<PAGE>
As filed with the Securities and Exchange Commission on July 11, 2000
Registration No. 333-32588
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OPNET TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 7373 52-1483235
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
3400 International Drive, N.W.
Washington, D. C. 20008
(202) 364-4700
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
---------------
Marc A. Cohen
Chairman of the Board and Chief Executive Officer
OPNET TECHNOLOGIES, INC.
3400 International Drive, N.W.
Washington, D.C. 20008
(202) 364-4700
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
Copies to:
Brent B. Siler, Esq. Lorraine Massaro, Esq.
HALE AND DORR LLP MORRISON & FOERSTER LLP
1455 Pennsylvania Avenue, N.W. 1290 Avenue of the Americas
Washington, D.C. 20004 New York, NY 10104
Telephone: (202) 942-8400 Telephone: (212) 468-8000
Telecopy: (202) 942-8484 Telecopy: (212) 468-7900
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued July 11 , 2000
4,000,000 Shares
[Logo of OPNET]
OPNET Technologies, Inc.
COMMON STOCK
-----------
OPNET Technologies, Inc. is offering 4,000,000 shares of its common stock. This
is our initial public offering and no public market currently exists for our
shares. We anticipate that the initial public offering price for our shares
will be between $12.00 and $14.00 per share.
-----------
We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol "OPNT."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 7.
-----------
PRICE $ A SHARE
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total........................................ $ $ $
</TABLE>
OPNET Technologies, Inc. has granted the underwriters the right to purchase up
to an additional 600,000 shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock
to investors on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
ROBERTSON STEPHENS
FRIEDMAN BILLINGS RAMSEY
, 2000
<PAGE>
[Inside Front Cover]
Software that Understands Networks
OPNET's products enable our customers to optimize the performance and maximize
the availability of networks and applications. Our products use predictive
simulation technology to assess future network and application performance under
a wide range of operating conditions.
The below descriptions appear in the middle and bottom of this page.
[OPNET IT DecisionGuru Logo]
OPNET IT DecisionGuru
Maximizes network availability, optimizes network and application performance
and reduce network operating costs.
A photograph of a network control room appears to the right of the OPNET IT
DecisionGuru logo, with the captions "Service Provider/Carrier" and
"Telecommunications Carriers, ISPs, ASPs, Wireless Network Operators, Cable
Service Providers."
[OPNET Netbiz Logo]
OPNET Netbiz
Facilitates and accelerates the sales process for network equipment and services
by automating network design and proposal generation.
A photograph of a group of people sitting around a table appears to the left of
the OPNET Netbiz logo, with the caption "Enterprises."
[OPNET Modeler Logo]
OPNET Modeler
Accelerates development of network equipment and protocols by enabling the
testing of product designs prior to manufacturing.
A photograph of a technician working on an item of network equipment appears to
the right of the OPNET Modeler logo, with the caption "Network Equipment
Manufacturers."
Arrows point from the OPNET IT DecisionGuru logo to the "Service
Provider/Carrier" and "Enterprises" photographs, from the OPNET Netbiz logo to
the "Service Provider/Carrier" and "Network Equipment Manufacturer" photographs
and from the OPNET Modeler logo to the "Network Equipment Manufacturers"
photograph.
<PAGE>
TABLE OF CONTENTS
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Page
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 7
Special Note Regarding Forward-
Looking Statements................. 14
Use of Proceeds..................... 15
Dividend Policy..................... 15
Capitalization...................... 16
Dilution............................ 17
Selected Consolidated Financial
Data............................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 27
Management....................... 41
Related Party Transactions....... 50
Principal Stockholders........... 51
Description of Capital Stock..... 52
Shares Eligible for Future Sale.. 55
Underwriters..................... 57
Legal Matters.................... 60
Experts.......................... 60
Where You Can Find More
Information..................... 60
Index to Consolidated Financial
Statements...................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. In this prospectus, the "Company," "we," "us"
and "our" refer to OPNET Technologies, Inc.
Until , 2000 (25 days after the commencement of this offering), all
dealers that buy, sell or trade shares, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
IT DecisionGuru(TM), Netbiz(TM), OPNET(R), OPNET Modeler(R), OPNET
Technologies(TM), and OPNETWORK(TM) are trademarks or service marks of OPNET.
Other trademarks or service marks appearing in this prospectus are the
property of their respective holders.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, our common stock being sold in this offering
and our financial statements and the related notes appearing elsewhere in this
prospectus.
OPNET TECHNOLOGIES, INC.
We provide predictive network management software solutions that enable
organizations to optimize the performance and maximize the availability of
communications networks and networked applications. Our suite of products
advances network and application management beyond reactive problem
identification and reporting to proactive problem resolution and avoidance. The
OPNET product suite combines predictive simulation and a comprehensive
understanding of network technologies to enable network professionals to more
effectively design and deploy networks, diagnose network and application
performance problems, and predict the impact of proposed network modifications.
Organizations increasingly depend upon their networks and applications to
successfully execute their business strategies. The design, operation, and
management of these networks are becoming more complex, and service providers
and enterprises must now manage the convergence of data, voice, and video
traffic over wireline and wireless architectures, integrating numerous existing
and emerging technologies. As the complexity of networks continues to increase,
so does the need for sophisticated solutions to manage network resources
effectively.
Our OPNET product suite consists of three primary software solutions: OPNET
IT DecisionGuru, OPNET Modeler, and OPNET Netbiz. OPNET IT DecisionGuru enables
service providers and enterprises to more effectively design and deploy
networks and to predict the performance of their networks and applications.
OPNET Modeler enables network equipment manufacturers to accelerate the design
and development of network equipment and communication protocols. OPNET Netbiz
facilitates and accelerates the sales process for service providers and network
equipment manufacturers by automating network design and proposal generation.
In addition, we provide comprehensive libraries of models of a wide range of
network technologies and communication protocols to enable our products to
simulate and analyze networks and applications.
Using our simulation-based products, we believe our customers are more
quickly and cost-effectively able to:
. design, deploy, and operate new networks, network services, and network
equipment;
. adapt their existing network infrastructure and network services to meet
their business-critical performance objectives;
. proactively identify and avoid network and application performance
problems;
. define achievable performance and availability requirements for network
services and applications, commonly known as service level agreements;
and
. streamline the sales process for network services and network equipment.
We sell our products through our direct sales force, our international
distributors, and original equipment manufacturers and resellers. We market our
products to service providers, such as telecommunications carriers, Internet
service providers, or ISPs, and application service providers, or ASPs, large
and medium-sized enterprises, and network equipment manufacturers. Since
inception, we have sold our products to over 600 customers, including service
providers, such as AT&T, British Telecom, MCI WorldCom, SBC Communications,
Sprint, and UUNET Technologies; enterprises, such as Boeing, IBM Global
Services, National Semiconductor, RR Donnelley, and Texas Utilities; and
network equipment manufacturers, such as 3Com, Cisco Systems, Ericsson,
Motorola, Nokia, and Nortel Networks.
4
<PAGE>
We intend to enhance our leadership position in the expanding market for
predictive network management software solutions by:
. increasing penetration of the service provider market;
. expanding our direct and international sales efforts;
. leveraging our existing customer base;
. introducing new products and enhancing the functionality of existing
products; and
. developing additional strategic relationships.
----------------
Our corporate offices are located at 3400 International Drive, N.W.,
Washington, D.C. 20008 and our telephone number is (202) 364-4700. Our
predecessor was incorporated in Maryland under the name MIL 3, Incorporated on
November 1, 1986, and we incorporated in Delaware on November 23, 1988 under
the same name. We changed our name to OPNET Technologies, Inc. on February 2,
2000. Our Web address is www.opnet.com. We do not intend that the information
on our Web site constitutes a part of this prospectus.
THE OFFERING
<TABLE>
<C> <S>
Common stock offered................................ 4,000,000 shares
Common stock to be outstanding after this offering.. 17,306,616 shares
Use of proceeds..................................... We intend to use the net
proceeds from this
offering for general
corporate purposes,
including working capital
and capital expenditures.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol.............. OPNT
</TABLE>
The number of shares of common stock to be outstanding after this offering
excludes:
. 2,203,287 shares of common stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $4.55
per share; and
. 2,925,000 shares of common stock reserved for future issuance under our
stock plans.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table is a summary of our consolidated financial data. You
should read this information together with our consolidated financial
statements and the related notes appearing at the end of this prospectus and
the information under "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The pro forma balance sheet data gives
effect to the conversion of all our outstanding redeemable convertible
preferred stock into shares of our common stock, which will occur automatically
upon the completion of this offering. The pro forma as adjusted balance sheet
data also reflects the sale of the common stock offered by us, after deducting
estimated underwriting discounts and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------
1996 1997 1998 1999 2000
------ ------ ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues......................... $5,989 $8,615 $11,929 $12,003 $19,235
Gross profit........................... 5,331 7,607 10,514 10,621 15,632
Income (loss) from operations.......... 1,360 2,505 2,590 (269) 333
Net income............................. 872 1,492 1,775 207 575
Net income applicable to common
shares................................ 872 1,492 1,766 193 561
Basic net income applicable per common
share................................. $ .08 $ .13 $ .16 $ .02 $ .05
Diluted net income per common share.... $ .08 $ .13 $ .14 $ .02 $ .04
Weighted average shares outstanding
(basic)............................... 11,524 11,674 11,153 10,661 10,740
Weighted average shares outstanding
(diluted)............................. 11,620 11,852 12,897 13,626 14,367
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 2000
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................... $ 8,765 $ 8,765 $55,625
Working capital................................... 7,112 7,112 53,572
Total assets...................................... 16,713 16,713 63,173
Total stockholders' equity........................ 3,468 10,416 57,276
</TABLE>
----------------
Except as otherwise indicated, information in this prospectus:
. reflects a three-for-two stock split of all outstanding shares of our
common stock to be effected prior to the completion of this offering;
. gives effect to the conversion of all outstanding redeemable convertible
preferred stock into an aggregate of 2,171,769 shares of our common
stock, which will occur automatically upon the completion of this
offering;
. assumes our common stock will be sold at $13.00 per share, which is the
mid-point of the range shown on the cover of this prospectus; and
. assumes the underwriters do not exercise their over-allotment option to
purchase additional shares in this offering.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before investing in our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following factors could harm our business and future operating results and
could result in a partial or complete loss of your investment.
Risks Related to Our Business and Industry
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.
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 predictive 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 predictive network management
software does not continue to grow, we could face declining revenues, which
could
7
<PAGE>
ultimately lead to our becoming unprofitable. The market for predictive
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 predictive 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 will 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. 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 DecisionGuru and OPNET Netbiz, 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 DecisionGuru and OPNET Netbiz, both of which were released in
August 1998. 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 OPNET IT DecisionGuru and OPNET Netbiz. To date,
we have not achieved widespread market acceptance of either product. 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. Sales through our indirect distribution channels
accounted for 27.8% of our total revenues for the fiscal year ended March 31,
1998, 24.4% for the fiscal year ended March 31, 1999, and 19.0% for the fiscal
year ended March 31, 2000. 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 have grown from a total of 89 employees at March
31, 1999 to a total of
8
<PAGE>
155 employees at June 30, 2000. 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
Sales of our products to customers outside North America accounted for
29.8% of our total revenues in fiscal 1998, 26.9% of our total revenues in
fiscal 1999, and 20.8% of our total revenues in the fiscal 2000. 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:
. 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 direct sales or support staff outside the United
States;
9
<PAGE>
. 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
We have recently begun to place additional emphasis on 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 predictive 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 predictive 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 and OPNET IT DecisionGuru currently face or potentially will
face competition from several sources, including:
. software vendors with predictive network management offerings, such as
Compuware, and application performance diagnosis solutions, such as
Optimal Networks;
. consultants who offer predictive network management advisory services;
and
. customers who develop their own predictive network management
capabilities, either internally or through outsourcing.
OPNET Netbiz competes with solutions designed to facilitate and automate sales
processes in general.
If 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.
10
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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.
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.
11
<PAGE>
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
We may 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 the net proceeds of this offering, 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 environments, we could experience significant delays in
product releases or shipments, which could result in lost revenues and
significant additional expense.
Risks Related to this Offering
Our stock price may be volatile, which could lead to losses by investors
and to securities litigation
Our stock may be subject to substantial price volatility, which may prevent
you from reselling our common stock at or above the initial public offering
price. In addition, securities class action litigation is often instituted
against companies following periods of volatility in their stock price. This
type of litigation could result in substantial costs and divert our
management's attention and resources.
Our common stock has never been sold in a public market. An active trading
market for our common stock may not develop or be sustained after completion
of this offering. The initial public offering price may not be indicative of
the prices that will prevail in the public market after this offering, and the
market price of our common stock could fall below the initial public offering
price.
The value of your investment could decline due to the impact of any of the
following factors upon the market price of our common stock:
. variations in our actual and anticipated operating results;
. changes in estimates of our earnings by market analysts;
. our failure to meet analysts' performance expectations; and
. lack of liquidity.
12
<PAGE>
In addition, stock markets, particularly the Nasdaq National Market, have
experienced extreme price and volume fluctuations, and the market prices of
securities of technology companies, including software companies, have been
highly volatile. These fluctuations have often been unrelated to the operating
performance of these companies. Fluctuations such as these may affect the
market price of our common stock. Substantial sales of our common stock after
this offering could also cause our stock price to decline. As a result,
investors may not be able to resell their shares at or above the initial
public offering price.
Our officers, directors, and their affiliates hold a majority of our stock
and, as a result, control us; this could limit your ability to influence the
outcome of key transactions, including changes of control
We anticipate that our directors, officers, and individuals or entities
affiliated with our directors as a group will beneficially own approximately
67.3% of our outstanding common stock after the completion of this offering.
This could limit the ability of our other stockholders to influence matters
requiring approval by our stockholders, including the election of directors
and the approval of mergers or similar transactions.
The provisions of our charter documents and Delaware law could delay or
prevent the sale of our company and diminish the voting rights of the holders
of our common stock
There are provisions in our certificate of incorporation and by-laws that
make it more difficult for a third party to acquire, or attempt to acquire,
control of our company, even if a change in control would result in the
purchase of your shares at a premium to the market price. For example, our
board of directors has the authority to issue up to 5,000,000 shares of
preferred stock. The board of directors can fix the price, rights,
preferences, privileges, and restrictions of the preferred stock without any
further vote or action by our stockholders. The issuance of shares of
preferred stock may delay or prevent a change in control transaction. As a
result, the market price of our common stock and the voting and other rights
of our stockholders may be adversely affected. The issuance of preferred stock
may result in the loss of voting control to other stockholders.
Our charter documents contain other provisions that could have an anti-
takeover effect, including:
. only one of the three classes of directors is elected each year;
. stockholders have limited ability to remove directors;
. stockholders cannot take actions by written consent;
. stockholders cannot call a special meeting of stockholders; and
. stockholders must give advance notice to nominate directors or submit
proposals for consideration at stockholder meetings.
In addition, we are subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which regulates corporate acquisitions.
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. They could also have the
effect of discouraging others from making tender offers for our common stock.
These provisions may also prevent changes in our management.
The substantial number of shares that will be eligible for sale in the near
future could cause our common stock price to decline
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could decline. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. Upon completion of this offering, we will have outstanding
17,306,616 shares of common stock, assuming no exercise of outstanding
options. Of these shares, the 4,000,000 shares sold in this offering will be
freely tradable, and 13,306,616 additional shares of common stock will be
available for sale in the public market 180 days after the
13
<PAGE>
date of this prospectus following the expiration of lock-up agreements between
our stockholders and the underwriters, and subject in some cases to compliance
with volume and other limitations of Rule 144 under the Securities Act. These
stockholders may be released from their lock-up agreements with the
underwriters at any time and without notice, which would allow for earlier
sale of shares in the public market.
If you invest in this offering, you will experience immediate and
substantial dilution
We expect that the initial public offering price of our common stock will
be substantially higher than the book value per share of the outstanding
common stock. As a result, investors purchasing common stock in this offering
will incur immediate and substantial dilution. In the past, we issued options
to acquire our common stock at prices significantly below the initial public
offering price. To the extent these outstanding options are ultimately
exercised, there will be further dilution to investors in this offering. The
section headed "Dilution" appearing elsewhere in this prospectus contains more
information regarding the dilution you will experience if you invest in this
offering.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus 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 above in the section captioned "Risk Factors," as well as any
cautionary language in this prospectus, 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. Before you invest in our common stock, you should be aware that
the occurrence of the events described in these risk factors and elsewhere in
this prospectus could have a material adverse effect on our business, results
of operations, and financial position.
14
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 4,000,000 shares of
common stock we are offering will be approximately $46.9 million, or
approximately $54.1 million if the underwriters exercise their over-allotment
option, assuming an initial public offering price of $13.00 per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
The primary purposes of this offering are to obtain additional equity
capital, create a public market for our common stock, and facilitate future
access to public markets. We intend to use the net proceeds of this offering
for general corporate purposes, including working capital and capital
expenditures. We expect to use approximately $3.5 million of the net proceeds
for capital expenditures, including furniture and equipment as well as
leasehold improvements related to our new headquarters facility in Bethesda,
Maryland. 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.
The types of acquisitions that we might make would largely depend upon the
business opportunities that we identify, if any, which we cannot predict at
this time. We presently have no agreements or commitments, and are not engaged
in any negotiations, with respect to any acquisition.
Pending their use, we plan to invest the net proceeds in investment grade,
interest-bearing securities.
DIVIDEND POLICY
We do not anticipate paying cash dividends in the foreseeable future. We
currently intend to retain all future earnings, if any, for use in the
operation of our business.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
. on an actual basis;
. on a pro forma basis to reflect the automatic conversion of all
outstanding redeemable convertible preferred stock into common stock on
the completion of this offering; and
. on a pro forma as adjusted basis to reflect the sale of the shares of
common stock offered by us in this offering and our receipt of the
estimated net proceeds, after deducting the estimated underwriting
discounts and commissions and the estimated offering expenses that we
expect to pay in connection with this offering.
You should read this table along with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our consolidated financial
statements and the related notes and the other financial information in this
prospectus.
<TABLE>
<CAPTION>
As of March 31, 2000
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term debt.................................. $ -- $ -- $ --
------- ------- --------
Series A redeemable convertible preferred stock,
$.001 par value;
160,000 shares authorized, 144,640 shares
issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma
and
pro forma as adjusted.......................... 6,948 -- --
Stockholders' equity:
Preferred stock, undesignated, $.001 par
value; 5,000,000 shares authorized; no shares
issued and outstanding, actual, pro forma
and pro forma as adjusted.................... -- -- --
Common stock, $.001 par value; 100,000,000
shares authorized; 17,078,726 shares issued
and 10,951,181 shares outstanding, actual;
19,250,495 shares issued and 13,122,950
shares outstanding, pro forma; 23,250,495
shares issued and 17,122,950 shares
outstanding, pro forma as adjusted........... 17 19 23
Additional paid-in capital.................... 623 7,569 54,425
Deferred compensation......................... (287) (287) (287)
Retained earnings............................. 7,125 7,125 7,125
Treasury stock................................ (4,010) (4,010) (4,010)
------- ------- --------
Total stockholders' equity.................. 3,468 10,416 57,276
------- ------- --------
Total capitalization...................... $10,416 $10,416 $ 57,276
======= ======= ========
</TABLE>
The outstanding share information excludes:
. 1,764,940 shares of common stock issuable upon exercise of outstanding
options as of March 31, 2000, at a weighted average exercise price of
$1.32 per share; and
. 1,173,384 shares of common stock reserved as of March 31, 2000 for future
issuance under our stock plan.
After March 31, 2000, we granted additional options exercisable to purchase
637,013 shares of our common stock with an exercise price equal to $12.00
price per share, options to purchase 183,666 shares of our common stock were
exercised and options to purchase 15,000 shares of our common stock were
cancelled. In addition, after March 31, 2000, we reserved an additional
2,925,000 shares of common stock for issuance under our new stock plans.
This table also gives effect to an amendment to our charter filed after
March 31, 2000 that increased the number of shares of common stock and
preferred stock authorized for issuance.
16
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was $10.0
million, or $0.76 per share of common stock. We have calculated this amount
by:
. subtracting our total liabilities from total tangible assets; and
. then dividing the difference by the total pro forma number of shares of
common stock outstanding, including the number of shares of common stock
that will be issued upon the automatic conversion of all redeemable
convertible preferred stock upon the completion of this offering.
If we give effect to our sale of 4,000,000 shares of common stock in this
offering at an assumed initial public offering price of $13.00 per share,
after deducting the estimated underwriting discounts and commissions and the
estimated offering expenses payable by us, our adjusted pro forma net tangible
book value as of March 31, 2000 would have been $56.8 million, or $3.32 per
share. This amount represents an immediate dilution of $9.68 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $13.00
Pro forma net tangible book value per share before this
offering........................................................ $.76
Increase in pro forma net tangible book value per share
attributable to new investors................................... 2.56
----
Pro forma net tangible book value per share after this offering.... 3.32
------
Dilution per share to new investors................................ $ 9.68
======
</TABLE>
The following table summarizes, as of March 31, 2000, after giving effect
to the conversion of the redeemable convertible preferred stock into common
stock, the difference between the number of shares of common stock purchased
from us, the total consideration paid to us, and the average price per share
paid by existing stockholders and by new investors, at an assumed initial
public offering price of $13.00 per share before deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 13,122,950 76.6% $ 3,308,370 6.0% $ .25
New investors.................. 4,000,000 23.4 52,000,000 94.0 $13.00
---------- ----- ----------- -----
Total........................ 17,122,950 100.0% $55,308,370 100.0%
========== ===== =========== =====
</TABLE>
If the underwriters exercise their over-allotment option in full, the
number of shares held by new investors will increase to 4,600,000 shares, or
26.0% of the total shares of common stock outstanding after this offering, the
number of shares held by existing stockholders will be reduced to 74.0% of the
total shares of common stock outstanding after this offering, and the dilution
to new investors would be $9.38 per share.
