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EX-32.1 - ShoreTel Inci00412_ex32-1.htm
EX-32.2 - ShoreTel Inci00412_ex32-2.htm
EX-31.2 - ShoreTel Inci00412_ex31-2.htm
EX-31.1 - ShoreTel Inci00412_ex31-1.htm
EX-23.1 - ShoreTel Inci00412_ex23-1.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K/A


(Amendment No. 1 to Form 10-K)


 

 

þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the year ended June 30, 2009

 

 

 

or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


 

 

 

Commission file number: 001-33506

 

SHORETEL, INC.

 

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

3661

77-0443568

(State or other jurisdiction of

(Primary standard

(I.R.S. employer

incorporation or organization)

industrial code number)

identification no.)

 

 

 

 

960 Stewart Drive
Sunnyvale, CA 94085-3913
(408) 331-3300

 

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

None.

 

Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock, $0.001 par value

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o  No þ

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o   No þ

          Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o  No  o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A.   þ

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

 

 

 

Large accelerated filer  o

Accelerated Filer  þ

 

Non-accelerated filer  o

Smaller reporting company  o

 

(do not check if a smaller reporting company)

 

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o  No þ


          The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 2008 was approximately $68.5 million (based on the last reported sale price of $4.49 on December 31, 2008 on The NASDAQ Global Select Market). This calculation does not reflect a determination that persons are affiliates for any other purposes. Shares of stock held by ten percent stockholders have been excluded from this calculation as they may be deemed affiliates.

          The number of shares outstanding of the registrant’s common stock as of September 2, 2009 was 44,426,218.

DOCUMENTS INCORPORATED BY REFERENCE

          Part III incorporates by reference certain information from the Registrant’s definitive proxy statement (the “2009 Proxy Statement”) for the 2009 Annual Meeting of Stockholders held on November 4, 2009 and filed with the Securities and Exchange Commission on October 5, 2009.

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TABLE OF CONTENTS

EXPLANATORY NOTE

ShoreTel, Inc. is filing this Amendment No. 1 to its Annual Report on Form 10-K for the year ended June 30, 2009, originally filed on September 10, 2009 (the “Original Filing”) to amend and restate our consolidated financial statements for the years ended June 30, 2009, 2008 and 2007 and for each of the quarters in fiscal 2009 and 2008, and to restate management’s report on internal control over financial reporting as of June 30, 2009. Subsequent to the issuance of our financial statements for the year ended June 30, 2009, our management determined that there were errors in the recording of stock-based compensation expense for the years ended June 30, 2009, 2008 and 2007 and therefore our consolidated financial statements required restatement. Refer to Notes 16 and 17 to the consolidated financial statements included in Part II, Item 8 for further discussion of the restatement.

The following items in the Original Filing have been amended as a result of the restatements:

Part I:

          Item 1: Business, to reflect the restated research and development expenses.

          Item 1A: Risk Factors, to reflect the restated accumulated deficit in the first paragraph and modifying the risk factor If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed on page 22.

Part II:

          Item 6: Selected Consolidated Financial Data;

          Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations;

          Item 8: Financial Statements and Supplementary Data;

          Item 9A: Controls and Procedures

Part IV:

          Item 15: Exhibit and Financial Statement Schedules

We have not modified or updated disclosures presented in our original annual report on Form 10-K, except as required to reflect the effects of these restatements. Accordingly, this Form 10-K/A, Amendment No. 1 does not reflect events occurring after the filing of our original 10-K and does not modify or update those disclosures affected by subsequent events, except specifically referenced herein. Information not affected by these restatements is unchanged and reflects the disclosures made at the time of the original filing of our Form 10-K on September 10, 2009. References to the annual report on Form 10-K herein shall refer to the annual report on Form 10-K originally filed on September 10, 2009.

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          This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to expectations concerning matters that are not historical facts. Words such as “projects,” “believes,” “anticipates,” “plans,” “expects,” “intends” and similar words and expressions are intended to identify forward-looking statements. While we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot assure you that those expectations will prove to be correct. Important factors that could cause our actual results to differ materially from those expectations are disclosed in this report, including, without limitation, in the “Risk Factors” described in Part I, Item 1A. All forward-looking statements are expressly qualified in their entirety by these factors and all related cautionary statements. We do not undertake any obligation to update any forward-looking statements.

 

 

ITEM 1.

BUSINESS

Overview

          We are a leading provider of Internet Protocol, or IP, unified communications systems for enterprises. Our systems are based on our distributed software architecture and switch-based hardware platform which enable multi-site enterprises to be served by a single system. Our systems enable a single point of management, easy installation and a high degree of scalability and reliability, and provide end users with a consistent, full suite of features across the enterprise, regardless of location. As a result, we believe our systems enable enhanced end user productivity and provide lower total cost of ownership and higher customer satisfaction than alternative systems.

          Our solution is comprised of ShoreGear switches, ShorePhone IP telephones and ShoreWare software applications. We provide our systems to enterprises across all industries, including to small, medium and large companies and public institutions. Our enterprise customers include multi-site Fortune 500 companies. As of June 30, 2009, we had sold our IP unified communications systems to approximately 11,000 enterprise customers. We sell our systems through our extensive network of over 700 channel partners.

          We have achieved broad industry recognition for our technology and high customer satisfaction. Our enterprise IP unified communications systems have been voted Best in Show” for the last three years at the industry’s flagship tradeshow, VoiceCon. For the last five years, IT executives surveyed by Nemertes Research, an independent research firm, have rated ShoreTel highest in customer satisfaction among leading enterprise unified communications systems providers.

          We were originally incorporated in California in September 1996, and reincorporated into Delaware in June 2007.

Products

          We provide a switch-based business communications systems for the enterprise. Our solutions are based on our distributed software architecture and appliance-based hardware platform that enable a single system to serve multi-site enterprises. This architecture provides high network reliability and allows for a single view of management and administration across all sites of a multi-site enterprise. System administrators can make changes anywhere throughout the system through a web browser interface that presents a user-friendly view of the system’s configuration. Our architecture also provides end users with a consistent and full set of features across an enterprise, regardless of location.

          We introduced our first suite of products in 1998 and have continued to add features and functionality throughout our history. Our bundled solution is comprised of ShoreGear switches, ShorePhone IP phones and ShoreWare software applications. As new software versions of our solution have been released, existing enterprise customers have been able to upgrade their switches, phones and applications, allowing them to preserve their ShoreTel investment.

          ShoreGear switches. Our switches provide call management functionality, and each switch in the system is capable of independently establishing and terminating calls without relying on a centralized call control server. As a result, enterprise unified communications can survive a variety of LAN, WAN and hardware failures. The high reliability of our switches is enhanced by two key design features: the use of flash memory in lieu of disk drives and running an embedded operating system optimized for real-time processing, such as call management. Unlike disk drives, flash memory does not rely on mechanical movement, and therefore is less likely to break down and cause our systems to fail. Furthermore, our embedded operating system enables a higher performing and more reliable software platform relative to server-centric IP systems because it is optimized for real-time processing. The reliability of the system can be further improved by adding an additional switch to the HQ location to create “n+1” redundancy, rather

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than requiring a dedicated back-up switch for each primary switch to improve reliability as needed by alternative systems. In addition, our switches connect to the public telephone network via one of several interfaces, including high-density T1 and E1 interfaces. We offer a range of switches of varying capabilities to meet the needs of enterprises of all sizes. The modular nature of our switches allows our enterprise customers to easily expand their system capacity by deploying additional switches across their network.

          ShorePhone IP phones. We offer a range of innovative, high performance phones to meet the needs of the different types of end users across the enterprise. Our phones are designed to provide a superior combination of ergonomics, sound quality and appearance. We offer a variety of phones that vary by size, display features, line capacity and Gigabit Ethernet support. ShorePhone IP phones are designed to function without any configuration, simplifying installation. Remote workers can also utilize ShoreTel IP telephones using an integrated VPN feature and mobile workers can select Wi-Fi phones that work with the open interfaces of the system.

          ShoreWare software applications. Our ShoreWare software features a number of applications that facilitate the end user experience and enterprise system management. In addition, we offer additional business applications that integrate with core business processes to provide enhanced end user productivity. An industry standard server is used to support these applications, as opposed to the call management functions of our systems, which run on ShoreGear switches. Our ShoreWare software consists of our proprietary software as well as third-party applications and includes:

 

 

 

 

Personal Call Manager. ShoreWare® Call Manager is an application suite for end users that includes ShoreWare Personal Call Manager, ShoreWare Professional Call Manager, ShoreWare Operator Call Manager and ShoreWare Mobile Call Manager Each application enables users to easily manage communications from their computer, and seamlessly move between video, voice (wired or wireless) or IM. By streamlining business communications, Call Manager improves communication accuracy, boosts productivity, and helps ensure effective collaboration. Call Manager provides easy licensing, easy set up, flexible features, telephony and IM control, integrated advanced call management, quality desktop video and softphone and a highly customizable interface.

 

 

 

 

Office Anywhere. The Office Anywhere feature enables end users outside the office to manage calls with Personal Call Manager and to enjoy the same call handling productivity benefits as their office-based colleagues. Calls directed to the end user’s office phone are forwarded to the end user’s location, and the end user’s outbound calls appear to the called party as if they originated in the end user’s office. Using Office Anywhere, end users have the same call management and unified messaging features and functionality at remote locations as they have in their offices.

 

 

 

 

Unified Messaging. Unified Messaging integrates our voicemail application with Microsoft Outlook. This enables end users to receive, send, be notified of and play voice mail messages through their Microsoft Outlook email.

 

 

 

 

Automated Attendant. Automated Attendant provides end users with a 24-hour automated call answering and routing capability that enables the enterprise to direct callers to appropriate individuals, workgroups or messages.

 

 

 

 

ShoreTel Contact Center. ShoreWare Contact Center applications provide a range of features to satisfy the needs of all organizations, from basic call center capabilities to sophisticated distributed multimedia contact center capabilities. The virtual contact center is now a reality as ShoreWare Contact Center enables organizations to route incoming contacts to the most appropriate agent in a multisite contact center, regardless of location.

 

 

 

 

Converged Conferencing. ShoreTel Converged Conferencing enables enterprises to conduct large audio conferences and provides collaboration tools for application sharing, desktop sharing, instant messaging and end user presence information.

 

 

 

 

Microsoft Integration. For customers seeking to leverage their investment in Microsoft’s Unified Communications portfolio, ShoreTel offers a range of integration options. Users can leverage their Microsoft Exchange messaging platform and Microsoft Office Communications Server installation with the ShoreTel solution as well as control their ShoreTel IP telephony using the Microsoft Office Communicator.

 

 

 

 

ShoreWare system management. Our browser-based system management applications consist of ShoreWare Director and ShoreWare System Monitor.

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ShoreWare Director. ShoreWare Director provides enterprises with a single point of system management, enabling IT administrators to view and manage the entire system of the enterprise from any location using a single application. A new end user’s extension, mailbox and automated attendant profile can be added from a single management screen, avoiding the additional work required with most PBXs, voice mail systems and automated attendants.

 

 

 

 

Business integration. We offer businesses the option to enhance their communication, enable their business applications pre-built solutions that integration with several customer relationship management (CRM) solutions (Salesforce.com, Microsoft Dynamics, Netsuite and RightNow) as well as cost recovery applications (Equitrak and Copitrak, and Lexis/Nexis Time Matters). These integrations are designed to improve the productivity of end users that use these application by seamlessly integrating communications capabilities into their data-driven workflow. Customers or partners can create additional business integrations using the open interfaces of the system available for developers through ShoreTel’s Developer Network.

     ShoreTel Global Services

          We complement our product offerings with a broad range of services that help us maintain and expand our relationships with enterprise customers and channel partners and, in the case of post-contractual support, provide us with recurring revenue. Typically, our channel partners provide many of these services, although we provide back up and escalation support as needed, or if requested by the enterprise customer, we provide these services directly.

          The ShoreTel Global Services include post-contractual support, training, system design and installation, and professional services as follows:

 

 

 

 

Post-contractual support services include web-based access support services and tools, access to technical support engineers, hardware replacement and software updates. These services are typically offered under support contracts with terms of up to five years.

 

 

 

 

Training services include certification programs for channel partners, training programs at enterprise customer or channel partner locations and self-paced, desktop training programs.

 

 

 

 

System design and installation services include the assessment of the unified communications requirements of a particular enterprise, the configuration of a system to maximize its efficiency, the management of the installation, and the subsequent testing and implementation of our systems.

 

 

 

 

Professional services include software development to improve system performance, enable integration of our systems with third party applications or legacy systems, streamline business processes and address enterprise customer-specific business opportunities.

     Technology

          Our systems are based on a combination of our proprietary software, industry-standard interfaces and protocols, and customized and off-the-shelf hardware components. We have developed proprietary technologies that are critical to the operation of the servers and ShoreGear switches within our systems and provide our systems with the properties that distinguish them from alternative IP systems.

          The key elements of our distributed software architecture are:

 

 

 

 

software that allows a geographically-distributed system to operate and be managed as a single system;

 

 

 

 

software that enables calling between switches and allows calls to be distributed among switches instead of using a single centralized switch;

 

 

 

 

software that enables ShoreGear switches to obtain call routing information;

 

 

 

 

software that monitors the bandwidth consumed on each WAN segment and prevents the system from exceeding bandwidth limitations;

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software that monitors all call activity on ShoreGear switches, and enables integration of ShoreTel and third-party applications;

 

 

 

 

software that coordinates the functions of all servers on the system, allowing them to perform as a single, virtual server;

 

 

 

 

software that enables remote ShoreTel and third-party applications to access and modify our systems;

 

 

 

 

software that enables the switch to communicate with the application server, and receive system configuration information;

 

 

 

 

software that allows each switch to maintain a comprehensive view of the system; and

 

 

 

 

software that provides a graphical user interface for our phones.

          Our switch-based software also uses industry-standard Media Gateway Control Protocol, or MGCP, and Session Initiation Protocol, or SIP, for setting up calls.

          ShoreGear switches are comprised of off-the-shelf, embedded microprocessors and networking components, such as Ethernet controllers, and customized integrated circuits. These switches run on an embedded operating system, and use random access memory and flash memory and our switch call management software for application processing. ShorePhone IP phones are comprised of enterprise IP phone chips manufactured by Broadcom Corporation and customized LCD displays, microphones and speaker circuitry.

     Enterprise Customers

          Our enterprise customers include small, medium and large companies and public institutions in a wide range of vertical markets, including professional services, financial services, government, education, health care, manufacturing, non-profit organizations, and technology industries. As of June 30, 2009, we had sold our IP unified communications systems to approximately 11,000 enterprise customers. Our broad enterprise customer base reflects our historical strength in the small and medium-sized business and public institution sectors.

          We believe that maintaining the highest possible levels of customer satisfaction is critical to our ability to retain existing and gain new enterprise customers. We believe that satisfied enterprise customers will purchase more of our products and serve as advocates for our systems, and we work closely with them as they deploy and use our systems. We follow implementation with a formal review with the enterprise customer that involves contacts with our internal staff and third-party technical personnel, and take prompt action to resolve any issues that might have been identified. We also have frequent follow-up contacts with our enterprise customers to promptly resolve issues and to ensure that they are fully satisfied with their system. We also survey enterprise customers that use technical support services to ensure that high-quality support services are being provided. Through this process, we gain valuable insights into the existing and future requirements of our enterprise customers’ activities and this helps us develop product enhancements that address the evolving requirements of enterprises.

          Additionally, to promote high-quality support throughout our services organization, we measure key performance indicators and operational metrics of our services organization, including call answer times, call abandon rates, customer satisfaction with technical support, time to issue resolution, call interaction quality, as well as customer satisfaction with system implementation, training services and technical support, and use the results to direct the management of our services organization.

          We also monitor our enterprise customers’ satisfaction with our channel partners by surveying our enterprise customers after the system is installed. We actively encourage our channel partners to maintain and improve our enterprise customers’ levels of satisfaction. We also monitor our channel partners’ satisfaction with ShoreTel, as their satisfaction with and advocacy of ShoreTel is also very important to our success.

     Sales and Marketing

          We sell our products and services primarily through an extensive network of channel partners, including distributors in most international markets. As of June 30, 2009, we had over 700 channel partners in our network. These channel partners range in size from single-site, regional firms with specialized products and services to multi-national firms that provide a full range of IT products and services including the top three US telecommunication carriers: AT&T, Verizon and Qwest. Our channel partners market and sell our products into both the large enterprise and small-to-medium enterprise markets.

