As filed with the Securities and Exchange Commission on
February 12, 2007
Registration
No. 333-
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
SHORETEL, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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3661
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77-0443568
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(State or other jurisdiction of
incorporation or organization)
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(Primary standard industrial
code number)
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(I.R.S. employer
identification no.)
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960 Stewart Drive
Sunnyvale, CA
94085-3913
(408) 331-3300
(Address, including zip code,
and telephone number, including area code, of Registrants
principal executive offices)
John W. Combs
Chairman, President and Chief Executive Officer
ShoreTel, Inc.
960 Stewart Drive
Sunnyvale, CA 94085
(408) 331-3300
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Dennis
DeBroeck, Esq.
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Jeffrey D.
Saper, Esq.
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Jeffrey R.
Vetter, Esq.
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Steven V.
Bernard, Esq.
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Fenwick & West
LLP
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Wilson Sonsini
Goodrich & Rosati
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Silicon Valley Center
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Professional
Corporation
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801 California Street
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650 Page Mill Road
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Mountain View, California
94041
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Palo Alto, California
94304
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(650) 988-8500
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(650)
493-9300
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box.
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act
of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act of 1933, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act of 1933, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same offering.
o
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Title of Each Class of
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Aggregate
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Amount of Registration
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Securities to be Registered
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Offering Price(1)
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Fee
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Common Stock, $0.001 par
value per share
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$
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85,000,000
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$
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9,095
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(1)
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Estimated pursuant to
Rule 457(o) solely for the purpose of calculating the
amount of the registration fee.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment that
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this preliminary prospectus is not complete and
may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell nor does it seek an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
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SUBJECT TO COMPLETION. DATED
FEBRUARY 12, 2007.
Shares
Common Stock
This is our initial public offering, and no public market
currently exists for our shares of common stock. ShoreTel, Inc.
is
offering shares
of common stock. We anticipate that the initial public offering
price will be between $ and
$ per share.
We have applied to have our common stock approved for quotation
on the NASDAQ Global Market under the symbol SHOR.
Investing in our common stock involves risks. See Risk
Factors beginning on page 7.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to
ShoreTel
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$
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$
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To the extent that the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from us at the initial public offering price less the
underwriting discount.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the shares on or
about ,
2007.
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Piper
Jaffray
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JMP
Securities
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Wedbush
Morgan Securities
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Prospectus
dated ,
2007
TABLE OF
CONTENTS
No dealer, salesperson or other person is authorized to give
any information or to represent anything not contained in this
prospectus.
You should rely only on the information contained in this
prospectus and any free writing prospectus prepared by or on
behalf of us. This prospectus is an offer to sell only the
shares offered hereby but only under circumstances and in
jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
Through and
including ,
2007 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealers obligation to
deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
i
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information you
should consider before buying shares of our common stock. Before
deciding to invest in shares of our common stock, you should
read the entire prospectus carefully, including our consolidated
financial statements and the related notes and the information
set forth under the headings Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, in each case included
elsewhere in this prospectus. Except where the context requires
otherwise, in this prospectus, Company,
ShoreTel, we, us, and
our refer to ShoreTel, Inc., a Delaware corporation,
and our predecessor, ShoreTel, Inc., a California corporation,
and where appropriate, their respective subsidiaries.
ShoreTel,
Inc.
Overview
We are a leading provider of IP telecommunications systems for
enterprises. Our systems are based on our distributed software
architecture and switch-based hardware platform which enable
multi-site enterprises to be served by a single
telecommunications system. Our systems enable a single point of
management, easy installation and a high degree of scalability
and reliability, and provide end users with a consistent, full
suite of features across the enterprise, regardless of location.
As a result, we believe our systems enable enhanced end user
productivity and provide lower total cost of ownership and
higher customer satisfaction than alternative systems.
Our solution is comprised of ShoreGear switches, ShorePhone IP
telephones and ShoreWare software applications. We provide our
systems to enterprises across all industries, including to
small, medium and large companies and public institutions. Our
enterprise customers include multi-site Fortune
500 companies with tens of thousands of employees. To date,
we have sold our IP telecommunications systems to over 4,000
enterprise customers, including CNET Networks, Robert Half
International and the City of Oakland, California. We sell our
systems through our extensive network of approximately 400
channel partners.
We have achieved broad industry recognition for our technology
and high customer satisfaction. Our enterprise IP
telecommunications systems received PC Magazines Best of
the Year 2005 Editors Choice designation. For the last
three years, IT executives surveyed by Nemertes Research, an
independent research firm, have rated ShoreTel highest in
customer satisfaction among leading enterprise
telecommunications systems providers.
We increased our total revenue over the last two fiscal years
from $18.8 million in fiscal 2004 to $61.6 million in
fiscal 2006, and we generated net income of $4.0 million in
fiscal 2006 and net income of $1.0 million for the three
months ended September 30, 2006.
Industry
Background
Enterprises have historically operated separate networks for
voice and data communications which resulted in significant
complexity and high cost. Multi-site enterprises typically
operated separate telecommunications systems at each of their
sites that often were difficult to install and manage. These
systems also required significant additional investments to
scale and did not enable delivery of a uniform set of features
and functions across all sites. Enterprises are increasingly
migrating to a single IP network for both voice and data
communications to reduce costs and network complexity and
increase end user productivity. This migration is creating a
significant opportunity for providers of IP telecommunications
systems. Gartner, Inc., an independent research firm, estimates
that worldwide enterprise telephony systems equipment end user
revenue was $17.2 billion in 2006, including legacy TDM
PBX/KTS equipment,
IP-enabled
PBX equipment and
IP-PBX
equipment. According to Gartner, the
IP-PBX
market was estimated to have been $3.9 billion in 2006 and
is expected to grow to $7.9 billion by 2010, which
represents a 19.1% compound annual growth rate. We refer to the
TDM PBX/KTS equipment as TDM systems,
IP-enabled
PBX equipment as hybrid systems, and
IP-PBX
equipment as IP systems.
TDM systems, hybrid systems and a common form of IP systems,
server-centric IP telecommunications systems, each have
significant limitations. TDM systems require a dedicated voice
network that consists of circuits and phones, as well as a
separate PBX switch for each office site, which results in a
series of standalone
1
telecommunications systems within a single enterprise. This also
results in high installation, integration, and on-going
management and maintenance costs. Hybrid systems are based on a
TDM infrastructure and suffer from many of the same shortcomings
as TDM systems. Hybrid systems also require enterprises to
maintain two telecommunications systems, further increasing
management complexity and cost and leading to inconsistent
features for end users across the enterprise. Server-centric IP
systems typically have a centralized software architecture and
require system management to be performed on a
site-by-site
basis. These systems can be costly to scale because significant
additional equipment is often required to accommodate growth
while maintaining adequate redundancy. Server-centric IP systems
also run on operating systems that were not optimized for
real-time voice processing, which we believe results in lower
reliability and decreased performance.
Our
Solution
We provide switch-based IP telecommunications systems for
enterprises that address the limitations of TDM, hybrid and
server-centric IP systems. Our systems are based on our
proprietary distributed software architecture and switch-based
hardware platform. Our software applications are distributed
across each site of an enterprise, providing end users with a
consistent, full suite of features across the enterprise,
regardless of location. Our switch-based hardware platform uses
our proprietary software to allow for a single point of
management of an enterprises telecommunications system
across all sites.
As a result of our distributed software architecture and
switch-based hardware platform, our systems provide enterprise
customers with a number of key benefits, including:
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Ease of use.
We provide a wide range of
innovative, high performance phones that we combine with our
feature-rich desktop software application, Personal Call
Manager. Personal Call Manager allows end users to control their
phones from their PCs, regardless of their location, and
integrates with enterprise software applications, such as
Microsoft Outlook and salesforce.com.
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Ease of installation and management.
Our
systems are easy to install as a result of our proprietary
installation software, which automatically recognizes and
configures the elements of our solution as they are added to the
systems. Our systems also feature a single point of management
with a simple, intuitive interface that allows IT managers to
modify their systems from anywhere through a web browser. We
believe our systems are also easier to install and manage
because they require fewer hardware elements than alternative
systems.
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Scalability.
We believe our distributed
software architecture and the modular design of our system
hardware allow enterprises to incrementally scale our systems
more cost-effectively than alternative systems, which can
require replacement of substantial amounts of system equipment
to increase capacity. In contrast, all of the investment an
enterprise customer makes in our systems will continue to
operate as their implementation of our systems expands to
support their growth.
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Reliability.
Our switches are designed to be
highly reliable and operate independently. Each switch in our
systems is capable of independently establishing and terminating
calls without relying on a centralized call control server, as
is the case with alternative systems. As a result, enterprise
telecommunications can survive a variety of LAN, WAN and
hardware failures using our systems.
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Low total cost of ownership.
Our systems allow
enterprise customers to lower the overall capital expenditures
and on-going operating expenses typically associated with the
deployment and management of enterprise telecommunications
systems.
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Our
Strategy
Our goal is to become the leading provider of IP
telecommunications systems for enterprises. Key elements of our
strategy include:
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Extend our technology advantage.
We intend to
continue our research and development activities and expand our
relationships with technology partners to enhance our product
functionality, feature set and end
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2
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user experience. We also intend to continue to develop
additional applications for our systems and expand the
interoperability of our systems with additional enterprise
applications.
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Grow our distribution network.
We intend to
increase our market penetration and extend our geographic reach
by expanding our business with existing channel partners and by
adding channel partners that serve specific target markets. We
are particularly focused on expanding our relationships with
channel partners that are focused on large enterprise accounts
and with channel partners that operate in strategic
international markets.
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Maintain focus on customer satisfaction.
We
intend to continue to work closely with enterprise customers to
gain valuable knowledge about their existing and future product
requirements to help us develop new products and product
enhancements that address their evolving requirements. We will
continue to actively measure, and develop programs to continue
to enhance, customer satisfaction.
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Increase our brand awareness.
We believe that
increased visibility and awareness of the ShoreTel brand will
enhance our ability to participate in enterprise customer
evaluations of telecommunications systems, and will enable us to
continue to grow our enterprise customer base. We intend to
increase our sales and marketing activities to both channel
partners and enterprise customers through targeted marketing
programs, such as participation in seminars, trade shows and
conferences, and advertising and public relations initiatives.
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Increase penetration of our installed base.
