ShoreTel, Inc.
ShoreTel Inc (Form: 10-Q, Received: 02/04/2011 15:02:01)
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 December 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 January 28, 2011, 46,146,492 shares of the registrant’s common stock were outstanding.

 

 

 


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SHORETEL, INC. AND SUBSIDIARIES

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

INDEX

 

     Page  
PART I: Financial Information      3   
Item 1    Financial Statements (Unaudited)      3   
   Condensed Consolidated Balance Sheets as of December 31, 2010 and June 30, 2010      3   
  

Condensed Consolidated Statements of Operations for the three months and six months ended December 31, 2010
and 2009

     4   
   Condensed Consolidated Statements of Cash Flows for the six months ended December 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      16   
Item 3    Quantitative and Qualitative Disclosures About Market Risk      28   
Item 4    Controls and Procedures      28   
PART II: Other Information      29   
Item 1    Legal Proceedings      29   
Item 1A    Risk Factors      29   
Item 2    Unregistered Sales of Equity Securities and Use of Proceeds      30   
Item 6    Exhibits      30   
   Signatures      31   
   Exhibit Index      32   

 

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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)

 

     December 31, 2010     June 30, 2010  

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 55,304      $ 68,426   

Short-term investments

     50,122        47,375   

Accounts receivable, net of allowance of $778 and $876 as of December 31, 2010 and June 30, 2010, respectively

     24,628        24,596   

Inventories

     12,760        9,954   

Prepaid expenses and other current assets

     3,948        8,125   
                

Total current assets

     146,762        158,476   

PROPERTY AND EQUIPMENT, net

     8,072        6,019   

GOODWILL

     7,415        —     

INTANGIBLE ASSETS, net

     9,555        5,025   

OTHER ASSETS

     963        1,201   
                

TOTAL ASSETS

   $ 172,767      $ 170,721   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 8,075      $ 7,868   

Accrued expenses and other

     8,829        10,061   

Accrued employee compensation

     8,173        8,261   

Deferred revenue

     21,804        19,450   
                

Total current liabilities

     46,881        45,640   

LONG-TERM LIABILITIES:

    

Long-term deferred revenue

     9,982        9,269   

Other long-term liabilities

     1,379        1,346   
                

Total liabilities

     58,242        56,255   
                

COMMITMENTS AND CONTINGENCIES (Note 12)

    

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, 46,098 and 45,370 shares as of December 31, 2010 and June 30, 2010, respectively

     229,921        222,491   

Accumulated other comprehensive income

     156        191   

Accumulated deficit

     (115,552     (108,216
                

Total stockholders’ equity

     114,525        114,466   
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 172,767      $ 170,721   
                

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
December 31,
    Six Months Ended
December 31,
 
     2010     2009     2010     2009  

REVENUE:

        

Product

   $ 37,913      $ 27,897      $ 73,139      $ 54,740   

Support and services

     9,816        7,560        18,869        14,467   
                                

Total revenue

     47,729        35,457        92,008        69,207   

COST OF REVENUE:

        

Product (1)

     12,847        9,787        24,614        19,320   

Support and services (1)

     3,125        2,806        6,101        5,390   
                                

Total cost of revenue

     15,972        12,593        30,715        24,710   

GROSS PROFIT

     31,757        22,864        61,293        44,497   

OPERATING EXPENSES:

        

Research and development (1)

     10,512        7,835        20,834        15,032   

Sales and marketing (1)

     18,314        12,910        35,517        24,927   

General and administrative (1)

     6,608        4,731        12,741        9,382   
                                

Total operating expenses

     35,434        25,476        69,092        49,341   
                                

LOSS FROM OPERATIONS

     (3,677     (2,612     (7,799     (4,844

OTHER INCOME (EXPENSE):

        

Interest income

     133        90        341        196   

Other

     (106     70        273        92   
                                

Total other income

     27        160        614        288   
                                

LOSS BEFORE PROVISION FOR INCOME TAXES

     (3,650     (2,452     (7,185     (4,556

PROVISION FOR INCOME TAXES

     (41     (44     (151     (66
                                

NET LOSS

   $ (3,691   $ (2,496   $ (7,336   $ (4,622
                                

Net loss per share — basic and diluted

   $ (0.08   $ (0.06   $ (0.16   $ (0.10
                                

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

     45,900        44,683        45,672        44,533   
                                

 

        

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

        

Cost of product revenue

   $ 27      $ 38      $ 62      $ 65   

Cost of support and services revenue

     161        235        361        346   

Research and development

     778        805        1,602        1,443   

Selling and marketing

     885        918        1,753        1,617   

General and administrative

     777        844        1,674        1,459   
                                

Total stock-based compensation expense

   $ 2,628      $ 2,840      $ 5,452      $ 4,930   
                                

See Notes to Condensed Consolidated Financial Statements

 

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SHORETEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
December 31,
 
     2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (7,336   $ (4,622

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

    

Depreciation and amortization

     1,932        1,312   

Amortization of premium/discount on investments

     354        51   

Stock-based compensation expense

     5,452        4,930   

Loss on disposal of property and equipment

     82        147   

Provision for (benefit from) doubtful accounts receivable

     (98     67   

Changes in assets and liabilities, net of effect of acquisition:

    

Accounts receivable

     126        2,637   

Inventories

     (2,745     (2,693

Prepaid expenses and other current assets

     4,237        (306

Other assets

     273        791   

Accounts payable

     459        677   

Accrued expenses and other

     (1,299     1,023   

Accrued employee compensation

     (195     2,329   

Deferred revenue

     2,972        2,168   
                

Net cash provided by operating activities

     4,214        8,511   
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (4,033     (1,721

Purchases of investments

     (3,136     (8,943

Proceeds from maturities of investments

     —          6,635   

Cost of acquisition of a business

     (11,375     —     

Purchases of software license and other

     (770     (931
                

Net cash used in investing activities

     (19,314     (4,960
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from issuance of common stock to employees

     2,330        1,408   

Taxes paid on vested and released stock awards

     (352     —     
                

Net cash provided by financing activities

     1,978        1,408   
                

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (13,122     4,959   

CASH AND CASH EQUIVALENTS — Beginning of period

     68,426        73,819   
                

CASH AND CASH EQUIVALENTS — End of period

   $ 55,304      $ 78,778   
                

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash refunded during the period for income taxes, net

   $ (1,547   $ —     

NONCASH INVESTING AND FINANCING ACTIVITIES:

    

Vesting of accrued early exercised stock options

   $ —        $ 14   

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

   $ 174      $ 560   

Purchases of other assets included in period-end accounts payable

   $ —        $ 200   

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 condensed consolidated financial statements as of December 31, 2010 and for the three months and six months ended December 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 for the fiscal year ended June 30, 2010.

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

Computation of Net Loss Per Share

Basic net loss per common share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is determined by dividing net loss by the weighted average number of common shares 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 six months ended December 31, 2010 and 2009, because to do so would have been anti-dilutive. Potentially dilutive securities of 9.8 million and 8.0 million for the three and six months ended December 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.

Comprehensive Income (Loss)

Other comprehensive income consists of net income (loss) for the period plus unrealized gains (losses) on short-term investments. Accordingly, comprehensive income (loss) was $(3.6) million and $(2.5) million for the three months ended December 31, 2010 and 2009, and $(7.3) million and $(4.5) million for the six months ended December 31, 2010 and 2009, respectively.

Goodwill and Other Intangible Assets

The Company allocates the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Such allocations require management to make significant estimates and assumptions, especially with respect to intangible assets.

Goodwill is measured and tested for impairment on an annual basis in the fourth quarter of our fiscal year in accordance with the Accounting Standards Codification No. 350 (“ASC 350”), Intangibles – Goodwill and Other, or more frequently if we believe indicators of impairment exist. Triggering events for impairment reviews may be indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market capitalization. The performance of the test involves a two-step process. The first step requires comparing the fair value of the each of our reporting units to its net book value, including goodwill. We have one reporting unit. A potential impairment exists if the fair value of the reporting unit is lower than its net book

 

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value. The second step of the process is only performed if a potential impairment exists, and it involves determining the difference between the fair value of the reporting unit’s net assets other than goodwill to the fair value of the reporting unit and if the difference is less than the net book value of goodwill, an impairment exists and is recorded.

We review the carrying values of long-lived assets whenever events and circumstances, such as reductions in demand, lower projections of profitability, significant changes in the manner of our use of acquired assets, or significant negative industry or economic trends, indicate that the net book value of an asset may not be recovered through expected undiscounted future cash flows from its use and eventual disposition. If this review indicates that there is an impairment, the impaired asset is written down to its fair value, which is typically calculated using: (i) quoted market prices and/or (ii) discounted expected future cash flows. Our estimates regarding future anticipated revenue and cash flows, the remaining economic life of the products and technologies, or both, may differ from those used to assess the recoverability of assets. In that event, impairment charges or shortened useful lives of certain long-lived assets may be required, resulting in a reduction in net income or an increase to net loss in the period when such determinations are made

Critical estimates in valuing certain intangible assets include, but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements, acquired developed technologies and patents; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

Recently Adopted Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry specific software revenue recognition guidance. In October 2009, the FASB also amended the standards for multiple deliverable revenue arrangements to:

 

  (i) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the arrangement consideration should be allocated among its elements;

 

  (ii) require an entity to allocate the revenue using estimated selling prices (ESP) of the deliverables if there is no vendor specific objective evidence (VSOE) or third party evidence of selling price (TPE); and

 

  (iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

This new accounting guidance became applicable to the Company beginning the first quarter of its fiscal year 2011. The Company adopted this guidance for transactions that were entered into or materially modified on or after July 1, 2010 using the prospective basis of adoption.

The Company derives its revenue from sales of IP telecommunications systems and related support and services. The typical system includes a combination of IP phones, switches and software applications. Product revenue is recognized when persuasive evidence of an arrangement exists, product has shipped or delivery has occurred (depending on when title passes), the sales price is fixed or determinable and free of contingencies and significant uncertainties, and collection is probable. The fee is considered fixed or determinable at the execution of an agreement, based on specific products and quantities to be delivered at specified prices. The agreements with customers generally do not include rights of return or acceptance provisions. To the extent that the Company’s agreements contain acceptance terms, the Company recognizes revenue upon product acceptance, unless the acceptance provision is deemed to be perfunctory. Even though substantially all of the contractual agreements do not provide return privileges, there are circumstances for which the Company will accept a return. The Company maintains a reserve for such returns based on historical experience. Payment terms to customers generally range from net 30 to net 60 days. In the event payment terms are extended materially from the Company’s standard business practices, the fees are deemed to not be fixed or determinable and revenue is recognized when the payment becomes due. The Company assesses the ability to collect from its customers based on a number of factors, including credit worthiness and past transaction history of the customer. If the customer is not deemed credit worthy, the Company defers all revenue from the arrangement until payment is received and all other revenue recognition criteria have been met. Shipping charges billed to customers are included in product revenue and the related shipping costs are included in cost of product revenue. Provisions for return allowances and product warranties are recorded at the time revenue is recognized based on the Company’s historical experience. The provision for return allowances is recorded as a reduction to revenues on the statement of operations and is included as a reduction to account receivables on the balance sheet.

The Company’s core software (herein after referred to as “essential software”) is integrated with hardware and is essential to the functionality of the integrated system product. The Company also sells additional software which provides increased features and functions, but is not essential to the overall functionality of the integrated system products (herein after referred to as ‘non-essential software’). At the initial purchase, the customer generally bundles together the hardware, essential software, non-essential software, as needed and up to five years of post-contractual support. Thereafter, if the enterprise customer increases end users and functionality, it may add more hardware, software components, and related post-contractual support by purchasing them separately.