The table above assumes no exercise of stock options outstanding on March
31, 2000. As of March 31, 2000, there were options outstanding to purchase
1,764,940 shares of common stock at a weighted average exercise price of $1.32
per share. To the extent any of these options are exercised, there will be
further dilution to new investors. To the extent all of these outstanding
options had been exercised as of March 31, 2000, pro forma net tangible book
value per share after this offering would have been $3.13 and total dilution
per share to new investors would have been $9.87.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the related notes
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this prospectus. The statement of
operations data for the years ended March 31, 1998, 1999, and 2000, and the
balance sheet data as of March 31, 1999 and 2000, are derived from, and are
qualified by reference to, our audited consolidated financial statements
included in this prospectus. The balance sheet data as of March 31, 1997 and
1998 is derived from our audited consolidated financial statements that are
not included in this prospectus. The statement of operations data for the year
ended March 31, 1996, and the balance sheet data as of March 31, 1996, are
derived from our unaudited consolidated financial statements that are not
included in this prospectus. The unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information set forth therein. Historical results are not
necessarily indicative of results that may be expected for any future period.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------
1996 1997 1998 1999 2000
------ ------ ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software licenses................... $3,908 $5,596 $ 7,875 $ 6,715 $10,577
Services............................ 2,081 3,019 4,054 5,288 8,658
------ ------ ------- ------- -------
Total revenues.................... 5,989 8,615 11,929 12,003 19,235
------ ------ ------- ------- -------
Cost of revenues:
Software licenses................... 93 310 435 133 728
Services............................ 565 698 980 1,249 2,875
------ ------ ------- ------- -------
Total cost of revenues............ 658 1,008 1,415 1,382 3,603
------ ------ ------- ------- -------
Gross profit.......................... 5,331 7,607 10,514 10,621 15,632
Operating expenses:
Research and development............ 1,809 2,055 3,190 4,850 5,696
Sales and marketing................. 1,788 2,228 3,398 4,056 7,510
General and administrative.......... 374 819 1,336 1,984 2,093
------ ------ ------- ------- -------
Total operating expenses.......... 3,971 5,102 7,924 10,890 15,299
------ ------ ------- ------- -------
Income (loss) from operations......... 1,360 2,505 2,590 (269) 333
Interest and other income............. 93 92 319 376 414
------ ------ ------- ------- -------
Income before provision (benefit) for
income taxes......................... 1,453 2,597 2,909 107 747
Provision (benefit) for income taxes.. 581 1,105 1,134 (100) 172
------ ------ ------- ------- -------
Net income............................ 872 1,492 1,775 207 575
Accretion of transaction costs on
redeemable convertible preferred
stock................................ -- -- (9) (14) (14)
------ ------ ------- ------- -------
Net income applicable to common
shares............................... $ 872 $1,492 $ 1,766 $ 193 $ 561
====== ====== ======= ======= =======
Basic net income applicable per common
share................................ $ .08 $ .13 $ .16 $ .02 $ .05
====== ====== ======= ======= =======
Diluted net income per common share... $ .08 $ .13 $ .14 $ .02 $ .04
====== ====== ======= ======= =======
Weighted average shares outstanding
(basic).............................. 11,524 11,674 11,153 10,661 10,740
Weighted average shares outstanding
(diluted)............................ 11,620 11,852 12,897 13,626 14,367
<CAPTION>
As of March 31,
---------------------------------------
1996 1997 1998 1999 2000
------ ------ ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............. $1,358 $2,178 $ 7,227 $ 6,414 $ 8,765
Working capital ...................... 1,682 3,280 8,135 6,806 7,112
Total assets.......................... 3,853 5,887 11,833 13,205 16,713
Redeemable convertible preferred
stock................................ -- -- 6,920 6,934 6,948
Total stockholders' equity............ 2,584 4,077 2,480 2,737 3,468
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our consolidated financial statements and the related notes included elsewhere
in this prospectus. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties, and assumptions. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to,
those set forth under "Risk Factors" and elsewhere in this prospectus.
Overview
We provide predictive network management software products and related
services. Our product suite consists of three primary software products: OPNET
IT DecisionGuru, OPNET Modeler, and OPNET Netbiz. We sell our OPNET suite of
products to service providers, including telecommunications carriers, ISPs,
and ASPs, large and medium-sized organizations, 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 primarily
through third-party distributors.
We sold our first products in 1987. Our operations have been financed
principally through cash provided by operations and a venture financing in
October 1997. In August 1998, we introduced our OPNET IT DecisionGuru and
OPNET Netbiz products and began a new marketing and sales strategy to focus on
these new products.
We generate revenues principally from licensing our software products and
providing related services, including maintenance and technical support,
consulting, and training.
Our software license revenues consist of license sales of our software
products and royalty income. Software license revenues are 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
license revenues are 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 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 product
upgrades. Revenues from maintenance and technical support agreements are
deferred and recognized ratably over the support period. 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 license revenues and service revenues for which payment has been
received, but that do not yet qualify for recognition as revenues, are
reflected as deferred revenues.
Revenues from sales outside of North America represented 29.8%, 26.9%, and
20.8% of our total revenues in the fiscal years ended March 31, 1998, 1999,
and 2000, respectively. Sales outside North America are primarily through our
third-party distributors, which are generally responsible for providing
technical support and service to customers within their territory. We expect
revenues from sales outside North America to continue to account for a
significant portion of our total revenues in the future.
19
<PAGE>
After our venture financing in October 1997, we implemented a plan to
diversify our product line and accelerated the development of our OPNET IT
DecisionGuru and OPNET Netbiz products. As a result, research and development
expenses increased significantly from fiscal 1998 to fiscal 1999. Also in the
quarter ended September 30, 1998, we began to increase our sales and marketing
staff to promote and sell our new products. Since that time, we have further
expanded our sales and marketing staff and expect to continue this expansion
to aggresively market our new products.
In March 1999, we entered into a two-year non-renewable agreement with
Cadence Design Systems, when they decided to discontinue their product line,
that required us to make an aggregate payment of $1.0 million to Cadence and
requires us to pay to Cadence a 50% royalty on specified sales of OPNET
Modeler products sold to the portion of Cadence's customer base that use an
existing Cadence product. In the year ended March 31, 2000, we incurred
royalties to Cadence of $595,000, representing 5.6% of our software license
revenues for that period. We are amortizing the $1.0 million payment over the
two-year marketing support period under the agreement as part of sales and
marketing expenses, and we charge the royalty payments to cost of software
license revenues as the related revenue is recognized.
At various dates during the year ended March 31, 2000, we granted options
to employees to purchase a total of 260,260 shares of common stock with
exercise prices below the estimated fair market value of the common stock at
the dates of grant. We recorded compensation expense of $36,000 for the year
ended March 31, 2000 resulting in a remaining deferred compensation balance of
$287,000 at March 31, 2000.
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:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Revenues:
Software licenses.................................... 66.0% 55.9% 55.0%
Services............................................. 34.0 44.1 45.0
------ ------ ------
Total revenues..................................... 100.0 100.0 100.0
------ ------ ------
Cost of revenues:
Software licenses.................................... 3.6 1.1 3.8
Services............................................. 8.2 10.4 14.9
------ ------ ------
Total cost of revenues............................. 11.8 11.5 18.7
------ ------ ------
Gross profit........................................... 88.2 88.5 81.3
Operating expenses:
Research and development............................. 26.7 40.4 29.6
Sales and marketing.................................. 28.5 33.8 39.1
General and administrative........................... 11.2 16.5 10.9
------ ------ ------
Total operating expenses........................... 66.4 90.7 79.6
------ ------ ------
Income (loss) from operations.......................... 21.8 (2.2) 1.7
Interest and other income.............................. 2.7 3.1 2.2
------ ------ ------
Income before provision (benefit) for income taxes..... 24.5 0.9 3.9
Provision (benefit) for income taxes................... 9.5 (0.8) 0.9
------ ------ ------
Net income............................................. 15.0% 1.7% 3.0%
====== ====== ======
</TABLE>
20
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended
March 31,
-------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Cost of software license revenues.......................... 5.5% 2.0% 6.9%
Cost of service revenues................................... 24.2 23.6 33.2
</TABLE>
Comparison of Years Ended March 31, 1999 and 2000
Revenues
Total revenues increased 60.3% from $12.0 million for fiscal 1999 to
$19.2 million for fiscal 2000. We believe that the percentage increase in our
total revenues achieved in this period is not necessarily indicative of future
results. Software license revenues were 55.9% of total revenues for fiscal
1999 and 55.0% of total revenues for fiscal 2000.
Software License Revenues. Software license revenues increased 57.5% from
$6.7 million for fiscal 1999 to $10.6 million for fiscal 2000. This increase
was primarily due to the substantial growth in overall demand for our
products, increased market acceptance of our OPNET IT DecisionGuru and OPNET
Netbiz products, which were introduced in August 1998, and increased revenues
generated through our indirect sales channels.
Service Revenues. Service revenues increased 63.7% from $5.3 million for
fiscal 1999 to $8.7 million for fiscal 2000. This increase was primarily due
to a substantial increase in demand for consulting services, primarily for
customizing our OPNET Netbiz product, increased maintenance and technical
support contracts related to new license sales, increased renewals of these
contracts by our installed base of licenses, and increased training services.
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,
reflecting the low materials, packaging, and other costs of software products
compared with the relatively high personnel costs associated with providing
services. Cost of service revenues varies based upon the relative mix of
maintenance and technical support, consulting, and training services.
Cost of Software License Revenues. Cost of software license revenues
increased 447.4% from $133,000 for fiscal 1999 to $728,000 for fiscal 2000.
Gross margin on software license revenues decreased from 98.0% for fiscal 1999
to 93.1% for fiscal 2000. This decrease in margin was primarily due to our
March 1999 agreement with Cadence that requires us to pay a 50% royalty for
specified sales of OPNET Modeler to the portion of Cadence's customer base
that uses an existing Cadence product. This agreement ends on March 31, 2001
and may continue to depress these margins through that date.
Cost of Service Revenues. Cost of service revenues increased 130.2% from
$1.2 million for fiscal 1999 to $2.9 million for fiscal 2000. Gross margin on
service revenues decreased from 76.4% for fiscal 1999 to 66.8% for fiscal
2000. This decrease in margin was primarily due to an increase in the
proportion of consulting revenues, and to a lesser extent training revenues,
both of which require more personnel costs and provide lower gross margins
than our maintenance services.
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 17.4% from $4.9 million for fiscal
1999 to $5.7 million for fiscal 2000. The increase was primarily related to
increased
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research and development staffing levels for developing new products and
sustaining and upgrading existing products. As a percentage of total revenues,
research and development expenses decreased from 40.4% for fiscal 1999 to
29.6% for fiscal 2000. This decrease as a percentage of total revenues
resulted from a proportionally smaller increase in research and development
staffing levels relative to a higher level of revenues for fiscal 2000. The
small dollar increase was the result of a leveling of research and development
staff following a year of strong growth in headcount. We believe that a
significant level of research and development investment will be required to
maintain our competitive position, and expect that the dollar amount of these
expenditures will continue to grow in future periods.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related benefits, commissions, user conference costs, tradeshows,
advertising, external consulting fees, and other costs associated with our
sales and marketing efforts. Sales and marketing expenses increased 85.2% from
$4.1 million for fiscal 1999 to $7.5 million for fiscal 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, the
amortization of payments made in connection with our March 1999 agreement with
Cadence and a significant increase in the level of advertising, tradeshow, and
other marketing activities. As a percentage of total revenues, sales and
marketing expenses increased from 33.8% for fiscal 1999 to 39.1% for fiscal
2000. The increase as a percentage of total revenues was due to our additional
investment of resources associated with developing a market for our OPNET IT
DecisionGuru and OPNET Netbiz products, which were introduced in August 1998.
We intend to continue to expand our global sales and marketing infrastructure
and, accordingly, expect our sales and marketing expenses to increase in the
future.
General and Administrative. General and administrative expenses consist
primarily of salaries, related benefits, and fees for recruiting, legal,
accounting, and other services. General and administrative expenses increased
5.5% from $2.0 million for fiscal 1999 to $2.1 million for fiscal 2000. The
increased level of spending was primarily due to additional personnel costs
and other expenses associated with our expansion of supporting infrastructure.
As a percentage of total revenues, general and administrative expenses
decreased from 16.5% for fiscal 1999 to 10.9% for fiscal 2000. We expect that
the dollar amount of general and administrative expenses will increase as we
expand our operations.
Interest and Other Income
Interest and other income increased 10.1% from $376,000 for fiscal 1999 to
$414,000 for fiscal 2000. Interest income increased 21.1% from $336,000 for
fiscal 1999 to $407,000 for fiscal 2000 as a result of more cash being
available for investment primarily from additional cash flow from operations
in fiscal 2000. Other income decreased 82.5% from $40,000 for fiscal 1999 to
$7,000 for fiscal 2000. Other income in fiscal 1999 was primarily related to
proceeds from an insurance settlement. We had no debt outstanding in either
period.
Provision for Income Taxes
The income tax benefit of $100,000 for fiscal 1999 resulted primarily from
research and development tax credits for which we qualified during the year.
The provision for income taxes for fiscal 2000 was $172,000. Our effective tax
rate for fiscal 2000 was 23.0%. This rate was relatively low due to research
and development tax credits available to us, and is likely to increase as our
earnings grow.
Comparison of Years Ended March 31, 1998 and 1999
Revenues
Total revenues increased slightly from $11.9 million for fiscal 1998 to
$12.0 million for fiscal 1999. Fiscal 1999 was a transition year for us, with
the major emphasis early in the year placed on developing our OPNET IT
DecisionGuru and OPNET Netbiz products, which we introduced in August 1998. As
a result, software license revenues declined early in fiscal 1999 and grew
throughout the later months of that fiscal year as we introduced the new
products and increased our focus on sales and marketing for these products.
Software License Revenues. Software license revenues decreased 14.7% from
$7.9 million for fiscal 1998 to $6.7 million for fiscal 1999. This decrease in
software license revenues was primarily due to our decision to
22
<PAGE>
de-emphasize sales and marketing efforts for OPNET Modeler in order to focus
those efforts on OPNET IT DecisionGuru and OPNET Netbiz.
Service Revenues. Service revenues increased 30.4% from $4.1 million for
fiscal 1998 to $5.3 million for fiscal 1999. This increase was primarily due
to substantial growth in consulting services related to the newly introduced
OPNET Netbiz product and, to a lesser extent, continued growth in maintenance
and technical support contracts from new and existing customers.
Cost of Revenues
Cost of Software License Revenues. Cost of software license revenues
decreased 69.4% from $435,000 for fiscal 1998 to $133,000 for fiscal 1999. The
decrease was primarily the result of lower product printing, packaging, and
distribution costs as we transitioned to electronic distribution for product
documentation, and, to a lesser extent, was also due to lower software license
revenues in fiscal 1999. As a result, cost of software license revenues as a
percentage of total license revenues decreased from 5.5% in fiscal 1998 to
2.0% in fiscal 1999. Gross margin on software license revenues was 94.5% in
fiscal 1998 and 98.0% in fiscal 1999.
Cost of Service Revenues. Cost of service revenues increased 27.4% from
$980,000 for fiscal 1998 to $1.2 million for fiscal 1999. The increase was
primarily due to staffing additions in the consulting, training, and customer
support organizations, as the professional services organization increased
substantially during the course of fiscal 1999. The gross margin on services
was 75.8% for fiscal 1998 and 76.4% for fiscal 1999.
Operating Expenses
Research and Development. Research and development expenses increased 52.0%
from $3.2 million for fiscal 1998 to $4.9 million for fiscal 1999. This
increase was primarily due to the substantial addition of engineering staff
that was required to develop OPNET IT DecisionGuru and OPNET Netbiz and to
continue to develop new products as well as to upgrade and sustain existing
products. Technological feasibility for both OPNET IT DecisionGuru and OPNET
Netbiz was achieved in August 1998, the same time that we completed testing
the products and initiated their general release. As result of the substantial
increase in staffing, research and development expenses grew from 26.7% of
total revenues in fiscal 1998 to 40.4% of total revenues in fiscal 1999.
Sales and Marketing. Sales and marketing expenses increased 19.4% from $3.4
million for fiscal 1998 to $4.1 million for fiscal 1999. This increase was
primarily due to an increase in the size of our sales force and an increased
level of marketing and advertising for introducing and selling our new
products, OPNET IT DecisionGuru and OPNET Netbiz. As a result of the increased
spending, sales and marketing expenses increased from 28.5% of total revenues
in fiscal 1998 to 33.8% of total revenues in fiscal 1999.
General and Administrative. General and administrative expenses increased
48.5% from $1.3 million for fiscal 1998 to $2.0 million for fiscal 1999. The
increased level of spending was primarily due to additional personnel costs,
particularly in the finance department, recruiting costs for the growth in the
consulting services group, and other expenses associated with our expansion of
supporting infrastructure. As result of these spending increases, general and
administrative expenses increased from 11.2% of total revenues in fiscal 1998
to 16.5% of total revenues in fiscal 1999.
Interest and Other Income
Interest and other income increased 17.9% from $319,000 for fiscal 1998 to
$376,000 for fiscal 1999. Interest income increased 9.4% from $307,000 for
fiscal 1998 to $336,000 for fiscal 1999 as a result of more cash being
available for investment primarily from our venture financing in fiscal 1998.
Other income in fiscal 1999 was primarily related to proceeds from an
insurance settlement. We had no debt outstanding in either period.
Provision for Income Taxes
The provision for income taxes of $1.1 million for fiscal 1998 changed to a
benefit of $100,000 for fiscal 1999 and the effective tax rate decreased from
39.0% for fiscal 1998 to a benefit for fiscal 1999. Both of these reductions
were primarily due to lower income in fiscal 1999 and research and development
tax credits for which we qualified in both periods.
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<PAGE>
Quarterly Results of Operations
The following table sets forth a summary of our quarterly operating results
for each of the last eight quarters. This information has been derived from
unaudited interim consolidated financial statements that, in the opinion of
our management, have been prepared on a basis consistent with the audited
consolidated financial statements contained elsewhere in this prospectus and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information when read in conjunction
with our audited consolidated financial statements and the related notes. We
believe that period-to-period comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of
future performance.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------
June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses...... $1,243 $1,621 $1,715 $2,136 $2,138 $2,447 $2,797 $3,195
Services............... 1,083 1,279 1,407 1,519 1,792 1,969 2,308 2,589
------ ------ ------ ------ ------ ------ ------ ------
Total revenues......... 2,326 2,900 3,122 3,655 3,930 4,416 5,105 5,784
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Software licenses...... 34 44 35 20 69 201 204 254
Services............... 290 281 284 394 545 742 762 826
------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues.............. 324 325 319 414 614 943 966 1,080
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 2,002 2,575 2,803 3,241 3,316 3,473 4,139 4,704
Operating expenses:
Research and
development........... 1,202 1,282 1,210 1,156 1,235 1,315 1,542 1,604
Sales and marketing.... 800 1,079 994 1,183 1,505 1,655 1,982 2,368
General and
administrative........ 397 446 503 638 467 512 523 591
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 2,399 2,807 2,707 2,977 3,207 3,482 4,047 4,563
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (397) (232) 96 264 109 (9) 92 141
Interest and other
income................. 136 86 78 76 75 93 105 141
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
provision (benefit) for
income taxes........... (261) (146) 174 340 184 84 197 282
Provision (benefit) for
income taxes........... (142) (97) 35 104 52 23 53 44
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ (119) $ (49) $ 139 $ 236 $ 132 $ 61 $ 144 $ 238
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
(as a percentage of total revenues)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses...... 53.4% 55.9% 54.9% 58.4% 54.4% 55.4% 54.8% 55.2%
Services............... 46.6 44.1 45.1 41.6 45.6 44.6 45.2 44.8
------ ------ ------ ------ ------ ------ ------ ------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Software licenses...... 1.5 1.5 1.1 0.5 1.8 4.5 4.0 4.4
Services............... 12.4 9.7 9.1 10.8 13.9 16.8 15.0 14.3
------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues.............. 13.9 11.2 10.2 11.3 15.7 21.3 19.0 18.7
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 86.1 88.8 89.8 88.7 84.3 78.7 81.0 81.3
Operating expenses:
Research and
development........... 51.7 44.2 38.8 31.6 31.4 29.8 30.2 27.7
Sales and marketing.... 34.4 37.2 31.8 32.4 38.3 37.5 38.8 41.0
General and
administrative........ 17.1 15.4 16.1 17.5 11.9 11.6 10.3 10.2
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 103.2 96.8 86.7 81.5 81.6 78.9 79.3 78.9
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (17.1) (8.0) 3.1 7.2 2.7 (0.2) 1.7 2.4
Interest and other
income................. 5.9 3.0 2.5 2.1 2.0 2.1 2.1 2.4
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
provision (benefit) for
income taxes........... (11.2) (5.0) 5.6 9.3 4.7 1.9 3.8 4.8
Provision (benefit) for
income taxes........... (6.1) (3.3) 1.1 2.8 1.3 0.5 1.0 0.7
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... (5.1)% (1.7)% 4.5% 6.5% 3.4% 1.4% 2.8% 4.1%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The trends discussed in the period comparisons above generally apply to the
results of operations for our eight most recent quarters, except for certain
differences discussed below.
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<PAGE>
Our revenues from software licenses and services, as well as total
revenues, increased sequentially in each of the last seven consecutive
quarters.
Cost of software license revenues has remained relatively constant from
quarter to quarter as a percentage of software license revenues except for the
quarters ended September 30, 1999, December 31, 1999, and March 31, 2000.
During those three quarters, we shipped products under our March 1999
agreement with Cadence, which required a 50% payment for sales to that portion
of the customer base of Cadence that uses an existing Cadence product. Cost of
service revenues as a percentage of service revenues has fluctuated as the mix
of services performed for customers varied between higher margin services,
such as maintenance, and lower margin services, such as consulting and
training.
Total operating expenses have fluctuated primarily as a result of
variations in our sales and marketing expenses. In general, sales and
marketing expenses increased as a result of increasing the sales force and the
level of marketing and advertising, as well as the additional commissions
associated with revenue growth. In addition, beginning in the quarter ended
June 30, 1999, we began to amortize over a two-year period marketing support
rights we received under our March 1999 agreement with Cadence. To a lesser
extent, our operating expenses have fluctuated as a result of costs associated
with hiring staff and the use of outside consultants.
We expect to experience significant fluctuations in future quarterly
operating results that may be caused by many factors including, among other
things:
. the timing of large orders;
. changes in the mix of our sales, including product sales requiring us to
make royalty payments;
. the timing and amount of our expenses;
. the cost and time required to develop new software products;
. the acceptance of new products introduced by us or our competitors;
. changes in network technology or in applications;
. general economic conditions; and
. changes in our pricing policies or those of our competitors.
Due to these and other factors, our quarterly revenues and operating expenses
are difficult to forecast accurately.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through cash
provided by operating activities. In October 1997, we raised $7.0 million in
venture financing, of which we used $3.4 million to repurchase stock from our
existing stockholders. As of March 31, 2000, we had cash, cash equivalents,
and short-term marketable securities totaling $8.8 million.
Cash provided by operating activities was $2.3 million, $312,000, and $4.1
million for fiscal 1998, 1999, and 2000, respectively. Cash provided by
operating activities is primarily derived from net income, as adjusted for
depreciation and amortization, and increases in deferred revenue and accrued
liabilities. The cash provided by operations is generally used to fund the
increases in accounts receivable as a result of the growth in our business.
Cash used in investing activities was $793,000, $1.2 million, and $1.9
million for fiscal 1998, 1999, and 2000, respectively. The funds were used
primarily to purchase property, equipment, and software. In fiscal 1999 and
fiscal 2000, these funds were also used to purchase marketing support rights
from Cadence.
Cash provided by financing activities was $3.5 million for fiscal 1998.
This reflected the net proceeds from our $7.0 million venture financing, less
expenses and the $3.4 million used to repurchase common stock from our
existing stockholders. During fiscal 1999 and 2000, the cash provided by
financing activities was primarily derived from the sale of common stock and
from the exercise of stock options.
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<PAGE>
We have a $5.0 million revolving line of credit with a commercial bank,
which expires in June 2001. 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 in order 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. We recently entered into a new
headquarters lease agreement which will increase our facilities costs
beginning in December 2000. 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. If we
require further capital resources in excess of the resources currently
available to us and the proceeds of this offering to grow our business,
execute our operating plan, or acquire complementary technologies or
businesses at any time in the future, we may seek to sell additional equity or
debt securities, which may result in additional dilution to our stockholders.