We
plan to leverage our installed enterprise customer base to
increase future sales. Since many organizations initially deploy
our systems at a single location, we believe we can drive
further penetration of our systems at multiple locations within
these enterprises.
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Corporate
Information
We were originally incorporated in California in September 1996,
and we plan to reincorporate into Delaware prior to the
completion of this offering. Our principal offices are located
at 960 Stewart Drive, Sunnyvale, CA 94085, and our telephone
number is
(408) 331-3300.
Our world wide web address is http: //www.shoretel.com. The
information found on, or accessible through, our website is not
a part of this prospectus.
ShoreTel, our logo, ShorePhone, ShoreGear and ShoreWare are
registered trademarks of ShoreTel. All other trademarks,
tradenames and service marks appearing in this prospectus are
the property of their respective owners.
3
THE
OFFERING
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Shares of common stock offered by ShoreTel
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shares
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Shares of common stock to be outstanding after this offering
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shares
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Use of proceeds
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We estimate that we will receive net proceeds of
$ million
from our sale of
the shares
of common stock offered by us in this offering, based on an
assumed initial public offering price of
$ per share, the midpoint of
the range set forth on the cover page of this prospectus, after
deducting estimated underwriting discounts and commissions and
estimated expenses payable by us. We intend to use the net
proceeds of this offering for working capital and general
corporate purposes. A portion may also be used for acquisitions
of or investments in complementary businesses, technologies or
other assets. See Use of Proceeds.
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Proposed NASDAQ Global Market symbol
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SHOR
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The number of shares of common stock to be outstanding after
this offering is based on 327,344,560 shares outstanding as
of September 30, 2006, and excludes:
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32,346,941 shares of common stock issuable upon exercise of
outstanding options as of September 30, 2006, at a weighted
average exercise price of $0.07 per share;
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7,844,000 shares of common stock issuable upon exercise of
options granted between October 1, 2006 and
February 12, 2007, at a weighted average exercise price of
$0.32 per share;
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708,851 shares of common stock issuable upon exercise of
outstanding warrants as of September 30, 2006, at a
weighted average exercise price of $0.28 per share; and
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50,000,000 shares of common stock reserved for future grant
or issuance under our 2007 equity incentive plan and
5,000,000 shares of common stock to be available for
issuance under our 2007 employee stock purchase plan effective
upon the completion of this offering.
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Except as otherwise noted, all information in this prospectus:
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reflects our reincorporation into Delaware and the filing of our
restated certificate of incorporation prior to the completion of
this offering;
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reflects the conversion of all our outstanding shares of
redeemable convertible preferred stock into an aggregate of
233,164,369 shares of common stock effective upon the
completion of this offering;
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reflects
a -for-
reverse split of our outstanding capital stock to be effective
prior to the completion of this offering; and
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assumes no exercise of the underwriters option to purchase
up to an
additional shares
from us.
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4
SUMMARY
CONSOLIDATED FINANCIAL DATA
The following tables summarize our consolidated financial data.
The consolidated statements of operations data for the fiscal
years ended June 30, 2004, 2005 and 2006 have been derived
from our audited consolidated financial statements included
elsewhere in this prospectus. The consolidated statements of
operations data for the three months ended
September 30, 2005 and 2006 and the consolidated balance
sheet data as of September 30, 2006, have been derived from
our unaudited consolidated financial statements included
elsewhere in this prospectus. The unaudited consolidated
financial statements include, in the opinion of management, all
adjustments, which include only normal recurring adjustments,
that management considers necessary for the fair presentation of
the financial information set forth in those financial
statements. You should read this data together with our
consolidated financial statements and the notes to those
statements included elsewhere in this prospectus and the
information under Selected Consolidated Financial
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operations. Our
historical results are not necessarily indicative of the results
to be expected in any future period.
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Year Ended June 30,
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Three Months Ended September 30,
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2004
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2005
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2006
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2005
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2006
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(In thousands, except share and per share amounts)
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Consolidated statement of
operations data:
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Revenue:
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Product
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$
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16,587
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$
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31,970
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$
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55,300
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$
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10,000
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$
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18,467
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Support and services
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2,241
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3,512
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6,308
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1,214
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1,948
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Total revenue
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18,828
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35,482
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61,608
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11,214
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20,415
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Cost of revenue:
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Product (1)
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7,725
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13,961
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21,855
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4,044
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6,507
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Support and services (1)
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1,660
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2,907
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5,425
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1,078
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|
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1,445
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Total cost of revenue
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9,385
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16,868
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27,280
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5,122
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7,952
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Gross profit
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9,443
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18,614
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34,328
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6,092
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12,463
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Operating expenses:
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Research and development (1)
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5,517
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7,034
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9,720
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2,051
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3,117
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Sales and marketing (1)
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8,004
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10,050
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15,699
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3,067
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5,677
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General and administrative (1)
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2,166
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3,045
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4,936
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|
875
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|
|
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2,573
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Total operating expenses
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15,687
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20,129
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30,355
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5,993
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|
|
|
11,367
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Income (loss) from operations
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(6,244
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)
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(1,515
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)
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3,973
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99
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1,096
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Other income (expense)
net
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(7
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)
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|
124
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248
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|
30
|
|
|
|
157
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|
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|
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Income (loss) before provision for
income taxes
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|
|
(6,251
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)
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|
|
(1,391
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)
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4,221
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|
|
|
129
|
|
|
|
1,253
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Provision for income taxes
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|
|
|
|
|
|
(11
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)
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|
|
(219
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)
|
|
|
(13
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)
|
|
|
(207
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss)
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|
|
(6,251
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)
|
|
|
(1,402
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)
|
|
|
4,002
|
|
|
|
116
|
|
|
|
1,046
|
|
Accretion of preferred stock
|
|
|
(26
|
)
|
|
|
(32
|
)
|
|
|
(51
|
)
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders
|
|
$
|
(6,277
|
)
|
|
$
|
(1,434
|
)
|
|
$
|
3,951
|
|
|
$
|
103
|
|
|
$
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.06
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.05
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
Shares used in computing net income
(loss) per share available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
49,345,069
|
|
|
|
53,517,065
|
|
|
|
66,091,748
|
|
|
|
60,507,022
|
|
|
|
79,113,086
|
|
Diluted
|
|
|
49,345,069
|
|
|
|
53,517,065
|
|
|
|
84,867,945
|
|
|
|
72,912,729
|
|
|
|
101,904,114
|
|
Unaudited pro forma net income per
share available to common shareholders (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.00
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.00
|
|
Unaudited shares used in computing
pro forma net income per share available to common shareholders
(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
299,256,117
|
|
|
|
|
|
|
|
312,277,455
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
318,032,314
|
|
|
|
|
|
|
|
335,068,483
|
|
5
|
|
|
(1)
|
|
Includes stock-based compensation
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of product revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
Cost of support and services revenue
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
14
|
|
|
|
5
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
17
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
97
|
|
General and administrative
|
|
|
45
|
|
|
|
82
|
|
|
|
45
|
|
|
|
9
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
45
|
|
|
$
|
82
|
|
|
$
|
82
|
|
|
$
|
23
|
|
|
$
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
See note 2 to our consolidated
financial statements for a description of the method used to
compute basic and diluted net income (loss) per share available
to common shareholders. Unaudited pro forma basic and diluted
net income per share allocable to common shareholders has been
computed to give effect to assumed conversion of redeemable
convertible preferred stock upon the closing of this offering on
an if-converted basis for the fiscal year ended June 30,
2006 and the three months ended September 30, 2006.
|
The pro forma consolidated balance sheet data set forth below
give effect to the conversion of all outstanding redeemable
convertible preferred stock into common stock upon the
completion of this offering. The pro forma as adjusted
consolidated balance sheet data set forth below give effect to
our receipt of the net proceeds from the sale
of shares
of common stock offered by us at an assumed initial public
offering price of $ per
share, the midpoint of the range set forth on the cover page of
this prospectus, after deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006
|
|
|
|
|
|
|
|
|
|
Pro Forma As
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
Adjusted(1)
|
|
|
|
(In thousands)
|
|
|
Consolidated balance sheet
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,290
|
|
|
$
|
13,290
|
|
|
$
|
|
|
Working capital
|
|
|
18,182
|
|
|
|
18,182
|
|
|
|
|
|
Total assets
|
|
|
34,611
|
|
|
|
34,611
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
56,345
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
(deficit)
|
|
|
(39,219
|
)
|
|
|
17,126
|
|
|
|
|
|
|
|
|
(1)
|
|
Each $1.00 increase or decrease in
the assumed public offering price of
$ per share would increase or
decrease, respectively, the amount of cash and cash equivalents,
working capital, total assets and total shareholders
equity on a pro forma as adjusted basis by approximately
$ million, assuming the
number of shares offered by us, as set forth on the cover of
this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions payable by us.
|
6
RISK
FACTORS
This offering and an investment in our common stock involve a
high degree of risk. You should carefully consider the risks and
uncertainties described below, together with all of the other
information in this prospectus, including the consolidated
financial statements and the related notes appearing at the end
of this prospectus, before deciding to invest in our common
stock. If any of the following risks actually occurs, our
business, financial condition, results of operations and future
prospects could be materially and adversely affected. In that
event, the market price of our common stock could decline and
you could lose part or all of your investment.
Risks
Related to Our Business
Our
recent profitability and growth rates may not be indicative of
our future profitability or growth, and we may not be able to
continue to maintain or increase our profitability or
growth.
While we have been profitable in recent periods, we had an
accumulated deficit of $89.8 million as of
September 30, 2006. This accumulated deficit is
attributable to net losses incurred from our inception in
September 1996 through the end of the third quarter of fiscal
2005. We may not succeed in maintaining or increasing our
profitability and could incur losses in future periods. We
expect to incur significant additional operating expenses
associated with being a public company. We also expect that our
operating expenses, including recognition of stock-based
compensation, will continue to increase in all areas as we seek
to grow our business. If our gross profit does not increase to
offset these expected increases in operating expenses, our
operating results will be negatively affected. You should not
consider our recent growth rates in terms of revenue and net
income as indicative of our future growth. Accordingly we cannot
assure you that we will be able to maintain or increase our
profitability in the future.
The
market in which we operate is intensely competitive, and many of
our competitors are larger, more established and better
capitalized than we are.