 

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This guidance does not generally change the units of accounting for the Company’s revenue transactions. Most of the products and services continue to qualify as separate units of accounting. Many of the Company’s products have both software and non-software components that function together to deliver the essential functionality of the integrated system product. The Company analyzes all of its software and non-software products and services and considers the features and functionalities of the individual elements and the stand alone sales of those individual components among other factors, to determine which elements are essential or non-essential to the overall functionality of the integrated system product.

For transactions entered into prior to the first quarter of fiscal year 2011, the Company recognized revenue based on industry specific software revenue recognition guidance. In accordance with industry specific software revenue recognition guidance, the Company utilized the residual method to determine the amount of product revenue to be recognized. Under the residual method, the fair value of the undelivered elements, such as post-contractual support, is deferred and the remaining portion of the arrangement consideration is recognized as product revenue. VSOE of fair value is limited to the price charged when the same element is sold separately. VSOE of fair value is established for post-contractual support based on the volume and pricing of the stand alone sales within a narrow range. The fair value of the post-contractual support is recognized on a straight-line basis over the term of the related support period, which is typically one to five years.

For transactions entered into or materially modified on or after the beginning of the first quarter of fiscal year 2011, the total arrangement fees were allocated to all the deliverables based on their respective relative selling prices. The relative selling price is determined using VSOE when available. When VSOE cannot be established, the Company attempts to determine the TPE for the deliverables. TPE is determined based on competitor prices for similar deliverables when sold separately by the competitors. Generally the Company’s product offerings differ from those of its competitors and comparable pricing of its competitors is often not available. Therefore, the Company is typically not able to determine TPE. When the Company is unable to establish selling price using VSOE or TPE, the Company uses ESP in its allocation of arrangement fees. The ESP for a deliverable is determined as the price at which the Company would transact if the products or services were sold on a stand alone basis.

The Company has been able to establish VSOE for its professional and post contractual support services mainly based on the volume and the pricing of the stand alone sales for these services within a narrow range. The Company establishes its ESP for products by considering factors including, but not limited to, geographies, customer segments and pricing practices. The determination of ESP is made through consultation with and formal approval by the Company’s management. The Company regularly reviews VSOE, TPE and ESP and maintains internal controls over the establishment and updates of these estimates.

The Company’s multiple element arrangements may include non-essential software deliverables that are subject to the industry specific software revenue recognition guidance. The revenue for these multiple element arrangements is allocated to the non-essential software deliverables and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the new revenue accounting guidance. As the Company has not been able to obtain VSOE for all of the non-essential software deliverables in the arrangement, revenue allocated to such non-essential software elements is recognized using the residual method in accordance with industry specific software revenue recognition guidance as the Company was able to obtain VSOE for the undelivered elements bundled with such non-essential software elements. Under the residual method, the amount of revenue recognized for the delivered non-essential software elements equaled the total allocated consideration less the VSOE of any undelivered elements bundled with such non-essential software elements.

Total revenue as reported and pro forma total revenue that would have been reported during the three and six months ended December 31, 2010, if the transaction entered into or materially modified on or after July 1, 2010 were subject to previous accounting guidance, are shown in the following table:

 

     Three Months Ended December 31, 2010
(Unaudited)
     Six months ended December 31, 2010
(Unaudited)
 
(In thousands)    As Reported      Pro Forma Basis
As If The
Previous
Accounting
Guidance Were in
Effect
     As reported      Pro Forma Basis
As If The
Previous
Accounting
Guidance Were in
Effect
 

Total revenue

   $ 47,729       $ 47,653       $ 92,008       $ 91,861   

The impact to total revenue during the three and six months ended December 31, 2010 of the new revenue accounting guidance was primarily to increase product revenues by 76,000 and $147,000 for the three and six months ended December 31, 2010, respectively.

In terms of the timing and pattern of revenue recognition, the new accounting guidance for revenue recognition is not expected to have a significant effect on total revenues in periods after the initial adoption when applied to multiple element arrangements due to the existence of VSOE for most of the Company’s service offerings which remain undelivered after the software and non-software

 

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tangible products are delivered at the inception of the arrangement. The Company’s future revenue recognition for multiple element arrangements is not expected to differ materially from the results in the current period. However, as the Company’s marketing and product strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in selling prices, including both VSOE and ESP which could impact future revenues.

3. Business Combination

On October 19, 2010, the Company acquired Agito Networks, Inc. (“Agito”), a privately-held company based in Santa Clara, California that provided mobility solutions to enterprises to drastically reduce mobile costs, provide high-quality, low cost coverage, increase productivity with greater responsiveness, accessibility and simplify unified communications for mobile workers and their peers. The acquisition of Agito is expected to expand and enhance the Company’s product offering by adding Agito’s mobility solution to the Company’s existing range of products, software and services. The purchase price of approximately $11.4 million was paid in cash. The goodwill from acquisition is deductible for tax purposes. The purchase price was allocated to tangible and intangible assets and liabilities assumed, based on their estimated fair values as follows (amounts in thousands):

 

Tangible assets

   $ 261   

Goodwill

     7,415   

Intangible assets

     4,220   

Liabilities assumed

     (521
        
   $ 11,375   
        

The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Agito as though the companies were combined as of the beginning of fiscal year 2010. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from the acquisition, including amortization charges from acquired intangible assets, adjustments to interest expenses for certain borrowings and exclusion of acquisition- related expenses and the related tax effects as though the companies were combined as of the beginning of fiscal year 2010. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal year 2010.

 

     (Unaudited)
Three Months Ended
December 31,
    (Unaudited)
Six Months Ended
December 31,
 
(In thousands, except per share amounts )    2010     2009     2010     2009  

Total revenue

   $ 47,832      $ 35,618      $ 92,451      $ 69,500   

Net loss

     (4,106     (3,957     (9,721     (7,741

Basic and diluted earnings per share

     (0.09     (0.09     (0.21     (0.17

4. Balance Sheet Details

Balance sheet components consist of the following:

 

(In thousands)    December 31,
2010
     June 30,
2010
 

Inventories:

     

Raw materials

   $ —         $ 335   

Work in process

     200         526   

Finished goods

     12,560         9,093   
                 

Total inventories

   $ 12,760       $ 9,954   
                 

Prepaid expenses and other current assets:

     

Prepaid expenses

   $ 3,594       $ 7,778   

Deferred cost of revenue

     354         347   
                 

Total prepaid expenses and other current assets

   $ 3,948       $ 8,125   
                 

 

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(In thousands)    December 31,
2010
    June 30,
2010
 

Property and equipment, net:

    

Computer equipment and tooling

   $ 9,717      $ 9,559   

Software

     2,298        1,354   

Furniture and fixtures

     1,774        1,196   

Leasehold improvements and other

     2,310        583   
                

Total property and equipment

   $ 16,099      $ 12,692   

Less accumulated depreciation and amortization

     (8,027     (6,673
                

Total property and equipment, net

   $ 8,072      $ 6,019   
                

Deferred revenue — current and long-term:

    

Product

   $ 1,591      $ 966   

Support and services

     30,195        27,753   
                

Total deferred revenue

   $ 31,786      $ 28,719   
                

Intangible assets:

The following is a summary of the Company’s intangible assets (in thousands):

 

     December 31, 2010      June 30, 2010  
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Patents

   $ 2,935       $ (733   $ 2,202       $ 2,310       $ (532   $ 1,778   

Technology

     4,130         (186     3,944         —           —          —     

Customer relationships

     300         (9     291         —           —          —     

Intangible assets in process

     3,118         —          3,118         3,247         —          3,247   
                                                   

Other intangible assets

   $ 10,483       $ (928   $ 9,555       $ 5,557       $ (532   $ 5,025   
                                                   

The Company acquired $2.8 million of technology, $0.3 million of customer relationships and $1.1 million of intangible assets in process from Agito Networks, Inc. as a part of the business combination discussed in Note 3. The Company transferred approximately $1.3 million from intangible assets in process to technology as one of the projects reached its completion during the quarter. The intangible assets are amortized over useful lives ranging from 3 years to 7 years.

Amortization of intangible assets for three months ended December 31, 2010 and 2009 was $0.4 million and $0.1 million, respectively, and for six months ended December 31, 2010 and 2009 was $0.5 million and $0.2 million, respectively.

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

 

Years Ending June 30,

      

2011 (remaining six months)

   $ 882   

2012

     1,764   

2013

     1,764   

2014

     1,451   

2015

     458   

2016

     62   

Thereafter

     56   
        

Total

   $ 6,437   
        

 

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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 December 31, 2010

                          

Corporate notes and commercial paper

   $ 32,985       $ 92       $ —        $ 33,077   

U.S. Government agency securities

     16,981         64         —          17,045   
                                  

Total short-term investments

   $ 49,966       $ 156       $ —        $ 50,122   
                                  

As of June 30, 2010

                          

Corporate notes and commercial paper

   $ 33,280       $ 142       $ (50   $ 33,372   

U.S. Government agency securities

     13,904         99         —          14,003   
                                  

Total short-term investments

   $ 47,184       $ 241       $ (50   $ 47,375   
                                  

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

 

     Amortized Cost      Fair Value  

As of December 31, 2010

             

Less than 1 year

   $ 39,951       $ 40,051   

Due in 1 to 3 years

     10,015         10,071   
                 

Total

   $ 49,966       $ 50,122   
                 
     Amortized Cost      Fair Value  

As of June 30, 2010

             

Less than 1 year

   $ 33,956       $ 34,133   

Due in 1 to 3 years

     13,228         13,242   
                 

Total

   $ 47,184       $ 47,375   
                 

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

5. 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.

 

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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 December 31, 2010  
     Fair Value      Level 1      Level 2      Level 3  

Cash and cash equivalents:

           

Money market funds

   $ 38,106       $ 38,106         —           —     

Short-term investments:

           

Corporate notes and commercial paper

     33,077         —           33,077         —     

U.S. Government agency securities

     17,045         —           17,045         —     
                                   

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

   $ 88,228       $ 38,106       $ 50,122       $ —     
                                   

The above table excludes $17.2 million of cash balances on deposit at banks.

 

     As at June 30, 2010  
     Fair Value      Level 1      Level 2      Level 3  

Cash and cash equivalents:

           

Money market funds

   $ 51,660       $ 51,660       $ —         $ —     

Short-term investments:

           

Corporate notes and commercial paper

     33,372         —           33,372         —     

U.S. Government agency securities

     14,003         —           14,003         —     
                                   

Total financial instruments measured and recorded at fair value as of June 30, 2010

   $ 99,035       $ 51,660       $ 47,375       $ —     
                                   

The above table excludes $16.8 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. The types of instruments valued based on quoted market prices in active markets include money market securities. Short-term investments 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. When other observable market data is not available, the Company relies on non-binding quotes from an independent broker. Non-binding quotes are based on proprietary valuation models. These models use algorithms based on inputs such as observable market data, quoted market prices for similar instruments, historical pricing trends of a security as relative to its peers, internal assumptions of the broker and statistically supported models. The types of instruments valued based on other observable inputs include corporate notes and commercial paper and U.S. Government agency securities. We reviewed our financial and non-financial assets and liabilities for the three and six months ended December 31, 2010 and 2009 and concluded that there were no material impairment charges during each of these periods.

6. Income Taxes

The Company recorded a provision for income taxes of $41,000 and $151,000 for the three months and six months ended December 31, 2010, compared to a provision for income taxes of $44,000 and $66,000 for the three and six months ended December 31, 2009.

 

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The Company maintains liabilities for uncertain tax positions. As of December 31, 2010 and June 30, 2010, the Company’s total amount of unrecognized tax benefits were $2.3 million and $2.1 million, respectively. Of the total of $2.3 million and $2.1 million of unrecognized tax benefits respectively, only $0.3 million, if recognized, would impact the effective tax rate.