If additional funding is required, we cannot be certain that it will be
available on acceptable terms, or at all.
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.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and hedging activities. As amended by Statement of
Financial Accounting Standards No. 137, this standard will be effective for us
for the fiscal years and quarters beginning after March 31, 2001, and requires
that an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. We have not completed the process of evaluating the impact of this
statement and are therefore unable to disclose the potential impact that
implementing SFAS No. 133 will have on our financial position or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 Revenue Recognition in Financial Statements. This
SAB expresses the Commission's views on applying generally accepted accounting
principles to revenue recognition in financial statements. We do not expect
the application of this SAB to have a material impact on our financial
statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25." With the exception of
certain provisions which required earlier application, this interpretation is
effective for all applicable transactions beginning July 1, 2000. We do not
expect that the adoption of this interpretation will have a material impact on
our financial statements.
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<PAGE>
BUSINESS
Overview
Our predictive network management software solutions enable our customers
to optimize the performance and maximize the availability of communications
networks and networked applications. The OPNET product suite combines
predictive simulation and a comprehensive understanding of network
technologies to enable network professionals to more effectively design and
deploy networks, diagnose network and application performance problems, and
predict the impact of proposed network modifications. Our OPNET product suite
consists of three primary software solutions: OPNET IT DecisionGuru for
service providers and enterprises, OPNET Modeler for network equipment
manufacturers, and OPNET Netbiz for service providers and network equipment
manufacturers. We believe our software solutions allow both users and
providers of networks to achieve higher levels of performance, and enhance the
return on investment from their networks and applications.
We market our products to service providers, such as telecommunications
carriers, ISPs, and ASPs, large and medium-sized enterprises, and network
equipment manufacturers. Since inception, we have sold our products to over
600 customers, including service providers, such as AT&T, British Telecom, MCI
WorldCom, SBC Communications, Sprint, and UUNET Technologies; enterprises,
such as Boeing, IBM Global Services, National Semiconductor, RR Donnelley, and
Texas Utilities; and network equipment manufacturers, such as 3Com, Cisco
Systems, Ericsson, Motorola, Nokia, and Nortel Networks.
Industry Background
Growth and Increased Complexity of Networks
Organizations are becoming increasingly reliant upon their communications
networks and networked applications to successfully execute their business
strategies. The increasing use of business applications, such as enterprise
resource planning, corporate intranets, online transaction processing, e-mail,
and streaming multimedia, has expanded the amount of network traffic within
organizations, and has resulted in significant growth in underlying network
infrastructures. In addition, the proliferation and widespread adoption of the
Internet has expanded the role of networks beyond organizational boundaries,
and these networks now represent the fundamental infrastructure for the
electronic conduct of business, known as e-business or e-commerce.
International Data Corporation, or IDC, estimates the number of Internet e-
commerce users worldwide will grow from 142 million in 1998 to over 502
million in 2003. In addition, IDC estimates e-commerce will grow from $50
billion in 1998 to more than $1.3 trillion in 2003. As a result, most
organizations are recognizing that managing the growth and operation of their
communications networks is critical to their business operations.
To support the rapidly expanding size and scope of communication
requirements, network infrastructures have been developed based on a wide
range of equipment, technologies, protocols, and network services. As a
result, the operation of these networks is becoming increasingly complex.
Service providers and enterprises must now manage the convergence of voice,
data, and video traffic over wireline and wireless architectures by
integrating numerous existing and emerging technologies. These technologies
include Asynchronous Transfer Mode, or ATM, Internet Protocol, or IP, Voice
over IP, IP Quality of Service, or IP-QoS, Multi-Protocol Label Switching, or
MPLS, Frame Relay, Synchronous Optical Network, or SONET, Code Division
Multiple Access, or CDMA, Digital Subscriber Line, or DSL, and data over
cable. IDC estimates that the installed base of networked PCs worldwide will
grow from 232 million in 1998 to 577 million in 2003. In addition, network
data traffic is expected to grow rapidly. Pioneer Consulting, LLC estimates
that peak-hour U.S. Internet bandwidth demand will grow from .33 terabits per
second in 1999 to 17.9 terabits per second in 2004, representing a 122%
compound annual growth rate. The growth of networks, network complexity, and
network data traffic has forced organizations to confront significant
challenges in the efficient and cost-effective management of networks and
applications.
Today, communications networks are sophisticated, dynamic systems that
evolve on a daily basis. The rate of network and traffic growth is challenging
the ability of organizations to meet required service levels upon which
critical business applications and operations rely. Constant evaluation of and
improvements to the network are essential to maintaining business and
application performance. However, since modifications to the network and its
traffic have the potential to result in network failures or service level
degradation, network
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<PAGE>
professionals need to plan and implement network changes in a controlled
manner, taking into account the potential consequences of their actions.
Inadequacy of Traditional Network Management Solutions
As the complexity of networks continues to increase, so does the need for
sophisticated solutions to manage network resources effectively. GartnerGroup
estimates that the overall market for network management software and
application performance and availability management software will grow from
$3.6 billion in 1999 to $7.1 billion in 2003. To date, network management
systems have primarily played a reporting role. These systems typically
collect, store, and analyze data about the traffic on the network, the status
and performance of network devices and links, and the availability of network
services and applications. While these traditional network management
solutions play an important role in managing networks, they are limited by
their focus on reporting past and present information. As a result, these
solutions are primarily reactive to events occurring within the network.
Reactive network management solutions do not adequately support key network
management functions, including network design and deployment, applications
deployment, capacity planning, contingency planning, traffic engineering,
budgeting, and deployment of network policies. This is because traditional
network management products provide limited insight into how network resources
will perform in response to future events. In general, the support for future
planning provided by reactive network management products is limited to trend
analysis and simple projections as to when key network and system resources
will become overloaded. Traditional solutions are not able to forecast the
impact of important changes that frequently occur in networks, such as traffic
growth, failure of network components, adoption of new networking
technologies, and reorganization of network assets. In addition, these
solutions do not generally take into account the network as a whole, the
interaction among network components, and the complex behaviors that are
inherent to modern networks.
Market Opportunity
To remain competitive, organizations must deal with increased complexity,
rapid growth, and continuous change in their communications networks. At the
same time, every change to the network environment introduces the potential
for performance degradation or system failures, and therefore, business
interruptions and lost revenue. As a result, organizations need predictive
network management solutions that allow them to evaluate network and
application performance in future scenarios. A predictive capability allows
network professionals not only to test network and application performance
under a wide range of operating conditions, but also to determine which
network technologies are best suited to ultimately solve business problems.
Business executives and network professionals need a comprehensive network
management solution that allows them to design and deploy networks and
implement network changes that:
. optimize overall system performance;
. maximize system availability;
. leverage emerging communications and networking technologies;
. ensure service levels are met for business-critical applications; and
. proactively manage network growth, complexity, and costs.
The OPNET Solution
Our suite of products represents the next generation of software solutions
that advances network and application management beyond reactive problem
identification and reporting to proactive problem resolution and avoidance. By
combining predictive simulation with a comprehensive understanding of network
technologies, the OPNET product suite enables network professionals to more
effectively design and deploy networks, predict the impact of proposed network
modifications, and diagnose network and application performance problems. The
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<PAGE>
ability of our products to accurately model and simulate network and
application performance is also valuable in the design and testing of new
network equipment and technologies and is an effective sales tool for
professionals who design and deploy networks. We believe that our software
products provide the following benefits to our customers:
Reduced Network Operating Risks
Our products enable our customers to more effectively manage the risks
associated with the necessary implementation of network upgrades and new
services by helping network managers evaluate which measures can be taken to
minimize potential network disruptions and maintain required service levels.
For example, an enterprise deploying a new application on its network can use
our products to determine if the performance of the application will meet
prescribed service levels and to what extent the network traffic generated by
the new application will compromise the service levels of existing
applications on the network. Service providers can use our products as part of
their overall planning process to minimize the risk that growth in their
subscriber base or restructuring of their network infrastructure will
jeopardize the availability or performance of their services.
Increased Productivity and Competitiveness
By using our products, network managers and application deployment teams
can gain greater control over the performance of business applications that
are critical to employee productivity and the competitiveness of the business.
Our products enable network professionals to diagnose and resolve application
performance problems that can prevent employees from carrying out essential
business tasks. In addition, our products support informed decision-making and
planning for network infrastructures that carry vital business data, including
e-commerce and e-business transactions. Our products also enable network
equipment manufacturers to test their equipment, technologies, and protocols
more thoroughly, while considering a wider range of alternative designs,
resulting in more robust networking products and faster introduction of
products to the marketplace.
Reduced Network Operating Costs
Our OPNET suite of products enables our customers to better determine the
appropriate financial commitments that should be made for network resources,
including bandwidth, advanced network technologies, and network hardware.
Using our products, network managers and planners can compare relative
benefits of alternative technologies and network designs, and weigh these
benefits in relation to the corresponding operational costs. Our products also
provide organizations that operate networks the ability to determine
achievable service levels and to understand whether network changes will
render service levels unacceptable. By proactively managing service levels,
these organizations are better able to reduce service level agreement
violations that may require paying costly penalties to their clients.
Additionally, these organizations are able to reduce costs caused by network
interruptions.
New Revenue Opportunities
The increasing complexity and scale of networks is creating challenges for
organizations that sell network equipment and network services. Our products
help the sales forces of these organizations to automate the network design
and proposal process and create competitive and consistent proposals, thereby
streamlining the sales cycle. This allows sales representatives to focus on a
greater number of sales opportunities. Additionally, our customers' sales
forces can leverage the predictive capabilities of our products to demonstrate
the performance of the proposed network design or network service prior to
deployment. We believe that these features allow our customers to
differentiate themselves from their competitors and enable the purchasers of
network equipment and services to make better informed and quicker buying
decisions.
Improved Customer Satisfaction
Our products improve satisfaction of network end users by enabling our
customers, which are the providers of network services and technologies, to
proactively manage and improve the quality and performance of their offerings.
By using our products' predictive capabilities, service providers can ensure
that adequate measures are
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taken to maintain the availability and performance of their services to their
clients over networks experiencing rapid traffic growth and the introduction
of changing technologies. For example, an ASP can use our software to uncover
the primary factors that can contribute to the poor performance of an
application and then determine the preferred approach to improving the
application's performance.
Strategy
Our objective is to enhance our leadership position in the market for
predictive network management software solutions. To achieve this goal, we are
pursuing the following strategies:
Increase Penetration Within the Service Provider Market
We believe that we can achieve significant additional penetration within
the service provider marketplace, which includes telecommunications carriers,
ISPs, and ASPs, by creating extensions to our existing software products to
address their specific network management needs. We also intend to focus
additional sales resources on service provider accounts and adopt service
provider-specific price structures that scale with the size of managed
networks. We expect to increase sales within this market by leveraging
relationships with our network equipment manufacturer customers, including
Cisco Systems and FORE Systems, recently acquired by Marconi, which sell
hardware to service providers, through a combination of reselling, referrals,
and joint marketing arrangements.
Expand Direct Sales Channel
We believe that there is significant untapped demand for our software
products and we plan to meet this demand by increasing the number of our
direct sales representatives. We currently employ 20 direct sales
representatives in the United States and expect to expand our sales team by
aggressively hiring qualified sales representatives. We intend to continue to
invest significant marketing and sales resources to support our direct sales
channel and intend to increase market awareness by expanding our advertising,
trade shows, direct marketing, customer seminars, and other marketing efforts.
Expand Global Sales Efforts
Our international sales activities are currently conducted by our
distributors that resell only OPNET Modeler in France, Germany, Scandinavia,
the United Kingdom, the Middle East, India, Pakistan, Australia, China, Japan,
Korea, and Singapore. We intend to accelerate the growth of our international
sales both by increasing the number of international distributors and by
enabling and training our current and new distributors to sell the entire
OPNET suite of products. We also intend to focus technical sales resources on
strengthening our distributors' sales, marketing, and training programs. We
intend to establish technical sales support centers in selected regions.
Leverage our Existing Customer Base
We currently have an installed base of over 600 customers that we believe
provides us with significant opportunities for additional sales of our current
and future products. We have successfully expanded license revenues within
many customer organizations by selling additional licenses for the same
products as well as complementary products from the OPNET product suite, and
we believe additional opportunities exist for these types of sales. In
addition, our solutions are built on a modular, flexible architecture, which
allows us to deliver new functionality to our customers in the form of product
modules and model libraries designed to work with our existing products. We
intend to continue to develop focused sales programs that will leverage our
new offerings, as well as the goodwill we have established, to increase
revenue from our existing customer base.
Further Extend Technology and Product Leadership
We believe that our OPNET suite of products is the most comprehensive
predictive network management software solution currently available. We intend
to maintain our product and technology leadership by enhancing the
functionality of existing products and introducing new products through
internal research and development and, potentially, through acquisition of
technologies or businesses. We plan to enhance our products with additional
capabilities, including additional interfaces to the operational network
environment; an expanded library of existing and emerging network protocols,
applications, and communications standards; and additional network service and
equipment cost/benefit analysis features.
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Develop Additional Strategic Relationships
We have created marketing programs to sell our software to professional
services organizations, including Andersen Consulting, PricewaterhouseCoopers,
Entex, and Enterprise Networking Systems, and to provide them with the support
and information they need to maximize their success using our products. These
programs facilitate our access to the large number of organizations which
outsource information technology and networking services. Although none of
these organizations has accounted for a material portion of our revenues to
date, we expect this strategy to lead to increased sales of our products, not
only among our professional services customers, but also among their clients.
We also have technology relationships with other network management software
vendors, including Hewlett-Packard, Agilent Technologies, Marconi, Tivoli
Systems, Concord Communications, and NetScout Systems, and expect to continue
to develop other technology relationships, as well as to pursue joint
marketing and selling opportunities of our complementary solutions. To date
none of these vendors has accounted for a material portion of our revenues.
Products
Our products use predictive simulation technology to support the assessment
of future network and application performance under a wide range of operating
conditions. Our products include model libraries that permit the simulation
and analysis of major network technologies and communication protocols, such
as Transmission Control Protocol/Internet Protocol, or TCP/IP, IP-QoS, Voice
over IP, SONET, CDMA, Virtual Local Area Networks, or VLANs, Frame Relay, IP
compression, data over cable, and ATM. We sell both off-the-shelf and
customized products that offer interfaces to traditional network management
systems and popular integration platforms, such as HP OpenView Network Node
Manager, Tivoli NetView, NetScout Systems Manager Plus, and Oracle database
products. The following chart summarizes our OPNET product suite:
<TABLE>
<CAPTION>
Product Description Target Customers
-------------------------------------------------------------------------------
<C> <S> <C>
OPNET IT DecisionGuru Enables users to predict Service providers and enterprises
the performance of
networks and
applications
-------------------------------------------------------------------------------
OPNET Modeler Enables designers to Network equipment manufacturers
evaluate how complex
networking equipment,
technologies, and
protocols will perform
under simulated network
conditions
-------------------------------------------------------------------------------
OPNET Netbiz Facilitates and Service providers and network
accelerates the sales equipment manufacturers
process by automating
network design and
proposal generation
-------------------------------------------------------------------------------
OPNET Modules Provide enhanced Entire customer base
functionality for our
primary software
products
-------------------------------------------------------------------------------
OPNET Model Libraries Libraries of models that Entire customer base
simulate the behavior of
networking technologies
and communication
protocols
</TABLE>
OPNET Modeler product license and maintenance revenues represented 91.0%,
75.8%, and 64.7% of our total revenues for the years ended March 31, 1998,
1999, and 2000, respectively. None of our other products or services accounted
for 15% or more of our total revenues during these periods.
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OPNET IT DecisionGuru
We began commercial distribution of OPNET IT DecisionGuru in August 1998.
OPNET IT DecisionGuru uses our predictive simulation and modeling technology,
which combines software models of network components, protocols, and
applications into a single overall model, in order to forecast many aspects of
network behavior. This capability enables service providers and enterprises to
predict the performance of their networks and applications under a wide range
of potential scenarios. OPNET IT DecisionGuru allows users to make comparisons
among alternative approaches to managing the evolution of their networks and
managing change within their networks, such as adopting new technologies,
increasing capacity, and reorganizing assets. OPNET IT DecisionGuru also
provides detailed views of an application's performance within a network. This
enables network managers and application deployment teams to understand the
impact of implementing a new application on existing applications, as well as
the ability of a network to support the resulting traffic. OPNET IT
DecisionGuru supports many popular communication protocols and networking
technologies that operate within wireline and wireless networks.
OPNET Modeler
OPNET Modeler was our first product and was introduced in 1987. OPNET
Modeler uses our device and protocol design environment, as well as our
predictive simulation technology, to enable our customers to build software
models of a broad range of network devices, communication protocols, and
applications, and to combine these models to run simulations in order to
predict network behavior and performance. These capabilities support the
design, modeling, and development of network equipment and protocols. OPNET
Modeler enables network equipment manufacturers to test product designs in a
wide variety of scenarios prior to manufacturing. Using OPNET Modeler, network
technology and equipment designers gain a better understanding of design
tradeoffs earlier in the product development process, reducing the need for
time-intensive and expensive hardware prototyping.
OPNET Netbiz
We began commercial distribution of OPNET Netbiz in August 1998. OPNET
Netbiz is designed to facilitate and accelerate the sales processes of service
providers and network equipment manufacturers. OPNET Netbiz enables our
customers' sales forces to quickly and automatically generate network service
and equipment proposals based on their clients' requirements by using advanced
network design techniques. OPNET Netbiz can interface with our customers'
applications for order processing, work-order generation, and provisioning.
OPNET Netbiz is Web-enabled to allow our customers' clients to create network
designs over the Internet prior to purchasing services and products.
OPNET Modules
We develop and sell a variety of software modules that provide enhanced
functionality to OPNET IT DecisionGuru, OPNET Modeler, and OPNET Netbiz.
Currently available OPNET modules include:
. Application Characterization Environment, for analyzing, diagnosing, and
simulating the performance of applications within a network based on
network traffic samples;
. Multi-Vendor Import, for importing network infrastructure and traffic
information from other network management software applications;
. Expert Service Prediction, for the definition and compliance testing of
service level agreements;
. Radio and Terrain Modeling, for modeling wireless networks and the
effects of terrain on those networks; and
. ERP NetworkGuru for SAP R/3, for the planning and analysis of SAP
application deployments, their effect on the network, and their ability
to perform effectively within an existing network environment.
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OPNET Model Libraries
The model libraries are used by OPNET IT DecisionGuru and OPNET Modeler to
simulate and analyze major networking technologies and communication
protocols. These libraries provide the building blocks used to generate models
of networks. OPNET IT DecisionGuru and OPNET Modeler include extensive
libraries of popular and emerging networking technologies and communication
protocols, such as TCP/IP, hypertext transfer protocol, or HTTP, Open Shortest
Path First routing, or OSPF, ATM, frame relay, and IP-QoS. Some of our model
libraries are included in our base products and others are available for an
additional fee.
Technology
Our technologies for modeling, designing, visualizing, and simulating
networks are based on extensive research and development efforts carried out
over the past 13 years. The following diagram summarizes the essential
components of our products:
[GRAPHIC -- OPNET MODELER COMPONENTS]
OPNET Modeler serves as a foundation for our other products, providing the
broadest array of functionality. OPNET IT DecisionGuru and OPNET Netbiz
represent progressively easier to use products, with functionality designed to
address specific business needs. All of the primary products within the OPNET
product suite use a significant amount of shared core software, allowing us to
create new products more efficiently and to foster the interoperability of our
products.
Simulation Engine
A key capability of OPNET IT DecisionGuru and OPNET Modeler is the ability
to perform detailed simulations of networks in order to understand how they
will perform in a wide range of scenarios. The core
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support for this capability is provided by the simulation engine, which
sequences a network model through a series of events, representing activity
within the network. The simulation engine has been designed to be highly
efficient and scalable, in order to support simulations of large networks that
transport substantial volumes of network traffic. We have developed and are
testing a parallel simulation module that will augment the simulation engine
to provide support for running simulations on computers with multiple
processors in order to enhance simulation speed. Currently, this module is
designed only for simulation of wireless networks but we plan to extend this
capability to other types of networks in the future.
Model Libraries
A network model consists of software objects that correspond to the
devices, computers, and links that constitute the actual network of interest.
The behavior of these objects is controlled by models of devices, computers,
applications, communication protocols, and links. Many network devices are
highly complex, incorporating the functionality of several dozen communication
protocol models and application models. These communication protocol models
and application models are provided in OPNET's model libraries, which consist
of a broad range of models that represent the behavior of standard and popular
communication protocols, applications, and networking technologies. The models
within the OPNET model libraries are based on a variety of information
sources, including standards documents, industry literature, publicly
available source code, input from our network equipment manufacturer
customers, and tests performed in a laboratory environment. These models
simulate many essential characteristics of the actual network components and
interact with each other within the context of a discrete-event simulation, in
order to predict the behavior and performance of an overall network. Many of
our models also can perform hybrid simulation, a novel technique that we
developed, which combines discrete-event simulation with sequences of fast
computations and mathematical calculations to accelerate simulation run times.
Our model libraries are developed and maintained using OPNET Modeler.
Customers who use OPNET Modeler frequently create extensions to the models
that we provide, as well as develop entirely new models to represent emerging
protocol standards, unique applications and protocols, or legacy systems that
are not yet included in our libraries. Users may share their models with each
other, either directly or through an on-line database that is accessible over
the Internet.
Network Object Store and Visualizer
The network object store contains the essential network information which
is used by each of our products. OPNET software represents networks as a
collection of data objects, each of which corresponds to a network component,
such as a network device, a communications link, or a computer. OPNET software
organizes these data objects into the network object store for each network of
interest. The network visualizer provides a graphical user interface for
viewing, modifying, or configuring the network represented in the network
object store.
Network and Traffic Import Engine
Our product suite provides interfaces to other network management software
so that our customers can leverage information collected by those
applications. Network and traffic import is currently based on the Application
Characterization Environment and the Multi-Vendor Import Module. These modules
allow our customers to import information about how a network is constructed
and the patterns of the traffic that flows through the network. This
information forms a model of a network as it is currently built and operating.
Modifications and extensions to the network and traffic model can then be
performed within the OPNET software to study the impact of proposed or
anticipated changes. Our OPNET software currently provides the ability to
import information from HP OpenView Network Node Manager, Tivoli NetView,
NetScout Systems Manager Plus, Agilent NetMetrix, Network Associates Sniffer
Network Analyzer, and other network analyzer products. We intend to develop
additional interfaces to other popular network management software products to
broaden our customers' ability to generate models of their networks
automatically.
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Device and Protocol Design Environment
OPNET Modeler provides a design environment to define models of network
devices, protocols, and applications. These models can then be used as
building blocks for modeling entire networks, or portions of networks, in
order to proactively manage performance. The device and protocol design
editors are used primarily by network equipment manufacturers, network
industry researchers, and our own staff to develop libraries containing models
of major network technologies.