The market for IP telecommunications and other
telecommunications systems is extremely competitive. Our
competitors include companies that offer IP systems, such as
Cisco Systems, Inc. and 3Com Corporation, and that offer
hybrid systems, such as Alcatel-Lucent, Avaya, Inc., Inter-Tel
Incorporated, Mitel Networks Corporation and Nortel Networks
Corporation. Several of the companies that offer hybrid systems
are beginning to also offer IP telecommunications systems. Many
of our competitors are substantially larger and have greater
financial, technical, research and development, sales and
marketing, manufacturing, distribution and other resources. We
could also face competition from new market entrants, whether
from new ventures or from established companies moving in to the
market. These competitors have various other advantages over us,
including:
|
|
|
|
|
greater market presence, name recognition and brand reputation;
|
|
|
|
a larger installed base of telecommunications and networking
systems with enterprise customers;
|
|
|
|
larger and more geographically distributed services and support
organizations and capabilities;
|
|
|
|
a broader offering of telecommunications and networking
products, applications and services;
|
|
|
|
a more established international presence to address the needs
of global enterprises;
|
|
|
|
substantially larger patent and intellectual property portfolios;
|
|
|
|
longer operating histories;
|
|
|
|
a longer history of implementing large-scale telecommunications
or networking systems;
|
|
|
|
more established relationships with industry participants,
customers, suppliers, distributors and other technology
companies; and
|
|
|
|
|
|
the ability to acquire technologies or consolidate with other
companies in the industry to compete more effectively.
|
7
Given their capital resources, many of these competitors are in
a better position to withstand any significant reduction in
capital spending by enterprise customers on telecommunications
equipment and are not as susceptible to downturns in a
particular market. This risk is enhanced because we focus our
business solely on the enterprise IP telecommunications market
and do not have a diversified portfolio of products that are
applicable to other market segments.
We compete primarily on the basis of price, feature set,
reliability, scalability, usability, total cost of ownership and
service. Because our competitors have greater financial strength
than we do and are able to offer a more diversified bundle of
products and services, they have offered and in the future may
offer telecommunications products at lower prices than we do.
These larger competitors can also bundle products with other
services, such as hosted or managed services, effectively
reducing the price of their products. In order to remain
competitive from a cost perspective, we have in the past reduced
the prices of our products, and we may be required to do so in
the future, in order to gain enterprise customers. Price
reductions could have a negative effect on our gross margins.
Our competitors may also be able to devote more resources to
developing new or enhanced products, including products that may
be based on new technologies or standards. If our
competitors products become more accepted than our
products, our competitive position will be impaired and we may
not be able to increase our revenue or may experience decreased
gross margins. If any of our competitors products or
technologies become the industry standard, if they are
successful in bringing their products to market earlier, or if
their products are more technologically capable than ours, then
our sales could be materially adversely affected. We may not be
able to maintain or improve our competitive position against our
current or future competitors, and our failure to do so could
materially and adversely affect our business.
As
voice and data networks converge, we are likely to face
increased competition from companies in the information
technology, personal and business applications and software
industries.
The convergence of voice and data networks and their wider
deployment by enterprises has led information technology and
communication applications deployed on converged networks to
become more integrated. This integration has created an
opportunity for the leaders in information technology, personal
and business applications and the software that connects the
network infrastructure to those applications, to enter the
telecommunications market and offer products that compete with
our systems. Competition from these potential market entrants
may take many forms, and they may offer products and
applications similar to those we offer. For example, Microsoft
Corporation has recently announced its unified communications
product roadmap. This includes its recently introduced
Office Communicator 2007, which Microsoft stated
will allow end users to control communications, including voice
over IP, through the Office Communicator application on their
PC, which we expect will provide functionality similar to that
offered by our Personal Call Manager application. Microsoft has
also announced plans to introduce Exchange Server 2007, a
product that will offer competing unified messaging
capabilities. Microsoft has also developed an IP phone and has
licensed the rights to produce such phones to third parties. In
addition, Microsoft has also entered into alliances with several
of our competitors, and in July 2006 announced an extensive
relationship with Nortel for the production of
IP-based
communications equipment that will be integrated with the
Microsoft systems and Office Communicator. Microsoft and other
leaders in the information technology, personal and business
applications and software industries, have substantial financial
and other resources that they could devote to this market.
If Microsoft continues to move into the telecommunications
market or if other new competitors from the information
technology, personal and business applications or software
industries enter the telecommunications market, the market for
IP telecommunications systems will become increasingly
competitive. If the solutions offered by Microsoft or other new
competitors achieve substantial market penetration, we may not
be able to maintain or improve our market position, and our
failure to do so could materially and adversely affect our
business and results of operations.
8
If the
emerging market for enterprise IP telecommunications systems
does not fully develop, our future business would be
harmed.
The market for enterprise IP telecommunications systems has
begun to develop only recently, is evolving rapidly and is
characterized by an increasing number of market entrants. As is
typical of a new and rapidly evolving industry, the demand for
and market acceptance of, enterprise IP telecommunications
systems products and services are uncertain. We cannot assure
you that enterprise telecommunications systems that operate on
IP networks will become widespread. In particular, enterprises
that have already invested substantial resources in other means
of communicating information may be reluctant or slow to
implement an IP telecommunications system that can require
significant initial capital expenditures as compared to a hybrid
system that might require a lower initial capital expenditure
despite higher potential total expenditures over the long term.
If the market for enterprise IP telecommunications systems fails
to develop or develops more slowly than we anticipate, our
products could fail to achieve market acceptance, which in turn
could significantly harm our business. This growth may be
inhibited by a number of factors, such as:
|
|
|
|
|
initial costs of implementation for a new system;
|
|
|
|
quality of infrastructure;
|
|
|
|
security concerns;
|
|
|
|
equipment, software or other technology failures;
|
|
|
|
regulatory encroachments;
|
|
|
|
inconsistent quality of service;
|
|
|
|
perceived unreliability or poor voice quality over IP networks
as compared to circuit-switched networks; and
|
|
|
|
lack of availability of cost-effective, high-speed network
capacity.
|
Moreover, as
IP-based
data communications and telecommunications usage grow, the
infrastructure used to support these services, whether public or
private, may not be able to support the demands placed on them
and their performance or reliability may decline. Even if
enterprise IP telecommunications systems become more widespread
in the future, we cannot assure you that our products will
attain broad market acceptance.
Our
operating results may fluctuate in the future, which could cause
our stock price to decline.
Our quarterly and annual results of operations may fluctuate in
the future as a result of a variety of factors, some of which
may be outside of our control. If our results of operations fall
below the expectations of securities analysts or investors, the
price of our common stock could decline substantially.
Fluctuations in our quarterly or annual results of operations
may be due to a number of factors, including, but not limited to:
|
|
|
|
|
the timing and volume of shipments of our products during a
particular period;
|
|
|
|
the timing and success of new product introductions by us or our
competitors;
|
|
|
|
changes in our or our competitors pricing policies or
sales terms;
|
|
|
|
changes in the mix of our products and services sold during a
particular period;
|
|
|
|
the amount and timing of operating costs related to the
maintenance and expansion of our business, operations and
infrastructure;
|
|
|
|
our ability to control costs, including third-party
manufacturing costs and costs of components;
|
|
|
|
our ability to obtain sufficient supplies of components;
|
|
|
|
our ability to maintain sufficient production volumes for our
products;
|
|
|
|
volatility in our stock price, which may lead to higher stock
compensation expenses pursuant to Statement of Financial
Accounting Standards No. 123(R), Share-Based Payments, or
SFAS 123(R);
|
9
|
|
|
|
|
the timing of costs related to the development or acquisition of
technologies or businesses;
|
|
|
|
general economic, industry and market conditions;
|
|
|
|
conditions specific to the IP telecommunications market, such as
rates of adoption of IP telecommunications systems and
introduction of new standards;
|
|
|
|
changes in domestic and international regulatory environments;
|
|
|
|
seasonality;
|
|
|
|
the purchasing and budgeting cycles of enterprise
customers; and
|
|
|
|
geopolitical events such as war, threat of war or terrorist
actions.
|
Because our operating expenses are largely fixed in the
short-term, any shortfalls in revenue in a given period would
have a direct and adverse effect on our operating results in
that period. We believe that our quarterly and annual revenue
and results of operations may vary significantly in the future
and that
period-to-period
comparisons of our operating results may not be meaningful. You
should not rely on the results of one period as an indication of
future performance.
We
rely on channel partners to sell our products, and disruptions
to, or our failure to develop and manage, our distribution
channels and the processes and procedures that support them
could adversely affect our business.
Approximately 92% of our total revenue in fiscal 2006 was
generated through indirect channel sales, and we expect indirect
channel sales will continue to generate a substantial majority
of our total revenue in the future. Our future success is highly
dependent upon establishing and maintaining successful
relationships with a variety of channel partners. In addition,
we rely on these entities to provide many of the installation,
implementation and support services for our products.
Accordingly, our success depends in large part on the effective
performance of these channel partners. By relying on channel
partners, we may in some cases have little or no contact with
the ultimate users of our products, thereby making it more
difficult for us to establish brand awareness, ensure proper
delivery and installation of our products, service ongoing
enterprise customer requirements and respond to evolving
enterprise customer needs. This difficulty could be more
pronounced in international markets, where we expect that
enterprise customers will purchase our systems from a channel
partner that purchased through a distributor. Additionally, some
of our channel partners are smaller companies that may not have
the same financial resources as other of our larger channel
partners, which could in some cases expose us to additional
collections risk.
Recruiting and retaining qualified channel partners and training
them in our technology and products requires significant time
and resources. In order to develop and expand our distribution
channel, we must continue to scale and improve our processes and
procedures that support our channel, including investment in
systems and training, and those processes and procedures may
become increasingly complex and difficult to manage. We have no
long-term contracts or minimum purchase commitments with any of
our channel partners, and our contracts with these channel
partners do not prohibit them from offering products or services
that compete with ours. Our competitors may be effective in
providing incentives to existing and potential channel partners
to favor their products or to prevent or reduce sales of our
products. Our channel partners may choose not to offer our
products exclusively or at all. Our failure to establish and
maintain successful relationships with channel partners would
likely materially adversely affect our business, operating
results and financial condition.
Our
sales cycle can be lengthy and unpredictable, which makes it
difficult to forecast the amount of our sales and operating
expenses in any particular period.
The sales cycle for our products typically ranges from six to
nine months, and in some cases can be over 12 months.
