ShoreTel, Inc.
ShoreTel Inc (Form: 10-Q, Received: 05/06/2010 17:08:52)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark one)

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

For the quarterly period ended March 31, 2010

OR

 

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

For the transition period from              to             

Commission File Number 001-33506

 

 

SHORETEL, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   77-0443568

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

960 Stewart Drive, Sunnyvale, California   94085-3913
(Address of principal executive offices)   (Zip Code)

(408) 331-3300

(Registrant’s telephone number, including area code)

 

 

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

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of April 28, 2010, 45,013,674 shares of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

SHORETEL, INC. AND SUBSIDIARIES

FORM 10-Q for the Quarter Ended March 31, 2010

INDEX

 

          Page
PART I: Financial Information    3

Item 1

   Financial Statements (Unaudited)    3
  

Condensed Consolidated Balance Sheets as of March 31, 2010 and June 30, 2009

   3
  

Condensed Consolidated Statements of Operations for the three months and nine months ended March 31, 2010 and 2009

   4
  

Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2010 and 2009

   5
  

Notes to Condensed Consolidated Financial Statements

   6

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    15

Item 3

   Quantitative and Qualitative Disclosures About Market Risk    25

Item 4

   Controls and Procedures    26
PART II: Other information    27

Item 1

   Legal Proceedings    27

Item 1A

   Risk Factors    27

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds    27

Item 6

   Exhibits    27
   Signatures    28
   Exhibit Index    29

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS (Unaudited)

SHORETEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

     March 31,
2010
    June 30,
2009
 
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 67,703      $ 73,819   

Short-term investments

     46,878        33,847   

Accounts receivable, net of allowance of $872 and $1,330 as of March 31, 2010 and June 30, 2009, respectively

     19,617        21,454   

Inventories

     12,318        11,805   

Prepaid expenses and other current assets

     8,166        3,110   
                

Total current assets

     154,682        144,035   

PROPERTY AND EQUIPMENT, net

     5,350        3,475   

OTHER ASSETS

     6,516        8,114   
                

TOTAL ASSETS

   $ 166,548      $ 155,624   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

CURRENT LIABILITIES:

    

Accounts payable

   $ 7,617      $ 7,774   

Accrued expenses and other

     9,951        4,494   

Accrued employee compensation

     6,233        4,895   

Deferred revenue

     17,850        15,255   
                

Total current liabilities

     41,651        32,418   

LONG-TERM LIABILITIES:

    

Long-term deferred revenue

     8,723        7,236   

Other long-term liabilities

     2,272        2,198   
                

Total liabilities

     52,646        41,852   
                

COMMITMENTS AND CONTINGENCIES (Note 11)

    

STOCKHOLDERS’ EQUITY:

    

Preferred stock, $0.001 par value: authorized 5,000; none issued and outstanding

     —          —     

Common stock and additional paid-in capital, par value $0.001 per share, authorized 500,000; issued and outstanding, 45,000 and 44,362 shares as of March 31, 2010 and June 30, 2009, respectively

     218,206        209,102   

Deferred stock compensation

     (3     (54

Accumulated other comprehensive income

     222        136   

Accumulated deficit

     (104,523     (95,412
                

Total stockholders’ equity

     113,902        113,772   
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 166,548      $ 155,624   
                

See Notes to Condensed Consolidated Financial Statements

 

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SHORETEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
March  31,
    Nine Months Ended
March  31,
 
     2010     2009
As Restated
    2010     2009
As Restated
 

REVENUE:

        

Product

   $ 28,945      $ 24,691      $ 83,685      $ 83,801   

Support and services

     8,089        6,546        22,556        18,631   
                                

Total revenue

     37,034        31,237        106,241        102,432   

COST OF REVENUE:

        

Product (1)

     10,049        8,624        29,369        28,726   

Support and services (1)

     2,933        2,730        8,323        8,589   
                                

Total cost of revenue

     12,982        11,354        37,692        37,315   

GROSS PROFIT

     24,052        19,883        68,549        65,117   

OPERATING EXPENSES:

        

Research and development (1)

     8,634        7,552        23,666        23,769   

Sales and marketing (1)

     14,726        11,472        39,653        34,484   

General and administrative (1)

     5,214        5,301        14,596        15,399   

Litigation settlement (Note 11)

     —          4,110        —          4,110   
                                

Total operating expenses

     28,574        28,435        77,915        77,762   
                                

LOSS FROM OPERATIONS

     (4,522     (8,552     (9,366     (12,645

OTHER INCOME (EXPENSE):

        

Interest income

     100        188        296        1,208   

Other

     (220     (39     (128     (641
                                

Total other income (expense)

     (120     149        168        567   
                                

LOSS BEFORE BENEFIT FROM INCOME TAXES

     (4,642     (8,403     (9,198     (12,078

BENEFIT FROM INCOME TAXES

     153        1,056        87        154   
                                

NET LOSS

   $ (4,489   $ (7,347   $ (9,111   $ (11,924
                                

Net loss per share — basic and diluted

   $ (0.10   $ (0.17   $ (0.20   $ (0.27
                                

Shares used in computing net loss per share — basic and diluted

     44,941        43,793        44,731        43,576   
                                

 

(1)    Includes stock-based compensation expense as follows:

        

Cost of product revenue

   $ 34      $ 23      $ 99      $ 86   

Cost of support and services revenue

     207        184        553        606   

Research and development

     805        597        2,248        2,181   

Sales and marketing

     911        741        2,528        2,753   

General and administrative

     861        619        2,320        1,926   
                                

Total stock-based compensation expense

   $ 2,818      $ 2,164      $ 7,748      $ 7,552   
                                

See Notes to Condensed Consolidated Financial Statements

 

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SHORETEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine Months Ended
March 31,
 
     2010     2009
As Restated
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (9,111   $ (11,924

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     2,045        1,440   

Amortization (accretion) of premium (discount) on investments

     72        (8

Stock-based compensation expense

     7,748        7,552   

Loss on disposal of property and equipment

     155        184   

Provision (benefit) for doubtful accounts receivable

     (83     966   

Changes in assets and liabilities:

    

Accounts receivable

     1,920        1,679   

Inventories

     (513     2,344   

Prepaid expenses and other current assets

     (3,746     (305

Other assets

     988        (268

Accounts payable

     (273     (1,109

Accrued expenses and other

     5,611        3,398   

Accrued employee compensation

     1,338        97   

Deferred revenue

     4,082        2,382   
                

Net cash provided by operating activities

     10,233        6,428   
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (3,518     (1,431

Purchases of investments

     (19,652     (18,040

Proceeds from sales/maturities of investments

     6,635        33,558   

Purchases of software license and other

     (1,200     (1,070
                

Net cash (used in) provided by investing activities

     (17,735     13,017   
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from issuance of common stock to employees

     1,504        1,404   

Taxes paid on vested and released stock awards

     (118     —     
                

Net cash provided by financing activities

     1,386        1,404   
                

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (6,116     20,849   

CASH AND CASH EQUIVALENTS - Beginning of period

     73,819        68,672   
                

CASH AND CASH EQUIVALENTS - End of period

   $ 67,703      $ 89,521   
                

NONCASH INVESTING AND FINANCING ACTIVITIES:

    

Vesting of accrued early exercised stock options

   $ 18      $ 46   

Purchase of property and equipment included in period-end accounts payable

     465        118   

Purchase of other assets included in period-end accounts payable and other liabilities

     —          1,530   

See Notes to Condensed Consolidated Financial Statements

 

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SHORETEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Description of Business

ShoreTel, Inc. and its subsidiaries (referred herein as “the Company”) is a leading provider of Pure Internet Protocol, or IP, unified communications systems for enterprises. The Company’s systems are based on its distributed software architecture and switch-based hardware platform which enable multi-site enterprises to be served by a single telecommunications system. The Company’s 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, management believes that the Company’s systems enable enhanced end user productivity and provide lower total cost of ownership and higher customer satisfaction than alternative systems.

2. Basis of Presentation and Significant Accounting Policies

The accompanying financial statements as of March 31, 2010 and for the three months and nine months ended March 31, 2010 and 2009 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K, as amended by Form 10-K/A for the fiscal year ended June 30, 2009.

In the opinion of the management, all adjustments (which include normal recurring adjustments, except as disclosed herein) necessary to present a fair statement of financial position as of March 31, 2010, results of operations for the three months and nine months ended March 31, 2010 and 2009, and cash flows for the nine months ended March 31, 2010 and 2009, as applicable, have been made. The results of operations for the three months and nine months ended March 31, 2010 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Computation of Net Loss per Share

Basic net loss per common share available to common stockholders is determined by dividing net loss available to common stockholders by the weighted average number of common shares available to common stockholders during the period. Diluted net loss per common share available to common stockholders is determined by dividing net loss available to common stockholders by the weighted average number of common shares available to common stockholders used in the basic loss per common share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding under the treasury stock method. Potentially dilutive securities were not included in the computation of dilutive net loss per share for the three and nine months ended March 31, 2010 and 2009, because to do so would have been anti-dilutive. Potentially dilutive securities of 8.3 million and 8.1 million for the three and nine months ended March 31, 2010 and 2009, respectively, were not included in the computation of dilutive net loss per share because to do so would have been anti-dilutive.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that revises accounting and reporting requirements for arrangements with multiple deliverables that are excluded from the scope of existing software revenue guidance. This update requires the use of an estimated selling price to determine the selling price of a deliverable in cases where neither vendor-specific objective evidence nor third-party evidence is available, which is expected to increase the ability for entities to separate deliverables in multiple-deliverable arrangements and, accordingly, to decrease the amount of revenue deferred in these cases. Additionally, this update requires the total selling price of a multiple-deliverable arrangement to be allocated at the inception of the arrangement to all deliverables based on relative selling prices. This update is to be applied prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which for the Company is July 1, 2010. The Company is currently evaluating the impact of adoption of this update on our financial position, results of operations and cash flows.

In October 2009, the FASB issued an accounting standards update that clarifies which revenue allocation and measurement guidance should be used for arrangements that contain both tangible products and software, in cases where the software is more than incidental to the tangible product as a whole. More specifically, if the software sold with or embedded within the tangible product is essential to the functionality of the tangible product, then this software as well as undelivered software elements that relate to this software is excluded from the scope of existing software revenue guidance, which is expected to decrease the amount of revenue deferred in these cases. This update is to be applied prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which for the Company is July 1, 2010. The Company is currently evaluating the impact of adoption of this update on our financial position, results of operations and cash flows.

 

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In January 2010, the FASB issued amended guidance on fair value measurements and disclosures. The new guidance requires additional disclosures regarding fair value measurements, amends disclosures about postretirement benefit plan assets, and provides clarification regarding the level of disaggregation of fair value disclosures by investment class. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements that will be effective for reporting periods beginning after December 15, 2010. Accordingly, the Company adopted this amendment in the quarter ended March 31, 2010, except for the additional Level 3 requirements which will be adopted in 2011. The adoption of this amendment did not have a significant impact on the Company’s financial position, results of operations or cash flows.

In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and the Company adopted this new guidance in the quarter ended March 31, 2010. The adoption of this amendment did not have a significant impact on the Company’s financial position, results of operations or cash flows.

3. Balance Sheet Details

Balance sheet components consist of the following:

 

(In thousands)

   March 31,
2010
    June 30,
2009
 

Inventories:

    

Raw materials

   $ 335      $ 398   

Work in process

     988        962   

Finished goods

     10,995        10,445   
                
   $ 12,318      $ 11,805   
                

Prepaid expenses and other current assets:

    

Prepaid expenses

   $ 5,460      $ 2,435   

Deferred cost of revenue

     355        315   

Deferred tax asset/tax receivables

     2,351        360   
                
   $ 8,166      $ 3,110   
                

Property and equipment, net:

    

Computer equipment and tooling

   $ 8,475      $ 5,281   

Software

     1,230        1,086   

Furniture and fixtures

     1,161        1,064   

Leasehold improvements and auto

     508        387   
                

Total property and equipment

   $ 11,374      $ 7,818   

Less accumulated depreciation and amortization

     (6,024     (4,343
                

Property and equipment - net

   $ 5,350      $ 3,475   
                

Deferred revenue - current and long-term:

    

Product

   $ 1,082      $ 988   

Support and services

     25,491        21,503   
                

Total deferred revenue

   $ 26,573      $ 22,491   
                

 

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The following is a summary of the Company’s long-term other assets (in thousands):

 

     March 31, 2010    June 30, 2009
     Gross Carrying
Amount
   Accumulated
Amortization
    Net Carrying
Amount
   Gross Carrying
Amount
   Accumulated
Amortization
    Net Carrying
Amount

Licensed technology

   $ 2,110    $ (419   $ 1,691    $ 1,860    $ (131   $ 1,729

Intangible assets in pre-release

     3,230      —          3,230      2,478      —          2,478
                                           

Other intangible assets

   $ 5,340    $ (419     4,921    $ 4,338    $ (131     4,207
                                   

Prepaid royalties

          1,283           2,285

Deferred tax asset

          79           1,388

Deposits and other

          233           234
                       

Total other assets

        $ 6,516         $ 8,114
                       

Other intangible asset categories previously disclosed have been separated into amounts in use and amounts in pre-release to conform to current categories presented.