Performance Analysis and Reporting Engine
As a network simulation runs, the elements of the network model record
information about their performance and behavior, in the same way probes or
traditional management systems record and report vital performance statistics
of actual networks. Performance statistics of interest to network managers
include the response times experienced by users of applications, the
utilization of communication links, and the number of connections that failed
to be established over the network. Our software selects, aggregates,
processes, and presents statistics in the form of graphs, charts, service
level agreement exception reports, and animations. Graphs, charts, and service
level agreement exceptions can be viewed within the OPNET software products or
through a standard Web browser.
Wireless Modeling Infrastructure
Our software provides wireless network modeling and simulation capabilities
based on the Radio Module and the Terrain Modeling Module. Using these
modules, our users are able to predict and analyze the performance of
applications and communication protocols running over wireless and combined
wireline/wireless infrastructures, taking into account complex factors that
are inherent to wireless environments, including intermittent availability of
links, radio interference, terrain effects, and time-varying signal strength
for mobile devices.
OPNET Integration Platform
The OPNET integration platform allows our customers to develop tailored
applications. The OPNET integration platform is a collection of software
modules that provides developers the capability to rapidly create user
interfaces, workflows, visualizations, and reports, to form a comprehensive
network design and analysis solution that meets unique customer requirements.
The OPNET integration platform is specifically designed to incorporate
knowledge of networking concepts, which allows developers to focus on the
aspects of the application that reflect their proprietary product lines,
business practices, and design configuration rules.
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<PAGE>
Customers
We have licensed our software to over 600 organizations worldwide. Our
customers include:
. service providers, including telecommunications carriers and ISPs;
. large and medium-sized enterprises that rely on networks to conduct
business, including organizations that provide consulting for the
planning, design, and troubleshooting of networks; and
. network equipment manufacturers.
The following is a representative list of organizations that have licensed
at least $50,000 of our software:
Service Providers
<TABLE>
<S> <C> <C>
AT&T France Telecom SBC Communications
AT&T Wireless Inmarsat Sprint
Deutsche Telekom INTELSAT Teledesic
Korea Telecom Telia
MCI WorldCom Telstra
NTT UUNET Technologies
Qwest Verizon Wireless
Enterprises
Abbott Laboratories DIRECTV Oracle
Aerospatiale Matra Entergy RR Donnelley
Andersen Consulting IBM Global Services SAP
Baker Hughes Internal Revenue Spiegel
Boeing Service Texas Utilities
Booz.Allen & Hamilton NASA TXU
DaimlerChrysler National Semiconductor Visa International
Daimler-Benz NetEffect
Network Equipment Manufacturers
3Com Nokia
Advanced Micro Devices Hewlett-Packard Nortel Networks
Alcatel Hughes Electronics Philips Electronics
Ascom Intel QUALCOMM
CableLabs ITT Industries Raytheon
Cisco Systems Lockheed Martin Rockwell
E-Systems Lucent Technologies Scientific Atlanta
Ericsson Marconi plc Siemens
FORE Systems Matsushita Electric ST Microelectronics
Fujitsu Industrial Toshiba
General Instruments Motorola TRW
GTE NEC
Network Equipment
Technologies
Newbridge Networks
</TABLE>
Historically, our software license agreements generally have provided our
customers with a perpetual license for the use of our software by a specified
number of concurrent users. In the future, we intend to pursue a licensing
model in which more of our licenses require annual renewal payments from our
customers.
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<PAGE>
For the year ended March 31, 2000, we generated 20.8% of our total revenues
from customers located outside North America. No single customer accounted for
more than 10% of our total revenues in any of the last three fiscal years.
Note 12 to our financial statements presents information regarding revenues
generated in the United States and internationally.
The following example shows how one of our customers uses our products:
Cisco Systems
The Challenge. Cisco Systems is a leading provider of networking equipment
and solutions. Because of the rapid pace at which new technology is emerging,
Cisco Systems desired software solutions to quickly demonstrate and quantify
the impact and value of new technologies for service providers.
The Solution. OPNET Modeler and OPNET IT DecisionGuru are being used by
Cisco Systems to shorten development cycles and deliver its New World hardware
to ISPs faster and more cost-effectively. OPNET Modeler accelerates the
development process by providing a simulated environment for testing protocols
and hardware designs, allowing Cisco Systems to test protocol behavior and
simulate traffic flow in a wide range of scenarios that closely mirror real-
world ISP infrastructures. In addition, OPNET IT DecisionGuru's virtual
proving ground quickly and efficiently demonstrates the value of Cisco
Systems-based networks to ISPs.
Sales and Marketing
We sell our software through our direct sales force, our international
distributors, and a number of original equipment manufacturers and resellers.
We have marketing relationships with original equipment manufacturers Hewlett-
Packard and Agilent Technologies. To date, neither of these original equipment
manufacturers has accounted for a material portion of our revenues. In North
America, the majority of our sales are made by our direct sales force. As of
June 30, 2000, our sales and marketing organization consisted of 51 employees
located in our headquarters in Washington, D.C., and our offices in Boston,
Dallas, and Santa Clara. We intend to expand our sales and marketing
organization through aggressive recruiting of qualified individuals.
Our direct sales force is organized into two primary groups; one group
focuses on selling OPNET IT DecisionGuru and OPNET Netbiz to our service
provider and enterprise customers as well as OPNET Netbiz to our network
equipment manufacturer customers, and the other group focuses on selling OPNET
Modeler to our network equipment manufacturer customers. Our international
sales activities are primarily conducted by our 10 distributors that resell
OPNET Modeler in France, Germany, Scandinavia, the United Kingdom, the Middle
East, India, Pakistan, Australia, China, Japan, Korea, and Singapore.
International sales activities are managed by our vice president of marketing
and international business development. In addition, we intend to establish
technical sales support centers in some of our markets in order to better
support our distributors.
We engage in marketing activities to increase awareness of our products
among our potential customer base and to create sources of leads for our sales
organization. Our marketing activities include:
. participation in networking industry tradeshows;
. seminars that introduce the capabilities of our software to potential
customers;
. seminars designed specifically for organizations that are already our
customers, but present significant potential for additional license
sales;
. advertisement in trade journals and networking-oriented Web sites;
. direct mailings to potential customers;
. product briefings with industry analysts; and
. a variety of public relations activities, including our annual
international user conference.
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For each of the last three years, we have sponsored OPNETWORK, an annual
international user conference convened in Washington, D.C. that focuses on
predictive network management for professionals in all areas of networking and
information technology. OPNETWORK '99, held in August 1999, included more than
290 hours of presentations and more than 60 guest speakers. Over 600 people
attended OPNETWORK '99, representing a 65% increase from the previous year.
Service and Support
Our service and support offerings include:
. consulting and customization services;
. software maintenance, which includes providing software updates for major
and minor revisions;
. technical support by telephone, e-mail, or fax; and
. training, which includes courses that enable our customers to more
effectively use our products.
We offer consulting services to assist our clients in customizing their
OPNET products. In particular, our customers typically buy customization
services with their purchase of OPNET Netbiz. Customization services are
performed by our consulting staff, which consists of software development
engineers, quality assurance engineers, technical documentation specialists,
and product managers. Some customers also choose to engage our consulting
services in proactive network management projects, including network planning,
network design, diagnosis of network performance problems, and communication
protocol design.
Software maintenance and technical support are purchased by our customers
as a single package, generally on an annual basis. Purchasers of these
services are provided with updates to the software they license from us as the
updates are released. The fee for this service is generally determined as a
percentage of the current price of product licenses.
We provide customer support from our support center at our headquarters in
Washington, D.C. Our technical support services are supported by a
comprehensive information system that ensures that customer inquiries are
addressed promptly, tracked until fully resolved, and recorded for future
reference. Reports on the overall responsiveness of the technical support
infrastructure, and the status of pending customer inquiries, are provided
regularly to our technical support staff, technical support management, and
executive management.
We have a core team of technical support staff supplemented by a number of
product developers and consultants who perform technical support on a
rotational basis. This staffing approach ensures that customers have access to
the best available product expertise, while simultaneously providing product
developers with direct customer feedback, which in turn helps us improve our
products.
We regularly offer training courses to our customers to assist them in
maximizing the benefit they receive from using our products. Our training
classes cover a broad range of topics. Training classes are offered at our
headquarters in Washington, D.C., our facilities in Santa Clara, California,
and at our customers' locations. As of June 30, 2000, our training staff
consisted of three employees.
Research and Development
We believe that our ability to enhance our current products, and create new
products in response to the needs of our customer base will be an important
factor for our future success. Accordingly, we intend to continue to commit
significant resources to product research and development. We expect to
accomplish a large part of our product improvements and new product
development through internal development efforts. New capabilities may also be
integrated into our product lines through the acquisition of technologies or
businesses, or the licensing of externally developed technologies.
Our total expenses for research and development for fiscal 1998, 1999, and
2000 were $3.2 million, $4.9 million, and $5.7 million, respectively. Our
research and development efforts to date have been conducted
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<PAGE>
in their entirety at our headquarters in Washington D.C., and all related
costs have been expensed as incurred. As of June 30, 2000, our research and
development staff consisted of 46 engineers and technical professionals.
Our research and development efforts are directed at increasing our
revenues by expanding the scope of our solutions to address additional
customer requirements. Our existing customers provide a meaningful source of
information which we use, and expect to continue to use, in order to guide our
future product development. In addition, we invest, and intend to continue to
invest, in research and analysis of trends in our industry and our product
markets, and we expect that our future products will reflect the results of
these analyses.
Our current research and development efforts are focused on the following:
. expansion of our model libraries to provide additional coverage of major
networking standards and technologies, including Dense Wavelength
Division Multiplexing, or DWDM, MPLS, and Private Network-Network
Interface, or PNNI;
. design and packaging of vertical solutions optimized to meet the specific
needs of service providers, based on our existing technologies;
. additional interfaces to other network management products in order to
maximize leverage of information about the existing network environment;
. new technologies to automate analysis of simulation results and diagnosis
of performance problems;
. new technologies that use information collected from the current
environment and results predicted by simulations to make recommendations
to our customers;
. advanced techniques for reducing simulation run times, including hybrid
simulation, which combines traditional simulation with sequences of fast
computations and mathematical calculations, and parallel simulation,
which allows simulations to take advantage of computers with multiple
processors; and
. flexible network design and optimization techniques to generate network
designs based on customer requirements.
Competition
The market for our products is evolving rapidly and is highly competitive.
We believe that this market is likely to become more competitive as the demand
for predictive network management solutions continues to increase. Although
none of our competitors offers a solution that is identical to ours, we are
subject to current and potential competition from:
. software vendors with predictive network management offerings, such as
Compuware, and application performance diagnosis solutions, such as
Optimal Networks;
. consultants who offer predictive network management advisory services;
and
. customers who develop their own predictive network management
capabilities, either internally or through outsourcing.
OPNET Netbiz also competes with solutions designed to facilitate and automate
sales processes in general.
In addition, it is possible that other vendors as well as some of our
customers or distributors will develop and market competitive solutions in the
future. Many of our current and potential competitors are larger and have
substantially greater financial and technical resources than we do.
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<PAGE>
We believe the principal competitive factors affecting the market for our
software products are the following:
. scope, quality, and cost-effectiveness of network management solutions;
. industry knowledge and expertise;
. the interoperability of solutions with existing network management
solutions;
. product performance, accuracy, technical features, ease of use, and
price; and
. customer service and support.
Intellectual Property
We rely on a combination of copyright, trademark, patent, and trade secret
laws, confidentiality agreements, and contractual provisions to protect our
intellectual property. However, we believe that these laws and agreements
afford us only limited protection. Despite our efforts to protect our
intellectual property, unauthorized parties may infringe upon our proprietary
rights. In addition, the laws of some foreign countries do not provide as much
protection of our proprietary rights as do the laws of the United States.
We currently hold registered trademarks in the United States for OPNET and
OPNET Modeler, and have pending applications in the United States for the
trademark registrations of IT DecisionGuru and Netbiz. We also hold additional
registered trademarks in the United States and have additional pending
applications. If not renewed, our registered trademarks will expire at various
times between April 2007 and September 2009. We have applied for trademark
protection in a number of international jurisdictions. In addition, we have
two pending patent applications for technologies related to the OPNET product
suite. If granted, the patents would expire in 2018 and 2019. We believe that,
because of the rapid pace of change in our industry, the intellectual property
protection for our products will be a less significant factor for our future
success than the knowledge, abilities, and experience of our employees.
Employees
As of June 30, 2000, we had 155 full-time employees, all of whom were
located in the United States. These included 51 in sales and marketing, 32 in
professional services, 46 in engineering, research, and development, and 26 in
finance and administration. Our employees are not represented by a collective
bargaining agreement and we consider our relations with our employees to be
good.
Facilities
Our corporate office and principal facility is located in Washington, D.C.
and consists of approximately 21,000 square feet of office space held under a
lease that expires on December 31, 2000. We also occupy an additional 7,100
square feet of space in the same building under a sublease that expires on
October 31, 2002. We also lease office space in Boston, Dallas, and Santa
Clara.
On June 2, 2000, we entered into an agreement to lease approximately 60,000
square feet of office space in Bethesda, Maryland. We plan to relocate our
corporate and principal operational offices to this facility in December 2000.
The lease has a ten-year term and we have two five-year renewal options.
Legal Proceedings
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers, Directors, and Key Employees
Our executive officers, directors, and some other key employees, and their
ages as of June 30, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Executive Officers and Directors:
Marc A. Cohen.................... 37 Chairman of the Board and Chief
Executive Officer
Alain J. Cohen................... 33 President, Chief Technology Officer and
Director
George M. Cathey................. 34 Senior Vice President of Engineering
Joseph F. Greeves................ 43 Senior Vice President of Finance and
Chief Financial Officer
Pradeep K. Singh................. 31 Senior Vice President of Engineering,
Model Research and Development
Bruce R. Evans (1)(2) ........... 41 Director
Steven G. Finn, PhD (1) ......... 54 Director
William F. Stasior (1)(2)........ 59 Director
Key Employees:
Erika J. Bohrer.................. 32 Vice President of Human Resources
Melanie A. Houghton.............. 37 Vice President of Strategic Business
Development
Steven R. Johnson................ 38 Vice President of Partner Programs
Randolph W. Jones................ 31 Vice President of IT Sales
Todd J. Kaloudis................. 26 Vice President of Marketing
Joseph J. Lenz................... 47 Vice President of International Sales
Eric R. Martin................... 28 Vice President of R & D Sales
Dennis R. McCoy.................. 49 Corporate Counsel
Alberto Morales.................. 34 Vice President of Information Systems
and Chief Information Officer
Eric S. Nudelman................. 31 Vice President of Engineering,
Applications and Training
Annukka Piironen................. 29 Vice President of Consulting Services
Michael D. Powers................ 30 Vice President, Solutions Group
</TABLE>
--------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Marc A. Cohen, one of our founders, has served as our chairman of the board
since our inception in 1986 and as our chief executive officer since 1994.
From 1986 to 1992, Mr. Cohen was also a consultant with Booz.Allen & Hamilton,
an international management and consulting company. Mr. Cohen received a
bachelor's degree in engineering science from Harvard and a master's degree in
electrical engineering from Stanford.
Alain J. Cohen, one of our founders, has served as our president and chief
technology officer and as a member of our board of directors since our
inception in 1986. Mr. Cohen received a bachelor's degree in electrical
engineering from M.I.T.
George M. Cathey has served as our senior vice president of engineering
since March 1999. From March 1991 to March 1999, Mr. Cathey served as our
director of core technologies. Mr. Cathey received bachelor's and master's
degrees in electrical engineering and computer science from M.I.T.
Joseph F. Greeves has served as our chief financial officer since November
1998 and as our senior vice president of finance since December 1999. Mr.
Greeves also served as our vice president of finance from November 1998
through December 1999. From November 1997 to August 1998, Mr. Greeves served
as vice president and chief financial officer of ACE*COMM, a
telecommunications software company. From January 1995 to July 1997, Mr.
Greeves served as vice president and chief financial officer of Fusion
Systems, a semiconductor technology company. Mr. Greeves is a certified public
accountant and received a bachelor's degree in accounting from the University
of Maryland.
41
<PAGE>
Pradeep K. Singh was appointed as our senior vice president of engineering,
model research and development in March 2000. From March 1999 to March 2000,
Mr. Singh served as our vice president of engineering, model research and
development. From September 1995 to February 1999, he served as our director
of model research and development. From October 1994 to August 1995, he was
one of our software engineers. Mr. Singh received a bachelor's degree in
engineering from Delhi College of Engineering (India) and a master's degree in
electrical engineering from Clemson.
Bruce R. Evans has served as a member of our board of directors since
September 1997. Mr. Evans has been with Summit Partners, a venture capital
firm, since 1986, serving as a general partner since 1991. Mr. Evans currently
serves on the boards of directors of DSET, Omtool, and Private Business.
Steven G. Finn has served as a member of our board of directors since March
1998. Dr. Finn has been a principal research scientist and lecturer at M.I.T.
since 1991. Dr. Finn has also served as a consultant with Matrix Partners, a
venture capital firm, since 1991.
William F. Stasior has served as a member of our board of directors since
March 1998. Since October 1999, Mr. Stasior has served as senior chairman of
Booz.Allen & Hamilton. From 1991 to October 1999, Mr. Stasior served as
chairman of Booz.Allen & Hamilton. Mr. Stasior also served as chief executive
officer of Booz.Allen & Hamilton from 1991 to April 1999.
Erika J. Bohrer has served as our vice president of human resources since
March 1999. From May 1997 to March 1999, she served as our director of human
resources. From May 1989 to May 1997, Ms. Bohrer held various recruiting
positions with Booz.Allen & Hamilton.
Melanie A. Houghton has served as our vice president of strategic business
development since September 1999. From June 1998 to August 1999, Ms. Houghton
served as our director of strategic sales, and from June 1996 to May 1998, she
served as one of our sales associates. From February 1995 to May 1996, Ms.
Houghton served as one of our human resources administrators.
Steven R. Johnson has served as our vice president of partner programs
since March 1999. From October 1998 to March 1999, he served as our director
of marketing. From 1988 to September 1998, he held various marketing positions
with Hewlett-Packard.
Randolph W. Jones has served as our vice president of IT sales since June
1999. From October 1998 to May 1999, Mr. Jones served as senior vice president
of a division of Parametric Technology Corporation, a software company. From
May 1994 to October 1998, Mr. Jones served as a divisional vice president of
Computer Associates International, a business software company.
Todd J. Kaloudis was appointed as our vice president of marketing in March
2000. Prior to that, Mr. Kaloudis served as our vice president of
international business development from November 1999 to March 2000. From May
1998 to November 1999, Mr. Kaloudis served as manager of technology strategy
at Teledesic, a global broadband satellite venture. Mr. Kaloudis also served
as a network design engineer at Teledesic from September 1996 to May 1998.
Prior to September 1996, Mr. Kaloudis was a student at M.I.T.
Joseph J. Lenz has served as our vice president of international sales
since May 2000. From December 1999 to April 2000, Mr. Lenz was the co-founder
and president of Intermeasure.com, an e-commerce software company. From
September 1995 to December 1999, Mr. Lenz served as the president of CACI
Products, a network software company. From 1993 to August 1995, Mr. Lenz
served as senior vice president-sales worldwide of CACI Products.
Eric R. Martin has served as our vice president of R & D sales since April
1999. From January 1998 to March 1999, Mr. Martin served as one of our sales
engineers. From September 1995 to September 1997, Mr. Martin was a student and
research assistant at M.I.T. From March 1995 to August 1995, Mr. Martin worked
as an architectural designer for Liu and Associates (Taiwan), an urban design
firm.
42
<PAGE>
Dennis R. McCoy has served as our corporate counsel since June 2000. From
1990 to May 2000, Mr. McCoy served as associate general counsel for CareFirst
BlueCross Blue Shield, a federally-chartered not-for-profit health insurance
company.
Alberto Morales has served as our chief information officer since February
1997 and our vice president of information systems since March 1999. Mr.
Morales also served as our director of information systems from February 1997
to March 1999. From July 1995 to February 1997, Mr. Morales served as a
software engineer at FGM, a software engineering consulting company. From
October 1994 to June 1995, Mr. Morales served as president of Virtesco, Inc.,
an engineered textiles company.
Eric S. Nudelman has served as our vice president of engineering
applications and training since March 1999. From March 1996 to March 1999, Mr.
Nudelman served as our director of training and technical marketing services.
From September 1995 to March 1996, Mr. Nudelman served as our assistant
director of strategic technical programs. From January 1993 to September 1995,
Mr. Nudelman was one of our applications engineers.
Annukka Piironen has served as our vice president of consulting services
since March 1999. From August 1996 to March 1999, Ms. Piironen served as our
director of consulting services and director of modeling services. From
September 1995 to July 1996, she served as our co-director of model research
and development. From April 1994 to September 1995, she was one of our
application engineers.
Michael D. Powers has served as our vice president, solutions group since
March 1999. From April 1998 to March 1999, Mr. Powers served as our director
of solutions group. From September 1995 to April 1998, Mr. Powers served as
our director of maintenance and technical support operations. From June 1992
to September 1995, Mr. Powers was one of our applications engineers.
Each executive officer serves at the discretion of the board of directors
and holds office until his successor is elected and qualified or until his
earlier resignation or removal. There are no family relationships among any of
our directors or executive officers, except that Marc Cohen and Alain Cohen
are brothers.
Pursuant to a shareholders agreement, dated as of September 30, 1997, by
and among Summit Ventures IV, L.P., Summit Investors III, L.P., Marc Cohen,
Alain Cohen, and us, Summit Ventures IV, L.P. and Summit Investors III, L.P.
were given the right to elect one representative to the board of directors.
Mr. Evans was elected as the representative of Summit Ventures IV, L.P. and
Summit Investors III, L.P. In addition, Marc Cohen, Alain Cohen, Summit
Ventures IV, L.P., and Summit Investors III, L.P. were given the right to
jointly elect one director who was not one of our employees and also not
affiliated with Marc Cohen, Alain Cohen, Summit Ventures IV, L.P., and Summit
Investors III, L.P. Dr. Finn was jointly elected by Marc Cohen, Alain Cohen,
Summit Ventures IV, L.P., and Summit Investors III, L.P. These rights
terminate upon the completion of this offering.
Compensation of Directors
We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors. Following this offering, our
non-employee directors will receive automatic annual grants of stock options
pursuant to our 2000 director stock option plan. In November 1998, we issued
15,000 shares of common stock to each of Dr. Finn and Mr. Stasior at a
purchase price of $2.00 per share, and granted to each of Dr. Finn and
Mr. Stasior an option to purchase 30,000 shares of common stock at an exercise
price of $2.00 per share.
Board Committees
The board of directors has established a compensation committee and an
audit committee. The compensation committee, which consists of Mr. Evans and
Mr. Stasior, reviews executive salaries, administers our bonus, incentive
compensation, and stock plans, and approves the salaries and other benefits of
our executive officers. In addition, the compensation committee consults with
our management regarding our pension and other benefit plans and compensation
policies and practices.
The audit committee, which consists of Mr. Evans, Dr. Finn, and Mr.
Stasior, reviews the professional services provided by our independent
accountants, the independence of our accountants from our management,
43
<PAGE>
our annual financial statements and our system of internal accounting
controls. The audit committee also reviews other matters with respect to our
accounting, auditing, and financial reporting practices and procedures as it
may find appropriate or may be brought to its attention.
Election of Directors
Following this offering, the board of directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. Mr.