Part of our strategy is to increasingly target our sales efforts
on larger enterprises. Because the sales cycle for large
enterprises is generally longer than for smaller enterprises,
our sales cycle in the future may be even longer than it has
been historically. As a result, we may have limited ability to
forecast whether or in which period a
10
sale will occur. The success of our product sales process is
subject to many factors, some of which we have little or no
control over, including:
|
|
|
|
|
the timing of enterprise customers budget cycles and
approval processes;
|
|
|
|
a technical evaluation or trial by potential enterprise
customers;
|
|
|
|
our ability to introduce new products, features or functionality
in a manner that suits the needs of a particular enterprise
customer;
|
|
|
|
the announcement or introduction of competing products; and
|
|
|
|
the strength of existing relationships between our competitors
and potential enterprise customers.
|
We may expend substantial time, effort and money educating our
current and prospective enterprise customers as to the value of,
and benefits delivered by, our products, and ultimately fail to
produce a sale. If we are unsuccessful in closing sales after
expending significant resources, our operating results will be
adversely affected. Furthermore, if sales forecasted for a
particular period do not occur in such period, our operating
results for that period could be substantially lower than
anticipated and the market price of our common stock could
decline.
Our
products incorporate some sole sourced components and the
inability of these sole source suppliers to provide adequate
supplies of these components may prevent us from selling our
products for a significant period of time or limit our ability
to deliver sufficient amounts of our products.
We rely on sole or limited numbers of suppliers for several key
components utilized in the assembly of our products. For
example, we source semiconductors that are essential to the
operation of our phones from separate single suppliers, and we
have not identified or qualified any alternative suppliers for
these components. If we lose access to these components we may
not be able to sell our products for a significant period of
time, and we could incur significant costs to redesign our
products or to qualify alternative suppliers. This reliance on a
sole source or limited number of suppliers involves several
additional risks, including:
|
|
|
|
|
supplier capacity constraints;
|
|
|
|
price increases;
|
|
|
|
timely delivery; and
|
|
|
|
component quality.
|
This reliance is exacerbated by the fact that we maintain a
relatively small amount of inventory and our contract
manufacturers typically acquire components only as needed. As a
result, our ability to respond to enterprise customer orders
efficiently may be constrained by the then-current availability
or the terms and pricing of these components. Disruption or
termination of the supply of these components could delay
shipments of our products and could materially and adversely
affect our relationships with current and prospective enterprise
customers. In addition, any increase in the price of these
components could reduce our gross margin and adversely impact
our profitability. We cannot assure you that we will be able to
obtain a sufficient quantity of these components to meet the
demands of enterprise customers in a timely manner or that
prices of these components will not increase. In addition,
problems with respect to yield and quality of these components
and timeliness of deliveries could occur. These delays could
also materially and adversely affect our operating results.
Our
business may be harmed if our contract manufacturers are not
able to provide us with adequate supplies.
We outsource the manufacturing of our products. Currently, we
have arrangements for the production of our switches with a
contract manufacturer in California and for the production of
our phones with a contract manufacturer located in China. Our
reliance on contract manufacturers involves a number of
potential risks, including the absence of adequate capacity and
reduced control over delivery schedules.
11
We depend on our contract manufacturers to finance the
production of goods ordered and to maintain adequate
manufacturing capacity. We do not exert direct control over our
contract manufacturers, so we may be unable to procure timely
delivery of acceptable products to our enterprise customers.
If sales of our products continue to grow, one or both of our
contract manufacturers may not have sufficient capacity to
enable it to increase production to meet the demand for our
products. Moreover, both of our contract manufacturers could
have manufacturing engagements with companies that are much
larger than we are and whose production needs are much greater
than ours. As a result, one or both of our contract
manufacturers may choose to devote additional resources to the
production of products other than ours if capacity is limited.
In addition, our contract manufacturers do not have any written
contractual obligation to accept any purchase order that we
submit for the manufacture of any of our products nor do we have
any assurance that our contract manufacturers will agree to
manufacture and supply any or all of our requirements for our
products. Furthermore, either of our contract manufacturers may
unilaterally terminate their relationship with us at any time
upon 180 days notice with respect to the contract
manufacturer of our switches and 120 days notice with
respect to the contract manufacturer of our phones or seek to
increase the prices they charge us. For example, in January
2005, one of our former contract manufacturers, which at the
time was the sole manufacturer of our switches, notified us that
it was terminating its relationship with us upon six months of
advance notice, which required us to qualify and obtain a new
contract manufacturer. As a result, we are not assured that our
current manufacturers will continue to provide us with an
uninterrupted supply of products of at an acceptable price in
the future.
Even if our contract manufacturers accept and fulfill our
orders, it is possible that the products may not meet our
specifications. Because we do not control the final assembly and
quality assurance of our products, there is a possibility that
these products may contain defects or otherwise not meet our
quality standards, which could result in warranty claims against
us that could adversely affect our operating results and future
sales.
If our contract manufacturers are unable or unwilling to
continue manufacturing our products in required volumes and to
meet our quality specifications, or if they significantly
increase their prices, we will have to identify one or more
acceptable alternative contract manufacturers. The process of
identifying and qualifying a new contract manufacturer can be
time consuming, and we may not be able to substitute suitable
alternative contract manufacturers in a timely manner or at
acceptable prices. Additionally, transitioning to new contract
manufacturers may cause delays in supply if the new contract
manufacturers have difficulty manufacturing products to our
specifications or quality standards. Furthermore, we do not own
the electronic design for our phones, hence it may be more
difficult for us to arrange for an alternate of or a replacement
for these products in a timely manner should a transition be
required.
Any disruption in the supply of products from our contract
manufacturers may harm our business and could result in a loss
of sales and an increase in production costs, which could
adversely affect our business and results of operations.
The
gross margins on our products may decrease due to competitive
pressures or otherwise, which could negatively impact our
profitability.
It is possible that the gross margins on our products will
decrease in the future in response to competitive pricing
pressures, new product introductions by us or our competitors,
changes in the costs of components or other factors. If we
experience decreased gross margins and we are unable to respond
in a timely manner by introducing and selling new, higher-margin
products successfully and continually reducing our product
costs, our gross margins may decline, which will harm our
business and results of operations.
If we
fail to develop and introduce new products and features in a
timely manner, or if we fail to manage product transitions, we
could experience decreased revenue or decreased selling prices
in the future.
Our future growth depends on our ability to develop and
introduce new products successfully. Due to the complexity of
the type of products we produce, there are significant technical
risks that may affect our ability to introduce new products and
features successfully. In addition, we must commit significant
resources to developing
12
new products and features before knowing whether our investments
will result in products that are accepted by the market. The
success of new products depends on many factors, including:
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the ability of our products to compete with the products and
solutions offered by our competitors;
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the cost of our products;
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the reliability of our products;
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the timeliness of the introduction and delivery of our
products; and
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the market acceptance of our products.
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If we are unable to develop and introduce new products in a
timely manner or in response to changing market conditions or
enterprise customer requirements, or if these products do not
achieve market acceptance, our operating results could be
materially and adversely affected.
Product introductions by us in future periods may also reduce
demand for, or cause price declines with respect to, our
existing products. As new or enhanced products are introduced,
we must successfully manage the transition from older products,
avoid excessive levels of older product inventories and ensure
that sufficient supplies of new products can be delivered to
meet enterprise customer demand. Our failure to do so could
adversely affect our revenue, gross margins and other operating
results.
If we
fail to respond to technological changes and evolving industry
standards, our products could become obsolete or less
competitive in the future.
The telecommunications industry is highly competitive and
characterized by rapidly changing technologies and standards,
frequent product introductions and short product life cycles.
Accordingly, our operating results depend upon, among other
things, our ability to develop and introduce new products and
our ability to reduce production costs of existing products. The
process of developing new technologies and products is complex,
and if we are unable to develop enhancements to, and new
features for, our existing products or acceptable new products
that keep pace with technological developments or industry
standards, our products may become obsolete, less marketable and
less competitive and our business will be harmed.
In addition, as industry standards evolve, it is possible that
one standard becomes predominant in the market. This could
facilitate the entry into the market of competing products,
which could result in significant pricing pressure.
Additionally, if one standard becomes predominant and we adopt
that standard, enterprises may be able to create a unified,
integrated system by using phones, switches, servers,
applications, or other telecommunications products produced by
different companies. Therefore, we may be unable to sell
complete systems to enterprise customers because the enterprise
customers elect to purchase portions of their telecommunications
systems from our competitors. For example, if a single industry
standard is adopted, customers may elect to purchase our
switches, but could purchase software applications and phones
from other vendors. This could reduce our revenue and gross
margins if enterprise customers instead purchase primarily
lower-margin products from us. Conversely, if one standard
becomes predominant, and we do not adopt it, potential
enterprise customers may choose to buy a competing system that
is based on that standard.
Our
products are highly complex and may contain undetected software
or hardware errors, which could harm our reputation and future
product sales.
Because our enterprise customers rely on our products for
telecommunications, an application that is critical to their
business, any failure to provide high quality and reliable
products, whether caused by our own failure or failures by our
contract manufacturer or suppliers, could damage our reputation
and reduce demand for our products. Our products have in the
past contained, and may in the future contain, undetected errors
or defects. Some errors in our products may only be discovered
after a product has been installed and used by enterprise
customers. Any errors or defects discovered in our products
after commercial release could result in loss of revenue, loss
of enterprise customers and increased service and warranty
costs, any of which could adversely affect our business. In
addition, we could face claims for product liability, tort or
breach of warranty. Our purchase orders contain provisions
relating to warranty disclaimers and liability limitations,
which may not be upheld. Defending a lawsuit,
13
regardless of its merit, is costly and may divert
managements attention and adversely affect the
markets perception of us and our products. In addition, if
our business liability insurance coverage proves inadequate or
future coverage is unavailable on acceptable terms or at all,
our business, operating results and financial condition could be
adversely affected.
Adverse
economic conditions or reduced information technology spending
generally and telecommunications spending specifically may
adversely impact our business.
Our business depends on the overall demand for information
technology, and in particular for telecommunications systems.
The market we serve is emerging and the purchase of our products
involves significant upfront expenditures. In addition, the
purchase of our products can be discretionary and may involve a
significant commitment of capital and other resources. Weak
economic conditions, or a reduction in information technology or
telecommunications spending even if economic conditions improve,
would likely adversely impact our business, operating results
and financial condition in a number of ways, including longer
sales cycles, lower prices for our products and services and
reduced unit sales.