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 Company is currently undergoing an income tax examination by the Internal Revenue Service (IRS) for its fiscal years 2008 and 2009. For the various foreign and state taxing jurisdictions in which the Company operates, tax years from 2000 through 2010 remain open and subject to tax examination.

7. Common Stock

Common Shares Reserved for Issuance

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

 

Reserved under stock option plans

     12,329   

Reserved under employee stock purchase plan

     390   

Conversion of warrants

     1   
        

Total

     12,720   
        

8. 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:

 

     Six Months Ended
December 31,
 

Employee Incentive Plans

   2010     2009  

Expected life of option plan (in years)

     6.08-6.26        6.08-6.46   

Expected life of ESPP right (in years)

     0.50        0.50   

Risk-free interest rate for option plan

     1.43-1.55     2.3-2.47

Risk-free interest rate for ESPP right

     0.19-0.20     0.16-0.27

Volatility for option plan

     57     58

Volatility for ESPP right

     46-51     58-138

Dividend yield

     0     0

During the three months ended December 31, 2010 and 2009, the Company recorded stock-based compensation expense of $2.6 million and $2.8 million respectively, net of forfeitures. During the six months ended December 31, 2010 and 2009, the Company recorded stock-based compensation expense of $5.5 million and $4.9 million, respectively, net of forfeitures.

Compensation expense is recognized only for the portion of stock options that are expected to vest. The Company estimates a forfeiture rate in determining stock-based compensation expense. A significant difference between actual and estimated forfeiture rates could affect the stock-based compensation expense recorded. As of December 31, 2010, total unrecognized compensation cost related to stock-based awards granted to employees and non-employee directors was $23.0 million. This cost will be amortized on a ratable basis over a weighted-average vesting period of approximately three years.

9. 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

 

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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”). The Company’s repurchase right for such options lapses as the options vest, generally over four years from the date of grant. There were no unvested shares subject to repurchase as of December 31, 2010.

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. 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 in February 2009 and 2010, respectively and 2.3 million in February 2011.

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 December 31, 2010 and June 30, 2010, there were no shares of the Company’s outstanding common stock subject to repurchase.

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, 2010

     4,510        7,492      $ 4.59         

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

     (7     —          —           

Granted

     (2,077     2,077        6.57         

Exercised

     —          (334     2.72         

Cancelled, forfeited or expired

     656        (656     5.38         

Restricted stock units granted (see Note 11)

     (767     —          —           

Restricted stock units cancelled

     249        —          —           
                        

Balance at December 31, 2010

     2,564        8,579      $ 5.09         7.0       $ 24,866   
                        

Vested and expected to vest at December 31, 2010

       8,101      $ 5.03         6.9       $ 23,954   
                  

Exercisable and vested at December 31, 2010

       3,120      $ 4.01         5.8       $ 12,476   
                  

The total pre-tax intrinsic value for options exercised in the six months ended December 31, 2010 and 2009, was $1.1 million and $1.4 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 7,000 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 six months ended December 31, 2010.

10. 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 six-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.

The ESPP was amended in November 2010 to permit employees to purchase shares in the purchase period at 85% of 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, effective for the offering period commencing on and after May 1, 2011.

 

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In February of fiscal year 2011 and 2010, 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 469,980 shares and 449,000 shares, respectively, pursuant to the terms of that plan.

As of December 31, 2010, 390,000 shares had been reserved for future issuance.

11. 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 six months ended December 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 six months ended December 31, 2010 and 2009 is as follows (in thousands):

 

     Six Months Ended
December 31, 2010
    Six Months Ended
December 31, 2009
 

Beginning balance

     809        507   

Awarded

     767        184   

Released

     (213     (46

Forfeited

     (177     (14
                

Ending balance

     1,186        631   
                

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

 

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

Shares outstanding

     1,186         1.96 years       $ 9,260   

Shares vested and expected to vest

     1,031         1.88 years         8,055   

12. 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 was 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 for $3.0 million, pursuant to which, without admitting any liability or wrongdoing of any kind, the Company would pay the plaintiff class $0.3 million with the remaining $2.7 million funded by insurance. This settlement agreement, which resolved all the claims in the litigation, received final Court approval in October 2010.

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 purported 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 reached an agreement in principle to settle the litigation in February 2010, pursuant to which, without admitting any liability or wrongdoing of any kind, the Company adopted certain corporate remedial measures. This settlement agreement, which resolves all the claims in the litigation, received preliminary Court approval in November 2010.

General. 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.

 

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Leases — The Company leases its facilities under noncancelable operating leases which expire at various times through 2018. 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 December 31, 2010, are as follows (in thousands):

 

Years Ending June 30,

      

2011 (remaining six months)

   $ 835   

2012

     1,555   

2013

     2,030   

2014

     1,930   

2015

     1,122   

2016

     866   

Thereafter

     1,572   
        

Total

   $ 9,910   
        

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 December 31, 2010.

Rent expense for the three months ended December 31, 2010 and 2009 was $0.5 million and $0.3 million respectively, and $0.9 million and $0.6 million for the six months ended December 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 $26.0 million as of December 31, 2010 and $22.9 million as of June 30, 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.

13. 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 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
December 31,
     Six Months Ended
December 31,
 
     2010      2009      2010      2009  

United States

   $ 42,113       $ 32,192       $ 81,620       $ 62,687   

International

     5,616         3,265         10,388         6,520   
                                   

Total revenues

   $ 47,729       $ 35,457       $ 92,008       $ 69,207   
                                   

 

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.”

 

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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 grown to over 900 as of December 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 often ship our products directly to the enterprise customer.

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

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

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

We are headquartered in Sunnyvale, California and have a sales, customer support, general and administrative and engineering functions in Austin, Texas. The majority of our personnel work at these locations. Sales, engineering, and support personnel are located throughout the United States and, to a lesser extent, in the United Kingdom, Ireland, Germany, Belgium, Spain, Hong Kong, Singapore and Australia. Most of our enterprise customers are located in the United States. Revenue from international sales is 11.8% and 11.3% of our total revenue for the three and six months ended December 31, 2010 and was less than 10% of total revenues for the three and six months ended December 31, 2009. 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

 

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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 December 31, 2010 was $31.8 million, consisting of $1.6 million of deferred product revenue and $30.2 million of deferred support and services revenues, of which $21.8 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, 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 is slightly 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.

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,

 

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

Income tax provision. Income tax provision includes federal, state and foreign tax on our income. 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.

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, 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. Other than the impairment assessment of goodwill and other long-lived assets resulting from the acquisition of Agito Networks, Inc., in the current quarter and adoption of the new revenue recognition rules at the beginning of the fiscal year as discussed in Note 2 of the financial statements and establishing the estimated selling prices for products and services, management believes there have been no significant changes during the six months ended December 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 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For a description of those accounting policies, please refer to our 2010 Annual Report on Form 10-K.

 

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Results of Operations

The following table sets forth selected condensed consolidated statements of operations data for three and six months ended December 31, 2010 and 2009 (Amounts in thousands, except per share amounts).

 

     (Unaudited)
Three Months Ended
December 31,
    (Unaudited)
Six Months Ended
December 31,
 
     2010     2009     2010     2009  

REVENUE:

        

Product

   $ 37,913      $ 27,897      $ 73.139      $ 54,740   

Support and services

     9,816        7,560        18,869        14,467   
                                

Total revenue

     47,729        35,457        92,008        69,207   

COST OF REVENUE:

        

Product (1)

     12,847        9,787        24,614        19,320   

Support and services (1)

     3,125        2,806        6,101        5,390   
                                

Total cost of revenue

     15,972        12,593        30,175        24,710   

GROSS PROFIT

     31,757        22,864        61,293        44,497   

OPERATING EXPENSES:

        

Research and development (1)

     10,512        7,835        20,834        15,032   

Sales and marketing (1)

     18,314        12,910        35,517        24,927   

General and administrative (1)

     6,608        4,731        12,741        9,382   
                                

Total operating expenses

     35,434        25,476        69,092        49,341   
                                

LOSS FROM OPERATIONS

     (3,677     (2,612     (7,799     (4,844

OTHER INCOME:

        

Interest income

     133        90        341        196   

Other

     (106     70        273        92   
                                

Total other income

     27        160        614        288   
                                

LOSS BEFORE PROVISION FOR INCOME TAXES

     (3,650     (2,452     (7,185     (4,556

PROVISION FOR INCOME TAXES

     (41     (44     (151     (66
                                

NET LOSS

   $ (3,691   $ (2,496   $ (7,336   $ (4,622
                                

Net loss per share — basic and diluted (2)

   $ (0.08   $ (0.06   $ (0.16   $ (0.10
                                

Shares used in computing net loss per share — basic and diluted (2)

     45,900        44,683        45,672        44,533   
                                

 

        

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

        

Cost of product revenue

   $ 27      $ 38      $ 62      $ 65   

Cost of support and services revenue

     161        235        361        346   

Research and development

     778        805        1,602        1,443   

Selling and marketing

     885        918        1,753        1,617   

General and administrative

     777        844        1,674        1,459   
                                

Total stock-based compensation expense

   $ 2,628      $ 2,840      $ 5,452      $ 4,930   
                                

 

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

 

     (Unaudited)
Three  Months Ended
December 31,
    (Unaudited)
Six Months  Ended
December 31,
 
     2010     2009     2010     2009  

REVENUE:

        

Product

     79     79     79     79

Support and services

     21     21     21     21
                                

Total revenue

     100     100     100     100

COST OF REVENUE:

        

Product

     27     28     27     28

Support and services

     6     8     6     8
                                

Total cost of revenue

     33     36     33     36
                                

GROSS PROFIT

     67     64     67     64

Operating expenses:

        

Research and development

     22     22     23     22

Sales and marketing

     39     36     39     36

General and administrative

     14     13     14     13
                                

Total operating expenses

     75     71     76     71
                                

LOSS FROM OPERATIONS

     (8 )%      (7 )%      (9 )%      (7 )% 

OTHER INCOME, net

     0     0     1     0
                                

LOSS BEFORE PROVISION FOR INCOME TAXES

     (8 )%      (7 )%      (8 )%      (7 )% 

PROVISION FOR INCOME TAXES

     0     0     0     0
                                

NET LOSS

     (8 )%      (7 )%      (8 )%      (7 )% 
                                

Use of Non-GAAP Financial Measures

We believe that evaluating our 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 our performance as it excludes non-cash and other special charges or credits that many investors and management feel may obscure our 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, amortization of acquisition-related intangibles 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 income is calculated by adjusting GAAP net income (loss) for stock-based compensation expense, amortization of acquisition-related intangibles, restructuring benefit, executive severance expense and the related tax impact. Non-GAAP net income per share per share is calculated by dividing Non-GAAP net income 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
December 31, 2010
    Six Months Ended
December 31, 2010
 
     GAAP     Excludes     Non-GAAP     GAAP     Excludes     Non-GAAP  

Revenue:

            

Product

   $ 37,913      $ —        $ 37,913      $ 73,139      $ —        $ 73,139   

Support and services

     9,816        —          9,816        18,869        —          18,869   
                                                

Total revenues

     47,729        —          47,729        92,008        —          92,008   

Cost of revenue

            

Product

     12,847        (168 )(a),(c)      12,679        24,614        (203 )(a),(c)      24,411   

Support and services

     3,125        (161 )(a)      2,964        6,101        (361 )(a)      5,740   
                                                

Total cost of revenue

     15,972        (329     15,643        30,715        (564     30,151   
                                                

Gross profit

     31,757        329        32,086        61,293        564        61,857   

Gross profit %

     66.5       67.2     66.6       67.2

Operating expenses:

            

Research and development

     10,512        (778 )(a)      9,734        20,834        (1,602 )(a)      19,232   

Sales and marketing

     18,314        (894 )(a),(c)      17,420        35,517        (1,762 )(a),(c)      33,755   

