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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 June 30, 2002
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 7372 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 July 31, 2002, there were outstanding 19,251,265 shares of common stock
of the registrant.
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TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
ITEM
1. - Condensed Consolidated Financial Statements (unaudited)................................................... 3
- Condensed Consolidated Balance Sheets as of June 30 and March 31, 2002................................. 3
- Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2002 and 2001...... 4
- Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2002 and 2001...... 5
- Notes to Condensed Consolidated Financial Statements .................................................. 6
2. - Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 8
3. - Quantitative and Qualitative Disclosures About Market Risk ............................................... 19
PART II
OTHER INFORMATION
Page
ITEM
1. - Legal Proceedings......................................................................................... 20
2. - Changes in Securities and Use of Proceeds................................................................. 20
3. - Defaults Upon Senior Securities .......................................................................... 20
4. - Submission of Matters to a Vote of Security Holders....................................................... 20
5. - Other Information ....................................................................................... 20
6. - Exhibits and Reports on Form 8-K ....................................................................... 20
Signatures ............................................................................................... 21
Exhibit Index ............................................................................................ 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
OPNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
June 30, March 31,
2002 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 63,278 $ 62,240
Accounts receivable, net of $293 and $203 in allowance for doubtful accounts at
June 30 and March 31, 2002, respectively 8,051 7,403
Unbilled accounts receivable 1,480 1,331
Refundable income taxes 308 1,253
Prepaid expenses and other current assets 846 910
------------ ------------
Total current assets 73,963 73,137
Property and equipment, net 7,468 7,670
Intangible assets, net 1,942 2,067
Goodwill 12,212 12,212
Other assets 405 70
------------ ------------
Total assets $ 95,990 $ 95,156
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 570 $ 544
Accrued liabilities 2,233 2,362
Deferred and accrued income taxes 146 156
Deferred revenue 8,201 8,019
------------ ------------
Total current liabilities 11,150 11,081
Note payable 150 150
Deferred rent 447 381
Deferred revenue 454 506
Deferred income taxes - 43
------------ ------------
Total liabilities 12,201 12,161
------------ ------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock- par value $0.001; 5,000 shares authorized, no shares issued and
outstanding at June 30 and March 31, 2002 - -
Common stock-par value $0.001; 100,000 authorized; 25,385 and 25,220 shares issued
at June 30 and March 31, 2002, respectively; 19,251 and 19,086 shares outstanding at
June 30 and March 31, 2002, respectively 25 25
Additional paid-in capital 72,971 72,655
Deferred compensation (56) (74)
Retained earnings 14,948 14,499
Accumulated other comprehensive income (loss) 1 (10)
Treasury stock - 6,134 shares at June 30 and March 31, 2002 (4,100) (4,100)
------------ ------------
Total stockholders' equity 83,789 82,995
------------ ------------
Total liabilities and stockholders' equity $ 95,990 $ 95,156
============ ============
See accompanying notes to condensed consolidated financial statements.
3
OPNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
June 30,
-------------------------
2002 2001
----------- ----------
(in thousands, except per
share data)
Revenues:
Software licenses $ 7,182 $ 6,530
Services 3,995 4,600
----------- ----------
Total revenues 11,177 11,130
----------- ----------
Cost of revenues:
Software licenses 200 110
Services 1,670 1,519
----------- ----------
Total cost of revenues 1,870 1,629
----------- ----------
Gross profit 9,307 9,501
----------- ----------
Operating expenses:
Research and development 3,141 3,154
Sales and marketing 4,518 4,169
General and administrative 1,185 985
Amortization of acquired technology 125 100
----------- ----------
Total operating expenses 8,969 8,408
----------- ----------
Income from operations 338 1,093
Interest and other income, net 283 651
----------- ----------
Income before provision for income taxes 621 1,744
Provision for income taxes 172 569
----------- ----------
Net income $ 449 $ 1,175
=========== ==========
Basic net income per common share $ 0.02 $ 0.06
=========== ==========
Diluted net income per common share $ 0.02 $ 0.06
=========== ==========
Weighted average common shares outstanding (basic) 19,163 18,809
=========== ==========
Weighted average common shares outstanding (diluted) 19,910 20,238
=========== ==========
See accompanying notes to condensed consolidated financial statements.
4
OPNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
June 30,
--------------------------
2002 2001
----------- ------------
(in thousands)
Cash flows from operating activities:
Net income $ 449 $ 1,175
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 406 500
Provision for losses on accounts receivable 90 -
Deferred income taxes (272) (24)
Tax benefit from exercise of nonqualified stock options - 53
Expense related to employee stock options 18 22
Changes in assets and liabilities:
Accounts receivable (887) (747)
Prepaid expenses and other current assets 64 844
Loans to employees - 231
Refundable income taxes 940 320
Deposits and other assets 62 16
Accounts payable 26 188
Accrued liabilities (129) (2,284)
Accrued income taxes (53) 108
Deferred revenue 130 24
Deferred rent 66 84
----------- ------------
Net cash provided by operating activities 910 510
----------- ------------
Cash flows from investing activities:
Acquisition - (1,156)
Purchase of property and equipment (204) (1,797)
----------- ------------
Net cash used in investing activities (204) (2,953)
----------- ------------
Cash flows from financing activities:
Proceeds from exercise of common stock options 156 212
Proceeds from issuance of common stock under employee stock
purchase plan 165 209
----------- ------------
Net cash provided by financing activities 321 421
----------- ------------
Effect of exchange rate changes on cash and cash equivalents 11 (6)
----------- ------------
Net increase (decrease) in cash and cash equivalents 1,038 (2,028)
Cash and cash equivalents, beginning of period 62,240 62,623
----------- ------------
Cash and cash equivalents, end of period $ 63,278 $ 60,595
=========== ============
See accompanying notes to condensed consolidated financial statements.
