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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, 2000 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 28, 2001, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $324,333,232. 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 29,180,035 at February 28, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III of this form 10-K is incorporated by
reference from the Company's definitive Proxy Statement for the Registrant's
2001 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after December 31,
2000.
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TABLE OF CONTENTS
Part I
Item 1. Business........................................................................................... 3
Item 2. Properties......................................................................................... 25
Item 3. Legal Proceedings.................................................................................. 25
Item 4. Submission of Matters to a Vote of Security Holders................................................ 25
Part II
Item 5. Market Registrant's Common Stock and Related Stockholder Matters................................... 25
Item 6. Selected Financial Data............................................................................ 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation............... 28
Item 7a Quantitative and Qualitative Disclosures about Market Risk......................................... 33
Item 8. Financial Statements and Supplementary Data........................................................ 34
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure.................. 52
Part III
Item 10. Directors and Executive Officers of the Registrant................................................. 52
Item 11. Executive Compensation............................................................................. 52
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 52
Item 13. Certain Relationships and Related Transactions..................................................... 52
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 52
Signatures.................................................................................................................. 53
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PART I
ITEM 1. BUSINESS
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 revisions to forward-looking statements to reflect events
or circumstances arising after the date of this document. See "Risk Factors."
OVERVIEW
Packeteer is a leading provider of application performance infrastructure
systems that are designed to provide enterprises and service providers a layer
of control for applications delivered across intranets, extranets and the
Internet. Packeteer's products -- powered by PacketWise software -- are designed
to ensure end-to-end quality of service (QoS) for networked applications and
managed services, enhancing users' quality of experience through comprehensive
bandwidth, traffic, content, service-level and policy management. Packeteer's
PacketShaper family of products, the PacketShaper and AppVantage systems,
integrates application discovery, analysis, control and reporting technologies
that are required for proactive application performance and bandwidth
management. The AppCelera family of Internet acceleration appliances employs SSL
acceleration and advanced content compression, transformation and caching
technologies to improve response times of mission critical enterprise, eBusiness
and eCommerce web applications.
Packeteer's products are deployed by Global 2000 corporations and service
providers, and sold through an established network of more than 100 VARs,
distributors, system-integrators and OEMs in more than 50 countries. Our
products are built on hardware platforms based on Intel-compatible
microprocessor technologies. In addition, PacketWise software is licensed by
major communications industry partners who integrate the software into specific
strategic networking solutions. We primarily 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 subsidiaries in Hong Kong, Japan, The Netherlands, United
Kingdom, Australia, Caymans and Canada. To date we have shipped more than 11,000
units.
We were incorporated in Delaware in January 1996 and in February 1997, we
began shipping our products. In this report, "Company", "Packeteer," "we," "us,"
and "our" refer to Packeteer, Inc. and its subsidiaries.
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 it 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
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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 graphic-intensive web
sites, download large files, view streaming 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
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
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- 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
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 application performance infrastructure
systems that are designed to provide enterprises and service providers a layer
of control for applications delivered across intranets, extranets and the
Internet. Packeteer's products -- powered by PacketWise software -- are designed
to ensure end-to-end quality of service (QoS) for networked applications and
managed services, enhancing users' quality of experience through comprehensive
bandwidth, traffic, content, service-level and policy management. Packeteer's
PacketShaper family of products, the PacketShaper and AppVantage systems,
integrates application discovery, analysis, control and reporting technologies
that are required for proactive application performance and bandwidth
management. The AppCelera family of Internet acceleration appliances employs SSL
acceleration and advanced content compression, transformation and caching
technologies to improve response times of mission critical enterprise, eBusiness
and eCommerce web applications.
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PacketWise software is at the core of our bandwidth management solutions
and is embedded in Packeteer-manufactured products, basically hardware
platforms, based on Intel-compatible microprocessor technologies, that run
various configurations of the PacketWise software and OEM-manufactured products.
Our PacketShaper products provide customers with solutions 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 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 300 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.
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.