General and administrative

     6,608        (777 )(a)      5,831        12,741        (2,199 )(a),(b)      10,542   
                                                

Total operating expenses

     35,434        (2,449     32,985        69,092        (5,563     63,529   
                                                

Loss from operations

     (3,677     2,778        (899     (7,799     6,127        (1,672

Other income, net

     27        —          27        614        —          614   
                                                

Loss before provision for income taxes

     (3,650     2,778        (872     (7,185     6,127        (1,058

Provision for income taxes

     (41     (99 )(d)      (140     (151     —   (d)      (151
                                                

Net loss

   $ (3,691   $ 2,679      $ (1,012   $ (7,336   $ 6,127      $ (1,209
                                                

Net loss per share available to common stockholders:

            

Basic

   $ (0.08   $ 0.06      $ (0.02   $ (0.16   $ 0.13      $ (0.03

Diluted (e)

   $ (0.08   $ 0.06      $ (0.02   $ (0.16   $ 0.13      $ (0.03

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

            

Basic

     45,900          45,900        45,672          45,672   

Diluted (e)

     45,900          45,900        45,672          45,672   

 

            

(a)    Excludes stock-based compensation as follows:

            

Cost of product revenue

     $ 27          $ 62     

Cost of support and services revenue

       161            361     

Research and development

       778            1,602     

Sales and marketing

       885            1,753     

General and administrative

       777            1,674     
                        
     $ 2,628          $ 5,452     
                        

(b)    Excludes severance for former Chief Executive Officer:

            

General and administration

     $ —            $ 525     
                        
     $ —            $ 525     
                        

(c)    Excludes amortization of acquisition-related intangibles:

            

Cost of product revenue

     $ 141          $ 141     

Sales and marketing

       9            9     
                        
     $ 150          $ 150     
                        

 

(d)    Excludes the tax impact of the items which are excluded in (a) to (c) above.

       

 

(e) Diluted net income per share and share count reflect the weighted average number of common shares used in the basic net income per share calculation plus the effects of all potentially dilutive securities. 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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     Three Months Ended
December 31, 2009
    Six Months Ended
December 31, 2009
 
     GAAP     Excludes     Non-GAAP     GAAP     Excludes     Non-GAAP  

Revenue:

            

Product

   $ 27,897      $ —        $ 27,897      $ 54,740      $ —        $ 54,740   

Support and services

     7,560        —          7,560        14,467        —          14,467   
                                                

Total revenues

     35,457        —          35,457        69,207        —          69,207   

Cost of revenue

            

Product

     9,787        (38 )(a)      9,749        19,320        (65 )(a)      19,255   

Support and services

     2,806        (235 )(a)      2,571        5,390        (346 )(a)      5,044   
                                                

Total cost of revenue

     12,593        (273     12,320        24,710        (411     24,299   
                                                

Gross profit

     22,864        273        23,137        44,497        411        44,908   

Gross profit %

     64.5       65.3     64.3       64.9

Operating expenses:

            

Research and development

     7,835        (805 )(a)      7,030        15,032        (1,443 )(a)      13,589   

Sales and marketing

     12,910        (918 )(a)      11,992        24,927        (1,590 )(a),(b)      23,337   

General and administrative

     4,731        (844 )(a)      3,887        9,382        (1,459 )(a)      7,923   
                                                

Total operating expenses

     25,476        (2,567     22,909        49,341        (4,492     44,849   
                                                

Income (Loss) from operations

     (2,612     2,840        228        (4,844     4,903        59   

Other income, net

     160        —          160        288        —          288   
                                                

Income (Loss) before provision for income taxes

     (2,452     2,840        388        (4,556     4,903        347   

Provision for income taxes

     (44     (4 )(c)      (48     (66     (32 )(c)      (98
                                                

Net income (loss)

   $ (2,496   $ 2,836      $ 340      $ (4,622   $ 4,871      $ 249   
                                                

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

            

Basic

   $ (0.06   $ 0.07      $ 0.01      $ (0.10   $ 0.11      $ 0.01   

Diluted (d)

   $ (0.06   $ 0.07      $ 0.01      $ (0.10   $ 0.11      $ 0.01   

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

            

Basic

     44,683          44,683        44,533          44,533   

Diluted (d)

     44,683          46,127        44,533          46,100   

 

            

(a)    Excludes stock-based compensation as follows:

            

Cost of product revenue

     $ 38          $ 65     

Cost of support and services revenue

       235            346     

Research and development

       805            1,443     

Sales and marketing

       918            1,617     

General and administrative

       844            1,459     
                        
     $ 2,840          $ 4,930     
                        

(b)    Excludes restructuring benefit as follows:

            

Sales and marketing

     $ —            $ (27  
                        
     $ —            $ (27  
                        

(c)    Excludes the tax impact of the items which are excluded in (a) and (b) above.

       

(d)    Diluted net income per share and share count reflect the weighted average number of common shares used in the basic net income per share calculation plus the effects of all potentially dilutive securities. 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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Comparison of the three months ended December 31, 2010 and December 31, 2009

Total revenue.

 

     Three Months Ended
December 31,
 
(Dollars in thousands)    2010      2009      Dollar
Variance
     Percent
Variance
 

Total revenue

   $ 47,729       $ 35,457         12,272         35

Total revenue increased by $12.3 million or 35% during the three months ended December 31, 2010 as compared to the three months ended December 31, 2009. This increase was primarily attributable to increases in both product and support and service revenues. Product revenue increased $10.0 million or 36% during the comparable period and support and services revenue increased by $2.3 million or 30% the comparable period. The increase in product revenue is primarily attributable to obtaining new customers as well as the continued growth and expansion in our installed customer base as we continue to grow our sales organization and increase our marketing efforts through greater brand awareness. The increase in support and service revenue is primarily due to overall growth in our installed customer based coupled with increased support renewals.

Cost of revenue and gross profit.

 

     Three Months Ended
December 31,
 
(Dollars in thousands)    2010     2009     Dollar
Variance
     Percent
Variance
 

Cost of revenue

   $ 15,972      $ 12,593      $ 3,379         27

Gross profit

   $ 31,757      $ 22,864      $ 8,893         39

Gross margins

     66.5     64.5     

Cost of revenue . Gross margins increased from 65% during the three months ended December 31, 2009 to 67% during the three months ended December 31, 2010. Service margins during the three months ended December 31, 2010 were 68% of service revenues as compared to 63% during the three months ended December 31, 2009. The increase in service margins is due to the growth in service revenues outpacing the increased cost of services and support and the reduction of the cost of the third party support costs. Product gross margins during three months ended December 31, 2010 increased modestly and were 66% or product revenue as compared to 65% during the three months ended December 31, 2009.

Operating expenses.

 

     Three Months Ended
December 31,
 
(Dollars in thousands)    2010      2009      Dollar
Variance
     Percent
Variance
 

Research and development

   $ 10,512       $ 7,835       $ 2,677         34

Sales and marketing

     18,314         12,910         5,404         42

General and administrative

     6,608         4,731         1,877         40

Research and development. Research and development expenses increased by $2.7 million or 34% during the three months ended December 31, 2010 as compared to three months ended December 31, 2009. The increase is primarily attributable to an increase of $1.5 million in employee related expenses including salaries, incentive compensation and fringe benefits, an increase of $0.4 million in consulting related expenses associated with various product development projects, an increase of $0.3 million in facility related expenses, and an increase of $0.2 million in development and testing equipment costs.

Sales and marketing. Sales and marketing expenses increased by $5.4 million or 42% during the three months ended December 31, 2010 as compared to three months ended December 31, 2009. The increase is primarily attributable to an increase of $2.0 million in employee related expenses including payroll, incentive compensation and fringe benefits, an increase of $1.1 million in advertising, branding and promotional activities, an increase of $1.0 million in sales commissions, an increase of $0.6 million in office related expenses, and an increase of $0.5 million in travel and training expenses associated with our expanded sales force.

General and administrative.  General and administrative expenses increased by $1.9 million or 40% during the three months ended December 31, 2010 as compared to three months ended December 31, 2009. The increase is primarily attributable to an increase of $0.6 million in consulting and professional services, an increase of $0.5 million in legal expenses mainly associated with

 

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legal costs incurred in our acquisition of Agito, Inc. in October 2010, an increase of $0.4 million in software related expenses, and $0.4 million increase in employee related expenses including payroll, incentive compensation and fringe benefits.

Other income, net.

 

     Three Months Ended
December 31,
 
(Dollars in thousands)    2010      2009      Dollar
Variance
    Percent
Variance
 

Other income, net

   $ 27       $ 160       $ (133     (83 )% 

Other income, net. Other income decreased by $0.1 million or 83% during the three months ended December 31, 2010 as compared to three months ended December 31, 2009. The decrease was primarily attributable to a loss on foreign exchange due to weakening of U.S. dollars of approximately $0.2 million offset by a moderate increase in interest earned on short-term investments during the period.

Income tax provision.

 

     Three Months Ended
December 31,
 
(Dollars in thousands)    2010      2009      Dollar
Variance
    Percent
Variance
 

Tax provision

   $ 41       $ 44       $ (3     (7 )% 
                                  

Income tax provision. The income tax provision decreased moderately by $3,000 or 7% during the three months ended December 31, 2010 as compared to three months ended December 31, 2009.

Comparison of the six months ended December 31, 2010 and December 31, 2009

Total revenue.

 

     Six Months Ended
December 31,
 
(Dollars in thousands)    2010      2009      Dollar
Variance
     Percent
Variance
 

Total revenue

   $ 92,008       $ 69,207       $ 22,801         33

Total revenue increased by $22.8 million or 33% during the six months ended December 31, 2010 as compared to the six months ended December 31, 2009. This increase was primarily attributable to increases in both product revenues which increased by $18.4 million or 34%, and support and service revenues which increased by $4.4 million or 30% as compared to the six months ended December 31, 2009. The overall increase in revenue is primarily due to increased customer traction as a result of our expanded sales and marketing efforts to increase brand awareness and overall market acceptance of our suite of products. The increase in product revenue is attributable to an increase in sales of phones and switches from new customers as well as a growing customer base. The increase in support and service revenue is due to an increase in support renewals and increased demand for our services.

Cost of revenue and gross profit.

 

     Six Months Ended
December 31,
 
(Dollars in thousands)    2010     2009     Dollar
Variance
     Percent
Variance
 

Cost of revenue

   $ 30,715      $ 24,710      $ 6,005         24

Gross profit

     61,293        44,497        16,796         38

Gross margins

     66.6     64.3     

Cost of revenue . Gross margins increased from 64% during the six months ended December 31, 2009 to 67% during the six months ended December 31, 2010. Service margins during the six months ended December 31, 2010 were 68% of service revenues as compared to 63% during the six months ended December 31, 2009. The increase in service margins was due to the growth in service revenues outpacing the increased cost of services and support and the reduction of the third party support costs.

 

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The product gross margins during the six months ended December 31, 2010 increased moderately and were 66% of product revenues as compared to 65% during the six months ended December 31, 2009.

Operating expenses.

 

     Six Months Ended
December 31,
 
(Dollars in thousands)    2010      2009      Dollar
Variance
     Percent
Variance
 

Research and development

   $ 20,834       $ 15,032       $ 5,802         39

Sales and marketing

     35,517         24,927         10,590         42

General and administrative

     12,741         9,382         3,359         36

Research and development. Research and development expenses increased by $5.8 million or 39% during the six months ended December 31, 2010 as compared to six months ended December 31, 2009. This increase was primarily attributable to an increase of $3.4 million in employee related expenses such as payroll, incentive compensation and fringe benefits, an increase of $1.2 million in consulting expenses to support various development projects, an increase of $0.6 million in office facilities related expenses, and an increase of $0.3 million in equipment costs used for development and testing purposes.