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          We maintain a sales organization that recruits, qualifies and trains new channel partners, participates in sales presentations to potential enterprise customers and assesses customer feedback to assist in developing product roadmaps. As part of our increased focus on sales to large accounts, we also have a major accounts program whereby sales personnel assist our channel partners in selling to and providing support for large enterprise customer accounts. No single channel partner accounted for 10% or more of our total revenue in fiscal 2009.

          We believe our channel partner network allows us to effectively sell our systems without the need to build large dedicated in-house sales and service capabilities. We continue to work with existing channel partners to expand their sales of our systems and to recruit new channel partners with a focus on increasing market coverage.

          Our internal marketing team focuses on increasing brand awareness, communicating product advantages and generating qualified leads for our sales force and channel partners. In addition to providing marketing materials, we communicate product and service offerings through our installed-base news letters, direct mail campaigns, web postings, press releases and web-based training.

     Research and Development

          We believe that our ability to enhance our current products, develop and introduce new products on a timely basis, maintain technological competitiveness and meet enterprise customer requirements is essential to our success. To this end, we have assembled a team of engineers with expertise in various fields, including voice and IP communications, unified communications network design, data networking and software engineering. Our principal research and development activities are conducted in Sunnyvale, California. We have invested significant time and financial resources into the development of our architecture, including our switches and related software. We intend to continue to expand our product offerings, improve the features available on our products and integrate our systems with third-party enterprise applications. Research and development expenses were $30.7 million, $26.8 million, and $17.3 million in fiscal 2009, 2008, and 2007, respectively.

     Manufacturing and Suppliers

          We outsource the manufacturing of our hardware products. This outsourcing allows us to:

 

 

 

 

avoid costly capital expenditures for the establishment of manufacturing operations;

 

 

 

 

focus on the design, development, sales and support of our hardware products; and

 

 

 

 

leverage the scale, expertise and purchasing power of specialized contract manufacturers.

          Currently, we have arrangements for the production of our switches with a contract manufacturer in California and for the production of our phones with a contract manufacturer located in China. We are qualifying an additional manufacturer of our phones. Our reliance on contract manufacturers involves a number of potential risks, including the absence of adequate capacity, ownership of certain elements of electronic designs, and reduced control over delivery schedules. Our contract manufacturers provide us with a range of operational and manufacturing services, including component procurement and performing final testing and assembly of our products. We typically depend on our contract manufacturers to procure components and to maintain adequate manufacturing capacity. We typically fulfill product orders out of our Fremont, California location or United Kingdom warehouse.

          We regularly provide forecasts for orders, and we order products from our contract manufacturers based on our projected sales levels, which is well in advance of receiving customer orders. However, enterprise customers may generally cancel or reschedule orders without penalty, and delivery schedules requested by enterprise customers in these orders frequently vary based upon each enterprise customer’s particular needs.

          We also rely on sole or limited numbers of suppliers for several key components utilized in the assembly of our products. For example, our contract manufacturers purchase semiconductors that are essential to the production of our phones from a single source supplier, and we have not identified any alternative suppliers for these components. This reliance is amplified by the fact that our contract manufacturers maintain relatively low inventories and acquire components only as needed. As a result, our ability to respond to enterprise customer orders efficiently may be constrained by the then-current availability or terms and pricing of these components. Constraints on our ability to respond efficiently is partially offset by build-up of levels of safety stock inventory which lets us respond to our enterprise customer orders in a timely manner. We cannot assure you that we will be able to obtain a sufficient quantity of these components in a timely manner to meet the demands of our enterprise customers or that prices of these components will not increase. Any delays or any disruption of the supply of these components could also materially and adversely affect our operating results.

     Financial Information about Geographic Areas

          For financial information about geographic areas, refer to Note 14 of the notes to the Consolidated Financial Statements in Item 8 of this report.

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Competition

          The market for enterprise IP unified communications systems is quickly evolving, highly competitive and subject to rapid technological change. As a result of the convergence of voice, video, messaging and data networking technologies that characterize IP enterprise unified communications systems, we compete with providers of enterprise unified communications systems, such as:

 

 

 

• Providers of IP systems, including Cisco Systems

 

 

 

• Providers of hybrid IP/TDM communication systems, including Aastra, Avaya, Alcatel-Lucent, Mitel Networks, NEC, Nortel Networks and Siemens

 

 

 

• Providers of Unified Communications software applications providers, including Microsoft

          In addition, because the market for our products is subject to rapid technological change, as the market evolves we may face competition in the future from companies that do not currently compete in the enterprise unified communications market, including companies that currently compete in other sectors of the information technology, communications and software industries or communications companies that serve residential rather than enterprise customers.

          In particular, as more enterprises converge their voice and data networks, the business information technology and communication applications deployed on converged networks become more integrated. We may face increased competition from current leaders in information technology infrastructure, information technology, personal and business applications and the software that connects the network infrastructure to those applications. This could include network systems providers such as Brocade, Hewlett-Packard, and Juniper.

          We could also face competition from new market entrants, whether from new ventures or from established companies moving into the market. Competition from these and other potential market entrants may take many forms, including offering products and applications similar to those we offer as part of a larger, bundled offering. In addition, technological developments and consolidation within the communications industry result in frequent changes to our group of competitors. Many of our current and potential competitors are substantially larger than we are and have significantly greater financial, sales, marketing, and distribution, technical, manufacturing and other resources. We believe that we currently compete favorably with regard to the principal competitive factors applicable to our products, which include:

 

 

 

 

Product scalability without significant upgrades from 10 to 10,000 users in a single image configuration

 

 

 

 

Customer satisfaction measured by independent third parties

 

 

 

 

World class customer service and support from technicians and support centers located around the world

 

 

 

 

Ease of management for system administrators

 

 

 

 

Productivity tools for users with integrated unified communications capabilities

 

 

 

 

Lowest total cost of ownership compared to competitor’s IP and hybrid system

 

 

 

 

Highest system availability and reliability with our distributed architecture

 

 

 

 

Lower selling costs for resellers and distributors with ease of implementation

          For more information concerning competition, please see Risk Factors - Risks Related To Our Business and Industry - The market in which we operate is intensely competitive, and many of our competitors are larger, more established and better capitalized than we are” and - As voice, video, messaging and data networks converge, we are likely to face increased competition from Microsoft and other companies in the information technology, personal and business applications and software industries.”

     Intellectual Property

          A factor to our success as a company depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary contractual protections.

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          We have eight patents issued in the United States, and have thirty patent applications in the United States. We also have one foreign patent and six patent applications relating to our United States patents.

          The steps we have taken to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our intellectual property rights and may challenge our issued patents. In addition, other parties may independently develop similar or competing technologies designed around any patents that are or may be issued to us. We intend to enforce our intellectual property rights vigorously, and from time to time, we may initiate claims against third parties that we believe are infringing on our intellectual property rights if we are unable to resolve matters satisfactorily through negotiation. If we fail to protect our proprietary rights adequately, our competitors could offer similar products, potentially significantly harming our competitive position and decreasing our revenue.

     Employees

          As of June 30, 2009, we had 375 employees in North America, Europe, Asia and Australia, of which 128 were in sales and marketing, 132 were in engineering, 55 were in global support services, 39 were in general and administrative functions and 21 were in operations. None of our employees are represented by labor unions, and we consider current employee relations to be good.

     Executive Officers

          The following table sets forth information about our executive officers as of September 2, 2009:

 

 

 

 

 

Name

 

Age

 

Position


 


 


John W. Combs

 

62  

 

Chairman, President and Chief Executive Officer

Edwin J. Basart

 

60  

 

Founder, Chief Technology Officer and Director

Michael E. Healy

 

48  

 

Chief Financial Officer

Donald J. Girskis

 

49  

 

Senior Vice President, Worldwide Sales

Pedro E. Rump

 

53  

 

Vice President, Engineering and Operations

Walter Weisner

 

53  

 

Vice President, Global Services

Ava M. Hahn

 

36  

 

Vice President, General Counsel and Secretary

          John W. Combs has served as our President and Chief Executive Officer and as a director since July 2004 and as our Chairman since February 2007. From July 2002 to May 2004, Mr. Combs served as Chairman and Chief Executive Officer of Littlefeet Inc., a wireless infrastructure supplier. From September 1999 to July 2002, Mr. Combs served as Chief Executive Officer of InternetConnect Inc., a broadband networking solutions provider. Mr. Combs has also held senior management positions at Nextel Communications, Inc., a wireless digital communications system provider, L.A. Cellular, a wireless network operator, Mitel Inc., a manufacturer of private branch exchanges and Fujitsu Business Communication Systems, Inc., a provider of telecommunications products. Mr. Combs holds a B.S. in engineering from California Polytechnic State University, San Luis Obispo.

          Edwin J. Basart co-founded ShoreTel in 1996 and has served as our Chief Technology Officer and as a director since inception. Prior to co-founding ShoreTel, Mr. Basart co-founded Network Computing Devices, Inc., a provider of thin client computing hardware and software, where he served as Vice President of Engineering, and Ridge Computers, Inc. where he served as Vice President of Software. Mr. Basart began his career as a software engineer at Hewlett Packard. Mr. Basart holds a B.S. in English from Iowa State University and an M.S. in electrical engineering from Stanford University.

          Michael E. Healy has served as our Chief Financial Officer since May 2007. From February 2004 to May 2007, he served as Chief Financial Officer and Senior Vice President of Finance of Genesis Microchip Inc., a supplier of display image processors. From November 2002 to February 2004, Mr. Healy served as Chief Financial Officer of Jamcracker, Inc., a software and application service provider. From September 1997 to June 2002, Mr. Healy held senior level finance positions at Exodus Communications, Inc., an Internet infrastructure outsourcing services provider (Exodus Communications sold substantially all of its assets in January 2002 and changed its name to EXDS, Inc. in February 2002), including as Senior Vice President of Finance prior to February 2002, and as its Chief Financial Officer and Corporate Treasurer from February 2002 to June 2002. From 1987 to 1997, Mr. Healy held various financial management positions at Apple Computer, Inc., and was an auditor at Deloitte & Touche LLP from 1983 to 1987. Mr. Healy holds a B.S. in accounting from Santa Clara University and is a Certified Public Accountant. Mr. Healy is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.

          Donald J. Girskis has served as our Senior Vice President of Worldwide Sales since February 2008. From 1993 to 2008, Mr. Girksis held a variety of executive positions at Sprint-Nextel, a telecommunications company, most recently as the Senior Vice President and General Manager of Boost Mobile, a subsidiary of Sprint-Nextel. At Nextel, Mr. Girskis held the position of Area

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Vice President of Sales, Area Vice President of Marketing, Vice President of Engineering, and General Manager. Prior to Sprint-Nextel, Mr. Girskis held sales management positions with Businessland, and Los Angeles Cellular Telephone Company. Mr. Girskis holds a B.A. in business administration from California State University at Fullerton.

          Pedro E. Rump has served as our Vice President of Engineering and Operations since January 2006. From July 2004 to January 2006, Mr. Rump served as Vice President of Engineering and Operations at Dust Networks, Inc., a developer of embedded wireless sensor networking products. From January 2004 to July 2004, Mr. Rump served as Vice President of Engineering at Sonim Technologies, Inc., a provider of voice over IP applications. From January 2003 to January 2004, Mr. Rump served as Vice President of Engineering at Littlefeet Inc. From January 2002 to October 2002, Mr. Rump served as Vice President of Inviso, a developer of signal transport and display solutions for television and telecommunications. Mr. Rump holds a B.S. and M.S. in electrical engineering from the Swiss Federal Institute of Technology.

          Walter Weisner has served as our Vice President of Global Services since July 2005. From April 2002 to June 2005, Mr. Weisner served as Vice President, Global Support Services for Webex Communications, Inc., a web communications services provider. From October 1999 to March 2002, Mr. Weisner served as Executive Vice President of Operations and Support for InternetConnect. Prior to joining InternetConnect, Mr. Weisner served as Senior Director of Customer Operations and Support for Nextel Communications, Southwest region, and also held positions in product management and product development with Nextel. Mr. Weisner holds a B.A. in business administration from Cleveland State University.

          Ava M. Hahn has served as our Vice President, General Counsel and Secretary since May 2009. Ms. Hahn joined ShoreTel in June 2007 serving in the position of General Counsel and Secretary. From August 2002 to May 2007, Ms. Hahn served in various capacities including General Counsel, Assistant General Counsel and Secretary for Genesis Microchip, Inc., a supplier of display image processors. From August 2000 to August 2002, Ms. Hahn served as Director, Legal Affairs for LuxN, Inc., a provider of optical access equipment. Prior to then, Ms. Hahn was in private practice at Wilson Sonsini Goodrich & Rosati, P.C. Ms. Hahn holds a J.D. from Columbia Law School and a B.A. from the University of California, Berkeley.

 

 

ITEM 1A.

RISK FACTORS

Risks Related to Our Business and Industry

          We may not be able to return to profitability.

          We were not profitable in the fiscal year ended June 30, 2009 and some prior periods, and we had an accumulated deficit of $95.4 million as of June 30, 2009. If we are not able to grow our revenues or maintain our operating expenses at appropriate levels based on those revenues, we may not succeed in achieving or maintaining profitability in future periods. We also incur significant operating expenses and have recently announced that we plan to increase operating expenses in order to fund our growth. If our gross profit does not increase to offset these expected increases in operating expenses, our operating results will be negatively affected. You should not consider our historic annual revenue growth rates as indicative of our future growth particularly in light of the current economic environment. Accordingly we cannot assure you that we will be able to return to significant revenue growth or profitability in the future.

          Current uncertainty in global economic conditions makes it particularly difficult to predict demand for our products, and makes it more likely that our actual results could differ materially from expectations.

          Our operations and performance depend on worldwide economic conditions, which have been depressed in the United States and other countries, and may remain depressed for the foreseeable future. These conditions make it difficult for our customers and potential customers to accurately forecast and plan future business activities, and have caused our customers and potential customers to slow or reduce spending on capital equipment such as our products. These economic conditions could also cause our competitors to drastically reduce prices or take unusual actions to gain a competitive edge, which could force us to provide similar discounts and thereby reduce our profitability. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, in the United States, or in our industry. These and other economic factors could have a material adverse effect on demand for our products and services, and on our financial condition including profitability and operating results.

          Our business could be harmed by adverse economic conditions in our target markets, reduced spending on information technology and telecommunication products by customers and potential customers, and the tightening of the credit markets.

          Our business depends on the overall demand for information technology, and in particular for telecommunications systems. The market we serve is emerging and the purchase of our products involves significant upfront expenditures. In addition, the purchase of our products can be discretionary and may involve a significant commitment of capital and other resources. In many cases, our resellers and/or end customers procure our products and services on credit. If credit is not available to them, it may be difficult or impossible for our resellers and/or end customers to purchase our products. Weak economic conditions in our target markets, or a reduction in information technology or telecommunications spending even if economic conditions improve, would

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likely adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices for our products and reduced unit sales.

          We rely on third-party resellers to sell our products, and disruptions to, or our failure to develop and manage our distribution channels and the processes and procedures that support them could adversely affect our business.

          Substantially all of our total revenue is generated through indirect channel sales. These indirect sales channels consist of third-party resellers that market and sell telecommunications systems and other products and services to customers. We expect indirect channel sales will continue to generate a substantial majority of our total revenue in the future. Therefore, our success is highly dependent upon establishing and maintaining successful relationships with third-party resellers, and the financial health of these resellers.

          Our success in expanding our customer base to larger enterprises will depend in part on our ability to expand our channel to partners that serve those larger enterprises. In addition, we rely on these entities to provide many of the installation, implementation and support services for our products. Accordingly, our success depends in large part on the effective performance of these channel partners. If a partner’s performance is ineffective, it may reflect badly upon ShoreTel or negatively impact our business. For example, if one of these resellers experiences a work stoppage due to a labor union dispute, installation of our phone systems could be delayed and our sales and reputation could suffer. By relying on channel partners, we may in some cases have little or no contact with the ultimate users of our products, thereby making it more difficult for us to establish brand awareness, ensure proper delivery and installation of our products, service ongoing enterprise customer requirements and respond to evolving enterprise customer needs. This difficulty could be more pronounced in international markets, where we expect that enterprise customers will purchase our systems from a channel partner that purchased through a distributor. Additionally, some of our channel partners are smaller companies that may not have the same financial resources as other of our larger channel partners, which exposes us to collections risks.

