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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10495 North De Anza Boulevard, Cupertino, CA 95014
(Address of principal executive offices) (Zip Code)
(408) 873-4400
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
There were 27,207,923 shares of the Company's Common Stock, par value $0.001,
outstanding on June 30, 2000.
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TABLE OF CONTENTS
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PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999................................ 3
Condensed Consolidated Statements of Operations for the six months ended and three months ended June 30, 2000
and June 30, 1999.......................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and June 30, 1999....... 5
Notes to Condensed Consolidated Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 9
Factors That May Affect Future Results......................................................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................................... 20
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................................................................... 21
Item 4. Submission of Matters to Vote of Securities Holders............................................................ 22
Item 5. Other Information.............................................................................................. 22
Item 6. Exhibits and Reports on Form 8-K............................................................................... 22
SIGNATURES............................................................................................................. 22
</TABLE>
In addition to historical information, this Form 10-Q contains forward-looking
statements including statements regarding our strategy, financial performance
and revenue sources that involve a number of risks and uncertainties, including
those discussed below at "Factors That May Affect Future Results" and in the
"Risk Factors" section of Packeteer's Annual Report on Form 10-K dated March 23,
2000 as filed with the SEC. While this outlook represents our current judgement
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 Form 10-Q. 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 "Factors That May Affect Future Results" below as well as "Risk
Factors" in Packeteer's Annual Report on Form 10-K dated March 23, 2000 as filed
with the SEC.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACKETEER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,941 $ 19,554
Short-term investments 24,899 37,918
Accounts receivable, less allowance for doubtful
accounts of $233 and $217, as of June 30, 2000 and
December 31, 1999 4,238 3,931
Inventories 1,598 523
Prepaids and other current assets 803 506
-------- --------
Total current assets 61,479 62,432
Property and equipment, net 936 755
Long-term investments and other assets 9,318 7,919
-------- --------
Total assets $ 71,733 $ 71,106
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 3,038 $ 1,890
Current portion of capital leases obligations 487 339
Current portion of notes payable 46 2,524
Accounts payable 822 1,302
Accrued compensation 1,706 1,480
Other accrued liabilities 3,782 2,400
Deferred revenue 1,361 1,212
-------- --------
Total current liabilities 11,242 11,147
Long-term liabilities 905 839
Common stock; $0.001 par value; 85,000 shares
authorized; 27,208 and 26,792 shares issued
and outstanding at June 30, 2000 and
December 31, 1999, respectively 27 27
Additional paid-in capital 90,332 88,848
Accumulated other comprehensive loss (83) (58)
Deferred stock-based compensation (1,509) (2,138)
Notes receivable from stockholders (338) (738)
Accumulated deficit (28,843) (26,821)
-------- --------
Total stockholders' equity 59,586 59,120
-------- --------
Total liabilities and stockholders' equity $ 71,733 $ 71,106
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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PACKETEER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
Product revenues $ 8,699 $ 3,606 $ 15,489 $ 6,330
Licensing revenues 412 375 778 750
-------- -------- -------- --------
Total net revenues 9,111 3,981 16,267 7,080
Cost of revenues 2,858 1,073 5,111 1,927
-------- -------- -------- --------
Gross profit 6,253 2,908 11,156 5,153
Operating expenses:
Research and development (exclusive of stock based
compensation expense of $61 and $116 for the three months
ended June 30, 2000 and 1999 and $129 and $237 for the six
months ended June 30, 2000 and 1999, respectively) 2,018 1,265 3,740 2,220
Sales and marketing (exclusive of stock based compensation
expense of $223 and $692 for the three months ended June 30,
2000 and 1999 and $477 and $1,324 for the six months ended
June 30, 2000 and 1999, respectively) 4,260 3,227 8,065 5,656
General and administrative (exclusive of stock based
compensation expense of $58 and $111 for the three months
ended June 30, 2000 and 1999 and $117 and $223 for the six
months ended June 30, 2000 and 1999, respectively) 1,055 609 2,264 1,142
Stock-based compensation 342 919 723 1,784
-------- -------- -------- --------
Total operating expenses 7,675 6,020 14,792 10,802
-------- -------- -------- --------
Net loss from operations (1,422) (3,112) (3,636) (5,649)
Other income (loss), net 877 (88) 1,614 (74)
-------- -------- -------- --------
Net loss $ (545) $ (3,200) $ (2,022) $ (5,723)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.02) $ (0.41) $ (0.08) $ (0.76)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share 26,482 7,860 26,308 7,565
======== ======== ======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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PACKETEER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,022) $ (5,723)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 384 250
Other non-cash transactions 751 1,779
Changes in operating assets and liabilities:
Accounts receivable (323) 872
Inventories (1,075) (14)
Prepaids and other current assets (297) (297)
Accounts payable and other accrued liabilities 1,128 460
Deferred revenue 149 (503)
-------- --------
Net cash used in operating activities (1,305) (3,176)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (565) (305)
Purchases of available-for-sale investments (29,102) (3,205)
Sales of available-for-sale investments 40,704 1,927
Other assets (7) 13
-------- --------
Net cash provided (used) by investing activities 11,030 (1,570)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 803 34
Proceeds from stockholders' notes receivable 400 88
Repurchase of common stock -- 1
Sale of stock to employees under the ESPP 640 --
Borrowings under line of credit 1,564 1,892
Repayments of line of credit (416) (360)
Proceeds from notes payable -- 5,000
Payments of notes payable (2,582) (34)
Proceeds from lease financing 432 267
Principal payments of capital lease obligations (179) (123)
-------- --------
Net cash provided by financing activities 662 6,765
-------- --------
Net increase in cash and cash equivalents 10,387 2,019
Cash and cash equivalents at beginning of period 19,554 2,550
-------- --------
Cash and cash equivalents at end of period $ 29,941 $ 4,569
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 268 $ 172
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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PACKETEER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
Packeteer, Inc., pursuant to the rules and regulations of the Securities and
Exchange Commission and include the accounts of Packeteer, Inc. and its
wholly-owned subsidiaries ("Packeteer" or collectively the "Company"). Certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such rules and regulations. While in the
opinion of Packeteer, the unaudited financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position at June 30, 2000 and the operating
results and cash flows for the six months ended June 30, 2000 and 1999, these
financial statements and notes should be read in conjunction with Packeteer's
audited consolidated financial statements and notes thereto, included in
Packeteer's Annual Report on Form 10-K for the year ended December 31, 1999
filed with the Securities and Exchange Commission on March 23, 2000.