5
OPNET TECHNOLOGIES, INC.
NOTES TO CONDENSED 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 Cary, NC; Dallas, TX;
Santa Clara, CA; Paris, France; Oxford, United Kingdom; Sydney, Australia; and
Ghent, Belgium.
The accompanying condensed consolidated financial statements include our
results and the results of our wholly owned subsidiaries. All 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, 2002, filed with the SEC. The March 31, 2002 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 months ended June 30, 2002 may not be indicative of the operating
results for the full fiscal year or any other future period.
2. Credit Agreement
Effective June 10, 2002, we entered into a $10.0 million line of credit
facility with a commercial bank. The line of credit permits the use of funds for
general corporate purposes and the issuance of letters of credit up to a maximum
of $10.0 million. Borrowings under the credit facility are limited to 80% of
eligible accounts receivable. We used the facility to issue a letter of credit
for approximately $3.4 million to satisfy the security deposit requirements for
our corporate office lease. 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 includes a fee in the amount of 0.25% per annum on the unused
portion of the line of credit. The credit facility is collateralized by our
accounts receivable 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. The line of credit facility expires June
10, 2004. As of June 30, 2002, we had no borrowings under the available line of
credit.
3. Stockholders' Equity
During the three months ended June 30, 2002, we received proceeds of
approximately $156,000 and issued 143,323 shares of Common Stock pursuant to
employee exercises of stock options. During the three months ended June 30, 2002
employees purchased 21,708 shares of Common Stock under the 2000 Employee Stock
Purchase Plan, resulting in proceeds to us of approximately $165,000.
6
4. Net Income per Common Share
The following is a reconciliation of the amounts used in calculating basic
and diluted net income per common share for the three months ended June 30, 2002
and 2001:
Three Months Ended
June 30,
---------------------------
2002 2001
------------ -----------
(in thousands, except per
share data)
Income (Numerator):
Net income (basic and diluted) $ 449 $ 1,175
========== ==========
Shares (Denominator):
Weighted average shares outstanding (basic) 19,163 18,809
Plus:
Effect of other dilutive securities - options 747 1,429
---------- ----------
Weighted average shares outstanding (diluted) 19,910 20,238
========== ==========
Net income per common share:
Basic net income per common share $ 0.02 $ 0.06
Diluted net income per common share $ 0.02 $ 0.06
5. Business Segment and Geographic Information
We operate in one industry segment, the development and sale of computer
software programs and related services. Revenues from transactions with U.S.
government agencies were approximately 33% and 25% of total revenues for the
three months ended June 30, 2002 and 2001, respectively. Total receivables from
transactions with U.S. government agencies were approximately 39% at June 30,
2002. Revenues from transactions outside the United States, based on shipping
destination, were approximately 22% and 17% of total revenues for the three
months ended June 30, 2002 and 2001, respectively. Substantially all assets were
held in the United States at June 30 and March 31, 2002.
6. Supplemental Cash Flow Information
Three Months Ended
June 30,
-----------------------------
2002 2001
-------------- -----------
(in thousands)
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ - $ 105
Cash paid for interest - 43
Supplemental disclosure of non-cash activities:
Accrued tenant allowance $ - $ 423
Post-closing acquisition adjustments - 217
7. Comprehensive Income
Comprehensive income includes net income and foreign currency translation
adjustments. For the three months ended June 30, 2002, our comprehensive income
was $460,000, and included accumulated foreign currency translation gains of
approximately $11,000.
8. New Accounting Pronouncement
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 146 (SFAS No. 146), "Accounting for Costs Associated with Exit or
Disposal Activities". SFAS No. 146 replaces Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS No. 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS No. 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002. We do not
expect the adoption of SFAS No. 146 to have a material effect on our
consolidated financial position, results of operations, or cash flows.
7
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 months ended June 30, 2002 ("Quarter
2003") and June 30, 2001 ("Quarter 2002"), and should be read in conjunction
with our condensed consolidated financial statements and the related notes
included elsewhere in this report. You should also read the following discussion
and analysis in conjunction with our consolidated financial statements and the
related notes and "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, 2002, filed with the SEC.
This report contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "plan," "potential," "should," "will," and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of operations
or of our financial position, or state other forward-looking information. We
believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able to
predict or control accurately. The factors listed in this section, 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 forward-looking statements. You should
also carefully review the risks outlined in other documents that we file from
time to time with the Securities and Exchange Commission, including our
Quarterly Reports on Form 10-Q that we will file in fiscal 2003.
Overview
Introduction. Founded in 1986, we are the pioneer and leading provider of
intelligent network management software. OPNET software embeds expert knowledge
on how network devices, network protocols, applications and servers operate.
This intelligence enables users in network operations, engineering, planning,
and application development to be far more effective in optimizing performance
and availability of their networks and applications. We believe our software
solutions generate significant return on investment to a broad customer base,
including corporate enterprises, government and defense agencies, network
service providers, and network equipment manufacturers by empowering them to
rapidly make better use of resources, reduce operational problems and improve
competitiveness.
We market focused software solutions for each of our target markets. OPNET
IT Guru, which was launched in August 1998 and OPNET SP Guru, which was launched
in June 2001, are our platform intelligent network management products for
enterprises and service providers, respectively. OPNET WDM Guru, which was
launched in December 2001, is an optical network planning product for network
equipment manufacturers and service providers. OPNET Modeler, our first product
that was launched in 1987, is a modeling and simulation product for network R&D,
mainly sold to network equipment manufacturers. OPNET Netbiz applications are
custom solutions developed with the OPNET Development Kit (ODK), which were
launched in August 1998, and are sold primarily to network equipment
manufacturers. Finally, OPNET VNE Server, which was launched in June 2002, is an
on-line continuously operating software product that maintains a valid
comprehensive view of the network, including infrastructure, configuration and
performance data. OPNET VNE Server merges and validates multiple sources of
information into a cohesive model. This product is sold mainly to enterprises
and service providers. We sell each of these products to government and defense
agencies.