          As a result of the ongoing credit contraction in the credit markets, our channel partners may have their credit lines withdrawn or may not be able to procure financing necessary to purchase our products, or maintain their business. Additionally, as a result of the current economic downturn, the businesses of our channel partners are being adversely affected. Our channel partners could be unable to devote the same level of resources to selling and marketing our systems, or worse, they could discontinue operations. In such event, we must find another channel partner to support the failed partner’s customers, or take on support of those customers ourselves, even if we have not been paid to do so. If our resellers cannot continue to purchase our products, or if they cease operations, our ability to collect receivables, our operating results and our financial condition will be materially adversely affected.

          Recruiting and retaining qualified channel partners and training them in our technology and products requires significant time and resources. In order to develop and expand our distribution channel, we must continue to scale and improve our processes and procedures that support our channel, including investment in systems and training, and those processes and procedures may become increasingly complex and difficult to manage. We have no long-term contracts or minimum purchase commitments with any of our channel partners, and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours. Our competitors may be effective in providing incentives to existing and potential channel partners to favor their products or to prevent or reduce sales of our products. Our channel partners may choose not to offer our products exclusively or at all. Our failure to establish and maintain successful relationships with channel partners would likely materially adversely affect our business, operating results and financial condition.

          Our business may be harmed if our contract manufacturers are not able to provide us with adequate supplies.

          We outsource the manufacturing of our products. Currently, we have arrangements for the production of our products with a contract manufacturer in California and a contract manufacturer located in China, and are in the process of qualifying another manufacturer in China. Our reliance on contract manufacturers involves a number of potential risks, including the absence of adequate capacity, financial viability, ownership of certain elements of electronic designs, the ongoing viability of those contract manufacturers, and reduced control over delivery schedules.

          We depend on our contract manufacturers to finance the production of goods ordered and to maintain adequate manufacturing capacity. Global economic conditions could adversely impact the financial condition of our contract manufacturers and their suppliers that could impact our contract manufacturer’s ability to procure components or otherwise manufacture our products. Additionally, as a result of the current economic downturn, the businesses of our contract manufacturers and other suppliers could be adversely affected and they may be required to slow or curtail operations. We do not exert direct control over our contract manufacturers or suppliers of our contract manufacturers, so we may be unable to procure timely delivery of acceptable products to our enterprise customers or incur substantially higher product costs if we move production to other contract manufacturers.

          If sales of our products continue to grow, one or both of our contract manufacturers may not have sufficient capacity to enable it to increase production to meet the demand for our products. Moreover, both of our contract manufacturers could have

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manufacturing engagements with companies that are much larger than we are and whose production needs are much greater than ours. As a result, one or both of our contract manufacturers may choose to devote additional resources to the production of products other than ours if capacity is limited.

          In addition, our contract manufacturers do not have any written contractual obligation to accept any purchase order that we submit for the manufacture of any of our products nor do we have any assurance that our contract manufacturers will agree to manufacture and supply any or all of our requirements for our products. Furthermore, either of our contract manufacturers may unilaterally terminate their relationship with us at any time upon 180 days notice with respect to the contract manufacturer of our switches and 120 days notice with respect to the contract manufacturer of our phones or seek to increase the prices they charge us. As a result, we are not assured that our current manufacturers will continue to provide us with an uninterrupted supply of products of at an acceptable price in the future.

          Even if our contract manufacturers accept and fulfill our orders, it is possible that the products may not meet our specifications. Because we do not control the final assembly and quality assurance of our products, there is a possibility that these products may contain defects or otherwise not meet our quality standards, which could result in warranty claims against us that could adversely affect our operating results and future sales.

          If our contract manufacturers are unable or unwilling to continue manufacturing our products in required volumes and to meet our quality specifications, or if they significantly increase their prices, whether caused by uncertain global economic conditions, tightening of the credit markets, their weak financial condition or otherwise, we will have to procure components on their behalf in the short term and identify one or more acceptable alternative contract manufacturers. The process of identifying and qualifying a new contract manufacturer can be time consuming, and we may not be able to substitute suitable alternative contract manufacturers in a timely manner or at acceptable prices. Additionally, transitioning to new contract manufacturers may cause delays in supply if the new contract manufacturers have difficulty manufacturing products to our specifications or quality standards and may result in unexpected costs to our business. Furthermore, we do not own the electronic design for our IP phones, hence it may be more difficult or costly for us to change the contract manufacturer of our phones or to arrange for an alternate of or a replacement for these products in a timely manner should a transition be required. This could also subject us to the risk that our competitors could obtain phones containing technology that is the same as or similar to the technology in our phones.

          Any disruption in the supply of products from our contract manufacturers may harm our business and could result in a loss of sales and an increase in production costs resulting in lower gross product margins, which could adversely affect our business and results of operations.

          Our operating results may fluctuate in the future, which could cause our stock price to decline.

          Our historical revenues and operating results have varied from quarter to quarter. Moreover, our actual or projected operating results for some quarters may not meet the expectations of stock market analysts and investors, which may cause our stock price to decline. In addition to the factors discussed elsewhere in this Risk Factors” section, a number of factors may cause our revenue to fall short of our expectations or cause fluctuations in our operating results, including:

 

 

 

 

the purchasing and budgeting cycles of enterprise customers;

 

 

 

 

the timing and volume of shipments of our products during a quarter, particularly as we have recently begun to experience an increased level of sales occurring towards the end of a quarter;

 

 

 

 

delays in purchasing decisions by our customers from one quarter to the next, or later;

 

 

 

 

adverse conditions specific to the IP telecommunications market, including decreased demand due to overall economic conditions or reduced discretionary spending by enterprises, rates of adoption of IP telecommunications systems and introduction of new standards;

 

 

 

 

the amount and timing of operating costs related to the maintenance and expansion of our business, operations and infrastructure;

 

 

 

 

the timing of recognition of revenue from sales to our customers;

 

 

 

 

the timing and success of new product introductions by us or our competitors;

 

 

 

 

changes in our or our competitors’ pricing policies or sales terms;

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changes in the mix of our products and services sold during a particular period;

 

 

 

 

our ability to control costs, including third-party manufacturing costs and costs of components;

 

 

 

 

our ability to obtain sufficient supplies of components;

 

 

 

 

our ability to maintain sufficient production volumes for our products from our contract manufacturers;

 

 

 

 

volatility in our stock price, which may lead to higher stock compensation expenses pursuant to Statement of Financial Accounting Standards No. 123(R), Share-Based Payment;

 

 

 

 

volatility and fluctuation in foreign currency exchange rates;

 

 

 

 

the timing of costs related to the development or acquisition of technologies or businesses;

 

 

 

 

changes in domestic and international regulatory environments affecting the internet and telecommunications industries;

 

 

 

 

our ability to successfully expand our international operations;

 

 

 

 

seasonality in our target markets;

 

 

 

 

general economic conditions or economic recession;

 

 

 

 

decline in interest rates on our investments; and

 

 

 

 

publicly-announced litigation, and the impact of such litigation on our operating results.

          Because our operating expenses are largely fixed in the short-term, any shortfalls in revenue in a given period would have a direct and adverse effect on our operating results in that period. We believe that our quarterly and annual revenue and results of operations may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of one period as an indication of future performance.

          The gross margins on our products may decrease due to competitive pressures or otherwise, which could negatively impact our profitability.

          It is possible that the gross margins on our products will decrease in the future in response to competitive pricing pressures, new product introductions by us or our competitors, changes in the costs of components, manufacturing issues, royalties we need to pay to use certain intellectual property, or other factors. If we experience decreased gross margins and we are unable to respond in a timely manner by introducing and selling new, higher-margin products successfully and continually reducing our product costs, our gross margins may decline, which will harm our business and results of operations.

 

 

 

The market in which we operate is intensely competitive, and many of our competitors are larger, more established and better capitalized than we are.

          The market for IP telecommunications and other telecommunications systems is extremely competitive. Our competitors include companies that offer IP systems, such as Cisco Systems, Inc. and that offer hybrid systems, such as Alcatel-Lucent, Avaya, Mitel Networks Corporation and Nortel Networks Corporation. In addition, we compete with much larger companies such as Microsoft in the unified communications market. Several of the companies that offer hybrid systems are beginning to also offer IP telecommunications systems. Many of our competitors are substantially larger and have greater financial, technical, research and development, sales and marketing, manufacturing, distribution and other resources. We could also face competition from new market entrants, whether from new ventures or from established companies moving in to the market. These competitors have various other advantages over us, including:

 

 

 

 

greater market presence, name recognition and brand reputation;

 

 

 

 

larger distribution channels;

 

 

 

 

a larger installed base of telecommunications and networking systems with enterprise customers;

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larger and more geographically distributed services and support organizations and capabilities;

 

 

 

 

a broader offering of telecommunications and networking products, applications and services;

 

 

 

 

a more established international presence to address the needs of global enterprises;

 

 

 

 

larger patent and intellectual property portfolios;

 

 

 

 

longer operating histories;

 

 

 

 

a longer history of implementing large-scale telecommunications or networking systems;

 

 

 

 

more established relationships with industry participants, customers, suppliers, distributors and other technology companies; and

 

 

 

 

the ability to acquire technologies or consolidate with other companies in the industry to compete more effectively.

          Given their capital resources, many of these competitors are in a better position to withstand any significant reduction in capital spending by enterprise customers on telecommunications equipment and are not as susceptible to downturns in a particular market. This risk is enhanced because we focus our business solely on the enterprise IP telecommunications market and do not have a diversified portfolio of products that are applicable to other market segments.

          We compete primarily on the basis of price, feature set, reliability, scalability, usability, total cost of ownership and service. Because our competitors have greater financial strength than we do and are able to offer a more diversified bundle of products and services, they have offered and in the future may offer telecommunications products at lower prices than we do. These larger competitors can also bundle products with other services, such as hosted or managed services, effectively reducing the price of their products. In order to remain competitive from a cost perspective, we have in the past reduced the prices of our products, and we may be required to do so in the future, in order to gain enterprise customers. Price reductions could have a negative effect on our gross margins.

          Our competitors may also be able to devote more resources to developing new or enhanced products, including products that may be based on new technologies or standards. If our competitors’ products become more accepted than our products, our competitive position will be impaired and we may not be able to increase our revenue or may experience decreased gross margins. If any of our competitors’ products or technologies become the industry standard, if they are successful in bringing their products to market earlier, or if their products are more technologically capable than ours, then our sales could be materially adversely affected. We may not be able to maintain or improve our competitive position against our current or future competitors, and our failure to do so could materially and adversely affect our business.

 

 

 

As voice and data networks converge, we are likely to face increased competition from Microsoft and other companies in the information technology, personal and business applications and software industries.

          The convergence of voice and data networks and their wider deployment by enterprises has led information technology and communication applications deployed on converged networks to become more integrated. This integration has created an opportunity for the leaders in information technology, personal and business applications and the software that connects the network infrastructure to those applications, to enter the telecommunications market and offer products that compete with our systems, commonly referred to as Unified Communications. Competition from these potential market entrants may take many forms, and they may offer products and applications similar to those we offer. For example, Microsoft Corporation has announced its unified communications product roadmap. This includes Office Communicator 2007,” which Microsoft states allows end users to control communications, including voice over IP, through the Office Communicator application on their PC, which provides functionality that competes with our Personal Call Manager application. Microsoft has also introduced Office Communications Server 2007,” a product that offers competing unified messaging capabilities. Microsoft has also developed an IP phone and has licensed the rights to produce such phones to third parties. Microsoft and other leaders in the information technology, personal and business applications and software industries, have substantial financial and other resources that they could devote to this market.

          If Microsoft continues to move into the telecommunications market or if other new competitors from the information technology, personal and business applications or software industries enter the telecommunications market, the market for IP telecommunications systems will become increasingly competitive. If the solutions offered by Microsoft or other new competitors achieve substantial market penetration, or if we cannot integrate our products with Microsoft’s, we may not be able to maintain or improve our market position, and our failure to do so could materially and adversely affect our business and results of operations.

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If the emerging market for enterprise IP telecommunications systems does not continue to grow and if we do not increase our market share, our future business would be harmed.

    The market for enterprise IP telecommunications systems is evolving rapidly and is characterized by an increasing number of market entrants. As is typical of a new and rapidly evolving industry, the demand for and market acceptance of, enterprise IP telecommunications systems products and services are uncertain. We cannot assure you that enterprise telecommunications systems that operate on IP networks will become widespread. In particular, enterprises that have already invested substantial resources in other means of communicating information may be reluctant or slow to implement an IP telecommunications system that can require significant initial capital expenditures as compared to a hybrid system that might require a lower initial capital expenditure despite higher potential total expenditures over the long term. If the market for enterprise IP telecommunications systems fails to develop or develops more slowly than we anticipate, our products could fail to achieve market acceptance, which in turn could significantly harm our business. This growth may be inhibited by a number of factors, such as:

 

 

 

 

initial costs of implementation for a new system;

 

 

 

 

quality of infrastructure;

 

 

 

 

security concerns;

 

 

 

 

equipment, software or other technology failures;

 

 

 

 

regulatory encroachments;

 

 

 

 

inconsistent quality of service;

 

 

 

 

perceived unreliability or poor voice quality over IP networks as compared to circuit-switched networks; and

 

 

 

 

lack of availability of cost-effective, high-speed network capacity.

          Moreover, as IP-based data communications and telecommunications usage grow, the infrastructure used to support these services, whether public or private, may not be able to support the demands placed on them and their performance or reliability may decline.

          Even if enterprise IP telecommunications systems become more widespread in the future, we cannot assure you that our products will attain broad market acceptance. We estimate that our sales represent a very small percentage of the total available market for enterprise IP telecommunications systems. We must increase our market penetration in order to maintain and expand our business.

 

 

 

If we fail to manage our growth effectively, our business could be harmed.

We recently announced that we plan to further expand our operations, particularly in sales headcount, channel partnerships, and the number and size of enterprise customers implementing our systems. We will need to increase our operating expenses in order to fund this expansion. This growth will place a significant strain on our management, administrative, operational and financial infrastructure. Our success will depend upon our ability to manage this growth effectively. If we do not increase our revenues commensurate to our increased spending, we will not be profitable. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Failure to effectively manage growth could result in difficulty in filling enterprise customer orders, declines in product quality or customer satisfaction, increases in costs, production and distribution difficulties, and any of these difficulties could adversely impact our business performance and results of operations.

 

 

 

Our sales cycle can be lengthy and unpredictable, which makes it difficult to forecast the amount of our sales and operating expenses in any particular period.

          The sales cycle for our products typically ranges from six to twelve months, or longer. Part of our strategy is to increasingly target our sales efforts on larger enterprises. Because the sales cycle for large enterprises is generally longer than for smaller enterprises, our sales cycle in the future may be even longer than it has been historically. As a result, we may have limited ability to forecast whether or in which period a sale will occur. The success of our product sales process is subject to many factors, some of which we have little or no control over, including:

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the timing of enterprise customers’ budget cycles and approval processes;

 

 

 

 

a technical evaluation or trial by potential enterprise customers;

 

 

 

 

our ability to introduce new products, features or functionality in a manner that suits the needs of a particular enterprise customer;

 

 

 

 

the announcement or introduction of competing products; and

 

 

 

 

the strength of existing relationships between our competitors and potential enterprise customers.

          We may expend substantial time, effort and money educating our current and prospective enterprise customers as to the value of, and benefits delivered by, our products, and ultimately fail to produce a sale. If we are unsuccessful in closing sales after expending significant resources, our operating results will be adversely affected. Furthermore, if sales forecasted for a particular period do not occur in such period, our operating results for that period could be substantially lower than anticipated and the market price of our common stock could decline.

 

 

 

If we fail to develop and introduce new products and features in a timely manner, or if we fail to manage product transitions, we could experience decreased revenue or decreased selling prices in the future.

          Our future growth depends on our ability to develop and introduce new products successfully. Due to the complexity of the type of products we produce, there are significant technical risks that may affect our ability to introduce new products and features successfully. For example, our future success will depend in part on our ability to introduce new applications such as contact center systems, which are based on complex software, and our ability to integrate our products with other business applications, such as Microsoft Office. In addition, we must commit significant resources to developing new products and features before knowing whether our investments will result in products that are accepted by the market. The success of new products depends on many factors, including:

 

 

 

 

the ability of our products to compete with the products and solutions offered by our competitors;

 

 

 

 

the cost of our products;

 

 

 

 

the reliability of our products;

 

 

 

 

the timeliness of the introduction and delivery of our products; and

 

 

 

 

the market acceptance of our products.

