| PACKETEER INC ITEM 1A RISK FACTORS You should carefully consider the risks described below before making an investment decision |
| If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected |
| In such case, the trading price of our common stock could decline, and you may lose all or part of your investment |
| IF THE WAN APPLICATION OPTIMIZATION SOLUTIONS MARKET FAILS TO GROW, OUR BUSINESS WILL FAIL The market for WAN Application Optimization 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 |
| OUR FUTURE OPERATING RESULTS ARE DIFFICULT TO PREDICT 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, and that the results of any quarterly period are not necessarily indicative of results to be expected for a full fiscal year |
| We have experienced fluctuations in our operating results in the past and may continue to do so in the future |
| Our operating results are subject to numerous factors, many of which are outside of our control and are difficult to predict |
| As a result, our quarterly operating results could fall below our forecasts or the expectations of public market analysts or investors in the future |
| If this occurs, the price of our common stock would likely decrease |
| Factors that could cause our operating results to fluctuate include variations in: • 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 geographical mix of the markets in which our products are sold; • the average selling prices of our products; and • the amount and timing of our operating expenses |
| In the past, revenue fluctuations resulted primarily from variations in the volume and mix of products sold and variations in channels through which products were sold |
| For example, our revenues for the three months ended September 30, 2005 were below analyst expectations due to shortfalls in expected product revenues in each of our regions, but also in part due to certain issues with our channel inventory levels, primarily in our Asia Pacific region, which resulted in our need to defer recognition of revenue on approximately dlra3dtta6 million in product sales |
| In addition, as an increasing portion of our revenues are derived from larger unit sales, the timing of such sales can have a material impact on quarterly performance |
| As a result, a delay in completion of large deals at the end of a quarter can result in our missing analysts’ forecasts for the quarter |
| Total operating expenses may fluctuate between quarters due to the timing of spending |
| For example, research and development expenses, specifically prototype expenses, consulting fees and other program costs, have fluctuated relative to the specific stage of product development of the various projects underway |
| Sales and marketing expenses have fluctuated due to the timing of specific events such as sales meetings or tradeshows, or the launch of new products |
| Additionally, operating costs outside the United States are incurred in local currencies, and are remeasured from the local currency to the US dollar upon consolidation |
| As exchange rates vary, these operating costs, when remeasured, may differ from our prior performance and our expectations |
| Tax rates can vary significantly based upon the geographical mix of the markets in which our products are sold and may also cause our operating results to fluctuate |
| See 16 _________________________________________________________________ [67]Table of Contents “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for detailed information on our operating results |
| WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES IN OUR MARKET SECTOR WHO OFFER, OR MAY IN THE FUTURE OFFER, COMPETING TECHNOLOGIES We compete in a 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, Juniper Networks, Inc, other switch/router vendors, security vendors and several small private companies that utilize competing technologies to provide bandwidth management and compression |
| We expect this competition to increase particularly due to the anticipated requirement from enterprises to consolidate more functionality into a single appliance |
| In addition, our products and technology compete for information technology budget allocations with products that offer monitoring capabilities, such as probes and related software |
| Also, merger and acquisition activity by other companies can and has created new perceived competitors |
| Lastly, we face indirect competition from companies that offer enterprise customers and service providers increased bandwidth and infrastructure upgrades that increase the capacity of their networks, which may lessen or delay the need for WAN Application Optimization solutions |
| Some of our competitors and potential 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, prospective customers who are extremely confident in and committed to the product offerings of our competitors, and therefore are unlikely to buy our products |
| 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 |
| Our 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 WAN Application Optimization solutions market, we also expect that other companies may enter or announce an intention to 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 |
| Similarly, demand for our products could decrease if current or prospective competitors make prospective product release announcements claiming superior performance or other advantages regardless of the market availability of such products |