Our
future success depends on our ability to attract and retain key
personnel, and our failure to do so could harm our ability to
grow our business.
Our future success will depend, to a significant extent, on our
ability to attract and retain our key personnel, namely our
management team and experienced sales and engineering personnel.
We must retain and motivate high quality personnel, and we must
also attract and assimilate other highly qualified employees.
Competition for qualified management, technical and other
personnel can be intense, and we may not be successful in
attracting and retaining such personnel. Competitors have in the
past and may in the future attempt to recruit our employees, and
our management and key employees are not bound by agreements
that could prevent them from terminating their employment at any
time. If we fail to attract and retain key employees, our
ability to grow our business could be harmed.
If we
fail to manage our growth effectively, our business could be
harmed.
We have recently experienced a period of rapid growth in our
headcount and operations. In the last year and a half, we have
more than doubled our workforce and significantly expanded our
channel partner network and the number and size of enterprise
customers implementing our systems. We anticipate that we will
further expand our operations. This growth has placed, and
future growth will place, a significant strain on our
management, administrative, operational and financial
infrastructure. Our success will depend in part upon our ability
to manage this growth effectively. To manage the expected growth
of our operations and personnel, we will need to continue to
improve our operational, financial and management controls and
our reporting systems and procedures. Failure to effectively
manage growth could result in difficulty in filling enterprise
customer orders, declines in product quality or customer
satisfaction, increases in costs or other production and
distribution difficulties, and any of these difficulties could
adversely impact our business performance and results of
operations.
We
intend to expand our international operations, which could
expose us to significant risks.
To date we have limited international operations and have not
had material revenue from international enterprise customers.
The future success of our business will depend, in part, on our
ability to expand our operations and enterprise customer base
successfully worldwide. Operating in international markets
requires significant resources and management attention and will
subject us to regulatory, economic and political risks that are
different from those in the United States. Because of our
limited experience with international operations, we cannot
assure you that our international expansion efforts will be
successful. In addition, we will face risks in doing business
internationally that could adversely affect our business,
including:
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our ability to comply with differing technical and environmental
standards and certification requirements outside the United
States;
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difficulties and costs associated with staffing and managing
foreign operations;
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greater difficulty collecting accounts receivable and longer
payment cycles;
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the need to adapt our products for specific countries;
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availability of reliable broadband connectivity and wide area
networks in targeted areas for expansion;
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unexpected changes in regulatory requirements;
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difficulties in understanding and complying with local laws,
regulations and customs in foreign jurisdictions;
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tariffs, export controls and other non-tariff barriers such as
quotas and local content rules;
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more limited protection for intellectual property rights in some
countries;
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adverse tax consequences;
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fluctuations in currency exchange rates, which could increase
the price of our products outside of the United States, increase
the expenses of our international operations and expose us to
foreign currency exchange rate risk;
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restrictions on the transfer of funds;
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new and different sources of competition; and
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political and economic instability and terrorism.
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Our failure to manage any of these risks successfully could harm
our future international operations and our overall business.
Failure
to protect our intellectual property could substantially harm
our business.
Our success and ability to compete are substantially dependent
upon our intellectual property. We rely on patent, trademark and
copyright law, trade secret protection and confidentiality or
license agreements with our employees, enterprise customers,
strategic partners and others to protect our intellectual
proprietary rights. However, the steps we take to protect our
intellectual property rights may be inadequate. We currently
have three issued patents and 11 patent applications in the
United States. We also have one issued and nine patent
applications in foreign countries based on our issued patents
and patent applications in the United States. We cannot assure
you that any additional patents will be issued. Even if patents
are issued, they may not adequately protect our intellectual
property rights or our products against competitors, and
third-parties may challenge the scope, validity
and/or
enforceability of our issued patents. In addition, other parties
may independently develop similar or competing technologies
designed around any patents that may be issued to us.
In order to protect our intellectual property rights, we may be
required to spend significant resources to monitor and protect
such rights. We may not be able to detect infringement, and may
lose our competitive position in the market before we are able
to do so. In the event that we detect any infringement of our
intellectual property rights, we intend to enforce such rights
vigorously, and from time to time we may initiate claims against
third parties that we believe are infringing on our intellectual
property rights if we are unable to resolve matters
satisfactorily through negotiation. Litigation brought to
protect and enforce our intellectual property rights could be
costly, time-consuming and distracting to management and could
result in the impairment or loss of portions of our intellectual
property. Furthermore, our efforts to enforce our intellectual
property rights may be met with defenses, counterclaims and
countersuits attacking the validity and enforceability of our
intellectual property rights. Our failure to secure, protect and
enforce our intellectual property rights could harm our brand
and adversely impact our business, financial condition and
results of operations.
15
If a
third-party asserts that we are infringing on its intellectual
property, whether successful or not, it could subject us to
costly and time-consuming litigation or expensive licenses,
which could harm our business.
There is considerable patent and other intellectual property
development activity in our industry. Our success depends, in
part, upon our not infringing upon the intellectual property
rights of others. Our competitors, as well have a number of
other entities and individuals, own or claim to own intellectual
property relating to our industry. From time to time, third
parties may claim that we are infringing upon their intellectual
property rights, and we may be found to be infringing upon such
rights. Third-parties have in the past sent us correspondence
regarding their intellectual property and in the future we may
receive claims that our products infringe or violate their
intellectual property rights. For example, in January 2007, we
received a letter from Rates Technology Inc. alleging that one
or more of our products or services infringed on two patents
owned by it. While we do not believe that our products infringe
on any valid patent held by this company, we cannot assure you
that it will not initiate a lawsuit against us. Furthermore, we
may be unaware of the intellectual property rights of others
that may cover some or all of our technology or products. Any
claims or litigation could cause us to incur significant
expenses and, if successfully asserted against us, could require
that we pay substantial damages or ongoing royalty payments,
prevent us from selling our products, or require that we comply
with other unfavorable terms. In addition, we may decide to pay
substantial settlement costs in connection with any claim or
litigation, whether or not successfully asserted against us.
Even if we were to prevail, any litigation regarding our
intellectual property could be costly and time-consuming and
divert the attention of our management and key personnel from
our business operations.
Litigation with respect to intellectual property rights in the
telecommunications industries is not uncommon and can often
involve patent holding companies who have little or no product
revenue and against whom our own patents may provide little or
no deterrence. We may also be obligated to indemnify our
enterprise customers or business partners in connection with any
such litigation, which could further exhaust our resources.
Furthermore, as a result of an intellectual property challenge,
we may be required to enter into royalty, license or other
agreements. We may not be able to obtain these agreements on
terms acceptable to us or at all. In addition, disputes
regarding our intellectual property rights may deter
distributors selling our products and dissuade potential
enterprise customers from purchasing such products. As such,
third party claims with respect to intellectual property may
increase our cost of goods sold or reduce the sales of our
products, and may have a material and adverse effect on our
business.
Our
products include third-party technology and intellectual
property, which could present additional risks.
We incorporate certain third-party technologies, such as our
contact center, collaboration bridge and network monitoring
software, into our products, and intend to utilize additional
third-party technologies in the future. However, licenses to
relevant third-party technology or updates to those technologies
may not continue to be available to us on commercially
reasonable terms, or at all. Furthermore, we do not own the
electronic design for our phones, hence it may be difficult for
us to arrange for an alternate of or a replacement for these
products in a timely manner. Therefore, we could face delays in
product releases until equivalent technology can be identified,
licensed or developed, and integrated into our current products.
These delays, if they occur, could materially adversely affect
our business.
We are
subject to environmental and other health and safety regulations
that may increase our costs of operations or limit our
activities.
We are subject to environmental and other health and safety
regulations relating to matters such as reductions in the use of
harmful substances, the use of lead-free soldering and the
recycling of products and packaging materials. For example, the
European Parliament and the Counsel of the European Union have
published directives on waste electrical and electronic
equipment and on the restriction of the use of certain hazardous
substances in electrical and electronic equipment. These
directives generally require electronics producers to bear the
cost of collection, treatment, recovery and safe disposal of
past and future products from end users and to ensure that new
electrical and electronic equipment does not contain specified
hazardous substances. While the cost of these directives to us
cannot be determined before regulations are adopted in
individual member states of the European Union, it may be
substantial and may divert resources, which could detract from
our ability to develop new products
16
or operate our business, particularly if we increase
international operations. We may not be able to comply in all
cases with applicable environmental and other regulations, and
if we do not, we may incur remediation costs or we may not be
able to offer our products for sale in certain countries, which
could adversely affect our results.
Some
of our competitors could design their products to prevent or
impair the interoperability of our products with enterprise
customers networks, which could cause installations to be
delayed or cancelled.
Our products must interface with enterprise customer software,
equipment and systems in their networks, each of which may have
different specifications. To the extent our competitors supply
network software, equipment or systems to our enterprise
customers, it is possible these competitors could design their
technologies to be closed or proprietary systems that are
incompatible with our products or to work less effectively with
our products than their own. As a result, enterprise customers
would be incentivized to purchase products that are compatible
with the products and technologies of our competitors over our
products. A lack of interoperability may result in significant
redesign costs and harm relations with our enterprise customers.
If our products do not interoperate with our enterprise
customers networks, installations could be delayed or
orders for our products could be cancelled, which would result
in losses of revenue and enterprise customers that could
significantly harm our business.
Our
revenue may decline as a result of changes in public funding of
educational institutions
In prior periods, public educational institutions have purchased
our products. Public schools receive funding from local tax
revenue, and from state and federal government through a variety
of programs, many of which seek to assist schools located in
underprivileged or rural areas. We believe that the funding for
a substantial portion of our sales to educational institutions
comes from federal funding, in particular the
E-rate
program.
E-rate
is a
program of the Federal Communications Commission that subsidizes
the purchase of approved telecommunications, Internet access,
and internal connections costs for eligible public educational
institutions. In the event that the federal government reduces
the amounts dedicated to the
E-rate
program in future periods, or eliminates the program completely,
our sales to educational institutions may be reduced.
Furthermore, if state and local funding of public education is
significantly reduced because of legislative changes or by
fluctuations in tax revenue due to changing economic conditions,
our sales to educational institutions may also be negatively
impacted. Any reduction in spending on telecommunications
systems by educational institutions would likely adversely
affect our business and results of operations.