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- 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 performance
infrastructure systems that give enterprises and service providers a new layer
of control for applications delivered across intranets, extranets and the
Internet. 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
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 telecommunications service provider
market and currently have numerous telecommunications service provider
customers, including: BIGLOBE, a wholly owned subsidiary of NEC Corporation; NTT
Corporation; Singapore Cable, Fujitsu Cable, EasyNet and Hewlett Packard. 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. We are actively
pursuing opportunities in the application service provider market and currently
have numerous application service provider customers, including Aristasoft,
AT&T, Vistorm, Macquarie and NTT Communications, that are currently using our
application service provider product, AppVantage. AppVantage 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 designed to enable 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
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: Alternative Technology, ACAL Nederlands; Syncordia
Solutions, a division of British Telecommunications PLC; First Technology, a
subsidiary of Comparex Holdings; Compaq Computer Corporation; Datacraft Asia
Ltd.; Encom Information Systems Co.; Future Link Europe; Macnica, Inc.; Net One
Systems Co., Ltd.; Nissho Electronics Corporation; Unisys Latin America; and
Williams Communications Solutions, LLC. Recently, we entered into an agreement
with IBM to distribute our products globally. 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.
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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 and Intel both 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 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
Packeteer's products -- powered by PacketWise(TM) software -- enable
enterprises and service providers to measure, control, accelerate and validate
the performance of networked applications and managed application services.
PacketShaper. PacketShaper is an application-based traffic and bandwidth
management system designed to deliver predictable, efficient performance for
applications running over the WAN and Internet. The PacketShaper(R) Enterprise
Edition is an application bandwidth management system that provides effective
application QoS using state-of-the-art bandwidth, traffic, service-level and
policy management technology. The PacketShaper ISP Edition is an Internet
bandwidth management platform that enables service providers to create
differentiated services through fast and efficient bandwidth provisioning and
management. With over 10,000 units shipped worldwide in Global 2000 enterprises
and service providers, PacketShaper is the market leader in bandwidth management
systems. The PacketShaper product line currently includes the 1500, 2500, 4500
and 6500 Enterprise Editions and 4500 and 6500 ISP Editions.
AppVantage. Especially designed for emerging managed application services,
the AppVantage family of Application Service Management (ASM) systems provides
the essential software needed to deliver measured and performance-assured
application services. In addition to PacketWise core QoS technologies, which
include application-based bandwidth, traffic, performance service-level and
policy management, AppVantage incorporates service-level mediation capabilities
that allow service providers to define clear service boundaries with customers
and create enforceable service-level agreements. It also enables application
performance reporting and billing models. AppVantage is ideally suited for
service providers who are delivering, hosting or providing infrastructure for
managed applications services. These include application service providers
(ASPs), hosting service providers (HSPs), management service providers (MSPs)
and Application Infrastructure Providers (AIPs). The AppVantage product line
currently includes the ASM-30, ASM-50, ASM-70 and ASM-90 Series.
AppCelera. A new line of products designed to accelerate the performance of
Internet applications, AppCelera ICX (Internet Content Accelerator) is an
advanced content acceleration product that can reduce web response-times by 50%
or more by accelerating web content delivery all the way to the user's desktop.
It combines content compression, transformation and caching technologies to
improve web application performance across the bandwidth-constrained last mile
connections while reducing both server and bandwidth resource consumption.
AppCelera ISX (Internet Security Accelerator) is designed to speed up processing
of secure web content by offloading resource-intensive security processing from
the server onto the ISX platform. Products include the AppCelera ICX-55, ICX-75
and ISX-50.
PolicyCenter(TM). A directory-based policy management application that
enables Packeteer's enterprise and service provider customers to broadly deploy,
scale and manage application QoS throughout the network, PolicyCenter is an LDAP
directory-enabled application running under Windows NT that enables customers to
centrally administer and update PacketShaper and AppVantage policies, software
versions, and device status for Packeteer-based networks.
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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
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, non-critical
applications such as web browsing and music downloading through peer-to-peer
applications and mission-critical applications such as Citrix, Oracle or SAP and
critical web sites are all assigned to the same TCP port number on a network but
can be individually classified using PacketShaper.
PacketShaper needs no assistance from network managers to automatically
detect and identify over 300 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 300 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.