Revenues. We generate revenues principally from licensing our intelligent
network management software products and providing related services, including
maintenance and technical support, consulting and training. Our software license
revenues consist of perpetual and term license sales of our software products.
Our service revenues consist of fees from maintenance and technical
support agreements, consulting services and training. The maintenance agreements
covering our products provide for technical support and periodic unspecified
product upgrades. In July 2001, we changed our business practice to allow our
customers to separately purchase periodic unspecified product upgrades without
purchasing technical support. Revenue related to periodic unspecified product
upgrades is now included in license revenue. Revenue related to technical
support is included in service revenue. License revenue from unspecified product
upgrades was approximately $1.7 million in Quarter 2003. We offer consulting
services, generally under fixed-price agreements, primarily to provide product
customization and enhancements. We provide classroom and on-site training to our
customers on a daily fee basis.
8
Revenues from sales outside of the United States represented approximately
22% and 17% of our total revenues in Quarter 2003 and 2002, respectively. Sales
outside the United States were primarily made through our Paris, France and
Oxford, United Kingdom offices as well as third-party distributors and
value-added resellers, who are generally responsible for providing technical
support and service to customers within their territory. We expect revenues from
sales outside the United States to continue to account for a significant portion
of our total revenues in the future. We believe that continued growth and
profitability will require further expansion of our sales, marketing and
customer service functions in international markets. We expect to commit
additional time and development resources to customizing our products and
services for selected international markets.
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:
Three Months Ended
June 30,
------------------------------
2002 2001
------------- ------------
Revenues:
Software licenses 64.3% 58.7%
Services 35.7 41.3
------------- ------------
Total revenues 100.0 100.0
------------- ------------
Cost of revenues:
Software licenses 1.8 1.0
Services 14.9 13.6
------------- ------------
Total cost of revenues 16.7 14.6
------------- ------------
Gross profit 83.3 85.4
------------- ------------
Operating expenses:
Research and development 28.1 28.3
Sales and marketing 40.4 37.5
General and administrative 10.6 8.8
Amortization of acquired intangibles 1.1 0.9
------------- ------------
Total operating expenses 80.2 75.5
------------- ------------
Income from operations 3.1 9.9
Interest and other income, net 2.5 5.8
------------- ------------
Income before provision for income taxes 5.6 15.7
Provision for income taxes 1.6 5.1
------------- ------------
Net income 4.0% 10.6%
============= ============
The following table sets forth, for each component of revenues, the cost of
these revenues as a percentage of the related revenues for the periods
indicated:
Three Months Ended
June 30,
------------------------------
2002 2001
------------- ------------
Cost of software license revenues 2.8% 1.7%
Cost of service revenues 41.8 33.0
Revenues
Software License Revenues. Software license revenues were $7.2 million and
$6.5 million for Quarter 2003 and Quarter 2002, respectively, representing an
increase of 10.0% in Quarter 2003 from Quarter 2002. This growth is due to
increased overall demand for our products, revenue contribution from new
products, increased penetration of international markets, expansion of marketing
and direct sales force and revenue contribution of approximately $1.7 million
from the change in business practice in July 2001 to allow customers to
separately purchase unspecified product upgrades without purchasing technical
support. However, revenue contribution from increased sales volume was partially
offset by discounts associated with
9
pricing strategies and product bundling. For Quarter 2003, growth in sales
to enterprises of OPNET IT Guru, Application Characterization Environment
("ACE"), ACE Decode Module, NetDoctor and Flow Analysis offset a significant
decline in sales to network equipment manufacturers of OPNET Modeler.
We may experience a slower rate of growth in overall software license
revenues in the near-term due to potentially lower spending levels by enterprise
IT organizations, service providers and network equipment manufacturers as a
result of a challenging economy.
Service Revenues. Service revenues were $4.0 million and $4.6 million in
Quarter 2003 and Quarter 2002, respectively, representing a decrease of 13.2% in
Quarter 2003 from Quarter 2002. The decrease results from the adverse impact on
service revenues from the change in business practice in July 2001 to allow
customers to separately purchase unspecified periodic product upgrades (license
revenue) and technical support (service revenue). This decrease is partially
offset by growing demand for our consulting services, including engagements with
U.S. government agencies, renewals of technical support contracts by our
installed base of customers, and additional technical support contracts related
to new license sales. We expect service revenues to decline in the near-term as
more of our customers purchase unspecified periodic product upgrades separately
from technical support. Our ability to grow service revenues will be dependent
on our ability to expand our installed base of customers and our ability to
maintain several large consulting contracts with U.S. government agencies.
Cost of Revenues
Cost of software license revenues consists primarily of royalties, media,
manuals, and distribution costs. Cost of service revenues consists primarily of
personnel-related costs in providing maintenance and technical support,
consulting and training to customers. Gross margin on software license revenues
is substantially higher than gross margin on service revenues, due to the low
materials, packaging and other costs of software products compared with the
relatively high personnel costs associated with providing services.
Cost of Software License Revenues. Cost of software license revenues were
$200,000 and $110,000 in Quarter 2003 and Quarter 2002, respectively. Gross
margin on software licenses revenue decreased to 97.2% for Quarter 2003 from
98.3% for Quarter 2002. The decrease in gross margin in Quarter 2003 from
Quarter 2002 is primarily due to an increase in sales requiring royalty payments
under licensing agreements.