Amortization of intangible assets for the three months ended March 31, 2010 and 2009 was $0.1 million and zero, respectively, and $0.3 million and $0.1 million for the nine months ended March 31, 2010 and 2009, respectively.

The estimated amortization expenses for intangible assets for the next five years and thereafter are as follows (in thousands):

 

Years Ending June 30,

    

2010 (remaining 3 months)

   $ 104

2011

     413

2012

     413

2013

     413

2014

     297

Thereafter

     51
      

Total

   $ 1,691
      

Short-Term Investments:

The following tables summarize the Company’s short-term investments (in thousands):

 

     Amortized Cost    Gross  Unrealized
Gains
   Gross Unrealized
Losses
    Fair
Value

As of March 31, 2010

          

Corporate notes and commercial paper

   $ 30,251    $ 152    $ (12   $ 30,391

US Government agency securities

     16,405      82      —          16,487
                            

Total short-term investments

   $ 46,656    $ 234    $ (12   $ 46,878
                            

As of June 30, 2009

          

Corporate notes and commercial paper

   $ 24,209    $ 111      —        $ 24,320

US Government agency securities

     9,502      25      —          9,527
                            

Total short-term investments

   $ 33,711    $ 136      —        $ 33,847
                            

The following table summarizes the maturities of the Company’s fixed income securities (in thousands):

 

     Amortized Cost    Fair Value

As of March 31, 2010

     

Less than 1 year

   $ 23,921    $ 24,046

Due in 1 to 3 years

     22,735      22,832
             

Total

   $ 46,656    $ 46,878
             
     Amortized Cost    Fair Value

As of June 30, 2009

     

Less than 1 year

   $ 6,646    $ 6,677

Due in 1 to 3 years

     27,065      27,170
             

Total

   $ 33,711    $ 33,847
             

 

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Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.

4. Fair Value Disclosure

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Further, entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.

 

   

Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The tables below set forth the Company’s cash equivalents and short-term investments measured at fair value on a recurring basis (in thousands):

 

     As of March 31, 2010
     Fair Value    Level 1    Level 2    Level 3

Assets

           

Cash and cash equivalents:

           

Money market funds

   $ 48,166    $ 48,166      —        —  

Short-term investments:

           

Corporate notes and commercial paper

     30,391      —        30,391      —  

US Government agency securities

     16,487      —        16,487      —  
                           

Total financial instruments measured and recorded at fair value as of March 31, 2010

   $ 95,044    $ 48,166    $ 46,878    $ —  
                           

The above table excludes $19.5 million of cash balances on deposit at banks.

 

     As at June 30, 2009
     Fair Value    Level 1    Level 2    Level 3

Assets

           

Cash and cash equivalents:

           

Money market funds

   $ 64,704    $ 64,704    $ —      $ —  

Short-term investments:

           

Corporate notes and commercial paper

     24,320      —        24,320      —  

US Government agency securities

     9,527      —        9,527      —  
                           

Total financial instruments measured and recorded at fair value as of June 30, 2009

   $ 98,551    $ 64,704    $ 33,847    $ —  
                           

The above table excludes $9.1 million of cash balances on deposit at banks.

Cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. Investment securities are classified within Level 2 of the fair value hierarchy because they are valued based on other observable inputs, including broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include money market securities. The types of instruments valued based on other observable inputs include corporate notes and commercial paper and US Government agency securities.

5. Income Taxes

The Company recorded an income tax benefit of $0.2 million and $1.1 million for the three months ended March 31, 2010 and 2009. The benefit for income taxes for the nine months ended March 31, 2010 and 2009 was $0.1 million and $0.2 million, respectively.

 

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The income tax benefit of $0.2 million and $0.1 million for the three and nine months ended March 31, 2010, respectively, are due primarily to an income tax benefit related to the timing of deductions in the federal income tax return, partially offset by a tax provision for the profitable jurisdictions and state taxes based upon income earned during the period with no tax benefit accrued on the loss jurisdictions. The income tax benefit for the nine months ended March 31, 2009 was calculated under the discrete method as management determined that an annual effective tax rate method would not provide a reliable estimate.

The “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008”, was signed into law on October 3, 2008. Under the Act, the research credit was retroactively extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010. The Company has calculated its federal R&D credit accordingly.

During the quarter ended March 31, 2010, the Company received a favorable tax ruling from the Internal Revenue Service. As a result of the ruling, at least $20 million of net operating losses that were previously limited by Section 382 of the Internal Revenue Code are now available to the Company to offset future taxable income. The deferred tax assets related to these net operating losses will have a full valuation allowance when they are reestablished. As a result, the Company plans to file an amended fiscal 2008 federal income tax return utilizing the available net operating loss and claim a tax refund for approximately $1.7 million.

The Company maintains a reserve allowance for uncertain tax positions. As of March 31, 2010, the Company’s total amount of unrecognized tax benefits were $1.9 million as compared to $1.5 million as of June 30, 2009, representing an increase of $0.4 million for the nine months ended March 31, 2010. The increase in the total unrecognized tax benefits is primarily due to Federal and California research tax credits. None of the total unrecognized tax benefits of the Company, if recognized, would impact the effective tax rate, as the Company has a full valuation allowance on its carryforward attributes.

While management believes that the Company has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the Company’s current position. Accordingly, the Company’s provisions on federal, state and foreign tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.

The Company’s only major tax jurisdiction is the United States. The tax years 2000 through 2009 remain open and subject to tax examination by the appropriate governmental agencies in the United States.

6. Common Stock

Common Shares Reserved for Issuance

At March 31, 2010, the Company has reserved shares of common stock for issuance as follows (in thousands):

 

Reserved under stock option plans

   12,950

Reserved under employee stock purchase plan

   879

Conversion of warrants

   2
    

Total

   13,831
    

7. Stock-Based Compensation

The Company estimated the grant date fair value of stock option awards and Employee Stock Purchase Plan (ESPP) rights using the Black-Scholes option valuation model with the following assumptions:

 

     Nine Months Ended
March 31,
 

Employee Incentive Plans

   2010     2009  

Expected life of option plan (in years)

   6.08-6.50      4.58-6.08   

Expected life of ESPP right (in years)

   0.50      0.50   

Risk-free interest rate for option plan

   2.3-2.47   1.76-3.11

Risk-free interest rate for ESPP right

   0.16-0.27   0.44-1.81

Volatility for option plan

   57-58   59

Volatility for ESPP right

   59-138   92-136

Dividend yield

   0   0

During the three months ended March 31, 2010 and 2009, the Company recorded non-cash stock-based compensation expense of $2.8 million and $2.2 million respectively. During the nine months ended March 31, 2010 and 2009, the Company recorded non-cash stock-based compensation expense of $7.7 million and $7.6 million, respectively.

 

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Compensation expense is recognized 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. As of March 31, 2010, total unrecognized compensation cost related to stock-based awards granted to employees and non-employee directors was $21.3 million. This cost will be amortized on a ratable basis over a weighted-average vesting period of approximately three years.

8. Stock Option Plan

In January 1997, the Board of Directors and stockholders adopted the 1997 stock option plan (the “1997 Plan”) which, as amended, provides for granting incentive stock options (“ISOs”) and nonqualified stock options (“NSOs”) for shares of common stock to employees, directors, and consultants of the Company. In September 2006, the Company’s board of directors increased the number of shares authorized and reserved for issuance under the 1997 Plan to 10,513,325 shares of common stock. In accordance with the 1997 Plan, the stated exercise price shall not be less than 100% and 85% of the estimated fair market value of common stock on the date of grant for ISOs and NSOs, respectively, as determined by the Board of Directors. The 1997 Plan provides that the options shall be exercisable over a period not to exceed ten years. Options generally vest ratably over four years from the date of grant. Options granted to certain executive officers are exercisable immediately and unvested shares issued upon exercise are subject to repurchase by the Company at the exercise price (“Class Two Options”). During the nine months ended March 31, 2010 and March 31, 2009, zero and 1,167 unvested shares were repurchased, respectively. The Company’s repurchase right for such options lapses as the options vest, generally over four years from the date of grant.

In February 2007, the Company adopted the 2007 Equity Incentive Plan (the “2007 Plan”) which, as amended, provides for grants of ISOs, NSOs, restrictive stock units (“RSUs”) and restrictive stock awards (“RSAs”) to employees, directors and consultants of the Company. This plan serves as the successor to the 1997 Plan, which terminated in January 2007. Five million shares of common stock were initially reserved for future issuance in the form of stock options, restricted stock awards or units, stock appreciation rights and stock bonuses. In February of each fiscal year, pursuant to the automatic increase provisions of the 2007 Plan, the Company’s board of directors increased the number of shares authorized and reserved for issuance under the 2007 Plan by 2.2 million and 2.2 million in 2009 and 2010, respectively.

Class Two Options granted under the 1997 Plan to certain executive officers are exercisable immediately and shares issued upon exercise are subject to repurchase by the Company at the exercise price, in the event the employee is terminated; such repurchase right lapses gradually over a four year period. The Company does not consider the exercise of stock options substantive when the issued stock is subject to repurchase. Accordingly, the proceeds from the exercise of such options are accounted for as a deposit liability until the repurchase right lapses, at which time the proceeds are reclassified to permanent equity. As of March 31, 2010 and June 30, 2009, there were 1,042 and 20,626 shares subject to repurchase, respectively, of the Company’s common stock outstanding and $1,000 and $19,000, respectively, of related recorded liability, which is included in accrued liabilities.

Transactions under the 1997 and 2007 Option Plans are summarized as follows:

 

           Options Outstanding

(In thousands, except per share data and contractual term)

   Shares Available
for Grant
    Number of
Shares
    Weighted
Average Exercise
Price
   Weighted
Average
Remaining
Contractual
Term
(in Years)
   Aggregate
Intrinsic
Value

Balance at July 1, 2009

   3,359      7,256      $ 4.19      

Shares authorized

   2,247             

Termination of remaining shares available for grant under the 1997 Option Plan and other non-plan options

   (27   —          —        

Granted

   (844   844        6.41      

Exercised

   —        (324     1.42      

Cancelled, forfeited or expired

   248      (248     4.84      

Restricted stocks granted (see Note 10)

   (359   —          —        

Restricted stocks cancelled

   47      —          —        

Balance at March 31, 2010

   4,671      7,528      $ 4.53    6.8    $ 16,702
                    

Vested and expected to vest at March 31, 2010

     6,940      $ 4.47    6.8    $ 15,876
                

Exercisable at March 31, 2010

     2,616      $ 3.25    6.2    $ 9,460
                

The total pre-tax intrinsic value for options exercised in the nine months ended March 31, 2010 and 2009 was $1.6 million and $0.8 million, respectively, representing the difference between the estimated fair values of the Company’s common stock underlying these options at the dates of exercise and the exercise prices paid. There were 27,000 cancelled options that expired under the 1997 Option Plan due to the termination of that plan. These cancelled, expired options have been included in the option activity for the nine months ended March 31, 2010.

 

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9. Employee Stock Purchase Plan

On September 18, 2007, the Board of Directors approved the commencement of offering periods under a previously-approved employee stock purchase plan (the “ESPP”). The ESPP allows eligible employees to purchase shares of Company stock at a discount through payroll deductions. The ESPP consists of nine-month offering periods commencing on May 1 st and November 1 st , each year. Employees purchase shares in the purchase period at 90% of the market value of the Company’s common stock at either the beginning of the offering period or the end of the offering period, whichever price is lower.

In February of fiscal 2010 and 2009, pursuant to the automatic increase provisions of the ESPP, the Company’s Board of Directors approved increases to the number of shares authorized and reserved for issuance under the ESPP by 449,000 shares and 438,000 shares, respectively, pursuant to the terms of that plan.

As of March 31, 2010, 935,000 shares had been issued under the ESPP since inception and 879,000 shares had been reserved for future issuance.

10. Restricted Stock

Under the 2007 Plan, the Company issued restricted stock awards to non-employee directors electing to receive them in lieu of an annual cash retainer during the nine months ended March 31, 2010.

In addition, restricted stock units can be issued under the 2007 Plan to eligible employees, and generally vest 25% at one year or 50% at two years from the date of grant and 25% annually thereafter.

