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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ____________________
to ________________.
Commission File Number _-_____
PACKETEER, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0420107
(State of incorporation) (I.R.S. Employer Identification No.)
10495 NORTH DE ANZA
CUPERTINO, CALIFORNIA 95014
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 873-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sale price of the common stock on the Nasdaq National
Market System on February 29, 2000, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $1,401,253,452. Shares of
common stock held by each officer and director and by each person known by the
Company to own 10% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares outstanding of Registrant's common stock, $0.001 par
value, was 27,142,924 at February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III of this form 10K is incorporated by
reference from the Company's definitive Proxy Statement for the Registrant's
2000 Annual
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Meeting of Stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A not later than 120 days after December 31, 1999.
------------------------------
TABLE OF CONTENTS
Part I
Item 1. Business ........................................................ 3
Item 2. Properties........................................................ 18
Item 3. Legal Proceedings ............................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ............. 18
Part II
Item 5. Market Registrant's Common Stock and Related Stockholder Matters.. 18
Item 6. Selected Financial Data ......................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation ........................................ 19
Item 7a Quantitative and Qualitative Disclosures about Market Risk ...... 33
Item 8. Financial Statements and Supplementary Data ..................... 35
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................ 51
Part III
Item 10. Directors and Executive Officers of the Registrant .............. 51
Item 11. Executive Compensation .......................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 51
Item 13. Certain Relationships and Related Transactions .................. 51
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 51
Signatures ................................................................................. 52
In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements regarding our strategy, financial
performance and revenue sources that involve a number of risks and
uncertainties, including those discussed below in "Risk Factors."
Forward-looking statements in this report include, but are not limited to, those
relating to the general rapid expansion of our business, including the expansion
of our network products, our ability to develop multiple applications, our
planned introduction of new products and services, the possibility of acquiring
complementary businesses, products, services and technologies and our
development of relationships with providers of leading Internet technologies.
While this outlook represents our current judgment on the future direction of
the business, such risks and uncertainties could cause actual results to differ
materially from any future performance suggested below. Readers are cautioned
not to place undue reliance on the forward-looking statements, which speak only
as of the date of this Annual Report. Packeteer undertakes no obligation to
publicly release any revision's to forward-looking statements to reflect events
or circumstances arising after the date of this document. See "Risk Factors."
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We were incorporated in Delaware in January 1996. In this report,
"Packeteer," "we," "us," and "our" refer to Packeteer, Inc. and its
subsidiaries.
PART I
ITEM 1. BUSINESS
OVERVIEW
Packeteer is a leading provider of Internet application infrastructure
systems designed to enable businesses and service providers to ensure the
quality of experience for networked applications and application services.
Packeteer's PacketWise software, the foundation of the Company's innovative
PacketShaper and AppVantage systems, integrates application discovery, analysis,
control and reporting technologies that are required for proactive application
performance and bandwidth management.
We deliver comprehensive application-adaptive bandwidth management by
discovering and classifying network traffic, analyzing application and network
performance, controlling traffic flow and then reporting on performance. These
four steps are accomplished through our PacketWise software which is embedded in
our PacketShaper family of products and in the networking products of our
technology partners. Our PacketShaper product family consists of hardware
platforms based on Intel compatible microprocessor technologies. Installing
PacketShaper imposes no changes to the existing network's equipment,
configuration or software.
Packeteer's products are deployed today by companies and service providers
through an established network of more than 100 VARs, distributors and system
integrators in more than 50 countries. To date we have shipped over 5,000
PacketShapers. In addition, PacketWise software is licensed by communications
industry partners who integrate the software into specific strategic networking
solutions.
INDUSTRY BACKGROUND
The Emergence of Internet Computing
Today, both the Internet and its underlying protocol TCP/IP, have grown to
positions of prominence in enterprise networking. Protocols are predefined
mechanisms for computers to communicate over networks. From its origins as a
network connecting academic and government institutions, the Internet has
evolved into an interactive communications and commerce platform supporting
businesses' daily operations. Originally intended to accommodate non-interactive
traffic such as file transfers and e-mail, the Internet and TCP/IP were designed
with the basic goals of connectivity, versatility and bandwidth exploitation.
With the evolution towards Internet computing, TCP/IP has become the
communications fabric, or as is commonly referred to in the technology industry,
the underlying protocol, of mission-critical enterprise networks. The Internet
has enabled a new generation of interactive applications to deliver core
business functions, including e-commerce, data access and information exchange,
to a broad range of users. Leveraging the fundamental attributes of the Internet
and TCP/IP, businesses, consumers and suppliers have become better connected.
This rapid development of a vast connected economy has given rise to a new
innovative business model, the Internet computing model.
The rapid emergence of Internet computing has had a significant effect on
today's enterprise networks and has created new challenges for information
technology managers. As more interactive business applications are developed
using web-enabled versions of enterprise software platforms, such as SAP R/3,
Oracle, PeopleSoft and Baan, the amount of network data is increasing
dramatically. E-commerce extends the confines of the enterprise network across
the Internet, making application performance difficult to ensure. Enterprise
users access graphics-intensive web sites, download large files, view streaming
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media presentations, monitor news and stock quotes and access other non-critical
information over the Internet. The resulting traffic deluge impacts network
resources that serve point-of-sale, order processing, enterprise resource
planning, supply-chain management and other vital business functions.
Internet computing relies on TCP/IP as the underlying protocol to support
distributed enterprise applications and the delivery of electronic services. The
Internet Protocol, or IP, provides for routing of packets across networks that
utilize TCP/IP as their underlying protocol. The Transmission Control Protocol,
or TCP, provides flow control for, and reliable ordered delivery of, Internet
Protocol packets. Unlike early non-interactive applications that did not require
real-time responsiveness, today's enterprise and e-commerce applications depend
on timely access to data and real-time transaction responses to ensure
productivity and a high quality of experience for end users. The shift toward
real-time, delay-sensitive data is accelerating as corporations begin to
converge database transactions and multimedia traffic onto their enterprise
networks. TCP/IP is unable to differentiate between traffic types and is
designed so that each transmission attempts to consume all available bandwidth.
These characteristics, which make TCP/IP suitable for non-interactive traffic,
threaten the performance of today's mission-critical applications.
The Traffic Bottleneck at the WAN Access Link
In recent years, the adoption of Fast Ethernet and Gigabit Ethernet
technologies has reduced network congestion on the LAN. Simultaneously, the
deployment of fiber infrastructure in the service provider backbone has also
reduced bandwidth contention in that portion of the network. However, the bridge
between the two, the WAN access link, has remained the slow, weak link in the
chain, forming a bandwidth bottleneck. WAN access link capacity is often
constrained, expensive and difficult to upgrade. When faced with bandwidth
contention at the bottleneck, TCP/IP provides neither a means to give
preferential treatment to select applications nor a good mechanism to
effectively control data flows because TCP flow control is handled only by end
systems. TCP/IP reacts to network congestion by discarding data packets and
sporadically reducing packet transmissions from the host computer. In enterprise
networks that are overwhelmed by increasing amounts of both non-critical and
mission-critical traffic, unmanaged congestion at the WAN access link undermines
application performance and can result in impaired productivity and lost
revenues.
Today's enterprise networks require solutions that ensure mission-critical
application performance, increase network efficiency, and enable the convergence
of data, voice and video traffic. Enterprises are seeking to align their
networks with their business priorities by making them adaptive to the unique
requirements of the growing mix of mission-critical applications. At the same
time, they seek to leverage investments in application software and proactively
control recurring network costs by optimizing bandwidth utilization.
Many existing and newly emerging telecommunications service providers are
also seeking to address the needs of enterprises that are adopting Internet
computing. Service providers have traditionally functioned as WAN bandwidth
suppliers, leasing data lines and selling Internet access to businesses and
consumers. In the face of heightened competition, service providers are seeking
to differentiate themselves by offering tiered services in order to attract and
retain customers and increase profitability. These offerings include web
hosting, application outsourcing and managed network services. To deliver these
services, service providers must be able to ensure network and application
performance and better manage and allocate network resources.
Limitations of Existing Approaches
Businesses and service providers currently employ several approaches in an
attempt to alleviate network congestion at the WAN access link. These approaches
include the following:
Adding bandwidth and infrastructure to over-provision the network. This
approach requires expensive upgrades to WAN access links and associated network
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equipment. Moreover, incremental increases in bandwidth only temporarily
alleviate network congestion, leaving the following problems unresolved:
- Over-provisioning results in under-utilization of the network during
non-peak periods;
- Increases in bandwidth tend to be consumed quickly by latent demand
within LAN and backbone infrastructure;
- Deployment costs and increases in recurring service charges can be
prohibitively expensive, especially for networks with many remote
sites and for international networks; and
- There is no application performance visibility to enable effective
capacity planning.
Implementing queuing-based features. Queuing technologies provide some
degree of prioritization and are frequently incorporated in routers, which are
devices that forward data packets from one LAN or WAN to another. These
implementations engage only after queues form, and attempt to provide quality of
service, or QoS, by reordering packets and then discarding packets when the
queues overflow. Router-based approaches typically identify and prioritize
traffic based on rudimentary characteristics such as port number, a simplistic
mechanism to coordinate the transmission of application data, IP address or
protocol type. While these approaches can alleviate some of the bandwidth
contention problems, they are inadequate to handle an increasingly complex mix
of interactive and real-time mission-critical applications. These limitations
include:
- Queuing-based approaches are reactive in nature and can only address
congestion after the fact, rather than preventing it from occurring;
- Congested queues result in packet loss, retransmissions and delays
that waste bandwidth and undermine application response times;
- Limited traffic classification capabilities inadequately distinguish
between different types of applications, resulting in sub-optimal
prioritization of traffic;
- Queuing does not directly control end-to-end application
performance; and
- Queuing-based approaches do not control inbound traffic flowing from
the WAN to the LAN.
Installing network-management tools. Several vendors provide software that
analyzes and monitors network traffic. While these products enable network
administrators to determine how bandwidth is being utilized, thereby identifying
where bandwidth management is required, they do not comprise a complete solution
for the following reasons:
- These products only monitor and report application performance and
bandwidth utilization, offering no means of fixing or resolving
performance problems; and
- Products that detect problems once they occur are reactive and don't
proactively prevent similar problems in the future.
The Bandwidth Management Opportunity
As Internet computing is more widely adopted, both businesses and service
providers are seeking ways to cost-effectively manage bandwidth, ensure
application performance and increase network efficiency. As mission-critical
applications compete with bandwidth-hungry non-critical traffic for limited
network resources, enterprises require a solution that not only monitors and
reports on application performance problems, but also provides the means to fix
such problems. As the complexity of their network infrastructures increases,
enterprises seek solutions that integrate easily into the existing network and
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are cost-effective to deploy and maintain. In response to growing competition,
service providers are looking to create new revenue streams by offering
differentiated network and application-based services that meet the needs of
enterprise customers. Whether the solution is implemented by the enterprise or
purchased from a service provider, effectively managing the performance of
mission-critical applications is essential to businesses relying on Internet
computing.
THE PACKETEER SOLUTION
Packeteer is a leading provider of Internet application infrastructure
systems designed to enable businesses and service providers to ensure the
quality of experience for networked applications and application services.
Packeteer's advanced PacketWise software, the foundation of the Company's
innovative PacketShaper and AppVantage systems, integrates application
discovery, analysis, control and reporting technologies that are required for
proactive application performance and bandwidth management. Packeteer's products
are deployed today by companies and service providers through an established
network of more than 100 VARs, distributors and system integrators in more than
50 countries.
PacketWise software is at the core of our bandwidth management solutions
and is embedded in Packeteer-manufactured products and OEM-manufactured
products. Our PacketShaper family of products consists of hardware platforms
based on Intel compatible microprocessor technologies that run various
configurations of our PacketWise software. Our PacketShaper products provide
customers with a solution designed to be deployed easily and cost-effectively
without additional investment in or impact to network equipment, software or
infrastructure. In addition, by working with OEM partners to embed PacketWise
technology into their networking products, we are able to address new market
opportunities that are outside of the scope of our PacketShaper family of
products.
As the enterprise network increasingly extends to include the Internet,
network managers are challenged with managing the dynamic growth in critical and
non-critical traffic. Each particular application and type of traffic -- such as
transactions, file transfers, voice or streaming multimedia -- requires a
tailored management strategy to ensure optimal performance. Our solutions are
based on a comprehensive four-step methodology that provides the elements for
effective bandwidth management:
I. Discover and Classify Traffic. Currently, PacketShaper automatically
detects and identifies over 200 types of traffic. Network managers
can refine traffic categories based on application, protocol, web
page, addresses, users and host names. In addition, managers can
define criteria to recognize proprietary applications so that
PacketShaper automatically classifies the associated traffic.
Sophisticated traffic classification enables network managers to
understand network congestion and to precisely target
bandwidth-allocation policies.
II. Analyze Performance. PacketShaper provides detailed analysis and
evaluation of network resources and application performance.
PacketShaper tracks traffic levels and trends, measures response
times and calculates network efficiency. Network managers can
analyze all traffic traversing a particular WAN access link or can
focus on an individual application, client, server or traffic type.
III. Control Traffic. PacketShaper allows network managers to control
application performance and network resources by defining precise
bandwidth-allocation policies. Policies can protect important
traffic, cap bandwidth-intensive traffic and guarantee service
levels. Network managers can tailor management strategies and
bandwidth allocation to suit the requirements of particular
applications or traffic, such as voice, video or data. PacketShaper
paces both inbound and outbound traffic over the WAN access link to
optimize performance and control end-to-end QoS. Our control
technology can also prohibit specific applications, such as
web-based entertainment or leisure applications, from utilizing any
enterprise resources.
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IV. Report Performance. PacketShaper provides reports describing current
and historical network performance. Comprehensive reports, graphs
and tables enable network managers to refine bandwidth management
policies, evaluate efficiency and plan capacity. PacketShaper
automatically measures per-transaction response times for each
application. Managers can set, enforce and monitor service-level
agreements, which quantify desired QoS for a particular application
or customer.
Our dynamic four-step approach to application-adaptive bandwidth
management enables businesses and service providers to realize the following key
benefits:
- Gain Network Performance Visibility and Insight. PacketShaper
provides valuable historical and real-time information about
application performance and network utilization through an
easy-to-use browser interface. Network managers gain a better
understanding of the nature of traffic running on their networks and
the problems and inefficiencies associated with that traffic.
- Ensure Bandwidth to Mission-Critical Applications. Policy-based
bandwidth allocation protects bandwidth for mission-critical
applications such as SAP R/3, Oracle and Baan, preventing
disruptions from bandwidth-hungry but less urgent applications such
as file transfers or casual web browsing.
- Simplify Deployment. PacketShaper installs easily and automatically
starts to discover, classify and analyze network traffic and
suggests policies to optimize performance. It complements the
existing network infrastructure, requires no router reconfiguration
or desktop changes and is designed not to disrupt network
connectivity in the event of software or hardware failure.
- Enable Interactive Services. VoIP, real-time video and other
streaming media require guaranteed bandwidth in order to achieve
minimum quality requirements. By using PacketShaper to set minimum
bandwidth guarantees and explicit delay bounds, network managers and
service providers can deliver smooth and predictable performance of
these delay-sensitive multimedia services.
- Increase Network Efficiency. PacketShaper improves network
efficiency and helps delay expensive capacity upgrades by managing
non-critical traffic to reduce retransmission overhead and smooth
the variability in bandwidth utilization.
- Facilitate E-Commerce. PacketShaper can reserve bandwidth for
individual web site customers on a shared WAN connection.
PacketShaper can also optimize response time for certain web pages,
such as product order and home pages, and redirect users with slower
connections to less data-intensive web pages.
STRATEGY
Our objective is to be the leading provider of application-adaptive
bandwidth management solutions. Key elements of our strategy include:
Focus on Bandwidth Management Needs of Enterprises. We are focused on
providing high performance, easy-to-use and cost-effective bandwidth management
solutions to enterprises whose businesses are based on Internet computing. For
these businesses, managing mission-critical application performance and
optimizing the value of the network will continue to be competitive
requirements. As the Internet proliferates and new Internet-based applications
and services emerge, we believe businesses will continue to adopt Internet
computing business models at a rapid rate and that effective bandwidth
management will become an increasingly important requirement for maintaining an
efficient enterprise network. We believe we have established a differentiated
market position based on our comprehensive solution that provides for effective
bandwidth management, early market leadership and brand awareness. We intend to
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continue to direct our development, sales and marketing efforts toward
addressing the bandwidth management needs of the Internet computing market.
Expand Presence in Telecommunications Service Provider Market. We are
actively pursuing opportunities in the service provider market and currently
have numerous service provider customers, including: BIGLOBE, a wholly owned
subsidiary of NEC Corporation; NTT Corporation; SONERA Technologies; Telefonica
de Espana; and Verio Inc. We believe service providers are under increasing
pressure to attract new subscribers, reduce subscriber turnover, improve
operating margins and develop new revenue streams. Specifically, service
providers seek to differentiate themselves through value-added service
offerings, such as web hosting, application outsourcing and application
service-level management. We believe our PacketShaper and PacketWise solutions
enable service providers to deliver these higher value services by enhancing
network and application performance and better managing and allocating network
resources. Our goal is to increase demand for our solutions with service
providers by leveraging our strong enterprise presence.
Expand presence in the Application Service Provider Market. Several of our
partners, Futurelink, Telepacific, Esoft Global and Compaq Computer Corporation
are currently evaluating our application service provider product, AppVantage.