The results of operations for the six months ended June 30, 2000 are not
necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year ending December 31, 2000.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND INVESTMENTS
We consider all highly liquid investment securities with maturities from
date of purchase of three months or less to be cash equivalents. Short-term
investments consist of debt securities with maturities between three months and
twelve months. Long-term investments consist of debt securities with maturities
greater than 12 months.
Management determines the appropriate classification of investments at
the time of purchase and reevaluates such determination at each balance sheet
date. To date, all marketable securities have been classified as
available-for-sale and are carried at fair value with material unrealized gains
and losses, if any, included in stockholders' equity. Realized gains and losses
and declines in value of securities judged to be other than temporary are
included in other income, net. Interest and dividends on all securities are
included in other income, net.
REVENUE RECOGNITION
We recognize product revenues, with provision made for estimated
returns, after the following events have occurred: the customer issues a
noncancelable purchase order; a product has been shipped to the customer; and
collection of the sales price is probable. Revenue from product maintenance
contract sales is deferred and recognized on a straight-line basis over the
contractual period. Amounts billed in excess of revenue recognized are included
as deferred revenue in the accompanying condensed consolidated balance sheets.
For software transactions entered into after January 1, 1998, the
Company adopted the American Institute of Certified Public Accountants' (AICPA)
Statement of Position (SOP) 97-2, "Software Revenue Recognition" as modified by
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect
to Certain Transactions." SOP 97-2 generally requires revenue earned on software
arrangements involving multiple-elements to be allocated to each element based
on its relative fair value. The fair value of the element must be based on
objective evidence that is specific to the vendor. If a vendor does not have
objective evidence of the fair value of all elements in a multiple-element
arrangement, all revenue from the arrangement must be deferred until such
evidence exists or until all elements have been delivered, unless the only
undelivered element is post-contract customer support, in which case, the entire
fee is recognized over the support period.
Licensing revenues relate to OEM arrangements. We recognize OEM license
fees, which include post-contract customer support, when the software has been
shipped to the customer, the fees are fixed and determinable and there is
evidence of the fair value of the post-contract customer support. When we do not
have sufficient evidence of fair value of post-contract customer support for our
OEM license arrangements, we recognize the revenues for these arrangements over
the support period.
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Service revenue is recognized ratably over the term of the contract as
the services are performed. To date, these amounts have not been significant.
NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period,
less the weighted-average number of shares of common stock that are subject to
repurchase. All convertible preferred stock, warrants for convertible preferred
stock and common stock, outstanding stock options and shares subject to
repurchase have been excluded from the calculation of diluted net loss per share
as their inclusion would be antidilutive for all periods presented.
The following table presents the calculation of basic and diluted net
loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (545) $ (3,200) $ (2,022) $ (5,723)
-------- -------- -------- --------
Denominator:
Basic and diluted:
Weighted-average shares of common stock outstanding 27,071 9,560 26,897 9,265
Less: shares subject to repurchase (589) (1,700) (589) (1,700)
-------- -------- -------- --------
Weighted-average shares used in computing basic
and diluted net loss per share 26,482 7,860 26,308 7,565
-------- -------- -------- --------
Basic and diluted net loss per share $ (0.02) $ (0.41) $ (0.08) $ (0.76)
======== ======== ======== ========
</TABLE>
The following potential common shares have been excluded from the
computation of diluted net loss per share for all periods presented because the
effect would have been antidilutive (in thousands):
<TABLE>
<CAPTION>
THREE AND SIX MONTHS
ENDED JUNE 30,
------------------
2000 1999
------ ------
(UNAUDITED)
<S> <C> <C>
Shares issuable under stock options 3,657 2,507
Shares of unvested stock subject to repurchase 589 1,700
Shares issuable pursuant to warrants to purchase
convertible preferred stock and common stock 45 201
Shares of convertible preferred stock
on an "as-if converted" basis -- 12,391
</TABLE>
The weighted average exercise price per share of outstanding stock
options was $14.41 and $3.21 as of June 30, 2000 and 1999, respectively. The
weighted average purchase price per share of unvested stock subject to
repurchase was $0.52 and $0.43 as of June 30, 2000 and 1999, respectively. The
weighted average exercise price of the warrants was $3.58 and $3.07 as of June
30, 2000 and 1999, respectively.
COMPREHENSIVE LOSS
SFAS No.130 Reporting Comprehensive Income establishes standards of
reporting and disclosure of comprehensive income and its components of net
income and other comprehensive income. Other comprehensive income refers to
revenues, expenses, gains and losses that are not included in net income but
rather are recorded directly in stockholders' equity. Other comprehensive loss
consists of net unrealized loss on the change in the fair value of
available-for-sale securities. The components of comprehensive loss for the
three and six months ended June 30, 2000 and 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Loss (545) (3,200) (2,022) (5,723)
Unrealized gain (loss) on securities 24 -- (25) --
------ ------ ------ ------
Comprehensive loss (526) (3,200) (2,051) (5,723)
====== ====== ====== ======
</TABLE>
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Tax effects of comprehensive loss are not considered material. The
components of accumulated other comprehensive loss at June 30, 2000 and December
31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Unrealized loss on securities (83) (58)
--- ---
Accumulated other comprehensive loss (83) (58)
=== ===
</TABLE>
SEGMENT INFORMATION
The Company's chief decision maker is considered to be the Company's
CEO. The CEO reviews financial information presented on a consolidated basis
substantially similar to the consolidated financial statements. Therefore, the
Company has concluded that it operates in one segment.
For the six months ended June 30, 2000, one customer, Alternative
Technology, accounted for 11.6% of total net revenues. For the six months ended
June 30, 1999, sales to ADC Telecommunications accounted for 10.6% of total net
revenues and sales to Macnica accounted for 10.5% of total net revenues.
Geographic Information
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total net revenues:
North America 4,081 1,822 7,313 3,214
Asia Pacific 2,296 1,213 3,940 1,887
Europe and rest of world 2,734 946 5,014 1,979
------ ------ ------ ------
Total net revenues 9,111 3,981 16,267 7,080
====== ====== ====== ======
</TABLE>
The Company operates worldwide and derives its revenue from the sale of
products and source licenses. Total net revenues by geographic region reflects
the destination of the product shipped.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standard (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, as amended by SFAS No. 137, establishes accounting and reporting
standards for derivative financial instruments and hedging activities related to
those instruments, as well as other hedging activities. Because the Company does
not currently hold any derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133, as amended,
will not have a material impact on its consolidated financial position, results
of operations, or cash flows. The Company will be required to adopt SFAS No. 133
in fiscal 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. In June 2000,
the SEC issued SAB 101B which deferred the effective date of SAB 101 until the
last quarter of fiscal years beginning after December 15, 1999. The Company is
currently reviewing the impact of SAB 101 on its consolidated financial position
or results of operations.