Cost of Service Revenues. Cost of service revenues were $1.7 million and
$1.5 million in Quarter 2003 and Quarter 2002, respectively, representing an
increase of 9.9% in Quarter 2003 from Quarter 2002. Gross margin on service
revenues decreased to 58.2% in Quarter 2003 from 67.0% in Quarter 2002 primarily
due to a higher proportion of service revenues derived from consulting services,
which provide lower gross margins than maintenance services. We expect cost of
service revenues as a percentage of service revenues to vary based primarily on
the profitability of individual consulting engagements.
Operating Expenses
Research and Development. Research and development expenses were $3.1
million and $3.2 million in Quarter 2003 and Quarter 2002, respectively. This
slight decrease is the result of a reduction in discretionary bonuses in Quarter
2003 compared to Quarter 2002; partially offset by an increase in personnel
costs from increased headcount as a result of the WDM NetDesign acquisition in
January 2002 and increased staffing levels for developing new products as well
as sustaining and upgrading existing products.
We believe that a significant level of research and development investment
will be required to maintain our competitive position and broaden our product
lines, as well as to enhance the features and functionality of our current
products. We expect the absolute dollar amount of these expenditures will
continue to grow but generally decrease as a percentage of total revenues in
future periods. Our ability to decrease these expenses as a percentage of
revenue will depend upon our revenue growth, among other factors.
Sales and Marketing. Sales and marketing expenses were $4.5 million and
$4.2 million in Quarter 2003 and Quarter 2002, respectively. The 8.4% increase
in Quarter 2003 from Quarter 2002 is primarily due to an increase in the size of
our direct sales force, including the addition of sales offices in the United
Kingdom and Australia in the second half of fiscal year 2002, increased
commissions associated with the growth in revenues, and higher conference costs.
As a percentage of total revenues, sales and marketing expenses increased
to 40.4% in Quarter 2003 from 37.5% in Quarter 2002. This increase was due to
our additional investment of resources associated with developing market
awareness for our products and increased costs related to our direct sales
force. We anticipate that we will continue
10
to commit substantial resources to sales and marketing in the future and
that sales and marketing expenses may increase in absolute dollars and as a
percentage of total revenue in future periods.
General and Administrative. General and administrative expenses were $1.2
million and $985,000 in Quarter 2003 and Quarter 2002, respectively. The 20.3%
increase in Quarter 2003 from Quarter 2002 is primarily due to higher legal,
accounting and other professional fees, bad debt expense and personnel costs.
This increase was partially offset by a decrease in discretionary bonuses for
Quarter 2003 compared to Quarter 2002.
We expect the dollar amount of general and administrative expenses to
increase as we continue to expand our operations but generally decrease as a
percentage of total revenues in future periods. Our ability to decrease these
expenses as a percentage of revenues will depend upon our revenue growth, among
other factors.
Amortization of Acquired Technology. In connection with our acquisitions of
NetMaker in March 2001 and WDM NetDesign in January 2002, we recorded acquired
technology of $2.5 million. Amortization of acquired technology was $125,000 in
Quarter 2003 and $100,000 in Quarter 2002.
Interest and Other Income, Net
Interest and other income, net were $283,000 and $651,000 in Quarter 2003
and Quarter 2002, respectively. The decrease of $368,000 in Quarter 2003 from
Quarter 2002 is primarily due to a reduction in interest income earned on our
cash and cash equivalents due to the decline in interest rates throughout the
period.
Provision for Income Taxes
Our effective tax rates were 28% and 33% for Quarter 2003 and Quarter 2002,
respectively. The effective tax rate differs from the statutory tax rate and
varies from period to period due principally to the amount of income before
taxes from various tax jurisdictions and the amount of tax credits available to
us in each period from incremental research expenditures.
We expect our effective tax rate in the near-term to range from 28% to 32%;
however, future provisions for taxes will depend, among other things, on the mix
and amount of worldwide income, the tax rates in effect for various tax
jurisdictions and the amount of research tax credits.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through cash
provided by operating activities and through the sale of equity securities. In
August 2000, we completed our initial public offering in which we raised
approximately $54.1 million, net of underwriting discounts and offering expenses
payable by us. As of June 30, 2002, we had cash and cash equivalents totaling
$63.3 million.
Cash provided by operating activities was $910,000 and $510,000 for Quarter
2003 and Quarter 2002, respectively. Cash provided by operating activities is
primarily derived from net income, as adjusted for depreciation and amortization
and increases in deferred revenue, changes in accrued liabilities and increases
in accounts receivable balances. The increase in cash provided by operations in
Quarter 2003 from Quarter 2002 was generated, in part, by (i) the collection of
refundable income taxes in Quarter 2003 from tax credits for incremental
research expenditures and (ii) no discretionary bonus payments in Quarter 2003,
offsetting the lower profitability in Quarter 2003. Accounts receivable
increased $797,000 from March 31, 2002 to June 30, 2002 due to higher customer
billing activity late in Quarter 2003 and to the billing terms of certain
consulting contracts.
Cash used in investing activities was $204,000 and $3.0 million for Quarter
2003 and Quarter 2002, respectively. The funds were used to purchase property
and equipment for our corporate headquarters in Bethesda, Maryland. Cash used in
investing activities for Quarter 2002 also includes the costs incurred for the
NetMaker acquisition.
Cash provided by financing activities was $321,000 and $421,000 for Quarter
2003 and Quarter 2002, respectively. Cash provided by financing activities
reflects the proceeds received from the exercise of stock options and the sale
of common stock under our 2000 Employee Stock Purchase Plan.