AppVantage(TM) is the industry's first policy-based application subscriber
management (ASM) system for the rapidly growing application service provider
(ASP) market. The AppVantage system provides an application infrastructure that
enables ASPs to quickly and cost-effectively deliver secure, measured and
performance-assured application services tailored to the needs of specific
markets and customers. The system is the first ASP-tailored platform to deliver
a clearly defined service demarcation point between ASPs and their customers and
delivery-chain partners; provide and enforce quality of service (QoS)
application-specific service level agreements (SLAs); and enable
application-specific billing. AppVantage will benefit ASPs by enabling faster
time-to-market for new services, reduced service cost basis and increased
revenues.
Continue to Build Indirect Distribution Channels. We believe we have built
on a worldwide distribution channel. We currently have over 100 VARs,
distributors, systems integrators and OEMs, that sell our products in over 50
countries. These relationships include: Syncordia Solutions, a division of
British Telecommunications PLC; Datacraft Asia Ltd.; Fujitsu Limited; Macnica;
Nissho Electronics Corporation; Persetel PQ Client Computing, a subsidiary of
Comparex Holdings; Unisys Corp.; and Williams Communications Solutions, LLC.
Recently, we entered into an agreement with Alcatel Business Systems to
distribute our products globally. We have recently signed an agreement with
Alternative Technology to distribute products in the U.S. We intend to continue
to develop and support new VAR and distribution relationships, as well as to
establish additional indirect channels with service providers, systems
integrators and OEMs. We believe this strategy will enable us to increase the
worldwide deployment of our products.
Develop OEM Relationships to Broaden PacketWise Deployment. We have
designed our PacketWise software in distinct modules to integrate with network
hardware platforms offered by other vendors. This integration brings Packeteer's
unique capabilities into markets where QoS is required but is beyond the scope
of the PacketShaper offering. We currently have two software OEM relationships.
ADC Telecommunications has licensed portions of our PacketWise software to
incorporate in its networking products. Adtran has licensed PacketWise
technology to enable classification and partitioning in managed network services
products. In addition, NEC sell PacketShaper with PacketWise software under
their own labels. These private label relationships allow our products to reach
consumers and markets that we would have difficulty reaching alone. With NEC we
have partners in Asia that provide local account management. We intend to pursue
additional OEM relationships in order to drive the proliferation of our
technology in enterprise and service provider networks.
Extend Bandwidth Management Technology Leadership. Our technological
leadership is based on our sophisticated traffic classification, flexible
policy-setting capabilities, precise rate control expertise and ability to
measure response time and network performance. We intend to invest our research
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and development resources to increase performance by handling higher speed WAN
connections, functionality by identifying and managing additional applications
or traffic types, and modularity by taking individual components of Packetwise
together or on a stand-alone basis of our existing bandwidth management
solutions and to develop new leading-edge technologies for emerging markets.
This includes extending our bandwidth management solutions to incorporate
in-depth application-management techniques that will improve performance over
the Internet and reduce bandwidth requirements. We plan to extend our current
portfolio by offering PacketWise-defined solutions that target the specific
needs of three primary market opportunities: application service-level
management, enterprise bandwidth management and service provider bandwidth
management.
PRODUCTS
We provide application-adaptive bandwidth management solutions to address
the needs of both businesses and service providers. Our products incorporate
innovative technology for discovery, classification, analysis, control and
management of disparate traffic flows in congestion-prone TCP/IP WAN access
links. Our PacketWise software is at the core of our bandwidth management
solutions and is embedded in our PacketShaper family of products, which includes
the AppVantage models. PacketShaper products consist of Intel compatible
microprocessor technology running various configurations of PacketWise. We also
license our PacketWise software to OEM partners for incorporation in their
networking products.
PacketShaper is available in three models to fit a broad range of network
environments, including corporate and service providers' data centers,
enterprise networks, branch offices and remote sites, as well as a wide variety
of additional network environments. Our PacketShaper products support multiple
WAN access link speeds. In addition, our solution supports thousands of
simultaneous sessions involving a wide range of protocols. Each of our
PacketShaper models is described below:
PacketShaper 1000 PacketShaper 1000 targets the needs of branch
offices and remote sites. It connects to 10 megabits per
second, or Mbps, Ethernet LANs and manages WAN access
links with speeds up to 384 Kbps.
PacketShaper 2000 PacketShaper 2000 targets the requirements of
enterprise network administrators and Internet service
providers. It connects to 10 Mbps LANs and manages WAN
access links with speeds up to 8 Mbps, or two T1/E1
lines.
PacketShaper 4000 PacketShaper 4000 targets corporate data centers and Fast
Ethernet LAN, or 100 Mbps, environments. It connects to
10 or 100 Mbps LANs and controls WAN access links with
speeds up to 45 Mbps, or a T3 line. This model also has
redundant power supplies and cooling fans, which are
important features in service provider environments. Even
if one of the fans or power supplies fails, PacketShaper
still operates.
PacketShaper 4000/ISP PacketShaper 4000/ISP targets service providers
and Fast Ethernet LAN, or 100 Mbps, environments. This
model contains a high-capacity, factory-installed
software option. It connects to 10 or 100 Mbps LANs and
controls WAN access links with speeds up to 45 Mbps, or a
T3 line. This model also has redundant power supplies and
cooling fans, which are important features in service
provider environments. Even if one of the fans or power
supplies fails, PacketShaper still operates.
PacketShapers are designed to be deployed easily and cost-effectively in
an existing network configuration. PacketShaper does not require any new
protocols, standards, router reconfiguration or desktop changes. Additionally,
each PacketShaper features a passive connector that maintains network
connectivity if a PacketShaper is turned off or shuts down due to a hardware or
software failure. PacketShapers are typically deployed between the LAN and the
WAN access router in order to manage bandwidth at the WAN access link where
traffic needs to be controlled to avoid a bottleneck.
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AppVantage is the industry's first policy-based application subscriber
management system specifically designed to support managed application services.
AppVantage provides a comprehensive infrastructure that enables Application
Service Providers (ASPs) to provision, monitor, measure and control customers'
quality of experience for each application service. It provides a point of
demarcation between the customer and the ASP; defines, enforces and validates
application service-level agreement (ASLAs); controls application performance;
and integrates billing. The AppVantage Application Subscriber management (ASM)
product line has three models that support a range of deployment options and
network capacities:
ASM-30 Low-range platform designed for connecting remote customer branches
at WAN speeds up to 512 kbps.
ASM-50 Mid-range platform designed for WAN speeds up to 6 Mbps. This model
is modular in that it is configured with two PCI-based expansion
slots to support future expansion while dual power supplies and
power-source connections ensure reliability.
ASM-70 High-performance platform designed for ASP and customer datacenters
at WAN speeds up to 45 Mbps. This model is also modular because it is
configured with two PCI-based expansion slots to support future
expansion while the dual power supplies and power-source connections
ensure reliability.
TECHNOLOGY
We differentiate our solution by combining our knowledge of enterprise
applications with our expertise in underlying network protocols. We have
invested heavily in developing valuable, proprietary software and related
technologies. In particular, we have developed expertise and technology in these
major areas: sophisticated traffic discovery and classification, flexible policy
definition and enforcement, precise rate control, application-based
response-time measurement, high-performance packet engines and scaleable
configuration. We have tied together these technologies with an easy-to-use, web
browser interface in order to insulate the end user from the sophistication of
the underlying technology and to allow them to derive the benefits of the
technology with minimal effort.
Sophisticated Traffic Discovery and Classification
The ability to automatically detect and classify an extensive collection
of applications and protocols differentiates PacketShaper from other bandwidth
management technologies. Sophisticated traffic classification is crucial to
understand network congestion and to target appropriate bandwidth-allocation
policies. Network software or devices that claim QoS features typically offer
rudimentary solutions because they can identify traffic based only on protocol
type or port numbers. This approach limits application-specific QoS capabilities
because these products do not recognize the detailed information required to
make intelligent classification decisions. PacketShaper discovers and classifies
traffic by focusing on content and applications where value to the end user
lies.
Relying only on more basic protocols to classify traffic prevents network
managers from discovering important traffic trends and limits policy-setting.
Sophisticated traffic types such as voice calls over networks based on Internet
Protocol, or VoIP, Oracle 8, TN3270, Citrix, and Microsoft DCOM cannot be
identified using rudimentary traffic classification schemes. PacketShaper
identifies traffic markers, detects changing, or dynamic, port assignments and
tracks transactions with changing port assignments. This sophisticated traffic
classification allows network managers to set policies and control the traffic
related to an individual application, session, client, server or traffic type.
PacketShaper permits a network manager to isolate each published application
running on a centralized server and can also differentiate among various
applications using the same port. For example, noncritical applications such as
web browsing and PointCast and mission-critical applications such as PeopleSoft
e7.5 and critical web sites are all assigned to the same TCP port number on a
network but can be individually classified using PacketShaper.
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PacketShaper needs no assistance from network managers to automatically
detect and identify over 150 traffic types. Without a sophisticated
identification and classification capability, managers are usually unaware of
the diversity of their own network traffic. In addition, managers can define
proprietary applications so that their traffic can be recognized and reported.
Our PacketShaper technology is differentiated by its ability to recognize older
enterprise protocols, such as AppleTalk, DECnet, IPX and SNA. We continuously
enhance PacketShaper's classification capability to include new traffic types.
Any traffic category can be made even more specific by adding more detailed
criteria -- for example, Oracle traffic to or from a particular database. The
PacketShaper automatically classifies over 200 different traffic types, some of
which are listed below. The traffic types are named either with their associated
protocol or application and are grouped according to the class of application
which generated that traffic. Each traffic type has an associated protocol which
allows it to be recognized on the network.
CLIENT/SERVER DIRECTORY E-MAIL FILE INTERNET LEGACY LAN
- ------------- SERVICES ------ SERVER -------- AND NON-IP
--------- ------ ----------
Baan biff ActiveX
CORBA CRS cc:MAIL Lockd FTP AppleTalk
FileMaker Pro DHCP Indent NetBIOS-IP Gopher AFP
FIX DNS IMAP NFS HTTP CU-Dev
Lotus Notes DPA MS DCOM Netware 5 IPv6 DECnet
MS DCOM Finger (Exchange) SLP IRC DLS
MS SQL LDAP MSSQ ISAKMP IPX
Oracle RADIUS POP3 Kerberos FNA
Oracle 8i rwho SMTP GAMING NNTP LAT
SMS LDAP SYSTEMS SOCKS NetBEUI
-------
Sun RPC TACACS Doom SSH SNA
whois Kali SSL
WINS Quake TFTP MESSAGING
---------
Quake II TCP UDP Groupwise
Quake II UDP UUCP Yahoo Msg
NETWORK PRINT ROUTING SESSION STREAMING VOICE OVER
MANAGEMENT ----- ------- ------- MEDIA ----------
PROTOCOL LPR AURP Citrix ----- Clarent CC
- ---------- TN3287 BGP OpenConnect MPEG CUSeeMe
Cisco TN5250p CBT PCAnywhere NetShow H.323
Discovery DRP RDP RealAudio I-Phone
ICMP PUSH EGP rlogin RTSP Micom VIP
NTP ----
REXEC Backweb EIGRP Telnet Shoutcast RTCP
SNMP Marimba IGMP Timbuktu Streamworks RTP
SYSLOG PointCast OSPF TN3270 WindowsMedia T.120
OSI TN5250 VDOPhone
PIM Xwindows TUNNELING
---------
RARP DLS
RIP GRE
Spanning Tree IPSEC
L2TP
RC5DES
PPTP
Flexible Policy Definition and Enforcement
PacketShaper provides network managers flexible tools to tailor solutions
for different applications or traffic types. Unlike queuing-based approaches,
PacketShaper allows network managers to do more than just prioritize one traffic
type over another. Our policy features offer the flexibility required to tune
bandwidth to specific applications and dynamically utilize available bandwidth.
Our policy features may be used individually or in conjunction with each other.
PacketShaper policy features include:
- Per-session rate policies. These policies enable network managers to
limit or guarantee bandwidth to each individual session of an
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application's traffic. Per-session policies allocate each session an
appropriate amount of bandwidth and prevent one large session from
inappropriately impacting others. Network managers specify a
minimum-guaranteed rate and allow the session scaled access to
additional available bandwidth. For example, a bandwidth cap for
traffic prevents web browsers from competing for bandwidth required
by mission-critical applications. Likewise, a guaranteed rate for
audio or video streams ensures that they are not interrupted by
traffic that tends to consume any available bandwidth.
- Partitions. Partitions allow the creation of a separate, exclusive
channel within a WAN access link. Partitions represent aggregate
bandwidth minimums or maximums governing how much of the network can
be used by a single application or traffic category. Partitions can
be fixed, creating dedicated virtual circuits, or burstable,
creating virtual circuits whose unused bandwidth can be shared.
- Priority policies. Priorities may be assigned to each application or
traffic category. Eight priority levels are available. Priority
policies are ideal for traffic that does not burst, non-IP traffic
and traffic characterized by small, high-priority flows.
- Admission-control policies. Admission control determines the
response if a bandwidth guarantee cannot be satisfied. Network
managers may choose to deny access, accommodate an additional user
with less than guaranteed performance, or, for web requests,
redirect the request to another server. For example, if an online
streaming-video service suffers a high- demand period and all
available bandwidth is consumed, an admission-control policy could
present a web page explaining that resources are busy. This allows a
maximum number of users to receive a targeted service quality
without degradation as new users seek to access the service.
- Discard and never-admit policies. These policies intentionally block
traffic. Discard policies toss packets without sending feedback to
the sender. Never-admit policies are similar to discard policies
except that the policy informs the sender that service is blocked.
Precise Rate Control
One of TCP/IP's primary weaknesses is an inability to guarantee QoS.
Unlike systems network architecture, or SNA, and asynchronous transfer mode, or
ATM, protocols, which have an embedded concept of rate, TCP/IP's attempts to
consume all available bandwidth conflict with the goal of predictable,
consistent, mission-critical application performance. PacketShaper's
standards-based TCP rate control technology overcomes TCP/IP's shortcomings by
proactively preventing congestion on both inbound and outbound flows and
increasing overall network throughput. Rather than discarding packets from a
congested queue, TCP rate control paces packet delivery to prevent congestion.
Rate control uses the remote user's access speed and real-time network latency
to calculate the optimal transmission speed. Evenly paced packet transmissions,
instead of packet bursts which consume all available bandwidth, yield
significant efficiency gains in the network. TCP rate control is a proactive and
precise way to increase network efficiency by avoiding retransmissions and
packet loss and creates a smooth, even flow rate that maximizes throughput. By
employing TCP rate control, PacketShaper manages the majority of traffic at the
access link before network congestion occurs.
For non-TCP based traffic, such as UDP, alternative rate-based management
techniques must be implemented. Typically UDP does not rely on acknowledgments
to signal successful receipt of data, and it therefore offers no means for flow
control. By directly controlling other TCP flows, however, PacketShaper
effectively makes bandwidth available for UDP flows. The combination of per flow
rate scheduling and explicit delay bounds removes latency and variability, or
jitter, for the UDP flows traversing the WAN access link.
For example, VoIP is a UDP-based application that is particularly
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latency-sensitive, requiring packets to be evenly spaced to eliminate jitter.
PacketShaper enhances VoIP performance in two ways. First, PacketShaper manages
competing traffic by using rate control to constrain bursty TCP traffic. In
addition, a rate policy for VoIP gives a minimum bandwidth guarantee to each
flow, ensuring that each voice stream gets the bandwidth it needs for
predictable performance. When there is a lull in the conversation, any unused
bandwidth is re-allocated to other traffic.
Application-Based Response-Time Measurement
PacketShaper's position in the enterprise network -- monitoring and
controlling all the traffic that passes -- gives it an opportunity to provide
accurate response-time measurements. Because it already handles and classifies
every packet, PacketShaper can easily calculate the time traffic spends
traveling between a client and a server and the time used by the server itself.
PacketShaper breaks each response-time measurement into network delay, the
time spent in transit, and server delay, the time the server used to process the
request. It can highlight clients and servers with the slowest performance.
PacketShaper allows network managers to set acceptability standards and then
track whether performance adheres to the standards.
High-Performance Packet Engines
Sophisticated classification and control of high-speed traffic must be
accomplished in an efficient manner. Adding significant delay in the process of
managing traffic flows would negate the resulting performance improvements.
Packeteer has developed expertise in the development of high-speed,
software-based packet engines running on real-time operating systems that can
efficiently process thousands of simultaneous high-speed connections with
minimal delay. This core-engine software technology scales to take advantage of
ever-increasing microprocessor performance to manage faster access links.
Scaleable Configuration
Large deployments require tools to ease the process of updating tens or
hundreds of PacketShapers that are distributed throughout the network. To
address these requirements, PacketShaper offers its own features, aligns with
industry standards and integrates with third-party tools.
For example, PacketShaper's Group Configuration Service is a feature in
the form of a web-based tool that network managers use to configure and deploy
large PacketShaper installations. As another example, PacketShaper can access a
lightweight directory access protocol, or LDAP, which is a networking industry
standard, to enable centralized management of data such as lists of IP
addresses. Finally, PacketShaper is accessible from within HP OpenView, a
Hewlett-Packard developed tool for network management.
CUSTOMERS
We sell all of our products through indirect channel partners. The
following is a representative list of our indirect channel partners by
geographic region:
EUROPE, AFRICA
NORTH AND SOUTH AMERICA AND THE MIDDLE EAST ASIA
- -------------------------------- -------------------------------- --------------------------------
AmeriNet, Inc. Activis, Ltd. AsiaSoft HK Ltd.
Alternative Technology ADAnet IIS Datacraft Asia Ltd.
Bay Data Consultants Alcatel Kanematsu USA, Inc.
Comdisco Computer Corp. Antea Consulting Lan Systems Pty Ltd.
Compaq Computer Corp. Data Construction Macnica, Inc.