In March 2000, the EITF published their consensus on EITF Issue No. 00-2,
"Accounting for Web Site Development Costs", which outlines the accounting
criteria for costs related to the development of web sites. The Company will be
required to adopt EITF Issue No. 00-2 in fiscal quarters beginning after June
30, 2000. The Company is in the process of assessing any impact that the
adoption of EITF Issue No. 00-2 will have on its consolidated financial position
or results of operations.
In March 2000, the EITF published their consensus on EITF Issue No. 00-3,
"Application of AICPA Statement of Position 97-2, Software Revenue Recognition,
to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware." EITF
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Issue No. 00-3 outlines the accounting criteria for hosting arrangements. The
Company does not expect the adoption of EITF Issue No. 00-3 to have material
effect on its consolidated financial position or results of operations.
In March 2000, The FASB issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25." This Interpretation clarifies the application of Opinion 25 for certain
issues: (a) the definition of employee for purposes of applying Opinion 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. Generally, this
Interpretation is effective July 1, 2000. The Company does not expect the
adoption of Interpretation No. 44 to have a material effect on its consolidated
financial position or results of operations.
NOTE 4. SUBSEQUENT EVENTS
On July 13, 2000 the Company signed a definitive agreement to acquire Workfire
Technologies International, Inc. ("Workfire"), a developer of software for
accelerating the performance of business-critical web applications and content
over the Internet, intranets and extranets. Under the terms of the agreement,
the Company will exchange 2,000,000 shares of its common stock for all of
Workfire's outstanding common stock and options outstanding. Closing of the
merger is subject to certain closing conditions and approval of the stockholders
of both Workfire and its parent corporation, Workfire.com. The transaction is
expected to close in the calendar quarter ending September 30, 2000 and will be
accounted for as a purchase.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this report. Except for historical information, the discussion in this report
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the
forward-looking statements as a result of a number of factors, including the
risks described in the section titled "Factors that may affect future results"
set forth below.
OVERVIEW
Packeteer is a leading provider of Internet application infrastructure
systems designed to enable businesses and service providers to ensure the
quality of experience for networked applications and application services.
Packeteer's advanced PacketWise software, the foundation of the Company's
innovative PacketShaper and AppVantage systems, integrates application
discovery, analysis, control and reporting technologies that are required for
proactive application performance and bandwidth management.
Packeteer's products are deployed today by leading companies and service
providers through an established network of more than 100 VARs, distributors,
system-integrators and OEMs in more than 50 countries. In addition, PacketWise
software is licensed by major communications industry partners who integrate the
software into specific strategic networking solutions. We 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 and Australia.
We were incorporated in January 1996. From our inception through January
1997, our operating activities related primarily to establishing a research and
development organization, developing and testing prototype designs, establishing
a sales and marketing organization and developing customer, vendor and
manufacturing relationships. We shipped our first product, the PacketShaper
2000, in February 1997. Since then, we have focused on developing additional
products and product enhancements, building our worldwide indirect sales channel
and establishing our sales, marketing and customer support organizations. We
began shipments of the PacketShaper 1000 and 4000 in October 1997. In April
2000, we began to ship the AppVantage line of products, the Packetshaper 1500,
the Packetshaper 2500 and the Packetshaper 4500. Since inception, we have
incurred significant losses and as of June 30, 2000, had an accumulated deficit
of $28.8 million.
In order to further the growth of our business, we sold 4,600,000 shares
of common stock in our initial public offering on July 28, 1999, which raised
approximately $62.6 million net of fees and expenses.
We have a limited operating history. We have not achieved profitability
on a quarterly or annual basis and we anticipate that we will incur net losses
for at least the next several quarters. We expect to continue to incur
significant sales and marketing, product
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development and administrative expenses and, as a result, will need to generate
significant quarterly revenues to achieve and maintain profitability.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total net revenues. These historical operating
results are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
Product revenues 95% 91% 95% 89%
Licensing revenues 5 9 5 11
---- ---- ---- ----
Total net revenues 100 100 100 100
Cost of revenues 31 27 31 27
---- ---- ---- ----
Gross margin 69 73 69 73
Operating expenses:
Research and development 22 32 23 31
Sales and marketing 47 81 50 80
General and administrative 12 15 14 16
Stock-based compensation 4 23 4 25
---- ---- ---- ----
Total operating expenses 85 151 91 153
---- ---- ---- ----
Net loss from operations (16) (78) (22) (80)
Other income, net 10 (2) 10 (1)
---- ---- ---- ----
Net loss (6)% (80)% (12)% (81)%
==== ==== ==== ====
</TABLE>
Total net revenues
Our total net revenues consist primarily of product sales and, to a
lesser extent, licensing fees from OEM partners. Our product revenues consist of
sales of our PacketShaper and AppVantage lines of products. We recognize product
revenues, with provision made for estimated returns, after the following events
have occurred: the customer issues a noncancelable purchase order; a product has
been shipped to the customer; and collection of the sales price is probable.
Maintenance revenue is deferred and amortized over the period of the contract.
Service revenue is recognized as the services are performed. Maintenance and
service revenues to date have not been significant. We routinely analyze and
provide, as necessary, reserves at the time of shipment for product returns and
allowances. We have estimated these reserves based on our experience and other
available information since we began shipping. These amounts have not been
significant to date. Our ability to estimate these reserves is limited to the
short history we have of shipping products. Our licensing revenues currently
consist of licensing and maintenance fees, and royalty payments from unit sales
of OEM products that incorporate our technology. We recognize OEM license fees,
which include post-contract customer support, when the software has been shipped
to the customer, the fees are fixed and determinable and there is evidence of
the fair value of the post-contract customer support. When we do not have
sufficient evidence of fair value of post-contract customer support for our OEM
license arrangements, we recognize the revenues for these arrangements over the
support period. OEM license maintenance fees are recognized over the support
period.