Restricted stock award and restricted stock unit activity for the nine months ended March 31, 2010 and 2009 is as follows (in thousands):

 

     Nine months ended
March 31, 2010
    Nine months ended
March 31, 2009
 

Beginning balance

   507      70   

Awarded

   359      522   

Released

   (88   (46

Forfeited

   (27   (28
            

Ending balance

   751      518   
            

Information regarding restricted stock units outstanding at March 31, 2010 is summarized below:

 

     Number of Shares (thousands)    Weighted Average
Remaining
Contractual Lives
   Average Intrinsic
Value (thousands)

Shares outstanding

   751    1.75 years    $ 4,967

Shares vested and expected to vest

   640    1.65 years      4,231

11. Litigation, Commitments and Contingencies

Litigation — The Company is a party to the following material litigation:

U.S. Federal Court Class Action Litigation . On January 16, 2008, a purported stockholder class action lawsuit captioned Watkins v. ShoreTel, Inc., et al., was filed in the United States District Court for the Northern District of California against the Company, certain of its officers and directors, and the underwriters of the Company’s initial public offering. A second purported class action alleging the same claims were filed on January 29, 2008 and the lawsuits were consolidated. A second consolidated amended class action complaint was subsequently filed on March 2, 2009. The consolidated action is purportedly brought on behalf of those who purchased the Company’s common stock pursuant to the initial public offering on July 3, 2007, purports to allege claims for violations of the federal securities laws, and seeks unspecified compensatory damages and other relief. The Company and counsel for the lead plaintiffs reached an agreement in principle in February 2010 to settle the litigation, pursuant to which, without admitting any liability or wrongdoing of any kind, the Company would pay the plaintiff class $250,000 with the remaining $2.75 million funded by insurance. This agreement, which is subject to final documentation and Court approval, would resolve all the claims in the litigation.

California State Court Derivative Action . On January 30, 2008, a purported shareholder derivative lawsuit captioned Berkovitz v. Combs, et al., was filed in the Superior Court of the State of California, County of Santa Clara, against the Company (as a nominal

 

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defendant), its directors and certain officers. The complaint purports to allege claims for breach of fiduciary duty and other claims and seeks unspecified compensatory damages and other relief based on essentially the same allegations as the class action litigation. The Company and plaintiffs have reached an agreement in principle to settle the litigation, pursuant to which, without admitting any liability or wrongdoing of any kind, the Company would adopt certain corporate remedial measures, terms of which are still being negotiated. Once documented, the settlement would be subject to Court approval.

On April 24, 2009, the Company and Mitel, the counter party, had entered into a confidential definitive agreement to settle the litigation between them. Under the terms of the agreement, the parties agreed to dismiss the patent litigation and trade libel litigation. Both matters were dismissed with prejudice on May 8, 2009. The agreement called for the Company to make payments totaling $5.0 million over four years. The present value of the payments was calculated to be $4.6 million, of which $0.5 million was estimated to be the value of the future right to use the technology covered by such patents and was recorded as a long term prepaid royalty asset that is being amortized to cost of revenue over approximately six years, which is the life of the patents. Accordingly, during the three months ended March 31, 2009, $4.1 million was recorded as litigation settlement.

The Company could become involved in litigation from time to time relating to claims arising out of the ordinary course of business or otherwise. Any litigation, regardless of outcome, is costly and time-consuming, can divert the attention of management and key personnel from business operations and deter distributors from selling the Company’s products and dissuade potential customers from purchasing the Company’s products.

Leases — The Company leases its facilities under noncancelable operating leases which expire at various times through 2015. The leases provide for the lessee to pay all cost of utilities, insurance, and taxes. Future minimum lease payments under the noncancelable leases as of March 31, 2010, are as follows (in thousands):

 

Years Ending June 30,

    

2010 (remaining 3 months)

   $ 426

2011

     1,671

2012

     1,576

2013

     1,161

2014

     1,112

Thereafter

     280
      

Total

   $ 6,226
      

Lease obligations for the Company’s foreign offices are denominated in foreign currencies, which were converted in the above table to U.S. dollars at the interbank exchange rate on March 31, 2010.

Rent expense for the three months ended March 31, 2010 and 2009 was $0.4 million and $0.5 million, respectively, and $1.0 million and $1.4 million for the nine months ended March 31, 2010 and 2009, respectively.

Purchase commitments —The Company had purchase commitments with contract manufacturers for inventory and with technology firms for usage of software licenses totaling approximately $13.8 million as of March 31, 2010.

Indemnification — Under the indemnification provisions of the Company’s customer agreements, the Company agrees to indemnify and defend its customers against infringement of any patent, trademark, or copyright of any country or the misappropriation of any trade secret, arising from the customers’ legal use of the Company’s services. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid by the customers under pertinent agreements. However, certain indemnification provisions potentially expose the Company to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against the Company or its customers pertaining to such indemnification provisions and no amounts have been recorded.

The Company also has entered into customary indemnification agreements with each of its officers and directors. The Company also has indemnification obligations to the underwriters of its initial public offering pursuant to the underwriting agreement executed in connection with that offering. As a result, the Company may have indemnification obligations to its officers, directors and underwriters in connection with the above-referenced securities-related litigation.

12. Segment Information

The Company is organized as, and operates in, one reportable segment: the development and sale of IP voice communication systems. The Company’s chief operating decision-maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of evaluating financial performance and allocating resources, accompanied by information about revenue by geographic regions. The Company’s assets are primarily located in the United States of America and not

 

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allocated to any specific region and it does not measure the performance of its geographic regions based upon asset-based metrics. Therefore, geographic information is presented only for revenue. Revenue by geographic region is based on the ship to address on the customer order.

The following presents total revenue by geographic region (in thousands):

 

     Three Months Ended
March 31,
   Nine Months Ended
March 31,
     2010    2009    2010    2009

United States

   $ 33,473    $ 28,824    $ 96,160    $ 95,186

International

     3,561      2,413      10,081      7,246
                           

Total revenues

   $ 37,034    $ 31,237    $ 106,241    $ 102,432
                           

13. Restructuring Costs

On March 31, 2009, the Company announced to the employees, a restructuring plan to lower its cost structure and improve efficiencies by reducing its worldwide workforce by approximately nine percent. As a result of the reduction in headcount, the Company recorded restructuring and other related charges, consisting of employee related termination costs in the three and nine months ended March 31, 2009.

There were no significant restructuring charges incurred in the three and nine months ended March 31, 2010. The following table sets forth the charges that are included in the operating expenses on the Company’s Consolidated Statement of Operations for the three and nine months ended March 31, 2009 (in thousands):

 

     Three and Nine months  ended
March 31, 2009
     Add Charges    Deduct Cash
Payments
   Non-Cash
Expense

Workforce reduction

   $ 501    $ —      $ —  

14. Restatement of Previously Issued Consolidated Financial Statements

As previously disclosed in the Form 10-K/A filed with the Securities and Exchange Commission on November 5, 2009, the Company identified an error in stock-based compensation for the three and nine months ending March 31, 2009. The error was identified after the Company’s third-party software provider notified its clients, including the Company, that it made a change to how its software program calculates stock-based compensation expense. Specifically, the prior version of this software calculated stock-based compensation expense by incorrectly continuing to apply a weighted average forfeiture rate to the vested portion of stock option awards until the grant’s final vest date rather than reflecting actual forfeitures as vested. Thus, this accounting error relates to the timing of stock-based compensation expense.

The Company determined that stock-based compensation expense error related to the three and nine months ended March 31, 2009 was $0.3 million and $0.8 million, respectively.

The following tables present the effect of the restatement adjustments by financial statement line item for Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows.

Condensed Consolidated Statement of Operations (in thousands):

 

     Three Months Ended
March 31, 2009
    Nine Months Ended
March 31, 2009
 
     As previously
reported
    As restated     As previously
reported
    As restated  

Cost of Revenue:

        

Product

   $ 8,623      $ 8,624      $ 28,720      $ 28,726   

Support and services

   $ 2,682      $ 2,730      $ 8,516      $ 8,589   

Total cost of revenue

   $ 11,305      $ 11,354      $ 37,236      $ 37,315   

Gross profit

   $ 19,932      $ 19,883      $ 65,196      $ 65,117   

Operating expenses:

        

Research and development

   $ 7,476      $ 7,552      $ 23,630      $ 23,769   

Sales and marketing

   $ 11,344      $ 11,472      $ 34,140      $ 34,484   

General and administrative

   $ 5,210      $ 5,301      $ 15,145      $ 15,399   

Total operating expenses

   $ 28,140      $ 28,435      $ 77,025      $ 77,762   

Loss from operations

   $ (8,208   $ (8,552   $ (11,829   $ (12,645

 

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     Three Months Ended
March 31, 2009
    Nine Months Ended
March 31, 2009
 
     As previously
reported
    As restated     As previously
reported
    As restated  

Loss before benefit from income taxes

   $ (8,059   $ (8,403   $ (11,262   $ (12,078

Net loss

   $ (7,003   $ (7,347   $ (11,108   $ (11,924

Net loss per share — basic and diluted

   $ (0.16   $ (0.17   $ (0.25   $ (0.27

Condensed Consolidated Statement of Cash Flows (in thousands):

 

     Nine Months Ended
March 31, 2009
 
     As previously
reported
    As restated  

Net loss

   $ (11,108   $ (11,924

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Stock-based compensation expense

   $ 6,736      $ 7,552   

Net cash provided by operating activities

   $ 6,428      $ 6,428   

 

ITEM 2. 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 condensed 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.”

The following discussion reflects the effects of the restatement discussed in Item 1 note 14 – Restatement of Previously Issued Consolidated Financial Statements to the Consolidated Financial Statements.

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.

We sell our products primarily through channel partners that market and sell our systems to enterprises across all industries, including 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 800 as of March 31, 2010. 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 will 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.

 

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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, engineering, 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 10% or less of our total revenue for the three and nine months ended March 31, 2010 and 2009, 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.

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 revenue attributable to existing enterprise customers, which currently represents a significant portion of our total revenue.

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 the rate of renewal 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 deferred revenue balance at March 31, 2010 was $26.6 million, consisting of $1.1 million of deferred product revenue and $25.5 million of deferred support and services revenues, of which $17.9 million is expected to be recognized within one year.

Gross profit. Our gross profit for products is primarily affected by our ability to reduce hardware costs faster than the decline in average overall system prices. We have been able to maintain our product gross profit by reducing hardware costs through product redesign and volume discount pricing from our suppliers. We have also introduced new, lower cost hardware following these introductions, which has continued to improve our product gross profit. In general, product gross profit on our switches is greater than product gross profit 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 system sales. We consider our ability to monitor and manage these factors to be a key aspect of maintaining product gross profit and increasing our profitability.

Gross profit for support and services can be lower than gross profit 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 maximum 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 profit 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 expenses. 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 increases in our headcount. We intend to expand our workforce to support our anticipated growth, and therefore our ability to forecast and increase revenue is critical to managing our operating expenses and profitability.

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.

 

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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 costs of personnel engaged in support and services, and are substantially fixed in the near term.

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 are devoting substantial resources to the development of additional functionality for existing products and the development of new products and related software applications.

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, allowance for doubtful accounts, 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, net. Other income (expense) primarily consists of interest earned on cash and short-term investments, foreign exchange gain (loss) and other miscellaneous income (expense).

Income tax provision (benefit). Income tax provision includes federal, state and foreign tax on our income. Historically, 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 had limited the realization of our net operating losses and tax credit carryforwards under Section 382 of the Internal Revenue Code in future periods. During the quarter ended March 31, 2010, the Company received a favorable tax ruling from the Internal Revenue Service related to Section 382. As a result of the ruling, at least $20 million of net operating losses that were previously limited by Section 382 of the Internal Revenue Code are now available to the Company to offset future taxable income and to recapture previously paid taxes. The deferred tax assets related to these net operating losses will have a full valuation allowance when they are reestablished. As a result, the Company plans to file an amended fiscal 2008 federal income tax return utilizing the available net operating losses and claim a tax refund for approximately $1.7 million, although we can provide no assurance as to the ultimate amount or timing of any refund.

Critical Accounting Policies and Estimates

The preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles in the United States of America, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and various other factors that we believe are reasonable under the circumstances. We consider our accounting policies related to revenue recognition, allowance for doubtful accounts, stock-based compensation, inventory valuation and accounting for income tax to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to estimate doubtful accounts,

 

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the calculation of stock-based compensation expense, and how we value inventory. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates. Management believes there have been no significant changes during the three months ended March 31, 2010 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2009 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. For a description of those accounting policies, please refer to our 2009 Annual Report on Form 10-K, as amended by Form 10-K/A.

