##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
 FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2005
 or
 o
    
    Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934for the transition period from to .
 Commission
File Number 000-26785
 PACKETEER, INC.
  DELAWARE
    
    77-0420107(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 
   þ o
  þ o
 .




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PART I            FINANCIAL INFORMATIONItem 1. Financial Statements:Unaudited Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
    
    
    3Unaudited Condensed Consolidated Income Statements for the Three and Six Months Ended
June 30, 2005 and June 30, 2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2005 and June 30, 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Factors That May Affect Future ResultsItem 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II            OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 6. Exhibits
    
    
    29Signatures
    
    
    30Exhibits
    
    
    31EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
   2




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June 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    30,088
    
    
    $
    15,666Short-term investments
    
    
    76,757
    
    
    
    66,512Accounts receivable, net of allowance for doubtful accounts
of $169 and $229, respectively
    
    
    18,905
    
    
    
    16,828Other receivables
    
    
    147
    
    
    
    1,888Inventories
    
    
    5,722
    
    
    
    3,106Prepaids and other current assets
    
    
    1,621
    
    
    
    1,784Total current assets
    
    
    133,240
    
    
    
    105,784Property and equipment, net
    
    
    2,877
    
    
    
    3,066Long-term investments
    
    
    762
    
    
    
    10,019Goodwill
    
    
    9,550
    
    
    
    9,527Other intangible assets, net
    
    
    6,407
    
    
    
    7,163Other non-current assets
    
    
    2,202
    
    
    
    2,233Total assets
    
    $
    155,038
    
    
    $
    137,792LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,307
    
    
    $
    2,802Accrued compensation
    
    
    6,371
    
    
    
    6,467Other accrued liabilities
    
    
    5,662
    
    
    
    7,588Income tax payable
    
    
    3,892
    
    
    
    2,438Deferred revenue
    
    
    19,151
    
    
    
    13,318Total current liabilities
    
    
    38,383
    
    
    
    32,613Long-term liabilities:Deferred revenue, less current portion
    
    
    2,875
    
    
    
    2,839Deferred rent and other
    
    
    430
    
    
    
    381Total liabilities
    
    
    41,688
    
    
    
    35,833Stockholders equity:Preferred stock, $0.001 par value;5,000 shares authorized; no shares issued and
outstanding as of June 30, 2005 and December 31,
2004, respectively
    
    
    
    
    
    
    Common stock, $0.001 par value;85,000 shares authorized; 33,854 and 33,418 shares
issued and outstanding as of June 30, 2005 and
December 31, 2004, respectively
    
    
    34
    
    
    
    33Additional paid-in capital
    
    
    184,572
    
    
    
    181,625Deferred stock-based compensation
    
    
    (1,016
    )
    
    
    (1,610
    )Accumulated other comprehensive loss
    
    
    (163
    )
    
    
    (207
    )Accumulated deficit
    
    
    (70,077
    )
    
    
    (77,882
    )Total stockholders equity
    
    
    113,350
    
    
    
    101,959Total liabilities and stockholders equity
    
    $
    155,038
    
    
    $
    137,792
  3




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Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net revenues:Product revenues
    
    $
    21,484
    
    
    $
    17,342
    
    
    $
    43,783
    
    
    $
    35,053Service revenues
    
    
    6,693
    
    
    
    4,300
    
    
    
    12,472
    
    
    
    8,093Total net revenues
    
    
    28,177
    
    
    
    21,642
    
    
    
    56,255
    
    
    
    43,146Cost of revenues:Product costs
    
    
    4,781
    
    
    
    4,147
    
    
    
    9,727
    
    
    
    7,704Service costs
    
    
    2,276
    
    
    
    1,485
    
    
    
    4,144
    
    
    
    2,825Amortization of purchased intangible assets
    
    
    400
    
    
    
    
    
    
    
    756
    
    
    
    Total cost of revenues
    
    
    7,457
    
    
    
    5,632
    
    
    
    14,627
    
    
    
    10,529Gross profit
    
    
    20,720
    
    
    
    16,010
    
    
    
    41,628
    
    
    