| IF WE DO NOT EXPAND OR ENHANCE OUR PRODUCT OFFERINGS OR RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO TECHNOLOGICAL CHANGE, OUR BUSINESS MAY NOT GROW OR WE MAY LOSE CUSTOMERS AND MARKET SHARE Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products and features 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 WAN Application Optimization solutions market is characterized by ongoing 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 |
| Develop- 17 _________________________________________________________________ [68]Table of Contents ments in router-based queuing schemes or alternative compression technologies could also significantly reduce demand for our product |
| Our future success will depend in part upon our ability to: • develop and maintain competitive products; • enhance our products by adding innovative features that differentiate our products from those of our competitors 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 |
| If we are unable to effectively perform with respect to the foregoing, or if we experience delays in product development, we could experience a loss of customers and market share |
| We have experienced such delays in the past and recently we announced that we have experienced a delay in the integration of certain technology we acquired from Mentat |
| ANY ACQUISITIONS WE MAKE COULD RESULT IN DILUTION TO OUR EXISTING STOCKHOLDERS AND DIFFICULTIES IN SUCCESSFULLY MANAGING OUR BUSINESS Packeteer has made, and may in the future make, acquisitions of, mergers with, or significant investments in, businesses that offer complementary products, services and technologies |
| For example, in December 2004 we announced our acquisition of Mentat |
| There are risks involved in these activities, including but not limited to: • 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 dlra9dtta6 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 |
| These factors could have a material adverse effect on our business, results of operations or financial position, especially in the case of a large acquisition |
| Furthermore, we may incur indebtedness or issue equity securities to pay for future acquisitions |
| The issuance of equity or convertible debt securities could be dilutive to our existing stockholders |
| 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 outside of the Americas accounted for 53prca, 59prca and 55prca of net revenues in 2005, 2004, and 2003, respectively |
| Our ability to grow will depend in part on the expansion of international sales, which will require success on the part of our resellers, distributors and systems integrators in marketing our products |
| 18 _________________________________________________________________ [69]Table of Contents 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 sustain and 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, manage or retain these indirect channel partners |
| Furthermore, to increase revenues in international markets, we will need to continue to establish foreign operations, to hire additional personnel to run these operations and to maintain good relations with our foreign indirect channel partners |
| To the extent that we are unable to successfully do so, or to the extent our foreign indirect channel partners are unable to perform effectively, our growth in international sales may be limited |
| Our international sales are currently all US dollar-denominated |
| As a result, an increase in the value of the US 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 US dollar and the particular local currency and could negatively affect our financial performance |
| 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 |
| IF WE ARE UNABLE TO FAVORABLY ASSESS THE EFFECTIVENESS OF OUR INTERNAL CONTROL OVER FINANCIAL REPORTING, OR IF OUR INDEPENDENT AUDITORS ARE UNABLE TO PROVIDE AN UNQUALIFIED ATTESTATION REPORT ON OUR ASSESSMENT, OUR STOCK PRICE COULD BE ADVERSELY AFFECTED Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, our management is required to report on the effectiveness of our internal control over financial reporting in each of our annual reports |
| In addition, our independent auditor must attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting |
| The rules governing the standards that must be met for management to assess our internal control over financial reporting are new and complex, and require significant documentation, testing and possible remediation |
| As a result, our efforts to comply with Section 404 have required the commitment of significant managerial and financial resources |
| As we are committed to maintaining high standards of public disclosure, our efforts to comply with Section 404 are ongoing, and we are continuously in the process of reviewing, documenting and testing our internal control over financial reporting, which will result in continued commitment of significant financial and managerial resources |
| For the year ended December 31, 2005, management’s assessment of the effectiveness of our internal control over financial reporting is included under the title “CONTROLS AND PROCEDURES” in Item 9A, and our independent registered public accounting firm’s attestation is included under the title “FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA” in Item 8 |
| Management’s assessment, and our registered public accounting firm’s attestation, concluded that our internal control over financial reporting as of December 31, 2005 was not effective due to a material weakness related to the calculation of our income tax provision |