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STREAMING MEDIA NETWORK ROUTING DATABASE E-MAIL, GAMING SYSTEMS
AND MUSIC P2P MANAGEMENT AURP Oracle 7/8i COLLABORATION, Doom
ERP WindowsMedia PROTOCOL BGP FileMaker Pro MESSAGING Quake I, II, & III
SAP Multi-cast ICMP by EGP MS SQL Microsoft Kali
Oracle Java NetShow packet type EIGRP Progress DCOM (MS Asheron's Call
Client Real Audio SYSLOG OSPF Exchange) Battle.net
Baan Streamworks SNMP RIP SMTP Diablo II
JD Edwards RTSP NTP RARP cc:MAIL Half-Life
MPEG Cisco Discovery Spanning Tree Biff MSN Zone
CLIENT/SERVER APPS ST2 Microsoft SMS CBT FILE SERVER POP3 Starsiege Tribes
CORBA SHOUTcast RSVP PIM NFS POP3 Kerberos Unreal
SunRPC (dyn port) QuickTime IGMP NetBIOS-IP IMAP Yahoo! Games
Java Rmt Mthd RTP DIRECTORY DRP Lockd LotusNotes MSSQ
FIX (Finance) AudioGalaxy SERVICES IGP AFS Novell
MATIP (Airline) Napster Finger Novell GroupWise PUSH
MeetingMaker Gnutella LDAP LEGACY LAN NetWare5 Yahoo! Messenger Marimba
OpenConnect Imesh DNS AND NON-IP MSN Messenger PointCast
JCP Scour RADIUS AppleTalk SECURITY AOL Instant Backweb
Folding@Home Kerberos DECnet PROTOCOL Messenger EntryPoint
VOICE OVER IP TACACS IPX DLS I Seek You Chat
INTERNET CUSeeMe CRS SNA L2TP
HTTP H.323 DHCP FNA PPTP PRINT MISC
URL T.120 DPA LAT IPSEC LPR Time Server
Web browser RTP Ident NetBEUI GRE TN5250p Date-Time
Mime type RTCP WINS AFP DPA TN3287
FTP, Passive FTP VDOPhone whois ISAKMP/IKE IPP
SSL Micom VIP THIN CLIENT OR key exchange
NNTP I-Phone HOST ACCESS SERVER BASED SOCKS Proxy
IRC Clarent TN3270 Citrix SESSION
Gopher MCK Commun. TN5250 Published Apps Telnet
UUCP Attachmate and VideoFrame Timbuktu
SSHTCP SHARESUDP RDP/Terminal REXEC
IP, UDP, TCP ATSTCP Server rlogin
IPv6 SMTBF Xwindows
TFTP Persoft VNC
ActiveX Persona
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
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
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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 it creates a
smooth and 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 an UDP-based application that is particularly
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 is 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, Packeteer offers its own centralized management
tools, PolicyCenter and Report Center. In addition, Packeteer aligns with
industry standards and integrates with third-party tools.
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Other third party management tools that Packeteer products integrate with
include Infovista, Micromuse and HP OpenView.
Web Server Acceleration
This software technology, represented by the AppCelera ISX-55 and
ISX-75, accelerates the transmission and rendering speed of Internet
applications by compressing traffic from end-to-end and dynamically increasing
the throughput of the low and medium speed connections. The software does this
using dynamic, static and variant content caching together with content-aware
compression and transformation techniques for an increase in performance. The
software determines the type of content, speed of access, and type of browser
and automatically optimizes the speed of delivery and rendering of information.
By combining caching with compression, this technology accelerates delivery of
business content and Internet applications to the user. This approach solves the
last mile problem of low to medium speed Internet connections that is not
addressed by today's reverse-proxy and network-based caching solutions.
CUSTOMERS
We sell all of our products primarily 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. ACAL Nederlands bv AsiaSoft HK Ltd.
Alternative Technology Access Networks Axishost Pte. Ltd.
Bay Data Consultants Activis, Ltd. Datacraft Asia Ltd.
Charter Communications ADAnet IIS Communications Datapro Infoworld
Combyte USA, Inc. Alcatel Business Systems Encom Information Systems Co.
Comdisco Computer Corp. Antea Consulting Express Data
Compaq Computer Corp. Data Construction Kanematsu Electronics Ltd.
C/Soft Inc. First Technology Lan Systems Pty Ltd.
Future Link MicroVisions Future Link Europe Macnica, Inc.