Data Transit Iperformances Nissho Electronics Corporation
DTM Corporation Logical Networks Plc Teledata (Singapore) Ltd.
Ernst & Young, LLP ME Networks AG Unitech Computer Systems Limited
M-13 MIEL
MicroVisions
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NCA (Network Persetel PQ Client Computing
Computing Architects, Inc.) Telemation AG & Co Netzwerke
NETPLEX Systems, Inc. Wang Holdings Netherlands B.V.
NETsource
Ocean Systems Engineer/ITI
(OSEC)
SE Technologies, Inc.
Solunet, Inc.
ThinApse Corp
Trivalent LAN Concepts, Inc.
Unisys Corp. through LACD
Williams Telecommunications
The following is a representative list of end users that have deployed
multiple PacketShapers:
ENTERPRISES SERVICE PROVIDERS
- ------------------------------------------------------------------- --------------------------------
American Bottling Company Mitchell International, Inc. BIGLOBE
Autodesk, Inc. Motorola, Inc. British Telecommunications PLC
Borden Chemical Inc. Northwestern Mutual Life Cypress Communications
Boy Scouts of America Insurance Company NTT Corporation
Cytec Industries Inc. Shell SONERA Technologies
Domino's Pizza, Inc. Sony Pictures Entertainment Telefonica de Espana
EDS Staley/Tate & Lyle North America Verio Inc.
Grant Thornton International Standard & Poor's
Hoechst Marion Roussel AG Transamerica Corporation
Hewlett-Packard Company Unilever N.V.
In 1999, no one customer accounted for more than 10% of total net
revenues. In 1998, sales to Macnica accounted for 12% of total net revenues.
Sales to the top 10 indirect channel partners accounted for 37% and 45% of
total net revenues for the years ended December 31, 1999 and 1998, respectively.
Sales to customers outside of North America constituted 55% and 55% of
total net revenues for the years ended December 31, 1999 and 1998, respectively.
The following representative case studies of three of our current
customers illustrate how some of our customers have deployed our products:
Autodesk. Autodesk is a leading supplier of PC design software and
multimedia tools used for a wide range of design, engineering, mapping and
design-visualization purposes. Autodesk sought to reduce spending on expensive
international WAN connections to its worldwide offices, as well as to ensure
predictable performance for mission-critical applications such as SAP, Citrix
WinFrame and Microsoft Outlook. Before installing PacketShaper, Autodesk
required two permanent virtual circuits, or PVCs, for each of its hub locations:
one for mission-critical applications and another for secondary traffic such as
file transfers. Using PacketShaper, Autodesk was able to consolidate its network
traffic, simplify its network management, reduce its PVC requirements by half,
and realize cost savings and efficiency by not maintaining additional network
infrastructure.
Domino's Pizza. Domino's Pizza is a leader in pizza delivery. When
Domino's purchased a new order-processing application from PeopleSoft, it sought
to ensure that appropriate bandwidth would be available on its corporate network
while preserving performance for other important traffic such as IPX, which is
used for access to network directory services. Using PacketShaper, Domino's was
able to identify the different types of traffic on its network, including
traffic types it had not previously known were consuming bandwidth. Network
managers defined bandwidth-allocation policies to enable PeopleSoft performance,
protect other mission-critical applications, and reduce bandwidth for non-
urgent traffic during times of contention.
Hoechst Marion Roussel. Hoechst Marion Roussel, or HMR, is a leading
pharmaceutical company with operations worldwide. When HMR began deploying SAP
R/3 in its Latin American operations to support mission-critical financial
management, manufacturing and sales functions, they found SAP R/3 competed for
network bandwidth with Microsoft Exchange. Adding more bandwidth was not an
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effective solution because TCP/IP applications, such as Microsoft Exchange,
attempt to consume all of the available bandwidth on a network, leaving other
applications with inadequate bandwidth to perform properly. WAN bandwidth is
also very expensive in Latin America. Packeteer's TCP rate control technology
enabled HMR to manage their Microsoft Exchange traffic by setting appropriate
bandwidth policies for several applications and enabling SAP R/3 to perform even
during heavy network congestion. The easily deployable nature and remote
management capabilities of Packeteer's solution enabled HMR to deploy
PacketShapers in multiple sites where technical resources were scarce.
MANUFACTURING
We outsource our manufacturing, including warranty repair, to two contract
manufacturers. PEMSTAR, located in San Jose, California, manufactures our
PacketShaper 1000 and 2000, and Sanmina, located in San Jose, California,
manufactures our PacketShaper 4000. The manufacturing processes and procedures
for both of these manufacturers are ISO 9002 certified. Outsourcing our
manufacturing enables us to reduce fixed costs and to provide flexibility in
meeting market demand.
We design and develop the key components of our products, including
printed circuit boards and software. In addition, we determine the components
that are incorporated in our products and select the appropriate suppliers of
these components. Product testing and burn-in is performed by our contract
manufacturers using tests and automated testing equipment that we specify. We
also use inspection testing and statistical process controls to assure the
quality and reliability of our products.
We use a rolling seven-month forecast based on anticipated product orders
to determine our material requirements. Lead times for the materials and
components we order vary significantly and depend on factors such as specific
supplier, contract terms and demand for a component at a given time. We submit
purchase orders for quantities requested within 90 days. PEMSTAR, Sanmina or
Packeteer may terminate the contract without cause at any time. At that time the
terminating party must honor all open purchase orders.
MARKETING AND SALES
We target our marketing and sales efforts at enterprises and service
providers. Marketing and sales activities focus on reaching the corporate
application network managers responsible for the performance of mission-critical
applications in the enterprise. They also focus on reaching service providers
that provide valued-added service offerings, such as web hosting, application
outsourcing and application service-level management.
Our marketing programs support the sale and distribution of our products
and educate existing and potential enterprise and service provider customers
about the benefits of our application-adaptive bandwidth management solutions.
Our marketing efforts include the following:
- publication of technical and educational articles in industry
magazines;
- public speaking opportunities;
- web site-based communication and promotion;
- industry tradeshows, technical conferences and technology seminars;
and
- advertising, direct mail and public relations.
We classify our distribution channels in the following three categories:
- Solution Partners. We have established an indirect distribution
channel which is comprised of a network of over 100 VARs,
distributors and systems integrators that sell our solutions in over
50 countries. These solution partners sell PacketShapers and other
products that are
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complementary to our application-adaptive bandwidth management
solution.
- Technology Partners. Technology partners are OEMs and companies with
whom we have established joint development relationships. These
partners license our PacketWise software for integration into their
networking products. For example, we established a relationship with
Hewlett-Packard to enhance HP OpenView so that PacketShaper can be
managed through its interface.
- Alliance Partners. We have developed a marketing alliance program to
establish new marketing relationships, as well as enhance existing
relationships, with hardware, software and systems vendors. We
believe that we can build brand awareness by working with alliance
partners to identify the needs of specific customer environments.
For example, we formed an alliance with Citrix to identify and
enhance the performance of individual applications within the Citrix
MetaFrame and WinFrame environments and an alliance with Clarent
Corporation to identify and enhance the quality of their VoIP
applications. We work with alliance partners on various joint
marketing initiatives, including product literature, direct mailings
and seminars. Some of these partners include Great Plains, Sales
Logix and Attachmate.
As of December 31, 1999, our worldwide sales and marketing organization
consisted of 60 individuals, including managers, sales representatives and
technical and administrative support personnel. We have ten domestic sales
offices located in Bedminster, New Jersey; Chicago, Illinois; Cupertino and San
Diego, California; Dallas, Irving and Grapevine, Texas; Fall River,
Massachusetts; Duluth, Georgia; and Tacoma, Washington. In addition, we have
four international sales offices located in Hong Kong; Sydney, Australia; Tokyo,
Japan; and Waddinxveen, The Netherlands.
We believe there is a strong international market for our bandwidth
management solutions. Our international sales are conducted primarily through
our overseas offices. Sales to customers outside of North America accounted for
55% and 55% of our total net revenues in 1999 and 1998, respectively. In
addition, sales to Asia Pacific accounted for 26% and 31% of our total net
revenues in 1999 and 1998, respectively.
RESEARCH AND DEVELOPMENT
As of December 31, 1999, our research and development organization
consisted of 30 employees, each with expertise in a different area of our
software: core engineering, classification, configuration and reporting
management, user interface and platform engineering. Since inception, we have
focused our research and development efforts on developing and enhancing our
application-adaptive bandwidth management solutions.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
Our customer service and support organization provides both product
maintenance and technical support services. Our technical support staff is
strategically located in five regional service centers: California, Hong Kong,
Japan, Australia and The Netherlands. Our indirect channel partners offer
similar support services for all of our products they sell. These services are
typically sold as a one-year contract to our resellers and end users. These
services are not provided without a maintenance contract.
COMPETITION
We compete in a new, rapidly evolving and highly competitive sector of the
Internet application infrastructure system market. We expect competition to
persist and intensify in the future from a number of different sources.
Increased
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competition could result in reduced prices and gross margins for our products
and could require increased spending by us on research and development, any of
which could harm our business. We compete with Cisco, CheckPoint and several
small private companies which sell products that utilize competing technologies
to provide bandwidth management. In addition, our products and technology
compete for information technology budget allocations with products that offer
monitoring technologies, such as probes and related software. Lastly, we face
indirect competition from companies that offer enterprises and service providers
increased bandwidth and infrastructure upgrades that increase the capacity of
their networks, and thereby may lessen or delay the need for bandwidth
management.
We believe the principal competitive factors in the bandwidth management
solutions market are:
- expertise and in-depth knowledge of applications;
- timeliness of new product introductions;
- ability to integrate in the existing network architecture without
requiring network reconfigurations or desktop changes;
- ability to ensure end-user performance in addition to aggregate
performance of the WAN access link;
- compatibility with industry standards;
- products that do not increase latency and packet loss;
- size and scope of distribution network;
- brand name; and
- access to customers and size of installed customer base.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright and trademark laws, and on
trade secrets, confidentiality provisions and other contractual provisions to
protect our proprietary rights. These measures afford only limited protection.
We currently have three issued U.S. patents and nine pending patent applications
including one for which we have received a notice of allowance. We cannot assure
you that our means of protecting our proprietary rights in the U.S. or abroad
will be adequate or that competitors will not independently develop similar
technologies. Our future success depends in part on our ability to protect our
proprietary rights to the technologies used in our principal products. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to obtain and use trade secrets or other
information that we regard as proprietary. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
U.S. We cannot assure you that any issued patent will preserve our proprietary
position, or that competitors or others will not develop technologies similar to
or superior to our technology. Our failure to enforce and protect our
intellectual property rights could harm our business, operating results and
financial condition.
From time to time, third parties, including our competitors, have asserted
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect that we will increasingly be subject to
infringement claims as the number of products and competitors in the
application-adaptive bandwidth management market grows and the functionality of
products overlaps. The results of any litigation matter are inherently
uncertain. In the event of an adverse result in any litigation with third
parties that could arise in the future, we could be required to pay substantial
damages, including treble damages if we are held to have willfully infringed, to
cease the manufacture, use and sale of infringing products, to expend
significant resources to develop non-infringing technology, or to obtain
licenses to the infringing technology. Licenses may not be available from any
third party that asserts intellectual property claims against us on commercially
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reasonable terms, or at all. In addition, litigation frequently involves
substantial expenditures and can require significant management attention, even
if we ultimately prevail.
EMPLOYEES
As of December 31, 1999, Packeteer employed a total of 107 full-time
employees. Of the total number of employees, 30 were in research and
development, 47 in sales and customer service, 13 in marketing, 3 in operations
and 14 in administration. Our employees are not represented by any collective
bargaining agreement with respect to their employment by Packeteer.
ITEM 2. PROPERTIES
We lease approximately 35,963 square feet of administrative and research
and development facilities in Cupertino, California. We believe our current
facilities will be sufficient to handle our operations for at least the next 12
months. We believe that future growth can be accommodated by obtaining the
necessary additional space. Packeteer leases sales offices in the following
locations: Duluth, Georgia; Bedminster, New Jersey; Dallas, Texas; Tacoma,
Washington; Sydney, Australia; Hong Kong; Tokyo, Japan; and Waddinxveen, The
Netherlands.
ITEM 3. LEGAL PROCEEDINGS
We have no material legal proceedings threatened or pending.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "PKTR" since our initial public offering on July 28, 1999. Prior to this
time, there was no public market for our common stock. The following table shows
the high and low sale prices per share of our common stock as reported on the
Nasdaq National Market for the periods indicated:
As of February 29, 2000, there were approximately 1,179 holders of our
common stock. We have never declared or paid any dividends on our capital stock.
We currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. The covenants under our Loan and Security Agreement with
Silicon Valley Bank prohibit us from paying cash dividends.
High Low
------- ------
Fiscal 1999:
Third Quarter (from July 28, 1999).............. $ 56.50 $21.13
Fourth Quarter.................................. 75.38 29.75
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of Packeteer,
Inc. and the Notes thereto included elsewhere in this report. The historical
results are not necessarily indicative of the operating results to be expected
in the future.
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PERIOD FROM
YEARS ENDED DECEMBER 31, JAN. 25, 1996
------------------------- (INCEPTION) TO
1999 1998 1997 DEC. 31, 1996
------ ------ ------ --------------
(in thousands,
except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues:
Product revenues........................... $ 16,824 $ 7,105 $ 1,413 $ --
Licensing revenues......................... 1,617 125 -- --
-------- ------- ------- -------
Total net revenues.................... 18,441 7,230 1,413 --
Cost of revenues............................. 5,286 2,386 457 --
-------- ------- ------- -------
Gross profit................................. 13,155 4,844 956 --
Operating expenses:
Research and development................... 5,164 2,779 2,932 725
Sales and marketing........................ 13,737 8,866 3,210 349
General and administrative................. 2,936 1,750 934 238
Amortization of stock-based compensation... 3,088 537 -- --
-------- ------- ------- -------
Total operating expenses.............. 24,925 13,932 7,076 1,312
-------- ------- ------- -------
Net loss from operations..................... (11,770) (9,088) (6,120) (1,312)
Interest and other income.................... 1,757 367 238 75
Interest and other expense................... (863) (78) (27) --
-------- ------- ------- -------
Net loss..................................... $(10,876) $(8,799) $(5,909) $(1,237)
======== ======= ======= =======
Basic and diluted net loss per share......... $ (0.71) $ (1.54) $ (1.82) $ (1.28)
======== ======= ======= =======
Shares used in computing basic and diluted
net loss per share.(1) .................... 15,343 5,709 3,253 965
======== ======= ======= =======
DECEMBER 31,
------------------------------------
1999 1998 1997 1996
------ ------ ------ ------
(in thousands)
CONSOLIDATED BALANCE SHEETS DATA:
Cash, cash equivalents and investments................... $65,158 $4,477 $2,416 $4,255
Working capital.......................................... 51,285 3,501 2,611 4,077
Total assets............................................. 71,106 8,570 4,935 4,453
Long-term obligations.................................... 839 739 356 --
Total stockholders' equity............................... 59,120 3,759 2,804 4,251
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the weighted average common and common equivalent
shares used to compute net loss per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this report. Except
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for historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of a number of factors, including the risks described in
the section titled "Factors Affecting Operating Results" set forth below.
OVERVIEW
Packeteer is a leading provider of Internet application infrastructure
systems designed to enable businesses and service providers to ensure the
quality of experience for networked applications and application services.
Packeteer's advanced PacketWise software, the foundation of the Company's
innovative PacketShaper and AppVantage systems, integrates application
discovery, analysis, control and reporting technologies that are required for
proactive application performance and bandwidth management.
Packeteer's products are deployed today by leading companies and service
providers through an established network of more than 100 VARs, distributors and
system integrators in more than 50 countries. In addition, PacketWise software
is licensed by major communications industry partners who integrate the software
into specific strategic networking solutions. We have subsidiaries in Hong Kong,
Japan and The Netherlands.
We were incorporated in January 1996. From our inception through January
1997, our operating activities related primarily to establishing a research and
development organization, developing and testing prototype designs, establishing
a sales and marketing organization and developing customer, vendor and
manufacturing relationships. We shipped our first product, the PacketShaper
2000, in February 1997. Since then, we have focused on developing additional
products and product enhancements, building our worldwide indirect sales channel
and establishing our sales, marketing and customer support organizations. We
began shipments of the PacketShaper 1000 and 4000 in October 1997. Since
inception, we have incurred significant losses and as of December 31, 1999, had
an accumulated deficit of $26.8 million.
In order to further the growth of our business, we sold 4,600,000 shares of
common stock in our initial public offering on July 28, 1999, which raised
approximately $62.6 million net of fees and expenses.
We sell our products worldwide exclusively through VARs, distributors,
systems integrators and OEMs. We use indirect channels to leverage the reach of
our sales force to obtain worldwide coverage. Our sales force and marketing
efforts are used to develop brand awareness and support our indirect channels.
We have a limited operating history. We have not achieved profitability on
a quarterly or annual basis, and we anticipate that we will incur net losses for
at least the next several quarters. We expect to continue to incur significant
sales and marketing, product development and administrative expenses and, as a
result, will need to generate significant quarterly revenues to achieve and
maintain profitability.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total net revenues. These historical operating
results are not necessarily indicative of the results for any future period.