Our
principal offices and the facilities of our contract
manufacturers are located near known earthquake fault zones, and
the occurrence of an earthquake or other catastrophic disaster
could damage our facilities or the facilities of our contract
manufacturers, which could cause us to curtail our
operations.
Our principal offices and the facilities of one of our contract
manufacturers are located in California near known earthquake
fault zones and, therefore, are vulnerable to damage from
earthquakes. We and our contract manufacturers are also
vulnerable to damage from other types of disasters, such as
power loss, fire, floods and similar events. If any disaster
were to occur, our ability to operate our business could be
seriously impaired. In addition, we may not have adequate
insurance to cover our losses resulting from disasters or other
similar significant business interruptions. Any significant
losses that are not recoverable under our insurance policies
could seriously impair our business and financial condition.
Our
products require reliable broadband connections, and we may be
unable to sell our products in markets where broadband
connections are not yet widely available.
End users of our products must have reliable access to an
enterprise customers wide area network in order for our
products to perform properly. Accordingly, it is not likely that
there will be demand for our products in geographic areas that
do not have a sufficiently reliable infrastructure of broadband
connections. Many geographic locations do not have reliable
infrastructure for broadband connections, particularly in some
international markets. Our future growth could be limited if
broadband connections are not or do not become widely available
in markets that we target.
17
If our
enterprise customers experience inadequate performance with
their wide area networks, even if unrelated to our systems, our
product performance could be adversely affected, which could
harm our relationships with current enterprise customers and
make it more difficult to attract new enterprise
customers.
Our products rely on the reliable performance of the wide area
networks of enterprise customers. If enterprise customers
experience inadequate performance with their wide area networks,
whether due to outages, component failures, or otherwise, our
product performance would be adversely affected. As a result,
when these types of problems occur with these networks, our
enterprise customers may not be able to immediately identify the
source of the problem, and may conclude that the problem is
related to our products. This could harm our relationships with
our current enterprise customers and make it more difficult to
attract new enterprise customers, which could harm our business.
We may
expand through acquisitions of, or investments in, other
companies, each of which may be difficult to identify and
successfully integrate into our business and could have other
adverse consequences.
We may in the future seek to acquire or invest in businesses,
products or technologies that we believe could complement or
expand our products, enhance our technical 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.
In addition, we do not have any experience in acquiring other
businesses. 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 completion of the acquisition. We may
also not achieve the anticipated benefits from the acquired
business due to a number of factors, including:
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unanticipated costs or liabilities associated with the
acquisition;
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incurrence of acquisition-related costs;
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diversion of managements attention from other business
concerns;
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harm to our existing business relationships with contract
manufacturers, channel partners and enterprise customers as a
result of the acquisition;
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the potential loss of key employees;
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use of resources that are needed in other parts of our business;
and
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use of substantial portions of our available cash to consummate
the acquisition.
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In addition, a significant portion of the purchase price of
companies we acquire may be allocated to acquired goodwill and
other intangible assets, which must be assessed for impairment
at least annually. In the future, if our acquisitions do not
yield expected returns, we may be required to take charges to
our earnings based on this impairment assessment process, which
could harm our results of operations.
Acquisitions could also 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
will incur significant increased costs as a result of operating
as a public company, and our management will be required to
devote substantial time to public company compliance
initiatives. These added costs and required management focus
could adversely affect our operating results.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
In addition, the Sarbanes-Oxley Act, as well as rules
subsequently implemented by the SEC and the NASDAQ Stock Market,
have imposed a variety of new requirements on public companies,
including requiring changes in corporate governance practices.
Our management and other personnel will need to devote a
substantial amount of time to these new compliance initiatives.
Moreover, these rules and regulations will increase our legal
18
and financial compliance costs and will make some activities
more time-consuming and costly. For example, we expect these new
rules and regulations will make it more difficult and expensive
for us to obtain director and officer liability insurance, and
we will be required to incur substantial costs to maintain the
same or similar coverage.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal controls for
financial reporting and disclosure controls and procedures. In
particular, commencing in fiscal 2008, we must perform system
and process evaluation and testing of our internal control over
financial reporting to allow management and our independent
registered public accounting firm to report on the effectiveness
of our internal controls over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act. Our compliance
with Section 404 will require that we incur substantial
accounting expense and expend significant management efforts. We
currently do not have an internal audit group, and we will need
to hire additional accounting and financial staff with
appropriate public company experience and technical accounting
knowledge. Moreover, if we are not able to comply with the
requirements of Section 404 in a timely manner, or if we or
our independent registered public accounting firm identifies
deficiencies in our internal controls over financial reporting
that are deemed to be material weaknesses, the market price of
our stock could decline and we could be subject to sanctions or
investigations by the NASDAQ Stock Market, the SEC or other
regulatory authorities, which would require additional financial
and management resources.
The increased costs associated with operating as a public
company may decrease our net income or increase our net loss,
and may require us to reduce costs in other areas of our
business or increase the prices of our products or services.
Additionally, if these requirements divert our managements
attention from other business concerns, they could have a
material adverse effect on our business, financial condition and
results of operations.
We
might require additional capital to support our business in the
future, and this capital might not be available on acceptable
terms, or at all.
If our cash and cash equivalents balances and any cash generated
from operations and from this offering are not sufficient to
meet our future cash requirements, we will need to seek
additional capital, potentially through debt or equity
financings, to fund our operations. We may also need to raise
additional capital to take advantage of new business or
acquisition opportunities. We may seek to raise capital by,
among other things:
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issuing additional common stock or other equity securities;
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issuing debt securities; or
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borrowing funds under a credit facility.
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We cannot assure you that we will be able to raise needed cash
on terms acceptable to us or at all. Financings, if available,
may be on terms that are dilutive or potentially dilutive to our
stockholders, and the prices at which new investors would be
willing to purchase our securities may be lower than the initial
public offering price. The holders of new securities may also
receive rights, preferences or privileges that are senior to
those of existing holders of common stock. In addition, if we
were to raise cash through a debt financing, such debt may
impose conditions or restrictions on our operations, which could
adversely affect our business. If new sources of financing are
required but are insufficient or unavailable, we would be
required to modify our operating plans to the extent of
available funding, which would harm our ability to maintain or
grow our business.
Risks
Related to the Offering
We
cannot assure you that a market will develop for our common
stock or what the market price of our common stock will
be.
Before this offering, there was no public trading market for our
common stock, and we cannot assure you that one will develop or
be sustained after this offering. If a market does not develop
or is not sustained, it may be difficult for you to sell your
shares of common stock at an attractive price or at all. We
cannot predict the prices at which our common stock will trade.
The initial public offering price for our common stock will be
determined through our negotiations with the underwriters and
may not bear any relationship to the market price at which our
common stock will trade after this offering or to any other
established criteria of the value of our business. It is
19
possible that, in future quarters, our operating results may be
below the expectations of securities analysts or investors. As a
result of these and other factors, the price of our common stock
may decline, and you could lose some or all of your investment.
The
price of our common stock may be volatile and the value of your
investment could decline.
In the past, technology stocks have experienced high levels of
volatility. The trading price of our common stock following this
offering may fluctuate substantially. The price of our common
stock that will prevail in the market after this offering may be
higher or lower than the price you pay, depending on many
factors, some of which are beyond our control and may not be
related to our operating performance. These fluctuations could
cause you to lose all or part of your investment in our common
stock. Factors that could cause fluctuations in the trading
price of our common stock include the following:
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price and volume fluctuations in the overall stock market from
time to time;
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significant volatility in the market price and trading volume of
technology companies;
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actual or anticipated changes in our results of operations or
fluctuations in our operating results;
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actual or anticipated changes in the expectations of investors
or securities analysts;
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actual or anticipated developments in our competitors
businesses or the competitive landscape generally;
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litigation involving us, our industry or both;
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regulatory developments in the United States, foreign countries
or both;
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general economic conditions and trends;
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major catastrophic events;
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sales of large blocks of our stock; or
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departures of key personnel.
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In the past, following periods of volatility in the market price
of a companys securities, securities class action
litigation has often been brought against that company. If our
stock price is volatile, we may become the target of securities
litigation. Securities litigation could result in substantial
costs and divert our managements attention and resources
from our business.
Future
sales of outstanding shares of our common stock into the market
in the future could cause the market price of our common stock
to drop significantly, even if our business is doing
well.
If our existing stockholders sell a large number of shares of
our common stock or the public market perceives that these sales
may occur, the market price of our common stock could decline.
Based on shares outstanding on December 31, 2006, upon the
completion of this offering, assuming no outstanding options are
exercised prior to the completion of this offering, we will have
approximately shares
of common stock outstanding. All of the shares offered under
this prospectus will be freely tradable without restriction or
further registration under the federal securities laws, unless
purchased by our affiliates. Taking into consideration the
effect of
lock-up
agreements entered into by our stockholders, the remaining
328,685,301 shares outstanding upon the completion of this
offering will be available for sale pursuant to Rules 144
and 701, and the volume, manner of sale and other limitations
under these rules, as follows:
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321,910,572 shares of common stock will be eligible for
sale in the public market, beginning on the 181st day after
the date of this prospectus, unless the
lock-up
period is otherwise extended pursuant to its terms, subject in
some cases to the provisions of Rule 144 under the
Securities Act of 1933 unless released sooner by the written
consent of Lehman Brothers Inc. and J.P. Morgan Securities
Inc.; and
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the remainder of the shares will be eligible from time to time
thereafter upon the lapse of our right to repurchase with
respect to any unvested shares.
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20
Following this offering, the holders of 287,878,041 shares
of our common stock issued upon conversion of our preferred
stock and warrants will be entitled to rights with respect to
the registration of these shares under the Securities Act. See
Description of Capital Stock Registration
Rights. If we register their shares of common stock
following the expiration of the
lock-up
agreements, these stockholders can immediately sell those shares
in the public market.
Promptly following this offering, we intend to register up to
approximately 93,177,695 shares of common stock that are
authorized for issuance under our stock option plans and
employee stock purchase plan. As of December 31, 2006,
38,177,695 shares were subject to outstanding options, of
which 14,331,864 shares were vested. Once we register these
shares, they can be freely sold in the public market upon
issuance, subject to the
lock-up
agreements referred to above and Rule 144 restrictions on
our affiliates.
If
securities analysts do not publish research or reports about our
business, or if they downgrade our stock, the price of our stock
could decline.