11
As discussed in Note 2 to our condensed consolidated financial statements,
effective June 10, 2002, we entered into a $10.0 million line of credit with a
commercial bank, which expires in June 2004. Borrowings under our line of credit
bear interest at an annual rate equal to LIBOR plus 2% to 2.5%. We have
currently used $3.4 million of the facility for a letter of credit that secures
the lease for our headquarters in Bethesda, Maryland. There was no balance
outstanding on this line of credit as of June 30, 2002.
As of June 30, 2002, we did not have any significant contractual
commitments other than operating leases for office facilities.
We expect working capital needs to increase in the foreseeable future in
order for us to execute our business plan. We anticipate that operating
activities, as well as planned capital expenditures, will constitute a material
use of our cash resources. In addition, we may utilize cash resources to fund
acquisitions or investments in complementary businesses, technologies or
products.
We believe that our current cash and cash equivalents and cash generated
from operations, along with available borrowings under our line of credit, will
be sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the next 12 months.
Critical Accounting Policies
The preparation of our financial statements in conformity with generally
accepted accounting principles requires us to utilize accounting policies and
make estimates and assumptions that affect our reported amounts. Future results
may differ from these estimates under different assumptions or conditions. We
consider the following accounting policies to be both important to the portrayal
of our financial position and results of operations and require the exercise of
significant, subjective, or complex judgment and/or estimates.
Revenue Recognition. We recognize revenue in accordance with Statement of
Position ("SOP") No. 97-2, "Software Revenue Recognition", as amended by SOP No.
98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, With Respect
to Certain Transactions", SOP No. 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" and the Securities and
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements."
For our software arrangements, a determination needs to be made for each
arrangement regarding whether the percentage-of-completion contract accounting
method should be used to recognize revenue or whether revenue can be recognized
when the software is delivered and all of the conditions of SOP 97-2 are met.
Contract accounting is required if our services are essential to the
arrangement. In some cases, our services are essential to the arrangement
because they involve customization and enhancements, and our fees are paid in
stages based upon the completion of defined service deliverables. As a result,
we typically recognize revenue from these arrangements using contract
accounting, which generally results in recording revenue over a longer period of
time. In other cases, our services are not essential to the arrangement and the
realization of our license fee is not dependent on the completion of such
services. In these situations, we recognize software license revenue when (1)
persuasive evidence of an arrangement exists, (2) the product has been
delivered, (3) the fee is fixed or determinable, and (4) collectibility is
probable, which generally results in recording revenue earlier than when
contract accounting is used. The determination of whether our services are
essential involves significant judgment and could have a material impact on our
results of operations from period to period to the extent that significant new
arrangements are not accounted for using contract accounting.
Under the percentage-of-completion contract accounting method, we recognize
revenue from the entire arrangement based on the percentage of hours incurred
related to our services compared to the total hours of such services. Using the
percentage-of-completion method requires us to make estimates about the future
cost of services and estimated hours to complete, which are subject to change
for a variety of internal and external factors. A change in these estimates
could result in a material adjustment to the amount of revenue recorded in any
period under the arrangement.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful
accounts receivable for estimated losses resulting from the inability of our
customers to make required payments and for the limited circumstances when the
customer disputes the amounts due us. Our methodology for determining this
allowance requires significant estimates. In estimating the allowance,
management considers the age of the receivable, the creditworthiness of the
customer, the economic conditions of the customer's industry and general
economic conditions. While we believe that the estimates we use are reasonable,
should any of these factors change, the estimates made by management will also
change, which could impact the amount of our future
12
allowance for doubtful accounts as well as future operating income.
Specifically, if the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments to us, additional
allowances may be required.
Valuation of Intangible Assets and Goodwill. We account for our goodwill
and intangible assets in accordance with Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets". Our intangible assets consist of acquired
technology. They are recorded at cost and amortized on a straight-line basis
over their expected useful lives of five years. We use the projected discounted
cash flow method in valuing our acquired technology, using certain assumptions
including revenue growth, cost levels, present value discount rate and working
capital requirements. While we believe the assumptions used are reasonable,
actual results will more likely than not differ from those assumptions. Future
cash flows are subject to change for a variety of internal and external factors.
We will periodically review the value of acquired technology for reasonableness.
Changes in our assumptions at the time of future periodic reviews could result
in impairment losses.
Goodwill is recorded when the consideration paid for acquisitions exceeds
the fair value of net tangible and intangible assets acquired. Goodwill is not
amortized. We perform an annual review during our fourth quarter to identify any
facts or circumstances that indicate the carrying value of goodwill is impaired.
The review is based on various analyses including cash flow and profitability
projections and the market capitalization of our common stock. Impairment, if
any, is based on the excess of the carrying amount of goodwill over its fair
value. No impairment has been indicated to date. Changes in our assumptions at
the time of future periodic reviews could result in impairment losses.
Accounting for Software Development Costs. Costs incurred in the research
and development of new software products are expensed as incurred until
technological feasibility is established. Development costs are capitalized
beginning when a product's technological feasibility has been established and
ending when the product is available for general release to our customers.
Technological feasibility is reached when the product reaches the working model
stage. To date, products and enhancements have generally reached technological
feasibility and have been released for sale at substantially the same time and
all research and development costs have been expensed. Consequently, no research
and development costs were capitalized in Quarter 2003 and Quarter 2002.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this report and presented elsewhere by management from time to time.