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
Net revenues:
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Product revenues.................................. 91% 98% 100%
Licensing revenues................................ 9 2 --
---- ---- ----
Total net revenues........................... 100 100 100
Cost of revenues.................................... 29 33 32
---- ---- ----
Gross margin........................................ 71 67 68
Operating expenses:
Research and development.......................... 28 38 208
Sales and marketing............................... 74 123 227
General and administrative........................ 16 24 66
Amortization of stock-based compensation.......... 17 8 --
---- ---- ----
Total operating expenses..................... 135 193 501
---- ---- ----
Net loss from operations............................ (64) (126) (433)
Interest and other income........................... 10 5 17
Interest and other expense.......................... (5) (1) (2)
----- ----- -----
Net loss............................................ (59)% (122)% (418)%
====== ====== ======
Total net revenues
Our total net revenues consist primarily of product sales and, to a lesser
extent, licensing fees from OEM partners. Our product revenues consist of sales
of our PacketShaper family of products. We recognize product revenues once the
customer issues a noncancelable purchase order and the product has been shipped
to the customer. Maintenance revenue is deferred and amortized over the period
of the contract. Service revenue is recognized as the services are performed.
Maintenance and service revenues to date have not been significant. We routinely
analyze and provide, as necessary, reserves at the time of shipment for product
returns and allowances. We have estimated these reserves based on our experience
and other available information since we began shipping. These amounts have not
been significant to date. Our ability to estimate these reserves is limited to
the short history we have of shipping products. Our licensing revenues currently
consist of licensing fees and royalty payments from unit sales of OEM products
that incorporate our technology. We recognize OEM license fees, which include
post-contract customer support, when the software has been shipped to the
customer, the fees are fixed and determinable and there is evidence of the fair
value of the post-contract customer support. When sufficient evidence of fair
value of post-contract customer support is not available, revenues are
recognized ratably over the support period. When we do not have sufficient
evidence of fair value of post-contract customer support for our OEM license
arrangements, we recognize the revenues for these arrangements over the support
period.
Total net revenues increased to $18.4 million in fiscal 1999 from $7.2
million in fiscal 1998 and from $1.4 million in fiscal 1997. Product revenues
increased to $16.8 million in fiscal 1999 from $7.1 million in fiscal 1998 and
$1.4 million in fiscal 1997 due to the increased number of units sold as a
result of increased channel and market development and product acceptance.
Licensing revenues increased to $1.6 million in fiscal 1999 from $125,000 in
fiscal 1998 and $0 in fiscal 1997. These increases were due to license and
royalty revenues from the ADC Telecommunications and Adtran agreements.
In fiscal 1999, no one customer accounted for more than 10% of total net
revenues. In fiscal 1998, sales to Macnica accounted for 12% of total net
revenues. Sales to the top 10 indirect channel partners accounted for 37% and
45% of total net revenues for fiscal 1999 and fiscal 1998, respectively. See
Note 9 of the Notes to Consolidated Financial Statements.
Cost of revenues
Our cost of revenues consist primarily of the cost of finished products
purchased from our two turnkey manufacturers, documentation and other overhead
costs. We outsource the manufacturing of the PacketShaper 1000 and PacketShaper
2000 to PEMSTAR and the PacketShaper 4000 to Sanmina. Our cost of revenues
increased to $5.3 million in fiscal 1999 from $2.4 million in fiscal 1998 and
$457,000 in fiscal
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1997. The cost of revenues represented 29%, 33% and 32% of total net revenues in
fiscal 1999, 1998 and 1997, respectively. The percentage decrease from fiscal
1998 to fiscal 1999 was due to increased economies of scale and reductions in
manufacturing costs. The percentage increase from fiscal 1997 to fiscal 1998 was
due to increases in manufacturing costs.
Research and development
Research and development expenses consist primarily of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development, testing and enhancement of the PacketShaper family of
products and PacketWise software. Research and development expenses increased to
$5.2 million in fiscal 1999 from $2.8 million in fiscal 1998 and $2.9 million in
fiscal 1997. The increase in research and development expenses from fiscal 1998
to fiscal 1999 was due to increases in personnel, consulting and related
overhead costs. The decrease in research and development expenses from fiscal
1997 to fiscal 1998 was due to reduced design, development and prototype
expenses partially offset by increases in staffing and related personnel costs.
Research and development expenses represented 28%, 38% and 208% of total net
revenues in fiscal 1999, 1998 and 1997, respectively. These percentage decreases
were primarily due to increased total net revenues.
As of December 31, 1999, all research and development costs have been
expensed as incurred. We believe that continued investment in research and
development is critical to attaining our strategic product and cost reduction
objectives. We expect these absolute dollar expenses to increase in the future
as we continue to develop new products and enhance existing products.
Sales and marketing
Sales and marketing expenses consist primarily of salaries, commissions
and related personnel expenses for those engaged in the sales, marketing and
support of the product as well as related trade show, promotional and public
relations expenses. Sales and marketing expenses increased to $13.7 million in
fiscal 1999 from $8.9 million in fiscal 1998 and $3.2 million in fiscal 1997.
The increases in both fiscal 1999 and fiscal 1998 reflected the hiring of
additional personnel in connection with building our sales force, and channel
and increased marketing activities. Sales and marketing expenses represented
75%, 123% and 227% of total net revenues for fiscal 1999, 1998 and 1997,
respectively. These percentage decreases were due to increased total net
revenues. We intend to pursue sales and marketing campaigns aggressively and
therefore expect our absolute dollar expenses to increase in the future.
General and administrative
General and administrative expenses consist primarily of salaries and
related personnel expenses for administrative personnel, professional fees and
other general corporate expenses. General and administrative expenses increased
to $2.9 million in fiscal 1999 from $1.8 million in fiscal 1998 and $934,000 in
fiscal 1997. General and administrative expenses represented 16%, 24% and 66% of
total net revenues for fiscal 1999, 1998 and 1997, respectively. These
percentage decreases were primarily due to increased net revenues. As we add
personnel and incur additional costs related to the growth of our business, we
expect our absolute dollar expenses to increase in the future.
Stock based compensation
Amortization of stock-based compensation resulted from the granting of
stock options to employees and consultants with exercise prices per share
determined to be below the deemed fair value per share of our common stock on
the dates of grant for financial reporting purposes. The stock-based
compensation is being amortized to expense in accordance with FASB
Interpretation No. 28 over the vesting period of the individual options,
generally four years. We recorded stock-based compensation expense of $3.1
million and $537,000 in fiscal 1999 and 1998, respectively, leaving $2.1 million
to be amortized in future periods.
Interest and other income
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Interest and other income consists primarily of interest income on our
cash and investments. Interest and other income totaled $1.8 million, $367,000
and $238,000 for fiscal 1999, 1998 and 1997, respectively. The increase in
fiscal 1999 relates to interest income on proceeds from our initial public
offering in July 1999.
Interest and other expense
Interest and other expense consists of interest expense related to our
line of credit, debt and capital lease obligations. Interest and other expense
totaled $863,000, $78,000 and $27,000 for fiscal 1999, 1998 and 1997,
respectively. The increase in fiscal 1999 relates to increased interest charges
on our line of credit, debt and capital lease obligations.
Income tax provision
Since inception, we have incurred net operating losses for federal and
state purposes and have not recognized any tax provision or benefit. As of
December 31, 1999, we had net operating loss carryforwards of approximately
$23.6 million and $14.6 million for federal and state income tax purposes,
respectively. These carryforwards, if not utilized, expire beginning 2005
through 2019. Federal and state laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in our
ownership that constitutes an "ownership change", as defined in Section 382 of
the Internal Revenue Code. If we have an ownership change, the ability to
utilize the stated carryforwards could be significantly reduced. See Note 7 of
Notes to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from the sale of preferred and
common stock and other financing activities such as bank credit against accounts
receivable, subordinated debt offerings and capital equipment leasing. Cash,
cash equivalents and investments totaled $65.2 million at December 31, 1999, an
increase of $60.7 million from $4.5 million at December 31, 1998. The increase
is due to the sale of common stock in our initial public offering in fiscal year
1999 and debt financing, partially offset by cash used in operations. Cash used
in operating activities in 1999 was $5.9 million, a decrease of $1.1 million
from $7.0 million in cash used in operating activities in 1998.
We have a lease to finance the acquisition of computer software and
hardware, and furniture. Our original lease agreement was extended and expired
as of November 1999. As of December 31, 1999, approximately $1.1 million was
outstanding under capital lease obligations related to this original lease
agreement. We have negotiated a new lease agreement that expires on November 30,
2000. The new lease agreement was unused as of December 31, 1999 and has a
capacity of $1.5 million. We have a revolving credit facility against accounts
receivable which provided borrowings of up to $3.0 million and expired on
January 10, 2000. We have negotiated a renewal for the credit facility that will
provide borrowings of up to $5.0 million and will expire on January 9, 2001.
Borrowings under this credit facility bear interest at the prime rate, which was
8.5% as of December 31, 1999, are due upon demand and are secured by
substantially all of our assets. At December 31, 1999, we had borrowed $1.9
million against our credit facility.
We also entered into subordinated loan and security agreements in January
1999 and May 1999. Borrowings under each of these agreements were $2.5 million
(for an aggregate amount of $5.0 million borrowed), bear interest at a rate of
12.25% and 12.76% per annum, respectively, and are secured by all of our
tangible assets. In August 1999, we repaid the $2.5 million borrowed under the
subordinated loan under the January 1999 agreement. At December 31, 1999, $2.5
million remained outstanding on the May 1999 agreement.
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
partial use of our cash resources. In addition, we may utilize cash resources to
fund acquisitions or investments in complementary businesses, technologies or
products. We believe that our current cash, cash equivalents, investments and
cash generated from operations and available borrowings under our credit
facilities, will
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be sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the foreseeable future.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. In order to distinguish
21st century dates from 20th century dates, the date code field needed to be
expanded to 4 digits. As a result, many companies' software and computer systems
were upgraded or replaced in order to comply with these year 2000 requirements.
The use of software and computer systems that are not year 2000 compliant could
have resulted in system failures or miscalculations resulting in disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in normal business activities.
To date, we have not suffered any disruptions in our computer systems or
software when the expanded date code field was first used on January 1, 2000. In
addition, to date, we have not been made aware that any third-party systems we
rely on, the manufacturing systems of our vendors or the systems our customers
use to order our services have suffered disruptions in their systems.
To date, we have spent approximately $50,000 on year 2000 compliance. At
this time, we do not expect to incur future expenditures relating to year 2000
compliance matters.
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially and adversely
affected. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
OUR LIMITED OPERATING HISTORY AND THE RAPIDLY EVOLVING MARKET WE SERVE MAKES
EVALUATING OUR BUSINESS PROSPECTS DIFFICULT
We were incorporated in January 1996 and began shipping our products
commercially in February 1997. Because of our limited operating history and the
uncertain nature of the rapidly changing market that we serve, we believe the
prediction of future results of operations is difficult. As an investor in our
common stock, you should consider the risks and difficulties that we face as an
early stage company in a new and rapidly evolving market. Some of the specific
risks we face include our ability to:
- execute our sales and marketing strategy;
- maintain current and develop new relationships with key VARs,
distributors, systems integrators and original equipment manufacturers,
or OEMs; and
- expand our domestic and international sales efforts.
WE HAVE A HISTORY OF LOSSES, EXPECT OUR EXPENDITURES TO INCREASE AND OUR LOSSES
TO CONTINUE, AND MAY NEVER ACHIEVE PROFITABILITY
We have incurred losses since we commenced operations in 1996 and may never
achieve profitability. Furthermore, we currently expect that our operating
expenditures will continue to increase significantly and we may not generate a
sufficient level of revenues to offset these expenditures or be able to adjust
spending in a timely manner to respond to any unanticipated decline in revenues.
We incurred net losses of $5.9 million in 1997, $8.8 million in 1998 and $10.9
million in 1999. As of December 31, 1999, we had an accumulated deficit of $26.8
million. Although our revenues have grown in recent quarters, we cannot be
certain when or if we will realize sufficient revenues to achieve profitability.
If revenues grow slower than we anticipate or if operating expenditures exceed
our expectations or
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cannot be adjusted accordingly, we may continue to experience significant losses
on a quarterly and annual basis. Even if we achieve profitability, we cannot
assure you that we can sustain or increase profitability on a quarterly or
annual basis in the future.
OUR FUTURE OPERATING RESULTS MAY NOT MEET ANALYSTS' EXPECTATIONS AND MAY
FLUCTUATE SIGNIFICANTLY, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE
We believe that period-to-period comparisons of our operating results
cannot be relied upon as an indicator of our future performance. Our operating
results may be below the expectations of public market analysts or investors in
some future quarter. If this occurs, the price of our common stock would likely
decrease. Our operating results are likely to fluctuate significantly in the
future on both a quarterly and an annual basis due to a number of factors, many
of which are outside our control. Factors that could cause our operating results
to fluctuate include variations in:
- the mix of products we sell;
- the mix of channels through which those products are sold;
- the average selling prices of our products;
- the timing and size of orders and shipments of our products;
- the amount and timing of revenues from OEMs; and
- the amount and timing of our operating expenses.
In the past, we have experienced fluctuations in operating results. For
example, gross margin decreased from 69.6% for the three months ended December
31, 1997 to 61.8% for the three months ended March 31, 1998, primarily due to
variations in the mix of products sold and variations in channels through which
products were sold. Research and development expenses have fluctuated due to
increased prototype expenses and consulting fees related to the launch of new
products, increased personnel expenses and costs associated with a facilities
move. Sales and marketing expenses have fluctuated due to increased personnel
expenses, expenditures related to trade shows and the launch of new products.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for detailed information on our annual operating results.
OUR RELIANCE ON SALES OF OUR PRODUCTS BY OTHERS MAKES IT DIFFICULT TO PREDICT
OUR REVENUES AND RESULTS OF OPERATIONS
The timing of our revenues is difficult to predict because of our reliance
on indirect sales channels and the variability of our sales cycle. The length of
our sales cycle for sales through our indirect channel partners to our end users
may vary substantially depending upon the size of the order and the distribution
channel through which our products are sold. We expect to have difficulties in
predicting revenues from OEMs because we are unable to forecast unit sales of
their products which incorporate our technology. Sales from our VARs and systems
integrators to end users typically take three to four months to complete. We are
dependent on timely and accurate inventory information from our indirect channel
partners to enable us to establish channel inventory reserves for indirect
channel partners whose inventory exceeds normal stocking levels. If this
inventory information is not timely or accurate, we could experience increased
levels of sales returns or unforecasted fluctuations in future revenue.
If revenues forecasted in a particular quarter do not occur in that
quarter, our operating results for that quarter could be adversely affected.
Furthermore, because our expense levels are based on our expectations as to
future revenue and to a large extent are fixed in the short term, a substantial
reduction or delay in sales of our products or the loss of any significant
indirect channel partner could harm our business.
IF THE BANDWIDTH MANAGEMENT SOLUTIONS MARKET FAILS TO GROW, OUR BUSINESS WILL
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FAIL
The market for bandwidth management solutions is in an early stage of
development and its success is not guaranteed. Therefore, we cannot accurately
assess the size of the market, the products needed to address the market, the
optimal distribution strategy, or the competitive environment that will develop.
In order for us to be successful, our potential customers must recognize the
value of more sophisticated bandwidth management solutions, decide to invest in
the management of their networks and the performance of important business
software applications and, in particular, adopt our bandwidth management
solutions. The growth of the bandwidth management solutions market also depends
upon a number of factors, including the availability of inexpensive bandwidth,
especially in international markets, and the growth of wide area networks.
IF WE ARE UNABLE TO DEVELOP AND MAINTAIN STRONG PARTNERING RELATIONSHIPS WITH
OUR INDIRECT CHANNEL PARTNERS, OR IF THEIR SALES EFFORTS ON OUR BEHALF ARE NOT
SUCCESSFUL, OUR SALES MAY SUFFER AND OUR REVENUES MAY NOT INCREASE
We rely on an indirect distribution channel consisting of VARs,
distributors, systems integrators and OEMs for all of our revenues. Because many
of our indirect channel partners also sell competitive products, our success and
revenue growth will depend on our ability to develop and maintain strong
cooperative relationships with significant indirect channel partners, as well as
on the sales efforts and success of those indirect channel partners.
We cannot assure you that our indirect channel partners will market our
products effectively or continue to devote the resources necessary to provide us
with effective sales, marketing and technical support. In order to support and
develop leads for our indirect distribution channels, we plan to expand our
field sales and support staff significantly. We cannot assure you that this
internal expansion will be successfully completed, that the cost of this
expansion will not exceed the revenues generated or that our expanded sales and
support staff will be able to compete successfully against the significantly
more extensive and well-funded sales and marketing operations of many of our
current or potential competitors. In addition, our indirect channel agreements
are generally not exclusive and one or more of our channel partners may compete
directly with another channel partner for the sale of our products in a
particular region or market. This may cause such channel partners to stop or
reduce their efforts in marketing our products. Our inability to effectively
establish or manage our distribution channels would harm our sales.
DEVELOPING STRONG OEM RELATIONSHIPS WILL BE TIME AND RESOURCE INTENSIVE AND MAY
NOT RESULT IN THE SUCCESSFUL DEPLOYMENT OF OUR TECHNOLOGY AND PRODUCTS
One aspect of our sales strategy is to develop relationships with OEM
partners that will license our PacketWise software and incorporate it into their
networking products. If we are not successful in entering into suitable OEM
relationships, our ability to successfully deploy our PacketWise software and
build brand awareness would be harmed. The development of OEM relationships
generally involves a considerable amount of management time and company
resources as potential OEM partners evaluate the viability of integrating our
technology. We cannot assure you that potential OEM partners will enter into a
relationship with us after we have expended these efforts and costs. In
addition, even if we are successful in entering into an OEM relationship, we
cannot assure you that our current or future OEM partners will be able to
integrate our technology into commercially viable products on a timely basis.
Furthermore, we cannot assure you that our OEM partners will give a high
priority to the marketing and sale of products which incorporate our technology
or that our OEM partners will not develop competitive products and decide to
terminate or minimize their relationship with us. The failure to build and
maintain successful OEM relationships would have a negative effect on the
deployment of our technology and products.