Results of Operations

The following table sets forth unaudited selected consolidated statements of operations data for three and nine months ended March 31, 2010 and 2009.

SHORETEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share amounts)

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2010     2009     2010     2009  

Revenue:

        

Product

   $ 28,945      $ 24,691      $ 83,685      $ 83,801   

Support and services

     8,089        6,546        22,556        18,631   
                                

Total revenues

     37,034        31,237        106,241        102,432   

Cost of revenue

        

Product (1)

     10,049        8,624        29,369        28,726   

Support and services (1)

     2,933        2,730        8,323        8,589   
                                

Total cost of revenue

     12,982        11,354        37,692        37,315   
                                

Gross profit

     24,052        19,883        68,549        65,117   

Gross profit %

     64.9     63.7     64.5     63.6

Operating expenses:

        

Research and development (1,2)

     8,634        7,552        23,666        23,769   

Sales and marketing (1,2)

     14,726        11,472        39,653        34,484   

General and administrative (1,2)

     5,214        5,301        14,596        15,399   

Litigation settlement

     —          4,110        —          4,110   
                                

Total operating expenses

     28,574        28,435        77,915        77,762   
                                

Loss from operations

     (4,522     (8,552     (9,366     (12,645

Other income, net

     (120     149        168        567   
                                

Loss before provision for income taxes

     (4,642     (8,403     (9,198     (12,078

Benefit from income taxes

     153        1,056        87        154   
                                

Net loss

   $ (4,489   $ (7,347   $ (9,111   $ (11,924
                                

Net loss per share available to common stockholders:

        

Basic

   $ (0.10   $ (0.17   $ (0.20   $ (0.27

Diluted (3)

   $ (0.10   $ (0.17   $ (0.20   $ (0.27

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

        

Basic

     44,941        43,793        44,731        43,576   

Diluted (3)

     44,941        43,793        44,731        43,576   

 

(1)    Includes stock-based compensation as follows:

        

Cost of product revenue

   $ 34      $ 23      $ 99      $ 86   

Cost of support and services revenue

     207        184        553        606   

Research and development

     805        597        2,248        2,181   

Sales and marketing

     911        741        2,528        2,753   

General and administrative

     861        619        2,320        1,926   
                                
   $ 2,818      $ 2,164      $ 7,748      $ 7,552   
                                

(2)    Includes restructuring charge as follows:

        

Research and development

   $ —        $ 124      $ —        $ 124   

Sales and marketing

     —          278        (27     278   

General and administrative

     —          99        —          99   
                                
   $ —        $ 501      $ (27   $ 501   
                                
(3) Diluted net loss per share and share count reflect the weighted average number of common shares used in the basic net loss per share calculation. Potentially dilutive securities were not included in the compilation of diluted net loss per share for the periods which had a net loss because to do so would have been anti-dilutive.

 

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Use of Non-GAAP Financial Measures

We believe that evaluating the Company’s ongoing operating results may limit the reader’s understanding if limited to reviewing only generally accepted accounting principles (GAAP) financial measures. Many investors and analysts have requested that, in addition to reporting financial information in accordance with GAAP we also disclose certain non-GAAP information because it is useful in understanding the Company’s performance as it excludes non-cash and other special charges or credits that many investors and management feel may obscure the Company’s true operating performance. Likewise, we use these non-GAAP financial measures to manage and assess the profitability of the business and determine a portion of our employee compensation. We do not consider stock-based compensation expenses and other special charges and related tax adjustments in managing the core operations. These measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies. Non-GAAP net loss is calculated by adjusting GAAP net loss for stock-based compensation expense, special charges and the related tax impact. Non-GAAP net loss per share per share is calculated by dividing Non-GAAP net loss by the weighted average number of diluted shares outstanding for the period. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP, and because these amounts are not determined in accordance with GAAP, they should not be used exclusively in evaluating our business and operations. We have provided a reconciliation of non-GAAP financial measures in the table below.

 

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RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(Amounts in thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2010     2009     2010     2009  

GAAP net loss available to stockholders:

   $ (4,489   $ (7,347   $ (9,111   $ (11,924

Adjustments for non-GAAP items (1)

     2,818        7,048        7,721        12,436   

Tax effect of non-GAAP adjustments

     4        (517     (28     (575
                                

Non-GAAP net loss available to stockholders

   $ (1,667   $ (816   $ (1,418   $ (63
                                

GAAP diluted net loss per share :

   $ (0.10   $ (0.17   $ (0.20   $ (0.27

Adjustments for non-GAAP items

     0.06        0.16        0.17        0.28   

Tax effect of non-GAAP adjustments

     0.00        (0.01     0.00        (0.01
                                

Non-GAAP diluted net loss per share :

   $ (0.04   $ (0.02   $ (0.03   $ 0.00   
                                

Shares Used in Non-GAAP diluted per share calculation

     44,941        43,793        44,731        43,576   

 

(1)    Adjustments for non-GAAP items include:

        

Stock-based compensation

   $ 2,818      $ 2,164      $ 7,748      $ 7,552   

Litigation settlement-Mitel

     —          4,110        —          4,110   

Restructuring expense (benefit)

     —          501        (27     501   

Cancellation of contractual obligation included in sales and marketing

     —          273       —          273   
                                

Adjustments for non-GAAP items

   $ 2,818      $ 7,048      $ 7,721      $ 12,436   
                                

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

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2010     2009     2010     2009  

Revenue:

        

Product

   78   79   79   82

Support and services

   22   21   21   18
                        

Total revenue

   100   100   100   100

Cost of revenue:

        

Product

   27   27   28   28

Support and services

   8   9   8   8
                        

Total cost of revenue

   35   36   36   36
                        

Gross profit

   65   64   64   64

Operating expenses:

        

Research and development

   23   24   22   23

Sales and marketing

   40   37   37   34

General and administrative

   14   17   14   15

Litigation settlement

   —        13   —        4
                        

Total operating expenses

   77   91   73   76
                        

Operating loss

   (12 )%    (27 )%    (9 )%    (12 )% 

Interest and other income, net

   —        —        —        —     
                        

Loss before benefit from income tax

   (12 )%    (27 )%    (9 )%    (12 )% 

Benefit from income taxes

   —        3   —        —     
                        

Net loss

   (12 )%    (24 )%    (9 )%    (12 )% 
                        

 

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The following table sets forth GAAP and Non-GAAP reconciliation of operating expenses (in thousands):

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2010     2009     2010     2009  

Total GAAP operating expenses

   $ 28,574      $ 28,435      $ 77,915      $ 77,762   

Stock-based compensation included in operating expenses

     (2,577     (1,957     (7,096     (6,860

Litigation settlement-Mitel

     —          (4,110     —          (4,110

Restructuring charge included in operating expenses

     —          (501     27        (501

Cancellation of contractual obligation included in Sales and Marketing

     —          (273     —          (273 )
                                

Total Non-GAAP operating expenses

   $ 25,997      $ 21,594      $ 70,846      $ 66,018   
                                

Non-GAAP items as a % of GAAP operating expenses

     (9 )%      (24 )%      (9 )%      (15 )% 

Comparison of the three months ended March 31, 2010 and March 31, 2009

Net Revenue.

 

     Three Months Ended
March 31,
 

(Dollars in thousands)

   2010    2009    Dollar
Variance
   Percent
Variance
 

Revenue

   $ 37,034    $ 31,237    $ 5,797    19

The increase of $5.8 million was primarily attributable to an increase in sales of our products by $4.3 million or 17% to $29.0 million in the three months ended March 31, 2010 compared to $24.7 million in the three months ended March 31, 2009. Additionally, support and service increased by $1.6 million or 25% to $8.1 million in the three months ended March 31, 2010 compared to $6.5 million in the same period of 2009. The increase was attributable to revenue associated with post-contractual support contracts accompanying new system sales, post-contractual support contract renewals and increased revenue from training and installation services.

Cost of revenue and gross profit.

 

     Three Months Ended
March 31,
 

(Dollars in thousands)

   2010     2009     Dollar
Variance
   Percent
Variance
 

Cost of revenue

   $ 12,982      $ 11,354      $ 1,628    14

Gross profit

   $ 24,052      $ 19,883      $ 4,169    21

Gross profit %

     64.9     63.7     

Cost of revenue . Gross profit increased from 63.7% in the three months ended March 31, 2009 to 64.9% in the three months ended March 31, 2010 primarily due to increase in support and service gross margin. Product gross profit percent remained comparable at 65% in the three months ended March 31, 2009 and March 31, 2008.

Support and services gross profit increased from 58.3% in the three months ended March 31, 2009 to 63.7% in the same period of 2010. In the three months ended March 31, 2010, support and services gross profit increased due to support and services revenue increasing by 24% and support and services cost increasing by only 7%, compared to the same period in 2009. The service cost increase was limited to 7% 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, remained comparable in the three months ended March 31, 2010 and March 31, 2009, although the headcount increased from 57 employees at March 31, 2009 to 62 employees at March 31, 2010.

Operating expenses.

 

     Three Months Ended
March 31,
 

(Dollars in thousands)

   2010    2009    Dollar
Variance
    Percent
Variance
 

Research and development

   $ 8,634    $ 7,552    $ 1,082      14

Sales and marketing

     14,726      11,472      3,254      28

General and administrative

     5,214      5,301      (87   (2 )% 

Litigation settlement-Mitel

     —        4,110      (4,110   (100 )% 

 

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Research and development. Compensation, including stock-based compensation, for research and development employees accounted for $0.8 million of the increase, primarily as a result of an increase in headcount to 161 employees at March 31, 2010, from 137 employees at March 31, 2009. Additionally, consulting and temporary help accounted for $0.4 million of the increase.

Sales and marketing. The increase in sales and marketing expenses is attributable to increases in advertisement and promotions of $1.7 million, employee compensation of $0.8 million and sales commissions of $0.5 million.

General and administrative.  Legal costs, bad debt expense and rent accounted for $0.4 million, $0.4 million, $0.2 million, respectively, of the decrease. The decrease was partially off-set by a $0.2 million increase, each in employee compensation, employee costs and consulting and temporary personnel.

Litigation settlement.  We recorded a charge of $4.1 million as a result of the agreement to settle our litigations with Mitel in the three months ended March 31, 2009.

Other income (expense),net.

 

     Three Months Ended
March 31,
 

(Dollars in thousands)

   2010     2009    Dollar
Variance
    Percent
Variance
 

Other income (net)

   $ (120   $ 149    $ (269   (181 )% 

Other income (expense),net. The decrease was primarily attributable to an increase in foreign currency exchange translation net loss of $0.2 million in the three months ended March 31, 2010 compared to the same period of 2009. Additionally, interest income (net) dropped by $0.1 million primarily due to a decline in overall interest rates in the three months ended March 31, 2010 compared to the same period of 2009.

Benefit from income taxes.

 

     Three Months Ended
March 31,
 
     2010    2009    Dollar
Variance
    Percent
Variance
 

Benefit from income taxes

   $ 153    $ 1,056    $ (903   (86 )% 
                            

Income tax benefit. The income tax benefit of $0.2 million for the three months ended March 31, 2010 represents the tax benefit related to the timing of deductions in the federal income tax return, partially offset by a tax provision for the profitable jurisdictions and state taxes based upon income earned during the period with no tax benefit accrued on the loss jurisdictions. For the three months ended March 31, 2009, the Company had a tax benefit of $1.1 million on a pre-tax loss of $8.4 million. The tax benefit is primarily a result of the year to date losses which were greater than the non-deductible expenses and thus the prior quarters tax provision was reduced. This resulted in a benefit during the three months ended March 31, 2009.

Comparison of the Nine months ended March 31, 2010 and March 31, 2009

Net Revenues.

 

     Nine Months Ended
March 31,
 

(Dollars in thousands)

   2010    2009    Dollar
Variance
   Percent
Variance
 

Revenue

   $ 106,241    $ 102,432    $ 3,809    4

The increase was primarily attributable to increase in sales of support and services. Support and services revenue was $22.6 million in the nine months ended March 31, 2010, an increase of $4.0 million, or 22%, from $18.6 million in the same period of 2009. The increase was attributable to revenue associated with post-contractual support contracts accompanying new system sales, post-contractual support contract renewals and increased revenue from training and installation services.

 

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Cost of revenue and gross profit.

 

     Nine Months Ended
March 31,
 

(Dollars in thousands)

   2010     2009     Dollar
Variance
   Percent
Variance
 

Cost of revenue

   $ 37,692      $ 37,315      $ 377    1

Gross profit

   $ 68,549      $ 65,117      $ 3,432    5

Gross profit %

     64.5     63.6     

Cost of revenue . Gross profit increased from 63.6% in the nine months ended March 31, 2009 to 64.5% in the nine months ended March 31, 2010 primarily due to increase in support and service gross margin partially offset by a decline in product gross margin.