    32,617Operating expenses:Research and development (includes stock-based
compensation of $216 and $0 for the
three months ended June 30, 2005 and
2004, respectively, and $434 and $0 for
the six months ended June 30, 2005 and
2004, respectively)
    
    
    5,463
    
    
    
    3,791
    
    
    
    10,651
    
    
    
    7,265Sales and marketing (includes stock-based
compensation
of $4 and $0 for the three months ended
June 30, 2005 and 2004, respectively,
and $14 and $0 for the six months ended
June 30, 2005 and 2004, respectively)
    
    
    9,300
    
    
    
    8,679
    
    
    
    19,209
    
    
    
    16,840General and administrative (includes stock-based
compensation of $2 and $0 for the three
months ended June 30, 2005 and 2004,
respectively, and $4 and $0 for the six
months ended June 30, 2005 and 2004,
respectively)
    
    
    1,292
    
    
    
    1,397
    
    
    
    3,243
    
    
    
    2,835Total operating expenses
    
    
    16,055
    
    
    
    13,867
    
    
    
    33,103
    
    
    
    26,940Income from operations
    
    
    4,665
    
    
    
    2,143
    
    
    
    8,525
    
    
    
    5,677Other income, net
    
    
    609
    
    
    
    171
    
    
    
    1,111
    
    
    
    364Income before provision for income taxes
    
    
    5,274
    
    
    
    2,314
    
    
    
    9,636
    
    
    
    6,041Provision for income taxes
    
    
    1,046
    
    
    
    230
    
    
    
    1,831
    
    
    
    603Net income
    
    $
    4,228
    
    
    $
    2,084
    
    
    $
    7,805
    
    
    $
    5,438Basic net income per share
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.23
    
    
    $
    0.17Diluted net income per share
    
    $
    0.12
    
    
    $
    0.06
    
    
    $
    0.22
    
    
    $
    0.16Shares used in computing basic net income per
share
    
    
    33,747
    
    
    
    32,921
    
    
    
    33,647
    
    
    
    32,797Shares used in computing diluted net income
per share
    
    
    34,993
    
    
    
    34,428
    
    
    
    35,103
    
    
    
    34,552
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Six months endedJune 30,2005
    
    2004Cash flows from operating activities:Net income
    
    $
    7,805
    
    
    $
    5,438Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,277
    
    
    
    798Amortization of purchased intangible assets
    
    
    756
    
    
    
    Amortization of stock-based compensation
    
    
    452
    
    
    
    Loss on disposal of property and
equipment
    
    
    17
    
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (2,077
    )
    
    
    30Other receivables
    
    
    1,741
    
    
    
    (37
    )Inventories
    
    
    (2,616
    )
    
    
    (409
    )Prepaids and other current assets
    
    
    163
    
    
    
    320Accounts payable
    
    
    505
    
    
    
    1,129Accrued compensation
    
    
    (96
    )
    
    
    254Other accrued liabilities
    
    
    (127
    )
    
    
    548Income tax payable
    
    
    1,454
    
    
    
    214Deferred revenue
    
    
    5,869
    
    
    
    3,604Net cash provided by operating activities
    
    
    15,123
    
    
    
    11,889Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,105
    )
    
    
    (1,092
    )Purchases of investments
    
    
    (37,934
    )
    
    
    (41,915
    )Proceeds from sales and maturities of investments
    
    
    36,990
    
    
    
    36,114Acquisition, net of cash acquired
    
    
    (1,773
    )
    
    
    Other assets
    
    
    31
    
    
    
    10Net cash used in investing activities
    
    
    (3,791
    )
    
    
    (6,883
    )Cash flows from financing activities:Proceeds from issuance of common stock, net of
repurchases
    
    
    1,964
    
    
    
    1,981Sale of stock to employees under the ESPP
    
    
    1,126
    
    
    
    574Payments of notes payable
    
    
    
    
    
    
    (103
    )Principal payments of capital lease obligations
    
    
    
    
    
    
    (227
    )Net cash provided by financing activities
    
    
    3,090
    
    
    
    2,225Net increase in cash and cash equivalents
    
    
    14,422
    
    
    
    7,231Cash and cash equivalents at beginning of period
    
    
    15,666
    
    
    