          If we are unable to develop and introduce new products in a timely manner or in response to changing market conditions or enterprise customer requirements, or if these products do not achieve market acceptance, our operating results could be materially and adversely affected.

          Product introductions by us in future periods may also reduce demand for, or cause price declines with respect to, our existing products. As new or enhanced products are introduced, we must successfully manage the transition from older products, avoid excessive levels of older product inventories and ensure that sufficient supplies of new products can be delivered to meet enterprise customer demand. Our failure to do so could adversely affect our revenue, gross margins and other operating results.

 

 

 

Our products incorporate some sole sourced components and the inability of these sole source suppliers to provide adequate supplies of these components may prevent us from selling our products for a significant period of time or limit our ability to deliver sufficient amounts of our products.

          We rely on sole or limited numbers of suppliers for several key components utilized in the assembly of our products. For example, we source semiconductors that are essential to the operation of our phones from separate single suppliers, and we have not identified or qualified any alternative suppliers for these components. We do not have supply agreements with our sole source suppliers, and the components for our products are typically procured by our contract manufacturers. If we lose access to these components we may not be able to sell our products for a significant period of time, and we could incur significant costs to redesign our products or to qualify alternative suppliers. This reliance on a sole source or limited number of suppliers involves several additional risks, including:

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supplier capacity constraints;

 

 

 

 

price increases;

 

 

 

 

purchasing lead times;

 

 

 

 

timely delivery; and

 

 

 

 

component quality.

          This reliance is exacerbated by the fact that we maintain a relatively small amount of inventory and our contract manufacturers typically acquire components only as needed. As a result, our ability to respond to enterprise customer orders efficiently may be constrained by the then-current availability or the terms and pricing of these components. Disruption or termination of the supply of these components could delay shipments of our products and could materially and adversely affect our relationships with current and prospective enterprise customers. Also, from time to time we have experienced component quality issues with products obtained from our contract manufacturers. In addition, any increase in the price of these components could reduce our gross margin and adversely impact our profitability. We may not be able to obtain a sufficient quantity of these components to meet the demands of enterprise customers in a timely manner or that prices of these components may increase. In addition, problems with respect to yield and quality of these components and timeliness of deliveries could occur. These delays could also materially and adversely affect our operating results.

 

 

 

If we fail to offer high quality customer support and services, our business would suffer.

          Once our telephone systems are deployed within our end customers’ sites, our customers depend on our support organization to resolve any issues relating to our products. A high level of customer support and services is important for the successful marketing and sale of our products. If we or our channel partners do not help our customers quickly resolve post-deployment issues and provide effective ongoing support, our ability to sell our products to existing customers would suffer and our reputation with potential customers would be harmed. Many of our channel partners offer primary support for the products they sell to customers. If the channel partners fail to provide timely and effective services, our business could be harmed. As we expand our sales, we will be required to hire and train additional support personnel. In addition, as we expand our operations internationally, our support organization will face additional challenges including those associated with delivering support, training and documentation in languages other than English. If we fail to maintain high quality customer support or to grow our support organization to match any future sales growth, our business will suffer.

 

 

 

If we fail to forecast demand for our products accurately, we may have excess or insufficient inventory, which may increase our operating costs, decrease our revenues and harm our business.

          We generate forecasts of future demand for our products several months prior to the scheduled delivery to our prospective customers and typically prior to receiving a purchase order from our customers. We therefore make significant investments before our resellers or customers are contractually obligated to purchase our products and before we know if corresponding shipment forecasts will be changed. Our resellers and customers are not contractually bound by the forecasts they provide us until they sign a purchase order, and the orders we ultimately receive often differ from original forecasts. If we underestimate demand for our products, we will have inadequate inventory, which could result in delays in shipments, loss of orders and reduced revenues. This is exacerbated by the fact that lead times for materials and components that we need can vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. On the other hand, if we overestimate demand for our products and increase our inventory in anticipation of customer orders that do not materialize, we will have excess inventory and we will face a risk of significant inventory write-downs. Our failure to forecast demand accurately on a timely basis could result in a decrease in our revenues and gross margins.

 

 

 

Our products are highly complex and may contain undetected software or hardware errors, which could harm our reputation and future product sales.

          Because our enterprise customers rely on our products for telecommunications, an application that is critical to their business, any failure to provide high quality and reliable products, whether caused by our own failure or failures by our contract manufacturer or suppliers, could damage our reputation and reduce demand for our products. Our products have in the past contained, and may in the future contain, undetected errors or defects. Some errors in our products may only be discovered after a product has been installed and used by enterprise customers. Any errors or defects discovered in our products after commercial release could result in loss of revenue, loss of enterprise customers and increased service and warranty costs, any of which could adversely affect our business. In addition, we could face claims for product liability, tort or breach of warranty. Our purchase orders contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is

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costly and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely affected.

 

 

 

If we fail to respond to technological changes and evolving industry standards, our products could become obsolete or less competitive in the future.

          The telecommunications industry is highly competitive and characterized by rapidly changing technologies and standards, frequent product introductions and short product life cycles. Accordingly, our operating results depend upon, among other things, our ability to develop and introduce new products and our ability to reduce production costs of existing products. The process of developing new technologies and products is complex, and if we are unable to develop enhancements to, and new features for, our existing products or acceptable new products that keep pace with technological developments or industry standards, our products may become obsolete, less marketable and less competitive and our business will be harmed.

          In addition, as industry standards evolve, it is possible that one standard becomes predominant in the market. This could facilitate the entry into the market of competing products, which could result in significant pricing pressure. Additionally, if one standard becomes predominant and we adopt that standard, enterprises may be able to create a unified, integrated system by using phones, switches, servers, applications, or other telecommunications products produced by different companies. Therefore, we may be unable to sell complete systems to enterprise customers because the enterprise customers elect to purchase portions of their telecommunications systems from our competitors. For example, if a single industry standard is adopted, customers may elect to purchase our switches, but could purchase software applications and phones from other vendors. This could reduce our revenue and gross margins if enterprise customers instead purchase primarily lower-margin products from us. Conversely, if one standard becomes predominant, and we do not adopt it, potential enterprise customers may choose to buy a competing system that is based on that standard.

 

 

 

Our future success depends on our ability to attract, integrate and retain key personnel, and our failure to do so could harm our ability to grow our business.

          Our future success will depend, to a significant extent, on our ability to attract, integrate and retain our key personnel, namely our management team and experienced sales and engineering personnel. We may experience difficulty assimilating our newly hired personnel, which may adversely affect our business. In addition, we must retain and motivate high quality personnel, and we must also attract and assimilate other highly qualified employees. Competition for qualified management, technical and other personnel can be intense, and we may not be successful in attracting and retaining such personnel. Competitors have in the past and may in the future attempt to recruit our employees, and our management and key employees are not bound by agreements that could prevent them from terminating their employment at any time. If we fail to attract, integrate and retain key employees, our ability to manage and grow our business could be harmed.

 

 

 

We intend to expand our international operations, which could expose us to significant risks.

          To date we have limited international operations and have had low amounts of revenue from international enterprise customers. The future success of our business will depend, in part, on our ability to expand our operations and enterprise customer base successfully worldwide. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks that are different from those in the United States. Because of our limited experience with international operations, our international expansion efforts may not be successful. In addition, we will face risks in doing business internationally that could adversely affect our business, including:

 

 

 

 

our ability to comply with differing technical and environmental standards and certification requirements outside the United States;

 

 

 

 

difficulties and costs associated with staffing and managing foreign operations;

 

 

 

 

greater difficulty collecting accounts receivable and longer payment cycles;

 

 

 

 

the need to adapt our products for specific countries;

 

 

 

 

availability of reliable broadband connectivity and wide area networks in targeted areas for expansion;

 

 

 

 

unexpected changes in regulatory requirements;

 

 

 

 

difficulties in understanding and complying with local laws, regulations and customs in foreign jurisdictions;

- 19 -



 

 

 

 

tariffs, export controls and other non-tariff barriers such as quotas and local content rules;

 

 

 

 

more limited protection for intellectual property rights in some countries;

 

 

 

 

adverse tax consequences;

 

 

 

 

fluctuations in currency exchange rates, which could increase the price of our products outside of the United States, increase the expenses of our international operations and expose us to foreign currency exchange rate risk;

 

 

 

 

restrictions on the transfer of funds; and

 

 

 

 

new and different sources of competition.

Our failure to manage any of these risks successfully could harm our future international operations and our overall business.

 

 

 

We are subject to environmental and other health and safety regulations that may increase our costs of operations or limit our activities.

          We are subject to environmental and other health and safety regulations relating to matters such as reductions in the use of harmful substances, the use of lead-free soldering and the recycling of products and packaging materials. For example, the European Parliament and the Counsel of the European Union have published directives on waste electrical and electronic equipment and on the restriction of the use of certain hazardous substances in electrical and electronic equipment. These directives generally require electronics producers to bear the cost of collection, treatment, recovery and safe disposal of past and future products from end users and to ensure that new electrical and electronic equipment does not contain specified hazardous substances. While the cost of these directives to us cannot be determined before regulations are adopted in individual member states of the European Union, it may be substantial and may divert resources, which could detract from our ability to develop new products or operate our business, particularly if we increase international operations. We may not be able to comply in all cases with applicable environmental and other regulations, and if we do not, we may incur remediation costs or we may not be able to offer our products for sale in certain countries, which could adversely affect our results.

 

 

 

Some of our competitors could design their products to prevent or impair the interoperability of our products with enterprise customers’ networks, which could cause installations to be delayed or cancelled.

           Our products must interface with enterprise customer software, equipment and systems in their networks, each of which may have different specifications. To the extent our competitors supply network software, equipment or systems to our enterprise customers, it is possible these competitors could design their technologies to be closed or proprietary systems that are incompatible with our products or to work less effectively with our products than their own. As a result, enterprise customers would be incentivized to purchase products that are compatible with the products and technologies of our competitors over our products. A lack of interoperability may result in significant redesign costs and harm relations with our enterprise customers. If our products do not interoperate with our enterprise customers’ networks, installations could be delayed or orders for our products could be cancelled, which would result in losses of revenue and enterprise customers that could significantly harm our business.

 

 

 

Our products require reliable broadband connections, and we may be unable to sell our products in markets where broadband connections are not yet widely available.

          End users of our products must have reliable access to an enterprise customer’s wide area network in order for our products to perform properly. Accordingly, it is not likely that there will be demand for our products in geographic areas that do not have a sufficiently reliable infrastructure of broadband connections. Many geographic locations do not have reliable infrastructure for broadband connections, particularly in some international markets. Our future growth could be limited if broadband connections are not or do not become widely available in markets that we target.

 

 

 

If our enterprise customers experience inadequate performance with their wide area networks, even if unrelated to our systems, our product performance could be adversely affected, which could harm our relationships with current enterprise customers and make it more difficult to attract new enterprise customers.

          Our products depend on the reliable performance of the wide area networks of enterprise customers. If enterprise customers experience inadequate performance with their wide area networks, whether due to outages, component failures, or otherwise, our product performance would be adversely affected. As a result, when these types of problems occur with these networks, our enterprise customers may not be able to immediately identify the source of the problem, and may conclude that the problem is related to our products. This could harm our relationships with our current enterprise customers and make it more difficult to attract new enterprise customers, which could harm our business.

- 20 -



 

 

 

We might require additional capital to support our business in the future, and this capital might not be available on acceptable terms, or at all.

          Although we anticipate that our current cash, cash equivalents and short-term investments on hand will be sufficient to meet our currently anticipated cash needs through fiscal 2010, if our cash and cash equivalents balances and any cash generated from operations and from our initial public offering are not sufficient to meet our future cash requirements, we will need to seek additional capital, potentially through debt or equity financings, to fund our operations. We may also need to raise additional capital to take advantage of new business or acquisition opportunities. We may seek to raise capital by, among other things:

 

 

 

 

issuing additional common stock or other equity securities;

 

 

 

 

issuing debt securities; or

 

 

 

 

borrowing funds under a credit facility.

    We may not be able to raise needed cash on terms acceptable to us or at all. Financings, if available, may be on terms that are dilutive or potentially dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the initial public offering price. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of common stock. In addition, if we were to raise cash through a debt financing, such debt may impose conditions or restrictions on our operations, which could adversely affect our business. If new sources of financing are required but are insufficient or unavailable, we would be required to modify our operating plans to the extent of available funding, which would harm our ability to maintain or grow our business.

 

 

 

We are exposed to fluctuations in the market value of our money market funds and investments and financial pressure on investment institutions managing our investments may lead to restrictions on access to our investments which could harm our financial condition.

          We maintain an investment portfolio of various holdings and maturities. These securities are recorded on our consolidated balance sheets at fair value. This portfolio includes money market funds, bonds and commercial paper of various issuers. If the debt of these issuers is downgraded, the carrying value of these investments could be impaired. In addition, we could also face default risk from some of these issuers, which could also cause the carrying value to be impaired.

 

 

 

Our products include third-party technology and intellectual property, which could present additional risks.

          We incorporate certain third-party technologies, such as our contact center, collaboration bridge and network monitoring software, into our products, and intend to utilize additional third-party technologies in the future. However, licenses to relevant third-party technology or updates to those technologies may not continue to be available to us on commercially reasonable terms, or at all. Furthermore, we do not own the electronic design for our phones, so it may be difficult for us to arrange for an alternate of or a replacement for these products in a timely manner. Therefore, we could face delays in product releases until equivalent technology can be identified, licensed or developed, and integrated into our current products. These delays, if they occur, could materially adversely affect our business.

 

 

 

Failure to protect our intellectual property could substantially harm our business.

          Our success and ability to compete are substantially dependent upon our intellectual property. We rely on patent, trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, enterprise customers, strategic partners and others to protect our intellectual proprietary rights. However, the steps we take to protect our intellectual property rights may be inadequate. We currently have a small number of issued U.S. patents and a small number of patent applications pending in the U.S. and outside the U.S. We cannot assure you that any additional patents will be issued. Even if patents are issued, they may not adequately protect our intellectual property rights or our products against competitors, and third-parties may challenge the scope, validity and/or enforceability of our issued patents. In addition, other parties may independently develop similar or competing technologies designed around any patents that may be issued to us.

          In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect such rights. We may not be able to detect infringement, and may lose our competitive position in the market before we are able to do so. In the event that we detect any infringement of our intellectual property rights, we intend to enforce such rights vigorously, and from time to time we may initiate claims against third parties that we believe are infringing on our intellectual property rights if we are unable to resolve matters satisfactorily through negotiation. Litigation brought to protect and enforce our intellectual property

- 21 -


rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect and enforce our intellectual property rights could harm our brand and adversely impact our business, financial condition and results of operations.

 

 

 

If a third party asserts that we are infringing on its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, which could harm our business.

          There is considerable patent and other intellectual property development activity in our industry. Our success depends, in part, upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, own or claim to own intellectual property relating to our industry and may have substantially larger and broader patent portfolios than we do. From time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. Third-parties have in the past sent us correspondence regarding their intellectual property and have filed litigation against us, and in the future we may receive claims that our products infringe or violate their intellectual property rights. In this regard, in 2007, Mitel Networks Corporation, one of our competitors, filed a lawsuit against us. Furthermore, we may be unaware of the intellectual property rights of others that may cover some or all of our technology or products. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from selling our products, damage our reputation, or require that we comply with other unfavorable terms, any of which could materially harm our business. In addition, we may decide to pay substantial settlement costs in connection with any claim or litigation, whether or not successfully asserted against us. Even if we were to prevail, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

          Litigation with respect to intellectual property rights in the telecommunications industries is not uncommon and can often involve patent holding companies who have little or no product revenue and against whom our own patents may provide little or no deterrence. We may also be obligated to indemnify our enterprise customers or business partners in connection with any such litigation, which could further exhaust our resources. Furthermore, as a result of an intellectual property challenge, we may be required to enter into royalty, license or other agreements. We may not be able to obtain these agreements on terms acceptable to us or at all. We may have to incur substantial cost in re-designing our products to avoid infringement claims. In addition, disputes regarding our intellectual property rights may deter distributors from selling our products and dissuade potential enterprise customers from purchasing such products. As such, third-party claims with respect to intellectual property may increase our cost of goods sold or reduce the sales of our products, and may have a material and adverse effect on our business.