Support and services gross profit increased from 53.9% in the nine months ended March 31, 2009 to 63.1% in the same period of 2010. In the nine months ended March 31, 2010, support and services gross profit increased due to support and services revenue increasing by 21% and support and services cost decreasing by 3%, compared to the same period in 2009. The service costs decreased by 3% 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, decreased 5% in the nine months ended March 31, 2010, although the headcount increased from 57 employees at March 31, 2009 to 62 employees at March 31, 2010. The increase in support and services gross profit was partially offset by decrease in product gross profit from 66% in the nine months ended March 31, 2009 to 65% in the nine months ended March 31, 2010.

Operating expenses.

 

     Nine Months Ended
March 31,
 

(Dollars in thousands)

   2010    2009    Dollar
Variance
    Percent
Variance
 

Research and development

   $ 23,666    $ 23,769    $ (103   0

Sales and marketing

   $ 39,653    $ 34,484    $ 5,169      15

General and administrative

   $ 14,596    $ 15,399    $ (803   (5 )% 

Litigation settlement-Mitel

     —        4,110      (4,110   (100 )% 

Research and development. Research and development expenses decreased by $0.1 million primarily due to decreases in outside engineering service expenses of $0.7 million, bonus expense of $0.4 million, and equipment repair and maintenance of $0.1 million. These decreases were partially offset by increases in employee compensation of $0.9 million and software licenses and maintenance expenses of $0.2 million.

Sales and marketing. The increase in sales and marketing expenses is attributable to increases in advertisement expense of $2.2 million, employee compensation of $1.3 million, commissions of $0.8 million, contractor and outside help of $0.6 million and travel expenses of $0.6 million.

General and administrative.  General and administrative expenses declined by $0.8 million primarily due to decreases in legal expenses of $1.1 million, bad debt expense of $1.1 million, and bonus of $0.2 million. These decreases were partially offset by increases in consulting and temporary labor personnel of $0.6 million, employee stock compensation of $0.4 million, employee-related costs of $0.3 million and professional fees of $0.2 million.

Litigation settlement.  We recorded a charge of $4.1 million as a result of the agreement to settle our litigations with Mitel in the nine months ended March 31, 2009.

Other income (expense), net.

 

     Nine Months Ended
March 31,
 

(Dollars in thousands)

   2010    2009    Dollar
Variance
    Percent
Variance
 

Other income (net)

   $ 168    $ 567    $ (399   (70 )% 

Other income (expense),net. The decrease was primarily attributable to a decline in interest income by $0.9 million due to lower overall interest rates in the nine months ended March 31, 2010 compared to the same period of 2009. This was partially offset by a net decrease in foreign currency exchange translation loss of $0.5 million in the nine months ended March 31, 2010 compared to the same period of 2009.

 

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Table of Contents

Benefit from income taxes.

 

     Nine Months Ended
March 31,
 
     2010    2009    Dollar
Variance
    Percent
Variance
 

Benefit from income taxes

   $ 87    $ 154    $ (67   (44 )% 

Income tax benefit. The income tax benefit of $0.1 million for the nine months ended March 31, 2010 represents the tax benefit related to the timing of deductions in the federal income tax return, partially offset by a tax provision for the profitable jurisdictions and state taxes based upon income earned during the period with no tax benefit accrued on the loss jurisdictions. For the nine months ended March 31, 2009, the Company had a tax benefit of $0.2 million on a pre-loss of $12.1 million.

Liquidity and Capital Resources

Balance Sheet and Cash Flows

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

 

     March 31,
2010
   June 30,
2009
   Increase/
(Decrease)
 

Cash, cash equivalents and short-term investments:

        

Cash and cash equivalents

   $ 67,703    $ 73,819    $ (6,116

Short-term investments

     46,878      33,847      13,031   
                      

Total

   $ 114,581    $ 107,666      6,915   
                      

As of March 31, 2010, our principal sources of liquidity consisted of cash and cash equivalents and short-term investments of $114.6 million and accounts receivable, net of $19.6 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.

We believe that our $114.6 million of cash and cash equivalents and short-term investments at March 31, 2010 will be sufficient to fund our operating requirements for at least 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 addition of new business initiatives, 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 and licensing 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:

 

     Nine Months Ended

(Dollars in thousands)

   March 31,
2010
    March 31,
2009

Net cash flow provided by (used in):

    

Operating activities

   $ 10,233      $ 6,428

Investing activities

     (17,735     13,017

Financing activities

     1,386        1,404
              

Net (decrease) increase in cash and cash equivalents

   $ (6,116   $ 20,849
              

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 operating expense 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 current assets and liabilities. We procure finished goods inventory from our contract manufacturers and typically pay them in 30 days. We extend credit to our channel partners and typically collect in 30 to 60 days. In some cases we also prepay for license rights to third-party products in advance of sales.

Net loss during the nine months ended March 31, 2010 and 2009 included non-cash charges of $7.7 million and $7.6 million in stock-based compensation expense, respectively, bad debt expense (benefit) of $(0.1) million and $1.0 million, respectively, and $2.0 million and $1.4 million in depreciation and amortization, respectively.

 

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Cash provided by operating activities during the nine months ended March 31, 2010 also reflect net changes in operating assets and liabilities, which provided $9.3 million consisting primarily of a significant decrease in accounts receivables of $1.9 million due to a decrease in days sales outstanding (DSO), an increase in accrued employee compensation of $1.3 million, an increase in deferred revenue of $4.1 million due to higher maintenance support contracts, an increase of $5.6 million in accrued liabilities, and a decrease in other assets of $1.0 million, partially offset by an increase in prepaid and other current assets of $3.7 million, an increase in inventories of $0.5 million and a decrease in accounts payables of $0.3 million.

Cash provided by operating activities during the nine months ended March 31, 2009 also reflect net changes in operating assets and liabilities, which provided $8.2 million, consisting primarily of a decrease in inventories of $2.3 million due to improved inventory turnover, a decrease in accounts receivable of $1.7 million, an increase in deferred revenue of $2.4 million and an increase in accrued liabilities and other long-term liabilities of $3.4 million, partially offset by a decrease in accounts payable of $1.1 million.

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 in corporate bonds 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.

Net cash (used in) provided by investing activities was $(17.7) million and $13.0 million in the nine months March 31, 2010 and 2009, respectively. Net cash used in investing activities in the first nine months ended March 31, 2010 related to net purchase of short-term investments of $13.0 million, purchase of fixed assets of $3.5 million and purchase of a software license and other of $1.2 million. In the nine months ended March 31, 2009, cash provided by investing activities primarily related to the net short-term investments sold and matured.

Cash flows from financing activities

Net cash provided by financing activities was $1.4 million each for the nine months ended March 31, 2010 and 2009, primarily due from the exercise of common stock options and issuance of common stock under employee stock purchase plan.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements 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.

Contractual obligations and commitments

The following table summarizes our contractual obligations as of March 31, 2010 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods:

 

     Payments Due By Period

(Dollars in thousands)

   Less than 1
Year
   1 - 3 Years    3 - 5 Years    5 years and after    Total

Operating Leases

   $ 1,676    $ 2,886    $ 1664    $ —      $ 6,226

Purchase obligations

     11,311      2,000      500      —        13,811
                                  

Total

   $ 12,987    $ 4,886    $ 2,164    $ —      $ 20,037
                                  

As of March 31, 2010, the Company’s total amount of unrecognized tax benefit was approximately $1.8 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting ShoreTel, Inc., see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K, as amended by Form 10-K/A for the fiscal year ended June 30, 2009, which is incorporated herein by reference. Our exposure to market risk has not changed materially since June 30, 2009.

 

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Litigation — The Company is a party to the following material litigation:

U.S. Federal Court Class Action Litigation . On January 16, 2008, a purported stockholder class action lawsuit captioned Watkins v. ShoreTel, Inc., et al., was filed in the United States District Court for the Northern District of California against the Company, certain of its officers and directors, and the underwriters of the Company’s initial public offering. A second purported class action alleging the same claims were filed on January 29, 2008 and the lawsuits were consolidated. A second consolidated amended class action complaint was subsequently filed on March 2, 2009. The consolidated action is purportedly brought on behalf of those who purchased the Company’s common stock pursuant to the initial public offering on July 3, 2007, purports to allege claims for violations of the federal securities laws, and seeks unspecified compensatory damages and other relief. The Company and counsel for the lead plaintiffs reached an agreement in principle in February 2010 to settle the litigation, pursuant to which, without admitting any liability or wrongdoing of any kind, the Company would pay the plaintiff class $250,000 with the remaining $2.75 million funded by insurance. This agreement, which is subject to final documentation and Court approval, would resolve all the claims in the litigation.

California State Court Derivative Action . On January 30, 2008, a purported shareholder derivative lawsuit captioned Berkovitz v. Combs, et al., was filed in the Superior Court of the State of California, County of Santa Clara, against the Company (as a nominal defendant), its directors and certain officers. The complaint purports to allege claims for breach of fiduciary duty and other claims and seeks unspecified compensatory damages and other relief based on essentially the same allegations as the class action litigation. The Company and plaintiffs have reached an agreement in principle to settle the litigation, pursuant to which, without admitting any liability or wrongdoing of any kind, the Company would adopt certain corporate remedial measures, terms of which are still being negotiated. Once documented, the settlement would be subject to Court approval. The Company could become involved in litigation from time to time relating to claims arising out of the ordinary course of business or otherwise. Any litigation, regardless of outcome, is costly and time-consuming, can divert the attention of management and key personnel from business operations and deter distributors from selling the Company’s products and dissuade potential customers from purchasing the Company’s products.

 

ITEM 1A. RISK FACTORS

There has been no material change in our risk factors as described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K, as amended by Form 10-K/A for the fiscal year ended June 30, 2009.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Use of Proceeds from Public Offering of Common Stock

The effective date of the registration statement for our initial public offering was July 2, 2007. As of March 31, 2010, the proceeds from our initial public offering have been invested in cash, cash equivalents and short term investments. None of the use of the proceeds was made, directly or indirectly, to our directors, officers, or persons owning 10% or more of our common stock.

 

ITEM 6. EXHIBITS

See Index to Exhibits following the signature page to this Form 10-Q, which is incorporated by reference herein.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 6, 2010

 

ShoreTel, Inc.
By:  

/s/    M ICHAEL E. H EALY

 

Michael E. Healy

Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit

Number

  

Exhibit Title

3.01    Executive Employment Agreement with John W. Combs dated February 22, 2010
31.1(1)    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2(1)    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1(1)    Section 1350 Certification of Chief Executive Officer.
32.2(1)    Section 1350 Certification of Chief Financial Officer.

 

(1) This certification accompanying this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

 

(b) Financial Statement Schedules.

All schedules have been omitted because they are either inapplicable or the required information has been given in the annual consolidated financial statements or the notes thereto.

 

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Exhibit 3.01

EXECUTIVE EMPLOYMENT AGREEMENT

This Executive Employment Agreement (the “ Agreement ”) is made and entered into as of February 22, 2010 (“ Effective Date ”), by and between ShoreTel, Inc., a Delaware corporation (the “ Company ”), and John W. Combs (the “ Executive ”).

 

1. NEW AGREEMENT

This Agreement represents the entire agreement and understanding between the parties as to the subject matter herein (whether oral or written and whether express or implied) and expressly supersedes any existing agreement or understanding providing for any employment, change in control, severance, termination or similar benefits by and between the Executive and the Company, including without limitation the Offer Letter, dated July 14, 2004, and the Retention Incentive Agreement between Executive and the Company.

 

2. POSITION AND DUTIES

Executive will serve as the Company’s President and Chief Executive Officer (“ CEO ”) and will report to the Company’s Board of Directors (the “ Board ”). Executive will have overall operating responsibility for the day-to-day management of the Company and will render such business and professional services in the performance of his duties, consistent with Executive’s position, as shall reasonably be assigned to him by the Board.

 

3. MEMBERSHIP ON BOARD

Executive is currently the Chairman of the Board. As long as Executive serves as CEO, the Company will nominate Executive for reelection as a member of the Board whenever his term expires. Executive may be removed from the Board in accordance with applicable law and the Company’s Bylaws. Executive’s position on the Board is also subject to Section 5 below.