IF WE ARE NOT ABLE TO MAINTAIN CURRENT AND FUTURE OEM RELATIONSHIPS, OUR
BUSINESS WILL BE HARMED
We may be unable to retain our current or future OEM partners. Generally,
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OEM relationships can be terminated with little or no notice. Our recent OEM
agreements with ADC Telecommunications, Inc. and Adtran, Inc. are not exclusive
and are each for an initial term of five years, with no obligation for either
ADC or Adtran to renew their respective agreements with us. We expect to enter
into similar OEM relationships in the future. If our relationship with any
current or future OEM partner is terminated by either party, we may not be
successful in replacing such partner on a timely basis or at all with another
suitable OEM partner.
OUR RELIANCE ON OEM PARTNERS FOR THE SALE OF OUR PRODUCTS MAKES IT DIFFICULT TO
MANAGE AND FORECAST PRODUCTION AND DELIVERY SCHEDULES AND SALES EXPECTATIONS
Our inability to forecast the level of orders from OEM partners may make
it difficult to schedule production, manage our contract manufacturers, and
forecast sales. The level and timing of orders placed by OEM partners who
purchase hardware from us may vary due to many factors including OEM partners'
attempts to balance their inventories, changes in the OEM partners'
manufacturing strategies and variation in demand for their products. Due to
product life cycles, competitive and economic conditions, these OEM partners
generally do not commit to firm production schedules in advance. Anticipated
orders from our current or future OEM partners may not materialize or delivery
schedules may be deferred as a result of changes in customer's business needs.
These order fluctuations and deferrals will harm our business.
THE PACKETSHAPER FAMILY OF PRODUCTS, WHICH INCLUDES THE APPVANTAGE MODELS AND
PACKETWISE SOFTWARE ARE CURRENTLY OUR ONLY PRODUCTS, AND ALL OF OUR CURRENT
REVENUES AND A SIGNIFICANT PORTION OF OUR FUTURE GROWTH DEPENDS ON THEIR
COMMERCIAL SUCCESS
All of our current revenues and a significant portion of our future growth
depends on the commercial success of our PacketShaper family of products and
PacketWise software, which are the only products that we currently offer. If our
target customers do not widely adopt, purchase and successfully deploy the
PacketShaper family of products or PacketWise software, our revenues will not
grow significantly.
IF OUR INTERNATIONAL SALES EFFORTS ARE UNSUCCESSFUL, OUR BUSINESS WILL FAIL TO
GROW
The failure of our indirect partners to sell our products internationally
will harm our business. Sales to customers outside of North America accounted
for 54.7% of our total net revenues in 1998 and 54.9% of our total net revenues
in 1999. In particular, sales to customers in our Asia Pacific region accounted
for 31.0% of our total net revenues in 1998 and 26.0% of our total net revenues
in 1999. Our ability to grow will depend in part on the expansion of
international sales, which will require success on the part of our VARs,
distributors, systems integrators and OEMs in marketing our products.
We intend to expand operations in our existing international markets and
to enter new international markets, which will demand management attention and
financial commitment. We may not be able to successfully expand our
international operations. In addition, a successful expansion of our
international operations and sales in foreign markets will require us to develop
relationships with suitable indirect channel partners operating abroad. We may
not be able to identify, attract or retain these indirect channel partners.
Furthermore, to increase revenues in international markets, we will need
to continue to establish foreign operations, to hire additional personnel to run
these operations and to maintain good relations with our foreign indirect
channel partners. To the extent that we are unable to successfully do so, our
growth in international sales will be limited.
Our international sales are currently all U.S. dollar-denominated. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in international markets. In
the future, we may elect to invoice some of our international customers in local
currency. Doing so will subject us to fluctuations in exchange rates between the
U.S. dollar and the particular local currency.
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SALES TO MACNICA OR OUR OTHER LARGE CUSTOMERS WOULD BE DIFFICULT TO REPLACE IF
LOST
A limited number of indirect channel partners have accounted for a large
part of our revenues to date and we expect that this trend will continue.
Because our expense levels are based on our expectations as to future revenue
and to a large extent are fixed in the short term, any significant reduction or
delay in sales of our products to any significant indirect channel partner or
unexpected returns from these indirect channel partners could harm our business.
No one customer accounted for more than 10% of total net revenues in 1999.
Sales to Macnica, Inc. accounted for 12% of our total net revenues in 1998. We
expect that our largest customers in the future could be different from our
largest customers today. End users can stop purchasing and indirect channel
partners can stop marketing our products at any time. We cannot assure you that
we will retain these indirect channel partners or that we will be able to obtain
additional or replacement partners. The loss of one or more of our key indirect
channel partners or the failure to obtain and ship a number of large orders each
quarter could harm our operating results.
COMPETITION FOR EXPERIENCED PERSONNEL IS INTENSE AND OUR INABILITY TO ATTRACT
AND RETAIN QUALIFIED PERSONNEL COULD SIGNIFICANTLY INTERRUPT OUR BUSINESS
OPERATIONS
Our future success will depend, to a significant extent, on the ability of
our management to operate effectively, both individually and as a group. Given
our early stage of development, we are dependent on our ability to attract,
retain and motivate high caliber key personnel. We have recently expanded our
sales force, and we are actively searching for systems engineers, research and
development engineers and sales and marketing personnel, all of whom are in
short supply. We currently have a small indirect channel partner and end-user
service and support organization and will need to increase our staff to support
new indirect channel partners and end users and the expanding needs of existing
indirect channel partners and end users. Additionally, we rely on qualified
systems engineers and service and support personnel to provide pre- and
post-sales technical support for our products. Competition for qualified
personnel in the networking industry, including systems engineers, sales and
service and support personnel, is intense, and we may not be successful in
attracting and retaining such personnel. There may be only a limited number of
persons with the requisite skills to serve in these key positions and it may
become increasingly difficult to hire such persons. Our business will suffer if
we encounter delays in hiring these additional personnel.
Competitors and others have in the past and may in the future attempt to
recruit our employees. We do not have employment contracts with any of our
personnel. We currently maintain "key person" life insurance on Craig W.
Elliott, our chief executive officer, Robert L. Packer, our chief technology
officer, and Brett D. Galloway, our vice president of engineering and chief
operating officer. The loss of the services of any of our senior management
could negatively impact our ability to carry out our business plan.
WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES IN OUR MARKET
SECTOR WHO ARE SUBSTANTIALLY LARGER AND MORE ESTABLISHED AND WHO HAVE
SIGNIFICANTLY GREATER RESOURCES THAN OUR COMPANY
We compete in a new, rapidly evolving and highly competitive sector of the
networking technology market. We expect competition to persist and intensify in
the future from a number of different sources. Increased competition could
result in reduced prices and gross margins for our products and could require
increased spending by us on research and development, sales and marketing and
customer support, any of which could harm our business. We compete with Cisco
Systems, Inc. and CheckPoint Software Technologies Ltd., which sell products
incorporating competing technologies. We also compete with several small private
companies which utilize competing technologies to provide bandwidth management.
In addition, our products and technology compete for information technology
budget allocations with products that offer monitoring capabilities, such as
probes and related software. Lastly, we face indirect competition from companies
that offer enterprises and service providers increased bandwidth and
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infrastructure upgrades that increase the capacity of their networks, which may
lessen or delay the need for bandwidth management solutions.
Many of our competitors are substantially larger than we are and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources and more established distribution channels. These
competitors may be able to respond more rapidly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than we can. We have
encountered, and expect to encounter, customers who are extremely confident in
and committed to the product offerings of our competitors. Furthermore, some of
our competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties to increase their ability
to rapidly gain market share by addressing the needs of our prospective
customers. These competitors may enter our existing or future markets with
solutions that may be less expensive, provide higher performance or additional
features or be introduced earlier than our solutions. Given the market
opportunity in the bandwidth management solutions market, we also expect that
other companies may enter our market with alternative products and technologies,
which could reduce the sales or market acceptance of our products and services,
perpetuate intense price competition or make our products obsolete. If any
technology that is competing with ours is or becomes more reliable, higher
performing, less expensive or has other advantages over our technology, then the
demand for our products and services would decrease, which would harm our
business.
IF WE DO NOT EXPAND OR ENHANCE OUR PRODUCT OFFERINGS OR RESPOND EFFECTIVELY TO
TECHNOLOGICAL CHANGE, OUR BUSINESS MAY NOT GROW
Our future performance will depend on the successful development,
introduction and market acceptance of new and enhanced products that address
customer requirements in a cost-effective manner. We cannot assure you that our
technological approach will achieve broad market acceptance or that other
technologies or solutions will not supplant our approach. The bandwidth
management solutions market is characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. The introduction of new products, market acceptance
of products based on new or alternative technologies, or the emergence of new
industry standards, could render our existing products obsolete or make it
easier for other products to compete with our products. Developments in
router-based queuing schemes could also significantly reduce demand for our
product. Alternative technologies, including packet-queuing technology, could
achieve widespread market acceptance. Our future success will depend in large
part upon our ability to:
- develop and maintain competitive products;
- enhance our products by adding innovative features that differentiate our
products from those of our competitors;
- bring products to market on a timely basis at competitive prices;
- identify and respond to emerging technological trends in the market; and
- respond effectively to new technological changes or new product
announcements by others.
We have in the past experienced delays in product development which to
date have not materially adversely affected us. However, these delays may occur
in the future and could result in a loss of customers and market share.
INTRODUCTION OF OUR NEW PRODUCTS MAY CAUSE CUSTOMERS TO DEFER PURCHASES OF OUR
EXISTING PRODUCTS WHICH COULD HARM OUR OPERATING RESULTS
When we announce new products or product enhancements that have the
potential to replace or shorten the life cycle of our existing products,
customers may defer purchasing our existing products. These actions could harm
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our operating results by unexpectedly decreasing sales, increasing our inventory
levels of older products and exposing us to greater risk of product
obsolescence.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE MAY EXPERIENCE OPERATING
INEFFICIENCIES AND HAVE DIFFICULTY MEETING DEMAND FOR OUR PRODUCTS
We have rapidly and significantly expanded our operations and anticipate
that further significant expansion will be required to address potential growth
in our customer base and market opportunities. This expansion could place a
significant strain on our management, products and support operations, sales and
marketing personnel and other resources, which could harm our business.
In the future, we may experience difficulties meeting the demand for our
products and services. The installation and use of our products requires
training. If we are unable to provide training and support for our products, the
implementation process will be longer and customer satisfaction may be lower. In
addition, our management team may not be able to achieve the rapid execution
necessary to fully exploit the market for our products and services. We cannot
assure you that our systems, procedures or controls will be adequate to support
the anticipated growth in our operations.
We may not be able to install management information and control systems
in an efficient and timely manner, and our current or planned personnel,
systems, procedures and controls may not be adequate to support our future
operations.
THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY
NEGATIVELY IMPACT GROSS MARGINS AND REVENUES
We may experience substantial period-to-period fluctuations in future
operating results due to the erosion of our average selling prices. The average
selling prices of our products could decrease in the future in response to
competitive pricing pressures, increased sales discounts, new product
introductions by us or our competitors or other factors. Therefore, to maintain
our gross margins, we must develop and introduce on a timely basis new products
and product enhancements and continually reduce our product costs. Our failure
to do so would cause our revenue and gross margins to decline.
OUR RELIANCE ON PEMSTAR, INC. AND SANMINA CORPORATION FOR SUBSTANTIALLY ALL OF
OUR MANUFACTURING REQUIREMENTS COULD CAUSE US TO LOSE ORDERS IF THESE THIRD
PARTY MANUFACTURERS FAIL TO SATISFY OUR COST, QUALITY AND DELIVERY REQUIREMENTS
We currently contract with PEMSTAR, Inc. and Sanmina Corporation, for the
manufacture of all of our current products. Any manufacturing disruption could
impair our ability to fulfill orders. Our future success will depend, in
significant part, on our ability to have others manufacture our products
cost-effectively and in sufficient volumes. We face a number of risks associated
with our dependence on third-party manufacturers including:
- reduced control over delivery schedules;
- the potential lack of adequate capacity during periods of excess demand;
- manufacturing yields and costs;
- quality assurance; and
- increases in prices and the potential misappropriation of our
intellectual property.
We have no long-term contracts or arrangements with any of our vendors
that guarantee product availability, the continuation of particular payment
terms or the extension of credit limits. We have experienced in the past, and
may experience in the future, problems with our contract manufacturers, such as
inferior quality, insufficient quantities and late delivery of product. To date,
these problems have not materially adversely affected us. We may not be able to
obtain additional volume purchase or manufacturing arrangements on terms that we
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consider acceptable, if at all. If we enter into a high-volume or long-term
supply arrangement and subsequently decide that we cannot use the products or
services provided for in the agreement, our business will be harmed. We cannot
assure you that we can effectively manage our contract manufacturers or that
these manufacturers will meet our future requirements for timely delivery of
products of sufficient quality or quantity. Any of these difficulties could harm
our relationships with customers and cause us to lose orders.
In the future, we may seek to use additional contract manufacturers. We
may experience difficulty in locating and qualifying suitable manufacturing
candidates capable of satisfying our product specifications or quantity
requirements. Further, new third-party manufacturers may encounter difficulties
in the manufacture of our products resulting in product delivery delays.
MOST OF THE COMPONENTS FOR OUR PRODUCTS COME FROM SINGLE OR LIMITED SOURCES, AND
WE COULD LOSE SALES IF THESE SOURCES FAIL TO SATISFY OUR SUPPLY REQUIREMENTS
Almost all of the components used in our products are obtained from single
or limited sources. Our products have been designed to incorporate a particular
set of components. As a result, our desire to change the components of our
products or our inability to obtain suitable components on a timely basis would
require engineering changes to our products before we could incorporate
substitute components.
We do not have any long-term supply contracts to ensure sources of supply.
If our contract manufacturers fail to obtain components in sufficient quantities
when required, our business could be harmed. Our suppliers also sell products to
our competitors. Our suppliers may enter into exclusive arrangements with our
competitors, stop selling their products or components to us at commercially
reasonable prices or refuse to sell their products or components to us at any
price. Our inability to obtain sufficient quantities of sole-sourced or
limited-sourced components, or to develop alternative sources for components or
products would harm our ability to grow our business.
OUR PRODUCTS MAY HAVE ERRORS OR DEFECTS THAT WE FIND AFTER THE PRODUCTS HAVE
BEEN SOLD, WHICH COULD NEGATIVELY AFFECT OUR REVENUES, THE MARKET ACCEPTANCE OF
OUR PRODUCTS AND INCREASE OUR COSTS
Our products are complex and may contain undetected defects, errors or
failures in either the hardware or software. In addition, because our products
plug into our end users' existing networks between the WAN access router and the
enterprise local area network, or LAN, they can directly affect the
functionality of the network. We have in the past encountered errors in our
products, which in a few instances resulted in complete network failures. To
date, these errors have not materially adversely affected us. Additional errors
may occur in our products in the future. The occurrence of defects, errors or
failures could result in the failure of our customer's network or
mission-critical applications, delays in installation, product returns and other
losses to us or to our customers or end users. In addition, we would have
limited experience responding to new problems that could arise with any new
products that we introduce. These occurrences could also result in the loss of
or delay in market acceptance of our products, which could harm our business.
We may also be subject to liability claims for damages related to product
errors. While we carry insurance policies covering this type of liability, these
policies may not provide sufficient protection should a claim be asserted. A
material product liability claim may harm our business.
ANY ACQUISITIONS WE MAKE COULD RESULT IN DILUTION, UNFAVORABLE ACCOUNTING
CHARGES AND DIFFICULTIES IN SUCCESSFULLY MANAGING OUR BUSINESS
We continually evaluate strategic acquisitions of other businesses. If we
were to consummate an acquisition, we would be subject to a number of risks,
including the following:
- difficulty in integrating the acquired operations and retaining acquired
personnel;
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- limitations on our ability to retain acquired distribution channels and
customers;
- diversion of management's attention and disruption of our ongoing
business; and
- limitations on our ability to successfully incorporate acquired
technology and rights into our service offerings and maintain uniform
standards, controls, procedures, and policies.
We may not successfully overcome problems encountered in connection with
potential acquisitions. In addition, an acquisition could harm our operating
results by diluting our stockholders' equity, causing us to incur additional
debt, or requiring us to amortize acquisition expenses and acquired assets.
Finally, recent and proposed changes by the Financial Accounting Standards
Board (FASB) and the SEC in the rules for merger accounting may affect our
ability to make acquisitions or be acquired. For example, elimination of the
"pooling" method of accounting for mergers increases the amount of goodwill that
we would be required to recognize if we acquire another company, which would
have an adverse financial impact on our future net loss or net income.
FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY WOULD RESULT IN
SIGNIFICANT HARM TO OUR BUSINESS
Our success depends significantly upon our proprietary technology and our
failure or inability to protect our proprietary technology would result in
significant harm to our business. We rely on a combination of patent, copyright
and trademark laws, and on trade secrets and confidentiality provisions and
other contractual provisions to protect our proprietary rights. These measures
afford only limited protection. We currently have three issued U.S. patents and
nine pending patent applications including one for which we have received a
notice of allowance. Our means of protecting our proprietary rights in the U.S.
or abroad may not be adequate and competitors may independently develop similar
technologies. Our future success will depend in part on our ability to protect
our proprietary rights and the technologies used in our principal products.
Despite our efforts to protect our proprietary rights and technologies
unauthorized parties may attempt to copy aspects of our products or to obtain
and use trade secrets or other information that we regard as proprietary. Legal
proceedings to enforce our intellectual property rights could be burdensome and
expensive and could involve a high degree of uncertainty. These legal
proceedings may also divert management's attention from growing our business. In
addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the U.S. Issued patents may not preserve our
proprietary position. If we do not enforce and protect our intellectual
property, our business will suffer substantial harm.
