##### 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 SEPTEMBER 30, 2005
 or
 o
    
    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 000-26785
 PACKETEER, INC.
  DELAWARE
(State of incorporation)
    
    77-0420107
(I.R.S. Employer Identification No.)
 
   þ o
  þ o
 .
  o þ




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PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Unaudited Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
    
    
    3Unaudited Condensed Consolidated Income Statements for the Three and Nine Months Ended
September 30, 2005 and September 30, 2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2005 and September 30, 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Factors That May Affect Future Results
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    31PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    31Item 6.
    
    Exhibits
    
    
    31Signatures
    
    
    
    
    
    
    32ExhibitsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
   2




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September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    36,327
    
    
    $
    15,666Short-term investments
    
    
    73,355
    
    
    
    66,512Accounts receivable, net of allowance for doubtful accounts
of $175 and $229, respectively
    
    
    17,231
    
    
    
    16,828Other receivables
    
    
    555
    
    
    
    1,888Inventories
    
    
    6,424
    
    
    
    3,106Prepaids and other current assets
    
    
    2,002
    
    
    
    1,784Total current assets
    
    
    135,894
    
    
    
    105,784Property and equipment, net of accumulated depreciation and
amortization of $7,704 and $6,105, respectively
    
    
    2,744
    
    
    
    3,066Long-term investments
    
    
    3,299
    
    
    
    10,019Goodwill
    
    
    9,527
    
    
    
    9,527Other intangible assets, net
    
    
    6,006
    
    
    
    7,163Other non-current assets
    
    
    2,194
    
    
    
    2,233Total assets
    
    $
    159,664
    
    
    $
    137,792LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,214
    
    
    $
    2,802Accrued compensation
    
    
    5,291
    
    
    
    6,467Other accrued liabilities
    
    
    4,844
    
    
    
    7,588Income tax payable
    
    
    3,888
    
    
    
    2,438Deferred revenue
    
    
    22,385
    
    
    
    13,318Total current liabilities
    
    
    38,622
    
    
    
    32,613Long-term liabilities:Deferred revenue, less current portion
    
    
    2,856
    
    
    
    2,839Deferred rent and other
    
    
    464
    
    
    
    381Total liabilities
    
    
    41,942
    
    
    
    35,833Stockholders equity:Preferred stock, $0.001 par value;
5,000 shares authorized; no shares issued and
outstanding as of September 30, 2005 and December
31, 2004, respectively
    
    
    
    
    
    
    Common stock, $0.001 par value;
85,000 shares authorized; 34,137 and 33,418 shares
issued and outstanding as of September 30, 2005 and
December 31, 2004, respectively
    
    
    34
    
    
    
    33Additional paid-in capital
    
    
    186,498
    
    
    
    181,625Deferred stock-based compensation
    
    
    (789
    )
    
    
    (1,610
    )Accumulated other comprehensive loss
    
    
    (199
    )
    
    
    (207
    )Accumulated deficit
    
    
    (67,822
    )
    
    
    (77,882
    )Total stockholders equity
    
    
    117,722
    
    
    
    101,959Total liabilities and stockholders equity
    
    $
    159,664
    
    
    $
    137,792
  3




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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues:Product revenues
    
    $
    17,632
    
    
    $
    18,311
    
    
    $
    61,415
    
    
    $
    53,364Service revenues
    
    
    7,203
    
    
    
    4,741
    
    
    
    19,675
    
    
    
    12,834Total net revenues
    
    
    24,835
    
    
    
    23,052
    
    
    
    81,090
    
    
    
    66,198Cost of revenues:Product costs
    
    
    4,248
    
    
    
    4,327
    
    
    
    13,975
    
    
    
    12,031Service costs
    
    
    1,980
    
    
    
    1,552
    
    
    
    6,124
    
    
    
    4,377Amortization of purchased intangible assets
    
    
    401
    
    
    
    
    
    
    
    1,157
    
    
    
    Total cost of revenues
    
    
    6,629
    
    
    
    5,879
    
    
    
    21,256
    
    
    
    16,408Gross profit
    
    
    18,206
    
    
    
    17,173
    
    
    
    59,834
    
    
    
    49,790Operating expenses:Research and development (includes stock-based
compensation of $217 and $0 for the
three months ended September 30, 2005
and 2004, respectively, and $651 and $0
for the nine months ended September 30,
2005 and 2004, respectively)
    
    
    5,524
    
    
    
    3,799
    
    
    
    16,175
    
    
    
    11,064Sales and marketing (includes stock-based
compensation
of $8 and $0 for the three months ended
September 30, 2005 and 2004,
respectively, and $22 and $0 for the
nine months ended September 30, 2005 and
2004, respectively)
    
    
    8,888
    
    
    
    8,348
    
    
    