 

4. EXCLUSIVE SERVICE

Executive will devote his full working time and attention to the business of the Company and will not directly or indirectly, engage or participate in any business that is competitive in any manner with the business of the Company. Executive will also be expected to comply with and be bound by the Company’s operating policies, procedures and practices that are from time to time in effect during the term of his employment. Executive’s service on the boards of directors of other companies will be subject to the same review and approval process that applies to other members of the Board. Executive will not render other services to any for-profit business other than the Company without the prior approval of the Board. It is understood that the Board may deny approval for any reason that it deems in the best interests of the Company including the desire to have Executive not take on additional time commitments.

 

5. AT-WILL EMPLOYMENT

Executive and the Company understand and acknowledge that Executive’s employment with the Company constitutes “at-will” employment, and the employment relationship may be terminated at any time, with or without cause and with or without notice. Executive agrees to resign from all positions that he holds with the Company, including, without limitation, his position as Chairman and a member of the Board immediately following the termination of his employment, if the Board so requests. Upon the Board’s request, Executive shall execute any and all documents reasonably required to give effect to any such terminations.

 

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6. COMPENSATION AND BENEFITS

 

  6.1 Base Salary . While employed by the Company pursuant to this Agreement, the Company shall pay Executive an annual base salary of $350,000 (the “ Base Salary ”), payable in accordance with the Company’s normal payroll practices, with such payroll deductions and withholdings as are required by law. The Base Salary will be reviewed annually by the Compensation Committee of the Board and may be increased (but not reduced, except as provided in Section 10.6(b)). Any changes thereto shall be determined by the Company in its sole and absolute discretion. Except as specifically set forth in this Section 6.1, the term “Base Salary” as used in this Agreement means the base salary of the Executive immediately preceding the Executive’s Termination Date.

 

  6.2 Incentive Compensation Target Bonus . Executive will be eligible to receive an annual objective-based incentive bonus (“ Target Bonus ”) based on criteria established by the Board. For the fiscal year of Executive’s employment ending June 30, 2010 (the “ 2010 Bonus ”), Executive’s Target Bonus will be equal to eighty-five percent (85%) of Executive’s then-current Base Salary subject to the FY10 CEO Performance Evaluation Process as currently documented by the Compensation Committee and ratified by the Board. Following the 2010 Bonus, Executive’s Target Bonus, if any, will be determined by the Board following the then-current FY CEO Performance Evaluation Process as documented by the Compensation Committee and ratified by the Board. The Target Bonus is conditioned upon Executive’s satisfying the criteria and objectives established by the Board. Except as may be set forth otherwise herein, to receive payment of any bonus Executive must be employed by the Company at the time bonuses are paid.

 

  6.3 Employee Benefits . Executive shall be eligible to participate in all employee benefit plans and arrangements, including, but not limited to, medical, dental, vision and long-term disability insurance benefits and arrangements, as are made available by the Company to its other senior executives, subject to the terms and conditions thereof.

 

  6.4 Vacation . Executive will be entitled to paid vacation and holidays pursuant to the terms of the Company’s vacation policy as may exist from time to time.

 

  6.5

Relocation Payment . The Board and the Company have determined that it is in the best interests of the Company for the Executive to relocate to the San Francisco Bay Area and work at the Company’s headquarters in Sunnyvale, CA. The Company shall pay to Executive a one-time relocation payment of $201,600, less all applicable deductions and withholding, which shall be payable within sixty (60) days following the Effective Date (the “ Relocation Payment ”). In the event Executive’s employment terminates for any reason, whether voluntarily or involuntarily, other than either a (i) Termination in Absence of Change of Control (as defined below) or a (ii) Termination Upon Change of Control (as defined below) within twenty-four (24) months following the Effective Date, Executive shall repay to the Company the Relocation Payment, prorated based on the number of months remaining in the twenty-four (24) month period following the Effective Date. Executive hereby authorizes the Company to withhold from his final paycheck any repayment of the Relocation Payment due to the Company and further agrees to re-affirm this authorization in writing if so requested by the Company. In the event the amount of the Relocation Payment that Executive owes the Company is greater

 

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  than the amount withheld from his final paycheck, Executive agrees to pay the remaining balance in full to the Company within thirty (30) days of his Termination Date. In the event Executive’s employment terminates in a Termination in Absence of Change of Control or a Termination Upon Change of Control no repayment to the Company shall be required.

 

  6.6 Expenses . The Company will, in accordance with applicable Company policies and guidelines, reimburse Executive for all reasonable and necessary expenses incurred by Executive in connection with his performance of services on behalf of the Company.

 

  6.7 Annual Physical . The Company will pay on Executive’s behalf the cost of one annual physical at Scripps Medical Center located in Southern California.

 

7. Q1 2010 EQUITY GRANTS

 

  7.1

Q1 2010 Option . On February 22, 2010 (the “ Date of Grant ”), Executive was granted an option under the Company’s 2007 Equity Incentive Plan (the “ Plan ”) to purchase 200,000 shares of the Company’s common stock (the “ Q1 2010 Option ”). The Q1 2010 Option cliff vests as to 100% of the shares subject to the Q1 2010 Option on the third (3 rd ) anniversary of the Date of Grant. Vesting of the Q1 2010 Option is subject to Executive’s continued service as a full-time employee of the Company, and in the event Executive ceases to be a full-time employee of the Company but remains a member of the Board (whether as a full-time salaried executive member or otherwise), vesting shall immediately cease unless the Board determines otherwise. The Q1 2010 Option is subject to the terms and conditions of the Plan, the written stock option agreement governing the Q1 2010 Option and the terms and conditions herein. Notwithstanding the foregoing, in the event of certain terminations of employment from the Company, the vesting of the Q1 2010 Option may be accelerated as set forth in Section 8.3.4 below.

 

  7.2

Q1 2010 RSU . On the Date of Grant, Executive was granted 110,000 restricted stock units under the Plan (the “ Q1 2010 RSU ” and together with the Q1 2010 Option, the “ Q1 2010 Awards ”). The Q1 2010 RSU cliff vests as to 100% of the shares subject to the Q1 2010 RSU on the third (3 rd ) anniversary of the Date of Grant. Vesting of the Q1 2010 RSU is subject to Executive’s continued service as a full-time employee of the Company, and in the event Executive ceases to be a full-time employee of the Company but remains a member of the Board (whether as a full-time salaried executive member or otherwise), vesting shall immediately cease unless the Board determines otherwise. The Q1 2010 RSU is subject to the terms and conditions of the Plan, the written restricted stock unit agreement governing the Q1 2010 RSU and the terms and conditions herein. Notwithstanding the foregoing, in the event of certain terminations of employment from the Company, the vesting and settlement of the Q1 2010 RSU may be accelerated as set forth in Section 8.3.4 below.

 

8. TERMINATION BENEFITS

 

  8.1 Prior Obligations . In the event that Executive’s employment terminates for any reason, whether voluntary or involuntary, Executive shall be entitled to the benefits under this Section 8.1:

 

  8.1.1 Accrued Salary and Vacation . A lump sum payment of all salary and accrued vacation earned through the Termination Date.

 

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  8.1.2 Expense Reimbursement . Upon submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses incurred by the Executive, consistent with past practices, in connection with the business of the Company prior to the Executive’s Termination Date.

 

  8.1.3 Employee Benefits . Benefits, if any, under any 401(k) plan, nonqualified deferred compensation plan, employee stock purchase plan and other Company benefit plans under which the Executive may be entitled to benefits, subject to and payable pursuant to the terms of such plans.

 

  8.2 Termination in Absence of a Change of Control : Subject to Section 8.4 and provided that the Executive executes a binding Termination Release Agreement in a form specified by the Company substantially as attached as Exhibit A within twenty-one (21) days from his Termination Date as set forth therein, in the event of the Executive’s Termination in the Absence of a Change of Control, in addition to the benefits provided under Section 8.1 of this Agreement, Executive shall be entitled to the following benefits:

 

  8.2.1 Executive shall receive an amount equal to eighteen (18) months of Executive’s Base Salary, payable in one lump sum.

 

  8.2.2 Provided that Executive timely elects continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (“ COBRA ”), the Company will reimburse Executive for premiums paid for such continuation coverage for a period of eighteen (18) months after Executive’s Termination Date.

 

  8.2.3

Executive shall receive an amount equal to Executive’s Target Bonus less any previously paid advances on such bonus for the fiscal year in which the Termination in the Absence of a Change of Control occurs, prorated for the number of days of Executive’s service to the Company for such year, payable in one lump sum. If such termination were to occur in the second (2 nd ) half of the fiscal year, the first (1 st)  half incentive plan funded percentage would be used and a performance rating factor of 1.0 in calculating the amount owed.

 

  8.3 Additional Benefits on Termination Upon Change of Control . Subject to Section 8.4 and provided that the Executive executes a binding Termination Release Agreement in a form specified by the Company substantially as attached as Exhibit A within twenty-one (21) days from his Termination Date as set forth therein, in the event of the Executive’s Termination Upon a Change of Control, in addition to the benefits provided under Section 8.1 of this Agreement (and in place of the benefits provided under Section 8.2 of this Agreement), Executive shall be entitled to the following benefits:

 

  8.3.1 Executive shall receive an amount equal to eighteen (18) months of Executive’s Base Salary, payable in one lump sum.

 

  8.3.2 Provided that Executive timely elects continuation coverage pursuant to COBRA, the Company will reimburse Executive for premiums paid for such continuation coverage for a period of eighteen (18) months after Executive’s Termination Date.

 

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  8.3.3 Executive shall receive an amount equal to one hundred and fifty percent (150%) of Executive’s Target Bonus for the year in which the Termination Upon Change of Control occurs, payable in one lump sum.

 

  8.3.4 With respect to the Q1 2010 Awards only, (i) if the Termination Upon a Change of Control occurs between the date of grant of the Q1 2010 Awards and the first anniversary of such date, one third (1/3) of the total shares subject to the Q1 2010 Awards shall have their vesting and exercisability (as applicable) accelerated in full; (ii) if the Termination Upon a Change of Control occurs between the first anniversary of the date of grant of the Q1 2010 Awards and the second anniversary of such date, two thirds (2/3) of the total shares subject to the Q1 2010 Awards shall have their vesting and exercisability accelerated in full and (iii) if the Termination Upon a Change of Control occurs between the second anniversary of the date of grant of the Q1 2010 Awards and the third anniversary of such date, one hundred percent (100%) of the total shares subject to the Q1 2010 Awards shall have their vesting and exercisability (as applicable) accelerated in full. The Executive shall be entitled to exercise the Q1 2010 Option within the period as specified by the Q1 2010 Option agreements, but in no event later than the expiration date of the Q1 2010 Option agreement.

 

  8.3.5 All unvested and outstanding Equity Awards other than the Q1 2010 Awards granted to Executive prior to the Change of Control (the “ Other Equity Awards ”) shall have their vesting and exercisability accelerated in full. The Executive shall be entitled to exercise any Other Equity Award within the period as specified by such Other Equity Award, but in no event later than the expiration date of such Other Equity Award; provided , however , to the extent permitted by Section 409A, the regulations thereunder, and the terms of the Other Equity Awards, that if such Other Equity Awards are not assumed by the Successor in a Change of Control, they shall accelerate in full and must be exercised or cashed out in full prior to the consummation of the Change of Control regardless of whether there occurs a Termination Upon Change of Control.

 

  8.3.6 Transition Services for Termination Upon Change of Control . As a condition to your receipt of the benefits provided pursuant to this Section 8.3, you agree that you will make yourself available to the Company (and any successor) following your Termination Upon a Change of Control to provide reasonable transition services for a period of time not to exceed three (3) months, provided that such services shall not account for greater than twenty percent (20%) of the level of services you provided in your capacity as an employee prior to your Termination Upon Change of Control.

 

  8.4 Timing of Payments .

 

  8.4.1 In the event that Executive’s employment terminates for any reason, whether voluntarily or involuntarily, all payments made under Section 8.1 of this Agreement shall be made within sixty (60) days of the Termination Date, provided that, for any payments where a release is required, such release has been executed and is effective.

 

  8.4.2

In the event of a Termination in Absence of a Change of Control, all payments (other than COBRA premium reimbursements) made under Section 8.2 of this

 

5


  Agreement shall be made within sixty (60) days of the Termination Date, provided that, for any payments where a release is required, such release has been executed and is effective.

 

  8.4.3 In the event of a Termination Upon a Change of Control, all payments (other than COBRA premium reimbursements) made under Section 8.3 of this Agreement shall be made within sixty (60) days of the Termination Date, provided however that if Executive’s Termination Date is prior to the consummation of the Change of Control, all payments (other than COBRA premium reimbursements) made under Section 8.3 of this Agreement (less any payments previously made under Section 8.2 of this Agreement) shall be made within sixty (60) days of the consummation of the Change of Control, provided further that, for any payments where a release is required, such release has been executed and is effective.