Evans will serve in the class whose term expires in 2001; Alain Cohen and Dr.
Finn will serve in the class of directors whose term expires in 2002; and Marc
Cohen and Mr. Stasior will serve in the class of directors whose term expires
in 2003. Upon the expiration of the term of a class of directors, directors in
that class will be eligible to be elected for a new three-year term at the
annual meeting of stockholders in the year in which that term expires.
Compensation Committee Interlocks and Insider Participation
We did not have a compensation committee until March 2000. Prior to that
time, the entire board of directors performed the function of a compensation
committee. No member of our compensation committee is an officer or employee.
No interlocking relationships exist between any member of our board of
directors or compensation committee and the board of directors or compensation
committee of any other company, nor has any interlocking relationship existed
in the past.
Agreements with Executives
Marc Cohen and Alain Cohen each entered into a non-compete agreement with
us on September 30, 1997. Under the agreements, Marc Cohen and Alain Cohen
each agreed not to compete with us during the term of his employment and, in
the event that his employment with us is terminated either at his voluntary
election or by us for good cause, for a period of 12 months thereafter. In
addition, Marc Cohen and Alain Cohen agreed not to solicit our employees or
customers on behalf of any competitor during the same period. Also, Marc Cohen
and Alain Cohen each agreed to protect our confidential information during his
employment, except as appropriate in the performance of his duties, and after
the termination of his employment.
Mr. Cathey serves as our senior vice president of engineering pursuant to
the terms of an employment agreement dated December 4, 1995. The agreement
expires on December 4, 2001. Pursuant to the terms of the agreement, Mr.
Cathey initially received an annual salary of $100,000, subject to periodic
increases at our discretion. Mr. Cathey's salary for fiscal 1999 was $142,155.
Under the agreement, Mr. Cathey agreed not to compete with us during the term
of his employment and for 18 months after termination of his employment.
Mr. Cathey also agreed not to solicit our employees or customers during the
same period.
We intend to enter into change-in-control agreements with Mr. Cathey, Mr.
Greeves, our senior vice president of finance and chief financial officer, and
Mr. Singh, our senior vice president of engineering, model research and
development. Pursuant to the terms of each agreement, if, during the one-year
period after a change in control of OPNET, we terminate the executive's
employment without cause or if the executive resigns within 90 days after we
diminish his position, authority, or responsibilities, reduce his annual base
salary or benefits, or relocate him, the executive will be entitled to:
. a lump sum payment equal to the sum of his highest annual salary and
highest annual bonus received during the five-year period preceding the
change in control; and
. continued employee benefits coverage for 12 months.
Each of the change-in-control agreements expire on the first to occur of March
31, 2003, if a change in control has not occurred prior to that date, or the
date 12 months after the occurrence of a change in control. In addition, if
not previously terminated, each agreement will be automatically extended for
additional one year terms unless we notify the executive that the agreement
will not be extended.
44
<PAGE>
We also intend to enter into nondisclosure, non-compete, nonsolicitation
and ownership of inventions agreements with Messrs. Greeves and Singh, under
which each executive will agree to protect our confidential information during
and after the termination of his employment, and not to compete with us during
the term of his employment and for 12 months after termination of his
employment.
Executive Compensation
The table below sets forth, for the years ended March 31, 1999 and 2000,
the cash compensation earned and shares underlying options granted to our
chairman of the board and chief executive officer and each of the other four
executive officers who received annual compensation in excess of $100,000 for
the fiscal year ended March 31, 2000, collectively referred to as the named
executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Compensation
Awards Long-
term
Annual ------------
Compensation Shares
Name and Fiscal ---------------- Underlying All Other
Principal Position Year Salary Bonus Options Compensation(1)
------------------ ------ -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Marc A. Cohen............. 1999 $156,000 -- -- $3,000
Chairman of the board 2000 120,000 $70,000 -- 3,000
and chief executive
officer
Alain J. Cohen............ 1999 156,000 -- -- 3,000
President and chief
technology officer 2000 120,000 70,000 -- 3,000
George M. Cathey.......... 1999 142,155 27,296 15,000 3,000
Senior vice president of
engineering 2000 155,460 26,878 15,000 3,000
Joseph F. Greeves......... 1999 44,551 1,042 128,206 --
Senior vice president of 2000 157,875 70,000 -- 3,000
finance and chief
financial officer
Pradeep K. Singh.......... 1999 95,000 39,521 -- 3,000
Senior vice president of 2000 123,333 41,563 -- 3,000
engineering, model
research and development
</TABLE>
--------
(1) Represents amounts contributed by us under our 401(k) plan.
In March 2000, the board of directors increased the annual salary of each
of Marc Cohen and Alain Cohen to $200,000. In June 2000, the board of
directors granted options to purchase up to 75,000 shares of common stock to
each of Marc Cohen and Alain Cohen, up to 37,500 shares of common stock to Mr.
Greeves, and up to 30,000 shares of common stock to Mr. Singh.
45
<PAGE>
Stock Options
The table below contains information concerning the grant of options to
purchase shares of our common stock to each of the named executive officers
during the year ended March 31, 2000. The percentage of total options granted
to employees set forth below is based on an aggregate of shares subject to
options granted to our employees in fiscal 2000.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term(2)
----------------------------------------------------------- -------------------------
Number of Percent of
Securities Total Fair Market
Underlying Options Granted Exercise Value on
Options To Employees in Price Date of Expiration
Name Granted Fiscal Year Per Share Grant(1) Date 0% 5% 10%
---- ---------- --------------- --------- ----------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Marc A. Cohen........... -- -- -- -- -- -- -- --
Alain J. Cohen.......... -- -- -- -- -- -- -- --
George M. Cathey........ 15,000 5.8% $4.00 $7.60 1/20/2010 $54,000 $125,694 $235,687
Joseph F. Greeves....... -- -- -- -- -- -- -- --
Pradeep K. Singh........ -- -- -- -- -- -- -- --
</TABLE>
--------
(1) As determined by the board of directors.
(2) The potential realizable value is calculated based on the term of the
option at the time of grant. Stock price appreciation of 0%, 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable values at 0%, 5% and 10%
appreciation are calculated by assuming that the exercise price on the
date of grant appreciates at the indicated rate for the entire term of the
option and that the option is exercised at the exercise price and sold on
the last day of its term at the appreciated price.
The table below sets forth information for each of the named executive
officers with respect to options to purchase common stock exercised during the
year ended March 31, 2000 and the value of options outstanding as of March 31,
2000.
Aggregate Option Exercises in the Year Ended March 31, 2000 and
Fiscal Year-End Option Holdings and Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at Fiscal Year- The-Money Options at
End Fiscal Year-End
------------------------- -------------------------
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Marc A. Cohen........... -- -- -- -- -- --
Alain J. Cohen.......... -- -- -- -- -- --
George M. Cathey........ 165,000 $1,166,390 -- 45,000 -- $ 308,000
Joseph F. Greeves....... 32,051 196,579 -- 96,155 -- 756,415
Pradeep K. Singh........ 7,500 17,710 -- 142,500 -- 1,280,980
</TABLE>
There was no public trading market for our common stock as of March 31,
2000. Accordingly, as permitted by the rules of the Securities and Exchange
Commission, we have calculated the value of unexercised in-the-money options
at fiscal year-end on the basis of the fair market value of our common stock
as of March 31, 2000 of $9.33 per share, as determined by the board of
directors, less the aggregate exercise price.
Stock and Benefit Plans
Amended and Restated 1993 Incentive Stock Option Plan
Our original stock option plan provided for the grant of incentive stock
options intended to qualify under Section 422 of the Internal Revenue Code. As
of June 30, 2000, options to purchase 2,155,287 shares of common
46
<PAGE>
stock were outstanding under the 1993 plan. The 1993 plan provides that, in
the event of a merger, liquidation or other acquisition event, our board of
directors must provide that all outstanding options or other stock-based
awards under the 1993 plan be assumed or substituted for by the acquiror. If
any of these events constitutes a change in control, and if within one year of
the change of control, the optionee's employment is terminated without cause
or the optionee leaves for good reason, then the assumed or substituted
options will be immediately exercisable in full. Following this offering, our
board of directors has provided that no additional grants will be made under
the 1993 plan.
2000 Stock Incentive Plan
Our 2000 stock incentive plan was adopted by our board of directors in
March 2000 and will be submitted to our stockholders for approval in July
2000. Up to 2,250,000 shares of our common stock, subject to adjustment in the
event of stock splits and other similar events, were reserved for issuance
under the 2000 plan. To date, we have not granted any options under the 2000
plan.
The 2000 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards.
Our officers, employees, directors, consultants and advisors and those of
our subsidiaries are eligible to receive awards under the 2000 plan. Under
present law, however, incentive stock options may only be granted to
employees.
Optionees receive the right to purchase a specified number of shares of our
common stock at a specified option price, subject to the terms and conditions
of the option grant. We may grant options at an exercise price less than,
equal to or greater than the fair market value of our common stock on the date
of grant. Under present law, incentive stock options and options intended to
qualify as performance-based compensation under Section 162(m) of the Internal
Revenue Code may not be granted at an exercise price less than the fair market
value of the common stock on the date of grant, or less than 110% of the fair
market value in the case of incentive stock options granted to optionees
holding more than 10% of our voting power. The 2000 plan permits our board of
directors to determine how optionees may pay the exercise price of their
options, including by cash, check or in connection with a "cashless exercise"
through a broker, by surrender of shares of common stock to us, or by any
combination of the permitted forms of payment.
Our board of directors administers the 2000 plan. Our board of directors
has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the 2000 plan and to interpret its
provisions. It may delegate authority under the 2000 plan to one or more
committees of the board of directors and, in limited circumstances, to one or
more of our executive officers. Our board of directors has authorized the
compensation committee to administer the 2000 plan, including the granting of
options to our executive officers. Subject to any applicable limitations
contained in the 2000 plan, our board of directors, our compensation committee
or any other committee or executive officer to whom our board of directors
delegates authority, as the case may be, selects the recipients of awards and
determines:
. the number of shares of common stock covered by options and the dates
upon which such options become exercisable;
. the exercise price of options;
. the duration of options; and
. the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase
price.
In the event of a merger, liquidation or other acquisition event, our board
of directors must provide that all outstanding options or other stock-based
awards under the 2000 plan be assumed or substituted for by the acquiror. If
any of these events constitutes a change in control, and if within one year of
the change of control, the optionee's employment is terminated without cause
or the optionee leaves for good reason, then the assumed or substituted
options will be immediately exercisable in full.
47
<PAGE>
No award may be granted under the 2000 plan after March 2010, but the
vesting and effectiveness of awards granted before those dates may extend
beyond those dates. Our board of directors may at any time amend, suspend or
terminate the 2000 plan.
2000 Director Stock Option Plan
Our 2000 director stock option plan was adopted by our board of directors
in March 2000 and will be submitted to our stockholders for approval in July
2000. Under the director stock option plan, directors who are not our
employees will be eligible to receive non-statutory options to purchase shares
of our common stock. A total of 225,000 shares of our common stock may be
issued upon the exercise of options granted under the director stock option
plan.
Under the terms of the director stock option plan:
. each person serving as a non-employee director upon completion of this
offering will be granted an option to purchase 15,000 shares of our
common stock;
. each person who first becomes a non-employee director after the
completion of this offering will be granted an option on the date of his
or her election to purchase a number of shares of common stock
calculated by multiplying 1,250 by the number of full calendar months
remaining from the date of his election until the first anniversary of
the last annual stockholders meeting; and
. each non-employee director will receive an option to purchase 15,000
shares of our common stock following each annual meeting of our
stockholders commencing with the 2001 annual meeting of stockholders.
These options vest immediately in full upon the option grant date. The
exercise price per share of all options will equal the fair market value per
share of our common stock on the option grant date, which in the case of the
options to be granted upon completion of this offering will be deemed to be
the initial public offering price per share in this offering. Each grant under
the director stock option plan will have a maximum term of ten years, subject
to earlier termination following the optionee's cessation of service.
2000 Employee Stock Purchase Plan
Our 2000 employee stock purchase plan was adopted by our board of directors
in March 2000 and will be submitted to our stockholders for approval in July
2000. The purchase plan authorizes the issuance of up to a total of 450,000
shares of our common stock to participating employees.
All of our employees, including our directors who are employees, and all
employees of any participating subsidiaries, whose customary employment is
more than 20 hours per week and for more than five months in any calendar
year, are eligible to participate in the purchase plan once they have been
employed by us or any subsidiary for a six month period. Employees who would
immediately after the grant own 5% or more of the total combined voting power
or value of our stock or that of any subsidiary are not eligible to
participate.
On the first day of a designated payroll deduction period, or offering
period, we will grant to each eligible employee who has elected to participate
in the purchase plan an option to purchase shares of our common stock as
follows: the employee may authorize up to a maximum of 10% of his or her base
pay to be deducted by us from his or her base pay during the offering period.
On the last day of this offering period, the employee is deemed to have
exercised the option, at the option exercise price, to the extent of
accumulated payroll deductions. Under the terms of the purchase plan, the
option price is an amount equal to 85% of the closing price, as defined in the
purchase plan, per share of our common stock on either the first day or the
last day of the offering period, whichever is lower. The first offering period
under the purchase plan will commence on the first day of the fiscal quarter
beginning after the completion of this offering. In no event may an employee
purchase in any one offering period a number of shares that exceeds the number
of shares determined by dividing $25,000 by the average market price of a
share of our common stock on the commencement date of the offering period.
48
<PAGE>
Our compensation committee may, in its discretion, choose an offering period
of 12 months or less for each offering and choose a different offering period
for each offering.
An employee who is not a participant on the last day of the offering period
is not entitled to exercise any option, and the employee's accumulated payroll
deductions will be refunded. An employee's rights under the purchase plan
terminate upon voluntary withdrawal from the purchase plan at any time, or
when the employee ceases employment for any reason, except that upon
termination of employment because of death, the employee's beneficiary has a
right to elect to exercise the option to purchase the shares which the
accumulated payroll deductions in the participant's account would purchase at
the date of death.
Because participation in the purchase plan is voluntary, we cannot now
determine the number of shares of our common stock to be purchased by any of
our current executive officers, by all of our current executive officers as a
group or by our non-executive employees as a group. Marc Cohen and Alain Cohen
are not eligible to participate in the purchase plan.
401(k) Plan
In August 1993, we adopted an employee savings and retirement plan
qualified under Section 401 of the Internal Revenue Code and covering all of
our employees. Pursuant to the 401(k) plan, employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit
and have the amount of such reduction contributed to the 401(k) plan. We make
matching contributions to the 401(k) plan, and may make discretionary and
extra contributions in amounts determined annually by our board of directors.
We contributed amounts to our 401(k) plan totaling approximately $92,000 in
fiscal 1998, $140,000 in fiscal 1999, and $236,000 in fiscal 2000.
49
<PAGE>
RELATED PARTY TRANSACTIONS
Stock Purchases by Affiliates and Related Matters
In September 1997, we issued and sold shares of series A convertible
preferred stock as set forth below at a purchase price of $48.40 per share.
Upon completion of this offering, each share of series A convertible preferred
stock will automatically convert into 15.015 shares of common stock.
<TABLE>
<CAPTION>
Number of Shares of Series A
Name of Investor Convertible Preferred Stock
---------------- ----------------------------
<S> <C>
Summit Ventures IV, L.P......................... 138,422
Summit Investors III, L.P....................... 6,218
</TABLE>
Mr. Evans, one of our directors, is a partner of Summit Partners L.P.
Summit Partners is the general partner of the general partner of each of
Summit Ventures IV, L.P. and Summit Investors III, L.P.
In October 1997, we repurchased shares of common stock from Marc Cohen,
Alain Cohen, and Mr. Cathey as set forth below at a purchase price of $3.23
per share. Marc Cohen is our chairman of the board and chief executive
officer, Alain Cohen is our president and chief technology officer and a
director, and Mr. Cathey is our senior vice president of engineering.
<TABLE>
<CAPTION>
Number of Shares of
Name of Stockholder Common Stock
------------------- -------------------
<S> <C>
Marc A. Cohen............................................ 312,495
Alain J. Cohen........................................... 450,000
George M. Cathey......................................... 45,000
</TABLE>
In November 1998, we issued and sold 15,000 shares of common stock to each
of Dr. Finn and Mr. Stasior at a purchase price of $2.00 per share, and
granted to each of Dr. Finn and Mr. Stasior an option to purchase 30,000
shares of common stock at an exercise price of $2.00 per share. Dr. Finn and
Mr. Stasior are members of our board of directors.
Option Amendment and Loan to Executive Officer
On January 20, 2000, we amended Mr. Cathey's option agreement to purchase
150,000 shares of common stock at $0.13 per share, which was not then
exercisable, in order to make it immediately exercisable. Mr. Cathey then
exercised the option in full on that date and borrowed $231,024 from us to pay
income taxes incurred by him upon purchasing the shares under the option, as
evidenced by a promissory note. The note bears interest at an annual rate of
6.0%, and all principal and accrued interest payable under the note is due on
the first anniversary of this offering. We have agreed to make additional
loans to Mr. Cathey, which will also be evidenced by promissory notes, if it
is subsequently determined that he owes additional taxes in connection with
the purchase of the shares. Any subsequent notes will also bear interest at an
annual rate of 6.0%, and all principal and accrued interest payable under the
notes will be due on the earlier of the second anniversary of the date of
issuance of the note or the first anniversary of this offering. The loan, and
any subsequent loans, are recourse to Mr. Cathey and are secured by the shares
of common stock that he purchased upon the exercise of the option. The balance
of principal and interest outstanding under these loans was $231,024 and
$6,190, as of June 30, 2000.
Policy on Future Transactions
Our board of directors has adopted the policy that all future transactions,
including loans between us and our officers, directors, principal stockholders
and their affiliates, will be approved by a majority of the board of
directors, including a majority of the independent and disinterested outside
directors on the board of directors, and will be on terms no less favorable to
us than could be obtained from unaffiliated third parties.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of June 30, 2000, assuming the conversion of all our
outstanding redeemable convertible preferred stock, by:
. each person who beneficially owns more than 5% of the outstanding shares
of our common stock;
. each of our directors;
. each of the named executive officers; and
. all of our directors and executive officers as a group.
The percentages shown are based on 13,306,616 shares of common stock
outstanding as of June 30, 2000 and 17,306,616 shares of common stock
outstanding after this offering, including the 4,000,000 shares that are being
offered for sale by us in this offering. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission, and
includes voting and investment power with respect to shares. The number of
shares beneficially owned by a person includes shares of common stock subject
to options held by that person that are currently exercisable or exercisable
within 60 days of June 30, 2000. The shares issuable under those options are
treated as if they were outstanding for computing the percentage ownership of
the person holding those options but are not treated as if they were
outstanding for the purposes of computing the percentage ownership of any
other person. Unless otherwise indicated below, to our knowledge, all persons
named in the table have sole voting and investment power with respect to their
shares of common stock, except to the extent authority is shared by spouses
under applicable law. Unless otherwise indicated, the address of each person
owning more than 5% of the outstanding shares of common stock is c/o OPNET
Technologies, Inc., 3400 International Drive, N.W., Washington, D.C. 20008.
<TABLE>
<CAPTION>
Percentage of
Common Stock
Beneficially
Owned
-----------------
Shares Beneficially Prior to After
Beneficial Owner Owned Offering Offering
---------------- ------------------- -------- --------
<S> <C> <C> <C>
Summit Ventures IV, L.P.(1)............. 2,171,769 16.3% 12.5%
600 Atlantic Avenue
Boston, MA 02210
Marc A. Cohen........................... 3,430,005 25.8 19.8
Alain J. Cohen.......................... 5,497,500 41.3 31.8
George M. Cathey(2) .................... 431,250 3.2 2.5
Joseph F. Greeves....................... 32,051 * *
Pradeep K. Singh........................ 30,000 * *
Bruce R. Evans(3)....................... 2,171,769 16.3 12.5
Steven G. Finn.......................... 30,000 * *
William F. Stasior...................... 30,000 * *
All executive officers and directors as
a group (8 persons).................... 11,652,575 87.6 67.3
</TABLE>
--------
* Less than 1% of the outstanding common stock.
(1) Includes 93,363 shares of common stock held by Summit Investors III, L.P.
Summit Partners, LLC is the general partner of Summit Partners IV, L.P.,
which is the general partner of Summit Ventures IV, L.P. Summit Partners,
LLC has voting and dispositive authority over the shares held by Summit
Ventures IV, L.P. and Summit Investors III, L.P. The members of Summit
Partners, LLC are Gregory M. Avis, Peter Y. Chung, Bruce R. Evans,
Thomas F. Farb, Walter G. Kortschak, Martin J. Mannion, Kevin P. Mohan,
Thomas S. Roberts, E. Roe Stamps, IV, Joseph F. Trustey, and Stephen G.
Woodsum.
(2) Includes 45,000 shares of common stock held of record by each of The
George M. Cathey Retained Annuity Trust #1 and The George M. Cathey
Retained Annuity Trust #2.
(3) Consists of 2,078,406 shares of common stock held by Summit Ventures IV,
L.P. and 93,363 shares of common stock held by Summit Investors III, L.P.
Summit Partners, LLC is the general partner of Summit Partners IV, L.P.,
which is the general partner of Summit Ventures IV, L.P. Summit Partners,
LLC, has voting and dispositive authority over the shares held by Summit
Ventures IV, L.P. and Summit Investors III, L.P. Mr. Evans does not have
voting or dipositive authority over the shares held by Summit Ventures IV,
L.P. and Summit Investors III, L.P. and disclaims beneficial ownership of
these shares.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $.001 par value per share, and
5,000,000 shares of preferred stock, $.001 par value per share. The following
is a summary of the material features of our capital stock. For more detail,
please see our amended and restated certificate of incorporation and amended
and restated by-laws to be effective after the completion of this offering,
filed as exhibits to the registration statement of which this prospectus is a
part.
Common Stock
As of June 30, 2000, after giving effect to the automatic conversion of our
outstanding redeemable convertible preferred stock, there were 13,306,616
shares of common stock outstanding held by 30 stockholders of record. Based
upon the number of shares outstanding as of that date, there will be
17,306,616 shares of common stock outstanding upon the completion of this
offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares
present in person or by proxy at the meeting and entitled to vote in such
election. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared by the board of directors out of funds
legally available to pay dividends. Upon our liquidation, dissolution, or
winding up, the holders of common stock are entitled to receive ratably all
assets after the payment of our liabilities, subject to the prior rights of
any outstanding preferred stock. Holders of the common stock have no
preemptive, subscription, redemption, or conversion rights. They are not
entitled to the benefit of any sinking fund. The outstanding shares of common
stock are, and the shares offered by us in this offering will be, when issued
and paid for, validly issued, fully paid, and nonassessable. The rights,
powers, preferences, and privileges of holders of common stock are subject to
the rights of the holders of shares of any series of preferred stock which we
may designate and issue in the future.
At present, there is no established trading market for the common stock. We
have applied to list our common stock on The Nasdaq Stock Market's National
Market under the symbol "OPNT."