Total net revenues increased to $9.1 million in the three months ended
June 30, 2000 from $4.0 million in the same quarter in the prior year, a
year-over-year increase of 129%. Total net revenues for the six months ended
June 30, 2000 increased to $16.3 million from $7.1 million in the six months
ended June 30, 1999, an increase of 130%. Product revenues increased to $8.7
million for the three months ended June 30, 2000 from $3.6 million for the three
months ended June 30, 1999, an increase of 141%. Product revenues increased to
$15.5 million in the six months ended June 30, 2000 from $6.3 million in the six
months ended June 30, 1999 due to the increased number of units sold as a result
of increased channel and market development and product acceptance. Licensing
revenues in the six months ended June 30, 2000 remained approximately consistent
as compared to the six months ended June 30, 1999. Licensing revenue for the six
months ended includes $423,000 of minimum royalty payments received from our OEM
partners.
During the six months ended June 30, 2000, one customer, Alternative
Technology, accounted for 11.6% of total net revenues. Sales to the top 10
indirect channel partners accounted for 47.6% and 46.2% of total net revenues
for the six months ended June 30, 2000 and June 30, 1999, respectively.
Cost of revenues
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Our cost of revenues consists primarily of the cost of finished products
purchased from our turnkey manufacturer, documentation and other overhead costs.
We outsource the manufacturing of the Packetshaper 1500, Packetshaper 2500,
Packetshaper 4500 and the AppVantage line of products to SMTC Manufacturing
Corporation. Our cost of revenue increased to $2.9 million in the three months
ended June 30, 2000 from $1.1 million in the three months ended June 30, 1999,
an increase of 166%. Our cost of revenues increased to $5.1 million in the six
months ended June 30, 2000 from $1.9 million in the six months ended June 30,
1999, an increase of 165%. The cost of revenues represented 31% and 27% of total
net revenues during the six months ended June 30, 2000 and June 30, 1999,
respectively. The percentage increase from June 30, 1999 was due to increases in
manufacturing and overhead costs.
Research and development
Research and development expenses consist primarily of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development, testing and enhancement of the PacketShaper and
AppVantage lines of products and PacketWise software. Research and development
expenses increased to $2.0 million for the three months ended June 30, 2000 from
$1.3 million for the three months ended June 30, 1999, an increase of 58%. For
the six months ended June 30, 2000, research and development expenses increased
to $3.7 million from $2.2 million for the six months ended June 30, 1999, an
increase of 68%. The increase in research and development expenses for the six
months ended June 30, 2000 was due to increases in personnel, consulting and
related overhead costs. Research and development expenses represented 23% and
31% of total net revenues for the six months ended June 30, 2000 and June 30,
1999, respectively. The percentage decrease from June 30, 1999 was primarily due
to increased total net revenues.
During the six months ended June 30, 2000, all research and development
costs have been expensed as incurred. We believe that continued investment in
research and development is critical to attaining our strategic product and cost
reduction objectives. We expect these absolute dollar expenses to increase in
the future as we continue to develop new products and enhance existing products.
Sales and marketing
Sales and marketing expenses consist primarily of salaries, commissions
and related personnel expenses for those engaged in the sales and marketing of
the product as well as related trade show, promotional and public relations
expenses. Sales and marketing expenses increased to $4.3 million in the three
months ended June 30, 2000 from $3.2 million in the three months ended June 30,
1999, an increase of 32%. Sales and marketing expenses increased to $8.1 million
in the six months ended June 30, 2000 from $5.7 million in the six months ended
June 30, 1999, an increase of 43%. The increase reflects the hiring of
additional personnel in connection with building our sales force, channel and
increased marketing activities. Sales and marketing expenses represented 50% and
80% of total net revenues for the six months ended June 30, 2000 and June 30,
1999, respectively. The percentage decrease from June 30, 1999 was primarily due
to increased total net revenues. We intend to pursue sales and marketing
campaigns aggressively and therefore expect our absolute dollar expenses to
increase in the future.
General and administrative
General and administrative expenses consist primarily of salaries and
related personnel expenses for administrative personnel, professional fees and
other general corporate expenses. General and administrative expenses increased
to $1.1 million for the three months ended June 30, 2000 from $609,000 for the
three months ended June 30, 1999, an increase of 73%. General and administrative
expenses increased to $2.3 million for the six months ended June 30, 2000 from
$1.1 million for the six months ended June 30, 1999, an increase of 98%. General
and administrative expenses represented 14% and 16% of total net revenues for
the six months ended June 30, 2000 and June 30, 1999, respectively. The
percentage decrease from June 30, 1999 was primarily due to increased total net
revenues. As we continue to add personnel and incur additional costs related to
the growth of our business, we expect our absolute dollar expenses to increase
in the future.
Stock-based compensation
Amortization of stock-based compensation resulted from the granting of
stock options to employees with exercise prices per share determined to be below
the deemed fair value per share of our common stock on the dates of grant for
financial reporting purposes. The stock-based compensation is being amortized to
expense in accordance with FASB Interpretation No. 28 over the vesting period of
the individual options, generally four years. We recorded stock-based
compensation expense of $723,000 and $1.8 million in the six months ended June
30, 2000 and June 30, 1999, respectively, leaving $1.5 million to be amortized
in future periods.
Other income (loss), net
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Other income (loss), net consists primarily of interest income on our
cash and investments offset by interest expense related to our line of credit,
debt and capital lease obligations. For the three months ended June 30, 2000,
interest income was $1.0 million offset by interest expense of $123,000. For the
three months ended June 30, 1999, interest income was $104,000 offset by
$192,000 in interest expense. For the six months ended June 30, 2000, interest
income was $2.0 million offset by interest expense of $339,000. For the six
months ended June 30, 1999, interest income was $198,000 offset by $272,000 in
interest expense. The increase in interest income relates to increased interest
income from our investments.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from the sale of preferred and
common stock and other financing activities such as bank credit against accounts
receivable, issuance of subordinated debt and capital equipment leasing. Cash,
cash equivalents and investments totaled $63.9 million at June 30, 2000, an
increase of $56.1 million from June 30, 1999. The increase is due to the sale of
common stock in our initial public offering in July 1999 and debt financing,
partially offset by cash used in operations. Cash used in operating activities
for the six months ended June 30, 2000 and June 30, 1999 was approximately $1.3
million and $3.2 million, respectively.
Net cash provided by investing activities was $11.0 million for the six
months ended June 30, 2000 and net cash used by investing activities was $1.6
million for the six months ended June 30, 1999. The increase in net cash
provided by investing activities is primarily due to the sale of
available-for-sale investments.