 

 

 

We face certain litigation risks.

          We are a party to certain lawsuits. Litigation can be lengthy, time-consuming, expensive, and disruptive to normal business operations and may divert management time and resources. The results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, results of operations or financial condition. In addition, we may incur higher general and administrative expenses than we have in the past in order to defend and prosecute this litigation which could adversely affects our operating results. For additional information regarding the material lawsuits in which we are involved, see Item 3 Legal Proceedings.”

 

 

 

If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.

          The Sarbanes-Oxley Act of 2002 requires, among other things, that we establish and maintain internal control over financial reporting and disclosure controls and procedures. In particular, under the current rules of the SEC, beginning with the year ended June 30, 2008, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our independent registered public accounting firm is also required to report on our internal control over financing reporting. Our and our auditor’s testing may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses and render our internal control over financial reporting ineffective. As a result of the error in the computation of the forfeiture rate used in computing our stock-based compensation expense, we have determined that we had a material weakness in our internal control over financial reporting as of June 30, 2009. While we have taken steps to remediate this material weakness, we will not be able to assess whether the steps we are taking will fully remedy the material weakness in our internal control over financial reporting until we have fully implemented them and a sufficient time passes in order to evaluate their effectiveness. We have incurred and we expect to continue to incur substantial accounting and auditing expense and expend significant management time in complying with the requirements of Section 404. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we and our independent registered

- 22 -


public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to investigations or sanctions by the SEC, The NASDAQ Stock Market, or NASDAQ, or other regulatory authorities or subject to litigation. To the extent any material weaknesses in our internal control over financial reporting are identified in the future, we could be required to expend significant management time and financial resources to correct such material weaknesses or to respond to any resulting regulatory investigations or proceedings.

 

 

 

Our principal offices and the facilities of our contract manufacturers are located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could damage our facilities or the facilities of our contract manufacturers, which could cause us to curtail our operations.

          Our principal offices, our disaster recovery site, and the facilities of one of our contract manufacturers are located in California near known earthquake fault zones and, therefore, are vulnerable to damage from earthquakes. We and our contract manufacturers are also vulnerable to damage from other types of disasters, such as power loss, fire, floods and similar events. If any disaster were to occur, our ability to operate our business could be seriously impaired. In addition, we may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions. Any significant losses that are not recoverable under our insurance policies could seriously impair our business and financial condition.

Risks Related to Ownership of Our Common Stock

 

 

 

Our stock price in the past has been volatile, and may continue to be volatile or may decline regardless of our operating performance, and investors may not be able to resell shares at or above the price at which they purchased the shares.

          Our stock has been publicly traded for a relatively short period of time, having first begun trading in July 2007. During that time our stock price has fluctuated significantly, from a low of approximately $3 per share to a high of approximately $18 per share. At times the stock price has changed very quickly. For example, in January 2008, our stock price dropped from approximately $13 per share to approximately $6 per share, and as a result, we were named in the lawsuits described in Item 3. If investors purchase shares of our common stock, they may not be able to resell those shares at or above the price at which they purchased them. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

 

 

 

fluctuations in the overall stock market;

 

 

 

 

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

 

 

 

actual or anticipated fluctuations in our operating results;

 

 

 

 

changes in operating performance and stock market valuations of other technology companies generally, or those that sell enterprise communication products in particular;

 

 

 

 

changes in financial estimates by any securities analysts who follow our company, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our stock;

 

 

 

 

ratings downgrades by any securities analysts who follow our company;

 

 

 

 

the public’s response to our press releases or other public announcements, including our filings with the SEC;

 

 

 

 

announcements by us or our competitors of significant technical innovations, customer wins or losses, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

 

 

 

introduction of technologies or product enhancements that reduce the need for our products;

 

 

 

 

market conditions or trends in our industry or the economy as a whole;

 

 

 

 

the loss of one or more key customers;

 

 

 

 

the loss of key personnel;

 

 

 

 

the development and sustainability of an active trading market for our common stock;

- 23 -



 

 

 

 

lawsuits threatened or filed against us and the outcome of such lawsuits;

 

 

 

 

future sales of our common stock by our officers, directors and significant stockholders; and

 

 

 

 

other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

          In addition, the stock markets, and in particular the Nasdaq Global Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have initiated securities class action litigation following declines in stock prices of technology companies. Our current litigation is, and any future litigation may, subject us to substantial costs, divert resources and the attention of management from our business, which could harm our business and operating results.

 

 

 

Future sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly, even if our business is doing well.

          Currently, more than 50% of our outstanding shares are held by our venture capital investors. If these investors or any of our existing stockholders sell a large number of shares of our common stock or the public market perceives that these sales may occur, the market price of our common stock could decline. All of our outstanding shares are freely tradable without restriction or further registration under the federal securities laws, subject in some cases to the volume, manner of sale and other limitations under Rule 144. In addition, pursuant to our investor rights agreement, some of our early investors may require us to register their shares for public sale which could result in a substantial volume of shares being sold in a short period of time. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

 

 

 

Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our stock.

          Our restated certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:

 

 

 

 

prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

 

 

 

 

limit who may call a special meeting of stockholders;

 

 

 

 

establish a classified board of directors, so that not all members of our board of directors may be elected at one time;

 

 

 

 

provide our board of directors with the ability to designate the terms of and issue a new series of preferred stock without stockholder approval;

 

 

 

 

require the approval of two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal certain provisions of our certificate of incorporation;

 

 

 

 

allow a majority of the authorized number of directors to adopt, amend or repeal our bylaws without stockholder approval;

 

 

 

 

do not permit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect directors; and

 

 

 

 

set limitations on the removal of directors.

          In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

- 24 -


PART II.

 

 

 

ITEM 6.

SELECTED CONSOLIDATED FINANCIAL DATA

          The following selected financial data should be read in connection with our consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K/A. Our historical results are not necessarily indicative of the results to be expected in any future period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

 


 

 

 

2009
(1)

 

2008
(1)

 

2007
(1)

 

2006

 

2005

 

 

 


 


 


 


 


 

 

 

(In thousands, except per share amounts)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

109,555

 

$

110,496

 

$

87,095

 

$

55,300

 

$

31,970

 

Support and services

 

 

25,267

 

 

18,233

 

 

10,732

 

 

6,308

 

 

3,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 

Total revenue

 

 

134,822

 

 

128,729

 

 

97,827

 

 

61,608

 

 

35,482

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product(2)

 

 

38,149

 

 

37,466

 

 

29,753

 

 

21,855

 

 

13,961

 

Support and services(2)

 

 

11,048

 

 

10,036

 

 

6,847

 

 

5,425

 

 

2,907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 

Total cost of revenue

 

 

49,197

 

 

47,502

 

 

36,600

 

 

27,280

 

 

16,868

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 

Gross profit

 

 

85,625

 

 

81,227

 

 

61,227

 

 

34,328

 

 

18,614

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(2)

 

 

30,724

 

 

26,811

 

 

17,260

 

 

9,720

 

 

7,034

 

Sales and marketing(2)

 

 

44,652

 

 

37,869

 

 

26,174

 

 

15,699

 

 

10,050

 

General and administrative(2)

 

 

19,596

 

 

17,645

 

 

11,674

 

 

4,936

 

 

3,045

 

Litigation settlement

 

 

4,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 

Total operating expenses

 

 

99,082

 

 

82,325

 

 

55,108

 

 

30,355

 

 

20,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 

Operating income (loss)

 

 

(13,457

)

 

(1,098

)

 

6,119

 

 

3,973

 

 

(1,515

)

Other income – net

 

 

1,141

 

 

4,101

 

 

273

 

 

248

 

 

124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 

Income (loss) before provision for income tax

 

 

(12,316

)

 

3,003

 

 

6,392

 

 

4,221

 

 

(1,391

)

Income tax provision

 

 

(343

)

 

(861

)

 

(408

)

 

(219

)

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 

Net income (loss)

 

 

(12,659

)

 

2,142

 

 

5,984

 

 

4,002

 

 

(1,402

)

Accretion of preferred stock

 

 

 

 

 

 

(50

)

 

(51

)

 

(32

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders

 

$

(12,659

)

$

2,142

 

$

5,934

 

$

3,951

 

$

(1,434

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 

Net income (loss) per common share available to common stockholders(3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.29

)

$

0.05

 

$

0.69

 

$

0.60

 

$

(0.27

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 

Diluted

 

$

(0.29

)

$

0.05

 

$

0.17

 

$

0.12

 

$

(0.27

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 



 

Shares used in computing net income (loss) per share available to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

43,714

 

 

42,413

 

 

8,565

 

 

6,609

 

 

5,352

 

Diluted

 

 

43,714

 

 

44,861

 

 

35,581

 

 

33,431

 

 

5,352

 


 

 

(1)

Amounts have been updated to reflect effects of restatement disclosed in note 17 – Restatement of Previously Issued Consolidated Financial Statements to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K/A, amendment no. 1.

- 25 -



 

 


(2)

Includes stock-based compensation expense as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

 


 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 


 


 


 


 


 

 

 

(In thousands)

 

Cost of product revenue

 

$

113

 

$

74

 

$

14

 

$

 

$

 

Cost of support and services revenue

 

 

799

 

 

545

 

 

109

 

 

16

 

 

 

Research and development

 

 

2,829

 

 

2,005

 

 

420

 

 

14

 

 

 

Sales and marketing

 

 

3,468

 

 

2,447

 

 

581

 

 

7

 

 

 

General and administrative

 

 

2,549

 

 

2,360

 

 

1,659

 

 

45

 

 

82

 

 

 



 



 



 



 



 

Total stock-based compensation expense

 

$

9,758

 

$

7,431

 

$

2,783

 

$

82

 

$

82

 

 

 



 



 



 



 



 


 

 

(3)

See Note 5 to our consolidated financial statements for a description of the method used to compute basic and diluted net income (loss) per share available to common stockholders.


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30,

 

 

 


 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 


 


 


 


 


 

 

 

(In thousands)

 

Consolidated balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents and short-term investments

 

$

107,666

 

$

102,811

 

$

17,326

 

$

12,333

 

$

5,373

 

Working capital

 

 

111,617

 

 

111,993

 

 

23,018

 

 

16,208

 

 

10,741

 

Total assets

 

 

155,624

 

 

147,797

 

 

53,034

 

 

30,885

 

 

20,960

 

Redeemable convertible preferred stock

 

 

 

 

 

 

56,341

 

 

56,332

 

 

56,281

 

Total stockholders’ equity (deficit)

 

 

113,772

 

 

113,213

 

 

(31,829

)

 

(41,168

)

 

(45,713

)


 

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed above in the section entitled “Risk Factors.” We report results on a fiscal year ending June 30. For ease of reference within this section, 2009 refers to the fiscal year ended June 30, 2009, 2008 refers to the fiscal year ended June 30, 2008, and 2007 refers to the fiscal year ended June 30, 2007.

Restatement

          The following discussion and analysis of our financial condition and results of operations includes the effects of the restated amounts as disclosed in Note 17 – Restatement of Previously Issued Consolidated Financial Statements to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K/A, Amendment No. 1. For this reason, the data set forth in this section may not be comparable to discussions and data in our previously filed Annual Reports.

Overview

          We are a leading provider of IP telecommunications solutions for enterprises. Our solution is comprised of our ShoreGear switches, ShorePhone IP phones and ShoreWare software applications. We were founded in September 1996 and shipped our first system in 1998. We have continued to develop and enhance our product line since that time. We currently offer a variety of models of our switches and IP phones.

- 26 -


          We sell our products primarily through channel partners that market and sell our systems to enterprises across all industries, including to small, medium and large companies and public institutions. We believe our channel strategy allows us to reach a larger number of prospective enterprise customers more effectively than if we were to sell directly. The number of our authorized channel partners has more than doubled since June 30, 2004 to over 700 as of June 30, 2009. Channel partners typically purchase our products directly from us. Our internal sales and marketing personnel support these channel partners in their selling efforts. In some circumstances, the enterprise customer will purchase products directly from us, but in these situations we typically compensate the channel partner for its sales efforts. At the request of the channel partner, we often ship our products directly to the enterprise customer.

          Most channel partners generally perform installation and implementation services for the enterprises that use our systems. In most cases, our channel partners provide the post-contractual support to the enterprise customer by providing first-level support services and purchasing additional services from us under a post-contractual support contract. For channel partners without support capabilities or that do not desire to provide support, we offer full support contracts to provide all of the support to enterprise customers.

          We outsource the manufacturing of our products to contract manufacturers. Our outsourced manufacturing model allows us to scale our business without the significant capital investment and on-going expenses required to establish and maintain a manufacturing operation. Our phone and switch products are manufactured by contract manufacturers located in California and in China. Our contract manufacturers provide us with a range of operational and manufacturing services, including component procurement, final testing and assembly of our products. We work closely with our contract manufacturers to manage the cost of components, since our total manufacturing costs are directly tied to component costs. We regularly provide forecasts to our contract manufacturers, and we order products from our contract manufacturers based on our projected sales levels well in advance of receiving actual orders from our enterprise customers. We seek to maintain sufficient levels of finished goods inventory to meet our forecasted product sales with limited levels of inventory to compensate for unanticipated shifts in sales volume and product mix.

          Although we have historically sold our systems primarily to small and medium sized enterprises, we expanded our sales and marketing activities to increase our focus on larger enterprise customers. Accordingly, we have a major accounts program whereby our sales personnel assist our channel partners to sell to large enterprise accounts, and we coordinate with our channel partners to enable them to better serve large multi-site enterprises. To the extent we are successful in penetrating larger enterprise customers, we expect that the sales cycle for our products will increase, and that the demands on our sales and support infrastructure will also increase.

          We are headquartered in Sunnyvale, California and the majority of our personnel work at this location. Sales and support personnel are located throughout the United States and, to a lesser extent, in the United Kingdom, Germany, Belgium, Spain, Hong Kong, Singapore and Australia. Most of our enterprise customers are located in the United States. Revenue from international sales has been less than 10% of our total revenue for 2009, 2008, and 2007, respectively. Although we intend to focus on increasing international sales, we expect that sales to enterprise customers in the United States will continue to comprise the significant majority of our sales.

          We have experienced some growth despite the economic recession, with our total revenue growing to $134.8 million for 2009 from $128.7 million for 2008. This growth in revenue has largely been driven by increased revenue from support and services. Our operating expenses have increased significantly to $99.1 million for 2009 from $82.3 million for 2008. This increase in operating expenses is primarily a result of a 2009 litigation settlement, restructuring costs, increases in advertising and promotion expense, facilities expenses, and compensation expense. Compensation expense included increases in stock-based compensation and commissions and reflected higher headcount. We increased headcount from 365 at June 30, 2008 to 375 at June 30, 2009. We expect to continue to add personnel primarily in our sales and customer support areas.

Key Business Metrics

          We monitor a number of key metrics to help forecast growth, establish budgets, measure the effectiveness of sales and marketing efforts and measure operational effectiveness.

          Initial and repeat sales orders. Our goal is to attract a significant number of new enterprise customers and to encourage existing enterprise customers to purchase additional products and support. Many enterprise customers make an initial purchase and deploy additional sites at a later date, and also buy additional products and support as their businesses expand. As our installed enterprise customer base has grown we have experienced an increase in orders attributable to existing enterprise customers, which currently represents a significant portion of our total revenue. For fiscal year 2009 order volume from existing enterprise customers represented approximately 54% of total order volume, while in fiscal year 2007 and 2008 it has been approximately 50%.

- 27 -


          Deferred revenue. Deferred revenue relates to the timing of revenue recognition for specific transactions based on service, support, specific commitments and other factors. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s transactions described above and are recognized as the revenue recognition criteria are met. Nearly all system sales include the purchase of post-contractual support contracts with terms of up to five years, and our renewal rates on these contracts have been high historically. We recognize support revenue on a ratable basis over the term of the support contract. Since we receive payment for support in advance of our recognizing the related revenue, we carry a deferred revenue balance on our consolidated balance sheet. This deferred revenue helps provide predictability to our future support and services revenue. Accordingly, the level of purchases of post-contractual support with our product sales is an important metric for us along with the renewal rates for these services. Our renewal rate on post contractual support contracts was approximately 80% in fiscal year 2009. Our deferred revenue balance at June 30, 2009 was $22.5 million, of which $15.3 million is expected to be recognized within one year.