Preferred Stock
Upon the completion of this offering, the board of directors will be
authorized, subject to any limitations prescribed by law, without further
stockholder approval, to issue up to an aggregate of 5,000,000 shares of
preferred stock. The preferred stock may be issued in one or more series and
on one or more occasions. Each series of preferred stock will have the number
of shares, designations, preferences, voting powers, qualifications and
special or relative rights or privileges as the board of directors may
determine. These rights and privileges may include, among others, dividend
rights, voting rights, redemption provisions, liquidation preferences,
conversion rights and preemptive rights.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could
adversely affect the voting power or other rights of the holders of common
stock. In addition, the issuance of preferred stock could make it more
difficult for a third party to acquire us, or discourage a third party from
attempting to acquire us. Upon completion of this offering there will be no
shares of preferred stock outstanding, and we do not have any current plans to
issue preferred stock after this offering.
Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested
52
<PAGE>
stockholder for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A business combination
includes mergers, consolidations, asset sales, and other transactions
involving OPNET and an interested stockholder. In general, an interested
stockholder is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock.
Our amended and restated certificate of incorporation and amended and
restated by-laws to be effective upon the completion of this offering provide:
. that the board of directors be divided into three classes, as nearly
equal in size as possible, with staggered three-year terms;
. that directors may be removed only for cause by the affirmative vote of
the holders of at least 75% of the shares of our capital stock entitled
to vote; and
. that any vacancy on the board of directors, however occurring, including
a vacancy resulting from an enlargement of the board, may only be filled
by vote of a majority of the directors then in office.
The classification of the board of directors and the limitations on the
removal of directors and filling of vacancies could have the effect of making
it more difficult for a third party to acquire us, which could have the effect
of discouraging a third party from attempting to do so.
Our amended and restated certificate of incorporation and amended and
restated by-laws will also provide that:
. any action required or permitted to be taken by the stockholders at an
annual meeting or special meeting of stockholders may only be taken if it
is properly brought before such meeting and may not be taken by written
action in lieu of a meeting; and
. special meetings of the stockholders may only be called by the chairman
of the board of directors, the president, or by the board of directors.
Our amended and restated by-laws provide that, in order for any matter to
be considered properly brought before a meeting, a stockholder must comply
with requirements regarding advance notice to us. These provisions could delay
until the next stockholders' meeting stockholder actions which are favored by
the holders of a majority of our outstanding voting securities. These
provisions may also discourage another person or entity from making a tender
offer for our common stock, because such person or entity, even if it acquired
a majority of our outstanding voting securities, would be able to take action
as a stockholder, such as electing new directors or approving a merger, only
at a duly called stockholders meeting, and not by written consent.
Delaware's corporation law provides generally that the affirmative vote of
a majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a
greater percentage. Our amended and restated certificate of incorporation
requires the affirmative vote of the holders of at least 75% of the shares of
our capital stock entitled to vote to amend or repeal any of the provisions of
our amended and restated certificate of incorporation described above.
Generally, our amended and restated by-laws may be amended or repealed by a
majority vote of the board of directors or the holders of a majority of the
shares of our capital stock issued and outstanding and entitled to vote. To
amend our amended and restated by-laws regarding special meetings of
stockholders, written actions of stockholders in lieu of a meeting, and the
election, removal, and classification of members of the board of directors
requires the affirmative vote of the holders of at least 75% of the shares of
our capital stock entitled to vote. The stockholder vote would be in addition
to any separate class vote that might in the future be required pursuant to
the terms of any series preferred stock that might be outstanding at the time
any amendments are submitted to stockholders.
53
<PAGE>
Limitation of Liability and Indemnification
Our amended and restated certificate of incorporation provides that our
directors and officers will be indemnified by us to the fullest extent
authorized by the General Corporation Law of Delaware. This indemnification
would cover all expenses and liabilities reasonably incurred in connection
with their services for or on behalf of us. In addition, our amended and
restated certificate of incorporation provides that our directors will not be
personally liable for monetary damages to us for breaches of their fiduciary
duty as directors, unless they violated their duty of loyalty to us or our
stockholders, acted in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions, or derived an improper personal
benefit from their action as directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 17,306,616 shares of common
stock outstanding assuming no exercise of outstanding options. Of these
shares, the 4,000,000 shares to be sold in this offering will be freely
tradable without restriction or further registration under the Securities Act
of 1933, as amended, except that any shares purchased by our affiliates, as
that term is defined in Rule 144 under the Securities Act, may generally only
be sold in compliance with the limitations of Rule 144 described below. All
shares of our common stock outstanding prior to this offering are subject to
180-day lock-up agreements described below and may not be sold in the public
market prior to the expiration of the lock-up agreements. Morgan Stanley & Co.
Incorporated may release the shares subject to the lock-up agreements in whole
or in part at any time without prior public notice. However, Morgan Stanley &
Co. Incorporated has no current plans to effect such a release. Upon the
expiration of the lock-up agreements, approximately 13,306,616 additional
shares will be available for sale in the public market, subject in some cases
to compliance with the volume and other limitations of Rule 144.
Sales of Restricted Shares
<TABLE>
<CAPTION>
Days After Date
of Approximate Shares
This Prospectus Eligible for Future Sale Comment
--------------- ------------------------ -------
<S> <C> <C>
Upon
effectiveness.. 4,000,000 Freely tradeable; sold in this offering
180 days after
effectiveness Lock-up expires; shares salable
............... 13,306,616 under Rule 144, 144(k) or 701
</TABLE>
In general, under Rule 144, a person, including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within
any three-month period, a number of such shares that does not exceed the
greater of (1) one percent of the then outstanding shares of common stock, or
approximately 173,066 shares immediately after this offering, or (2) the
average weekly trading volume in the common stock in the over-the-counter
market during the four calendar weeks preceding the date on which notice of
such sale is filed, provided specified requirements concerning availability of
public information, manner of sale and notice of sale have been satisfied. In
addition, our affiliates must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
shares of common stock which are not restricted securities.
Under Rule 144(k), a person who is not an affiliate and has not been an
affiliate for at least three months prior to the sale and who has beneficially
owned shares for at least two years may resell these shares without compliance
with the foregoing requirements. In meeting the one- and two-year holding
periods described above, a holder of shares can include the holding periods of
a prior owner who was not an affiliate. The one- and two-year holding periods
described above do not begin to run until the full purchase price or other
consideration is paid by the person acquiring the shares from the issuer or an
affiliate.
Rule 701 provides that currently outstanding shares of common stock
acquired under our employee compensation plans may be resold beginning 90 days
after the date of this prospectus (1) by persons, other than affiliates,
subject only to the manner of sale provisions of Rule 144, and (2) by
affiliates under Rule 144 without compliance with its one-year minimum holding
period, subject to certain limitations.
Lock-up Agreements
Subject to limited exceptions, our executive officers, directors, and
stockholders, and most of our optionholders have agreed that, without the
prior written consent of Morgan Stanley & Co. Incorporated, they will not,
during the period ending 180 days after the date of this prospectus, directly
or indirectly, sell, offer, contract or grant any option to sell, pledge,
transfer, establish an open put equivalent position, or otherwise dispose of
any shares of common stock, options or warrants to acquire shares of common
stock, or securities
55
<PAGE>
exchangeable or exerciseable for or convertible into shares of common stock
currently or hereafter owned either of record or beneficially, or publicly
announce their intention to do any of the foregoing. For more information on
these restrictions, see "Underwriters."
Stock Options
As of June 30, 2000, approximately 185,711 shares of common stock were
issuable pursuant to vested options or pursuant to other rights granted under
our 1993 incentive stock option plan. All of such shares issuable upon the
exercise of options that are exercisable within 180 days following this
offering are subject to lock-up agreements with the underwriters.
We intend to file a registration statement on Form S-8 under the Securities
Act, following the date of this prospectus, to register up to 5,128,287 shares
of common stock issuable under our stock plans and pursuant to outstanding
options that are not under our stock plans. This registration statement is
expected to become effective upon filing.
Registration Rights
After this offering, the holders of approximately 11,249,274 shares of
common stock and rights to acquire common stock will be entitled to rights
with respect to the registration of their shares under the Securities Act.
Under the terms of the agreement between us and the holders of these
registrable securities, if we propose to register any of our securities under
the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, these holders are entitled to
notice of the registration and are entitled to include shares of their common
stock in the registration. Additionally, these holders are entitled to demand
registration rights pursuant to which they may require us on up to two
occasions to file a registration statement under the Securities Act at our
expense with respect to their shares of common stock, and we are required to
use our commercially reasonable best efforts to effect the registration. All
of these registration rights are subject to typical conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in the registration and our right not to effect
a requested registration within six months following this offering or within
three months following any subsequent offering of our securities pursuant to a
registration statement filed with the Securities and Exchange Commission.
56
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, FleetBoston Robertson Stephens Inc.
and Friedman, Billings, Ramsey & Co., Inc. are acting as representatives, have
severally agreed to purchase, and OPNET has agreed to sell to them, severally,
the number of shares of common stock indicated below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.....................................
FleetBoston Robertson Stephens Inc....................................
Friedman, Billings, Ramsey & Co., Inc.................................
---------
Total .............................................................. 4,000,000
=========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from OPNET and subject to prior sale. The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of OPNET's common
stock offered by this prospectus are subject to the approval of certain legal
matters by their counsel and to certain other conditions. The underwriters are
obligated to take and pay for all of the shares of common stock offered by
this prospectus if any such shares are taken. However, the underwriters are
not required to take or pay for the shares covered by the underwriters' over-
allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any underwriter may allow, and dealers may reallow, a concession not in excess
of $ a share to other underwriters or to other dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
OPNET has granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to an aggregate of 600,000
additional shares of common stock at the public offering price set forth on
the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose
of covering over-allotments, if any, made in connection with the offering of
the shares of common stock offered by this prospectus. To the extent this
option is exercised, each underwriter will become obligated, subject to
specified conditions, to purchase approximately the same percentage of
additional shares of common stock as the number set forth next to the
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of all underwriters in the
preceding table. If the underwriters' option is exercised in full, the total
price to the public would be $ , the total underwriters' discounts and
commissions would be $ and total proceeds to OPNET would be $
.
Morgan Stanley Dean Witter Online Inc., an affiliate of Morgan Stanley &
Co. Incorporated, is acting as a selected dealer in connection with the
offering and will distribute shares of common stock over the Internet to its
eligible account holders. In addition, Friedman, Billings, Ramsey & Co., Inc.
has agreed to allocate a number of shares to fbr.com for sale to its online
brokerage account holders. fbr.com, a division of FBR Investment Services,
Inc., is an affiliate of Friedman, Billings, Ramsey & Co., Inc. An electronic
prospectus is available on the Web site maintained by fbr.com.
The underwriters have informed OPNET that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
57
<PAGE>
OPNET has filed an application for its common stock to be quoted on the
Nasdaq National Market under the symbol "OPNT."
Each of OPNET and its directors, executive officers, and some of its other
stockholders have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the underwriters, it will not, during
the period ending 180 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock,
whether any transaction described above is to be settled by delivery of shares
of common stock or other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
. the sale of shares to the underwriters;
. the issuance by OPNET of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing; or
. transactions by any person other than OPNET relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may sell more shares
than they are obligated to purchase under the underwriting agreement, creating
a short position. A short sale is "covered" if the short position is no
greater than the number of shares available for purchase by the underwriters
under the over-allotment option. The underwriters can close out a covered
short sale by exercising the over-allotment option or purchasing shares in the
open market. In determining the source of shares to close out a covered short
sale, the underwriters will consider, among other things, the open market
price of shares compared to the price available under the over-allotment
option. The underwriters may also sell shares in excess of the over-allotment
option, creating a "naked" short position. The underwriters must close out any
naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who purchase in the
offering. In addition, to stabilize the price of the common stock, the
underwriters may bid for, and purchase, shares of common stock in the open
market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the common stock in the
offering, if the syndicate repurchases previously distributed common stock to
cover syndicate short positions or to stabilize the price of the common stock.
Any of these activities may stabilize or maintain the market price of the
common stock above independent market levels. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
OPNET and the underwriters have agreed to indemnify each other against a
variety of liabilities, including liabilities under the Securities Act.
OPNET has agreed to pay its printing, legal, accounting and other expenses
relating to the offering, which it estimates to be $1.5 million.
Directed Share Program
At the request of OPNET, the underwriters have reserved for sale, at the
initial offering price, up to 280,000 shares of the common stock offered
hereby for OPNET's directors, officers, employees, customers,
58
<PAGE>
business associates, and related persons. At OPNET's request, the underwriters
have reserved approximately 80,000 of these shares for sale, at the initial
public offering price, to Mitsui & Co. LTD. OPNET cannot assure you that any
of the reserved shares will be purchased. The number of shares of common stock
available for sale to the general public will be reduced to the extent these
parties purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the
same basis as the other shares offered by this prospectus.
Pricing of the Offering
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between OPNET and the representatives. Among the factors to be considered in
determining the initial public offering price will be the future prospects of
OPNET and its industry in general, sales, earnings, and certain other
financial operating information of OPNET in recent periods, and the price-
earnings ratios, price-sales ratios, market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of OPNET. The estimated initial public offering price range set forth
on the cover page of this preliminary prospectus is subject to change as a
result of market conditions and other factors.
59
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Washington, D.C. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Morrison & Foerster LLP, New York, New York.
EXPERTS
The financial statements as of March 31, 1999 and 2000 and for each of the
three years in the period ended March 31, 2000 included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common
stock we propose to sell in this offering. This prospectus, which constitutes
part of the registration statement, does not contain all of the information
set forth in the registration statement. For further information about us and
the common stock we propose to sell in this offering, we refer you to the
registration statement and the exhibits and schedules filed as a part of the
registration statement. Statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are summaries of the material provisions of the
contract or document. If a contract or document has been filed as an exhibit
to the registration statement, we refer you to the copy of the contract or
document that has been filed. The registration statement may be inspected
without charge at the principal office of the Commission in Washington, D.C.
and copies of all or any part of which may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can also be
obtained at prescribed rates by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission's
toll-free number is 800-SEC-0330. In addition, the Commission maintains a Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission.
60
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of March 31, 1999 and 2000................ F-3
Consolidated Statements of Operations for the years ended March 31, 1998,
1999, and 2000.......................................................... F-4
Consolidated Statements of Cash Flows for the years ended March 31, 1998,
1999, and 2000.......................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years
ended March 31, 1998, 1999 and 2000..................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
OPNET Technologies, Inc.
Washington, D.C.
We have audited the accompanying consolidated balance sheets of OPNET
Technologies, Inc., as of March 31, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended March 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of March 31,
1999 and 2000, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
McLean, Virginia
April 19, 2000, except for note 15 paragraph 1, paragraph 2, paragraphs 3
through 5, and paragraph 6 as to which the dates are June 2, 2000, June 5,
2000, June 10, 2000 and June 27, 2000, respectively.
F-2
<PAGE>
OPNET TECHNOLOGIES, INC.
Consolidated Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, 2000
------------------
Pro Forma
March 31, Unaudited
1999 Actual (Note 1)
--------- ------- ---------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 6,414 $ 8,765 $ 8,765
Accounts receivable, net of $185 and $100 in
allowance for doubtful accounts at March 31,
1999 and 2000................................... 3,080 3,119 3,119
Refundable income taxes.......................... 417 476 476
Deferred offering costs.......................... -- 400 400
Deferred income taxes............................ 105 101 101
Prepaid expenses and other current assets........ 167 376 376
------- ------- -------
Total current assets............................. 10,183 13,237 13,237
------- ------- -------
Deferred income taxes............................. 31 99 99
Property and equipment, net....................... 1,734 2,272 2,272
Intangible assets, net of $42 and $542 in
accumulated amortization at March 31, 1999 and
2000............................................. 958 458 458
Other assets:
Deposits......................................... 42 62 62
Loan to officer.................................. -- 231 231
Purchased software, net of accumulated
amortization of $184 and $223 at March 31, 1999
and 2000........................................ 257 354 354
------- ------- -------
Total assets.................................... $13,205 $16,713 $16,713
======= ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Accounts payable................................. $ 163 $ 170 $ 170
Accrued liabilities.............................. 1,129 2,479 2,479
Deferred revenue................................. 2,085 3,476 3,476
------- ------- -------
Total current liabilities........................ 3,377 6,125 6,125
Non-current liabilities:
Deferred rent.................................... 40 30 30
Deferred revenue................................. 117 142 142
------- ------- -------
Total non-current liabilities.................... 157 172 172
Commitments and contingencies (note 8)
Series A redeemable convertible preferred stock,
par value $0.001--160 shares authorized, 145
issued and outstanding at March 31, 1999 and 2000
and no shares issued and outstanding pro forma,
liquidation preference - $48.40 per share........ 6,934 6,948 --
Stockholders' equity:
Preferred stock--par value $0.001; 400 shares
authorized; 160 shares designated as Series A
(above), 145 issued and outstanding............. -- -- --
Common stock--par value $0.001; 20,000 shares
authorized; 16,809, 17,079 and 19,251 shares
issued at March 31, 1999 and 2000 and March 31,
2000 pro forma, respectively; 10,681, 10,951 and
13,123 shares outstanding at March 31, 1999 and
2000 and March 31, 2000 pro forma,
respectively.................................... 17 17 19
Additional paid-in capital....................... 166 623 7,569
Deferred compensation............................ -- (287) (287)
Retained earnings................................ 6,564 7,125 7,125
Treasury stock--6,128 shares at March 31, 1999
and 2000 and March 31, 2000 pro forma .......... (4,010) (4,010) (4,010)
------- ------- -------
Total stockholders' equity....................... 2,737 3,468 10,416
------- ------- -------
Total liabilities and stockholders' equity...... $13,205 $16,713 $16,713
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
OPNET TECHNOLOGIES, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Revenues:
Software licenses................................ $ 7,875 $ 6,715 $10,577
Services......................................... 4,054 5,288 8,658
------- ------- -------
Total revenues................................. 11,929 12,003 19,235
------- ------- -------
Cost of revenues:
Software licenses................................ 435 133 728
Services......................................... 980 1,249 2,875
------- ------- -------
Total cost of revenues......................... 1,415 1,382 3,603
------- ------- -------
Gross profit....................................... 10,514 10,621 15,632
Operating expenses:
Research and development......................... 3,190 4,850 5,696
Sales and marketing.............................. 3,398 4,056 7,510
General and administrative....................... 1,336 1,984 2,093
------- ------- -------
Total operating expenses....................... 7,924 10,890 15,299
------- ------- -------
Income (loss) from operations...................... 2,590 (269) 333
Interest and other income.......................... 319 376 414
------- ------- -------
Income before provision (benefit) for income
taxes............................................. 2,909 107 747
Provision (benefit) for income taxes............... 1,134 (100) 172
------- ------- -------
Net income ........................................ 1,775 207 575
Accretion of transaction costs on redeemable
convertible preferred stock....................... (9) (14) (14)
------- ------- -------
Net income applicable to common shares............. $ 1,766 $ 193 $ 561
======= ======= =======
Basic net income applicable per common share....... $ .16 $ .02 $ .05
======= ======= =======
Diluted net income per common share................ $ .14 $ .02 $ .04
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
OPNET TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 1,775 $ 207 $ 575
Adjustments to reconcile net income to net cash
provided by operating activities:
Accreted income on investments.................. (6) -- --
Expense related to employee stock options....... -- -- 36
Depreciation and amortization................... 346 568 1,229
Write-off of property and software.............. 48 3 --
Deferred income taxes........................... (41) (414) (64)
Changes in assets and liabilities:
Accounts receivable........................... (42) (939) (39)
Loans to employees............................ -- -- (231)
Prepaid expenses and other current assets..... (105) 46 (209)
Refundable income taxes....................... (330) (38) (59)
Deposits...................................... (15) -- (20)
Accounts payable.............................. (10) 54 7
Accrued liabilities........................... 157 434 1,496
Deferred revenue.............................. 522 399 1,416
Deferred rent................................. (5) (8) (10)
------- ------- -------
Net cash provided by operating activities.... 2,294 312 4,127
------- ------- -------
Cash flows from investing activities:
Maturities of securities available for sale....... 193 206 --
Purchase of intangibles........................... -- (500) (500)
Purchase of software.............................. (102) (184) (197)
Proceeds from sale of property and equipment...... -- 2 --
Purchase of property and equipment................ (884) (713) (1,167)
------- ------- -------
Net cash used in investing activities........ (793) (1,189) (1,864)
------- ------- -------
Cash flows from financing activities:
Net proceeds from sale of redeemable convertible
preferred stock.................................. 6,911 -- --
Purchase of treasury stock........................ (3,363) -- --
Proceeds from sale of common stock................ -- 60 --
Proceeds from exercise of common stock options.... -- 4 134
Costs incurred for intended initial public
offering......................................... -- -- (46)
------- ------- -------
Net cash provided by financing activities.... 3,548 64 88
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 5,049 (813) 2,351
Cash and cash equivalents, beginning of year....... 2,178 7,227 6,414
------- ------- -------
Cash and cash equivalents, end of year............. $ 7,227 $ 6,414 $ 8,765
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes........ $ 1,502 $ 353 $ 566
======= ======= =======
Supplemental disclosure of non cash activities:
Obligation assumed for acquired intangibles....... $ -- $ 500 $ --
======= ======= =======
Accrued offering costs............................ $ -- $ -- $ 354
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
OPNET TECHNOLOGIES, INC.
Consolidated Statements of Changes in Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------- Additional -------------- Total
Shares Shares Paid-In Deferred Retained Stockholders'
Issued Outstanding Amount Capital Shares Amount Compensation Earnings Equity
------ ----------- ------ ---------- ------ ------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1997.. 16,759 11,674 $17 $ 102 5,085 $ (647) $ -- $4,605 $ 4,077
Net income............. 1,775 1,775
Purchase of treasury
stock................. (1,043) 1,043 (3,363) (3,363)
Accretion of
transaction costs on
redeemable
convertible preferred
stock ................ (9) (9)
------ ------ --- ------ ----- ------- ----- ------ -------
Balance, March 31,
1998................... 16,759 10,631 17 102 6,128 (4,010) -- 6,371 2,480
Net income............. 207 207
Share options
exercised............. 20 20 4 4
Common shares issued... 30 30 60 60
Accretion of
transaction costs on
redeemable convertible
preferred stock....... (14) (14)
------ ------ --- ------ ----- ------- ----- ------ -------
Balance, March 31,
1999................... 16,809 10,681 17 166 6,128 (4,010) -- 6,564 2,737
Net income ............ 575 575
Share options
exercised............. 270 270 134 134
Deferred compensation
on employee stock
options............... 323 (323) --
Amortization of
deferred compensation
on employee stock
options............... 36 36
Accretion of
transaction costs on
redeemable convertible
preferred stock....... (14) (14)
------ ------ --- ------ ----- ------- ----- ------ -------
Balance, March 31,
2000................... 17,079 10,951 17 623 6,128 (4,010) (287) 7,125 3,468
Pro forma conversion of
redeemable convertible
preferred stock to
common stock
(unaudited)............ 2,172 2,172 2 6,946 6,948
------ ------ --- ------ ----- ------- ----- ------ -------
Pro forma balance,
March 31, 2000
(unaudited)............ 19,251 13,123 $19 $7,569 6,128 $(4,010) $(287) $7,125 $10,416
====== ====== === ====== ===== ======= ===== ====== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The predecessor of OPNET Technologies, Inc. ("OPNET" or the "Company") was
incorporated in the State of Maryland in 1986. The Company was incorporated in
the State of Delaware in 1988. The Company's predecessor filed articles of
dissolution with the State of Maryland in 1990. The Company's wholly owned
subsidiary, MIL 3 International Limited, was incorporated in Barbados in June
1998. During fiscal year 2000, the Company changed its name from MIL3, Inc. to
OPNET Technologies, Inc.