CLAIMS BY OTHERS THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS COULD BE
COSTLY TO DEFEND AND COULD HARM OUR BUSINESS
We may be subject to claims by others that our products infringe on their
intellectual property rights. These claims, whether or not valid, could require
us to spend significant sums in litigation, pay damages, delay product
shipments, reengineer our products or acquire licenses to such third-party
intellectual property. We may not be able to secure any required licenses on
commercially reasonable terms, or at all. We expect that we will increasingly be
subject to infringement claims as the number of products and competitors in the
bandwidth management solutions market grows and the functionality of products
overlaps. Any of these claims or resulting events could harm our business.
IF OUR PRODUCTS DO NOT COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT
REGULATIONS, OUR BUSINESS COULD BE HARMED
The market for bandwidth management solutions is characterized by the need
to support industry standards as these different standards emerge, evolve and
achieve acceptance. In the United States, our products must comply with various
regulations and standards defined by the Federal Communications Commission and
Underwriters Laboratories. Internationally, products that we develop may be
required to comply with standards established by telecommunications authorities
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in various countries as well as with recommendations of the International
Telecommunication Union. To remain competitive we must continue to introduce new
products and product enhancements that meet these emerging U.S. and
International standards. However, in the future we may not be able to
effectively address the compatibility and interoperability issues that arise as
a result of technological changes and evolving industry standards. Failure to
comply with existing or evolving industry standards or to obtain timely domestic
or foreign regulatory approvals or certificates could harm our business.
OUR GROWTH AND OPERATING RESULTS WOULD BE IMPAIRED IF WE ARE UNABLE TO MEET OUR
FUTURE CAPITAL REQUIREMENTS
We currently anticipate that our existing cash and investment balances and
available line of credit will be sufficient to meet our liquidity needs for the
forseeable future. However, we may need to raise additional funds if our
estimates of revenues, working capital or capital expenditure requirements
change or prove inaccurate or in order for us to respond to unforeseen
technological or marketing hurdles or to take advantage of unanticipated
opportunities.
In addition, we expect to review potential acquisitions that would
complement our existing product offerings or enhance our technical capabilities.
While we have no current agreements or negotiations underway with respect to any
such acquisition, any future transaction of this nature could require
potentially significant amounts of capital. These funds may not be available at
the time or times needed, or available on terms acceptable to us. If adequate
funds are not available, or are not available on acceptable terms, we may not be
able to take advantage of market opportunities to develop new products or to
otherwise respond to competitive pressures.
OUR EXECUTIVE OFFICERS AND DIRECTORS WILL BE ABLE TO CONTROL ALL MATTERS
REQUIRING STOCKHOLDER APPROVAL INCLUDING DELAYING OR PREVENTING A CHANGE IN OUR
CORPORATE CONTROL
Our executive officers and directors and their affiliates together control
approximately 54.0% of the outstanding common stock as of December 31, 1999. As
a result, these stockholders, if they act together, will be able to control all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may have the effect of delaying, preventing or deterring a change in control of
Packeteer, could deprive our stockholders of an opportunity to receive a premium
for their common stock as part of a sale of Packeteer and might affect the
market price of our common stock.
CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF
PACKETEER MORE DIFFICULT, WHICH COULD LOWER THE MARKET PRICE OF THE COMMON STOCK
Our corporate documents and Section 203 of the Delaware General
Corporation Law could discourage, delay or prevent a third party or a
significant stockholder from acquiring control of Packeteer. In addition,
provisions of our certificate of incorporation may have the effect of
discouraging, delaying or preventing a merger, tender offer or proxy contest
involving Packeteer. Any of these anti-takeover provisions could lower the
market price of the common stock and could deprive our stockholders of the
opportunity to receive a premium for their common stock that they might
otherwise receive from the sale of Packeteer.
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk
Fixed Income Investments
Our exposure to market risks for changes in interest rates relate
primarily to investments in debt securities issued by U.S. government agencies
and corporate debt securities. We place our investments with high credit quality
issuers and, by policy, limit the amount of the credit exposure to any one
issuer.
Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. All highly liquid
investments with less than three months to maturity are considered to be cash
equivalents;
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investments with maturities between three and twelve months are considered to
be short-term investments; and investments with maturities in excess of twelve
months are considered to be long-term investments. We do not expect any material
loss with respect to our investment portfolio. The following table presents the
amounts of cash equivalents and investments that are subject to market risk by
range of expected maturity and weighted average interest rates.
December 31, 1999 December 31, 1998
---------------------- ----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
CARRYING INTEREST CARRYING INTEREST
AMOUNT RATE AMOUNT RATE
---------- ---------- ---------- ----------
Cash Equivalents:
Commercial paper, market auction preferred
and medium-term notes, net of $2 and $0
unrealized gain, as of December 31, 1999
and 1998........................................ 17,727 6.20% 2,389 5.58%
Short-term investments:
Commercial paper, corporate notes and bonds,
and medium-term notes, net of $15 and $0
of unrealized loss, as of December 31, 1999
and 1998........................................ 37,918 5.91% 1,927 5.80%
Long-term investments:
Corporate notes and medium-term notes, net of
$45 and $0 of unrealized loss, as of
December 31, 1999 and 1998...................... 7,686 6.56% -- --
------- ------
Total investment securities................... $63,331 6.07% $4,316 5.68%
======= ======
Foreign Exchange
We develop products in the United States and sell in North America, South
America, Asia and Europe. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. All sales are currently made in U.S. dollars;
however, a strengthening of the dollar could make our products less competitive
in foreign markets. We have no foreign exchange contracts, option contracts or
other foreign hedging arrangements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
DECEMBER 31,
--------------------
1999 1998
--------- --------
Current assets:
Cash and cash equivalents................................. $ 19,554 $ 2,550
Short-term investments.................................... 37,918 1,927
Accounts receivable, less allowance for doubtful accounts
of $217, and $293, as of December 31, 1999 and 1998, 3,931 2,745
Other receivables......................................... 35 39
Inventories............................................... 523 188
Prepaids and other current assets......................... 471 124
------- --------
Total current assets.................................. 62,432 7,573
Property and equipment, net................................. 755 794
Long-term investments....................................... 7,686 --
Other assets................................................ 233 203
------- --------
Total assets.......................................... $ 71,106 $ 8,570
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 1,890 $ --
Current portion of capital lease obligations.............. 339 215
Current portion of note payable........................... 2,524 71
Accounts payable.......................................... 1,302 1,015
Accrued compensation...................................... 1,480 253
Other accrued liabilities................................. 2,400 1,011
Deferred revenue.......................................... 1,212 1,507
------- --------
Total current liabilities............................. 11,147 4,072
Capital lease obligations, less current portion............. 763 570
Note payable, less current portion.......................... 76 151
Other long-term liabilities................................. -- 18
-------- --------
Total liabilities..................................... 11,986 4,811
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value;
Authorized: 5,000 and 13,703 shares at
December 31, 1999 and 1998, respectively;
Issued and outstanding: none and 12,391 shares
at December 31, 1999 and 1998, respectively........... -- 13
Common stock, $0.001 par value;
Authorized: 85,000 and 40,000 shares at
December 31, 1999 and 1998, respectively;
Issued and outstanding: 26,792 and 9,723 shares
at December 31, 1999 and 1998, respectively........... 27 10
Additional paid-in capital.................................. 88,848 20,924
Accumulated other comprehensive loss........................ (58) --
Deferred compensation....................................... (2,138) (514)
Notes receivable from stockholders.......................... (738) (729)
Accumulated deficit......................................... (26,821) (15,945)
-------- --------
Total stockholders' equity............................ 59,120 3,759
-------- --------
Total liabilities and stockholders' equity............ $ 71,106 $ 8,570
======== ========
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net revenues:
Product revenues............................... $ 16,824 $ 7,105 $ 1,413
Licensing revenues............................. 1,617 125 --
-------- -------- --------
Total net revenues........................ 18,441 7,230 1,413
Cost of revenues................................. 5,286 2,386 457
-------- -------- --------
Gross profit..................................... 13,155 4,844 956
Operating expenses:
Research and development, excluding amortization
of stock-based compensation of $459, $86 and
none for 1999, 1998 and 1997, respectively.... 5,164 2,779 2,932
Sales and marketing, excluding amortization
of stock-based compensation of $2,184, $436,
and none for 1999, 1998 and 1997,respectively 13,737 8,866 3,210
General and administrative, excluding
amortization of stock-based compensation of
$445, $15, and none for 1999, 1998 and 1997,
respectively................................. 2,936 1,750 934
Amortization of stock-based compensation......... 3,088 537 --
-------- -------- --------
Total operating expenses.................. 24,925 13,932 7,076
-------- -------- --------
Net loss from operations......................... (11,770) (9,088) (6,120)
Interest and other income........................ 1,757 367 238
Interest and other expense....................... (863) (78) (27)
-------- -------- --------
Net loss......................................... $(10,876) $ (8,799) $ (5,909)
======== ======== ========
Basic and diluted net loss per share............. $ (0.71) $ (1.54) $ (1.82)
======== ======== ========
Shares used in computing basic and diluted
net loss per share............................. 15,343 5,709 3,253
======== ======== ========
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Convertible Accumulated
Preferred Stock Common Stock Additional Other
--------------- -------------- Paid-in Deferred Comprehensive
Shares Amount Shares Amount Capital Compensation Loss
------ ------ ------ ------ ------- ------------ -------------
Balances,
December 31, 1996...... 7,622 $ 8 7,359 $ 7 $5,498 $ -- $ --
Issuance of preferred
stock.................. 2,216 2 -- -- 4,389 -- --
Issuance of common stock
upon exercise of
stock options.......... -- -- 1,940 2 242 -- --
Repurchase of common
stock.................. -- -- (318) -- (10) -- --
Issuance of warrants for
preferred stock........ -- -- -- -- 26 -- --
Net loss................. -- -- -- -- -- -- --
----- --- ----- --- ------- ------- ------
Balances as of
December 31, 1997...... 9,838 10 8,981 9 10,145 -- --
Issuance of preferred
stock.................. 2,553 3 -- -- 9,105 -- --
Issuance of common stock
upon exercise of
stock options.......... -- -- 1,042 1 619 -- --
Stock-based compensation
to non-employees....... -- -- -- -- 269 -- --
Issuance of common stock
upon exercise of stock
purchase rights........ -- -- 6 -- 1 -- --
Repurchase of common
stock.................. -- -- (306) -- (40) -- --
Issuance of warrants for
preferred stock........ -- -- -- -- 38 -- --
Repayment of notes
receivable from
stockholders........... -- -- -- -- -- -- --
Deferred compensation
related to stock option
grants................. -- -- -- -- 787 (787) --
Amortization of
stock-based
compensation........... -- -- -- -- -- 273 --
Net loss................. -- -- -- -- -- -- --
----- --- ----- --- ------- ------- ------
Balances as of
December 31, 1998...... 12,391 13 9,723 10 20,924 (514) --
Stock-based compensation
to non-employees....... -- -- -- -- 798 -- --
Stock options granted to
non-employees.......... -- -- -- -- 42 -- --
Issuance of common stock
upon exercise of stock
options................ -- -- 125 -- 278 -- --
Issuance of common stock,
net of issuance costs
of $6,445.............. -- -- 4,600 4 62,552 -- --
Conversion of preferred
stock..................(12,391) (13) 12,391 13 -- -- --
Repurchase of common
stock.................. -- -- (103) -- (28) -- --
Issuance of warrants for
preferred stock........ -- -- -- -- 368 -- --
Issuance of common stock
upon exercise of
warrants, net.......... -- -- 56 -- -- -- --
Repayments of notes
receivable from
stockholders........... -- -- -- -- -- -- --
Deferred compensation
related to stock option
grants................. -- -- -- -- 3,914 (3,914) --
Amortization of
stock-based
compensation........... -- -- -- -- -- 2,290 --
Comprehensive loss
Net loss ..............
Unrealized loss on
investments........... (58)
Comprehensive loss ......
Net loss................. -- -- -- -- -- -- --
----- --- ----- --- ------- -------- ------
Balances as of
December 31, 1999...... -- $-- 26,792 $27 $88,848 $(2,138) (58)
===== === ====== === ======= ======= ======
Notes
Receivable
From Accumulated Comprehensive
Stockholders Deficit Loss Total
------------ ----------- ------------- --------
Balances,
December 31, 1996...... $ (25) $(1,237) $ 4,251
Issuance of preferred
stock.................. -- -- 4,391
Issuance of common stock
upon exercise of
stock options.......... (195) -- 49
Repurchase of common
stock.................. 6 -- (4)
Issuance of warrants for
preferred stock........ -- -- 26
Net loss................. -- (5,909) (5,909)
------- ------- -------
Balances as of
December 31, 1997...... (214) (7,146) 2,804
Issuance of preferred
stock.................. -- -- 9,108
Issuance of common stock
upon exercise of
stock options.......... (568) -- 52
Stock-based compensation
to non-employees....... -- -- 269
Issuance of common stock
upon exercise of stock
purchase rights........ -- -- 1
Repurchase of common
stock.................. 52 -- 12
Issuance of warrants for
preferred stock........ -- -- 38
Repayment of notes
receivable from
stockholders........... 1 -- 1
Deferred compensation
related to stock option
grants................. -- -- --
Amortization of
stock-based
compensation........... -- -- 273
Net loss................. -- (8,799) (8,799)
------- ------- -------
Balances as of
December 31, 1998...... (729) (15,945) 3,759
Stock-based compensation
to non-employees....... -- -- 798
Stock options granted to
non-employees.......... -- -- 42
Issuance of common stock
upon exercise of stock
options................ (188) -- 90
Issuance of common stock,
net of issuance costs
of $6,445.............. -- -- 62,556
Conversion of preferred
stock.................. -- -- --
Repurchase of common
stock.................. 28 -- --
Issuance of warrants for
preferred stock........ -- -- 368
Issuance of common stock
upon exercise of
warrants, net.......... -- -- --
Repayments of notes
receivable from
stockholders........... 151 -- 151
Deferred compensation
related to stock option
grants................. -- -- --
Amortization of
stock-based
compensation........... -- -- 2,290
Comprehensive loss
Net loss............... -- -- (10,876)
Unrealized loss on
investments............ -- -- (58) (58)
-------
Comprehensive loss....... (10,934)
========
Net loss................. -- (10,876) (10,876)
------- ------- -------
Balances as of
December 31, 1999...... (738) (26,821) 59,120
======= ======= =======
See accompanying notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
-------- ------- -------
Cash flows from operating activities:
Net loss.......................................... $(10,876) $(8,799) $(5,909)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation.................................... 747 215 261
Allowance for doubtful accounts................. (76) 305 37
Amortization of deferred stock-based
compensation.................................. 3,088 542 --
Issuance of stock purchase rights............... 42 38 26
Amortization of deferred interest............... 340 -- --
Changes in operating assets and liabilities:
Accounts receivable........................... (1,110) (2,329) (758)
Other receivables............................. 4 724 (764)
Inventories................................... (335) 175 (356)
Prepaids and other current assets............. (347) -- (106)
Accounts payable.............................. 287 (318) 1,185
Accrued compensation.......................... 1,227 168 60
Other accrued liabilities..................... 1,371 800 184
Deferred revenue.............................. (295) 1,464 42
-------- ------- -------
Net cash used in operating activities....... (5,933) (7,015) (6,098)
-------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment............... (708) (605) (492)
Purchases of short-term investments............... (37,933) (1,927) --
Proceeds from sale of short-term investments...... 1,927 -- --
Purchases of long-term investments................ (7,731) --
Other assets...................................... (96) (59) (113)
-------- ------- -------
Net cash used in investing activities....... (44,541) (2,591) (605)
-------- ------- -------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock..... -- 9,108 4,391
Net proceeds from issuance of common stock........ 62,646 53 49
Proceeds from stockholders' note receivable....... 151 1 --
Repurchase of common stock........................ -- 12 (4)
Borrowings under line of credit................... 2,651 -- --
Repayments of line of credit...................... (761) -- --
Proceeds from note payable........................ 5,000 -- 287
Payments of note payable.......................... (2,570) (67) (29)
Proceeds from lease financing..................... 648 749 165
Principal payments of capital lease obligations... (287) (116) (13)
Proceeds from other long-term liabilities......... -- -- 18
-------- ------- -------
Net cash provided by financing activities... 67,478 9,740 4,864
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 17,004 134 (1,839)
Cash and cash equivalents at beginning of year...... 2,550 2,416 4,255
-------- ------- -------
Cash and cash equivalents at end of year............ $ 19,554 $ 2,550 $ 2,416
======== ======= =======
Supplemental disclosures of cash flow information:
Cash paid during year for interest................ $ 550 $ 48 $ --
======== ======= =======
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Packeteer, Inc. (the "Company") was incorporated on January 25, 1996, to
provide Internet application infrastructure systems designed to enable
businesses and service providers to ensure the quality of experience for
networked applications and application services. The Company's PacketWise
software, the foundation of the Company's PacketShaper and AppVantage systems,
integrates application discovery, analysis, control and reporting technologies
that enable proactive application performance and bandwidth management. The
Company markets and distributes its products via a worldwide network of VARs,
distributors, systems integrators and OEMs. The Company commenced principal
operations in 1997. The Company is headquartered in Cupertino, California, and
has wholly owned subsidiaries in Japan, Hong Kong and The Netherlands.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the financial
statements of the Company and its three wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(c) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Revenue Recognition
We recognize product revenues, with provision made for estimated returns,
after the following events have occurred: the customer issues a noncancelable
purchase order; a product has been shipped to the customer; and collection of
the sales price is probable.