    28,097
    
    
    
    25,188General and administrative (includes stock-based
compensation of $2 and $0 for the three
months ended September 30, 2005 and
2004, respectively, and $6 and $0 for
the nine months ended September 30, 2005
and 2004, respectively)
    
    
    1,786
    
    
    
    1,549
    
    
    
    5,029
    
    
    
    4,384Total operating expenses
    
    
    16,198
    
    
    
    13,696
    
    
    
    49,301
    
    
    
    40,636Income from operations
    
    
    2,008
    
    
    
    3,477
    
    
    
    10,533
    
    
    
    9,154Other income, net
    
    
    776
    
    
    
    308
    
    
    
    1,887
    
    
    
    672Income before provision for income taxes
    
    
    2,784
    
    
    
    3,785
    
    
    
    12,420
    
    
    
    9,826Provision for income taxes
    
    
    529
    
    
    
    377
    
    
    
    2,360
    
    
    
    980Net income
    
    $
    2,255
    
    
    $
    3,408
    
    
    $
    10,060
    
    
    $
    8,846Basic net income per share
    
    $
    0.07
    
    
    $
    0.10
    
    
    $
    0.30
    
    
    $
    0.27Diluted net income per share
    
    $
    0.06
    
    
    $
    0.10
    
    
    $
    0.29
    
    
    $
    0.26Shares used in computing basic net income per
share
    
    
    33,924
    
    
    
    33,112
    
    
    
    33,740
    
    
    
    32,902Shares used in computing diluted net income
per share
    
    
    35,098
    
    
    
    34,333
    
    
    
    35,102
    
    
    
    34,479
  4




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Nine months endedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    10,060
    
    
    $
    8,846Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,848
    
    
    
    1,249Amortization of purchased intangible assets
    
    
    1,157
    
    
    
    Amortization of stock-based compensation
    
    
    679
    
    
    
    Loss on disposal of property and
equipment
    
    
    17
    
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (403
    )
    
    
    (2,016
    )Other receivables
    
    
    1,333
    
    
    
    10Inventories
    
    
    (3,318
    )
    
    
    (444
    )Prepaids and other current assets
    
    
    (218
    )
    
    
    (283
    )Accounts payable
    
    
    (588
    )
    
    
    41Accrued compensation
    
    
    (1,176
    )
    
    
    (375
    )Other accrued liabilities
    
    
    (911
    )
    
    
    1,653Income tax payable
    
    
    1,450
    
    
    
    470Deferred revenue
    
    
    9,084
    
    
    
    4,605Net cash provided by operating activities
    
    
    19,014
    
    
    
    13,756Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,543
    )
    
    
    (1,393
    )Purchases of investments
    
    
    (53,123
    )
    
    
    (55,551
    )Proceeds from sales and maturities of investments
    
    
    53,008
    
    
    
    52,234Acquisition, net of cash acquired
    
    
    (1,750
    )
    
    
    Other assets
    
    
    39
    
    
    
    27Net cash used in investing activities
    
    
    (3,369
    )
    
    
    (4,683
    )Cash flows from financing activities:Proceeds from issuance of common stock, net of
repurchases
    
    
    2,670
    
    
    
    2,260Sale of stock to employees under the ESPP
    
    
    2,346
    
    
    
    1,256Repayment of notes receivable from stockholders
    
    
    
    
    
    
    6Payments of notes payable
    
    
    
    
    
    
    (139
    )Principal payments of capital lease obligations
    
    
    
    
    
    
    (344
    )Net cash provided by financing activities
    
    
    5,016
    
    
    
    3,039Net increase in cash and cash equivalents
    
    
    20,661
    
    
    
    12,112Cash and cash equivalents at beginning of period
    
    
    15,666
    
    
    
    25,664Cash and cash equivalents at end of period
    
    $
    36,327
    
    
    $
    37,776Supplemental disclosures of cash flow information:Cash paid during period for taxes
    
    $
    966
    
    
    $
    511Cash paid during period for interest
    
    $
    3
    
    
    $
    26
  5




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
    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred,
    
    the fee is fixed or determinable, and
    
    collectibility is probable.
  6




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September 30, 2005
    
    
    December 31, 2004Completed products
    
    $
    5,519
    
    
    $
    2,957Raw materials and
components
    
    
    905
    
    
    
    149$
    6,424
    
    
    $
    3,106
   September 30, 2005
    
    
    December 31, 2004Gross Carrying
    
    
    Accumulated
    
    


    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net Amount
    
    
    Amount
    
    
    Amortization
    
    
    Net AmountDeveloped technology
    
    $
    5,100
    
    
    $
    (792
    )
    
    $
    4,308
    
    
    $
    5,100
    
    
    $
    (27
    )
    