GTC Systems, Inc. Grupo Antea Nissho Electronics Corporation
Information Systems Group, Inc. Iperformances RBR Networks Pte. Ltd.
IBM Miel SunRise Information Co. Ltd.
Intel Q&I Nederland bv Teledata (Singapore) Ltd.
M-13 Westcon UK Ltd. Transition Systems (M) Sdn. Bhd.
NETPLEX Systems, Inc. Unitech Computer Systems Limited
Ocean Systems Engineer/ITI
(OSEC)
Solunet, Inc.
Unisys Corp. through LACD
Williams Telecommunications
The following is a representative list of end users that have deployed
multiple PacketShapers:
ENTERPRISES SERVICE PROVIDERS
---------------------------------------------------------------------- --------------------------------
ABM Industries Incorporated Johnson & Johnson AT&T
American Bottling Company Korea Exchange Bank Aristasoft
Autodesk, Inc. Mitchell International, Inc. BIGLOBE
Borden Chemical Inc. Motorola, Inc. British Telecommunications PLC
Boy Scouts of America Nokia Cypress Communications
Canon Northwestern Mutual Life Macquarie
Cytec Industries Inc. Insurance Company Nifty Corporation
Charter Communications Omnitel NTT Communications
Daewoo Securities Pepsi SONERA Technologies
Domino's Pizza, Inc. Sharp Telefonica de Espana
EDS Shell Verio Inc.
Grant Thornton International Sony Pictures Entertainment Vistorm
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Hoechst Marion Roussel AG Staley/Tate & Lyle North America
Hewlett-Packard Company Standard & Poor's
IBM Transamerica Corporation
Intel Unilever N.V.
In 2000, one customer accounted for 12% of total net revenues. In 1999, no
one customer accounted for more than 10% of total net revenues. Sales to the top
10 indirect channel partners accounted for 46% and 37% of total net revenues for
the years ended December 31, 2000 and 1999, respectively.
The following representative case studies of four of our current customers
illustrate how some of our customers have deployed our products:
Korean Exchange Bank. Korean Exchange Bank, or KEB, is one of the leading
credit card service organizations in Korea with extensive branch networks.
Sluggish web based banking services frustrated both customers and branch
employees and ever-expanding IP traffic was slowing the performance of
business-critical application using SNA, an enterprise protocol. In order to
avoid the expensive WAN bandwidth upgrades that would be instantly consumed by
non-urgent applications, KEB deployed PacketShapers at KEB's branch offices. The
PacketShaper identified SNA traffic and makes sure it has access to the
bandwidth it needs for timely performance-no matter how active IP is. In
addition, PacketShaper separates KEB's service-oriented web traffic from casual
web browsing and applies per-session bandwidth controls to prevent unwanted
impact. KEB now has protected, predictable performance for both SNA and
web-based applications without the expense of upgrading the WAN links at all 24
branches.
Ciba Specialty Chemicals. Ciba Specialty Chemicals, or CSC, is one of the
largest producer of specialty chemicals for consumer products. CSC was
frustrated by expensive WAN links in South America and was uncertain about
whether they were getting what they paid for. The PacketShaper was initially
installed to identify the applications on the network and analyze their response
times and share of capacity. They discovered that critical application
performance suffered during spikes in bandwidth-hungry traffic from e-mails with
large attachments, web browsing, and FTP flows. CSC used the PacketShaper's
bandwidth-allocation policies to cap this bandwidth-hungry traffic and commit
bandwidth to critical, time-sensitive traffic.
ABM Industries. ABM Industries is a large industrial facilities contractor
that implemented thin-client terminals with server-based, centralized
applications in place of personal computers. However, the server-based
applications competed with printing and Web traffic for bandwidth and mission
critical application traffic was unpredictable. ABM deployed over 100
PacketShapers to ensure application performance. First, the traffic was
discovered and classified; next, the traffic types were assigned priorities.
These priorities ensure that the mission critical application traffic is
control. The PacketShaper helped ABM avoid performance and productivity
decreases associated with poorly managed WAN links.
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
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 one contract
manufacturer, SMTC located in San Jose, California. The manufacturing processes
and procedures for this manufacturer 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
manufacturer 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.