          Gross margin. Our gross margin for products is primarily affected by our ability to reduce hardware costs faster than the decline in average overall system prices. We strive to increase our product gross margin by reducing hardware costs through product redesign and volume discount pricing from our suppliers. In general, product gross margin on our switches is greater than product gross margin on our IP phones. As the prices and costs of our hardware components have decreased over time, our software components, which have lower costs than our hardware components, have represented a greater percentage of our overall margin on system sales. We consider our ability to monitor and manage these factors to be a key aspect of maintaining product gross margins and increasing our profitability.

          Gross margin for support and services is slightly lower than gross margin for products, and is impacted primarily by personnel costs and labor related expenses. The primary goal of our support and services function is to ensure a high level of customer satisfaction and our investments in support personnel and infrastructure are made with this goal in mind. We expect that as our installed enterprise customer base grows, we will be able to improve gross margin for support and services through economies of scale. However, the timing of additional investments in our support and services infrastructure could materially affect our cost of support and services revenue, both in absolute dollars and as a percentage of support and services revenue and total revenue, in any particular period.

          Operating expense management. Our operating expenses are comprised primarily of compensation and benefits for our employees and, therefore, the increase in operating expenses has been primarily related to increase in our headcount. In recent periods, litigation costs have also adversely affected our operating costs, although with the settlement of the Mitel litigation, we expect these costs to decrease substantially. We intend to expand our workforce to support our anticipated growth, and therefore our ability to forecast revenue is critical to managing our operating expenses.

Basis of Presentation

          Revenue. We derive our revenue from sales of our IP telecommunications systems and related support and services. Our typical system includes a combination of IP phones, switches and software applications. Channel partners buy our products directly from us. Prices to a given channel partner for hardware and software products depend on that channel partner’s volume and customer satisfaction metrics, as well as our own strategic considerations. In circumstances where we sell directly to the enterprise customer in transactions that have been assisted by channel partners, we report our revenue net of any associated payment to the channel partners that assisted in such sales. This results in recognized revenue from a direct sale approximating the revenue that would have been recognized from a sale of a comparable system through a channel partner. Product revenue has accounted for 81%, 86%, and 89% of our total revenue for 2009, 2008 and 2007, respectively.

          Support and services revenue primarily consists of post-contractual support, and to a lesser extent revenue from training services, professional services and installations that we perform. Post-contractual support includes software updates which grant rights to unspecified software license upgrades and maintenance releases issued during the support period. Post-contractual support also includes both Internet- and phone-based technical support. Post-contractual support revenue is recognized ratably over the contractual service period.

          Cost of revenue. Cost of product revenue consists primarily of hardware costs, royalties and license fees for third-party software included in our systems, salary and related overhead costs of operations personnel, freight, warranty costs and provision for excess inventory. The majority of these costs vary with the unit volumes of product sold. Cost of support and services revenue consists of salary and related overhead costs of personnel engaged in support and services.

          Research and development expenses. Research and development expenses primarily include personnel costs, outside engineering costs, professional services, prototype costs, test equipment, software usage fees and facilities expenses. Research and development expenses are recognized when incurred. We capitalize software development costs incurred from determination of technological feasibility through general release of the product to customers. Research and development capitalized and shown under other assets was $0.5 million, $0 and $0 in fiscal 2009, 2008, and 2007, respectively.

- 28 -


          We are devoting substantial resources to the development of additional functionality for existing products and the development of new products and related software applications. We intend to continue to make significant investments in our research and development efforts because we believe they are essential to maintaining and improving our competitive position. Accordingly, we expect research and development expenses to continue to increase in absolute dollars.

          Sales and marketing expenses. Sales and marketing expenses primarily include personnel costs, sales commissions, travel, marketing promotional and lead generation programs, advertising, trade shows, demo equipment, professional services fees and facilities expenses. We plan to continue to invest in development of our distribution channel by increasing the size of our field sales force and the number of our channel partners to enable us to expand into new geographies, including Europe and Asia Pacific, and further increase our sales to large enterprises. In conjunction with channel growth, we plan to increase the investment in our training and support of channel partners to enable them to more effectively sell our products. We also plan to continue investing in our domestic and international marketing activities to help build brand awareness and create sales leads for our channel partners. We expect that sales and marketing expenses will increase in absolute dollars and remain our largest operating expense category.

          General and administrative expenses. General and administrative expenses relate to our executive, finance, human resources, legal and information technology organizations. Expenses primarily include personnel costs, professional fees for legal, accounting, tax, compliance and information systems, travel, recruiting expense, software amortization costs, depreciation expense and facilities expenses. In addition, as we expand our business, we expect to increase our general and administrative expenses.

          Other income (expense). Other income (expense) primarily consists of interest earned on cash and short-term investments and other miscellaneous income (expenses).

          Income tax provision. Income tax provision includes federal, state and foreign tax on our income. From inception through 2005, we accumulated substantial net operating loss and tax credit carryforwards. We account for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes, net operating loss carry-forwards and other tax credits measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized.

          We believe we have had multiple ownership changes, as defined under Section 382 of the Internal Revenue Code, due to significant stock transactions in previous years, which limits the realization of our net operating losses and tax credit carryforwards under Sections 382 and 383 of the Internal Revenue Code in future periods. Based on our final analysis performed in 2008, we believe the provisions of Section 382 results in the forfeiture of significant amount of federal and California net operating loss carry-forward and research and development tax credit carry-forwards.

          Results of Operations

          The following table sets forth selected consolidated statements of operations data as a percentage of total revenue for each of the periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

 


 

 

 

2009

 

2008

 

2007

 

 

 


 


 


 

Revenue:

 

 

 

 

 

 

 

 

 

 

Product

 

 

81

%

 

86

%

 

89

%

Support and services

 

 

19

%

 

14

%

 

11

%

 

 



 



 



 

Total revenue

 

 

100

%

 

100

%

 

100

%

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

Product

 

 

28

%

 

29

%

 

30

%

Support and services

 

 

8

%

 

8

%

 

7

%

 

 



 



 



 

Total cost of revenue

 

 

36

%

 

37

%

 

37

%

 

 



 



 



 

Gross profit

 

 

64

%

 

63

%

 

63

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

23

%

 

21

%

 

18

%

Sales and marketing

 

 

33

%

 

29

%

 

27

%

General and administrative

 

 

14

%

 

13

%

 

12

%

Litigation settlement

 

 

3

%

 

 

 

 

 

 



 



 



 

Total operating expenses

 

 

73

%

 

63

%

 

57

%

 

 



 



 



 

Operating income (loss)

 

 

(9

)%

 

 

 

6

%

Other income, net

 

 

1

%

 

3

%

 

 

Income (loss) before provision for income tax

 

 

(8

)%

 

3

%

 

6

%

Provision for income taxes

 

 

(1

)%

 

(1

)%

 

 

Net income (loss)

 

 

(9

)%

 

2

%

 

6

%

 

 



 



 



 

- 29 -


Fiscal 2009 compared to Fiscal 2008

          Revenue.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 

 

 

 

 


 

Change

 

 

 

June 30,
2009

 

June 30,
2008

 


 

 

 

 

 

$

 

%

 

 

 


 


 


 


 

 

 

(in thousands, except percentages)

 

Revenue

 

$

134,822

 

$

128,729

 

$

6,093

 

 

5

%

          The increase was primarily attributable to increased support and services revenue. Support and services revenue was $25.3 million in 2009, an increase of $7.1 million, or 39%, from $18.2 million in 2008, as a result of a $5.5 million increase in revenue associated with post-contractual support contracts accompanying new system sales, post-contractual support contract renewals, a $0.7 million increase in installations revenue and a $0.6 million increase in training services revenue. Product revenue declined marginally to $109.6 million in 2009 from $110.5 million in 2008 due to a decrease in revenue from ShoreGear switches, IP phones and software licenses, all of which had slight decline in average selling prices, partially offset by higher volumes. The average selling price decline was primarily driven by increased discounting due to the world wide economic recession that reduced the level of IT capital spending at enterprises and specifically impacted the IP Telephony market which has declined significantly in the last year.

          Gross margin.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 

 

 

 

 


 

Change

 

 

 

June 30,
2009

 

June 30,
2008

 


 

 

 

 

 

$

 

%

 

 

 


 


 


 


 

 

 

(in thousands, except percentages)

 

Cost of revenue

 

$

49,197

 

$

47,502

 

$

1,695

 

 

4

%

Gross profit

 

$

85,625

 

$

81,227

 

$

4,398

 

 

5

%

Gross margin

 

 

63.5

%

 

63.1

%

 

n/a

 

 

1

%

          The increase in gross margin was attributable to an increase in support and services gross margin from 45% in 2008 to 56% in 2009. This increase was partially offset by a decline in product gross margin from 66% in 2008 to 65% in 2009 due to a decline in average selling price of our ShoreGear Switches of 10% and a decline in our IP Phones of 2%. Support and services gross margin increased due to support and services revenue increasing by 39% and service costs only increasing by 10%, compared to the same period in 2008. The service costs increase was limited to 10% as the Company deployed employee resources to a lower cost region outside of our California headquarters office. Compensation for support and services employees, the largest category of support and service costs, increased 16% in 2009, primarily due to an increase in stock-based compensation and an increase in headcount from 52 employees at June 30, 2008 to 55 employees at June 30, 2009.

          Operating expenses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 

 

 

 

 


 

Change

 

 

 

June 30,
2009

 

June 30,
2008

 


 

 

 

 

 

$

 

%

 

 

 


 


 


 


 

 

 

(in thousands, except percentages)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

30,724

 

$

26,811

 

$

3,913

 

 

15

%

Sales and marketing

 

$

44,652

 

$

37,869

 

$

6,783

 

 

18

%

General and administrative

 

$

19,596

 

$

17,645

 

$

1,951

 

 

11

%

Litigation settlement

 

$

4,110

 

$

 

$

4,110

 

 

n/a

 

- 30 -


          Research and development. These expenses represented 23% and 21% of total revenue in 2009 and 2008, respectively. Compensation, including stock-based compensation, for research and development employees accounted for $4.1 million of the increase, primarily as a result of increased headcount during the year. The increase in research and development expenses also included $0.2 million each in legal expenses associated with trademark & patent costs and in depreciation, $0.5 million in facilities, $0.3 million corporate bonus and $0.1 million each in travel and software expenses. These increases were primarily offset by a decrease of $1.1 million in non-recurring engineering expenses, and decreases of $0.3 million each in issued equipment expenses related to usage in beta programs and in consulting and professional services.

          Sales and marketing. These expenses represented 33% and 29% of total revenue in 2009 and 2008, respectively. Compensation, including stock-based compensation for sales and marketing employees represented $4.9 million of the increase. The increase in sales and marketing compensation included increases of $1.0 million in stock-based compensation, $1.5 million in commissions and $2.4 million due to increased headcount during the year. Additional increase in sales and marketing expenses included increases of $0.2 million each in restructuring expenses, consulting expenses, facilities expenses, and in travel expenses, and $1.1 million in promotional expenses.

          General and administrative. These expenses represented 14% and 13% of total revenue in 2009 and 2008, respectively. Compensation for general and administrative employees, including stock-based compensation, accounted for $0.6 million of the increase. Additional increases in general and administrative expenses included $0.8 million in the provision for doubtful accounts, $0.1 million each in depreciation expense, employee relations expenses, equipment expenses and restructuring expenses, $0.3 million in sales tax expense and $0.2 million each in telecom and in legal expenses. These increases were partially offset by a decrease of $0.3 million in facilities expenses and $0.2 million in corporate bonus expense.

          Litigation Settlement. We recorded a charge of $4.1 million as a result of the agreement to settle our litigation with Mitel in April 2009.

          Other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 

 

 

 

 


 

Change

 

 

 

June 30,
2009

 

June 30,
2008

 


 

 

 

 

 

$

 

%

 

 

 

 


 


 


 


 

 

 

(in thousands, except percentages)

 

Other Income, net

 

$

1,141

 

$

4,101

 

$

(2,960

)

 

(72

)%

          Other income. Other income is primarily composed of interest earned on our cash and cash equivalents and short-term investments and foreign currency translation gains and losses. The decrease in other income is primarily attributable to reduced interest rates earned on relatively stable cash and investment balances. Interest income decreased $2.8 million, or 66%, from 2008 to 2009 due to substantially lower interest rates. In addition, foreign currency translation losses increased $0.2 million in 2009 compared to 2008.

          Income tax provision.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 

 

 

 

 


 

Change

 

 

 

June 30,
2009

 

June 30,
2008

 


 

 

 

 

 

$

 

%

 

 

 


 


 


 


 

 

 

(in thousands, except percentages)

 

Tax provision

 

$

343

 

$

861

 

$

(518

)

 

(60

)%

- 31 -


          Income tax provision. The income tax provision was $0.3 million in 2009, a decrease of $0.6 million, from approximately $0.9 million in 2008. We incurred a loss before provision for income tax in 2009; however, due to differences related to book vs. tax, we generated taxable income in 2009 and accordingly, we recorded an income tax provision in 2009. We were profitable in 2008 and had an effective tax rate of approximately 28.7% as a result of utilizing portions of the deferred tax asset and reducing the related valuation allowance.

Fiscal 2008 compared to Fiscal 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 


 

Change

 

 

 

June 30,

 

June 30,

 


 

 

 

2008

 

2007

 

$

 

%

 

 

 


 


 


 


 

 

 

(in thousands, except percentages)

 

Revenue

 

$

128,729

 

$

97,827

 

$

30,902

 

 

32

%

          The revenue growth in 2008 was primarily attributable to increased sales of our products and services. Product revenue was $110.5 million in 2008, an increase of $23.4 million, or 27%, from $87.1 million in 2007. Support and services revenue was $18.2 million in 2008, an increase of $7.5 million, or 70%, from $10.7 million in 2007, as a result of increased revenue associated with post-contractual support contracts accompanying new system sales, post-contractual support contract renewals and increased revenue from training services and installations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 


 

Change

 

 

 

June 30,

 

June 30,

 


 

 

 

2008

 

2007

 

$

 

%

 

 

 


 


 


 


 

 

 

(in thousands, except percentages)

 

Cost of revenue

 

$

47,502

 

$

36,600

 

$

10,902

 

 

30

%

Gross profit

 

$

81,227

 

$

61,227

 

$

20,000

 

 

33

%

Gross margin

 

 

63.1

%

 

62.6

%

 

n/a

 

 

1

%

          In 2008, the increase in total gross margin was attributable to support and services gross margin of 45% compared to 36% in 2007. Support and services gross margin increased due to support and services revenue increasing by 70% and service costs only increasing 47%, compared to the same period in 2007. Compensation for support and services employees, the largest category of support and service costs, increased 33% in 2008, as headcount increased from 42 employees at June 30, 2007 to 52 employees at June 30, 2008. The product gross margin remained at 66% in 2008 and 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 


 

Change

 

 

 

June 30,

 

June 30,

 


 

 

 

2008

 

2007

 

$

 

%

 

 

 


 


 


 


 

 

 

(in thousands, except percentages)

 

Research and development

 

$

26,811

 

$

17,260

 

$

9,551

 

 

55

%

Sales and marketing

 

$

37,869

 

$

26,174

 

$

11,695

 

 

45

%

General and administrative

 

$

17,645

 

$

11,674

 

$

5,971

 

 

51

%

          Research and development. These expenses represented 21% and 18% of total revenue in 2008 and 2007, respectively. Compensation, including stock-based compensation, for research and development employees accounted for $6.4 million of the increase, primarily as a result of an increase in headcount to 125 employees at June 30, 2008, from 102 employees at June 30, 2007. Additional increases research and development expenses included $1.6 million in outside engineering charges, $0.8 million in facilities costs and $0.3 million in consulting and professional services.

          Sales and marketing. These expenses represented 29% and 27% of total revenue in 2008 and 2007, respectively. Compensation, including stock-based compensation for sales and marketing employees represented $7.9 million of the increase, primarily as a result of an increase in headcount, to 127 employees at June 30, 2008 from 94 employees at June 30, 2007. Additional

- 32 -


increases in sales and marketing expenses included $1.0 million in travel and entertainment, $0.4 million in consulting and temporary labor costs, $0.2 million each in trade shows, marketing cooperative advertising, and in depreciation expense and $0.3 million each in public relations, issued equipment and facilities expenses.