Our operating results may fluctuate significantly as a result of factors
outside of our control, which could cause the market price of our stock to
decline
Our operating results have fluctuated in the past, and are likely to
fluctuate significantly in the future. Our financial results may as a
consequence fall short of the expectations of public market analysts or
investors, which could cause the price of our common stock to decline. Our
revenues and operating results may vary significantly from quarter to quarter
due to a number of factors, many of which are beyond our control. Factors that
could affect our operating results include:
.. the timing of large orders;
.. software arrangements requiring contract accounting;
.. changes in the mix of our sales, including the mix between higher margin
software products and somewhat lower margin services and maintenance, and
the proportion of our license sales requiring us to make royalty payments;
.. the timing and amount of our marketing, sales, and product development
expenses;
.. the cost and time required to develop new software products;
.. the introduction, timing, and market acceptance of new products
introduced by us or our competitors;
.. changes in network technology or in applications, which could require us
to modify our products or develop new products;
.. general economic conditions, which can affect our customers' purchasing
decisions and the length of our sales cycle;
13
.. changes in our pricing policies or those of our competitors; and
.. the timing and size of potential acquisitions by us.
We expect to make significant expenditures in all areas of our business,
particularly sales and marketing operations, in order to promote future growth.
Because the expenses associated with these activities are relatively fixed in
the short term, we may be unable to adjust spending quickly enough to offset any
unexpected shortfall in revenue growth or any decrease in revenue levels. In
addition, our revenues in any quarter depend substantially on orders we receive
and ship in that quarter. We typically receive a significant portion of orders
in any quarter during the last month of the quarter, and we cannot predict
whether those orders will be placed and shipped in that period. If we have lower
revenues than we expect, we probably will not be able to reduce our operating
expenses quickly in response. Therefore, any significant shortfall in revenues
or delay of customer orders could have an immediate adverse effect on our
operating results in that quarter.
For all of these reasons, quarterly comparisons of our financial results
are not necessarily meaningful and you should not rely on them as an indication
of our future performance.
The market for intelligent network management software is new and evolving,
and if this market does not develop as anticipated, our revenues could decline
We derive all of our revenues from the sale of products and services that
are designed to allow our customers to manage the performance of networks and
applications. Accordingly, if the market for intelligent network management
software does not continue to grow, we could face declining revenues, which
could ultimately lead to our becoming unprofitable. The market for intelligent
network management software solutions is in an early stage of development.
Therefore, we cannot accurately assess the size of the market and may be unable
to identify an effective distribution strategy, the competitive environment that
will develop, and the appropriate features and prices for products to address
the market. If we are to be successful, our current and potential customers must
recognize the value of intelligent network management software solutions, decide
to invest in the management of their networks, and, in particular, adopt and
continue to use our software solutions.
Our customers are primarily in four target markets and our operating
results may be adversely affected by changes in one or more of these markets
As part of our focus on four targeted markets, our financial results
depend, in significant part, upon the economic conditions of enterprise, U.S.
government agencies, service provider and network equipment manufacturer
markets. An economic downturn or adverse change in the regulatory environment or
business prospects for one or more of these markets may decrease our revenues or
lower our growth rate.
A decline in information technology spending may result in a decrease in
our revenues or lower our growth rate
A decline in the demand for information technology among our current and
prospective customers may result in decreased revenues or a lower growth rate
for us because our sales depend, in part, on our customers' level of funding for
new or additional information technology systems and services.
A continued economic downturn may cause our customers to reduce or
eliminate information technology spending and cause price erosion for our
solutions, which would substantially reduce the number of new software licenses
we sell and the average sales price for these licenses. Accordingly, we cannot
assure you that we will be able to increase or maintain our revenues.
If our newest products, particularly those targeted primarily for
enterprises, do not gain widespread market acceptance, our revenues might not
increase and could even decline
We expect to derive a substantial portion of our revenues in the future
from sales to enterprises of version 8.1 of OPNET IT Guru, which was released in
May 2002, Application Characterization Environment, which was released in fiscal
2000, products released in fiscal 2002, such as ACE Decode Module, NetDoctor and
Flow Analysis, and OPNET VNE Server, which was released in June 2002. Our
business depends on customer acceptance of these products and our revenues may
not increase, or may decline, if our target customers do not adopt and expand
their use of our products. To date, we have not achieved widespread market
acceptance of our products. In addition, if our OPNET Modeler product, which we
have been selling since 1987, continues to encounter declining sales, which
could occur for a variety of reasons, including market saturation and the
financial condition of network equipment manufacturers, and sales of our newer
products do not grow at a rate sufficient to offset the shortfall, our revenues
would decline.
14
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 SP Guru
and OPNET WDM Guru, both launched in fiscal 2002. Accordingly, if our products
fail to perform favorably in the service provider environment or to gain wider
adoption by service providers, our business and future operating results could
suffer.
Our lengthy and variable sales cycle makes it difficult to predict
operating results
It is difficult for us to forecast the timing and recognition of revenues
from sales of our products because prospective customers often take significant
time evaluating our products before licensing them. The period between initial
customer contact and a purchase by a customer may vary from three months to more
than a year. During the sales process, the customer may decide not to purchase
or may scale down proposed orders of our products for various reasons, including
changes in budgets and purchasing priorities. Our prospective customers
routinely require education regarding the use and benefit of our products. This
may also lead to delays in receiving customers' orders.
If we do not successfully expand our sales force, we may be unable to
increase our sales
We sell our products primarily through our direct sales force, and we must
expand the size of our sales force to increase revenues. If we are unable to
hire or retain qualified sales personnel, if newly hired personnel fail to
develop the necessary skills to be productive, or if they reach productivity
more slowly than anticipated, our ability to increase our revenues and grow our
business could be compromised. Our sales people require a long period of time to
become productive, typically three to six months. The time required to reach
productivity, as well as the challenge of attracting, training, and retaining
qualified candidates, may make it difficult to meet our sales force growth
targets. Further, we may not generate sufficient sales to offset the increased
expense resulting from growing our sales force or we may be unable to manage a
larger sales force.
Our ability to increase our sales will be impaired if we do not expand and
manage our indirect distribution channels
To increase our sales, we must, among other things, further expand and
manage our indirect distribution channels, which consist primarily of
international distributors and original equipment manufacturers and resellers.