Maintenance revenue on product sales is recognized ratably over the term of
the maintenance period.
For software transactions entered into after January 1, 1998, the Company
adopted the American Institute of Certified Public Accountants' (AICPA)
Statement of Position (SOP) 97-2, "Software Revenue Recognition" as modified by
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect
to Certain Transactions." SOP 97-2 generally requires revenue earned on software
arrangements involving multiple-elements to be allocated to each element based
on its relative fair value. The fair value of the element must be based on
objective evidence that is specific to the vendor. If a vendor does not have
objective evidence of the fair value of all elements in a multiple-element
arrangement, all revenue from the arrangement must be deferred until such
evidence exists or until all elements have been delivered, unless the only
undelivered element is post-contract customer support, in which case, the entire
fee is recognized over the support period.
Licensing revenues relate to OEM arrangements. We recognize OEM license
fees, which include post-contract customer support, when the software has been
shipped to the customer, the fees are fixed and determinable and there is
evidence of the fair value of the post-contract customer support. When
sufficient evidence of fair value of post-contract customer support is not
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available, revenues are recognized ratably over the support period. We do not
have sufficient evidence of fair value of post-contract customer support for our
OEM license arrangements, and we recognize the revenues for these arrangements
over the support period.
Service revenue is recognized as the services are performed. To date, these
amounts have not been significant.
(e) Cost of Revenues
Cost of revenues consists primarily of costs of product sales. Costs of
licensing revenues, including product packaging, documentation and reproduction
have not been significant. The Company provides reserves for warranty costs
expected to be incurred.
(f) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of cash on deposit with banks, money market
instruments and investments in commercial paper. As of December 31, 1999 and
1998, cash equivalents total approximately $17,727 and $2,389, respectively.
(g) Investments
Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. As of December 31, 1999 and 1998, all investment securities
are designated as "available-for-sale." Available-for-sale securities are
carried at fair value based on quoted market prices, with the unrealized losses,
net of tax, reported as a separate component of stockholders' equity. The cost
of investments sold is determined on the specific identification method.
Short-term investments mature between three to twelve months from the date of
purchase. Short-term investments consist primarily of commercial paper,
corporate notes, corporate bonds and medium term notes. Long-term investments
have maturity dates after twelve months from the date of purchase and consist
primarily of corporate notes.
(h) Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market. Inventory balances represent completed products
available-for-sale.
(i) Property and Equipment
Property and equipment, including leasehold improvements and equipment
acquired under capital lease, are recorded at cost. Depreciation and
amortization are provided using a straight-line method over the shorter of the
estimated useful lives of the assets or the lease terms, generally one to four
years.
The Company reviews property and equipment for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of property and equipment is measured by
comparison of its carrying amount to future net cash flows the property and
equipment is expected to generate. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the property and equipment exceeds its fair market value. To date, the
Company has made no adjustments to the carrying amount of its property and
equipment due to impairment.
(j) Advertising and Sales Promotion Costs
Advertising and sales promotion costs are expensed as incurred.
(k) Research and Development Costs
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Development costs incurred in the research and development of new products
and enhancements to existing products are expensed as incurred until
technological feasibility in the form of a working model has been established.
To date, software developments have been completed concurrent with the
establishment of technological feasibility, and, accordingly, no costs have been
capitalized.
(l) Business and Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents,
investments and accounts receivable. The Company's cash, cash equivalents and
investments are maintained with highly accredited financial institutions. The
Company believes no significant concentration of credit risk exists with respect
to these financial instruments. Concentrations of credit risk with respect to
trade receivables are limited as the Company performs ongoing credit evaluations
of its customers. Based on management's evaluation of potential credit losses,
the Company believes its allowances for doubtful accounts are adequate.
The Company's products, which are sold worldwide, are targeted to
organizations utilizing wide area networks. Accordingly, the Company's future
success depends upon the capital spending patterns of such customers and the
continued demand by such customers for the Company's products. The networking
industry is characterized by rapidly changing technology, evolving industry
standards, changes in end-user requirements and frequent new product
introductions and enhancements.
The Company's continued success will depend upon its ability to enhance
existing products and to develop and introduce, on a timely basis, new products
and features that keep pace with technology developments and emerging industry
standards. Furthermore, as a result of its international sales, the Company's
operations are subject to risks of doing business abroad, including, but not
limited to, export duties, changes to import and export regulations, longer
payment cycles, and greater difficulty in collecting accounts receivable. While,
to date, these factors have not had an adverse material impact on the Company's
consolidated results of operations, there can be no assurance that there will
not be such an impact in the future.
(m) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance for any
tax benefits of which future realization is uncertain.
(n) Stock-Based Compensation
For employee stock-based compensation plans, the Company uses the intrinsic
value-based method of accounting. Deferred compensation expense associated with
stock-based compensation is being amortized on an accelerated basis over the
vesting period of the individual award consistent with the method described in
Financial Accounting Standards Board (FASB) Interpretation No. 28, "Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award Plans".
For non-employees, the Company computes the fair value of the stock based
compensation in accordance with SFAS 123 "Accounting for Stock Based
Compensation" and Emerging Issues Task Force (EITF) 96-18 "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
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(o) Foreign Currency Transactions
The Company's sales to international customers are U.S. dollar-denominated.
As a result, there are no foreign currency gains or losses related to these
transactions.
The functional currency for the Company's foreign subsidiaries is the U.S.
dollar. Accordingly, the entities remeasure monetary assets and liabilities at
period-end exchange rates, while nonmonetary items are remeasured at historical
rates. Income and expense accounts are remeasured at the average rates in effect
during the year, except for depreciation which is remeasured at historical
rates.
Remeasurement adjustments and transaction gains and losses are recognized
in income in the year of occurrence. To date, the effect of such amounts on net
income has not been material.
(p) Other Comprehensive Loss
The Company has $58 of net unrealized loss on change in the fair value of
available for sale securities which is a component of other comprehensive
loss. The tax effect of the components of other comprehensive loss is not
significant.
(q) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
vested outstanding shares of common stock. Diluted net loss per share is
computed using the weighted-average number of shares of vested common stock
outstanding and, when dilutive, potential common shares. Potential common shares
include unvested common stock outstanding and potential common shares from
options and warrants to purchase common stock using the treasury stock method,
and convertible preferred stock on the as-if converted basis. All potential
shares have been excluded from the computation of diluted net loss per share for
all periods presented because the effect would be antidilutive. Pursuant to
SEC Staff Accounting Bulletin No. 98, common stock and convertible preferred
stock issued for nominal consideration, prior to the anticipated effective date
of the initial public offering, or IPO, are included in the calculation of basic
and diluted net loss per share as if they were outstanding for all periods
presented. To date, the Company has not had any issuances or grants for nominal
consideration. Diluted net loss per share does not include the effects of the
following potential common shares:
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------- ------ ------
Shares issuable under stock options.................. 2,727 1,073 900
Shares of unvested stock subject to repurchase....... 984 2,757 4,571
Shares issuable pursuant to warrants to purchase
convertible preferred stock........................ 143 58 42
Shares issuable related to convertible preferred
stock on an "as-if-converted" basis................ -- 12,391 9,838
(s) Financial Instruments
The carrying value of cash, cash equivalents, investments, accounts
receivable, accounts payable and accrued expenses approximates their estimated
fair value due to the relative short maturity of these instruments. The carrying
value of long-term debt and capital lease obligations approximates carrying
value based on the market interest rates available to the Company for debt of
similar risk and maturities.
(t) Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee (ACSEC)
issued SOP 98-1, "Accounting For the Costs of Computer Software Developed
Obtained for Internal Use." SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. SOP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. The adoption of SOP 98-1
did not have any material impact on the Company's financial position, results
of operations or cash flows.
In June 1998 and June 1999, the FASB issued SFAS Nos. 133 and 137,
respectively, both titled "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 137 amended the effective date of SFAS No. 133 to the
first
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quarter of fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statements of financial position, and that the corresponding gains
or losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
Because the Company does not hold any derivative instruments and does not engage
in hedging activities, the adoption of SFAS No. 133 is not expected to have a
material impact on the Company's financial position, result of operations or
cash flows.
2. FINANCIAL INSTRUMENTS
The following is a summary of available-for-sale debt and marketable equity
securities:
AVAILABLE-FOR-SALE SECURITIES
-------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ---------- ---------- ----------
(in thousands)
DECEMBER 31, 1999
- -----------------
Commercial paper, market auction preferreds,
corporate bonds and notes and medium-term notes... $63,389 $ 2 $ (60) $63,331
------- ----- ----- -------
Total debt securities.......................... 63,389 2 (60) 63,331
U.S. marketable equity securities................... -- -- -- --
------- ----- ----- -------
$63,389 $ 2 $ (60) $63,331
======= ===== ===== =======
Amounts included in cash and cash equivalents....... $17,725 $ 2 $ -- $17,727
Amounts included in short-term investments.......... 37,933 -- (15) 37,918
Amounts included in long-term investments........... 7,731 -- (45) 7,686
------- ----- ----- -------
$63,389 $ 2 $ (60) $63,331
======= ===== ===== =======
DECEMBER 31, 1998
- -----------------
Commercial paper, market auction preferreds,
corporate notes .................................. $ 4,316 $ -- $ -- $ 4,316
------- ----- ----- -------
Total debt securities.......................... 4,316 $ -- $ -- $ 4,316
U.S. marketable equity securities................... -- -- -- --
------- ----- ----- -------
$ 4,316 $ -- $ -- $ 4,316
======= ===== ===== =======
Amounts included in cash and cash equivalents....... $ 2,389 $ -- $ -- $ 2,389
Amounts included in short-term investments.......... 1,927 -- -- 1,927
Amounts included in long-term investments........... -- -- -- --
------- ----- ----- -------
$ 4,316 $ -- $ -- $ 4,316
======= ===== ===== =======
Maturities of debt securities at market value at December 31, 1999 are as
follows (in thousands):
Mature in one year or less...................... $55,645
Mature after one year through five years........ 7,686
Mature after five years......................... --
-------
$63,331
=======
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1999 and
1998:
1999 1998
------ ------
Computers and equipment.................................. $ 411 $ 262
Equipment under capital lease............................ 1,570 1,021
Furniture and fixtures................................... 50 39
Leasehold improvements................................... 17 17
------ ------
2,048 1,339
Less accumulated depreciation and amortization........... 1,293 545
------ ------
$ 755 $ 794
====== ======
Accumulated depreciation and amortization includes amortization of
approximately $963 and $226 on equipment under capital lease as of December 31,
1999 and 1998, respectively.
4. LEASE COMMITMENTS
The Company leases its facility and certain equipment under noncancelable
lease agreements, which expire at various dates through 2003. As of December 31,
1999, the future minimum rental payments under capital and operating leases are
as follows:
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASE LEASE
- ------------ ------- ---------
2000..................................................... $ 424 $1,063
2001..................................................... 410 1,061
2002..................................................... 298 935
2003..................................................... 90 --
2004..................................................... -- --
------ ------
Total future minimum lease payments......................... 1,222 $3,059
======
Less imputed interest....................................... 120
------
Present value of future minimum lease payments
under capital lease....................................... 1,102
Less current portion........................................ 339
------
Long-term portion........................................... $ 763
======
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Rent expense was $722, $616, and $138 for the years ended December 31, 1999,
1998 and 1997, respectively.
5. REVOLVING LOAN AGREEMENT
In January 1999, the Company entered into a revolving loan agreement with a
maximum line of credit of $3,000. Advances are limited to the lesser of the
maximum line or the borrowing base which is 80% of eligible receivables. The
outstanding principal balance accrues interest at a per annum rate equal to the
prime rate (which was 8.5% at December 31, 1999) and is secured by all present
and future collateral of the Company. The Company is required to maintain
certain financial covenants related to working capital and quarterly maximum net
loss amounts. As of December 31, 1999, the Company was in compliance with the
covenants and the outstanding balance on the line of credit was approximately
$1,900. Subsequent to December 31, 1999, the revolving loan agreement was
extended to January 2001 and amended, increasing the maximum line of credit to
$5,000.
6. NOTES PAYABLE
In January 1999, the Company entered into a subordinated loan agreement
evidenced by a promissory note of $2,500, that was secured by the assets of the
Company. The note had a stated interest rate of 12.25% and was payable in 36
monthly installments of various amounts with the final installment due on
February 1, 2002. In connection with the note, the Company issued a warrant to
purchase 98 shares of Series D preferred stock at $3.58 per share. The warrant
was immediately exercisable and expires in January 2006. The Company estimated
the fair value of the warrant on the grant date to be $211 using the
Black-Scholes model with the following assumptions: risk-free interest rate of
4.5%; a contractual life of seven years; expected volatility of 50%; and no
dividends. The Company amortized the value of the warrant to interest expense
through August 1999, at which time the note was paid off and the remaining $164
balance of the unamortized discount was expensed.
In May 1999, the Company entered into a loan and security agreement
evidenced by a secured promissory note of $2,500. The note has a stated interest
rate of 12.76% with interest-only payments due monthly. The final interest and
principal payment is due in May 2000. In connection with the note, the Company
issued a warrant to purchase 45 shares of Series D preferred stock at $6.25 per
share. The warrant is immediately exercisable and expires in May 2009. The
Company estimated the fair value of the warrant on the grant date to be $157
using the Black-Scholes model with the following assumptions: risk-free interest
rate of 5.4%; a term of 10 years; expected volatility of 50%; and no dividends.
The Company amortizes the value of the warrant to interest expense over the term
of the warrant. The unamortized balance of the warrant discount was $52 as of
December 31, 1999.
As of December 31, 1999, the Company had $152 outstanding on a note
payable, which is secured by the Company's property and equipment. This balance
is payable in monthly installments of $7 each through June 1, 2001, at which
time a final balloon payment of $34 is due. The note has a stated interest rate
of 6.75%. The note has been discounted for warrants to purchase 42 shares of
Series B preferred stock at $1.00 per share. The warrant was immediately
exercisable and expires in June 2005. At the date of grant, the Company
estimates fair value of the warrant to be $26 using the Black-Scholes model with
the following assumptions: risk-free interest rate of 6%; a term of 8 years;
expected volatility of 50%; and no dividends. As of December 31, 1999 the
unamortized balance of the discount amounted to $13. (See Note 7(c))
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7. STOCKHOLDERS' EQUITY
(a) Preferred Stock
As of December 31, 1998, the Company had 13,703 shares of preferred stock
authorized and had designated and issued preferred stock as follows:
Outstanding Shares
------------------
December 31,
Authorized ------------ Liquidation
Shares 1998 Preference
---------- ---- -----------
Series A.............................. 2,800 2,800 0.25
Series B.............................. 4,864 4,822 1.00
Series C.............................. 2,216 2,216 2.00
Series D.............................. 3,823 2,553 3.94
------ ------
13,703 12,391
====== ======
The rights, preferences, and privileges of the holders of Series A, B, C,
and D preferred stock were as follows:
- The holders of Series A, B, C, and D preferred stock were entitled to
receive dividends at the rate of $0.02, $0.08, $0.16, and $0.32 per
share, respectively, per annum, payable when and as declared by the
Company's Board of Directors, in preference and priority to any payments
of dividends to holders of the Company's common stock. The dividend
rights were not cumulative.
- Shares of Series A, B, C, and D preferred stock had a liquidation
preference of $0.25, $1.00, $2.00, and $3.94 per share, respectively,
plus any declared but unpaid dividends.
- Each holder of preferred stock had voting rights equal to common stock on
an "as if converted" basis.
- Each share of preferred stock was convertible at any time into one share
of common stock at the option of the holder, subject to adjustment. The
conditions for converting the shares from preferred to common included a
public offering in which the gross proceeds exceeded $15,000 and the
offering price equaled or exceeded $3.75 per share for Series A, B, and C
preferred stock, and $7.39 per share for Series D preferred stock.
In July 1999, in connection with the Company's initial public offering all
12,391 shares of preferred stock were converted into 12,391 shares of common
stock of the Company.
In July 1999, the stockholders of the Company approved an amendment to the
Company's certificate of incorporation to reduce the number of authorized shares
of preferred stock to 5,000 shares. The 5,000 shares of authorized preferred
stock are undesignated and the Board of Directors has the authority to issue and
to determine the rights, preference and privileges thereof.
(b) Common Stock
As of December 31, 1998 the Company was authorized to issue 40,000 shares
of common stock. In May 1999, the Company's Board of Directors authorized the
Company to issue 85,000 shares, effective upon completion of an initial public
offering in July 1999.
During 1997, the Company issued 1,940 shares of common stock upon the
exercise of stock options granted under the Company's 1996 Equity Incentive Plan
(the "1996 Plan"). Shares issued under the 1996 Plan are subject to repurchase
as described
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below under Note (5)(d). Of the 1,940 shares issued upon the exercise of stock
options in 1997, 1,840 shares were issued in conjunction with full recourse,
promissory notes secured by the shares. Of the total purchase price, 10% was
paid at the time of purchase. The remaining principal, which bears interest at
5.6% to 6.8%, is due in annual installments, plus interest, through 2002.
In October 1997, the Company repurchased 318 shares of common stock at
$0.10 to $0.25 per share from terminated employees in exchange for $4 in cash
and cancellation of $6 in promissory notes.
During 1998, the Company issued 1,048 shares of common stock upon the
exercise of stock options and stock purchase rights. Of the 1,048 shares issued
upon the exercise of stock options, 1,042 shares were issued in conjunction with
full recourse, promissory notes secured by the shares. Of the total purchase
price, 10% was paid at the time of purchase. The remaining principal, which
bears interest at 5.5% to 6.5%, is due in annual installments, plus interest,
through 2003.