| Specifically, we did not maintain effective controls over (i) the reconciliation of the income tax accounts to the supporting schedules, and (ii) the review of the income tax account reconciliation by someone other than the preparer |
| Although we intend to diligently and regularly review and update our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, in 19 _________________________________________________________________ [70]Table of Contents future years we may discover additional areas of our internal controls that need improvement, and our management may encounter problems or delays in completing the implementation and maintenance of any such improvements necessary to make a favorable assessment of our internal controls over financial reporting |
| We may not be able to favorably assess the effectiveness of our internal controls over financial reporting for our 2006 fiscal year or beyond, or our independent auditors may be unable to provide an unqualified attestation report on our assessment |
| If this occurs, investor confidence and our stock price could be adversely affected |
| 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, OR IF THEY FAIL TO PROVIDE ADEQUATE SERVICES TO OUR END USER CUSTOMERS, OUR SALES MAY SUFFER AND OUR REVENUES MAY NOT INCREASE We rely primarily on an indirect distribution channel consisting of resellers, distributors and systems integrators for 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, receive and fulfill customer orders of our products on a timely basis 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 continue to expand our field sales and support staff as needed |
| 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 |
| For example, our revenues for the quarter ended September 30, 2005 were below analyst expectations in part due to certain issues with our channel sales, particularly in our Asia Pacific region, which resulted in the deferral of approximately dlra3dtta6 million of revenue due to channel inventory in excess of our policy |
| In addition, our indirect channel partners may provide services to our end user customers that are inadequate or do not meet expectations |
| Such failures to provide adequate services could result in customer dissatisfaction with us or our products and services due to delays in maintenance and replacement, decreases in our customers’ network availability and other losses |
| These occurrences could result in the loss of customers and repeat orders and could delay or limit market acceptance of our products, which would negatively affect our sales and results of operations |
| 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 |
| accounted for 22prca and 13prca of net revenues, respectively |
| In 2004, sales to the same two customers accounted for 22prca and 19prca of net revenues, respectively |
| and Macnica, Inc |
| accounted for 22prca, 14prca and 10prca of net revenues, respectively |
| In addition, as an increasing portion of our revenues is derived from larger unit sales, the timing of such sales can have a material impact on quarterly performance |
| As a result, a delay in completion of large deals at the end of a quarter can result in our missing 20 _________________________________________________________________ [71]Table of Contents analysts forecasts for the quarter |
| We expect that our largest customers in the future could be different from our largest customers today |
| End users could stop purchasing and indirect channel partners could stop marketing our products at any time |
| We cannot assure you that we will retain our current 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 |
| WE FACE RISKS RELATED TO INVENTORIES OF OUR PRODUCTS HELD BY OUR DISTRIBUTORS Many of our distributors maintain inventories of our products |
| We work closely with these distributors to monitor channel inventory levels so that appropriate levels of products are available to resellers and end users |
| However, if distributors reduce their levels of inventory or if they do not maintain sufficient levels to meet customer demand, our sales could be negatively impacted |
| Additionally, we monitor and track channel inventory with our distributors in order to estimate end user requirements |
| Overstocking could occur if reports from our distributors about expected customer orders are inaccurate, if customer orders are not fulfilled in a forecasted quarter or the demand for our products were to rapidly decline due to economic downturns, increased competition, underperformance of distributors or the introduction of new products by our competitors or ourselves |
| This could cause sales and cost of sales to fluctuate from quarter to quarter |
| For example, for the three months ended September 30, 2005, we deferred revenue of dlra3dtta6 million related to inventory in our distribution channel in excess of our policy, compared to no deferral for the three months ended December 31, 2005 |
| OUR RELIANCE ON SALES OF OUR PRODUCTS BY OTHERS AND THE VARIABILITY OF OUR SALES CYCLE 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 generally operate a book/ship business and as a result have limited unfulfilled product orders at any point in time |
| Substantially all of our revenues in any quarter depend upon customer orders that we receive and fulfill in that quarter |
| If revenues forecasted in a particular quarter do not occur in that quarter, our operating results for that quarter could be adversely affected |