    $
    5,073Customer contracts and relationships
    
    
    1,900
    
    
    
    (350
    )
    
    
    1,550
    
    
    
    1,900
    
    
    
    (8
    )
    
    
    1,892Tradename
    
    
    200
    
    
    
    (52
    )
    
    
    148
    
    
    
    200
    
    
    
    (2
    )
    
    
    198Purchased intangible assets
    
    
    7,200
    
    
    
    (1,194
    )
    
    
    6,006
    
    
    
    7,200
    
    
    
    (37
    )
    
    $
    7,163Goodwill
    
    
    9,527
    
    
    
    
    
    
    
    9,527
    
    
    
    9,527
    
    
    
    
    
    
    
    9,527$
    16,727
    
    
    $
    (1,194
    )
    
    $
    15,533
    
    
    $
    16,727
    
    
    $
    (37
    )
    
    $
    16,690
  7




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Year
    
    AmountRemainder of 2005
    
    $
    4002006
    
    
    1,4152007
    
    
    1,3602008
    
    
    1,2952009
    
    
    1,2682010
    
    
    268$
    6,006
  In re Packeteer, Inc. Initial Public Offering Securities Litigation,
      8




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Accrued warranty obligations at December 31, 2004
    
    $
    315Provision for current period sales
    
    
    156Warranty costs incurred
    
    
    (233
    )Accrued warranty obligations at September 30, 2005
    
    $
    238
           9




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income as reported
    
    $
    2,255
    
    
    $
    3,408
    
    
    $
    10,060
    
    
    $
    8,846Add: Stock-based
compensation under APB 25,
net of tax
    
    
    184
    
    
    
    
    
    
    
    551
    
    
    
    Deduct: Stock-based
compensation expense
determined under fair
value-based method for all
awards, net of tax
    
    
    (3,016
    )
    
    
    (3,146
    )
    
    
    (8,931
    )
    
    
    (7,572
    )Net income (loss) pro forma
    
    $
    (577
    )
    
    $
    262
    
    
    $
    1,680
    
    
    $
    1,274Net income (loss) per share:Basic  as reported
    
    $
    0.07
    
    
    $
    0.10
    
    
    $
    0.30
    
    
    $
    0.27Diluted  as reported
    
    $
    0.06
    
    
    $
    0.10
    
    
    $
    0.29
    
    
    $
    0.26Basic  pro forma
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.04Diluted  pro forma
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.04
     Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net income
    
    $
    2,255
    
    
    $
    3,408
    
    
    $
    10,060
    
    
    $
    8,846Denominator:Basic:Weighted-average shares of common stock outstanding
    
    
    34,024
    
    
    
    33,112
    
    
    
    33,842
    
    
    
    32,902Less: shares subject to repurchase
    
    
    (100
    )
    
    
    
    
    
    
    (102
    )
    
    
    Basic weighted-average common shares outstanding
    
    
    33,924
    
    
    
    33,112
    
    
    
    33,740
    
    
    
    32,902Diluted:Basic weighted-average common shares outstanding
    
    
    33,924
    
    
    
    33,112
    
    
    
    33,740
    
    
    
    32,902Add: potentially dilutive common shares from stock
options and shares subject to repurchase
    
    
    1,152
    
    
    
    1,201
    
    
    
    1,338
    
    
    
    1,553Add: potentially dilutive common shares from warrants
    
    
    22
    
    
    
    20
    
    
    
    24
    
    
    
    24Diluted weighted-average common shares outstanding
    
    
    35,098
    
    
    
    34,333
    
    
    
    35,102
    
    
    
    34,479Basic net income per share
    
    $
    0.07
    
    
    $
    0.10
    
    
    $
    0.30
    
    
    $
    0.27Diluted net income per share
    
    $
    0.06
    
    
    $
    0.10
    
    
    $
    0.29
    
    
    $
    0.26
 10




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12.
    
    COMPREHENSIVE INCOME
  13.
    
    SEGMENT REPORTING
    Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues:Americas
    
    $
    12,751
    
    
    $
    9,457
    
    
    $
    38,061
    
    
    $
    27,133Asia Pacific
    
    
    4,083
    
    
    
    6,931
    
    
    
    19,148
    
    
    
    17,675Europe, Middle East, Africa
    
    
    8,001
    
    
    
    6,664
    
    
    
    23,881
    
    
    
    21,390Total net revenues
    
    $
    24,835
    
    
    $
    23,052
    
    
    $
    81,090
    
    
    $
    66,198
   14.
    