The trading market for our common stock will rely in part on the
availability of research and reports that third-party industry
or financial analysts publish about us. Further, if one or more
of the analysts who do cover us downgrade our stock, our stock
price may decline. If one or more of these analysts cease
coverage of our company, we could lose visibility in the market,
which in turn could cause the liquidity of our stock and our
stock price to decline.
Concentration
of ownership among our existing directors, executive officers,
and principal stockholders may prevent new investors from
influencing significant corporate decisions.
Upon closing of this offering, assuming the underwriters
option to purchase additional shares is not exercised, based
upon beneficial ownership as of December 31, 2006, our
current directors, executive officers, holders of more than 5%
of our common stock, including funds affiliated with Crosspoint
Venture Partners, Foundation Capital, Lehman Brothers and
J.P. Morgan, and their respective affiliates will, in the
aggregate, beneficially own approximately % of our
outstanding common stock. As a result, these stockholders will
be able to exercise a controlling influence over matters
requiring stockholder approval, including the election of
directors and approval of significant corporate transactions,
and will have significant influence over our management and
policies. Some of these persons or entities may have interests
that are different from yours. For example, these stockholders
may support proposals and actions with which you may disagree or
which are not in your interests. The concentration of ownership
could delay or prevent a change in control of our company or
otherwise discourage a potential acquirer from attempting to
obtain control of our company, which in turn could reduce the
price of our common stock. In addition, these stockholders, some
of whom have representatives sitting on our board of directors,
could use their voting influence to maintain our existing
management and directors in office, delay or prevent changes of
control of our company, or support or reject other management
and board proposals that are subject to stockholder approval,
such as amendments to our employee stock plans and approvals of
significant financing transactions.
We
have broad discretion in the use of the net proceeds from this
offering.
We cannot specify with certainty the particular uses of the net
proceeds we will receive from this offering. Our management will
have broad discretion in the application of the net proceeds,
including for any of the purposes described in the section
entitled Use of Proceeds. Accordingly, you will have
to rely upon the judgment of our management with respect to the
use of the proceeds, with only limited information concerning
managements specific intentions. Our management may spend
a portion or all of the net proceeds from this offering in ways
that our stockholders may not desire or that may not yield a
favorable return. The failure by our management to apply these
funds effectively could harm our business. Pending their use, we
may invest the net proceeds from this offering in a manner that
does not produce income or that loses value.
We do
not intend to pay dividends for the foreseeable
future.
We have never declared or paid any cash dividends on our common
stock. We intend to retain any earnings to finance the operation
and expansion of our business, and we do not anticipate paying
any cash dividends in the
21
future. As a result, you may only receive a return on your
investment in our common stock if the market price of our common
stock increases.
If you
purchase shares of our common stock in this offering, you will
experience substantial and immediate dilution.
If you purchase shares of our common stock in this offering, you
will experience substantial and immediate dilution of
$ per share based on an
assumed initial public offering price of
$ per share, which is the
midpoint of the range set forth on the cover page of this
prospectus, because the price that you pay will be substantially
greater than the net tangible book value per share of the common
stock that you acquire. This dilution is due in large part to
the fact that our earlier investors paid substantially less than
the initial public offering price when they purchased their
shares of our capital stock. You will experience additional
dilution upon the exercise of options to purchase common stock
under our equity incentive plans, if we issue restricted stock
to our employees under these plans or if we otherwise issue
additional shares of our common stock.
Our
charter documents and Delaware law may inhibit a takeover that
stockholders consider favorable and could also limit the market
price of our stock.
Upon the completion of this offering, provisions of our restated
certificate of incorporation and bylaws and applicable
provisions of Delaware law may make it more difficult for or
prevent a third party from acquiring control of us without the
approval of our board of directors. These provisions:
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prohibit stockholder action by written consent, thereby
requiring all stockholder actions to be taken at a meeting of
our stockholders;
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limit who may call a special meeting of stockholders;
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establish a classified board of directors, so that not all
members of our board of directors may be elected at one time;
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provide our board of directors with the ability to designate the
terms of and issue a new series of preferred stock without
stockholder approval;
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require the approval of two-thirds of the shares entitled to
vote at an election of directors to adopt, amend or repeal our
bylaws or repeal certain provisions of our certificate of
incorporation;
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allow a majority of the authorized number of directors to adopt,
amend or repeal our bylaws without stockholder approval;
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do not permit cumulative voting in the election of our
directors, which would otherwise permit less than a majority of
stockholders to elect directors; and
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set limitations on the removal of directors.
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In addition, Section 203 of the Delaware General
Corporation Law generally limits our ability to engage in any
business combination with certain persons who own 15% or more of
our outstanding voting stock or any of our associates or
affiliates who at any time in the past three years have owned
15% or more of our outstanding voting stock. These provisions
may have the effect of entrenching our management team and may
deprive you of the opportunity to sell your shares to potential
acquirers at a premium over prevailing prices. This potential
inability to obtain a control premium could reduce the price of
our common stock.
Please see Description of Capital Stock
Anti-takeover Provisions for a more detailed description
of these provisions.
22
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY
DATA
This prospectus, particularly in the sections entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business, contains forward-looking statements that
are subject to substantial risks and uncertainties. All
statements other than statements of historical facts contained
in this prospectus, including statements regarding our future
financial position, the statements under the caption Our
Strategy in the Prospectus Summary section,
the statements under the caption Our Strategy in the
Business section, other statements regarding our
strategies for growth and current development initiatives,
statement regarding planned expenditures, including capital
expenditures, expansion of our research and development, sales
and marketing and support organizations, and statements
regarding other aspects of our business strategy, and plans and
objectives for future operations, are forward-looking
statements. In some cases, you can identify forward-looking
statements by terms such as believe,
may, estimate, continue,
anticipate, intend, should,
plan, expect, predict, or
potential, the negative of these terms or other
similar expressions. We have based these forward-looking
statements largely on our current expectations and projections
about future events and financial trends that we believe may
affect our financial condition, results of operations, business
strategy and financial needs. These forward-looking statements
are subject to a number of risks, uncertainties and assumptions
described in the section entitled Risk Factors and
elsewhere in this prospectus. We qualify all of our
forward-looking statements by these cautionary statements.
Moreover, we operate in a very competitive and rapidly changing
environment. New risks emerge from time to time. It is not
possible for our management to predict all risks, nor can we
assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any
forward-looking statements we may make. Before investing in our
common stock, investors should be aware that the occurrence of
the events described in the section entitled Risk
Factors and elsewhere in this prospectus could have a
material adverse effect on our business, results of operations
and financial condition.
You should not rely upon forward-looking statements as
predictions of future events. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee that the future results, levels
of activity, performance or events and circumstances reflected
in the forward-looking statements will be achieved or occur.
Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking
statements. We undertake no obligation to update publicly any
forward-looking statements for any reason after the date of this
prospectus to conform these statements to actual results or to
changes in our expectations.
This prospectus also contains statistical data and estimates,
including those relating to market size and growth rates of the
markets in which we participate, that we obtained from industry
publications and reports generated by Gartner, Inc. and Nemertes
Research Inc. These publications generally indicate that they
have obtained their information from sources they believe to be
reliable, but do not guarantee the accuracy and completeness of
their information. Although we believe the publications are
reliable, we have not independently verified their data.
You should read this prospectus and the documents that we
reference in this prospectus and have filed with the SEC as
exhibits to the registration statement of which this prospectus
is a part with the understanding that our actual future results,
levels of activity, performance and events and circumstances may
be materially different from what we expect.
23
USE OF
PROCEEDS
We estimate that we will receive net proceeds of
$ million from our sale of
the shares
of common stock offered by us in this offering, based on an
assumed initial public offering price of
$ per share, the midpoint of
the range set forth on the cover page of this prospectus, after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us. If the
underwriters option to purchase additional shares is
exercised in full, we estimate that our net proceeds will be
approximately $ million. Each
$1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease the net proceeds to us from this
offering by approximately
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions payable by us.
The principal purposes of this offering are to increase public
awareness of our company and improve our competitive position,
obtain additional capital, create a public market for our common
stock and facilitate our future access to the public equity
markets. We anticipate that we will use the net proceeds
received by us from this offering for working capital and other
general corporate purposes. In addition, we may use a portion of
the proceeds of this offering for possible acquisitions of
complementary businesses, technologies or other assets. We have
no current agreements or commitments with respect to any
acquisitions.
We currently have no specific plans for the use of the net
proceeds to us from this offering. The amounts and timing of our
actual expenditures will depend on numerous factors, including
the amount of cash used in or generated by our operations, sales
and marketing activities and competitive pressures. We therefore
cannot estimate the amount of the net proceeds to be used for
any of the purposes described above. We may find it necessary or
advisable to use our net proceeds for other purposes, and we
will have broad discretion in the application of our net
proceeds.
Pending the uses described above, we intend to invest the net
proceeds from the sale of shares of our common stock sold by us
in this offering in short-term, interest bearing, investment
grade securities. We cannot predict whether the net proceeds
will yield a favorable return.
DIVIDEND
POLICY
We have never declared or paid any cash dividends on our capital
stock. We currently intend to retain all available funds and any
future earnings to support our operations and finance the growth
and development of our business. We do not intend to pay cash
dividends on our common stock for the foreseeable future. In
addition, the terms of our current line of credit prohibits the
payment of cash dividends without the lenders consent.
24
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2006:
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on an actual basis;
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on a pro forma basis to reflect the conversion of all
outstanding redeemable convertible preferred stock into common
stock upon the completion of this offering; and
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on a pro forma as adjusted basis to reflect the sale of the
shares of our common stock offered by us at an assumed initial
public offering price of
$ per share, the midpoint of
the range set forth on the cover page of this prospectus, after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
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You should read this table together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our audited consolidated financial
statements and the related notes, each included elsewhere in
this prospectus.