| The greater the volume of an anticipated order, the lengthier the sales cycle for the order and the more material the potential adverse impact on our operating results if the order is not timely received in a quarter |
| In addition, as an increasing portion of our revenues is now derived from larger sales, the risk of delayed sales having a material impact on quarterly performance has increased |
| 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 |
| Our future operating results are significantly dependent upon the continued market acceptance of our products and enhanced applications |
| Our business will be harmed if our products do not continue to achieve market acceptance or if we fail to develop and market improvements to our products or new and enhanced products |
| A decline in demand for 21 _________________________________________________________________ [72]Table of Contents our WAN Application Optimization systems as a result of competition, technological change or other factors would harm our business |
| 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 |
| OUR PRODUCTS MAY HAVE ERRORS OR DEFECTS THAT WE FIND AFTER THE PRODUCTS HAVE BEEN SOLD, WHICH COULD INCREASE OUR COSTS AND NEGATIVELY AFFECT OUR REVENUES AND THE MARKET ACCEPTANCE OF OUR PRODUCTS 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, they can directly affect the functionality of those networks |
| Furthermore, end users rely on our products to maintain acceptable service levels |
| We have in the past encountered errors in our products, which in a few instances resulted in network failures and in a number of instances resulted in degraded service |
| To date, these errors have not materially adversely affected us |
| Additional errors may occur in our products in the future |
| In particular, as our products and our customers’ networks become increasingly complex, the risk and potential consequences of such errors increases |
| The occurrence of defects, errors or failures could result in the failure of our customers’ networks 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 |
| In particular, when a customer experiences what they believe to be a defect, error or failure, they will often delay additional purchases of our product until such matter is addressed or consider products offered by competitors |
| 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 |
| OUR RELIANCE ON THIRD-PARTY MANUFACTURERS 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 rely on one contract manufacturer, SMTC, for all of our manufacturing requirements |
| Third-party manufacturers may encounter difficulties in the manufacture of our products, resulting in product delivery delays |
| Any manufacturing disruption could impair our ability to fulfill orders |
| Our future success will depend, in significant part, on our ability to have these third party manufacturers, or others, manufacture our products cost-effectively and in sufficient volumes |
| We face a number of risks associated with our dependence on third-party manufacturers including: • reduced control over delivery schedules; • the potential lack of adequate capacity during periods of excess demand; • 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 |
| 22 _________________________________________________________________ [73]Table of Contents We have no long-term contracts or arrangements with our manufacturer that guarantees 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 with these manufacturers 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 third-party manufacturers or that they 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, or we may be unable to obtain terms that are acceptable to us |
| The lead-time required to identify and qualify new manufacturers could affect our ability to timely ship our products and cause our operating results to suffer |
| In addition, failure to meet customer demand in a timely manner could damage our reputation and harm our customer relationships, resulting in reduced market share |
| 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 with any of our vendors to ensure sources of supply |
| If our contract manufacturer fails to obtain components in sufficient quantities when required, our business could be harmed |
| Our suppliers also sell products to our competitors |
| Our suppliers may enter into exclusive arrangements with our competitors, stop selling their products or components to us at commercially reasonable prices or refuse to sell their products or components to us at any price |
| Our inability to obtain sufficient quantities of single-sourced or limited-sourced components, or to develop alternative sources for components or products would harm our ability to maintain and expand our business |
| CHANGES IN FINANCIAL ACCOUNTING STANDARDS ARE LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS Proposed initiatives could result in changes in accounting rules, which could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results |
| Specifically, the adoption of SFAS 123(R), “Share Based Payments,” will require us to recognize the fair value of equity instruments provided to employees as an expense in our reported financial statements as services are performed, rather than footnote only disclosure as required in 2005 and prior periods |
| We expect that the adoption of this new accounting pronouncement will have a material impact on our financial statements commencing with the three months ending March 31, 2006 |