          General and administrative. These expenses represented 13% and 12% of total revenue in 2008 and 2007, respectively. Compensation for general and administrative employees, including stock-based compensation, accounted for $3.5 million of the increase, primarily as a result of an increase in headcount, to 42 employees at June 30, 2008 from 33 employees at June 30, 2007. Increases in general and administrative expenses included $1.5 million in legal expenses including litigation expenses, $0.8 million in office rent expense, $0.4 million in insurance, and $0.3 million in depreciation. These increases were partially offset by decreases of $0.4 million in recruiting costs and $0.1 million in software license and maintenance fees.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 


 

Change

 

 

 

June 30,

 

June 30,

 


 

 

 

2008

 

2007

 

$

 

%

 

 

 


 


 


 


 

 

 

(in thousands, except percentages)

 

Other Income, net

 

$

4,101

 

$

273

 

$

3,828

 

 

1402

%

          Other income (expense). The increase is primarily attributable to increase in interest income by $3.3 million on account of higher cash and investment balances in 2008 as compared to 2007. Additionally, in 2007 there were expenses of $0.5 million associated with an increase in fair value of preferred stock warrants that were converted in connection with our initial public offering that were partially offset against other income.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 


 

Change

 

 

 

June 30,

 

June 30,

 


 

 

 

2008

 

2007

 

$

 

%

 

 

 


 


 


 


 

 

 

(in thousands, except percentages)

 

Tax provision

 

$

861

 

$

408

 

$

453

 

 

111

%

          Income tax provision. The income tax provision was $0.9 million in 2008, an increase of $0.5 million, from $0.4 million in 2007, primarily due to an increase in our effective tax rate from 6.4% to 28.7%.

Liquidity and Capital Resources

     Cash and Cash Equivalents and Investments.

          The following table summarizes our cash and cash equivalents and short-term investments (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended June 30,

 

 

 


 

 

 

2009

 

2008

 

2007

 

 

 






 

Cash and cash equivalents

 

$

73,819

 

$

68,672

 

$

17,326

 

Short-term investments

 

 

33,847

 

 

34,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 

Total

 

$

107,666

 

$

102,811

 

$

17,326

 

 

 



 



 



 

          As of June 30, 2009, our principal sources of liquidity consisted of cash and cash equivalents and short-term investments of $107.7 million and net accounts receivable of $21.5 million.

          Our principal uses of cash historically have consisted of the purchase of finished goods inventory from our contract manufacturers, payroll and other operating expenses related to the development of new products and purchases of property and equipment.

- 33 -


          We believe that our $107.7 million of cash and cash equivalents and short-term investments at June 30, 2009, together with cash flows from our operations will be sufficient to fund our operating requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products, the continuing market acceptance of our products and acquisition activities. We may enter into agreements relating to potential investments in, or acquisitions of, complementary businesses or technologies in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

          The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

 


 

 

 

2009

 

2008

 

2007

 

 

 


 


 


 

 

 

(In thousands)

 

Cash provided by operating activities

 

$

7,447

 

$

8,153

 

$

7,910

 

Cash used in investing activities

 

$

(5,494

)

$

(36,519

)

$

(2,224

)

Cash provided by (used in) financing activities

 

$

3,194

 

$

79,712

 

$

(693

)

     Cash flows from operating activities

          Our cash flows from operating activities are significantly influenced by our cash expenditures to support the growth of our business in areas such as research and development, sales and marketing and administration. Our operating cash flows are also influenced by our working capital needs to support growth and fluctuations in inventory, accounts receivable, vendor accounts payable and other assets and liabilities. We procure finished goods inventory from our contract manufacturers and typically pay them within 30-60 days. We extend credit to our channel partners and typically collect in 30 to 60 days, although these time periods can vary and can be longer.

          Cash provided by operating activities is generated by net income (loss) adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was $7.4 million for 2009 as compared to cash provided by operations of $8.2 million for 2008 and $7.9 million for 2007. The decline in cash provided by operations in fiscal year 2009 compared to fiscal year 2008 resulted primarily from our net loss of $12.7 million, offset by noncash adjustments. Noncash adjustments were higher in 2009 compared to 2008, including stock-based compensation expense, which was higher in 2009 by $2.3 million. Noncash adjustments included $9.8 million in stock-based compensation, $1.1 million in provision for doubtful accounts, $0.2 million loss on disposal of property and equipment and $2.0 million in depreciation expense. These were partially offset by $0.2 million in excess tax benefits from stock options exercised. In addition, the period-to-period change in cash flows relating to operating activities is composed of increases in deferred revenue of $3.8 million, primarily due to the deferral of revenue from sales of post contractual support contracts exceeding the revenue recognized from post contractual support contracts, and increases in accrued liabilities and other of $2.3 million and in accounts payable of $1.8 million, decreases in prepaid expenses and other current assets of $0.5 million, and inventory of $0.2 million. These sources of cash were partially offset by uses of cash associated with an increase in accounts receivable of $0.6 million due to increased sales in 2009 compared to 2008.

          Net cash provided by operating activities in 2008 partly consisted of net income of $2.1 million. Noncash adjustments were higher in 2008 compared to 2007, including stock-based compensation expense, which was higher in 2008 by $4.6 million. This was partially offset by a higher deferred tax benefit of $1.7 million in 2008. In addition, the period-to-period change in cash flows relating to operating activities was also affected by an increase in deferred revenue of $4.7 million, primarily due to the deferral of revenue from sales of post contractual support contracts exceeding the revenue recognized from post contractual support contracts, and an increase in accrued liabilities and other of $2.3 million, accrued employee compensation of $1.8 million, primarily attributable to increased headcount. These sources of cash were partially offset by uses of cash associated with an increase in accounts receivable of $2.7 million due to increased sales in 2008 compared to 2007, an increase in inventories of $5.0 million primarily due to business growth and an increase in other assets of $1.9 million.

          Net cash provided by operating activities in 2007 primarily consisted of net income of $6.0 million, stock-based compensation expense of $2.8 million, depreciation and amortization expense of $1.0 million, increase in fair value of the preferred stock warrants by $0.5 million. This was partially off-set by a decrease of $2.4 million related to net changes in assets and liabilities. Of this $2.4 million decrease, the primary sources of cash out-flow were increases to accounts receivable of $8.2 million, inventories of $2.4 million and prepaid and other current assets of $2.5 million which was partially off-set by increased deferred revenue relating to support contracts of $7.4 million and increased accounts payable of $2.0 million.

- 34 -


     Cash flows from investing activities

          We have classified our investment portfolio as available for sale and our investments are made with a policy of capital preservation and liquidity as the primary objectives. We may hold investments to maturity; however, we may sell an investment at any time if the quality rating of the investment declines, the yield on the investment is no longer attractive or we are in need of cash. Because we invest only in investment securities that are highly liquid with a ready market, we believe that the purchase, maturity or sale of our investments has no material impact to our overall liquidity.

          Net cash used in investing activities was $5.5 million, $36.5 million, and $2.2 million in 2009, 2008 and 2007, respectively. Net cash used in investing activities in 2009 was primarily related to $4.1 million used to purchase technology licenses and patents and $1.8 million used to purchase property and equipment. This was partially offset by sale/maturities of investments made in U.S. government sponsored securities and corporate bonds and commercial paper. Net cash used in investing activities in 2008 was primarily related to investments made in U.S. government sponsored securities and corporate bonds and commercial paper and in 2007 was primarily for capital expenditures related to manufacturing tooling for the production of our hardware products, computer equipment for our research and development lab and to support our growth in headcount. Our requirements for additional capital expenditures are subject to change depending upon several factors, including our needs based on our changing business and industry and market conditions.

     Cash flows from financing activities

          Net cash provided by (used in) financing activities was $3.2 million, $79.7 million and $(0.7) million, in 2009, 2008 and 2007, respectively. In 2009, we generated proceeds of $3.0 million from the sale of employee stock purchase plan shares and the exercise of common stock options and $0.2 million from tax benefit of stock options exercised. In 2008, we generated proceeds of $78.6 million from our initial public offering including payment of other offering costs, $0.9 million from exercise of common stock options and received tax benefit of stock options exercised of $0.3 million. In 2007, we incurred $1.3 million of costs related to our initial public offering and generated $0.6 million of net proceeds from the exercise of common stock options.

Contractual Obligations

          The following is a summary of our contractual obligations as of June 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

 

 


 

 

 

Total

 

Less Than
1 Year

 

1-3 Years

 

3-5 Years

 

Thereafter

 

 

 

(In thousands)

 

Operating lease obligations (1)

 

$

6,390

 

$

1,151

 

$

2,678

 

$

2,281

 

$

280

 

Non-cancellable purchase commitments for finished goods

 

 

16,161

 

 

16,161

 

 

 

 

 

 

 

Purchase commitments for software license use

 

 

5,049

 

 

2,355

 

 

2,194

 

 

500

 

 

 

 

 



 



 



 



 



 

Total

 

$

27,600

 

$

19,667

 

$

4,872

 

$

2,781

 

$

280

 

 

 



 



 



 



 



 

          (1) On July 16, 2009, the Company entered into an amendment of the lease for its corporate headquarters. The existing lease was scheduled to expire on October 31, 2009 and the amendment extends the term of the existing lease to September 30, 2014. The Company has included incremental obligation of $4.8 million to the total lease commitment arising from the amendment as a component of the operating lease obligations in the contractual obligations summary above.

          Effective July 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, (FIN 48”). As of June 30, 2009, the Company’s total amount of unrecognized tax benefit was approximately $1.5 million of which none, if recognized, would impact the effective tax rate as the Company has a valuation allowance on its carryforward attributes. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.

Off-Balance Sheet Arrangements

          We do not have any material off-balance sheet arrangements (Other than those disclosed above within Contractual Obligations”) nor do we have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

- 35 -


Critical Accounting Policies and Estimates

          Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the dates of the consolidated financial statements, the disclosure of contingencies as of the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented. Although we believe that our judgments and estimates are reasonable under the circumstances, actual results may differ from those estimates.

          We believe the following to be our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that are uncertain:

 

 

 

 

Revenue recognition;

 

 

 

 

Allowance for doubtful accounts;

 

 

 

 

Stock-based compensation;

 

 

 

 

Inventory valuation; and

 

 

 

 

Accounting for income taxes.

          If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See Risk Factors” for certain matters that may affect our future financial condition or results of operations.

     Revenue Recognition

          Product Revenue. Our software is integrated with our hardware and is essential to the functionality of the integrated system product. Product sales typically include a perpetual license to our software, except in limited circumstances such as sales of spare or replacement handsets, back-up switches and additional business applications. We recognize revenue for these sales in accordance with Statement of Position (SOP) No. 97-2, Software Revenue Recognition , or Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements , as applicable, depending on whether the hardware is sold in a multiple-element arrangement with software and post-contractual support or on a standalone basis if the enterprise customer purchases hardware, software, or maintenance support separately. For the initial sale, we generally bundle together the hardware, software, and post-contractual support contracts with terms of up to five years. Thereafter, if the enterprise customer increases the number of end user deployments and/or functionality, it may add more hardware, software, and related post-contractual support by purchasing them separately. We evaluate existence of vendor-specific objective evidence, or VSOE, of fair value for post-contractual support and, installation and services and training, as noted below.

          We recognize product revenue when persuasive evidence of an arrangement exists, product has shipped or delivery has occurred (depending on when title passes), the sales price is fixed or determinable and free of contingencies and significant uncertainties, and collection is probable. Our fee is considered fixed or determinable at the execution of an agreement, based on specific products and quantities to be delivered at specified prices. Our agreements generally do not include rights of return or acceptance provisions. To the extent that the Company’s agreements contain acceptance terms, the Company recognizes revenue upon product acceptance, unless the acceptance provision is deemed to be perfunctory. We maintain a reserve for sales returns based on historical experience. Payment terms generally range from net 30 to net 60 days. In the event payment terms are extended materially from our standard business practices, the fees are deemed to not be fixed or determinable and revenue is recognized when the payments become due. We assess the ability to collect from channel partners based on a number of factors, including creditworthiness and past transaction history. If the channel partner is not deemed creditworthy, we defer all revenue from the arrangement until payment is received and all other revenue recognition criteria have been met. Shipping charges are included in product revenue and the related shipping costs are included in cost of product revenue.

          We monitor and analyze the accuracy of sales returns estimates by reviewing actual returns and adjust it for future expectations to determine the adequacy of our current and future reserve needs. If actual future returns and allowances differ from past experience and expectation, additional allowances may be required.

          We have arrangements with channel partners to reimburse the channel partners for cooperative marketing costs meeting specified criteria. The reimbursements are limited to 50% of the actual costs charged to the channel partners by third-party vendors for advertising, trade shows and other related sales and marketing activities for which we receive an identifiable benefit, subject to a limit of the total cooperative marketing allowance earned by each channel partner. In accordance with EITF Issue No. 01-9,

- 36 -


Accounting for Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor’s Products) , we record the reimbursements to the channel partners meeting such specified criteria within sales and marketing expenses in the accompanying consolidated statements of operations.

          Post-Contractual Support. Our support and services revenue is primarily derived from post-contractual support. We account for post-contractual support revenue based on SOP 97-2, which states that if an arrangement includes multiple elements, the fee should be allocated to the various elements based on VSOE of fair value, regardless of any separate prices stated within the contract for each element. VSOE of fair value is limited to the price charged when the same element is sold separately. VSOE of fair value is established for support through prior renewals of post-contractual support contracts, which establishes a price which is based on a standalone sale. To determine the fair value of the price charged, we analyze both the selling prices when elements are sold separately as well as the concentrations of those prices. We believe those concentrations have been sufficient to enable us to establish VSOE of fair value for the post-contract support revenues.

          We use the residual method, as allowed by SOP No. 98-9,Modification of SOP 97-2,Software Revenue Recognition With Respect to Certain Transactions , to determine the amount of product revenue to be recognized. Under the residual method, the fair value of the undelivered elements, such as post-contractual support, installation services and training, are deferred and the remaining portion of the sales amount is recognized as product revenue. The fair value of the post-contractual support is recognized as support and services revenue on a straight-line basis over the term of the related support period, which can be up to five years in length.

          Installation and training. Installation services are sold on an elective basis. Channel partners or enterprise customers generally perform installations without our involvement, so we do not recognize substantial revenue from installation services. As installation is typically performed by the channel partner or enterprise customer, it is not considered essential to the functionality of the delivered elements. Installation is generally priced at established rates based on estimated hours to install our systems. Training services are also sold on an elective basis, both to channel partners and to enterprise customers, and is purchased both with system orders and on a standalone basis. VSOE of fair value has been established for training. We recognize revenue related to installation services and training upon delivery of the service.

          If VSOE of fair value does not exist for installation, training or commitments to provide specified upgrades, services or additional products to customers in the future, as has been the case from time to time in the past, we defer all revenue from the arrangement until the earlier of the point at which VSOE of fair value does exist or all such elements from the arrangement have been delivered.

     Allowance for Doubtful Accounts

          We review our allowance for doubtful accounts on a quarterly basis by assessing individual accounts receivable that materially exceed due dates. Risk assessment for these accounts includes historical collections experience with the specific account and with our similarly situated accounts coupled with other related credit factors that may evidence a risk of default and loss to us. Accordingly, the amount of this allowance will fluctuate based upon changes in revenue levels, collection of specific balances in accounts receivable and estimated changes in channel partner credit quality or likelihood of collection. If the financial condition of our channel partners were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The allowance for doubtful accounts represents management’s best estimate, but changes in circumstances, including unforeseen declines in market conditions and collection rates, may result in additional allowances in the future or reductions in allowances due to future recoveries.

      Stock-Based Compensation

          Prior to July 1, 2006, we accounted for employee stock options using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , or APB 25, and Financial Accounting Standards Board Interpretation No. (FIN) 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25 , and had adopted the disclosure only provisions of Statement of Financial Accounting Standards, or SFAS No. 123, Accounting for Stock-Based Compensation , or SFAS 123, and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure , or SFAS 148.