Sales and marketing. Sales and marketing expenses increased by $10.6 million or 42% in the six months ended December 31, 2010 as compared to six months ended December 31, 2009. The increase is primarily attributable to an increase of $4.2 million in employee related expenses including payroll, bonus and fringe benefits, an increase of $2.9 million in advertising, branding and promotional activities, an increase of $1.2 million in sales commissions, an increase of $1.2 million in travel and training expenses associated with our expanded sales force, and an increase of $0.8 million in greater office expenses and equipment costs.

General and administrative.  General and administrative expenses increased by $3.4 million or 36% in the six months ended December 31, 2010 as compared to six months ended December 31, 2009. The increase is primarily attributable to an increase of $1.5 million increase in employee payroll and benefits, an increase of $0.7 million in consulting and professional services, an increase of $0.5 million in legal expenses mainly relating to our acquisition of Agito in October 2010, and an increase of $0.4 million in software related expenses.

Other income, net.

 

     Six Months Ended
December 31,
 
(Dollars in thousands)    2010      2009      Dollar
Variance
     Percent
Variance
 

Other income, net

   $ 614       $ 288       $ 326         113

Other income, net. Other income increased by $0.3 million or 113% during the six months ended December 31, 2010 as compared to six months ended December 31, 2009. The increase was primarily attributable to an increase in interest income of $0.2 million partly from the interest income received related to an income tax refund received during the prior quarter and an increase of $0.1 million in foreign exchange gain due to strengthening of the foreign currencies gain relative to U.S. dollar.

Income tax provision.

 

     Six Months Ended
December 31,
 
(Dollars in thousands)    2010      2009      Dollar
Variance
     Percent
Variance
 

Tax provision

   $ 151       $ 66       $ 85         129

Income tax provision. The income tax provision increased by $0.1 million or 129% during the six months ended December 31, 2010 as compared to six months ended December 31, 2009.

 

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Liquidity and Capital Resources

Balance Sheet and Cash Flows

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

 

     December 31,
2010
     June 30,
2010
     Increase/
(Decrease)
 

Cash, cash equivalents and short-term investments:

        

Cash and cash equivalents

   $ 55,304       $ 68,426       $ (13,122

Short-term investments

     50,122         47,375         2,747   
                          

Total

   $ 105,426       $ 115,801       $ (10,375
                          

As of December 31, 2010, our principal sources of liquidity consisted of cash, cash equivalents and short-term investments of $105.4 million and accounts receivable net of $24.6 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 $105.4 million of cash, cash equivalents and short-term investments at December 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. Please refer to Note 3 to the financial statements regarding the acquisition of Agito Networks, Inc. by the Company in October 2010. If needed, 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:

 

     Six Months Ended  
(In thousands)    December 31,
2010
    December 31,
2009
 

Net cash flow provided by (used in):

    

Operating activities

   $ 4,214      $ 8,511   

Investing activities

     (19,314     (4,960

Financing activities

     1,978        1,408   
                

Net (decrease) increase in cash and cash equivalents

   $ (13,122   $ 4,959   
                

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 general 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 40 to 60 days. In some cases we also prepay for license rights to third-party products in advance of sales.

Net loss during the six months ended December 31, 2010 and 2009 included non-cash charges of $5.5 million and $4.9 million in stock-based compensation expense, respectively, and $1.9 million and $1.3 million in depreciation and amortization, respectively.

Cash provided by operating activities during the six months ended December 31, 2010 also reflect net changes in operating assets and liabilities, which provided $3.8 million consisting primarily of a significant decrease in prepaid expenses and other current assets of $4.2 million from the settlement of a legal liability, a decrease in other assets of $0.3 million, a decrease in accounts receivables of $0.1 million, an increase in deferred revenue of $2.9 million, an increase in accounts payable of $0.5 million offset by an increase in inventories of $2.7 million, a decrease of $1.3 million in accrued liabilities and a decrease in accrued employee compensation of $0.2 million.

 

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Cash provided by operating activities during the six months ended December 31, 2009 also reflect net changes in operating assets and liabilities, which provided $6.6 million consisting primarily of a significant decrease in accounts receivables of $2.6 million due to strong collection patterns from our customers, an increase in accrued employee compensation of $2.3 million, an increase in deferred revenue of $2.2 million, an increase of $1.0 million in accrued liabilities, an increase in accounts payable of $0.7 million and a decrease in other assets of $0.8 million, partially offset by an increase in inventories of $2.7 million, and a decrease in prepaid and other current assets of $0.3 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 for operating or strategic purposes.

Net cash used in investing activities was $19.3 million and $5.0 million in the six months ended December 31, 2010 and 2009, respectively. Net cash used in investing activities in the six months ended December 31, 2010 related to purchase consideration of $11.4 million paid for the acquisition of Agito Networks, Inc. in October 2010, purchase of short-term investments of $3.1 million, purchase of property, plan and equipment of $4.0 million and purchase of a perpetual license and patent of $0.8 million. Net cash used in investing activities in the six months ended December 31, 2009 related to net purchases of short-term investments of $2.3 million, purchase of property, plant and equipment of $1.7 million and purchase of a perpetual license and patent of $0.9 million.

Cash flows from financing activities

Net cash provided by financing activities was $2.0 million for the six months ended December 31, 2010 and $1.4 million for the six months ended December 31, 2009, respectively, primarily from the exercise of common stock options and issuance of common stock under our 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 December 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

   $ 1,518       $ 5,531       $ 1,732       $ 1,129       $ 9,910   

Purchase obligations

     26,224         —           —           —           26,224   
                                            

Total

   $ 27,742       $ 5,531       $ 1,732       $ 1,129       $ 36,134   
                                            

 

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 for the fiscal year ended June 30, 2010. Our exposure to market risk has not changed materially since June 30, 2010.

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our 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, our Chief Executive Officer and Chief Financial Officer have concluded that, as of end of such period, our disclosure controls and procedures were effective.

Internal Control Over Financial Reporting. There have not been any changes in our 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, our internal control over financial reporting.

 

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PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

See Note 12 to the Condensed Consolidated Financial Statements contained in Part I herein.

 

ITEM 1A. RISK FACTORS

Except as noted below, there are no material changes in our risk factors as described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K, for the fiscal year ended June 30, 2010.

We recently made an acquisition and may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders, increase expenses, and otherwise disrupt our operations and harm our operating results.

We recently acquired a company, and we may acquire or invest in other businesses, products or technologies that we believe could complement or expand our capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. We cannot assure you that we will realize the anticipated benefits of these acquisitions.

There are inherent risks in integrating and managing corporate acquisitions, and the Company has limited experience with acquisitions. If we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

 

   

unanticipated costs or liabilities associated with the acquisition;

 

   

diversion of management’s attention from other business concerns;

 

   

harm to our existing business relationships with business partners and customers as a result of the acquisition;

 

   

the potential loss of key employees;

 

   

use of resources that are need in other parts of our business; and

 

   

use of substantial portions of our available cash to consummate the acquisition.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to goodwill and other indefinite lived intangible assets, which must be assessed for impairment at least annually. Also, contingent considerations related to the acquisitions will be remeasured to fair value at each reporting period, with any changes in the value recorded as income or expense. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could harm our results of operations

Future acquisitions could result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer.

We are embarking on a new distribution strategy, which could be disruptive to our business.

Substantially all of our total revenue is generated through indirect sales channels. These indirect sales channels primarily consist of third-party resellers that market and sell telecommunications systems and other products and services to customers. We have recently announced that we will now sell our products through distributors as well as resellers in the United States. As a result, we have contracted with distributors who will purchase our products, add value such as other products and services, and then distribute our products through resellers. This new strategy is intended to increase our distribution channel and enable our revenue growth, but it could also disrupt our existing established reseller channels.

We have no long-term contracts or minimum purchase commitments with our distributors, and our contracts with these distributors do not prohibit them from offering products or services that compete with ours. Our competitors may be effective in providing incentives to existing and potential distributors to favor their products or to prevent or reduce sales of our products. Our distributors may choose not to offer our products exclusively or at all. Our failure to establish and maintain successful relationships with our distributors could materially adversely affect our business, operating results and financial condition.

 

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We have had significant executive management turnover, and may not be able to retain or attract the executives we need to succeed.

We have had significant turnover in our executive team. Our former Chief Executive Officer, John W. Combs, resigned as our Chief Executive Officer and a member of the Board of Directors effective September 30, 2010. On December 13, 2010 we announced that Peter Blackmore joined the Company as our Chief Executive Officer and as a member of the Board of Directors.

We cannot assure you that we will be able to retain other key employees, including senior management and executive positions. If we cannot attract and retain these executives and key employees, our business would be harmed, particularly if the departure of any executive or key employee results in a business interruption, or if we are not successful in preserving material knowledge of our departing employees.

 

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 December 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: February 4, 2011

 

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

10.1      2007 Employee Stock Purchase Plan, as amended on November 2, 2010
10.2      Lease Agreement between River Place Corporate Park, LP and Shore Tel, Inc, dated June 30, 2008, and as amended on September 16, 2009, December 2009, and December 10, 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.

 

32

Exhibit 10.1

 

LOGO

2007 Employee Stock Purchase Plan


SHORETEL, INC.

2007 E MPLOYEE S TOCK P URCHASE P LAN

A DOPTED BY THE B OARD OF D IRECTORS ON S EPTEMBER  18, 2007 1

AND AMENDED NOVEMBER 2, 2010

1.     Establishment of Plan . ShoreTel, Inc. (the “ Company ”) proposes to grant options for purchase of the Company’s Common Stock to eligible employees of the Company and its Participating Corporations (as hereinafter defined) pursuant to this Employee Stock Purchase Plan (this “ Plan ”). For purposes of this Plan, “Parent” and “Subsidiary” shall have the same meanings as “parent corporation” and “subsidiary corporation” in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the “Code”), and “Corporate Group” shall refer collectively to the Company and all its Parents and Subsidiaries. “Participating Corporations” are the Company and any Parents or Subsidiaries that the Board of Directors of the Company (the “ Board ”) designates from time to time as corporations that shall participate in this Plan. The Company intends this Plan to qualify as an “employee stock purchase plan” under Section 423 of the Code (including any amendments to or replacements of such Section), and this Plan shall be so construed. Any term not expressly defined in this Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. A total of five hundred thousand (500,000) shares of the Company’s Common Stock is reserved for issuance under this Plan. In addition, on each January 1 after the first Offering Date, the aggregate number of shares of the Company’s Common Stock reserved for issuance under the Plan shall be increased automatically by the number of shares equal to one percent (1%) of the total number of outstanding shares of the Company Common Stock on the immediately preceding December 31 ( rounded down to the nearest whole share ); provided, that the Board or the Committee may, in its sole discretion, reduce the amount of the increase in any particular year; and, provided further , that the aggregate number of shares issued over the term of this Plan shall not exceed five million (5,000,000) shares of Common Stock. The number of shares reserved for issuance under this Plan and the maximum number of shares that may be issued under this Plan shall be subject to adjustments effected in accordance with Section 14 of this Plan.

2.     Purpose . The purpose of this Plan is to provide eligible employees of the Company and Participating Corporations with a means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees’ sense of participation in the affairs of the Company and Participating Corporations, and to provide an incentive for continued employment.

3.     Administration . This Plan shall be administered by the Compensation Committee of the Board or by the Board (either referred to herein as the “ Committee ”). Subject to the provisions of this Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of this Plan shall be determined by the Committee and its decisions shall be final and binding upon all Participants. Members of the Committee shall receive no compensation for their services in connection with the administration of this Plan, other than standard fees as established from time to time by the Board for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of this Plan shall be paid by the Company.