    RECENT ACCOUNTING PRONOUNCEMENTS
  11




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ä ä ä
      13




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Cost of Revenues
   Research and Development
 Sales and Marketing
 General and Administrative
   14




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Revenue recognition
 
    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred,
    
    the fee is fixed or determinable, and
    
    collectibility is probable.
         15




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Inventory valuation
 Valuation of long-lived and intangible assets and goodwill
  Sales return reserve
 Rebate reserves.
 Warranty reserves
 Accounting for Income Taxes .
 16




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Three months ended
    
    

Nine months endedSeptember 30,

    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues:Product revenues
    
    
    71
    %
    
    
    79
    %
    
    
    76
    %
    
    
    81
    %Service revenues
    
    
    29
    
    
    
    21
    
    
    
    24
    
    
    
    19Total net revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenues:Product costs
    
    
    17
    
    
    
    19
    
    
    
    17
    
    
    
    18Service costs
    
    
    8
    
    
    
    7
    
    
    
    8
    
    
    
    7Amortization of purchased intangible assets
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    Total cost of revenues
    
    
    27
    
    
    
    26
    
    
    
    26
    
    
    
    25Gross margin
    
    
    73
    
    
    
    74
    
    
    
    74
    
    
    
    75Operating expenses:Research and development
    
    
    22
    
    
    
    16
    
    
    
    20
    
    
    
    17Sales and marketing
    
    
    36
    
    
    
    36
    
    
    
    35
    
    
    
    38General and administrative
    
    
    7
    
    
    
    7
    
    
    
    6
    
    
    
    6Total operating expenses
    
    
    65
    
    
    
    59
    
    
    
    61
    
    
    
    61Income from operations
    
    
    8
    
    
    
    15
    
    
    
    13
    
    
    
    14Other income, net
    
    
    3
    
    
    
    1
    
    
    
    2
    
    
    
    1Income before provision for income taxes
    
    
    11
    
    
    
    16
    
    
    
    15
    
    
    
    15Provision for income taxes
    
    
    2
    
    
    
    1
    
    
    
    3
    
    
    
    2Net income
    
    
    9
    %
    
    
    15
    %
    
    
    12
    %
    
    
    13
    %
   17




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Payments due by periodContractual Obligations
    
    
    Total
    
    
    Remainder of 2005
    
    
    1  3 years
    
    
    3  5 years
    
    
    More than 5 yearsCash obligations not reflected in Balance SheetOperating lease obligations
    
    $
    3,749
    
    
    $
    504
    
    
    $
    2,978
    
    
    $
    214
    
    
    $
    53Purchase obligations
    
    
    3,741
    
    
    
    3,741
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    7,490
    
    
    $
    4,245
    
    
    $
    2,978
    
    
    $
    214
    
    
    $
    53
  Overview
 Operating Activities.
 Investing Activities.
 Financing Activities.
   
   21




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-
    
    the timing and size of orders and shipments of our products;-
    
    the mix of products we sell;-
    
    the mix and effectiveness of the channels through which those products are sold;-
    
    the average selling prices of our products; and-
    
    the amount and timing of our operating expenses.
    22




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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 and meet the needs of our larger customers;-
    
    bring products to market and introduce new features on a timely basis at competitive prices;-
    
    integrate acquired technology into our products;-
    
    identify and respond to emerging technological trends in the market; and-
    
    respond effectively to new technological changes or new product announcements by others.
  23




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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.
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29




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September
    
    
    DecemberAmortized Cost as of September 30, 2005
    
    
    30, 2005
    
    
    31, 2004Expected Maturity Date
    
    2005
    
    
    2006
    
    
    2007
    
    
    Total
    
    
    Fair Value
    
    
    Fair ValueCash equivalents
    
    $
    34,890
    
    
    $
    
    
    
    $
    
    
    
    $
    34,890
    
    
    $
    34,859
    
    
    $
    12,904Weighted-average rate
    
    
    3.72
    %
    
    
    
    
    
    
    Short-term investments
    
    
    36,717
    
    
    
    36,797
    
    
    
    
    
    
    
    73,514
    
    
    
    73,355
    
    
    
    66,512Weighted-average rate
    
    
    3.16
    %
    
    
    3.32
    %
    
    
    Long-term investments
    
    
    
    
    
    
    
    
    
    
    3,308
    
    
    
    3,308
    
    
    
    3,299
    
    
    
    10,019Weighted-average rate
    
    
    
    
    
    
    
    
    
    
    4.31
    %Total investment portfolio
    
    $
    71,607
    
    
    $
    36,797
    
    
    $
    3,308
    
    
    $
    111,712
    
    
    $
    111,513
    
    
    $
    89,435






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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 September 30, 2005 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.



















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


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PACKETEER, INC.By:
    /s/  DAVE CÔTÉDave CôtéPresident and Chief Executive Officer By:
    /s/   DAVID YNTEMADavid YntemaChief Financial Officer and Secretary 32




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ExhibitNo.
    
    DescriptionExhibit 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