Net cash provided by financing activities was $662,000 and $6.8 million
for the six months ended June 30, 2000 and June 30, 1999, respectively. The
decrease in net cash provided by financing activities is due to decreased
borrowings from our subordinated debt instruments and also due to the paydown of
subordinated debt.
We expect to experience growth in our working capital needs for the
foreseeable future in order to execute our business plan. We anticipate that
operating activities, as well as planned capital expenditures, will constitute a
partial use of our cash resources. In addition, we may utilize cash resources
for facilities expansion and to fund acquisitions or investments in
complementary businesses, technologies or products. We believe that our current
cash, cash equivalents, investments and cash generated from operations and
available borrowings under our credit facilities, will be sufficient to meet our
anticipated cash requirements for working capital and capital expenditures for
at least the next 12 months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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:
o execute our sales and marketing strategy;
o maintain current and develop new relationships with key VARs,
distributors, systems integrators and original equipment
manufacturers, or OEMs; and
o expand our worldwide sales efforts.
WE HAVE A HISTORY OF LOSSES, EXPECT OUR EXPENDITURES TO INCREASE AND OUR LOSSES
TO CONTINUE, AND MAY NEVER ACHIEVE PROFITABILITY
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We have incurred losses since we commenced operations in 1996 and may
never achieve profitability. Furthermore, we currently expect that our operating
expenditures will continue to increase significantly and we may not generate a
sufficient level of revenues to offset these expenditures or be able to adjust
spending in a timely manner to respond to any unanticipated decline in revenues.
We incurred net losses of $5.9 million in 1997, $8.8 million in 1998, and $10.9
million in 1999. For the six months ended June 30, 2000, we incurred a loss of
$2.0 million and as of June 30, 2000 we had an accumulated deficit of $28.8
million. Although our revenues have grown in recent quarters, we cannot be
certain when or if we will realize sufficient revenues to achieve profitability.
If revenues grow slower than we anticipate or if operating expenditures exceed
our expectations or cannot be adjusted accordingly, we may continue to
experience significant losses on a quarterly and annual basis. Even if we
achieve profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future.
OUR FUTURE OPERATING RESULTS MAY NOT MEET ANALYSTS' EXPECTATIONS AND MAY
FLUCTUATE SIGNIFICANTLY, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE
We believe that period-to-period comparisons of our operating results
cannot be relied upon as an indicator of our future performance. Our operating
results may be below the expectations of public market analysts or investors in
some future quarter. If this occurs, the price of our common stock would likely
decrease. Our operating results are likely to fluctuate significantly in the
future on both a quarterly and an annual basis due to a number of factors, many
of which are outside our control. Factors that could cause our operating results
to fluctuate include variations in:
o the mix of products we sell;
o the mix of channels through which those products are sold;
o the average selling prices of our products;
o the timing and size of orders and shipments of our products;
o the amount and timing of revenues from OEMs; and
o the amount and timing of our operating expenses.
In the past, we have experienced fluctuations in operating results. For
example, gross margin decreased from 69.6% for the six months ended December 31,
1997 to 61.8% for the six months ended June 30, 1998, primarily due to
variations in the mix of products sold and variations in channels through which
products were sold. Research and development expenses have fluctuated due to
increased prototype expenses and consulting fees related to the launch of new
products, increased personnel expenses and costs associated with a facilities
move. Sales and marketing expenses have fluctuated due to increased personnel
expenses and expenditures related to trade shows and the launch of new products.
OUR RELIANCE ON SALES OF OUR PRODUCTS BY OTHERS MAKES IT DIFFICULT TO PREDICT
OUR REVENUES AND RESULTS OF OPERATIONS
The timing of our revenues is difficult to predict because of our
reliance on indirect sales channels and the variability of our sales cycle. The
length of our sales cycle for sales through our indirect channel partners to our
end users may vary substantially depending upon the size of the order and the
distribution channel through which our products are sold. We expect to have
difficulties in predicting revenues from OEMs because we are unable to forecast
unit sales of their products which incorporate our technology. Sales from our
VARs and systems integrators to end users typically take three to four months to
complete. We are dependent on timely and accurate inventory information from our
indirect channel partners to enable us to establish channel inventory reserves
for indirect channel partners whose inventory exceeds normal stocking levels. If
this inventory information is not timely or accurate, we could experience
increased levels of sales returns or unforecasted fluctuations in future
revenue.
If revenues forecasted in a particular quarter do not occur in that
quarter, our operating results for that quarter could be adversely affected.
Furthermore, because our expense levels are based on our expectations as to
future revenue and to a large extent are fixed in the short term, a substantial
reduction or delay in sales of our products or the loss of any significant
indirect channel partner could harm our business.
IF THE BANDWIDTH MANAGEMENT SOLUTIONS MARKET FAILS TO GROW, OUR BUSINESS WILL
FAIL
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The market for bandwidth management solutions is in an early stage of
development and its success is not guaranteed. Therefore, we cannot accurately
assess the size of the market, the products needed to address the market, the
optimal distribution strategy, or the competitive environment that will develop.
In order for us to be successful, our potential customers must recognize the
value of more sophisticated bandwidth management solutions, decide to invest in
the management of their networks and the performance of important business
software applications and, in particular, adopt our bandwidth management
solutions. The growth of the bandwidth management solutions market also depends
upon a number of factors, including the availability of inexpensive bandwidth,
especially in international markets, and the growth of wide area networks.
IF WE ARE UNABLE TO DEVELOP AND MAINTAIN STRONG PARTNERING RELATIONSHIPS WITH
OUR INDIRECT CHANNEL PARTNERS, OR IF THEIR SALES EFFORTS ON OUR BEHALF ARE NOT
SUCCESSFUL, OUR SALES MAY SUFFER AND OUR REVENUES MAY NOT INCREASE
We rely on an indirect distribution channel consisting of VARs,
distributors, systems integrators and OEMs for all of our revenues. Because many
of our indirect channel partners also sell competitive products, our success and
revenue growth will depend on our ability to develop and maintain strong
cooperative relationships with significant indirect channel partners, as well as
on the sales efforts and success of those indirect channel partners.