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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. SMTC 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 performance infrastructure systems. 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 categories:
- Solutions 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 solutions partners sell PacketShapers and other products that
are complementary to our application performance infrastructure
systems.
- 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, 2000, our worldwide sales and marketing organization
consisted of 66 individuals, including managers, sales representatives and
technical and administrative support personnel. We have domestic sales offices
located in Bedminster, New Jersey; Schaumberg, Illinois; Cupertino, California;
Dallas, Texas; and Tacoma, Washington. In addition, we have international sales
offices located in Hong Kong; Sydney and Melbourne, Australia; Singapore; Tokyo,
Japan; Kelowna, Canada; 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
54% and 55% of our total net revenues in 2000 and 1999, respectively. In
addition, sales to Asia Pacific accounted for 28% and 26% of our total net
revenues in 2000 and 1999, respectively.
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RESEARCH AND DEVELOPMENT
As of December 31, 2000, our research and development organization
consisted of 66 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 performance 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 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 six issued U.S. patents and nine pending patent applications. 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
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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
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, 2000, Packeteer employed a total of 183 full-time
employees. Of the total number of employees, 66 were in research and
development, 52 in sales and customer service, 14 in marketing, 26 in operations
and 25 in administration. Our employees are not represented by any collective
bargaining agreement with respect to their employment by Packeteer.
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 $9.4, $10.9 and $8.8 million in 2000, 1999 and 1998,
respectively. As of December 31, 2000, we had an accumulated deficit of $36.2
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 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
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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 timing and size of orders and shipments of our products;
- the amount and timing of revenues from OEMs;
- the mix of products we sell;
- the mix of channels through which those products are sold;
- the average selling prices of our products; and
- the amount and timing of our operating expenses.
In the past, we have experienced fluctuations in operating results. These
fluctuations resulted primarily from 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.
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 APPLICATION TRAFFIC AND BANDWIDTH MANAGEMENT SOLUTIONS MARKET FAILS TO
GROW, OUR BUSINESS WILL FAIL
The market for application 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 primarily 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
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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.
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,
OEM relationships can be terminated with little or no notice. Our recent OEM
agreements with ADC Telecommunications, Inc., Adtran, Inc., Skystream Networks,
Inc. and Intel Corporation are not exclusive and the initial terms range from
one to five years, with no obligation 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.
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.
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.
OUR PRODUCT LINES CURRENTLY CONSIST OF THE PACKETSHAPER, APPVANTAGE AND
APPCELERA SYSTEMS AND PACKETWISE SOFTWARE, 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, AppVantage and
AppCelera lines of products and PacketWise software, which are the only products
that we currently
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offer. If our target customers do not widely adopt, purchase and successfully
deploy the PacketShaper, AppVantage and Appcelera lines of products or
PacketWise software, our revenues will not grow significantly.
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
our operating results by unexpectedly decreasing sales, increasing our inventory
levels of older products and exposing us to greater risk of product
obsolescence.
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.
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% and 55% of our total net revenues in fiscal 2000 and 1999, respectively.
In particular, sales to customers in our Asia Pacific region accounted for 28%
and 26% of our total net revenues in fiscal 2000 and 1999, respectively. 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.
SALES TO 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.
Sales to one customer accounted for 12% of total net revenues in 2000 and 1998.
No one customer accounted for more than 10% of total net revenues in 1999. 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
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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.
OUR ACQUISITION OF WORKFIRE MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND
MANAGEMENT DUE TO DIFFICULTIES IN ASSIMILATING PERSONNEL AND OPERATIONS
We may not realize the benefits from the acquisition of Workfire we
completed on September 13, 2000. We may not be able to successfully assimilate
the additional personnel, operations, acquired technology and products into our
business. In particular, we will need to assimilate and retain key engineering
personnel and professional consultants. This is particularly difficult because
Workfire's operations are located in Canada and we are headquartered in
California. Key personnel from Workfire may decide that they do not want to work
for us. In addition, we may wish to integrate Workfire products into our
products, and it is uncertain whether we may accomplish this easily or at all.
These difficulties could disrupt our ongoing business, distract management and
employees or increase expenses. Acquisitions are inherently risky and we may
also face unexpected costs, which may adversely affect operating results in any
quarter.
