to $1,499,000 for the nine months ended December 31, 2001 from
$1,877,000 for the nine months ended December 31, 2000. The decrease is
primarily driven by a reduction in interest income earned on our cash and cash
equivalents due to the decline in interest rates throughout the quarter.
Provision for Income Taxes
The provision for income taxes decreased to $233,000 for the three months
ended December 31, 2001 from $678,000 for the three months ended December 31,
2000. Our effective tax rate for the three months ended December 31, 2001 was
16.0% compared to 37.2% for the three months ended December 31, 2000. This
decrease in the provision and corresponding decrease in the effective tax rate
is primarily due to an increased percentage of research and development tax
credits available to us. We have been conducting a multi-phase review of our
costs to determine their qualification for the research and development tax
credit. We expect this review to be completed in the fourth quarter of fiscal
2002, and we believe that our effective tax rate for the fourth quarter,
considering current operating levels, will be less than our normalized expected
effective tax rate range for fiscal 2002 of 29 to 31%.
The provision for income taxes increased to $1,278,000 for the nine months
ended December 31, 2001 from $1,238,000 for the nine months ended December 31,
2000. Our effective tax rate for the nine months ended December 31, 2001 was
27.0% compared to 37.0% for the nine months ended December 31, 2000. This
increase in the provision and corresponding decrease in the effective tax rate
is primarily due to the growth in operating income partially offset by an
increased percentage of research and development tax credits available to us.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through cash
provided by operating activities. In September 1997, we raised $7.0 million in
venture financing, of which we used $3.4 million to repurchase stock from our
existing stockholders. In August 2000, we completed our initial public offering
in which we raised approximately $54.1 million, net of underwriting discounts
and commissions and offering expenses paid by us. As of December 31, 2001, we
had cash and cash equivalents totaling $60.9 million.
Cash provided by operating activities was $1.5 million for the nine months
ended December 31, 2001. Cash provided by operating activities is primarily
derived from net income, as adjusted for depreciation and amortization offset by
increased accounts receivable and decreased accrued liability balances as a
result of the growth in our business. Cash used in investing activities was $4.1
million for the nine months ended December 31, 2001. The funds were used
primarily to purchase approximately $1.1 million of property and equipment for
our new corporate headquarters in Bethesda, Maryland, to pay the costs incurred
for the NetMaker acquisition and to pay for our investment in WDM NetDesign.
Cash provided by financing
13
activities was $857,000 for the nine months ended December 31, 2001, reflecting
the proceeds received from the issuance of a note payable, the exercise of stock
options and the sale of common stock under our 2000 Employee Stock Purchase
Plan.
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
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
new headquarters in Bethesda, Maryland.
We expect to experience growth in our working capital needs for the
foreseeable future as we execute our business plan. We anticipate that operating
activities, as well as planned capital expenditures, will constitute a material
use of our cash resources. We may utilize cash resources to further expand our
facilities or 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.
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 Quarterly Report on Form 10-Q 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 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;
. 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.
14
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.
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 OPNET ServiceProvider
Guru. Accordingly, the failure of our products to perform favorably in the
service provider environment or to gain wider adoption by service providers
could have a negative effect on our business and future operating results.
If our newest products, OPNET IT Guru, OPNET Netbiz, OPNET ServiceProvider
Guru and OPNET WDM Guru 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
OPNET IT Guru and OPNET Netbiz, both of which were released in August 1998,
OPNET ServiceProvider Guru, which was released in June 2001, and OPNET WDM Guru,
which was released in December 2001. 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 these products. To date,
we have not achieved widespread market acceptance of either OPNET IT Guru or
OPNET Netbiz, and we have only recently begun shipping OPNET ServiceProvider
Guru and OPNET WDM Guru. In addition, if our OPNET Modeler product, which we
have been selling since 1987, encounters declining sales, which could occur for
a variety of reasons, including market saturation, and sales of our newer
products do not grow at a rate sufficient to offset the shortfall, our revenues
would decline.
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 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
15
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.
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 continue 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:
. greater difficulty in accounts receivable collection and longer
collection periods;
. political and economic instability;
. difficulty in attracting distributors that will market and support
our products effectively;
. 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; and
. the effects of currency fluctuations.