          In accordance with APB 25, stock-based compensation expense, which is a non-cash charge, resulted from stock option grants at exercise prices that, for financial reporting purposes, were deemed to be below the estimated fair value of the underlying common stock on the date of grant. Effective July 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payment , or SFAS 123(R), using the prospective transition method, which requires us to apply the provisions of SFAS 123(R) only to awards newly granted, modified, repurchased or cancelled, after the adoption date. Under this transition method, our stock-based compensation expense recognized beginning July 1, 2006 is based on the grant date fair value of stock option awards we grant or modify after July 1, 2006. Prior to and during fiscal year 2007, we categorized our options into two classes. Class One includes all options granted with standard four-year vesting and no ability to exercise prior to vesting. Class Two includes options

- 37 -


granted with standard four-year vesting but allow for early exercisability. We discontinued granting Class Two options as of June 30, 2007. We recognize stock-based compensation expense for both Class One and Class Two on a straight-line basis over the options’ expected vesting terms, generally four years. We estimated the grant date fair value of stock option awards under the provisions of SFAS 123(R) using the Black-Scholes option valuation model with the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 


 

 

 

 

 

 

 

June 30, 2007

 

 

 

 

 

 

 


 

 

 

June 30, 2009

 

June 30, 2008

 

Class One

 

Class Two

 

 

 


 


 


 


 

Expected life from grant date of option

 

 

4.58-6.46 years

 

 

6.08 years

 

 

6.08 years

 

 

4.0 years

 

Risk-free interest rate

 

 

1.76-3.11%

 

 

2.42-4.50%

 

 

4.6-4.8%

 

 

4.6-4.8%

 

Expected volatility

 

 

58-59%

 

 

62%

 

 

71%

 

 

55%

 

Expected dividend yield

 

 

0%

 

 

0%

 

 

0%

 

 

0%

 

          We estimated the grant date fair value of stock purchase rights granted for ESPP under the provisions of SFAS 123(R) using the Black-Scholes option valuation model with the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 


 

 

 

June 30, 2009

 

June 30, 2008

 

June 30, 2007

 

 

 


 


 


 

Expected life from grant date of ESPP

 

 

0.50 years

 

 

0.50 years

 

 

 

Risk-free interest rate

 

 

0.31-1.81%

 

 

2.03-2.49%

 

 

 

Expected volatility

 

 

92-138%

 

 

47-136%

 

 

 

Expected dividend yield

 

 

0%

 

 

0%

 

 

 

          During 2009, we recorded non-cash stock-based compensation expense of $9.8 million under SFAS 123(R). In future periods, stock-based compensation expense may increase as we issue additional equity-based awards to continue to attract and retain key employees. Additionally, SFAS 123(R) requires that we recognize compensation expense only for the portion of stock options that are expected to vest, assuming an expected forfeiture rate in determining stock-based compensation expense, which could affect the stock-based compensation expense recorded if there is a significant difference between actual and estimated forfeiture rates. Our estimated forfeiture rate in the year ended June 30, 2009 was 11.6%. At June 30, 2009, total unrecognized compensation cost related to stock-based awards granted to employees and non-employee directors was $23.2 million, net of estimated forfeitures of $7.7 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately three years.

     Inventory Valuation

          Inventories consist principally of finished goods and are stated at the lower of cost or market value, with cost being determined under a standard cost method that approximates first-in, first out. A small portion of our inventory also relates to evaluation units located at enterprise customer locations and service inventory. Inventory valuation reserves are established to reduce the carrying amounts of our inventories to their net estimated realizable values. Inventory valuation reserves are based on historical usage, expected demand and, with respect to evaluation units, conversion rate and age. Inherent in our estimates of market value in determining inventory valuation reserves are estimates related to economic trends, future demand for our products and technological obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory valuation reserves could be required and would be reflected in cost of product revenue in the period in which the reserves are taken. Inventory valuation reserves were $0.6 million and $0.3 million as of June 30, 2009 and 2008, respectively. Once a reserve is established, it is maintained until the unit to which it relates is sold or scrapped.

     Accounting for Income Taxes

          The Company accounts for income taxes using the asset and liability method as prescribed by Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit of which future realization is uncertain.

- 38 -


          The total valuation allowance increased by approximately $6.5 million in 2009 and was primarily related to the increase in the R&D credit and stock-based compensation and other timing differences. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred tax assets will not be realized. The realization of deferred tax assets is based on several factors, including the Company’s past earnings and the scheduling of deferred taxes and projected income from operating activities. As of June 30, 2009, management does not believe it is more likely than not that $12.0 million of the $13.7 million net deferred tax assets relating to U.S. federal and state operations are realizable. The Company intends to maintain the valuation allowance until sufficient positive evidence exists to support reversal of some or all of the valuation allowance. In addition, the occurrence of negative evidence with respect to deferred tax assets which currently have no valuation allowance could result in an increase in the valuation allowance in the future period. The Company’s income tax expense (benefit) recorded in the future will be reduced or increased in the event changes to the valuation allowance are required.

Recent Accounting Pronouncements

          Refer to Note 1 of Notes to Consolidated Financial Statements in this Form 10-K/A for a discussion of the expected impact of recently issued accounting pronouncements.

- 39 -



 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SHORETEL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Page

 

 


Report of Independent Registered Public Accounting Firm

 

41

Consolidated Balance Sheets (As restated)

 

42

Consolidated Statements of Operations (As restated)

 

43

Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity and Comprehensive Income (Loss) (As restated)

 

44

Consolidated Statements of Cash Flows (As restated)

 

45

Notes to Consolidated Financial Statements (As restated)

 

46

- 40 -


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
ShoreTel, Inc.
Sunnyvale, California

          We have audited the accompanying consolidated balance sheets of ShoreTel, Inc. and subsidiaries (collectively, the “Company”) as of June 30, 2009 and 2008, and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended June 30, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

          We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

          In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ShoreTel, Inc. and subsidiaries as of June 30, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2009, in conformity with accounting principles generally accepted in the United States of America.

          As discussed in Note 1 to the consolidated financial statements, on July 1, 2007 the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.

          As discussed in Note 17, the accompanying consolidated financial statements as of June 30, 2009 and 2008 and for the years ended June 30, 2009, 2008 and 2007 have been restated

          We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 10, 2009 (November 5, 2009 as to the effects of the material weakness described in the third paragraph of Management’s Annual Report on Internal Control Over Financial Reporting (as revised)), expressed an adverse opinion on the Company’s internal control over financial reporting because of a material weakness.

/s/ DELOITTE & TOUCHE LLP

San Jose, California
September 10, 2009 (November 5, 2009 as to the effects of the restatement discussed in Note 17)

- 41 -


SHORETEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except per share amounts)

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 


 

 

 

2009
As restated

 

2008
As restated

 

 

 


 


 

ASSETS

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

73,819

 

$

68,672

 

Short-term investments

 

 

33,847

 

 

34,139

 

Accounts receivable, net of allowances of $1,330 and $414 as of June 30, 2009 and June 30, 2008, respectively

 

 

21,454

 

 

21,909

 

Inventories

 

 

11,805

 

 

12,008

 

Prepaid expenses and other current assets

 

 

3,110

 

 

5,063

 

 

 



 



 

Total current assets

 

 

144,035

 

 

141,791

 

PROPERTY AND EQUIPMENT - Net

 

 

3,475

 

 

3,649

 

OTHER ASSETS

 

 

8,114

 

 

2,357

 

 

 



 



 

TOTAL

 

$

155,624

 

$

147,797

 

 

 



 



 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

7,774

 

$

5,952

 

Accrued liabilities and other

 

 

4,494

 

 

4,420

 

Accrued employee compensation

 

 

4,895

 

 

5,547

 

Deferred revenue

 

 

15,255

 

 

13,879

 

 

 



 



 

Total current liabilities

 

 

32,418

 

 

29,798

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

Long-term deferred revenue

 

 

7,236

 

 

4,786

 

Other long-term liabilities

 

 

2,198

 

 

 

 

 



 



 

Total liabilities

 

 

41,852

 

 

34,584

 

 

 



 



 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Preferred stock, par value $.001 per share, authorized 5,000 shares; none issued and outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and additional paid-in capital, par value $.001 per share, authorized 500,000; issued and outstanding, 44,362 and 43,341 shares as of June 30, 2009 and June 30, 2008, respectively

 

 

209,102

 

 

196,184

 

Deferred compensation

 

 

(54

)

 

(142

)

Accumulated other comprehensive income (loss)

 

 

136

 

 

(76

)

Accumulated deficit

 

 

(95,412

)

 

(82,753

)

 

 



 



 

Total stockholders’ equity

 

 

113,772

 

 

113,213

 

 

 



 



 

TOTAL

 

$

155,624

 

$

147,797

 

 

 



 



 

See notes to consolidated financial statements

- 42 -


SHORETEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

 


 

 

 

2009
As
restated

 

2008
As restated

 

2007
As restated

 

 

 


 


 


 

 

 

(Amounts in thousands, except per shareamounts)

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

Product

 

$

109,555

 

$

110,496

 

$

87,095

 

Support and services

 

 

25,267

 

 

18,233

 

 

10,732

 

 

 



 



 



 

Total revenue

 

 

134,822

 

 

128,729

 

 

97,827

 

COST OF REVENUE:

 

 

 

 

 

 

 

 

 

 

Product

 

 

38,149

 

 

37,466

 

 

29,753

 

Support and services

 

 

11,048

 

 

10,036

 

 

6,847

 

 

 



 



 



 

Total cost of revenue

 

 

49,197

 

 

47,502

 

 

36,600

 

GROSS PROFIT

 

 

85,625

 

 

81,227

 

 

61,227

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

30,724

 

 

26,811

 

 

17,260

 

Sales and marketing

 

 

44,652

 

 

37,869

 

 

26,174

 

General and administrative

 

 

19,596

 

 

17,645

 

 

11,674

 

Litigation settlement

 

 

4,110

 

 

 

 

 

 

 



 



 



 

Total operating expenses

 

 

99,082

 

 

82,325

 

 

55,108

 

 

 



 



 



 

INCOME (LOSS) FROM OPERATIONS

 

 

(13,457

)

 

(1,098

)

 

6,119

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,399

 

 

4,141

 

 

803

 

Change in fair value of warrants

 

 

 

 

 

 

(508

)

Other

 

 

(258

)

 

(40

)

 

(22

)

 

 



 



 



 

Total other income

 

 

1,141

 

 

4,101

 

 

273

 

 

 



 



 



 

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES

 

 

(12,316

)

 

3,003

 

 

6,392

 

PROVISION FOR INCOME TAXES

 

 

(343

)

 

(861

)

 

(408

)

 

 



 



 



 

NET INCOME (LOSS)

 

 

(12,659

)

 

2,142

 

 

5,984

 

ACCRETION OF PREFERRED STOCK

 

 

 

 

 

 

(50

)

 

 



 



 



 

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS

 

$

(12,659

)

$

2,142

 

$

5,934

 

 

 



 



 



 

Net income (loss) per common share available to common stockholders:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.29

)

$

0.05

 

$

0.69

 

 

 



 



 



 

Diluted

 

$

(0.29

)

$

0.05

 

$

0.17

 

 

 



 



 



 

Weighted average shares used in computing net income (loss) per share available to common stockholders:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

43,714

 

 

42,413

 

 

8,565

 

Diluted

 

 

43,714

 

 

44,861

 

 

35,581

 

 

 


See notes to consolidated financial statements

- 43 -


 

SHORETEL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE

PREFERRED STOCK AND STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Convertible
Preferred Stock

 

Common Stock and
Additional Paid-In-
Capital

 

Deferred
Stock
Compensation

 

Note
Receivable

from
Stockholders

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Accumulated
Deficit

 

Total
Stockholders’

Equity

 

 

 


 


 

 

 

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 

 


 


 


 


 


 


 


 


 


 

 

 

(Amounts in thousands)

 

BALANCE - July 1, 2006

 

23,316

 

$

56,332

 

 

9,289

 

$

50,277

 

$

(335

)

$

(231

)

$

 

$

(90,879

)

$

(41,168

)

Accretion of preferred stock

 

 

 

 

50

 

 

 

 

 

(50

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(50

)

Exercise of common stock options

 

 

 

 

 

 

 

901

 

 

573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

573

 

Stock-based compensation expense(1)

 

 

 

 

 

 

 

 

 

 

2,685

 

 

98

 

 

 

 

 

 

 

 

 

 

 

2,783

 

Repayment of note receivable from shareholder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

12

 

Vesting of accrued early exercised stock options

 

 

 

 

 

 

 

 

 

 

228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

228

 

Warrants reclassified to liabilities

 

 

 

 

(41

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Surrender of common stock for settlement of notes receivable (Note 4)

 

 

 

 

 

 

 

(58

)

 

(410

)

 

 

 

 

219

 

 

 

 

 

 

 

 

(191

)

Net income and comprehensive income(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,984

 

 

5,984

 

 

 


 



 



 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE - June 30, 2007(1)

 

23,316

 

 

56,341

 

 

10,132

 

 

53,303

 

 

(237

)

 

 

 

 

 

(84,895

)

 

(31,829

)

Proceeds from initial public offering, net of offering costs

 

 

 

 

 

 

 

9,085

 

 

77,328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

77,328

 

Preferred stock warrants converted to common stock warrants

 

 

 

 

 

 

 

 

 

 

549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

549

 

Conversion of preferred stock to common stock

 

(23,316

)

 

(56,341

)

 

23,316

 

 

56,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56,341

 

Exercise of warrants

 

 

 

 

 

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under stock-based compensation plans

 

 

 

 

 

 

 

747

 

 

857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

857

 

Stock-based compensation expense(1)

 

 

 

 

 

 

 

 

 

 

7,336

 

 

95

 

 

 

 

 

 

 

 

 

 

 

7,431

 

Vesting of accrued early exercised stock options

 

 

 

 

 

 

 

 

 

 

220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

220

 

Income tax benefit related to stock option exercises

 

 

 

 

 

 

 

 

 

 

250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

250

 

Components of comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(76

)

 

 

 

 

(76

)

Net income(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,142

 

 

2,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,066

 

 

 


 



 



 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – June 30, 2008(1)

 

 

$

 

 

43,341

 

$

196,184

 

$

(142

)

$

 

$

(76

)

$

(82,753

)

$

113,213

 

Common stock issued under stock-based compensation plans

 

 

 

 

 

 

 

1,021

 

 

3,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,004

 

Stock-based compensation expense(1)

 

 

 

 

 

 

 

 

 

 

9,670

 

 

88

 

 

 

 

 

 

 

 

 

 

 

9,758

 

Vesting of accrued early exercised stock options

 

 

 

 

 

 

 

 

 

 

54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54

 

Income tax benefit related to stock option exercises

 

 

 

 

 

 

 

 

 

 

190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

190

 

Components of comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

212

 

 

 

 

 

212

 

Net loss(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,659

)

 

(12,659

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,447

)

 

 


 



 



 



 



 



 



 



 



 

BALANCE - June 30, 2009(1)

 

 

$

 

 

44,362

 

$

209,102

 

$

(54

)

$

 

$

136

 

$

(95,412

)

 

113,772

 

 

 


 



 



 



 



 



 



 



 



 


 

 

(1)

As restated.

See notes to consolidated financial statements

- 44 -


SHORETEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

 


 

 

 

2009
As restated

 

2008
As restated

 

2007
As restated

 

 

 


 


 


 

 

 

(In thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(12,659

)

$

2,142

 

$

5,984

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,965

 

 

1,606

 

 

956

 

Amortization/Accretion of premium/discount on investments

 

 

27

 

 

(198

)

 

 

Stock compensation expense

 

 

9,758

 

 

7,431

 

 

2,783

 

Excess tax benefit from stock options exercised

 

 

(190

)

 

(250

)

 

 

Loss on disposal of property and equipment

 

 

191

 

 

270

 

 

38

 

Increase in fair value of warrants

 

 

 

 

 

 

508

 

Deferred tax benefit

 

 

 

 

(1,748

)

 

 

Recovery from settlement of note receivable

 

 

 

 

 

 

(191

)

Provision for doubtful accounts receivable

 

 

1,066

 

 

245

 

 

238

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(611

)

 

(2,743

)

 

(8,170

)

Inventories

 

 

203

 

 

(4,951

)

 

(2,401

)

Prepaid expenses and other current assets

 

 

480

 

 

57

 

 

(2,520

)

Other assets

 

 

(85

)

 

(1,880

)

 

(55

)

Accounts payable

 

 

1,796

 

 

(586

)

 

2,034

 

Accrued liabilities and other

 

 

2,332

 

 

2,283

 

 

463

 

Accrued employee compensation

 

 

(652

)

 

1,761

 

 

864

 

Deferred revenue

 

 

3,826

 

 

4,714

 

 

7,379

 

 

 



 



 



 

Net cash provided by operating activities

 

 

7,447

 

 

8,153

 

 

7,910

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,842

)

 

(2,407

)

 

(2,106

)

Purchase of investments

 

 

(35,087

)

 

(51,267

)