We cannot assure you that our indirect channel partners will market our
products effectively or continue to devote the resources necessary to provide us
with effective sales, marketing and technical support. In order to support and
develop leads for our indirect distribution channels, we plan to expand our
field sales and support staff significantly. We cannot assure you that this
internal expansion will be successfully completed, that the cost of this
expansion will not exceed the revenues generated or that our expanded sales and
support staff will be able to compete successfully against the significantly
more extensive and well-funded sales and marketing operations of many of our
current or potential competitors. In addition, our indirect channel agreements
are generally not exclusive and one or more of our channel partners may compete
directly with another channel partner for the sale of our products in a
particular region or market. This may cause such channel partners to stop or
reduce their efforts in marketing our products. Our inability to effectively
establish or manage our distribution channels would harm our sales.
DEVELOPING STRONG OEM RELATIONSHIPS WILL BE TIME AND RESOURCE INTENSIVE AND MAY
NOT RESULT IN THE SUCCESSFUL DEPLOYMENT OF OUR TECHNOLOGY AND PRODUCTS
One aspect of our sales strategy is to develop relationships with OEM
partners that will license our PacketWise software and incorporate it into their
networking products. If we are not successful in entering into suitable OEM
relationships, our ability to successfully deploy our PacketWise software and
build brand awareness would be harmed. The development of OEM relationships
generally involves a considerable amount of management time and company
resources as potential OEM partners evaluate the viability of integrating our
technology. We cannot assure you that potential OEM partners will enter into
relationships with us after we have expended these efforts and costs. In
addition, even if we are successful in entering into OEM relationships, 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 relationships with us. The failure to build and
maintain successful OEM relationships would have a negative effect on the
deployment of our technology and products.
IF WE ARE NOT ABLE TO MAINTAIN CURRENT AND FUTURE OEM RELATIONSHIPS, OUR
BUSINESS WILL BE HARMED
We may be unable to retain our current or future OEM partners.
Generally, OEM relationships can be terminated with little or no notice. Our 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.
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
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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 and 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.
PACKETEER'S PRODUCT LINES CURRENTLY CONSISTS OF THE PACKETSHAPER AND APPVANTAGE
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 and AppVantage
lines of products and PacketWise software, which are the only products that we
currently offer. If our target customers do not widely adopt, purchase and
successfully deploy the PacketShaper and AppVantage 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 54.7% of our total net revenues in 1998, 54.9% of our
total net revenues in 1999 and 55.0% of our total net revenues in the six months
ended June 30, 2000. In particular, sales to customers in the Asia Pacific
region accounted for 31.0% of our total net revenues in 1998, 26.0% of our total
net revenues in 1999, and 24.2% of our total net revenues in the six months
ended June 30, 2000. 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.
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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.
For the six months ended June 30, 2000 one of our customers, Alternative
Technology, accounted for 11.6% of total net revenues. For the six months ended
June 30, 1999, ADC Telecommunications and Macnica, Inc. accounted for 10.6% and
10.5% of total net revenues, respectively. We expect that our largest customers
in the future could be different from our largest customers today. End users can
stop purchasing and indirect channel partners can stop marketing our products at
any time. We cannot assure you that we will retain these indirect channel
partners or that we will be able to obtain additional or replacement partners.
The loss of one or more of our key indirect channel partners or the failure to
obtain and ship a number of large orders each quarter could harm our operating
results.
COMPETITION FOR EXPERIENCED PERSONNEL IS INTENSE AND OUR INABILITY TO ATTRACT
AND RETAIN QUALIFIED PERSONNEL COULD SIGNIFICANTLY INTERRUPT OUR BUSINESS
OPERATIONS
Our future success will depend, to a significant extent, on the ability
of our management to operate effectively, both individually and as a group.
Given our early stage of development, we are dependent on our ability to
attract, retain and motivate high caliber key personnel. We have recently
expanded our sales force, and we are actively searching for systems engineers,
research and development engineers and sales and marketing personnel, all of
whom are in short supply. We currently have a small indirect channel partner and
end-user service and support organization and will need to increase our staff to
support new indirect channel partners and end users and the expanding needs of
existing indirect channel partners and end users. Additionally, we rely on
qualified systems engineers and service and support personnel to provide pre-
and post-sales technical support for our products. Competition for qualified
personnel in the networking industry, including systems engineers, sales and
service and support personnel, is intense, and we may not be successful in
attracting and retaining such personnel. There may be only a limited number of
persons with the requisite skills to serve in these key positions and it may
become increasingly difficult to hire such persons. Our business will suffer if
we encounter delays in hiring these additional personnel.
Competitors and others have in the past and may in the future attempt to
recruit our employees. We do not have employment contracts with any of our
personnel. The loss of the services of any of our senior management could
negatively impact our ability to carry out our business plan.
WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES IN OUR MARKET
SECTOR WHO ARE SUBSTANTIALLY LARGER AND MORE ESTABLISHED AND WHO HAVE
SIGNIFICANTLY GREATER RESOURCES THAN OUR COMPANY
We compete in a new, rapidly evolving and highly competitive sector of
the networking technology market. We expect competition to persist and intensify
in the future from a number of different sources. Increased competition could
result in reduced prices and gross margins for our products and could require
increased spending by us on research and development, sales and marketing and
customer support, any of which could harm our business. We compete with Cisco
Systems, Inc. and CheckPoint Software Technologies Ltd., which sell products
incorporating competing technologies. We also compete with several small private
companies which utilize competing technologies to provide bandwidth management.
In addition, our products and technology compete for information technology
budget allocations with products that offer monitoring capabilities, such as
probes and related software. Lastly, we face indirect competition from companies
that offer enterprises and service providers increased bandwidth and
infrastructure upgrades that increase the capacity of their networks, which may
lessen or delay the need for bandwidth management solutions.
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Many of our competitors are substantially larger than we are and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources and more established distribution channels. These
competitors may be able to respond more rapidly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than we can. We have
encountered, and expect to encounter, customers who are extremely confident in
and committed to the product offerings of our competitors. Furthermore, some of
our competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties to increase their ability
to rapidly gain market share by addressing the needs of our prospective
customers. These competitors may enter our existing or future markets with
solutions that may be less expensive, provide higher performance or additional
features or be introduced earlier than our solutions. Given the market
opportunity in the bandwidth management solutions market, we also expect that
other companies may enter our market with alternative products and technologies,
which could reduce the sales or market acceptance of our products and services,
perpetuate intense price competition or make our products obsolete. If any
technology that is competing with ours is or becomes more reliable, higher
performing, less expensive or has other advantages over our technology, then the
demand for our products and services would decrease, which would harm our
business.