4.     Eligibility . Any employee of the Company or the Participating Corporations is eligible to participate in an Offering Period (as hereinafter defined) under this Plan except the following:

(a) employees who are not employed by the Company or a Participating Corporation at the beginning of such Offering Period or at such other time period as specified by the Committee;

(b) employees who are customarily employed for twenty (20) hours or less per week;

 

1

Share amounts herein have been adjusted to reflect a 1-for-10 reverse stock split approved by the Board in June 2007, following stockholder approval.

 

- 1 -


(c) employees who are customarily employed for five (5) months or less in a calendar year;

(d) employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Corporations or who, as a result of being granted an option under this Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Corporations;

(e) employees who do not meet any other eligibility requirements that the Committee may choose to impose (within the limits permitted by the Code); and

(f) individuals who provide services to the Company or any of its Participating Corporations as independent contractors who are reclassified as common law employees for any reason except for federal income and employment tax purposes.

5.     Offering Dates.

(a) The offering periods of this Plan (each, an “ Offering Period ”) may be of up to twenty-four (24) months duration and shall commence and end at the times designated by the Committee during which payroll deductions of Participants are accumulated under this Plan.

(b) The initial Offering Period shall commence on November 1, 2007, and shall end with the Purchase Date that occurs on or prior to April 30, 2008. Thereafter, a six-month Offering Period shall commence on each May 1 (ending with the Purchase Date that occurs on or prior to the next October 31) and November 1 (ending with the Purchase Date that occurs on or prior to the next April 30).

(c) The first business day of each Offering Period is referred to as the “ Offering Date .” The last business day of each Offering Period is referred to as the “ Purchase Date .” The Committee shall have the power to change these terms as provided in Section 25 below.

6.     Participation in this Plan.

Eligible employees may become participants (a “ Participant ” or collectively, “ Participants ”) in an Offering Period under this Plan on the Offering Date by delivering a subscription agreement to the Company prior to such Offering Date, or such other time period as specified by the Committee, and timely satisfying any other eligibility requirements for participating in such Offering Period. Notwithstanding the foregoing, the Committee may set a later time for filing the subscription agreement authorizing payroll deductions for all eligible employees with respect to a given Offering Period. Once an employee becomes a participant in an Offering Period, then such employee will automatically participate in the Offering Period commencing immediately following the last day of such prior Offering Period unless the employee withdraws or is deemed to withdraw from this Plan or terminates further participation in the Offering Period as set forth in Section 11 below. Such participant is not required to file any additional subscription agreement in order to continue participation in this Plan.

7.     Grant of Option on Enrollment . Becoming a Participant with respect to an Offering Period will constitute the grant (as of the Offering Date) by the Company to such Participant of an option to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by a fraction, the numerator of which is the amount accumulated in such Participant’s payroll deduction account during such Offering Period and the denominator of which is the lower of (i) ninety percent (90%) of the fair market value of a share of the Company’s Common Stock on the Offering Date (but in no event less than the par value of a share of the Company’s Common Stock), or (ii) ninety percent (90%) of the fair market value of a share of the Company’s Common Stock on the Purchase Date (but in no event less than the par value of a share of the Company’s Common Stock) provided, however ,

 

- 2 -


that the number of shares of the Company’s Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (x) the maximum number of shares set by the Committee pursuant to Section 10(b) below with respect to the applicable Purchase Date, or (y) the maximum number of shares which may be purchased pursuant to Section 10(a) below with respect to the applicable Purchase Date. The fair market value of a share of the Company’s Common Stock shall be determined as provided in Section 8 below.

Effective for the offering period commencing on and after May 1, 2011, the paragraph immediately foregoing shall be amended and restated in its entirety as follows:

Grant of Option on Enrollment . Becoming a Participant with respect to an Offering Period will constitute the grant (as of the Offering Date) by the Company to such Participant of an option to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by a fraction, the numerator of which is the amount accumulated in such Participant’s payroll deduction account during such Offering Period and the denominator of which is the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company’s Common Stock on the Offering Date (but in no event less than the par value of a share of the Company’s Common Stock), or (ii) eighty-five percent (85%) of the fair market value of a share of the Company’s Common Stock on the Purchase Date (but in no event less than the par value of a share of the Company’s Common Stock) provided, however , that the number of shares of the Company’s Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (x) the maximum number of shares set by the Committee pursuant to Section 10(b) below with respect to the applicable Purchase Date, or (y) the maximum number of shares which may be purchased pursuant to Section 10(a) below with respect to the applicable Purchase Date. The fair market value of a share of the Company’s Common Stock shall be determined as provided in Section 8 below.

8.     Purchase Price . The purchase price per share at which a share of Common Stock will be sold in any Offering Period shall be ninety percent (90%) of the lesser of:

(a) The fair market value on the Offering Date; or

(b) The fair market value on the Purchase Date.

The term “ fair market value ” means, as of any date, the value of a share of the Company’s Common Stock determined as follows:

(i) if such Common Stock is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal or such other source as the Committee deems reliable; or

(ii) if such Common Stock is publicly traded but is not admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal or such other source as the Committee deems reliable.

Effective for the offering period commencing on and after May 1, 2011, the paragraph immediately foregoing shall be amended and restated in its entirety as follows:

Purchase Price . The purchase price per share at which a share of Common Stock will be sold in any Offering Period shall be eighty-five percent (85%) of the lesser of:

(a) The fair market value on the Offering Date; or

(b) The fair market value on the Purchase Date.

 

- 3 -


The term “ fair market value ” means, as of any date, the value of a share of the Company’s Common Stock determined as follows:

(i) if such Common Stock is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal or such other source as the Committee deems reliable; or

(ii) if such Common Stock is publicly traded but is not admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal or such other source as the Committee deems reliable.

9.     Payment Of Purchase Price; Payroll Deduction Changes; Share Issuances .

(a) The purchase price of the shares is accumulated by regular payroll deductions made during each Offering Period. The deductions are made as a percentage of the Participant’s compensation in one percent (1%) increments not less than one percent (1%), nor greater than fifteen percent (15%) or such higher or lower limit as may be set by the Committee for a particular Offering Period. Compensation shall mean all W-2 cash compensation categorized by the Company as base salary or regular hourly wages, bonuses, overtime pay, commissions, and shift premiums, provided , however , that for purposes of determining a Participant’s compensation, any election by such Participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the Participant did not make such election. Payroll deductions shall commence on the first payday following the first day of the Offering Period and shall continue to the last payday at or prior to the Purchase Date of such Offering Period unless altered or terminated as provided in this Plan.

(b) A Participant may decrease the rate of payroll deductions during an Offering Period by filing with the Company a new authorization for payroll deductions, with the new rate to become effective for the next payroll period commencing after the Company’s receipt of the authorization and continuing for the remainder of the Offering Period unless changed as described below. Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one (1) decrease may be made effective during any Offering Period. A Participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing with the Company a new authorization for payroll deductions prior to the beginning of such Offering Period, or such other time period as specified by the Committee.

(c) A Participant may reduce his or her payroll deduction percentage to zero during an Offering Period by filing with the Company a request for cessation of payroll deductions. Such reduction shall be effective beginning with the next payroll period after the Company’s receipt of the request and no further payroll deductions will be made for the duration of the Offering Period. Payroll deductions credited to the Participant’s account prior to the effective date of the request shall be used to purchase shares of Common Stock of the Company in accordance with Section (e) below. A reduction of the payroll deduction percentage to zero shall be treated as such Participant’s withdrawal from such Offering Period, and the Plan, effective as of the day after the next Purchase Date following the filing date of such request with the Company.

(d) All payroll deductions made for a Participant are credited to his or her account under this Plan and are deposited with the general funds of the Company. No interest accrues on the payroll deductions. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions.

(e) On each Purchase Date, so long as this Plan remains in effect and provided that the Participant has not submitted a signed and completed withdrawal form before that date which notifies the

 

- 4 -


Company that the Participant wishes to withdraw from that Offering Period under this Plan and have all payroll deductions accumulated in the account maintained on behalf of the Participant as of that date returned to the Participant, the Company shall apply the funds then in the Participant’s account to the purchase of whole shares of Common Stock reserved under the option granted to such Participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The purchase price per share shall be as specified in Section 8 of this Plan. Any amount remaining in a Participant’s account on a Purchase Date which is less than the amount necessary to purchase a full share of the Company’s Common Stock shall be carried forward, without interest, into the next Offering Period, as the case may be. In the event that this Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the Participant, without interest. No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in this Plan has terminated prior to such Purchase Date.

(f) As promptly as practicable after the Purchase Date, the Company shall issue shares for the Participant’s benefit representing the shares purchased upon exercise of his or her option.

(g) During a Participant’s lifetime, his or her option to purchase shares hereunder is exercisable only by him or her. The Participant will have no interest or voting right in shares covered by his or her option until such option has been exercised.

10.     Limitations on Shares to be Purchased.

(a) No Participant shall be entitled to purchase stock under any Offering Period at a rate which, when aggregated with such Participant’s rights to purchase stock, that are also outstanding in the same calendar year(s) (whether under other Offering Periods or other employee stock purchase plans of the Corporate Group), exceeds $25,000 in fair market value, determined as of the Offering Date, (or such other limit as may be imposed by the Code) for each calendar year in which such Offering Period is in effect (hereinafter the “Maximum Share Amount”). The Company shall automatically suspend the payroll deductions of any Participant as necessary to enforce such limit provided that when the Company automatically resumes such payroll deductions, the Company must apply the rate in effect immediately prior to such suspension.

(b) The Committee may, in its sole discretion, set a lower maximum number of shares which may be purchased by any Participant during any Offering Period than that determined under Section 10(a) above, which shall then be the Maximum Share Amount for subsequent Offering Periods. If a new Maximum Share Amount is set, then all Participants must be notified of such Maximum Share Amount prior to the commencement of the next Offering Period for which it is to be effective. The Maximum Share Amount shall continue to apply with respect to all succeeding Offering Periods unless revised by the Committee as set forth above.

(c) If the number of shares to be purchased on a Purchase Date by all Participants exceeds the number of shares then available for issuance under this Plan, then the Company will make a pro rata allocation of the remaining shares in as uniform a manner as shall be reasonably practicable and as the Committee shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares to be purchased under a Participant’s option to each Participant affected.

(d) Any payroll deductions accumulated in a Participant’s account which are not used to purchase stock due to the limitations in this Section 10, and not covered by Section 9(e), shall be returned to the Participant as soon as practicable after the end of the applicable Offering Period, without interest.

11.     Withdrawal .

(a) Each Participant may withdraw from an Offering Period under this Plan by signing and delivering to the Company a written notice to that effect on a form provided for such purpose by the Company. Such withdrawal may be elected at any time prior to the end of an Offering Period, or such other time period as specified by the Committee.

 

- 5 -


(b) Upon withdrawal from this Plan, the accumulated payroll deductions shall be returned to the withdrawn Participant, without interest, and his or her interest in this Plan shall terminate. In the event a Participant voluntarily elects to withdraw from this Plan, he or she may not resume his or her participation in this Plan during the same Offering Period, but he or she may participate in any Offering Period under this Plan which commences on a date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth in Section 6 above for initial participation in this Plan.

12.     Termination of Employment . Termination of a Participant’s employment for any reason, including retirement, death, disability, or the failure of a Participant to remain an eligible employee of the Company or of a Participating Corporation, immediately terminates his or her participation in this Plan. In such event, accumulated payroll deductions credited to the Participant’s account will be returned to him or her or, in the case of his or her death, to his or her legal representative, without interest. For purposes of this Section 12, an employee will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company or of a Participating Corporation in the case of sick leave, military leave, or any other leave of absence approved by the Company; provided that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute.

13.     Return of Payroll Deductions . In the event a Participant’s interest in this Plan is terminated by withdrawal, termination of employment or otherwise, or in the event this Plan is terminated by the Board, the Company shall deliver to the Participant all accumulated payroll deductions credited to such Participant’s account. No interest shall accrue on the payroll deductions of a Participant in this Plan.