Expanding our OPNET Netbiz consulting services business will be costly and
may not result in any compensating increase in sales or profitability
16
We have been aggressively expanding our consulting services delivered in
conjunction with sales of OPNET Netbiz. The significant additional expenditures
and operational resources required to expand our OPNET Netbiz consulting
services business will place additional strain on our management, financial, and
operational resources and may make it more difficult for us to maintain
profitability. If OPNET Netbiz does not achieve significant market acceptance,
our customers will not engage our consulting services organization to assist
with consulting, custom development, implementation support, and training for
OPNET Netbiz. In addition, we may be unable to attract or retain a sufficient
number of the highly qualified consulting services personnel that we expect the
expansion of our consulting services business will require.
We face intense competition, which could cause us to lose sales, resulting
in lower revenues and profitability
The intense and increasing competition in our market could cause us to lose
sales, which could result in lower revenues and could cause us to 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.
OPNET Modeler, OPNET IT Guru, OPNET ServiceProvider Guru and OPNET WDM Guru
currently face or potentially will face competition from several sources,
including:
. software vendors with intelligent network management offerings and
application performance diagnosis solutions, such as Compuware;
. consultants who offer intelligent network management advisory
services; and
. customers who develop their own intelligent network management
capabilities, either internally or through outsourcing.
OPNET Netbiz competes with solutions designed to facilitate and automate
sales processes in general.
If the Internet infrastructure does not grow as currently anticipated,
sales of our OPNET Netbiz product may not grow and our revenues may decline
Our OPNET Netbiz product addresses a new and emerging market for sales
process automation, including over the Internet, by service providers and
network equipment manufacturers. The failure of this market to develop, or a
delay in the development of this market, would reduce demand for OPNET Netbiz
and cause our revenues to decline. The success of OPNET Netbiz depends
substantially upon the widespread adoption of the Internet as a primary medium
for commerce and business applications. Moreover, critical issues concerning the
commercial use of the Internet, such as security, reliability, cost,
accessibility, and quality of service, remain unresolved and may negatively
affect the growth of Internet use or the attractiveness of commerce and business
communication over the Internet.
Potential errors in our products and our inability to correct those errors
could harm our reputation 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.
17
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 by decreasing demand
for our products, 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 by decreasing demand for our products. 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.
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.
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, in January 2002, we
completed our acquisition of WDM NetDesign. We may continue to acquire or make
investments in companies, products, or technologies if opportunities arise. Any
acquisitions 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.
18
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 3. Quantitative and Qualitative Disclosures About Market Risk
We consider all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents, and those with maturities greater than
three months are considered to be marketable securities. Cash equivalents and
marketable securities are stated at amortized cost plus accrued interest, which
approximates fair value. Cash equivalents and marketable securities consist
primarily of money instruments and U.S. Treasury bills. We currently do not
hedge interest rate exposure, but do not believe that an increase in interest
rates would have a material effect on the value of our marketable securities.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
OPNET is involved in various claims and legal proceedings arising from its
normal operations. Management does not regard any of those matters to be
material.
ITEM 2. Changes in Securities and Use of Proceeds
On August 7, 2000, we closed an initial public offering of our Common Stock
(the "Offering"). The shares of Common Stock sold in the Offering were
registered under the Securities Act on a Registration Statement on Form S-1 (No.
333-32588) (the "Registration Statement") that was declared effective by the
Securities and Exchange Commission on August 1, 2000, and the Offering commenced
on that date.
After deducting the underwriting discounts and commissions and the estimated
Offering expenses, our net proceeds from the Offering were approximately $54.1
million.
We intend to use the net proceeds of the Offering for general corporate
purposes, including working capital and capital expenditures. From the date of
the Offering through December 31, 2001, we used approximately $4.8 million of
the net proceeds for capital expenditures and leasehold improvements related to
our new headquarters facility in Bethesda, Maryland. We also used approximately
$6.2 million of the net proceeds for the NetMaker acquisition and
acquisition-related expenses, and $461,000 for the investment in WDM NetDesign.
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 invest the net proceeds in investment grade,
interest-bearing securities. None of these amounts were paid directly or
indirectly to any of our directors, officers, general partners or their
associates, persons owning 10% or more of any class of equity securities of
OPNET, or any of our affiliates.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits: See Exhibit Index
19
B. Reports on Form 8-K
None.
20
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPNET TECHNOLOGIES, INC.
(Registrant)
By: /s/ Joseph W. Kuhn
-------------------------------------
Name: Joseph W. Kuhn
Title: Vice President of Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: February 5, 2002
21
OPNET Technologies, Inc.
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.1 Amended and Restated 2000 Stock Incentive Plan
---
22