IF WE DO NOT EXPAND OR ENHANCE OUR PRODUCT OFFERINGS OR RESPOND EFFECTIVELY TO
TECHNOLOGICAL CHANGE, OUR BUSINESS MAY NOT GROW
Our future performance will depend on the successful development,
introduction and market acceptance of new and enhanced products that address
customer requirements in a cost-effective manner. We cannot assure you that our
technological approach will achieve broad market acceptance or that other
technologies or solutions will not supplant our approach. The bandwidth
management solutions market is characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. The introduction of new products, market acceptance
of products based on new or alternative technologies, or the emergence of new
industry standards, could render our existing products obsolete or make it
easier for other products to compete with our products. Developments in
router-based queuing schemes could also significantly reduce demand for our
product. Alternative technologies, including packet-queuing technology, could
achieve widespread market acceptance. Our future success will depend in large
part upon our ability to:
o develop and maintain competitive products;
o enhance our products by adding innovative features that
differentiate our products from those of our competitors;
o bring products to market on a timely basis at competitive prices;
o identify and respond to emerging technological trends in the
market; and
o 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 THE 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.
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THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY
NEGATIVELY IMPACT GROSS MARGINS AND REVENUES
We may experience substantial period-to-period fluctuations in future
operating results due to the erosion of our average selling prices. The average
selling prices of our products could decrease in the future in response to
competitive pricing pressures, increased sales discounts, new product
introductions by us or our competitors or other factors. Therefore, to maintain
our gross margins, we must develop and introduce on a timely basis new products
and product enhancements and continually reduce our product costs. Our failure
to do so would cause our revenue and gross margins to decline.
OUR RELIANCE ON SMTC CORPORATION FOR ALL OF OUR MANUFACTURING REQUIREMENTS COULD
CAUSE US TO LOSE ORDERS IF THESE THIRD PARTY MANUFACTURERS FAIL TO SATISFY OUR
COST, QUALITY AND DELIVERY REQUIREMENTS
We currently contract with 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:
o reduced control over delivery schedules;
o the potential lack of adequate capacity during periods of excess
demand;
o manufacturing yields and costs;
o quality assurance; and
o increases in prices and the potential misappropriation of our
intellectual property.
We have no long-term contracts or arrangements with any of our vendors
that guarantee product availability, the continuation of particular payment
terms or the extension of credit limits. We have experienced in the past, and
may experience in the future, problems with our contract manufacturers, such as
inferior quality, insufficient quantities and late delivery of product. To date,
these problems have not materially adversely affected us. We may not be able to
obtain additional volume purchase or manufacturing arrangements on terms that we
consider acceptable, if at all. If we enter into a high-volume or long-term
supply arrangement and subsequently decide that we cannot use the products or
services provided for in the agreement, our business will be harmed. We cannot
assure you that we can effectively manage our contract manufacturers or that
these manufacturers will meet our future requirements for timely delivery of
products of sufficient quality or quantity. Any of these difficulties could harm
our relationships with customers and cause us to lose orders.
In the future, we may seek to use additional contract manufacturers. We
may experience difficulty in locating and qualifying suitable manufacturing
candidates capable of satisfying our product specifications or quantity
requirements. Further, new third-party manufacturers may encounter difficulties
in the manufacture of our products resulting in product delivery delays.
OUR PRODUCTS MAY HAVE ERRORS OR DEFECTS THAT WE FIND AFTER THE PRODUCTS HAVE
BEEN SOLD, WHICH COULD NEGATIVELY AFFECT OUR REVENUES AND THE MARKET ACCEPTANCE
OF OUR PRODUCTS AND INCREASE OUR COSTS
Our products are complex and may contain undetected defects, errors or
failures in either the hardware or software. In addition, because our products
plug into our end users' existing networks between the WAN access router and the
enterprise local area network, or LAN, they can directly affect the
functionality of the network. We have in the past encountered errors in our
products, which in a few instances resulted in complete network failures. To
date, these errors have not materially adversely affected us. Additional errors
may occur in our products in the future. The occurrence of defects, errors or
failures could result in the failure of our customer's network or
mission-critical applications, delays in installation, product returns and other
losses to us or to our customers or end users. In addition, we would have
limited experience responding to new problems that could arise with any new
products that we introduce. These occurrences could also result in the loss of
or delay in market acceptance of our products, which could harm our business.
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We may also be subject to liability claims for damages related to
product errors. While we carry insurance policies covering this type of
liability, these policies may not provide sufficient protection should a claim
be asserted. A material product liability claim may harm our business.
ANY ACQUISITIONS WE MAKE COULD RESULT IN DILUTION, UNFAVORABLE ACCOUNTING
CHARGES AND DIFFICULTIES IN SUCCESSFULLY MANAGING OUR BUSINESS
On July 13, 2000, we entered into an agreement to acquire Workfire
Technologies International, Inc. pursuant to which Workfire will merge with one
of our wholly-owned subsidiaries. In addition, we continually evaluate strategic
acquisitions of other businesses. Our consummation of the acquisition of
Workfire or of other businesses would subject us to a number of risks, including
the following:
o difficulty in integrating the acquired operations and retaining
acquired personnel;
o limitations on our ability to retain acquired distribution channels
and customers;
o diversion of management's attention and disruption of our ongoing
business; and
o limitations on our ability to successfully incorporate acquired
technology and rights into our service offerings and maintain
uniform standards, controls, procedures, and policies.
We may not successfully overcome problems encountered in connection with
our acquisition of Workfire or other potential acquisitions. In addition, our
acquisition of Workfire will, and other 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.
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 four issued U.S. patents, one
published patent, and nine pending patent applications including one for which
we have received a notice of allowance. Our means of protecting our proprietary
rights in the U.S. or abroad may not be adequate and competitors may
independently develop similar technologies. Our future success will depend in
part on our ability to protect our proprietary rights and the technologies used
in our principal products. Despite our efforts to protect our proprietary rights
and technologies unauthorized parties may attempt to copy aspects of our
products or to obtain and use trade secrets or other information that we regard
as proprietary. Legal proceedings to enforce our intellectual property rights
could be burdensome and expensive and could involve a high degree of
uncertainty. These legal proceedings may also divert management's attention from
growing our business. In addition, the laws of some foreign countries do not
protect our proprietary rights as fully as do the laws of the U.S. Issued
patents may not preserve our proprietary position. If we do not enforce and
protect our intellectual property, our business will suffer substantial harm.