    25,664Cash and cash equivalents at end of period
    
    $
    30,088
    
    
    $
    32,895Supplemental disclosures of cash flow information:Cash paid during period for taxes
    
    $
    447
    
    
    $
    394Cash paid during period for interest
    
    $
    
    
    
    $
    21
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June 30, 2005
    
    December 31, 2004Gross
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    
    
    
    
    Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Net Amount
    
    Amount
    
    Amortization
    
    Net AmountDeveloped technology
    
    $
    5,100
    
    
    $
    (537
    )
    
    $
    4,563
    
    
    $
    5,100
    
    
    $
    (27
    )
    
    $
    5,073Customer contracts and relationships
    
    
    1,900
    
    
    
    (221
    )
    
    
    1,679
    
    
    
    1,900
    
    
    
    (8
    )
    
    
    1,892Tradename
    
    
    200
    
    
    
    (35
    )
    
    
    165
    
    
    
    200
    
    
    
    (2
    )
    
    
    198Purchased intangible assets
    
    
    7,200
    
    
    
    (793
    )
    
    
    6,407
    
    
    
    7,200
    
    
    
    (37
    )
    
    
    7,163Goodwill
    
    
    9,550
    
    
    
    
    
    
    
    9,550
    
    
    
    9,527
    
    
    
    
    
    
    
    9,527$
    16,750
    
    
    $
    (793
    )
    
    $
    15,957
    
    
    $
    16,727
    
    
    $
    (37
    )
    
    $
    16,690
  6




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Year
    
    AmountRemainder of 2005
    
    $
    8012006
    
    
    1,4152007
    
    
    1,3602008
    
    
    1,2952009
    
    
    1,2682010
    
    
    268$
    6,407
  Six MonthsEndedJune 30, 2005Balance at December 31, 2004
    
    $
    9,527Subsequent goodwill adjustments
related to Mentat income taxes,
reserve adjustments and
transactions costs
    
    
    23Balance at June 30, 2005
    
    $
    9,550
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income as reported
    
    $
    4,228
    
    
    $
    2,084
    
    
    $
    7,805
    
    
    $
    5,438Add: Stock-based
compensation under APB 25,
net of tax
    
    
    178
    
    
    
    
    
    
    
    367
    
    
    
    Deduct: Stock-based
compensation expense
determined under fair
value-based method for all awards, net of tax
    
    
    (2,928
    )
    
    
    (2,988
    )
    
    
    (5,915
    )
    
    
    (4,426
    )Net income (loss) pro forma
    
    $
    1,478
    
    
    $
    (904
    )
    
    $
    2,257
    
    
    $
    1,012Net income (loss) per share:Basic  as reported
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.23
    
    
    $
    0.17Diluted  as reported
    
    $
    0.12
    
    
    $
    0.06
    
    
    $
    0.22
    
    
    $
    0.16Basic  pro forma
    
    $
    0.04
    
    
    $
    (0.03
    )
    
    $
    0.07
    
    
    $
    0.03Diluted  pro forma
    
    $
    0.04
    
    
    $
    (0.03
    )
    
    $
    0.06
    
    
    $
    0.03
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In re Packeteer, Inc. Initial Public Offering Securities Litigation,
      Accrued warranty obligations at December 31, 2004
    
    $
    315Provision for current period sales
    
    
    85Warranty costs incurred
    
    
    (162
    )Accrued warranty obligations at June 30, 2005
    
    $
    238
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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Numerator:Net income
    
    $
    4,228
    
    
    $
    2,084
    
    
    $
    7,805
    
    
    $
    5,438Denominator:Basic:Weighted-average shares of common stock outstanding
    
    
    33,847
    
    
    
    32,921
    
    
    
    33,750
    
    
    
    32,797Less: shares subject to repurchase
    
    
    (100
    )
    
    
    
    
    
    
    (103
    )
    
    
    Basic weighted-average common shares outstanding
    
    
    33,747
    
    
    
    32,921
    
    
    
    33,647
    
    
    
    32,797Diluted:Basic weighted-average common shares outstanding
    
    
    33,747
    
    
    
    32,921
    
    
    
    33,647
    
    
    
    32,797Add: potentially dilutive common shares from stock
options and shares subject to repurchase
    