If we are unable to expand and manage our relationships with our distributors,
our distributors are unable or unwilling to effectively market and sell our
products, or we lose existing distributor relationships, we might not be able to
increase our revenues. Our international distributors and original equipment
manufacturers and resellers have no obligation to market or purchase our
products. In addition, they could partner with our competitors, bundle or resell
competitors' products, or internally develop products that compete with our
products.
We may not be able to successfully manage our expanding operations, which
could impair our ability to operate profitably
We may be unable to operate our business profitably if we fail to manage
our growth. Our rapid growth has sometimes strained, and may in the future
continue to strain, our managerial, administrative, operational, and financial
resources and controls. We plan to continue to expand our operations and
increase the number of our full-time employees. Our ability to manage growth
will depend in part on our ability to continue to enhance our operating,
financial, and management information systems. Our personnel, systems, and
controls may not be adequate to support our growth. In addition, our revenues
may not continue to grow at a sufficient rate to absorb the costs associated
with a larger overall employee base.
If we are unable to introduce new and enhanced products on a timely basis
that respond effectively to changing technology, our revenues may decline
Our market is characterized by rapid technological change, changes in
customer requirements, frequent new product and service introductions and
enhancements, and evolving industry standards. If we fail to develop and
introduce new and enhanced products on a timely basis that respond to these
changes, our products could become obsolete, demand for our products could
decline and our revenues could fall. Advances in network management technology,
software engineering, simulation technology, or the emergence of new industry
standards, could lead to new competitive products that have better performance,
more features, or lower prices than our products and could render our products
unmarketable. In addition, the introduction and adoption of future network
technologies or application architectures could reduce or eliminate the need for
predictive network management software.
Our future revenue is substantially dependent upon our installed customer
base continuing to license additional products, renew maintenance agreements and
purchase additional services
15
Our installed customer base has traditionally generated additional revenue
from consulting services, renewed maintenance agreements and license of other
products. The maintenance agreements are generally renewable at the option of
the customers and there are no mandatory payment obligations or obligations to
license additional software. In addition, customers may decide not to purchase
additional products or services. If our customers fail to renew their
maintenance agreements or purchase additional products or services, our revenues
could decrease.
Increases in service revenues as a percentage of total revenues could
decrease overall margins and adversely affect our operating results
We realize lower margins on service revenues than on software license
revenues. As a result, if service revenues increase as a percentage of total
revenues, our gross margins will be lower and our operating results may be
adversely affected.
If we fail to retain our key personnel and attract and retain additional
qualified personnel, we might not be able to sustain our revenue growth
Our future success and our ability to sustain our revenue growth depend
upon the continued service of our executive officers and other key sales and
research and development personnel. The loss of any of our key employees, in
particular Marc A. Cohen, our chairman of the board and chief executive officer,
and Alain J. Cohen, our president and chief technology officer, could adversely
affect our ability to pursue our growth strategy. We do not have employment
agreements or any other agreements that obligate any of our officers or key
employees to remain with us.
We must also continue to hire large numbers of highly qualified
individuals, particularly software engineers and sales and marketing personnel.
Our failure to attract and retain technical personnel for our product
development, consulting services, and technical support teams may limit our
ability to develop new products or product enhancements. Competition for these
individuals is intense, and we may not be able to attract and retain additional
highly qualified personnel in the future. In addition, limitations imposed by
federal immigration laws and the availability of visas could impair our ability
to recruit and employ skilled technical professionals from other countries to
work in the United States.
Our international operations subject our business to additional risks,
which could cause our sales or profitability to decline
We plan to increase our international sales activities, but these plans are
subject to a number of risks that could cause our sales to decline or could
otherwise cause a decline in profitability. These risks include:
.. difficulty in attracting distributors that will market and support our
products effectively;
.. greater difficulty in accounts receivable collection and longer
collection periods;
.. the need to comply with varying employment policies and regulations that
could make it more difficult and expensive to manage our employees if we
need to establish more direct sales or support staff outside the United
States;
.. potentially adverse tax consequences;
.. the effects of currency fluctuations; and
.. political and economic instability.
We expect to face intense competition, which could cause us to lose sales,
resulting in lower profitability
Increasing competition in our market could cause us to lose sales and
become unprofitable. The market for intelligent network management software is
evolving rapidly and is highly competitive. We believe that this market is
likely to become more competitive as the demand for intelligent network
management solutions continues to increase. Many of our current and potential
competitors are larger and have substantially greater financial and technical
resources than we do. In addition, it is possible that other vendors as well as
some of our customers or distributors will develop and market solutions that
compete with our products in the future.
If our products contain errors and we are unable to correct those errors,
our reputation could be harmed and could cause our customers to demand refunds
from us or assert claims for damages against us
16
Our software products could contain significant errors or bugs that may
result in:
.. the loss of or delay in market acceptance and sales of our products;
.. the delay in introduction of new products;
.. diversion of our resources;
.. injury to our reputation; and
.. increased support costs.
Bugs may be discovered at any point in a product's life cycle. We expect
that errors in our products will be found in the future, particularly in new
product offerings and new releases of our current products.
Because our customers use our products to manage networks that are critical
to their business operations, any failure of our products could expose us to
product liability claims. In addition, errors in our products could cause our
customers' networks and systems to fail or compromise their data, which could
also result in liability to us. Product liability claims brought against us
could divert the attention of management and key personnel, could be expensive
to defend, and may result in adverse settlements and judgments.