 

9. FEDERAL EXCISE TAX UNDER SECTION 280G

If (1) any amounts payable to the Executive under this Agreement or otherwise are characterized as excess parachute payments pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the “ Code ”), and (2) the Executive thereby would be subject to any United States federal excise tax due to that characterization, then Executive’s termination benefits hereunder will be payable either in full or in a lesser amount, whichever would result, after taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, in Executive’s receipt on an after-tax basis of the greatest amount of termination and other benefits. The determination of any reduction required pursuant to this section (including the determination as to which specific payments shall be reduced) shall be made by one of the seven largest accounting firms doing business in the U.S. which otherwise does not perform services for the Company, as designated by the Company, and such determination shall be conclusive and binding upon the Company or any related corporation for all purposes. If required, the payments and benefits under this Agreement shall be reduced in the following order: (A) a pro rata reduction of (i) cash payments that are subject to Section 409A as deferred compensation and (ii) cash payments not subject to Section 409A; (B) a pro rata reduction of (i) employee benefits that are subject to Section 409A as deferred compensation and (ii) employee benefits not subject to Section 409A; and (C) a pro rata cancellation of (i) accelerated vesting of stock and other equity-based awards that are subject to Section 409A as deferred compensation and (ii) stock and other equity-based awards not subject to Section 409A. In the event that acceleration of vesting of stock and other equity-based award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of Executive’s stock and other equity-based awards unless Executive elects in writing a different order for cancellation.

 

10. DEFINITIONS

 

  10.1 Capitalized Terms Defined . Capitalized terms used in this Agreement shall have the meanings set forth in this Section 10, unless the context clearly requires a different meaning.

 

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  10.2 Cause ” means:

 

  (a) material failure to perform Executive’s duties; provided that no termination for Cause under this subsection (a) shall occur unless the Executive: (i) has been provided with notice of the Company’s intention to terminate the Executive for Cause, and (ii) has had at least 30 days to cure or correct Executive’s behavior;

 

  (b) engagement in intentional misconduct which is materially detrimental to the Company; provided that no termination for Cause under this subsection (b) shall occur unless the Executive: (i) has been provided with notice of the Company’s intention to terminate the Executive for Cause, and (ii) has had at least 30 days to cure or correct his or her behavior;

 

  (c) failure or refusal to comply in any material respect with the terms of the Company’s Assignment and Confidentiality Agreement, the Company’s insider trading policy, or any other reasonable written policies of the Company; provided that no termination for Cause under this subsection (c) shall occur unless the Executive: (i) has been provided with notice of the Company’s intention to terminate the Executive for Cause, and (ii) has had at least 30 days to cure or correct his or her behavior;

 

  (d) an act or acts of material fraud or dishonesty undertaken by Executive and intended to result in Executive’s substantial gain or personal enrichment at the expense of the Company;

 

  (e) conviction of or plea of no contest to any felony; or

 

  (f) a good faith determination by the Board that Executive has failed to cooperate with the Company in any governmental or internal investigation of the Company or its directors or officers.

 

  10.3 Change of Control ” means:

 

  (a) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), other than a trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, becomes the “beneficial owner” (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing fifty (50%) percent or more of (A) the outstanding shares of common stock of the Company or (B) the combined voting power of the Company’s outstanding securities;

 

  (b) the consummation of a merger or consolidation, or series of related transactions, which results in the voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), directly or indirectly, at least fifty (50%) percent of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation;

 

7


  (c) the sale or disposition of all or substantially all of the Company’s assets (or consummation of any transaction, or series of related transactions, having similar effect); or

 

  (d) a change in the composition of the Board occurring within a twelve (12) month period, as a result of which fewer than a majority of the Directors are “Incumbent Directors.” “Incumbent Directors shall mean Directors who are either (i) Directors as of the date of this Agreement, or (ii) elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

 

  10.4 Company ” shall mean ShoreTel, Inc. and, following a Change of Control, any Successor.

 

  10.5 Equity Award ” shall mean any option, restricted stock award, restricted stock unit award, stock appreciation right or other equity award to acquire shares of the Company’s common stock granted or issued to the Executive.

 

  10.6 Good Reason ” means a material negative change in the service relationship by the occurrence of any of the following conditions, without the Executive’s written consent:

 

  (a) a reduction of Executive’s authority, duties, or responsibilities provided that all reductions occurring over the preceding consecutive twelve (12) month period in the aggregate are material; provided , however , that the following shall not , in and of themselves, constitute “Good Reason”: (i) absent a Change of Control, the termination of Executive’s position as “President”, if Executive remains CEO; and (ii) absent a Change of Control, the termination of Executive’s position as “Chairman of the Board”, or as a general member of the Board, if Executive remains CEO.

 

  (b) a fifteen percent (15%) or more reduction in the Executive’s Base Salary relative to the highest amount in effect since the Effective Date (other than an equivalent percentage reduction in annual base salaries that applies to Executive’s entire business unit or, prior to a Change of Control, applies to the majority of named executive officers);

 

  (c) the Company’s requiring the Executive to be based at any office or location more than 35 miles from the Company’s headquarters in Sunnyvale, CA, which is where the Executive is based as of the Effective Date;

 

  (d) The Company’s failure to obtain the assumption of this Agreement by any successor corporation to or acquirer of the Company;

 

  (e) A requirement that Executive report to anyone other than the Board; or

 

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  (f) After a Change in Control, a requirement that Executive serve in any position other than Chief Executive Officer of a corporation whose shares are publicly traded or is a stand-alone entity that is privately owned.

 

  10.7 Permanent Disability ” means “disability” as defined in Section 409A and Treasury Regulations promulgated thereunder:

 

  10.8 Successor ” means the Company as defined above and any successor to or assignee of substantially all of its business and/or assets whether or not as part of a Change of Control.

 

  10.9 Termination Date ” means the effective date of an Executive’s “separation from service” (as defined in Section 409A and Treasury Regulations promulgated thereunder).

 

  10.10 Termination in Absence of Change of Control ” means:

 

  10.10.1 any termination of the Executive’s employment by the Company without Cause other than during the period beginning three (3) months prior to the consummation of a Change of Control and ending on the date which is twelve (12) months following a Change of Control; or

 

  10.10.2 any resignation by the Executive for Good Reason where (i) such Good Reason occurs other than during the period commencing during the period beginning three (3) months prior to the consummation of a Change of Control and ending on the date which is twelve (12) months following the Change of Control, and (ii) notice is provided to the Company within ninety (90) days of the existence of Good Reason with a thirty (30) day opportunity to cure.

 

  10.10.3 Notwithstanding the foregoing, the term “Termination in Absence of Change of Control” shall not include any termination of the Executive’s employment (1) by the Company for Cause; (2) by the Company as a result of Executive’s Permanent Disability; (3) as a result of Executive’s death; or (4) as a result of the Executive voluntarily terminating Executive’s employment with the Company for other than Good Reason.

 

  10.11 Termination Upon Change of Control ” means:

 

  10.11.1 any termination of the employment of the Executive by the Company without Cause during the period commencing during the period beginning three (3) months prior to the consummation of a Change of Control and ending on the date which is twelve (12) months following the consummation of a Change of Control; or

 

  10.11.2 any resignation by the Executive for Good Reason where (i) such Good Reason occurs during the period commencing during the period beginning three (3) months prior to the consummation of a Change of Control and ending on the date which is twelve (12) months following the Change of Control, and (ii) notice is provided to the Company within ninety (90) days of the existence of Good Reason with a thirty (30) day opportunity to cure.

 

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  10.11.3 Notwithstanding the foregoing, the term “Termination Upon Change of Control” shall not include any termination of Executive’s employment (1) by the Company for Cause; (2) by the Company as a result of Executive’s Permanent Disability; (3) as a result of Executive’s death; or (4) as a result of Executive’s voluntary termination of Executive’s employment with the Company other than for Good Reason.

 

11. RELEASE OF CLAIMS

Executive’s receipt of payments and benefits under this Agreement is conditioned upon the delivery by Executive of a signed and effective Termination Release Agreement in substantially the form attached hereto as Exhibit A , provided, however, that the Executive shall not be required to release any rights the Executive may have to be indemnified by the Company.

 

12. EXCLUSIVE REMEDY

The Executive shall be entitled to no other termination, severance or change of control compensation, benefits, or other payments from the Company as a result of any Termination Upon a Change of Control with respect to which the payments and/or benefits described in Section 8 have been provided to the Executive, except as expressly set forth in this Agreement.

 

13. CONFLICT IN BENEFITS; NONCUMULATION OF BENEFITS

 

  13.1 No Limitation of Regular Benefit Plans . Except as provided in Section 13.2 below, this Agreement is not intended to and shall not affect, limit or terminate any plans, programs or arrangements of the Company that are regularly made available to a significant number of employees or officers of the Company, including without limitation the Company’s equity incentive plans.

 

  13.2 Noncumulation of Benefits . The Executive may not cumulate cash severance payments, acceleration of Equity Award vesting or other termination benefits under both this Agreement, any other written agreement with the Company and/or another plan or policy of the Company. If the Executive has any other binding written agreement or other binding arrangement with the Company that provide that upon a change of control or termination of employment the Executive shall receive change of control, termination, severance or similar benefits, then Executive hereby expressly waives Executive’s rights to such other benefits and any agreement providing such benefits terminates and is superseded on the Effective Date of this Agreement.

 

14. PROPRIETARY AND CONFIDENTIAL INFORMATION

Executive’s receipt of the payments and benefits described in this Agreement are conditioned upon the Executive’s acknowledgment of Executive’s continuing obligation under, and Executive’s agreement to abide by the terms and conditions of, the Company’s Confidentiality and/or Proprietary Rights Agreement between the Executive and the Company. Accordingly, during the term of this Agreement and following the Termination Date, Executive agrees to continue to abide by the terms and conditions of the Company’s Confidentiality and/or Proprietary Rights Agreement between the Executive and the Company.

 

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15. NON-SOLICITATION

For a period of one (1) year after the Termination Date, the Executive will not solicit the services or business of any employee or consultant of the Company to discontinue that person’s or entity’s relationship with or to the Company without the written consent of the Company.

 

16. ARBITRATION

 

  16.1 Disputes Subject to Arbitration . Any claim, dispute or controversy arising out of this Agreement, the interpretation, validity or enforceability of this Agreement or the alleged breach thereof shall be submitted by the parties to binding arbitration by a sole arbitrator under the rules of the American Arbitration Association; provided, however, that (1) the arbitrator shall have no authority to make any ruling or judgment that would confer any rights with respect to the trade secrets, confidential and proprietary information or other intellectual property of the Company upon the Executive or any third party; and (2) this arbitration provision shall not preclude the Company from seeking legal and equitable relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company’s intellectual property. Judgment may be entered on the award of the arbitrator in any court having jurisdiction.

 

  16.2 Site of Arbitration . The site of the arbitration proceeding shall be in Santa Clara County, California.

 

17. NOTICES

For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed return receipt requested as follows:

If to the Company:

960 Stewart Drive

Sunnyvale, CA 94085

Attn: Legal Department

and, if to the Executive, at the address indicated below or such other address specified by the Executive in writing to the Company. Either party may provide the other with notices of change of address, which shall be effective upon receipt.

 

18. MISCELLANEOUS PROVISIONS

 

  18.1 Heirs and Representatives of the Executive; Successors and Assigns of the Company . This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the successors and assigns of the Company.

 

  18.2 No Assignment of Rights . The interest of the Executive in this Agreement or in any distribution to be made under this Agreement may not be assigned, pledged, alienated, anticipated, or otherwise encumbered (either at law or in equity) and shall not be subject to attachment, bankruptcy, garnishment, levy, execution, or other legal or equitable process. Any act in violation of this Section 18.2 shall be void.

 

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  18.3 Amendment; Waiver . No provision of this Agreement shall be modified, amended, waived or discharged unless the modification, amendment, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

 

  18.4 Entire Agreement . This Agreement represents the entire agreement and understanding between the parties as to the subject matter herein (whether oral or written and whether express or implied) and expressly supersedes any existing agreement or understanding providing for any employment, change control, severance, termination or similar benefits by and between the Executive and the Company, including without limitation the Offer Letter, dated July 14, 2004, and the Retention Incentive Agreement between Executive and the Company.