The Company provides predictive network management software solutions that
enable its customers to optimize the performance and maximize the availability
of networks and applications. The Company's product suite consists of three
primary software products: OPNET Modeler, OPNET IT DecisionGuru, and OPNET
Netbiz. The Company sells its OPNET suite of products to service providers,
including telecommunications carriers, Internet service providers, application
service providers, large and medium-sized organizations, and network equipment
manufacturers. The Company markets its product suite in North America
primarily through a direct sales force and, to a lesser extent, several
resellers and original equipment manufacturers. Internationally, the Company
markets its products primarily through third-party distributors.
(a) Principles of Consolidation--The financial statements include the
results of OPNET Technologies, Inc. and its wholly owned subsidiary,
MIL 3 International Limited. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) Estimates and Assumptions--The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, as well
as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents--The Company considers deposits in banks and
all highly liquid investments with an original maturity of three months
or less to be cash equivalents. At March 31, 1999 and 2000, the
Company's investments consisted of money market accounts with banks and
brokerage firms, and overnight reverse repurchase agreements; their
carrying amounts approximated fair values.
(d) Marketable Securities--The Company has classified its marketable
securities as available-for-sale, as defined in SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
(e) Accounts Receivable--Accounts receivable includes $219,000 and $224,000
of unbillable accounts receivable as of March 31, 1999 and 2000, which
have been recorded as revenue from fixed-price consulting agreements
using the percentage of completion method of accounting.
(f) Concentration of Credit Risk--Financial instruments that potentially
subject the Company to a concentration of credit risk consist
principally of cash and accounts receivable. The Company generally does
not require collateral on accounts receivable as the majority of its
customers are large, well-established companies, or government
entities.
The Company maintains its cash balance at several financial
institutions, including a brokerage firm. The Federal Deposit Insurance
Corporation insures the bank accounts up to $100,000. Although balances
exceed that amount, the Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk
to cash.
(g) Software Development Costs--Development costs incurred in the research
and development of new software products and enhancements to existing
software products are expensed as incurred until technological
feasibility has been established. The Company considers technological
feasibility to be established when all planning, designing, coding, and
testing has been completed according to design specifications. After
technological feasibility has been established, any additional costs
would be
F-7
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
specifications. After technological feasibility has been established,
any additional costs would be capitalized in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." Through
March 31, 2000, software development has been substantially completed
concurrently with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized to date.
(h) Pro Forma Presentation--Under the terms of the Company's agreements
with the holders of the redeemable convertible preferred stock (See
Note 6), all of such preferred stock will be converted automatically
into shares of common stock upon the closing of the Company's initial
public offering. The pro forma balance sheet information at March 31,
2000 reflects the conversion of the Series A stock into 2,171,769
shares of common stock as if the conversion occurred on March 31, 2000.
(i) Purchased Software--Purchased software is amortized on a straight-line
basis, generally over five years. Amortization expense for fiscal years
1998, 1999 and 2000 was $44,000, $76,000 and $100,000, respectively.
(j) Property and Equipment--Property and equipment are stated at cost.
Depreciation on property and equipment is computed on a straight-line
basis over the estimated useful lives of the assets, generally ranging
from five to seven years. Leasehold improvements are depreciated over
the shorter of the estimated useful life of the assets or the term of
the related lease. Repairs and maintenance are expensed as incurred;
major improvements and betterments are capitalized.
(k) Intangible Assets--Intangible assets consist of marketing support
rights that were acquired from another company under a two-year
contract. These costs are being amortized over the two-year contract
period using the straight-line method of amortization.
(l) Impairment of Long-Lived Assets--The Company reviews its long-lived
assets, including property and equipment, for impairment whenever
events or changes in circumstances indicate that the carrying amounts
of the assets may not be fully recoverable. In the event an evaluation
of recoverability is required, the estimated future undiscounted net
cash flows of the assets would be compared to the carrying amounts of
the assets to determine if a write-down is required.
(m) Revenue Recognition--The Company derives revenues principally from two
sources, product license fees for the use of the OPNET technology-based
software products, primarily OPNET ITDecisionGuru, OPNET Modeler and
OPNET Netbiz, and service fees.
The Company recognizes revenue based on the provisions of Statement of
Position ("SOP") No. 97-2, Software Revenue Recognition (as amended by
SOP No. 98-4 and SOP 98-9) and SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Software
license revenues consist of license sales of software products and
royalty income. For the OPNET ITDecisionGuru and OPNET Modeler products,
as well as the sale of additional licenses of the OPNET Netbiz product
to existing customers, as no significant modifications to the software
are required, software license revenues are recognized upon persuasive
evidence of an arrangement, delivery and acceptance of the software, and
when collection of a fixed or determinable license fee is considered
probable. The initial sale of the OPNET Netbiz product to a new customer
requires significant modifications to the software product, and software
license revenues are recognized along with consulting fees on a
percentage-of-completion basis as the modifications are performed, as
described below. Royalty income is derived from the sale of company
products by third parties, whereby the third party distributes the
product under its own name. The Company receives a stipulated percentage
of all such sales. Royalty income is recognized at the time at which the
sale is communicated to the Company by the third party. The Company's
policy is not to allow returns because it allows its
F-8
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
customers to evaluate the Company's software products before purchases.
The Company does not recognize revenue until after customer delivery and
acceptance.
Service revenues consist of fees from maintentance and technical support
agreements, consulting services and training. Service revenues from
implementation and customization services that are essential to the
customer's use of the software are bundled with the software and the
entire arrangement is recognized under the percentage-of-completion
method. In these circumstances, although both software license revenues
and service revenues are recognized using the percentage-of-completion
method where vendor-specific objective evidence exists for each element,
software license revenues are separated from service revenues and
classified accordingly in the statement of operations. Percentage-of-
completion is measured by the percentage of implementation and
customization hours incurred to date to estimated total implementation
hours. In addition, revenues from consulting services are also measured
by the relationship of hours incurred to the estimated total hours of
the contract. Revisions in estimated hours are reflected in the
accounting period in which the required revisions become known.
Anticipated losses on contracts are charged to income in their entirety
when such losses become evident. Training is provided on a daily-fee
basis with revenue recognized as the services are performed. Maintenance
agreements provide for technical support and periodic unspecified
product upgrades. Maintenance revenue is deferred and recognized on a
straight-line basis over the term of the agreement; amounts received in
advance of revenue recognition are classified as deferred revenue.
Where software licenses are bundled with the sale of maintenance or
other services, the Company determines vendor-specific objective
evidence ("VSOE") for each element of the arrangement. For maintenance,
VSOE is based upon the renewal rate for maintenance specified in each
contract, which is also included on the Company's price list. For
software, VSOE is based upon the Company's standard price list, which
specifies prices applicable to each level of volume purchased and which
are applicable when the products are sold separately. VSOE for
consulting and implementation services is based upon the rates charged
for these services when sold separately. Discounts are applied
proportionately to each element included in the arrangement based on
each element's fair value without regard to the discount.
The Company sells off-the-shelf software licenses and maintenance to
distributors at a predetermined price. The Company provides technical
support and maintenance to the distributors and the distributors provide
support to the end customer. Revenue on these sales is recorded in the
same manner as all other software license and maintenance sales. These
sales are not contingent upon the distributors' resale of the software
to the end user.
(n) Income Taxes--The income tax provision includes income taxes currently
payable plus the net change during the year in deferred tax assets or
liabilities. Deferred tax assets and liabilities reflect the
differences between the carrying value under generally accepted
accounting principles and tax basis of assets and liabilities using
enacted tax rates for the period in which the difference is expected to
reverse.
(o) Advertising Costs--Advertising costs are expensed as incurred and
include $156,000, $373,000 and $533,000 for the fiscal years ended
March 31, 1998, 1999 and 2000, respectively.
(p) Foreign Currency Transactions--Revenues denominated in foreign
currencies are translated at the prevailing exchange rate at the time
of the transaction. Gain or loss on foreign exchange is reported in the
Consolidated Statements of Operations.
F-9
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
(q) Net Income Per Share--Basic net income per share has been computed
using the weighted average number of common shares outstanding during
the period; diluted net income per share includes dilutive stock
options and convertible preferred stock.
(r) Stock-Based Compensation--In 1993, the Company instituted an Incentive
Stock Option Plan (the "1993 Plan"), intended to qualify as such under
the provisions of Section 422 of the Internal Revenue Code of 1986, as
amended. In addition, during fiscal year 1999, the Company began
issuing nonqualified stock options. The Company grants stock options
for a fixed number of shares to employees, with an exercise price not
less than the fair market value of the shares, as determined by the
1993 Plan committee, on the date of the grant.
The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees." In October
1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). As permitted
by SFAS 123, the Company accounts for stock-based compensation in
accordance with APB Opinion No. 25, and accordingly, recognizes
compensation expense for fixed stock option grants only when the
exercise price is less than the fair value of the shares on the date of
the grant. Pro forma net income and pro forma net income per share
disclosures are provided for employee stock option grants made in
fiscal years 1998, 1999 and 2000 as if the fair-value-based method
defined in SFAS 123 had been applied (see Note 10).
(s) Redeemable Convertible Preferred Stock--The Company accretes the
increase in the redemption value of its Series A redeemable convertible
preferred stock through a charge to retained earnings based upon the
redemption dates prescribed in the Amended and Restated Certificate of
Incorporation. The period of accretion began on the September 1997
issuance date and ends on the prescribed redemption dates beginning
October 2002 and continuing through October 2005.
(t) Reclassifications--Certain reclassifications have been made to the
prior-year financial statements to conform to the current-year
presentation.
(u) Recently Issued Accounting Pronouncements--In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments and hedging activities. As amended by Statement
of Financial Accounting Standard No. 137, this standard will be
effective for the Company for the fiscal years and quarters beginning
after March 31, 2001, and requires that an entity recognize all
qualifying derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. The
Company has not completed the process of evaluating the impact of this
statement and is therefore unable to disclose the potential impact that
implementing SFAS No. 133 will have on its financial position or
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101--Revenue Recognition in Financial
Statements. This SAB expresses the SEC's views on applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company does not expect the application of this SAB to
have a material impact on its financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25." With the
exception of certain provisions which require earlier application, this
interpretation is effective for all applicable transactions beginning
July 1, 2000. The Company does not expect that the adoption of this
Interpretation will have a material impact on its financial statements.
F-10
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
2. INTANGIBLE ASSETS
Under the terms of an agreement, effective March 1, 1999, the Company
acquired a new distribution channel and rights to a royalty stream, as well as
marketing support rights, from another company, for $1.0 million. The
agreement is for a two-year period and may be extended by mutual agreement.
The Company paid $500,000 in cash at closing and the balance was paid during
fiscal year 2000.
Under the terms of the agreement, the other company agreed to refund the
full $1.0 million if certain conditions are not met. The Company is amortizing
the cost over the two-year minimum period, using the straight-line method.
3. PROPERTY AND EQUIPMENT
At March 31, 1999 and 2000, property and equipment were as follows:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Computer equipment................................. $ 2,406,000 $ 2,584,000
Office furniture and equipment..................... 735,000 1,078,000
----------- -----------
Total............................................ 3,141,000 3,662,000
Less: accumulated depreciation..................... (1,407,000) (1,390,000)
----------- -----------
Property and equipment--net........................ $ 1,734,000 $ 2,272,000
=========== ===========
</TABLE>
Depreciation expense for fiscal years 1998, 1999, and 2000 was $302,000,
$450,000 and $729,000, respectively.
4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at March 31, 1999 and 2000:
<TABLE>
<CAPTION>
1999 2000
---------- ----------
<S> <C> <C>
Accrued bonuses....................................... $ 331,000 $1,247,000
Accrued vacation...................................... 178,000 278,000
Accrued contractual payments.......................... 500,000 --
Accrued royalty payments.............................. -- 272,000
Accrued commissions................................... 45,000 206,000
Accrued offering costs................................ -- 354,000
Other................................................. 75,000 122,000
---------- ----------
Total............................................... $1,129,000 $2,479,000
========== ==========
</TABLE>
F-11
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
5. INCOME TAXES
The components of the provision for income taxes for the years ended March
31, 1998, 1999 and 2000, were as follows:
<TABLE>
<CAPTION>
1998 1999 2000
---------- --------- --------
<S> <C> <C> <C>
Current provision:
Federal................................. $ 876,000 $ 238,000 $158,000
State................................... 299,000 76,000 78,000
---------- --------- --------
Total current provision............... 1,175,000 314,000 236,000
---------- --------- --------
Deferred (benefit) provision:
Federal................................. (31,000) (323,000) (69,000)
State................................... (10,000) (91,000) 5,000
---------- --------- --------
Total deferred benefit................ (41,000) (414,000) (64,000)
---------- --------- --------
Total (benefit) provision for income
taxes................................ $1,134,000 $(100,000) $172,000
========== ========= ========
</TABLE>
At March 31, 1999 and 2000, respectively, the components of the Company's
deferred tax assets and deferred tax liabilities were as follows:
<TABLE>
<CAPTION>
1999 2000
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued vacation expense............................. $ 44,000 $ 68,000
Deferred revenue..................................... 495,000 361,000
Deferred rent........................................ 14,000 9,000
Deferred tax credits................................. -- 85,000
Other temporary differences.......................... 92,000 31,000
--------- ---------
Total deferred tax assets.......................... 645,000 554,000
--------- ---------
Deferred tax liabilities:
Cash to accrual conversion........................... (321,000) (145,000)
Accelerated depreciation............................. (152,000) (161,000)
Other temporary differences.......................... (36,000) (48,000)
--------- ---------
Total deferred tax liabilities..................... (509,000) (354,000)
--------- ---------
Net deferred tax assets............................ $ 136,000 $ 200,000
========= =========
</TABLE>
The provision for income taxes for fiscal years 1998, 1999 and 2000 differs
from the amount computed by applying the statutory U.S. Federal income tax
rate to income before taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. Federal rate................................ 34% 34% 34%
Increase (decrease) in taxes resulting from:
State income taxes--net of Federal benefit............. 7 7 7
Tax credits............................................ (3) (141) (22)
Other permanent differences--net....................... 1 7 4
--- ---- ---
Effective tax rate......................................... 39% (93)% 23%
=== ==== ===
</TABLE>
F-12
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On September 30, 1997, the Company entered into a Series A Redeemable
Convertible Preferred Stock Purchase Agreement (the "Agreement") with two
investors. The Company authorized 160,000 shares of the Series A Redeemable
Convertible Preferred Stock (the "Series A Preferred Stock") and issued and
sold 144,640 shares, $.001 par value, for $7,000,576. Each holder of Series A
Preferred Stock is entitled to vote on all matters to be taken before the
stockholders of the Company and is entitled to the number of votes equal to
the number of whole shares of Common Stock into which such holder's shares of
Series A Preferred Stock could be converted on the record date for the
determination of shareholders entitled to vote on such matter.
Any share of the Series A Preferred Stock may, at the option of the holder,
be converted at any time into fully paid and nonassessable shares of Common
Stock. The number of shares of Common Stock to which a holder of Series A
Preferred Stock shall be entitled upon conversion shall be the product
obtained by multiplying the Applicable Conversion Rate by the number of shares
of Series A Preferred Stock being converted. The Conversion Rate is defined as
the quotient obtained by dividing the "Initial Purchase Price" of $48.40 by
the Applicable Conversion Value which (after giving effect to the Company's
ten-for-one and three-for-two common stock splits) is $3.23 per share at March
31, 2000. The Applicable Conversion Value may be adjusted from time to time
upon certain conditions such as sale of Common Stock, issuance of warrants,
options, and rights to Common Stock, and extraordinary Common Stock events.
The holders of record of outstanding Series A Preferred Stock shall be
entitled to receive, out of any assets of the Company legally available
therefore, such dividends as may from time to time be declared by the
Company's board of directors. In the event of any liquidation, dissolution, or
winding up of the Company, whether voluntary or involuntary, before any
distribution may be made with respect to the Common Stock or any other series
of capital stock, holders of each outstanding share of Series A Preferred
Stock shall be entitled to be paid out of the assets of the Company available
for distribution to holders of the Company's capital stock of all classes, an
amount equal to the "Initial Purchase Price" of each share of Series A
Preferred Stock, as adjusted for any stock split or combination,
reclassification, or similar event (as so adjusted the "Liquidation Amount").
The "Initial Purchase Price" per share of the Series A Preferred Stock, as
issued as of September 30, 1997, is $48.40.
The Series A Preferred Stock shall automatically be converted into Common
Stock upon the occurrence of a "Qualified Public Offering," which shall mean
an underwritten public offering of capital stock of the Company pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
with gross proceeds in excess of $20,000,000 and an offering price per share
of such capital stock at least three times the then-existing applicable
conversion value of the Series A Preferred Stock.
At the written election of the holders of more than 50% of the then
outstanding shares of Series A Preferred Stock given during the thirty-day
period commencing on each of October 1, 2002, 2003, 2004, 2005, the Company
shall (1) redeem pro rata from all holders of Series A Preferred Stock within
60 days of its receipt of such election, 25% of the shares of Series A
Preferred Stock outstanding on October 1, 1997 or (2) redeem all outstanding
shares of Series A Preferred Stock concurrently with the occurrence of a
"liquidity event," which is defined as (1) the liquidation, winding up or
dissolution of the Company, (2) the sales of all or substantially all of the
assets of the Company, or (3) the merger or consolidation of the Company with
or into another entity. The redemption amount is based upon the Liquidation
Amount for purposes of these redemptions.
Each outstanding share of Series A Preferred Stock must be redeemed by the
Company within the 60-day period following receipt by the Company of written
notice from the holders of more than 50% of the outstanding shares of such
class, given during the 12 month period commencing on October 1, 2005, at a
per share price equal to the higher of (a) the Liquidation Amount, or (b) the
fair market value of such share. The fair market
F-13
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
value of the Series A Preferred Stock shall be determined by negotiation
between the Company and the holders of the Series A Preferred Stock or by an
independent appraisal.
The difference between the carrying amounts of the Series A Preferred Stock
of $6,934,000 and $6,948,000 as of March 31, 1999 and 2000, respectively, and
the redemption amount of $7,001,000 based upon the liquidation amount,
represents the cost of issuance, which is being accreted pro rata over the
period beginning on the September 1997 issuance date and ending on the
prescribed redemption dates beginning October 2002 and continuing through
October 2005.
7. RELATED PARTY TRANSACTIONS
The Company sells consulting services to a certain customer through another
company, which is wholly-owned by one of the executive officers of the
Company. Such sales totaled $20,000 during fiscal year 1998, $36,000 during
fiscal year 1999 and $98,000 during fiscal year 2000. The Company had no
accounts receivable balance due from the other company as of March 31, 1999
and 2000.
8. COMMITMENTS AND CONTINGENCIES
OPNET leases office space under noncancelable operating leases. The leases
for office space contain escalation clauses that provide for increased rentals
based primarily on increases in real estate taxes, operating expenses, or the
average consumer price index. Total rent expense under all leases for fiscal
years 1998, 1999 and 2000 was $525,000, $677,000 and $710,000, respectively.
At March 31, 2000, future minimum lease payments required under noncancelable
leases were as follows:
<TABLE>
<CAPTION>
Year ending March 31,
---------------------
<S> <C>
2001............................................................... $547,000
2002............................................................... 73,000
2003............................................................... 74,000
2004............................................................... 76,000
2005............................................................... 38,000
--------
Total minimum lease payments..................................... $808,000
========
</TABLE>
9. RETIREMENT PLAN
Effective August 1, 1993, OPNET established a 401(k) retirement plan (the
"Plan") covering all eligible employees, as defined. Eligible employees who
are at least 21 years old may participate. Under the terms of the Plan,
participants may defer a portion of their salaries as employee contributions.
The Company makes matching contributions, and may make discretionary and extra
contributions. Employee contributions and extra contributions made by the
Company are 100% vested immediately. In general, matching and discretionary
contributions made by the Company vest ratably over a five-year period. The
Company's contributions under this Plan for fiscal years 1998, 1999 and 2000
were $92,000, $140,000 and $236,000, respectively.
10. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
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.
Basic earnings per share is to be computed by dividing net income available to
common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is to reflect the
potential dilution that could occur if securities or other contracts to issue
common shares were exercised or converted into common shares for all periods
presented.
F-14
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
During fiscal year 1999, the Board of Directors approved a ten-for-one
stock split of all of the shares of the common stock of the Company
authorized, issued, and outstanding. All shares have been adjusted to reflect
this change and to reflect the three-for-two stock split as discussed in Note
15.
The following is a reconciliation of the amounts used in calculating basic
and diluted net income per common share for fiscal years 1998, 1999 and 2000:
<TABLE>
<CAPTION>
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Income (Numerator):
Net income applicable to common shares
(basic)................................ $1,766,000 $ 193,000 $ 561,000
Plus:
Accretion of transaction costs on
redeemable convertible preferred
stock.................................. 9,000 14,000 14,000
---------- ---------- ----------
Net income (diluted).................... $1,775,000 $ 207,000 $ 575,000
========== ========== ==========
Shares (Denominator):
Weighted average shares outstanding
(basic)................................ 11,152,635 10,661,006 10,740,287
Effect of other dilutive securities:
Options............................... 659,579 795,417 1,455,315
Redeemable convertible preferred
stock................................ 1,084,800 2,169,600 2,171,769
---------- ---------- ----------
Weighted average shares outstanding
(diluted).............................. 12,897,014 13,626,023 14,367,371
========== ========== ==========
Net income per common share:
Basic net income applicable per common
share.................................. $ .16 $ .02 $ .05
Diluted net income per common share..... $ .14 $ .02 $ .04
</TABLE>
11. STOCK OPTION PLANS
The 1993 Incentive Stock Option Plan (the "1993 Plan") provides for the
granting of incentive stock options to purchase up to 3,000,000 shares of
common stock of the Company. The option price must be equal to or greater than
the fair market value, as determined by the 1993 Plan Committee. Options are
granted for terms of up to 10 years, and generally vest over periods ranging
from one to six years from the date of grant.
During fiscal year 1999, the Company also granted stock options under three
separate nonqualified stock option agreements. These options were granted for
a ten-year period and vest over three years.
F-15
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
Option transactions were as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Options outstanding, March 31, 1997............ 521,250 $0.21
Options granted.............................. 820,032 0.87
Options canceled............................. (12,000) 0.33
---------
Options outstanding, March 31, 1998............ 1,329,282 0.61
Options granted.............................. 624,976 1.87
Options exercised............................ (19,500) 0.16
Options canceled............................. (123,144) 0.72
---------
Options outstanding, March 31, 1999............ 1,811,614 1.04
Options granted.............................. 260,260 2.57
Options exercised............................ (270,176) 0.50
Options canceled............................. (36,758) 2.28
---------
Options outstanding, March 31, 2000............ 1,764,940 1.32
=========
Options exercisable, March 31, 2000............ 71,375 1.26
=========
Options available for future grant, March 31,
2000.......................................... 1,173,384
=========
</TABLE>
At March 31, 2000, options outstanding were as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Remaining
Exercise Price Outstanding Contractual Life
-------------- ----------- ----------------
<S> <C> <C>
$0.081 1,875 4.00 years
0.179 22,500 5.00
0.269 243,750 6.00
0.358 377,640 4.05
1.467 456,405 5.17
2.000 594,520 6.43
4.000 68,250 9.73
</TABLE>
The Company has computed the pro forma disclosures required under SFAS No.