Our software products rely on our intellectual property, and any failure to
protect our intellectual property could enable our competitors to market
products with similar features that may reduce our revenues and could allow the
use of our products by users who have not paid the required license fee
If we are unable to protect our intellectual property, our competitors
could use our intellectual property to market products similar to our products,
which could reduce our revenues. In addition, we may be unable to prevent the
use of our products by persons who have not paid the required license fee, which
could reduce our revenues. Our success and ability to compete depend
substantially upon the internally developed technology that is incorporated in
our products. Policing unauthorized use of our products is difficult, and we may
not be able to prevent misappropriation of our technology, particularly in
foreign countries where the laws may not protect our proprietary rights as fully
as those in the United States. Others may circumvent the patents, copyrights,
and trade secrets we own. In the ordinary course of business, we enter into a
combination of confidentiality, non-competition and non-disclosure agreements
with our employees.
These measures afford only limited protection and may be inadequate,
especially because our employees are highly sought after and may leave our
employ with significant knowledge of our proprietary information. In addition,
any confidentiality, non-competition and non-disclosure agreements we enter into
may be found to be unenforceable, or our copy protection mechanisms embedded in
our software products could fail or could be circumvented.
Our products employ technology that may infringe on the proprietary rights
of others, and, as a result, we could become liable for significant damages
We expect that our software products may be increasingly subject to
third-party infringement claims as the number of competitors in our industry
segment grows and the functionalities of products in different industry segments
overlap.
Regardless of whether these claims have any merit, they could:
.. be time-consuming to defend;
.. result in costly litigation;
.. divert our management's attention and resources;
.. cause us to cease or delay product shipments; or
.. require us to enter into royalty or licensing agreements.
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
17
business because we would not be able to sell the affected product without
redeveloping it or incurring significant additional expense.
Possible adverse impact of interpretations of existing accounting
pronouncements
Based on our reading and interpretations of SOPs 81-1, 97-2 and 98-9, and
SAB 101, we believe that our current contract terms and business arrangements
have been properly reported. However, the American Institute of Certified Public
Accountants and its Software Revenue Recognition Task Force continue to issue
interpretations and guidance for applying the relevant standards to a wide range
of sales contract terms and business arrangements that are prevalent in the
software industry. Future interpretations of existing accounting standards or
changes in our business practices could result in future changes in our revenue
recognition accounting policies that could have a material adverse effect on our
business, financial condition and results of operations.
As with other software vendors, we may be required to delay revenue
recognition into future periods that could adversely impact our operating
results
We have in the past had to, and in the future may have to, defer
recognition for license fees due to several factors, including whether:
.. software arrangements include undelivered elements for which we do not
have vendor specific evidence of fair value;
.. we must deliver services for significant customization, enhancements and
modifications of our software;
.. the transaction involves material acceptance criteria or there are other
identified product-related issues;
.. the transaction involves contingent payment terms or fees;
.. we are required to accept a fixed-fee services contract; or
.. we are required to accept extended payment terms.
Because of the factors listed above and other specific requirements under
accounting principles generally accepted in the United States for software
revenue recognition, we must have very precise terms in our software
arrangements in order to recognize revenue when we initially deliver software or
perform services. Negotiation of mutually acceptable terms and conditions can
extend the sales cycle, and sometimes we do not obtain terms and conditions that
permit revenue recognition at the time of delivery.
If we undertake acquisitions, they may be expensive and disruptive to our
business and could cause the market price of our common stock to decline
In March 2001, we completed the NetMaker acquisition. We may continue to
acquire or make investments in companies, products or technologies if
opportunities arise. Any acquisition could be expensive, disrupt our ongoing
business, distract our management and employees, and adversely affect our
financial results and the market price of our common stock. We may not be able
to identify suitable acquisition or investment candidates, and if we do identify
suitable candidates, we may not be able to make these acquisitions or
investments on commercially acceptable terms or at all. If we make an
acquisition, we could have difficulty integrating the acquired technology,
employees, or operations. In addition, the key personnel of the acquired company
may decide not to work for us.
We also expect that we would incur substantial expenses if we acquired
other businesses or technologies. We might use cash on hand, incur debt, or
issue equity securities to pay for any future acquisitions. If we issue
additional equity securities, our stockholders could experience dilution and the
market price of our stock may decline.
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
18
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.
19
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
In August 2000, we closed an initial public offering of our common stock.
The Registration Statement on Form S-1 (No. 333-32588) was declared effective by
the Securities and Exchange Commission on August 1, 2000 and we commenced the
offering on that date. After deducting the underwriting discounts and
commissions and the offering expenses, the net proceeds from the offering were
approximately $54.1 million.
As of June 30, 2002, the proceeds from the offering were used to fund
approximately (i) $7.6 million of general corporate expenses, working capital
and capital expenditures, including $4.8 million for capital expenditures and
leasehold improvements related to our headquarters facility in Bethesda,
Maryland, (ii) $6.2 million of acquisition and acquisition-related expenses for
the NetMaker acquisition, and (iii) $1.4 million of the purchase price for WDM
NetDesign. None of these amounts were paid directly or indirectly to any
director, officer, or general partner of us or their associates, persons owning
10% or more of any class of our equity securities, or any affiliate of us. We
have not allocated any of the remaining net proceeds to any identifiable uses.
We may also use a portion of the net proceeds to acquire businesses, products,
or technologies that are complementary to our business. Pending their use, we
have invested the net proceeds in investment grade, interest-bearing securities.
ITEM 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
B. Reports on Form 8-K
None.
20
SIGNATURE
Pursuant to the requirements of the Securities 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: August 9, 2002
21
OPNET TECHNOLOGIES, INC.
EXHIBIT INDEX
Exhibit
Number Description
10.1 Loan Agreement, dated June 10, 2002, between Registrant
and Bank of America, N.A.
10.2 Promissory Note, dated June 10, 2002, between Registrant
and Bank of America, N.A.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
---------------
22