 

  18.5 Withholding Taxes; 409A . All payments made under this Agreement shall be subject to reduction to reflect all federal, state, local and other taxes required to be withheld by applicable law. To the extent (a) any payments or benefits to which Executive becomes entitled under this Agreement, or under any agreement or plan referenced herein, in connection with Executive’s termination of employment with the Company constitute deferred compensation subject to Section 409A of the Code (“ Section 409A ”) and (b) Executive is deemed at the time of such termination of employment to be a “specified employee” under Section 409A of the Code, then such payments shall not be made or commence until the earliest of (i) the expiration of the six (6)-month period measured from the date of Executive’s “separation from service” (as such term is at the time defined in Treasury Regulations under Section 409A of the Code) from the Company; or (ii) the date of Executive’s death following such separation from service; provided, however, that such deferral shall only be effected to the extent required to avoid adverse tax treatment to Executive, including (without limitation) the additional twenty percent (20%) tax for which Executive would otherwise be liable under Section 409A(a)(1)(B) of the Code in the absence of such deferral. Upon the expiration of the applicable deferral period, any payments which would have otherwise been made during that period (whether in a single sum or in installments) in the absence of this paragraph shall be paid to Executive or Executive’s beneficiary in one lump sum (without interest). Any termination of Executive’s employment is intended to constitute a “separation from service” as such term is defined in Treasury Regulation Section 1.409A-1. It is intended that each installment of the payments provided hereunder constitute separate “payments” for purposes of Treasury Regulation Section 1.409A-2(b)(2)(i). It is further intended that payments hereunder satisfy, to the greatest extent possible, the exemption from the application of Code Section 409A (and any state law of similar effect) provided under Treasury Regulation Section 1.409A-1(b)(4) (as a “short-term deferral”).

 

  18.6 Severability . The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

 

12


  18.7 Choice of Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California, without regard to where the Executive has his residence or principal office or where he performs his duties hereunder.

 

  18.8 Reimbursement of Legal Fees . The Company will reimburse Executive for reasonable legal fees incurred in connection with this Agreement in an amount not to exceed $10,000.

 

  18.9 Effective Date; Term of Agreement .

The term of this Agreement shall commence on the Effective Date and continue until the earlier of such time as all of the obligations of the parties hereto with respect to this Agreement have been satisfied. Notwithstanding the foregoing, during the three (3) month period which follows the second (2 nd ) anniversary after the Effective Date and during such three (3) month period every three (3) years thereafter (“ Termination Notice Period ”), either Executive or the Company shall be able to give notice to the other party that this Agreement shall be terminated at the end of the calendar year in which the end of the Termination Notice Period occurs. After a Change of Control, the immediately preceding sentence shall be null and void.

 

13


I N W ITNESS W HEREOF , each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

 

E XECUTIVE

/s/ John W. Combs                        

John W. Combs
Address:  

 

 

 

S HORE T EL , INC .
By:  

/s/ Chuck Kissner

Title:  

Lead Director      

 

14


EXHIBIT A

T ERMINATION R ELEASE A GREEMENT

In consideration of the severance benefits (the “ Severance Benefits ”) offered to me by ShoreTel, Inc. (the “ Employer ”) pursuant to my Employment Agreement with Employer dated              , 2010 (the “ Agreement ”) and in connection with the termination of my employment, I agree to the following general release (the “ Release ”).

1. On behalf of myself, my heirs, executors, administrators, successors, and assigns, I hereby fully and forever generally release and discharge Employer, its current, former and future parents, subsidiaries, affiliated companies, related entities, employee benefit plans, and their fiduciaries, predecessors, successors, officers, directors, shareholders, agents, employees and assigns (collectively, the “Company”) from any and all claims, causes of action, and liabilities up through the date of my execution of the Release. The claims subject to this release include, but are not limited to, those relating to my employment with Employer and/or any predecessor or successor to Employer and the termination of such employment. All such claims (including related attorneys’ fees and costs) are barred without regard to whether those claims are based on any alleged breach of a duty arising in statute, contract, or tort. This expressly includes waiver and release of any rights and claims arising under any and all laws, rules, regulations, and ordinances, including, but not limited to: Title VII of the Civil Rights Act of 1964; the Older Workers Benefit Protection Act; the Americans With Disabilities Act; the Age Discrimination in Employment Act; the Fair Labor Standards Act; the National Labor Relations Act; the Family and Medical Leave Act; the Employee Retirement Income Security Act of 1974, as amended (“ERISA”); the Workers Adjustment and Retraining Notification Act; the California Fair Employment and Housing Act (if applicable); the provisions of the California Labor Code (if applicable); the Equal Pay Act of 1963; and any similar law of any other state or governmental entity. The parties agree to apply California law in interpreting the Release.

Accordingly, I further waive any rights under Section 1542 of the Civil Code of the State of California or any similar state statute. Section 1542 states: “A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which, if known to him or her, must have materially affected his or her settlement with the debtor.”

2. This Release does not extend to, and has no effect upon, any benefits that have accrued, and to which I have become vested, under any employee benefit plan within the meaning of ERISA sponsored by the Company.

 

  a.

In understanding the terms of the Release and my rights, I have been advised to consult with an attorney of my choice prior to executing the Release. I understand that nothing in this Release is intended to constitute an unlawful release or waiver of any of my rights under any laws and/or to prevent, impede, or interfere with my ability and/or rights, if any: (a) under applicable workers’ compensation laws; (b) to seek unemployment benefits; (c) to file a charge or complaint with a government agency such as but not limited to the Equal Employment Opportunity Commission, the National Labor Relations Board, or any applicable state agency; (d) provide truthful testimony if under subpoena to do so, (e) file a claim with any state or federal agency or to participate or cooperate in such a matter, and/or (f) to challenge the validity of this release. Furthermore, notwithstanding any provisions and covenants herein, the Release shall not waive (a) any rights to indemnification I may have as an officer or director of Employer or otherwise in connection with my employment with Employer, under applicable law or Employer’s bylaws or other governing instruments or any agreement addressing such subject matter between Employer and me (including any fiduciary insurance policy maintained by Employer under which I am covered) or under any merger or acquisition agreement addressing such subject matter, (b) any obligations owed to me pursuant to the Agreement, (c)


  my rights of insurance under any liability policy covering Employer’s officers (in addition to the rights under subsection (a) above), or (d) any accrued but unpaid wages; any reimbursement for business expenses pursuant to Employer’s policies for such reimbursements, any outstanding claims for benefits or payments under any benefit plans of Employer or subsidiaries, any accrued but unused vacation, any ongoing agreements evidencing outstanding equity awards granted to me, any obligations owed to me pursuant to the terms of outstanding written agreements between myself and Employer and any claims I may not release as a matter of law, including indemnification claims under applicable law. To the fullest extent permitted by law, any dispute regarding the scope of this general release shall be resolved through binding arbitration pursuant to Subsection i below, and the arbitration provision set forth in the Agreement.

 

  b. I understand and agree that Employer will not provide me with the Severance Benefits unless I execute the Release. I also understand that I have received or will receive, regardless of the execution of the Release, all wages owed to me together with any accrued but unused vacation pay, less applicable withholdings and deductions, earned through my termination date.

 

  c. As part of my existing and continuing obligations to Employer, I have returned to Employer all documents (and all copies thereof) and other property belonging to Employer that I have had in my possession at any time, including but not limited to files, notes, drawings, records, business plans and forecasts, financial information, specification, computer-recorded information, tangible property (including, but not limited to, computers, laptops, pagers, etc.), credit cards, entry cards, identification badges and keys; and any materials of any kind which contain or embody any proprietary or confidential information of Employer (and all reproductions thereof). I understand that, even if I did not sign the Release, I am still bound by any and all confidential/proprietary/trade secret information, non-disclosure and inventions assignment agreement(s) signed by me in connection with my employment with Employer, or with a predecessor or successor of Employer, pursuant to the terms of such agreement(s).

 

  d. I represent and warrant that I am the sole owner of all claims relating to my employment with Employer and/or with any predecessor of Employer, and that I have not assigned or transferred any claims relating to my employment to any other person or entity.

 

  e. I agree to keep the Severance Benefits and the provisions of this Release confidential and not to reveal their contents to anyone except my lawyer, my spouse or other immediate family member, and/or my financial consultant, or as required by legal process or applicable law.

 

  f. I understand and agree that the Release shall not be construed at any time as an admission of liability or wrongdoing by either the Company or me.

 

  g. I understand and agree that the Release shall not be construed at any time as an admission of liability or wrongdoing by either the Company or myself.

 

  h. I agree that I will not make any negative or disparaging statements or comments, either as fact or as opinion, about the Company, its employees, officers, directors, shareholders, vendors, products or services, business, technologies, market position or performance. Nothing in this paragraph shall prohibit me from providing truthful information in response to a subpoena or other legal process.

 

  i.

Any controversy or any claim arising out of or relating to the interpretation, enforceability or breach of the Release shall be settled by arbitration in accordance with the arbitration provision of the Agreement. If for any reason the arbitration procedure set forth in the Agreement is unavailable, I agree to arbitration under the employment arbitration rules of the American

 

2


  Arbitration Association or any successor hereto. The parties further agree that the arbitrator shall not be empowered to add to, subtract from, or modify, alter or amend the terms of the Release. Any applicable arbitration rules or policies shall be interpreted in a manner so as to ensure their enforceability under applicable state or federal law.

 

  j. I agree that I have had at least twenty-one (21) calendar days in which to consider whether to execute the Release, no one hurried me into executing the Release during that period, and no one coerced me into executing the Release. I understand that the offer of the Severance Benefits and the Release shall expire on the twenty-second (22nd) calendar day after my employment termination date if I have not accepted it by that time. I further understand that Employer’s obligations under the Release shall not become effective or enforceable until the eighth (8th) calendar day after the date I sign the Release provided that I have timely delivered it to Employer (the “Effective Date”) and that in the seven (7) day period following the date I deliver a signed copy of the Release to Employer I understand that I may revoke my acceptance of the Release. I understand that the Severance Benefits will become available to me after the Effective Date.

 

  k. In executing the Release, I acknowledge that I have not relied upon any statement made by Employer, or any of its representatives or employees, with regard to the Release unless the representation is specifically included herein. Furthermore, the Release and the Agreement contain our entire understanding regarding eligibility for and the payment of severance benefits and supersedes any or all prior representations and agreements regarding the subject matter. Once effective and enforceable, this agreement can only be changed by another written agreement signed by me and an authorized representative of Employer.

 

  l. Should any provision of the Release be determined by an arbitrator, court of competent jurisdiction, or government agency to be wholly or partially invalid or unenforceable, the legality, validity and enforceability of the remaining parts, terms, or provisions are intended to remain in full force and effect. Specifically, should a court, arbitrator, or agency conclude that a particular claim may not be released as a matter of law, it is the intention of the parties that the general release and the waiver of unknown claims above shall otherwise remain effective to release any and all other claims. I acknowledge that I have obtained sufficient information to intelligently exercise my own judgment regarding the terms of the Release before executing the Release.

[S IGNATURE P AGE TO G ENERAL R ELEASE A GREEMENT F OLLOWS ]

 

3


EXECUTIVE’S ACCEPTANCE OF RELEASE

BEFORE SIGNING MY NAME TO THE RELEASE, I STATE THE FOLLOWING: I HAVE READ THE RELEASE, I UNDERSTAND IT AND I KNOW THAT I AM GIVING UP IMPORTANT RIGHTS. I HAVE OBTAINED SUFFICIENT INFORMATION TO INTELLIGENTLY EXERCISE MY OWN JUDGMENT. I HAVE BEEN ADVISED THAT I SHOULD CONSULT WITH AN ATTORNEY BEFORE SIGNING IT, AND I HAVE SIGNED THE RELEASE KNOWINGLY AND VOLUNTARILY.

Date delivered to employee              ,          .

Executed this              day of              ,          .

 

 

Signature

 

Name (Please Print)

[S IGNATURE P AGE TO G ENERAL R ELEASE A GREEMENT ]

 

4

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a), AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John W. Combs, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of ShoreTel, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financing reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 6, 2010

 

/s/ John W. Combs

John W. Combs

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a), AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael E. Healy, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of ShoreTel, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financing reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 6, 2010

 

/s/ Michael E. Healy

Michael E. Healy

Chief Financial Officer

(Principal Accounting and Financial Officer)

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, John W. Combs, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of ShoreTel, Inc. for the quarter ended March 31, 2010 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of ShoreTel, Inc.

Date: May 6, 2010

 

By:  

/s/ John W. Combs

Name:   John W. Combs
Title:  

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by referenced into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made on or before or after the date of this Report), irrespective at any general incorporation language contained in such filing.

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael E. Healy, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of ShoreTel, Inc. for the quarter ended March 31, 2010 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of ShoreTel, Inc.

Date: May 6, 2010

 

By:  

/s/ Michael E. Healy

Name:   Michael E. Healy
Title:  

Chief Financial Officer

(Principal Accounting and Financial Officer)

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by referenced into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made on or before or after the date of this Report), irrespective at any general incorporation language contained in such filing.