During 1998, the Company repurchased 306 shares of common stock at $0.10 to
$0.50 per share from terminated employees in exchange for $12 in cash and
cancellation of $52 in promissory notes.
During 1999, the Company issued 181 shares of common stock upon the
exercise of stock options and warrants. Of the shares issued upon the exercise
of stock options, 50 shares were issued in conjunction with full recourse,
promissory notes secured by the shares. Of the total purchase price, 10% was
paid at the time of purchase. The remaining principal, which bears interest at
4.6% to 5.4%, is due in annual installments, plus interest, through 2004.
During 1999, the Company repurchased 103 shares of common stock at $0.10 to
$3.50 per share from terminated employees in exchange for cancellation of $28 in
promissory notes.
In July 1999, the Company raised $62.6 million, net of issuance costs, from
an initial public offering of 4,600 shares of common stock.
(c) Warrants
In June 1997, the Company issued a warrant in connection with a leasing
agreement to purchase 42 shares of Series B preferred stock at $1.00 per share.
At the date of grant, the Company estimated the fair value of the warrant to be
$26 using the Black-Scholes model with the following assumptions: risk free
interest rate of 6%; an contractual life of eight years; expected volatility of
50%; and no dividends.
In 1998, the Company issued a warrant in connection with a leasing
agreement to purchase 16 shares of Series D preferred stock at $3.94 per share.
At the date of grant, the Company estimated the fair value of the warrant to be
$38 using the Black-Scholes model with the following assumptions: risk free
interest rate of 5%; an contractual life of eight years; expected volatility of
50%; and no dividends.
In October and November of 1999, a warrant holder elected to exercise
warrants to purchase 58 shares of common stock. As a result of a net exercise,
the Company issued 56 shares of common stock to the warrant holder.
During 1999, in connection with the loan agreements the Company issued
warrants to purchase 143 shares of Series D preferred stock at $3.58 and $6.25
per share. (see Note 6).
In July 1999, in connection with the Company's initial public offering the
warrants to purchase preferred stock converted to warrants to purchase common
stock.
As of December 31, 1999 and 1998 the weighted average exercise price of warrants
was $4.42 and $1.81, respectively. At December 31, 1999, the following warrants
were outstanding:
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Shares of Aggregate Expiration
Common Stock Exercise Price Dates
------------ -------------- ------------
Common Stock 98 $350 January 2007
Common Stock 45 $281 May 2007
(d) Stock and Option Plans
1999 Stock Incentive Plan
The 1999 Stock Incentive Plan (the "1999 Plan") is intended to serve as the
successor program to our 1996 Equity Incentive Plan (the "1996 Plan"). In May
1999, the Company's Board of Directors approved the 1999 Plan, which became
effective on July 27, 1999, under which 900 shares have been reserved for
issuance. Previously, 515 shares were authorized under the 1996 Plan. In
addition, any shares not issued under the 1996 Plan will also be available for
grant under the 1999 Plan. The number of shares reserved under the 1999 Plan
will automatically increase annually beginning on January 1, 2000 by the lesser
of 3,000 shares or 5% of the total number of shares of common stock outstanding.
Under the 1999 Plan, eligible individuals may be granted options to purchase
common shares or may be issued shares of common stock directly. The 1999 Plan is
administered by the Board of Directors, which sets the terms and conditions of
the options. Non statutory stock options and incentive stock options are
exercisable at prices not less than 85% and 100%, respectively, of the fair
value on the date of grant. The options become 25% vested one year after the
date of grant with 1/48 per month vesting thereafter and expire at the end of 10
years from date of grant or sooner if terminated by the Board of Directors. The
options may include a provision whereby the option holder may elect at any time
to exercise the option prior to the full vesting of the option. Unvested shares
so purchased shall be subject to a repurchase right by the Company at the
original purchase price. Such right shall lapse at a rate equivalent to the
vesting period of the original option. As of December 31, 1999, 984 shares were
subject to repurchase.
A summary of stock option activity under the 1996 and 1999 Plans follows:
OPTIONS OUTSTANDING
-----------------------------
AVAILABLE NUMBER OF WEIGHTED-AVERAGE
FOR GRANT SHARES EXERCISE PRICE
--------- --------- ----------------
Balances as of December 31, 1996.................. 1,137 704 $0.10
Shares made available for grant................. 953 -- --
Repurchased..................................... 318 -- --
Granted......................................... (2,480) 2,480 0.17
Exercised....................................... -- (1,940) 0.13
Cancelled....................................... 344 (344) 0.16
------ ------
Balances as of December 31, 1997.................. 272 900 0.22
Shares made available for grant................. 2,025 -- --
Repurchased..................................... 306 -- --
Granted......................................... (1,300) 1,300 1.96
Exercised....................................... -- (1,042) 0.59
Cancelled........................................ 85 (85) 1.02
------ ------
Balances as of December 31, 1998.................. 1,388 1,073 1.90
Shares made available for grant................. 1,415 -- --
Repurchased..................................... 103 -- --
Granted......................................... (1,787) 1,787 7.74
Exercised....................................... -- (97) 2.75
Cancelled....................................... 36 (36) 3.19
------ ------
Balances as of December 31, 1999.................. 1,155 2,727 $5.68
====== ======
The weighted-average exercise price of stock options outstanding was $5.68
and $1.90 as of December 31, 1999 and 1998, respectively. The weighted average
purchase price of unvested stock was $0.55 and $0.34 as of December 31, 1999 and
1998, respectively.
The following table summarizes information about stock options outstanding under
the 1996 and 1999 Plans as of December 31, 1999:
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OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/99 LIFE (YEARS) PRICE AT 12/31/99 PRICE
-------- ----------- ------------ -------- ----------- --------
$ 0.10-$ 2.50 651 7.95 $ 1.04 651 $ 1.04
$ 3.50 1,586 9.02 $ 3.50 1,586 $ 3.50
$ 6.25-$15.00 335 9.44 $ 8.80 335 $ 8.80
$29.88-$57.00 155 9.79 $40.46 -- $40.46
----- ---- ------ ----- ------
Total 2,727 8.86 $ 5.68 2,572 $ 3.57
===== =====
As of December 31, 1999, 482 options with a weighted-average exercise price
of $1.88 were vested.
1999 Employee Stock Purchase Plan
In May 1999, the Company's Board of Directors adopted the 1999 Employee
Stock Purchase Plan (the "ESPP"). The ESPP became effective July 27, 1999. A
total of 500 shares has been reserved for issuance under this plan. The ESPP
permits participants to purchase common stock through payroll deductions of up
to 15% of an employee's compensation, including commissions, overtime, bonuses
and other incentive compensation. The purchase price per share will be equal to
85% of the fair market value per share on the participant's entry date into the
offering period or, if lower, 85% of the fair value per share on the semi-annual
purchase date. No shares of common stock were issued under this ESPP during
1999.
STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation," the Company has elected
to continue to follow Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees" in accounting for stock-based awards
to employees. Under APB 25, the Company generally recognizes no compensation
expense with respect to such awards.
Pro forma information regarding the net income (loss) and net income
(loss) per share is required by SFAS 123 for awards granted or modified after
December 31, 1994 as if the Company had accounted for its stock-based awards to
employees under the fair value method of SFAS 123. The fair value of the
Company's stock-based awards to employees was estimated using a Black-Scholes
option pricing model.
The fair value of the Company's stock-based awards was estimated assuming
no expected dividends and the following weighted-average assumptions:
OPTIONS ESPP
----------------------------- ------
1999 1998 1997 1999
------ ------ ------ ------
Expected Life (years).................. 4 4 4 .50
Expected volatility.................... 110% 50% 50% 110%
Risk-free interest rates............... 4.5% 4.5% 6.5% 4.5%
For pro forma purposes, the estimated fair value of the Company's stock-
based awards is amortized over the award's vesting period (for options) and the
six month purchase period (for stock purchases under the ESPP). The
Company's pro forma information follows:
1999 1998 1997
--------- -------- --------
Net loss--Historical.................................... $(10,876) $(8,799) $(5,909)
Net loss--Pro forma..................................... $(13,986) $(8,854) $(5,934)
Basic and Diluted net loss per share-Historical......... $ (0.71) $ (1.54) $ (1.82)
Basic and diluted net loss per share-Pro forma.......... $ (0.91) $ (1.54) $ (1.82)
Calculated under SFAS 123, the weighted-average fair value of the options
granted during 1999, 1998 and 1997 was $4.64, $0.90 and $0.04 per share,
respectively. The weighted average fair value of employee stock purchase rights
granted under the ESPP Plan during 1999 was $18.66 per share.
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In connection with options granted in fiscal years 1999 and 1998, the
Company has recorded deferred stock-based compensation of $3,914 and $787,
respectively, representing the difference between the exercise price and the
fair value of the Company's common stock at the date of grant. The amount is
being amortized over the vesting period for the individual options. Amortization
of stock-based compensation of $2,290 and $273 was recognized during the years
ended December 31, 1999 and 1998, respectively.
8. INCOME TAXES
The differences between the income tax expense (benefit) computed at the
federal statutory rate of 34% and the Company's actual income tax provision for
all periods presented primarily related to net operating losses not benefited as
follows:
1999 1998
---- ----
U.S. federal statutory rate (benefit)....................... (34)% (34)%
Net losses without benefits................................. 34% 34%
---- ----
Total tax expense (benefit)................ -- --
==== ====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1999 and 1998, are
presented below:
1999 1998
------- -------
Deferred tax assets:
Various accruals and reserves not deductible for tax
purposes............................................... $ 507 $ 264
Property and equipment.................................... -- 97
Net operating loss carryover.............................. 9,308 5,759
Research credit carryforwards............................. 784 255
Capitalized start-up expenditures......................... 216 315
Deferred stock-based compensation......................... 675 215
------- -------
Total deferred tax assets............................... 11,490 6,905
Valuation allowance......................................... (11,367) (6,905)
Deferred tax liabilities:
Property and equipment.................................... (123) --
------- -------
Total deferred tax liabilities......................... (123) --
------- -------
Net deferred tax assets..................................... $ -- $ --
======= =======
The net change in the valuation allowance for the year ended December 31,
1999 and 1998 was an increase of $4,462 and $3,706, respectively.
As of December 31, 1999, the Company has net operating loss carryforwards
for federal and California state income tax purposes of approximately $23,588
and $14,565, respectively. In addition, the Company had federal and state
research credit carryforwards of approximately $440 and $344, respectively. The
Company's federal net operating loss and research credit carryforwards will
expire in the years 2011 through 2019, if not utilized. The Company's state net
operating loss carryforwards will expire in the year 2004. The state research
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credit can be carried forward indefinitely.
Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event of
an "ownership change" as defined in Internal Revenue Code Section 382. The
Company has not yet determined whether an ownership change has occurred.
9. 401(k) PLAN
In 1997, the Company adopted a 401(k) plan (the "401(k)"). Participation in
the 401(k) is available to all employees. Entry date to the 401(k) is the first
day of each month. Each participant may elect to contribute an amount up to 25%
of his or her annual base salary plus commission and bonus, but not to exceed
the statutory limit as prescribed by the Internal Revenue Code. The Company may
make discretionary contributions to the 401(k). To date, no contributions have
been made by the Company.
10. SEGMENT REPORTING
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company's chief
operating decision maker is considered to be the Company's CEO. The CEO reviews
financial information presented on a consolidated basis substantially similar to
the consolidated financial statements. Therefore, the Company has concluded that
it operates in one segment and accordingly has provided only the required
enterprise-wide disclosures.
The Company operates in the United States and internationally and derives
its revenue from the sale of products and software licenses. The Company's
sales, marketing, and development efforts have been focused on the PacketShaper
family of products and PacketWise software. In 1999, no one customer accounted
for more than 10% of total net revenues. In 1998, sales to Macnica accounted
for 11.9% of total net revenues. Sales outside of North America accounted for
54.9%, 54.7%, and 59.9% of the Company's total revenues in 1999, 1998, and 1997
respectively.
Geographic Information
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------ ------ ------
Total net revenues:
North America............................ $8,310 $3,273 $ 566
Asia Pacific............................. 4,795 2,238 617
Europe and rest of world................. 5,336 1,719 230
------- ------ ------
Total net revenues.................... $18,441 $7,230 $1,413
======= ====== ======
Total net revenues reflects the destination of the product shipped.
Long-lived assets are primarily located in North America. Long-lived assets
located outside North America are insignificant.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Packeteer, Inc.:
We have audited the accompanying consolidated balance sheets of Packeteer,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1999. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule listed in the index at Item
14(a)2. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial
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statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Packeteer,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Mountain View, California
January 21, 2000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G to Form 10-K, the information required by
Items 10, 11, 12, and 13 of Part III is incorporated by reference to our
definitive Proxy Statement with respect to our 2000 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A with the Securities and
Exchange Commission not later than 120 days after December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See the Consolidated Statements beginning on page 35 of this
Form 10-K.
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves (see
page 53 of this Form 10-K).
(3) Exhibits
See the Exhibit Index at page 53 of this Form 10-K.
(b) No reports on Form 8-K were filed during the last quarter of the fiscal year
ended December 31, 1999.
(C) See the Exhibit Index at page 53 of this Form 10-K.
(d) See the Consolidated Financial Statements beginning on page 35 and Financial
Statement Schedule at page 53 of this Form 10-K.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Cupertino,
State of California, on this 23rd day of March, 2000.
PACKETEER, INC.
By: /s/ DAVID YNTEMA
-------------------------------------
David Yntema
Chief Financial Officer and Secretary
Date: March 23, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Craig
Elliott and David Yntema, and each of them acting individual, as his
attorney-in-fact, each with full power of substitution and resubstitution, for
him or her in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K (including post-effective amendments), and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact full power and authority to do and perform each and every act
and thing requisite and necessary to be done in connection therewith as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ CRAIG ELLIOTT President and Chief Executive March 23, 2000
- ---------------------------------- Officer (Principal Executive
Craig Elliott Officer) and Director
/s/ DAVID YNTEMA Chief Financial Officer and March 23, 2000
- ---------------------------------- Secretary (Principal Financial and
David Yntema Accounting Officer)
/s/ ROBERT PACKER Chief Technical Officer and March 23, 2000
- ---------------------------------- Director
Robert Packer
/s/ BRETT GALLOWAY Vice President, Engineering, March 23, 2000
- ---------------------------------- Chief Operating Officer
Brett Galloway and Director
Director
- ----------------------------------
Steven Campbell
/s/ JOSEPH GRAZIANO Director March 23, 2000
- -----------------------------------
Joseph Graziano
/s/ PETER MORRIS Director March 23, 2000
- -----------------------------------
Peter Morris
/s/ WILLIAM STENSRUD Director March 23, 2000
- -----------------------------------
William Stensrud
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the years ended December 31, 1997, 1998, and 1999
(in thousands)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
1999
Accounts Receivable Allowances........... 293 28 (104) 217
Warranty Reserve......................... 76 515 (278) 313
1998
Accounts Receivable Allowances........... 37 305 (49) 293
Warranty Reserve......................... 32 85 (41) 76
1997
Accounts Receivable Allowances........... $-- $37 $-- $37
Warranty Reserve......................... -- 32 -- 32
EXHIBITS INDEX
EXHIBIT
NUMBER Description
- -------- -------------
3.1(2) Registrant's Amended and Restated Certificate of
Incorporation.
3.2(2) Registrant's Amended and Restated Bylaws.
4.1(2) Form of Registrant's Specimen Common Stock Certificate.
10.1(2) Lease Agreement between Packeteer and Eldon R. Hoffman dated
August 25, 1997.
10.2(2) OEM Agreement between Packeteer and ADC Telecommunications,
Inc., dated December 17, 1998.
10.3(2) Reseller Agreement between Packeteer and Alcatel Business
Systems, dated May 7, 1999.
10.4(2) Loan and Security Agreement between Packeteer and Silicon
Valley Bank, dated January 1, 1999.
10.5(2) Export-Import Bank Loan and Security Agreement between
Packeteer and Silicon Valley Bank, dated January 19, 1999.
10.6(2) Subordinated Loan and Security Agreement between Packeteer
and Comdisco, Inc., dated January 21, 1999.
10.7(2) Master Lease Agreement between Packeteer and Comdisco, Inc.,
dated June 3, 1997.
10.8(2) Registrant's 1996 Equity Incentive Plan.
10.9(2) Registrant's 1999 Stock Incentive Plan.
10.10(2) Registrant's 1999 Employee Stock Purchase Plan.
10.11(2) Form of Indemnity Agreement entered into by Registrant with each of
its executive officers and directors.
10.12(2) Loan and Security Agreement between Packeteer and MMC/GATX
Partnership No. 1 dated May 20, 1999.
10.13(2) OEM Agreement between Packeteer and Lucent Technologies,
Inc. dated June 25, 1999.
10.14(2) OEM Agreement between Packeteer and Adtran, Inc. dated June
29, 1999.
10.15(1) Amendment dated February 2, 2000 to the Loan and Security Agreement and
the Export-Import Bank Loan and security agreement between Packeteer and
Silicon Valley Bank.
10.16(1) Master Lease Agreement between Packeteer and Pentech Financial Services,
Inc., dated November 1, 1999.
10.17(1) Addendum to Lease Agreement between Packeteer and Eldon R. Hoffman
dated November 1, 1999.
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21.1(2) Subsidiaries of Packeteer
23.1(1) Consent of KPMG LLP, Independent Accountants
24.1 Power of Attorney (see page 52)
27.1(1) Financial Data Schedules
- -------------------------
(1) Filed herewith.
(2) Incorporated by reference from Packeteer's Registration Statement on Form
S-1 (Reg. No. 79333-79077), as amended.
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