CLAIMS BY OTHERS THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS COULD BE
COSTLY TO DEFEND AND COULD HARM OUR BUSINESS
We may be subject to claims by others that our products infringe on
their intellectual property rights. These claims, whether or not valid, could
require us to spend significant sums in litigation, pay damages, delay product
shipments, reengineer our products or acquire licenses to such third-party
intellectual property. We may not be able to secure any required licenses on
commercially reasonable terms, or at all. We expect that we will increasingly be
subject to infringement claims as the number of products and
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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 Internet application infrastructure systems 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.
In addition, we expect to review potential acquisitions that would
complement our existing product offerings or enhance our technical capabilities
and we have entered into an agreement to acquire Workfire Technologies
International, Inc., a developer of software for accelerating the performance of
business-critical web applications and content over the Internet, intranets and
extranets. This 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 32.6% of the outstanding common stock as of July 31, 2000.
As a result, these stockholders, if they act together, may 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 OUR 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 our 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fixed Income Investments
Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. Our exposure to
market risks for changes in interest rates relate primarily to the Company's
investment portfolio. The Company's
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investment portfolio primarily consists of investments in debt securities issued
by U.S. government agencies and corporate debt securities. We place our
investments with high credit quality issuers and, by policy, limit the amount of
the credit exposure to any one issuer. We do not expect any material loss with
respect to our investment portfolio.
All highly liquid investments with less than three months to maturity
are considered to be cash equivalents. Investments with maturities between three
and twelve months are considered to be short-term investments. Investments with
maturities in excess of twelve months are considered to be long-term
investments. The following table presents the amounts of cash equivalents and
investments that are subject to market risk by range of expected maturity and
weighted average interest rates.
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
----------------------- ----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
CARRYING INTEREST CARRYING INTEREST
AMOUNT RATE AMOUNT RATE
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Cash Equivalents:
Commercial paper, market auction preferred
and corporate notes and bonds $28,764 6.58% $17,727 6.20%
Short-term investments:
Corporate notes and bonds and medium-term notes 24,899 6.98% 37,918 5.91%
Long-term investments:
Corporate notes and bonds and medium-term notes 9,078 7.14% 7,686 6.56%
------- -------
Total investment securities $62,741 6.82% $63,331 6.07%
======= =======
</TABLE>
Foreign Exchange
We develop products in the United States and sell in North America,
South America, Asia and Europe. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. All sales are currently made in U.S.
dollars; thus, a strengthening of the dollar could make our products less
competitive in foreign markets. We have no foreign exchange contracts, option
contracts or other foreign hedging arrangements.
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(d) Use of Proceeds from Sales of Registered Securities. Packeteer
commenced its initial public offering ("IPO") on July 28, 1999 pursuant to a
Registration Statement on Form S-1 (File No. 333-79077). In the IPO, Packeteer
sold an aggregate of 4,600,000 shares of common stock (including an over
allotment option of 600,000 shares) at $15.00 per share.
The sale of the shares of common stock generated aggregate gross
proceeds of approximately $69.0 million. The aggregate net proceeds were
approximately $62.6 million, after deducting underwriting discounts and
commissions of approximately $4.8 million and expenses of the offering of
approximately $1.6 million. Of the net proceeds, Packeteer has used $5 million
to repay two separate notes payable of $2.5 million each. The remaining $57.6
million of the net proceeds are expected to be used for general corporate
purposes, including working capital, product development and capital
expenditures. The amounts actually expended for such purposes may vary
significantly and will depend on a number of factors described under "Factors
That May Affect Future Results". A portion of the net proceeds may also be used
for expansion of facilities, to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies. Pending such
uses, the net proceeds of the IPO have been invested in short and long-term,
interest bearing, investment grade securities. None of Packeteer's net proceeds
of the IPO were paid directly or indirectly to any director, officer, general
partner of the Company or their associates, persons owning 10% or more of any
class of equity securities of Packeteer, or an affiliate of Packeteer.
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Item 4. Submission of Matters to a Vote of Security Holders
The following proposals were voted upon by the Company's stockholders at the
Annual Stockholders' Meeting held on May 24, 2000:
1. The following persons were elected as directors of the Company to serve until
the 2003 Annual Stockholders' Meeting or until their successors are elected and
qualified with the votes indicated beside their respective names:
Schedule of votes cast for each director:
<TABLE>
<CAPTION>
Votes For Votes Withheld
---------- --------------
<S> <C> <C>
Peter T. Morris 21,701,165 440,793
Robert L. Packer 21,754,589 390,369
</TABLE>
2. A proposal to ratify the appointment of KPMG LLP as the Company's independent
auditors for the fiscal year ending December 31, 2000 was approved by the vote
of 22,135,990 shares for; 3,065 shares withheld or voted against the proposal;
and 2,303 shares abstained.
Item 5. Other information
On July 13, 2000, Packeteer entered into an Agreement and Plan of Merger
and Reorganization (the "Agreement") under which the Company, through it's
wholly-owned subsidiary, Workfire Acquisition Corp., a Delaware corporation,
will merge with and into Workfire Technologies International, Inc., a Nevada
corporation ("Workfire"), a wholly-owned subsidiary of Workfire.com, a Nevada
corporation ("Workfire Parent"). Pursuant to the Agreement, Workfire will be the
surviving corporation to the merger and will become a wholly-owned subsidiary of
Packeteer.
Under the terms of the agreement, Packeteer will issue 2,000,000 shares
of its common stock (including options to purchase common stock to be issued to
Workfire option holders) to Workfire Parent in exchange for all of the issued
and outstanding stock of Workfire. Workfire Parent will then be required to
liquidate and distribute its shares of Packeteer to its stockholders. The merger
is intended to qualify as a tax-free reorganization and the parties expect to
account for the transaction as a purchase.
Closing of the merger is subject to certain closing conditions and
approval of the stockholders of both Workfire and Workfire Parent. Workfire
Parent and certain of its stockholders have agreed to vote their shares in favor
of the merger. The transaction is expected to close in the calendar quarter
ended September 30, 2000.
Workfire is a developer of software for accelerating the performance of
business-critical web applications and content over the Internet, intranets and
extranets. After the acquisition, Workfire will continue to operate out of its
facility in Kelowna, British Columbia, Canada, as Packeteer's Internet
Acceleration Products group.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27.1 Financial Data Schedule
B. Reports on Form 8-K
None.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized and in the capacity indicated.
PACKETEER, INC.
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August 4, 2000
/s/ David C. Yntema
------------------------------------
David C. Yntema
Chief Financial Officer and Secretary
(Duly authorized Officer and Principal
Financial and Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule
24