| CHANGES IN EFFECTIVE TAX RATES OR ADVERSE OUTCOMES RESULTING FROM EXAMINATION OF OUR INCOME TAX RETURNS COULD ADVERSELY AFFECT OUR RESULTS As a global company, we are subject to taxation in the United States and various other countries |
| Our future tax rates could be affected by changes in the composition of earnings in countries with differing tax rates, changes in the valuation of our deferred tax assets and liabilities, or changes in the tax laws |
| 23 _________________________________________________________________ [74]Table of Contents In addition, we are subject to periodic audits by the IRS or other taxing authorities |
| We regularly assess the likelihood of unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes |
| Significant judgment is required to determine worldwide tax liabilities |
| The outcome of these examinations could adversely affect our operating results |
| OUR INABILITY TO ATTRACT, INTEGRATE 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 |
| We are dependent on our ability to attract, successfully integrate, retain and motivate high caliber key personnel |
| Competition for qualified personnel and management in the networking industry, including 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 |
| Competitors and others have in the past and may in the future attempt to recruit our employees |
| With the exception of our CEO, we do not have employment contracts with any of our personnel |
| Our business will suffer if we encounter delays in hiring additional personnel as needed |
| In addition, if we are unable to successfully integrate new key personnel into our business operations in an efficient and effective manner, the attention of our management may be diverted from growing our business or we may be unable to retain such personnel |
| In November 2005 we hired a new Vice President of Human Resources and in January 2006 we hired a new Vice President of Engineering |
| IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE MAY EXPERIENCE OPERATING INEFFICIENCIES AND HAVE DIFFICULTY MEETING DEMAND FOR OUR PRODUCTS In the past, we have experienced rapid and significant expansion of our operations |
| If further rapid and significant expansion is 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 use of our products requires training, which is provided by our channel partners, as well as ourselves |
| If we are unable to provide training and support for our products in a timely manner, 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 |
| 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, confidentiality provisions and other contractual provisions to protect our proprietary rights |
| These measures afford only limited protection |
| As of December 31, 2005, we have 22 issued US patents and 62 pending US patent applications |
| Currently, none of our technology is patented outside of the United States |
| Our means of protecting our proprietary rights in the US 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 24 _________________________________________________________________ [75]Table of Contents 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 US Issued patents may not preserve our proprietary position |
| If we do not enforce and protect our intellectual property, our business will suffer substantial harm |
| CLAIMS BY OTHERS THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS COULD BE COSTLY TO DEFEND AND COULD HARM OUR BUSINESS We may be subject to claims by others that our products infringe on their intellectual property rights |
| These claims, whether or not valid, could require us to spend significant sums in litigation, pay damages, delay product shipments, reengineer our products or acquire licenses to such third-party intellectual property |
| We may not be able to secure any required licenses on commercially reasonable terms, or at all |
| We expect that we will increasingly be subject to infringement claims as the number of products and competitors in the WAN Application Optimization solutions market grows and the functionality of products overlaps |
| IF OUR PRODUCTS DO NOT COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS, OUR BUSINESS COULD BE HARMED The market for WAN Application Optimization 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 must comply with standards established by the International Electrotechnical Commission 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 US 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 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 |
| 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 |
| CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF PACKETEER MORE DIFFICULT, WHICH COULD LOWER THE MARKET PRICE OF THE COMMON STOCK Our corporate documents and Section 203 of the Delaware General Corporation Law could discourage, delay or prevent a third- party or a significant stockholder from acquiring control of Packeteer |
| In addition, provisions of our certificate of incorporation may have the effect of discouraging, delaying or preventing a 25 _________________________________________________________________ [76]Table of Contents merger, tender offer or proxy contest involving Packeteer |
| Any of these anti-takeover provisions could lower the market price of the common stock and could deprive our stockholders of the opportunity to receive a premium for their common stock that they might otherwise receive from the sale of Packeteer |