THE MERGER OF WORKFIRE INTO OUR COMPANY COULD ADVERSELY AFFECT OUR COMBINED
FINANCIAL RESULTS
If the benefits of the merger of Workfire into our company do not exceed
the costs of the merger, including dilution to our stockholders resulting from
the issuance of shares in connection with the merger, our financial results,
including earnings per share, could be adversely affected. We are not certain
that we will be able to achieve our financial estimates if the anticipated
revenue from the sale of products containing technology or other intellectual
property acquired in the merger is not realized. In addition we have recorded
goodwill, intangible assets and deferred stock-based compensation of
approximately $72.8 million in connection with the merger, which will be
amortized over a period of three years from the date of acquisition.
THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE AS A RESULT OF THE MERGER OF
WORKFIRE INTO OUR COMPANY
The market price of our common stock may decline as a result of the merger
if :
- the integration of our company and Workfire is unsuccessful;
- we do not achieve the perceived benefits of the merger as rapidly or
to the extent anticipated by the financial or industry analysts or
investors; or
- the effect of the merger on our financial results is not consistent
with the expectations of financial or industry analysts or investors.
The market price of our common stock could also decline as a result of
factors related to the merger which may currently be unforeseen. A decline in
the market price of our common stock could materially and adversely affect our
operating results.
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. Our
consummation of the acquisition of other businesses would subject us to a number
of risks, including the following:
- difficulty in integrating the acquired operations and retaining
acquired personnel;
- limitations on our ability to retain acquired distribution channels
and customers;
- diversion of management's attention and disruption of our ongoing
business; and
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- limitations on our ability to successfully incorporate acquired
technology and rights into our product and service offerings and
maintain uniform standards, controls, procedures, and policies.
We may not successfully overcome problems encountered in connection with
potential acquisitions. In addition, acquisitions could harm our operating
results by diluting our stockholders' equity and requiring us to amortize
acquisition expenses and acquired assets. Further, potential acquisitions could
cause us to incur additional debt.
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.
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. The loss of services of any of our senior management could negatively
impact our ability to carry 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
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
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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.
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.
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OUR RELIANCE ON SMTC FOR ALL OF OUR MANUFACTURING REQUIREMENTS COULD CAUSE US TO
LOSE ORDERS IF THIS THIRD PARTY MANUFACTURER FAILS TO SATISFY OUR COST, QUALITY
AND DELIVERY REQUIREMENTS
We currently contract with SMTC 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 manufacturer, 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
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 manufacturer or that this
manufacturer 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 manufacturer fails 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
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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.
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 five issued U.S. patents, one
published patent and eight 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
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
foreseeable 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.
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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 22% of our outstanding common stock as of February 28, 2001 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 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 we can accommodate future growth by obtaining the
necessary additional space. Packeteer leases offices in the following locations:
Bedminster, New Jersey; Dallas, Texas; Tacoma, Washington; Schaumburg, Illinois;
Branford, Connecticut; Kelowna, Canada; Sydney and Melbourne, Australia; Hong
Kong; Singapore; 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 closing prices per share of our common stock as reported on the
Nasdaq National Market for the periods indicated:
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HIGH LOW
---- ---
Fiscal 2000:
Fourth Quarter.............................. $40.31 $ 8.69
Third Quarter............................... 52.38 25.38
Second Quarter.............................. 38.00 10.50
First Quarter............................... 73.00 33.00
Fiscal 1999:
Fourth Quarter.............................. 75.38 29.75
Third Quarter (from July 28, 1999).......... 56.50 21.13
As of February 28, 2001, there were approximately 486 registered 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.
Several Packeteer executives have informed us that, in order to diversify
their investment portfolios while avoiding conflicts of interest or the
appearance of any such conflict that might arise from their position with the
company, they have established a written plan in accordance with SEC Rule 10b5-1
for gradually liquidating a portion of their holdings of our common stock. In
particular, we have been notified that Craig W. Elliott, President and CEO and
Brett D. Galloway, Vice President of Corporate Development; intend to sell a
specific number of shares of stock per month, subject to certain contingencies
relating to prevailing stock price. The plans runs from May 1, 2001 through
April 30, 2002.
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ITEM 6. SELE