    
    1,223
    
    
    
    1,483
    
    
    
    1,431
    
    
    
    1,729Add: potentially dilutive common shares from warrants
    
    
    23
    
    
    
    24
    
    
    
    24
    
    
    
    26Diluted
weighted-average common shares outstanding
    
    
    34,993
    
    
    
    34,428
    
    
    
    35,103
    
    
    
    34,552Basic net income per share
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.23
    
    
    $
    0.17Diluted net income per share
    
    $
    0.12
    
    
    $
    0.06
    
    
    $
    0.22
    
    
    $
    0.16
    9




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Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net revenues:Americas
    
    $
    13,406
    
    
    $
    10,230
    
    
    $
    25,310
    
    
    $
    17,676Asia Pacific
    
    
    7,087
    
    
    
    4,392
    
    
    
    15,065
    
    
    
    10,744Europe, Middle East, Africa
    
    
    7,684
    
    
    
    7,020
    
    
    
    15,880
    
    
    
    14,726Total net revenues
    
    $
    28,177
    
    
    $
    21,642
    
    
    $
    56,255
    
    
    $
    43,146
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ä ä ä
   11




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Cost of Revenues
  Research and Development
 Sales and Marketing
 12




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General and Administrative
    Revenue recognition
 
    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred,
    
    the fee is fixed or determinable, and
    
    collectibility is probable.
      13




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Inventory valuation
 Valuation of long-lived and intangible assets and goodwill
  Sales return reserve
 Rebate reserves.
 Warranty reserves
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Accounting for Income Taxes .
    Three
months ended
    
    

Six
months endedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues:Product revenues
    
    
    76
    %
    
    
    80
    %
    
    
    78
    %
    
    
    81
    %Service revenues
    
    
    24
    
    
    
    20
    
    
    
    22
    
    
    
    19Total net revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenues:Product costs
    
    
    17
    
    
    
    19
    
    
    
    17
    
    
    
    18Service costs
    
    
    8
    
    
    
    7
    
    
    
    8
    
    
    
    6Amortization of purchased intangible assets
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Total cost of revenues
    
    
    26
    
    
    
    26
    
    
    
    26
    
    
    
    24Gross margin
    
    
    74
    
    
    
    74
    
    
    
    74
    
    
    
    76Operating expenses:Research and development
    
    
    19
    
    
    
    18
    
    
    
    19
    
    
    
    17Sales and marketing
    
    
    33
    
    
    
    40
    
    
    
    34
    
    
    
    39General and administrative
    
    
    5
    
    
    
    6
    
    
    
    6
    
    
    
    7Total operating expenses
    
    
    57
    
    
    
    64
    
    
    
    59
    
    
    
    63Income from operations
    
    
    17
    
    
    
    10
    
    
    
    15
    
    
    
    13Other income, net
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    1Income before provision for income taxes
    
    
    19
    
    
    
    11
    
    
    
    17
    
    
    
    14Provision for income taxes
    
    
    4
    
    
    
    1
    
    
    
    3
    
    
    
    1Net income
    
    
    15
    %
    
    
    10
    %
    
    
    14
    %
    
    
    13
    %
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Payments due by periodRemainder of
    
    1 - 3
    
    3 - 5
    
    More than 5Contractual Obligations
    
    Total
    
    2005
    
    years
    
    years
    
    yearsCash obligations not reflected in Balance SheetOperating lease obligations
    
    $
    4,066
    
    
    $
    965
    
    
    $
    2,845
    
    
    $
    205
    
    
    $
    51Purchase obligations
    
    
    3,731
    
    
    
    3,731
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    7,797
    
    
    $
    4,696
    
    
    $
    2,845
    
    
    $
    205
    
    
    $
    51
  Overview
 Operating Activities.
 Investing Activities.
 Financing Activities.
  19