14.     Capital Changes . In the event that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the Company, or other change in the corporate structure of the Company affecting the Common Stock the Committee shall make such adjustment as it determines (in its sole discretion) to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, including without limitation, the number and class of Common Stock which may be delivered under the Plan, the purchase price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised, and the numerical limits of Sections 1 and 10 shall be proportionately adjusted.

15.     Nonassignability . Neither payroll deductions credited to a Participant’s account nor any rights with regard to the exercise of an option or to receive shares under this Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 below) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be void and without effect.

16.     Reports . Individual accounts will be maintained for each Participant in this Plan. Each Participant shall receive promptly after the end of each Offering Period a report of his or her account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Offering Period.

17.     Notice of Disposition . Each Participant shall notify the Company in writing if the Participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two (2) years from the Offering Date or within one (1) year from the Purchase Date on which such shares were purchased (the “ Notice Period ”). The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to

 

- 6 -


this Plan requesting the Company’s transfer agent to notify the Company of any transfer of the shares. The obligation of the Participant to provide such notice shall continue notwithstanding the placement of any such legend on the certificates.

18.     No Rights to Continued Employment . Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Participating Corporation, or restrict the right of the Company or any Participating Corporation to terminate such employee’s employment.

19.     Equal Rights And Privileges . All eligible employees shall have equal rights and privileges with respect to this Plan so that this Plan qualifies as an “employee stock purchase plan” within the meaning of Section 423 or any successor provision of the Code and the related regulations. Any provision of this Plan which is inconsistent with Section 423 or any successor provision of the Code shall, without further act or amendment by the Company, the Committee or the Board, be reformed to comply with the requirements of Section 423. This Section 19 shall take precedence over all other provisions in this Plan.

20.     Notices . All notices or other communications by a Participant to the Company under or in connection with this Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.

21.     Term; Stockholder Approval . This Plan will become effective on November 1, 2007. This Plan was approved by the stockholders of the Company within twelve (12) months before or after the date this Plan was adopted by the Board. No purchase of shares that are subject to such stockholder approval before becoming available under this Plan shall occur prior to stockholder approval of such shares and the Board or Committee may delay any Purchase Date and postpone the commencement of any Offering Period subsequent to such Purchase Date as deemed necessary or desirable to obtain such approval (provided that if a Purchase Date would occur more than twenty-four (24) months after commencement of the Offering Period to which it relates, then such Purchase Date shall not occur and instead such Offering Period shall terminate without the purchase of such shares and Participants in such Offering Period shall be refunded their contributions without interest). This Plan shall continue until the earlier to occur of (a) termination of this Plan by the Board (which termination may be effected by the Board at any time pursuant to Section 25 below), (b) issuance of all of the shares of Common Stock reserved for issuance under this Plan, or (c) the tenth anniversary of the first Purchase Date under the Plan.

22.     Designation of Beneficiary.

(a) A Participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the Participant’s account under this Plan in the event of such Participant’s death subsequent to the end of an Offering Period but prior to delivery to him of such shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant’s account under this Plan in the event of such Participant’s death prior to a Purchase Date.

(b) Such designation of beneficiary may be changed by the Participant at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under this Plan who is living at the time of such Participant’s death, the Company shall deliver such shares or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.

23.     Conditions Upon Issuance of Shares; Limitation on Sale of Shares . Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of

 

- 7 -


such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

24.     Applicable Law . The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of Delaware.

25.     Amendment or Termination . The Committee, in its sole discretion, may amend, suspend, or terminate the Plan, or any part thereof, at any time and for any reason. If the Plan is terminated, the Committee, in its discretion, may elect to terminate all outstanding Offering Periods either immediately or upon completion of the purchase of shares of Common Stock on the next Purchase Date (which may be sooner than originally scheduled, if determined by the Committee in its discretion), or may elect to permit Offering Periods to expire in accordance with their terms (and subject to any adjustment pursuant to Section 14). If an Offering Period is terminated prior to its previously-scheduled expiration, all amounts then credited to Participants’ accounts for such Offering Period, which have not been used to purchase shares of the Company’s Common Stock, shall be returned to those Participants (without interest thereon, except as otherwise required under local laws) as soon as administratively practicable. Further, the Committee will be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the administration of the Plan, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of the Company’s Common Stock for each Participant properly correspond with amounts withheld from the Participant’s base salary or regular hourly wages, and establish such other limitations or procedures as the Committee determines in its sole discretion advisable which are consistent with the Plan. Such actions will not require stockholder approval or the consent of any Participants. However, no amendment shall be made without approval of the stockholders of the Company within twelve (12) months of the adoption of such amendment if such amendment would: (a) increase the number of shares that may be issued under this Plan; or (b) change the designation of the employees (or class of employees) eligible for participation in this Plan.

26.     Corporate Transactions.

(a) In the event of a Corporate Transaction (as defined below), each outstanding right to purchase Company Common Stock will be assumed or an equivalent option substituted by the successor corporation or a parent or a subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the purchase right, the Offering Period with respect to which such purchase right relates will be shortened by setting a new Purchase Date (the “ New Purchase Date ” and will end on the New Purchase Date. The New Purchase Date shall occur on or prior to the consummation of the Corporate Transaction.

(b) “ Corporate Transaction ” means the occurrence of any of the following events: (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; or (ii) the consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; or (iii) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting

 

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securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation or (iv) any other transaction which qualifies as a “corporate transaction” under 424(a) of the Code wherein the stockholders of the Company give up all of their equity interest in the Company (except for the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company).

 

- 9 -

Exhibit 10.2

L EASE A GREEMENT

B ETWEEN

R IVER P LACE C ORPORATE P ARK , LP

AS L ANDLORD , AND

S HORETEL , I NC .

AS T ENANT ,

C OVERING APPROXIMATELY 10,683 RENTABLE SQUARE FEET

OF THE B UILDING KNOWN AS

R IVER P LACE C ORPORATE P ARK , B UILDING IV

LOCATED AT

6500 R IVER P LACE B LVD .

A USTIN , T RAVIS C OUNTY , T EXAS


TABLE OF CONTENTS

 

SECTION 1. DEFINITIONS AND BASIC PROVISIONS

     1   

SECTION 2. LEASE GRANT

     1   

SECTION 3. TERM

     1   

SECTION 4. RENT

     2   

(a) Payment

     2   

(b) Consumer Price Index Increases to Basic Rental

     2   

(c) Basic Costs

     3   

(d) Annual Cost Statement

     3   

(e) Adjustments to Basic Costs

     3   

SECTION 5. DELINQUENT PAYMENT; HANDLING CHARGES

     3   

SECTION 6. SECURITY DEPOSIT

     3   

SECTION 7. LANDLORD’S OBLIGATIONS

     4   

(a) Services

     4   

(b) Excess Utility Use

     4   

(c) Discontinuance

     5   

(c) Restoration of Services; Abatement

     5   

SECTION 8. IMPROVEMENTS AND REPAIRS

     5   

(a) Improvements; Alterations

     5   

(b) Repairs; Maintenance

     6   

(c) Performance of Work

     6   

(d) Mechanic’s Liens

     6   

SECTION 9. PERMITTED AND PROHIBITED USES

     7   

SECTION 10. ASSIGNMENT AND SUBLETTING

     7   

(a) Transfers; Consent

     7   

(b) Cancellation

     8   

(c) Additional Compensation

     8   

SECTION 11. INSURANCE; WAIVERS; SUBROGATION; INDEMNITY

     8   

(b) Landlord Insurance

     9   

(c) Waiver of Negligence Claims; No Subrogation

     9   

(d) Indemnity

     9   

SECTION 12. SUBORDINATION ATTORNMENT; NOTICE TO LANDLORD’S
MORTGAGEE

     10   

(a) Subordination

     10   

(b) Attornment

     10   

(c) Notice to Landlord’s Mortgagee

     10   

SECTION 13. RULES AND REGULATIONS

     10   

SECTION 14. CONDEMNATION

     10   

(a) Taking - Landlord’s and Tenant’s Rights

     10   


(b) Taking - Landlord’s Rights

     10   

(c) Award

     11   

SECTION 15. FIRE OR OTHER CASUALTY

     11   

(a) Repair Estimate

     11   

(b) Landlord's and Tenant's Rights

     11   

(c) Landlord's Rights

     11   

(d) Repair Obligation

     11   

SECTION 16. TAXES

     11   

SECTION 17. EVENTS OF DEFAULT

     12   

SECTION 18. REMEDIES

     12   

SECTION 19. PAYMENT BY TENANT; NON-WAIVER

     13   

(a) Payment by Tenant

     13   

(b) No Waiver

     13   

SECTION 20. SURRENDER OF PREMISES

     13   

SECTION 21. HOLDING OVER

     14   

SECTION 22. CERTAIN RIGHTS RESERVED BY LANDLORD

     14   

SECTION 23. SUBSTITUTION SPACE

     15   

SECTION 24. MISCELLANEOUS

     15   

(a) Landlord Transfer

     15   

(b) Landlord's Liability

     15   

(c) Force Majeure

     15   

(d) Brokerage

     15   

(e) Estoppel Certificates and Financial Information

     15   

(f) Notices

     15   

(g) Severability

     15   

(h) Amendments; and Binding Effect

     16   

(i) Quiet Enjoyment

     16   

(j) Joint and Several Liability

     16   

(k) Captions

     16   

(l) No Merger

     16   

(m) No Offer

     16   

(n) Exhibits

     16   

(o) Entire Agreement

     16   

(p) Dates of Performance

     17   

1.1

     17   

(q) Non-Disclosure

     17   

(r) Time of the Essence

     17   

(s) Waiver of Jury Trial

     17   

(t) Attorney’s Fees

     17   


SECTION 25. HAZARDOUS SUBSTANCES

     17   

SECTION 26. BUILDING AMENITIES

     18   

EXHIBITS TO THIS LEASE

 

Exhibit A

  

- Outline of Premises

Exhibit B

  

- Building Rules and Regulation

Exhibit C

  

- Basic Costs

Exhibit D

  

- Tenant Finish-Work

Exhibit E

  

- Parking

Exhibit F

  

- Commencement Date Memorandum

Exhibit G

  

- Option to Extend

Exhibit H

  

- Right of First Offer

Exhibit I

  

- Expansion Option

Exhibit J

  

- Signage, Roof Rights, and Backup Generator

Exhibit K

  

- Location of Backup Generator


BASIC LEASE INFORMATION

 

Lease Date:

  

June 30, 2008

Tenant:

  

Shoretel, Inc.

Tenant’s Address:

  

960 Stewart Drive, Sunnyvale, California 94085

Tenant Contact:

  

TBD by Tenant

Tenant Telephone:

  

(408) 331-3600

Tenant’s Broker:

  

Staubach Company, to be paid by Landlord.

Landlord:

  

River Place Corporate Park, LP

Landlord’s Address:

  

901 Mopac Expressway

Building One, Suite 200

Austin, Texas 78746

Landlord Contact:

  

Aspen Growth Properties, Inc., attn: Property Manager for Landlord

Landlord Telephone:

  

512-732-9922

Landlord’s Broker:

  

Not Applicable

Building:

  

The building commonly known as “River Place Corporate Park, Building IV”, located at 6500 River Place Blvd., Austin, Texas 78730 which contains 87,228 of rentable square feet.

Premises:

  

Suite No. 200 and 202 containing approximately 10,683 rentable square feet (“ RSF ”) on the second floor of the Building. The Premises are outlined on the plan attached to the Lease as Exhibit A . The RSF comprising the Premises are computed based on the usable square feet within the Premises plus Tenant’s proportionate share of the Common Areas. The RSF shall initially be 10,683 RSF.