123 for all stock options granted for the years ended March 31, 1998 and 1999,
using the minimum value method permitted by SFAS No. 123 for nonpublic
entities. For fiscal year 2000, the Company estimated its volatility based
upon the volatility of comparable public companies. The weighted average fair
value at date of grant for options granted during fiscal years 1998, 1999 and
2000 was $0.17, $0.29 and $3.01 per share, respectively.
The weighted average assumptions used for options granted during fiscal
years 1998, 1999 and 2000 were as follows:
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................... 6.00% 4.78% 5.90%
Expected dividend yield........................... 0.00% 0.00% 0.00%
Expected life..................................... 4 years 4 years 4 years
Volatility factor................................. -- -- 82%
</TABLE>
F-16
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
The pro forma effects of applying SFAS No. 123 for fiscal years 1998, 1999
and 2000 would be as follows:
<TABLE>
<CAPTION>
1998 1999 2000
---------- -------- --------
<S> <C> <C> <C>
Pro forma net income........................... $1,758,000 $174,000 $461,000
Pro forma net income per share--basic.......... $ .16 $ .02 $ .04
Pro forma net income per share--diluted........ $ .14 $ .01 $ .03
</TABLE>
At various dates during the year ended March 31, 2000, the Company granted
a total of 260,260 options to employees with exercise prices below the
estimated fair market value at the dates of grant. The Company recorded
compensation expense of $36,000 for the year ended March 31, 2000 resulting in
a remaining deferred compensation balance of $287,000 at March 31, 2000.
On January 20, 2000, the Company accelerated the vesting of an executive
officer's options to purchase 150,000 shares of common stock. The vesting was
accelerated as a consideration to the officer because the related stock
options were initially intended to be incentive stock options, but were
actually non-qualified stock options under section 422 of the Internal Revenue
Code. Absent this acceleration, management believes that it is unlikely the
options would expire unexerciseable. The officer exercised the option in full
on that date and borrowed $231,024 from the Company to pay income taxes
incurred by him upon purchasing the shares under the option, as evidenced by a
promissory note. The Company has agreed to make additional loans to the
officer if it is subsequently determined that he owes additional taxes in
connection with the purchase of the shares. The current and any subsequent
borrowings under this agreement bear interest at an annual rate of 6% and are
due on the earlier of the second anniversary of the date of issuance of the
note or the first anniversary of this offering. In addition, the note gives
full recourse to the Company against all of the officer's assets. The Company
fully intends to exercise this recourse if necessary.
On March 13, 2000, the Board of Directors approved, among other things,
resolutions:
(a) To adopt, subject to stockholder approval, the 2000 Stock Incentive
Plan (the "2000 plan") pursuant to which the Company may grant incentive stock
options, non-qualified stock options, stock appreciation rights, performance
share awards, and restricted and unrestricted stock awards for the purchase of
2,250,000 shares of common stock. The 2000 plan provides that the option price
must be equal to or greater than the fair market value, as determined by the
Board of Directors. Options are granted for terms of up to 10 years.
(b) To adopt, subject to stockholder approval, the 2000 Employee Stock
Purchase Plan, which provides all eligible employees of the Company, including
members of the Board of Directors who are employees, to purchase up to a
limited amount of shares, with a total limit of 450,000 shares of common stock
of the Company. An employee may authorize a payroll deduction up to a maximum
of 10% of his or her compensation during the plan period. The purchase price
for each share purchased will be 85% of the closing price of the common stock.
(c) To adopt, subject to stockholder approval, the 2000 Director Stock
Option Plan, which provides for the automatic annual granting of options to
purchase stock to Directors of the Company, who are not employees of the
Company or any subsidiary of the Company, for up to a total of 225,000 shares
of common stock of the Company. The option price must be equal to or greater
than the fair market value, as determined by the Board of Directors.
(d) To make no further grants of options or stock awards under the 1993
Incentive Stock Option Plan upon approval of the 2000 Stock Incentive Plan.
(e) To issue additional options, with an exercise price equal to the
initial public offering price per share in the offering (See Notes 14 and 15).
F-17
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
Compensation expense related to stock options for subsequent years is as
follows:
<TABLE>
<CAPTION>
Year ending March 31,
---------------------
<S> <C>
2001............................................................. $ 97,000
2002............................................................. 94,000
2003............................................................. 70,000
2004............................................................. 26,000
--------
Total compensation expense..................................... $287,000
========
</TABLE>
12. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company operates in one industry segment, the development and sale of
computer software programs and related services. No single customer accounted
for 10% or more of the Company's accounts receivable or revenues as of or for
the fiscal years ended March 31, 1998, 1999 or 2000. In addition, there were
no sales to any customers within a single country except for the United States
where such sales accounted for 10% or more of total revenue. Substantially all
assets are held in the United States for the fiscal years ended March 31,
1998, 1999 or 2000.
Revenues by geographic destination and as a percentage of total revenues
for fiscal years 1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Geographic Area by Destination
United States......................... $ 7,864,000 $ 8,572,000 $14,424,000
International......................... 4,065,000 3,431,000 4,811,000
----------- ----------- -----------
$11,929,000 $12,003,000 $19,235,000
=========== =========== ===========
<CAPTION>
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Geographic Area by Destination
United States......................... 65.9% 71.4% 75.0%
International......................... 34.1 28.6 25.0
----------- ----------- -----------
100.0% 100.0% 100.0%
=========== =========== ===========
</TABLE>
F-18
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
13. VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts
receivable reserve accounts:
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Charges to End of
of Period Expenses Deductions Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended -
March 31, 1998.................... $ -- $ -- $ -- $ --
March 31, 1999.................... -- 185,000 -- 185,000
March 31, 2000.................... 185,000 53,000 138,000 100,000
</TABLE>
Deductions represent write-offs of receivables previously reserved.
14. INITIAL PUBLIC OFFERING
On March 13, 2000, the Board of Directors approved the Company's plan to
make a public offering of up to $70,000,000 of common stock.
To be effective upon closing of the offering, the Board of Directors
approved a resolution to increase the authorized capital stock of the Company
to 105,160,000 shares, consisting of 100,000,000 shares of common stock, par
value $.001 per share, 160,000 shares of Series A redeemable convertible
preferred stock, and 5,000,000 shares of undesignated preferred stock, par
value $.001 per share.
15. SUBSEQUENT EVENTS
Facilities Lease
On June 2, 2000, the Company executed a new office lease agreement and
plans to relocate its corporate and principal operational offices to Bethesda,
Maryland. The Company is scheduled to take possession of the premises,
consisting of approximately 60,000 square feet of office space, in December
2000. The lease is for ten years with two five-year renewal options. The first
year rent will be approximately $2,267,000 and is subject to escalation based
upon a consumer price indexed adjustment of up to 3% each year. The lease also
requires the Company to maintain a security deposit of approximately
$3,400,000 (in the form of a bank letter of credit, as discussed below), which
is subject to annual reductions based upon meeting certain minimum financial
requirements.
Stock Options
On June 5, 2000, the Board of Directors rescinded its March 13, 2000
authorization to grant stock options with an exercise price equal to the
initial public offering price (see note 11). Additionally, the Board of
Directors authorized the grant of 637,013 stock options to employees at $12
per share, the estimated fair market value of the Company's common stock
(following the three-for-two stock split) as determined by the Board of
Directors at the date of the grant.
Loan Agreement
On June 10, 2000, the Company entered into a $5,000,000 line of credit
facility, with a commercial bank, which expires on June 10, 2001. The line of
credit allows the Company to use the funds for corporate borrowings and
issuance of letters of credit up to a maximum of $5,000,000. The Company used
the facility to issue a letter of credit for approximately $3,400,000 to
satisfy the security deposit requirements for its new corporate office
facilities lease, as discussed above.
F-19
<PAGE>
OPNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
The outstanding principal balance on the credit facility is payable on June
10, 2001 with interest payable monthly, based on LIBOR plus the applicable
margin ranging from 2% to 2.5% as stated in the agreement. The credit facility
also has a renewal option for one additional year provided the Company meets
certain conditions by the original maturity date.
The credit facility is collateralized by certain assets of the Company.
There are also certain financial ratios and conditions that the Company must
maintain under the terms of the loan agreement, as well as certain covenants
with which the Company must comply.
Stock Split
On June 27, 2000, in connection with the Company's contemplated initial
public offering of common stock, the Board of Directors approved a three-for-
two split of common stock prior to the closing of the offering. All references
to the number of common shares and per share amounts have been restated as
appropriate to reflect the effect of the split for all periods presented.
F-20
<PAGE>
[Inside Back Cover]
OPNET Customers
A photograph of an individual looking at a screen shot in the center of the
page. Along the left side of the page appear the names of certain customers of
OPNET:
Service Providers
AT&T
AT&T Wireless
Belgacom
Bell Atlantic
Bell Canada
British Telecom
Deutsche Telekom
France Telecom
Inmarsat
INTELSAT
Korea Telecom
MCI WorldCom
NTT
Qwest
SBC Communications
Sprint
Teledesic
Telia
Telstra
UUNET Technologies
Verizon Wireless
Enterprises
Abbott Laboratories
Aerospatiale Matra
Andersen Consulting
Baker Hughes
Boeing
Booz Allen & Hamilton
DaimlerChrysler
Daimler-Benz
DIRECTV
Entergy
IBM Global Services
Internal Revenue Service
NASA
National Semiconductor
NetEffect
Oracle
RR Donnelley
SAP
Spiegel
Texas Utilities
TXV
Visa International
<PAGE>
[Outside Back Cover]
OPNET Logo
Optimum Network Performance
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 20,460
NASD filing fee.................................................. 8,250
Nasdaq National Market listing fee............................... 100,000
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 400,000
Blue Sky fees and expenses (including legal fees)................ 25,000
Transfer agent and registrar fees and expenses................... 10,000
Miscellaneous.................................................... 336,290
----------
Total.......................................................... $1,500,000
==========
</TABLE>
--------
* To be filed by amendment.
The Registrant will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
The Registrant's Third Amended and Restated Certificate of Incorporation
(the "Restated Certificate") provides that, except to the extent prohibited by
the Delaware General Corporation Law (the "DGCL"), the Registrant's directors
shall not be personally liable to the Registrant or its stockholders for
monetary damages for any breach of fiduciary duty as directors of the
Registrant. Under the DGCL, the directors have a fiduciary duty to the
Registrant which is not eliminated by this provision of the Restated
Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the
DGCL for breach of the director's duty of loyalty to the Registrant, for acts
or omissions which are found by a court of competent jurisdiction to be not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by the DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws. The Registrant has obtained liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out
of their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL including for an unlawful payment of dividend or
unlawful stock purchase or redemption or (iv) for any transaction from which
the director derived an improper personal benefit. The DGCL provides further
that the indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, a vote of stockholders or otherwise. The
Restated Certificate eliminates the personal liability of directors to the
fullest extent permitted by the DGCL and, together with the Registrant's
Amended and Restated By-Laws (the "Restated By-Laws"), provides that the
Registrant
II-1
<PAGE>
reason of the fact that such person is or was a director or officer of the
Registrant, or is or was serving at the request of the Registrant as a
director or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Reference is made to the Registrant's Form of Third Amended and
Restated Certificate of Incorporation and Form of Amended and Restated By-Laws
filed as Exhibits 3.2 and 3.4 hereto, respectively.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). Reference
is made to the form of Underwriting Agreement to be filed as Exhibit 1.1
hereto.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Restated Certificate. The Registrant is not
aware of any threatened litigation or proceeding that may result in a claim
for such indemnification.
Item 15. Recent Sales of Unregistered Securities.
The following information regarding the issuance of the Registrant's
securities gives effect to a three-for- two stock split of the Registrant's
common stock. Since March 1, 1997, the Registrant has issued the following
securities that were not registered under the Securities Act as summarized
below.
(a) On September 30, 1997, the Registrant issued and sold an aggregate of
144,640 shares of its series A convertible preferred stock to two accredited
investors for an aggregate sale price of $7,000,576. The Registrant relied on
the exemption provided by Section 4(2) under the Securities Act for this sale
of its series A convertible preferred stock. Upon the completion of this
offering, each share of series A convertible preferred stock will
automatically convert into 15.015 shares of common stock.
(b) On November 1, 1998, the Registrant issued and sold 15,000 shares of
its common stock to each of Dr. Finn and Mr. Stasior for a purchase price of
$30,000. Dr. Finn and Mr. Stasior are members of the Registrant's board of
directors. The Registrant relied on the exemption provided by Section 4(2)
under the Securities Act for this sale of its common stock.
II-2
<PAGE>
(c) Since March 1, 1997, the Registrant has issued options to purchase a
total of 2,342,281 shares of common stock at exercise prices ranging from
$0.36 to $12.00 per share to employees, consultants and directors pursuant to
the Registrant's Amended and Restated 1993 Incentive Stock Option Plan (the
"1993 Plan") and pursuant to option agreements that are not under the 1993
Plan, as detailed in the following table:
<TABLE>
<CAPTION>
Number of
Number of Shares
Shares of Issued Upon
Common Stock Exercise of
Underlying Exercise Price Options as of
Date of Grant Options Granted Per Share June 15, 2000
------------- --------------- -------------- -------------
<S> <C> <C> <C>
April 1, 1997................... 434,025 $ 0.36 --
February 15, 1998............... 22,500 0.91 --
March 31, 1998.................. 363,507 1.47 --
October 1, 1998................. 30,000 1.47 --
November 1, 1998................ 60,000 2.00 30,000
November 23, 1998............... 128,206 1.47 32,051
March 21, 1999.................. 18,000 2.00 --
March 31, 1999.................. 388,770 2.00 10,250
June 20, 1999................... 128,507 2.00 --
July 1, 1999.................... 34,253 2.00 11,416
August 2, 1999.................. 750 2.00 --
November 15, 1999............... 22,500 2.00 --
January 1, 2000................. 39,750 4.00 --
January 10, 2000................ 13,500 4.00 --
January 20, 2000................ 15,000 4.00 --
January 24, 2000................ 6,000 4.00 --
June 5, 2000.................... 637,013 12.00 --
</TABLE>
The Registrant relied on an exemption provided by Rule 701 under the
Securities Act for the issuance of these options.
The purchasers in each of the above-mentioned transactions represented
their intention to acquire the securities for investment only and not with a
view to the distribution thereof. Appropriate legends were affixed to the
stock certificates issued in such transactions. All recipients had access,
through employment or other relationships, to information about the Registrant
to make an informed investment decision. No underwriters were involved in the
foregoing sales of securities.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1* Form of Second Amended and Restated Certificate of Incorporation
3.2* Form of Third Amended and Restated Certificate of Incorporation of the
Registrant, to be filed at the completion of this offering
3.3* By-Laws of the Registrant
3.4* Form of Amended and Restated By-Laws of the Registrant, to be
effective upon the completion of this offering
4.1** Specimen common stock certificate
4.2* See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate
of Incorporation and By-Laws of the Registrant defining the rights of
holders of common stock of the Registrant
5.1** Opinion of Hale and Dorr LLP
10.1* Series A Preferred Stock Purchase Agreement, dated as of September 30,
1997, by and among the Registrant, Summit Ventures IV, L.P. and Summit
Investors III, L.P.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.2* Shareholders Agreement, dated as of September 30, 1997, by and among
the Registrant, Summit Ventures IV, L.P., Summit Investors III, L.P.,
Marc A. Cohen and Alain J. Cohen
10.3* Registration Rights Agreement, dated as of September 30, 1997, by and
among the Registrant, Summit Ventures IV, L.P., Summit Investors III,
L.P., Marc A. Cohen and Alain J. Cohen
10.4* Stock Repurchase Agreement, dated as of September 30, 1997, by and
between the Registrant and Marc A. Cohen
10.5* Stock Repurchase Agreement, dated as of September 30, 1997, by and
between the Registrant and Alain J. Cohen
10.6* Stock Purchase and Option Agreement, dated as of November 1, 1998,
between the Registrant and Steven G. Finn
10.7* Stock Purchase and Option Agreement, dated as of November 1, 1998,
between the Registrant and William F. Stasior
10.8* Stock Repurchase Agreement, dated as of September 30, 1997, by and
between the Registrant and George M. Cathey
10.9* Stock Purchase and Option Agreement, dated as of December 4, 1995,
between the Registrant and George M. Cathey, as amended on January 20,
2000
10.10* Amended and Restated 1993 Incentive Stock Option Plan
10.11* 2000 Stock Incentive Plan
10.12* 2000 Employee Stock Purchase Plan
10.13* 2000 Director Stock Option Plan
10.14* Employment Agreement, dated as of December 4, 1995, between the
Registrant and George M. Cathey
10.15* Non-competition Agreement, dated as of September 30, 1997, between the
Registrant and Marc A. Cohen
10.16* Non-competition Agreement, dated as of September 30, 1997, between the
Registrant and Alain J. Cohen
10.17* Loan Agreement, dated as of January 20, 2000, between the Registrant
and George M. Cathey
10.18* Secured Promissory Note, dated as of January 20, 2000, issued by
George M. Cathey to the Registrant
10.19* Form of Change-in-Control Agreement between the Registrant and Joseph
F. Greeves
10.20* Form of Change-in-Control Agreement between the Registrant and Pradeep
K. Singh
10.21* Agreement of Lease, dated as of June 18, 1993, between the Registrant
and International Telecommunication Satellite Organization, as amended
on October 26, 1994, as amended on April 28, 1995, as amended on
September 8, 1995, as amended on April 28, 1999, as amended on
September 7, 1999
10.22* Sublease Agreement, dated as of November 1, 1997, between the
Registrant and WJLA-TV
10.23* Form of Change-in-Control Agreement between the Registrant and George
M. Cathey
10.24* Office Lease Agreement, dated May 2000, between the Registrant and
Street Retail, Inc.
10.25** Loan Agreement, dated June 10, 2000, between the Registrant and Bank
of America, N.A.
21.1* Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2** Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1* Powers of Attorney
27.1* Financial Data Schedule
</TABLE>
--------
* Previously filed.
** To be filed by amendment.
(b) Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Delaware General
Corporation Law, the Restated Certificate of the registrant, the Underwriting
Agreement, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification
II-4
<PAGE>
is against public policy as expressed in the Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the registrant will, unless in the opinion of
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in
Washington, D.C., on this 11th day of July, 2000.
OPNET TECHNOLOGIES, INC.
By: /s/ Alain J. Cohen
---------------------------
Alain J. Cohen
President, Chief Technology
Officer and Director
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
* Chairman of the Board of July 11, 2000
______________________________________ Directors and Chief
Marc A. Cohen Executive Officer
(Principal Executive
Officer)
/s/ Alain J. Cohen President, Chief July 11, 2000
______________________________________ Technology Officer and
Alain J. Cohen Director
/s/ Joseph F. Greeves Senior Vice President of July 11, 2000
______________________________________ Finance and Chief
Joseph F. Greeves Financial Officer
(Principal Financial
and Accounting Officer)
* Director July 11, 2000
______________________________________
Bruce R. Evans
* Director July 11, 2000
______________________________________
Steven G. Finn
* Director July 11, 2000
______________________________________
William F. Stasior
</TABLE>
By: /s/ Alain J.Cohen
----------------------------
Alain J. Cohen
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1* Form of Second Amended and Restated Certificate of Incorporation
3.2* Form of Third Amended and Restated Certificate of Incorporation of the
Registrant, to be filed at the completion of this offering
3.3* By-Laws of the Registrant
3.4* Form of Amended and Restated By-Laws of the Registrant, to be
effective upon the completion of this offering
4.1** Specimen common stock certificate
4.2* See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate
of Incorporation and By-Laws of the Registrant defining the rights of
holders of common stock of the Registrant
5.1** Opinion of Hale and Dorr LLP
10.1* Series A Preferred Stock Purchase Agreement, dated as of September 30,
1997, by and among the Registrant, Summit Ventures IV, L.P. and Summit
Investors III, L.P.
10.2* Shareholders Agreement, dated as of September 30, 1997, by and among
the Registrant, Summit Ventures IV, L.P., Summit Investors III, L.P.,
Marc A. Cohen and Alain J. Cohen
10.3* Registration Rights Agreement, dated as of September 30, 1997, by and
among the Registrant, Summit Ventures IV, L.P., Summit Investors III,
L.P., Marc A. Cohen and Alain J. Cohen
10.4* Stock Repurchase Agreement, dated as of September 30, 1997, by and
between the Registrant and Marc A. Cohen
10.5* Stock Repurchase Agreement, dated as of September 30, 1997, by and
between the Registrant and Alain J. Cohen
10.6* Stock Purchase and Option Agreement, dated as of November 1, 1998,
between the Registrant and Steven G. Finn
10.7* Stock Purchase and Option Agreement, dated as of November 1, 1998,
between the Registrant and William F. Stasior
10.8* Stock Repurchase Agreement, dated as of September 30, 1997, by and
between the Registrant and George M. Cathey
10.9* Stock Purchase and Option Agreement, dated as of December 4, 1995,
between the Registrant and George M. Cathey, as amended on January 20,
2000
10.10* Amended and Restated 1993 Incentive Stock Option Plan
10.11* 2000 Stock Incentive Plan
10.12* 2000 Employee Stock Purchase Plan
10.13* 2000 Director Stock Option Plan
10.14* Employment Agreement, dated as of December 4, 1995, between the
Registrant and George M. Cathey
10.15* Non-competition Agreement, dated as of September 30, 1997, between the
Registrant and Marc A. Cohen
10.16* Non-competition Agreement, dated as of September 30, 1997, between the
Registrant and Alain J. Cohen
10.17* Loan Agreement, dated as of January 20, 2000, between the Registrant
and George M. Cathey
10.18* Secured Promissory Note, dated as of January 20, 2000, issued by
George M. Cathey to the Registrant
10.19* Form of Change-in-Control Agreement between the Registrant and Joseph
F. Greeves
10.20* Form of Change-in-Control Agreement between the Registrant and Pradeep
K. Singh
10.21* Agreement of Lease, dated as of June 18, 1993, between the Registrant
and International Telecommunication Satellite Organization, as amended
on October 26, 1994, as amended on April 28, 1995, as amended on
September 8, 1995, as amended on April 28, 1999, as amended on
September 7, 1999
10.22* Sublease Agreement, dated as of November 1, 1997, between the
Registrant and WJLA-TV
10.23* Form of Change-in-Control Agreement between the Registrant and George
M. Cathey
10.24* Office Lease Agreement, dated May 2000, between the Registrant and
Street Retail, Inc.
10.25** Loan Agreement, dated June 10, 2000, between the Registrant and Bank
of America, N.A.
21.1* Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2** Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1* Powers of Attorney
27.1* Financial Data Schedule
</TABLE>
--------
* Previously filed.
** To be filed by amendment.