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-
    
    the timing and size of orders and shipments of our products;-
    
    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.
    20




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-
    
    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.
    21




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-
    
    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;-
    
    difficulties in managing software development activities to define a combined product
roadmap, ensuring timely development of new products, timely release of new products to
market, and the development of efficient integration and migration tools;-
    
    the potential product liability associated with selling the acquired companys products;
and-
    
    the potential write-down of impaired goodwill and intangible and other assets. In
particular, we recorded approximately $9.6 million in goodwill related to the acquisition of
Mentat that will be subject to impairment testing rather than being amortized over a fixed
period. To the extent that the business acquired in that transaction does not remain
competitive, some or all of the goodwill related to that acquisition could be charged
against future earnings.
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-
    
    reduced control over delivery schedules;-
    
    the potential lack of adequate capacity during periods of excess demand;-
    
    decreases in manufacturing yields and increases in costs;-
    
    the potential for a lapse in quality assurance procedures;-
    
    increases in prices; and-
    
    the potential misappropriation of our intellectual property.
        25




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June 30,
    
    December 31,Amortized Cost as of June 30, 2005
    
    2005
    
    2004Expected Maturity Date
    
    2005
    
    2006
    
    2007
    
    Total
    
    Fair Value
    
    Fair ValueCash equivalents
    
    $
    27,369
    
    
    $
    
    
    
    $
    
    
    
    $
    27,369
    
    
    $
    27,360
    
    
    $
    12,904Weighted-average rate
    
    
    3.17
    %
    
    
    
    
    
    
    Short-term investments
    
    
    47,944
    
    
    
    28,954
    
    
    
    
    
    
    
    76,898
    
    
    
    76,757
    
    
    
    66,512Weighted-average rate
    
    
    2.82
    %
    
    

    3.29
    %

    
    

    Long-term investments
    
    
    
    
    
    
    740
    
    
    
    35
    
    
    
    775
    
    
    
    762
    
    
    
    10,019Weighted-average rate
    
    

    

    
    
    

    2.17
    %

    
    

    4.08
    %Total investment portfolio
    
    $
    75,313
    
    
    $
    29,694
    
    
    $
    35
    
    
    $
    105,042
    
    
    $
    104,879
    
    
    $
    89,435
   
  a.
    
    Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined under Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer, have concluded
that our disclosure controls and procedures were sufficiently effective to ensure that the
information required to be disclosed by us in this Quarterly Report on Form 10-Q was
recorded, processed, summarized and reported within the time periods specified in the SECs
rules and instructions for Form 10-Q.b.
    
    There has been no change in our internal control over financial reporting during the
three months ended June 30, 2005 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
 28




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##### Table of Contents



Director
    
    Votes For
    
    Votes WithheldSteven J. Campbell
    
    
    29,339,578
    
    
    
    2,463,532Craig W. Elliott
    
    
    30,562,260
    
    
    
    1,240,850Joseph A. Graziano
    
    
    30,581,602
    
    
    
    1,221,508
  2.
    
    The proposal to amend the 1999 Stock Incentive Plan was approved with the following votes:
 For:
    
    
    16,072,377Against or Withheld:
    
    
    9,561,007Abstain:
    
    
    7,834
 3.
    
    The proposal to ratify the appointment of KPMG LLP as the Companys independent auditors for the
fiscal year ending December 31, 2005 was approved with the following votes:
 For:
    
    
    31,573,468Against or Withheld:
    
    
    224,428Abstain:
    
    
    5,214
 
  Exhibit 31.1
    
    Sarbanes-Oxley Section 302 Certification  CEOExhibit 31.2
    
    Sarbanes-Oxley Section 302 Certification  CFOExhibit 32.1
    
    Sarbanes-Oxley Section 906 Certification  CEOExhibit 32.2
    
    Sarbanes-Oxley Section 906 Certification  CFO
 29




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##### Table of Contents



PACKETEER, INC.By:
    
    /s/ DAVE CÔTÉDave CôtéPresident and Chief Executive OfficerBy:
    
    /s/ DAVID YNTEMADavid YntemaChief Financial Officer and Secretary
 30




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##### Table of Contents



Exhibit Index
 Exhibit 31.1
    
    Sarbanes-Oxley Section 302 Certification  CEOExhibit 31.2
    
    Sarbanes-Oxley Section 302 Certification  CFOExhibit 32.1
    
    Sarbanes-Oxley Section 906 Certification  CEOExhibit 32.2
    
    Sarbanes-Oxley Section 906 Certification  CFO