 

Tenant shall occupy Suite 202 consisting of approximately 1,201 RSF once the current tenant vacates the space and upon five (5) days following the substantial completion of Tenant Improvements in Suite 202, which date is estimated to be December 31, 2008. The current tenant’s lease expires on October 31, 2008.

 

Tenant shall be permitted to occupy Suite 203 consisting of approximately 4,070 SF beginning as of the date of full execution of this Lease, on a temporary basis until Suite 200 is ready for occupancy, which shall be five (5) days following the substantial completion of Tenant Improvements in Suite 200. Tenant shall not be required to pay any Basic Costs or Base Rent in connection with Suite 203 during Tenant’s occupancy of Suite 203.

Landlord shall have no right to relocate the Premises during the Term of this Lease, as renewed and extended, if applicable.

Project:

  

River Place Corporate Park Office Buildings, consisting of Buildings I through VII, associated parking structures and common area, with an address of 6500 River Place Blvd., Austin, Texas 78730.

A SPEN G ROWTH P ROPERTIES – N ET L EASE

 

     
   L EASE S UMMARY P AGE 1   


Term:

  

The Commencement Date (as herein defined), shall be two (2) separate dates and shall be determined as follows: Forty two (42) months, commencing no earlier than (i) five (5) calendar days following substantial completion of the Tenant Improvements in Suite 200, which date is estimated to be September 1, 2008; and (ii) five (5) days following the substantial completion of Tenant Improvements in Suite 202, which date is estimated to be December 31, 2008 (collectively referred to herein as the “ Commencement Date ”), as each may be extended pursuant to paragraph 4, of Exhibit “D” (“ Tenant-Finish Work ”), and ending at (a) 5:00 p.m., February 28, 2012 for Suite 200; and (ii) 5:00 p.m. February 28, 2012 for Suite 202, which dates are subject to adjustment and earlier termination as provided in this Lease. Notwithstanding the foregoing, if Landlord does not deliver the Premises to Tenant on or before November 1, 2008, Tenant shall have the right to terminate this Lease.

Base Rent:

  

Upon the Commencement Date, Base Rent shall be the following:

 

Period

  

Per RSF

  

Monthly Rent

  

Annual Rent

Months 1 - 6

  

$0.00

  

$0.00

  

$0.00

Months 7 – 18

  

$18.50

  

$16,469.63

  

$197,635.50

Months 19 – 30

  

$19.00

  

$16,914.75

  

$202,977.00

Months 31 - 42

  

$19.50

  

$17,359.88

  

$208,318.50

 

  

•      All Basic Costs for Months 1 – 6 of the Term, beginning as of the Commencement Date specific to Suite 200 and Suite 202, as applicable, shall be abated.

Security Deposit:

  

$26,787.63

Rent:

  

Base Rent, Tenant’s Proportionate Share of Basic Costs and all other sums that Tenant may owe to Landlord under the Lease.

Permitted Use:

  

General office, training, engineering, software testing labs and all other uses permitted under the Project’s zoning and uses incidental thereto.

Tenant’s

Proportionate Share:

  

12.25 %, which is the percentage obtained by dividing (a) 10,683 the RSF in the Premises by (b) the 87,228 RSF in the Building, provided that Landlord and Tenant acknowledge that Tenant’s Proportionate Share shall be adjusted as additional completed RSF are added to or subtracted to the Building.

Tenant’s Estimated

Proportionate Share

of Basic Costs:

  

Costs of $10.59 per RSF ($9,427.75 per month).

Initial

Liability Insurance

Amount

  

$3,000,000.00

Tenant

Improvement

Allowance:

  

$11.50 per RSF ($122,854.50)

 

Tenant may, in Tenant’s sole discretion, amortize any additional elected Tenant Improvement Allowance (as used, the “ Elected TI ”) up to $5.00 per rentable square foot at 10% interest over the first three (3) calendar years of the Term. The Tenant Improvement Allowance and Elected TI may be used for any and all costs associated with the Premises including, but not limited to: building standard and non-building standard

A SPEN G ROWTH P ROPERTIES – N ET L EASE

 

     
   L EASE S UMMARY P AGE 2   


  

improvements, architectural and engineering services, permitting, and construction management fees, moving expenses, security network setup, telephone equipment and installation, signage, furniture and furniture set up, all cabling costs and consultant fees.

Building’s

Proportionate Share:

  

The percentage obtained by dividing (a) the 87,228 RSF contained within the Building by (b) 586,499 RSF contained within the Project; provided that Landlord and Tenant acknowledge that the Building’s Proportionate Share shall be adjusted as additional completed rentable square feet are added to or subtracted from the Project. Currently, the Building’s Proportionate Share equals 14.87%.

The foregoing Basic Lease Information is incorporated into and made a part of the Lease identified above. All terms set forth in the left column are defined terms used in this Lease and having the meaning set forth in the corresponding right column. If any conflict exists between any Basic Lease Information and the Lease, then the Lease shall control.

 

LANDLORD: River Place Corporate Park, LP

 

       a Texas limited partnership

 

by: ASPEN GROWTH PROPERTIES, INC., its General Partner

 

By:

  /s/ Mark McAllister
 

Name:

 

Mark McAllister

 

Its:

 

President

TENANT:

   

Shoretel, Inc.

 

By:

 

                /s/ John W. Combs

 

Name:

 

                John W. Combs

 

Its:

 

                CEO

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   L EASE S UMMARY P AGE 3   


LEASE

THIS LEASE AGREEMENT (this “ Lease ”) is entered into as of June 30, 2008, between River Place Corporate Park, L.P., a Texas limited partnership (“ Landlord ”), and Shoretel, Inc. (“ Tenant ”).

 

SECTION 1.
DEFINITIONS

AND BASIC
PROVISIONS

  

1. The definitions and basic provisions set forth in the Basic Lease Information (the “ Basic Lease Information ”) executed by Landlord and Tenant contemporaneously herewith are incorporated herein by reference for all purposes.

SECTION 2.

LEASE GRANT

  

2. Subject to the terms of this Lease, Landlord leases to Tenant, and Tenant leases from Landlord, the Premises.

SECTION 3.

TERM

  

3. (a) Term Defined . The Term of this Lease begins on the Commencement Date and ends on the date shown in the Basic Lease Information. If the Commencement Date is not the first day of a calendar month, then the Term shall be extended by the time between the Commencement Date and the first day of the next month. Either at Landlord’s request prior to Tenant’s taking possession of the Premises, or no later than 10 days after receipt of request therefore following the Commencement Date, Landlord and Tenant shall execute a Commencement Date Memorandum in the form attached hereto as Exhibit F.

 

(b) No Liability if Term Delayed . If this Lease is executed before the Premises become vacant or otherwise available and ready for occupancy by Tenant, or if any present occupant of the Premises holds over and Landlord cannot acquire possession of the Premises before the Commencement Date, then (i) Tenant’s obligation to pay Rent hereunder shall be waived until Landlord tenders possession of the Premises to Tenant which date shall be no later than November 1, 2008 or Tenant may terminate this Lease, (ii) the Term shall be extended by the time between the scheduled Commencement Date and the date on which Landlord tenders possession of the Premises to Tenant (which date will then be defined as the Commencement Date), (iii) Landlord shall not be in default hereunder or be liable for damages therefore, and (iv) Tenant shall accept possession of the Premises when Landlord tenders possession thereof to Tenant.

 

(c) Condition of the Premises . Prior to the Commencement Date, Landlord will construct the tenant improvements in accordance with the terms of Exhibit “D” , Tenant Finish-Work, attached hereto. By occupying the Premises, Tenant shall be deemed to have accepted the Premises in their AS-IS condition as of the date of such occupancy, subject to the performance of punch-list items that remain to be performed by Landlord, if any. Tenant shall execute and deliver to Landlord, either before the end of any Landlord and Tenant inspection of the Premises on the Commencement Date, or if not done at that time within ten days after Landlord has requested same, a letter on Landlord’s standard form confirming (1) the Commencement Date, (2) that Tenant has accepted the Premises, and (3) that Landlord has performed all of its obligations with respect to the Premises (except for punch-list items specified in such letter). Notwithstanding the foregoing, Landlord hereby warrants and represents to Tenant that the Premises, the Building and the common areas are in compliance with all laws, rules, regulations and ordinances, including, without limitation, all environmental laws and the Americans with Disabilities Act of 1990 (ADA) and that Landlord shall be responsible thereafter for any legal requirements applicable to the Building and all common areas.

 

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Subsequent to Tenant’s acceptance of the Premises, Tenant shall be responsible for the cost of all work required to comply with the retrofit requirements of the Americans with Disabilities Act of 1990, and all rules, regulations, and guidelines promulgated thereunder, as the same may be amended from time to time, necessitated by any installations, additions, or alterations made in or to the Premises at the request of or by Tenant or by Tenant’s use of the Premises (other than retrofit work whose cost has been particularly identified as being payable by Landlord in an instrument signed by Landlord and Tenant), regardless of whether such cost is incurred in connection with retrofit work required in the Premises.

SECTION 4.

RENT

  

4. (a) Payment . Tenant shall timely pay to Landlord the Base Rent and all additional sums to be paid by Tenant to Landlord under this Lease, including Tenant’s Proportionate Share of Basic Costs as set forth in subsection (c) below, without notice or demand and without deduction or set off, at Landlord’s Address (or such other address as Landlord may from time to time designate in writing to Tenant). Base Rent, adjusted as herein provided, shall be payable monthly in advance. The first monthly installment of Base Rent (which for purposes herein is the seventh (7 th ) month of the Term) shall be payable contemporaneously with the execution of this Lease; thereafter, monthly installments of Base Rent shall be due on the first day of the eighth (8 th ) full calendar month of the Term and continuing on the first day of each succeeding calendar month during the Term. Base Rent for any fractional month at the beginning of the Term shall be prorated based on 1/365 of the current annual Base Rent for each day of the partial month this Lease is in effect, and shall be due on the Commencement Date.

 

(b) Increase to Base Rent . The monthly Base Rent shall increase once at the end of each Lease Year as shown in the section entitled “Base Rent” in the Basic Lease Information. A Lease Year means a period of twelve (12) consecutive calendar months; provided, however, that the first Lease Year shall commence on the Commencement Date and expire on the last day of the twelfth (12th) full calendar month following the Commencement Date.

 

Tenant shall not be responsible for increases in operating in excess of six percent (6%) per year on a cumulative basis, exclusive of those expenses categorized as not within the control of the Landlord “Non-Controllable Expenses”. For purposes of this provision, Non-Controllable Expenses shall be defined as taxes, utilities, insurance, and expenses that increase as a result of minimum wage rate increases. In addition, management fees shall be capped not to exceed four percent (4%) of the annual rental income received. Landlord agrees to protect any substantial tax increases.

 

Landlord shall keep books and records which shall, for the purpose of verifying the Common Areas Expenses, which books and records shall be subject to examination by Tenant and Tenant’s accountants at reasonable times during business hours and in a manner which does not unreasonably interfere with the conduct of Landlord’s business. Any such examination for any calendar year shall be conducted within three (3) months following Landlord’s delivery to Tenant of the statement of actual Basic costs, and shall be limited to the calendar year for which such statement of actual Basic Costs was furnished. The examination shall be conducted by an accountant licensed in the State of Texas, and the compensation paid to such accountant shall not be based on the results of the examination or a reduction in Tenant’s obligation to pay Basic Costs. If the examination of Landlord’s statement of actual Basic Costs shows that actual Basic Costs have been understated, Tenant shall pay to Landlord the difference between the amount actually paid by Tenant to Landlord for the prior calendar year, and the amount that the examination shows should have been paid by Tenant to Landlord. If the examination of Landlord’s statement of actual Basic costs shows that actual Basic costs have been overstated, Landlord shall have thirty (30) days to conduct its own