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As of
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September 30, 2006
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|
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Pro
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Pro Forma as
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Actual
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|
Forma
|
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Adjusted(1)
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(Unaudited, in thousands, except share and per share data)
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Cash and cash equivalents
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$
|
13,290
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|
|
$
|
13,290
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$
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|
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|
|
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|
|
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|
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Redeemable convertible preferred
stock, $0.01 par value: 235,862,612 shares authorized,
233,164,369 shares issued or outstanding, actual; no shares
authorized, no shares issued and outstanding, pro forma and pro
forma as adjusted
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$
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56,345
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|
$
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|
$
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Shareholders (deficit)
equity:
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Preferred Stock, $0.01 par
value: no shares authorized, issued or outstanding, actual;
5,000,000 shares authorized, no shares issued and outstanding,
pro forma and pro forma as adjusted
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Common stock, $0.01 par
value, 415,000,000 shares authorized,
94,180,191 shares issued and outstanding, actual;
415,000,000 shares authorized, 327,344,560 shares
issued and outstanding, pro forma; 500,000,000 shares
authorized, shares
issued and outstanding, pro forma as adjusted
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1,040
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|
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|
3,372
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|
|
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Additional paid-in capital
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|
50,105
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|
|
|
104,118
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|
|
|
|
Deferred compensation
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|
(312
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)
|
|
|
(312
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)
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|
|
|
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Notes receivable from shareholder
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|
|
(219
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)
|
|
|
(219
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)
|
|
|
|
|
Accumulated deficit
|
|
|
(89,833
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)
|
|
|
(89,833
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)
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|
|
|
|
|
|
|
|
|
|
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|
|
|
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Total shareholders (deficit)
equity
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|
$
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(39,219
|
)
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|
$
|
17,126
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|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
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|
$
|
17,126
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|
|
$
|
17,126
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|
|
$
|
|
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|
|
|
|
|
|
|
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|
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|
(1)
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Each $1.00 increase or decrease in the assumed public offering
price of $ per share would
increase or decrease, respectively, the amount of cash and cash
equivalents, additional paid-in capital and total
shareholders equity (deficit) by approximately
$ , assuming the number of shares
offered by us, as set forth on the cover of this prospectus,
remains the same and after deducting the estimated underwriting
discounts and commissions payable by us.
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25
The information in the table above excludes:
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32,346,941 shares of common stock issuable upon exercise of
outstanding options as of September 30, 2006, at a weighted
average exercise price of $0.07 per share;
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7,844,000 shares of common stock issuable upon exercise of
options granted between October 1, 2006 and
February 12, 2007, at a weighted average exercise price of
$0.32 per share;
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|
708,851 shares of common stock issuable upon exercise of
outstanding warrants as of September 30, 2006, at a
weighted average exercise price of $0.28 per share; and
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50,000,000 shares of common stock reserved for future grant
or issuance under our 2007 equity incentive plan and
5,000,000 shares of common stock to be available for
issuance under our 2007 employee stock purchase plan effective
upon the completion of this offering.
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26
DILUTION
If you invest in our common stock, your interest will be diluted
immediately to the extent of the difference between the initial
public offering price per share of our common stock and the pro
forma as adjusted net tangible book value per share of our
outstanding common stock immediately after completion of this
offering.
As of September 30, 2006, we had a pro forma net tangible
book value of $ million, or
$ per share of common stock
outstanding. Pro forma net tangible book value per share is
equal to our total tangible assets (total assets less intangible
assets) less total liabilities, divided by the pro forma number
of outstanding shares of our common stock, which gives effect to
the conversion of all outstanding shares of redeemable
convertible preferred stock into common stock upon the
completion of this offering.
Dilution in pro forma net tangible book value per share
represents the difference between the amount per share paid by
investors in this offering and pro forma net tangible book value
per share of our common stock immediately after the completion
of this offering. After giving effect to the sale
of shares
of common stock offered by us under this prospectus at an
assumed public offering price of
$ per share, which is the
midpoint of the range set forth on the cover page of this
prospectus, and after deducting the estimated underwriting
discounts and estimated offering expenses payable by us, our pro
forma as adjusted net tangible book value as of
September 30, 2006 would have been approximately
$ million, or approximately
$ per share of common stock.
This represents an immediate increase in pro forma net tangible
book value of $ per share to
our existing stockholders and an immediate dilution of
$ per share to new investors
purchasing shares in this offering. The following table
illustrates this per share dilution:
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Assumed initial public offering
price per share
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|
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|
$
|
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Pro forma net tangible book value
per share as of September 30, 2006, before
giving effect to this offering
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|
$
|
|
|
|
|
|
|
Increase in pro forma net tangible
book value per share attributable to this
offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Pro forma as adjusted net tangible
book value per share after giving effect to this offering
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Dilution per share to new
investors in this offering
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|
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|
$
|
|
|
|
|
|
|
|
|
|
|
|
Each $1.00 increase or decrease in the assumed public offering
price of $ per share would
increase or decrease, respectively, our pro forma as adjusted
net tangible book value by
$ million, our pro forma as
adjusted net tangible book value per share after this offering
by $ million per share and
the dilution per share to new investors in this offering by
$ per share, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
underwriting discounts and commissions payable by us.
The following table shows, as of September 30, 2006, the
number of shares of common stock purchased from us, the total
consideration paid to us and the average price paid per share by
existing stockholders and by new investors purchasing common
stock in this offering at an assumed initial public offering
price of $ per share, which
is the midpoint of the range set forth on the cover page of this
prospectus, and before deducting the underwriting discount and
estimated offering expenses payable by us.
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|
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|
|
|
|
|
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
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|
Average
|
|
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|
Shares Purchased
|
|
|
Total Consideration
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|
|
Price per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
Existing stockholders
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Each $1.00 increase or decrease in the assumed public offering
price of $ per share would
increase or decrease, respectively, the total consideration paid
by new investors and total consideration paid by all
stockholders
27
by $ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions payable by us.
If the underwriters exercise in full their option to purchase up
to
additional shares from us in this offering, our pro forma as
adjusted net tangible book value per share as of
September 30, 2006 will be $ ,
representing an immediate increase in pro forma net tangible
book value per share attributable to this offering of
$ to our existing stockholders and
an immediate dilution per share to new investors in this
offering of $ . If the
underwriters option to purchase additional shares is
exercised in full, our existing stockholders would
own % and our new investors would
own % of the total number of shares
of our common stock outstanding after this offering.
The information in the table above excludes:
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|
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32,346,941 shares of common stock issuable upon exercise of
outstanding options as of September 30, 2006, at a weighted
average exercise price of $0.07 per share;
|
|
|
|
7,844,000 shares of common stock issuable upon exercise of
options granted between October 1, 2006 and
February 12, 2007, at a weighted average exercise price of
$0.32 per share;
|
|
|
|
708,851 shares of common stock issuable upon exercise of
outstanding warrants as of September 30, 2006, at a
weighted average exercise price of $0.28 per share; and
|
|
|
|
50,000,000 shares of common stock reserved for future grant
or issuance under our 2007 equity incentive plan and
5,000,000 shares of common stock to be available for
issuance under our 2007 employee stock purchase plan effective
upon the completion of this offering.
|
To the extent that any options or warrants are exercised, new
options or shares of common stock are issued under our 2007
equity incentive plan or our 2007 employee stock purchase plan
or we issue additional shares of common stock in the future,
there will be further dilution to investors participating in
this offering.
28
SELECTED
CONSOLIDATED FINANCIAL DATA
The following tables summarize our selected consolidated
financial data. The consolidated statements of operations data
for the fiscal years ended June 30, 2004, 2005 and 2006 and
the consolidated balance sheet data as of June 30, 2005 and
2006 have been derived from our audited consolidated financial
statements included elsewhere in this prospectus. The selected
consolidated balance sheet data as of June 30, 2002 and
2003 and the selected consolidated statements of operations as
of and for the years ended June 30, 2002 and 2003 are
derived from our audited consolidated financial statements,
which are not included in this prospectus. The consolidated
statements of operations data for the three months ended
September 30, 2005 and 2006, and the consolidated balance
sheet data as of September 30, 2006, have been derived from
our unaudited consolidated financial statements included
elsewhere in this prospectus. The unaudited consolidated
financial statements have been prepared on a basis consistent
with our audited financial statements contained in this
prospectus and include, in the opinion of management, all
adjustments, which include only normal recurring adjustments,
that management considers necessary for the fair presentation of
the financial information set forth in those financial
statements. You should read this data together with our
consolidated financial statements and related notes to those
statements included elsewhere in this prospectus and the
information under Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Our historical results are not necessarily indicative of the
results to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Consolidated statement of
operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
5,302
|
|
|
$
|
8,537
|
|
|
$
|
16,587
|
|
|
$
|
31,970
|
|
|
$
|
55,300
|
|
|
$
|
10,000
|
|
|
$
|
18,467
|
|
Support and services
|
|
|
1,872
|
|
|
|
1,755
|
|
|
|
2,241
|
|
|
|
3,512
|
|
|
|
6,308
|
|
|
|
1,214
|
|
|
|
1,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
7,174
|
|
|
|
10,292
|
|
|
|
18,828
|
|
|
|
35,482
|
|
|
|
61,608
|
|
|
|
11,214
|
|
|
|
20,415
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product (1)
|
|
|
3,463
|
|
|
|
4,634
|
|
|
|
7,725
|
|
|
|
13,961
|
|
|
|
21,855
|
|
|
|
4,044
|
|
|
|
6,507
|
|
Support and services (1)
|
|
|
2,221
|
|
|
|
2,003
|
|
|
|
1,660
|
|
|
|
2,907
|
|
|
|
5,425
|
|
|
|
1,078
|
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
5,684
|
|
|
|
6,637
|
|
|
|
9,385
|
|
|
|
16,868
|
|
|
|
27,280
|
|
|
|
5,122
|
|
|
|
7,952
|
|
Gross profit
|
|
|
1,490
|
|
|
|
3,655
|
|
|
|
9,443
|
|
|
|
18,614
|
|
|
|
34,328
|
|
|
|
6,092
|
|
|
|
12,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development (1)
|
|
|
7,100
|
|
|
|
6,118
|
|
|
|
5,517
|
|
|
|
7,034
|
|
|
|
9,720
|
|
|
|
2,051
|
|
|
|
3,117
|
|
Sales and marketing (1)
|
|
|
8,419
|
|
|
|
6,847
|
|
|
|
8,004
|
|
|
|
10,050
|
|
|
|
15,699
|
|
|
|
3,067
|
|
|
|
5,677
|
|
General and administrative (1)
|
|
|
3,538
|
|
|
|
2,731
|
|
|
|
2,166
|
|
|
|
3,045
|
|
|
|
4,936
|
|
|
|
875
|
|
|
|
2,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,057
|
|
|
|
15,696
|
|
|
|
15,687
|
|
|
|
20,129
|
|
|
|
30,355
|
|
|
|
5,993
|
|
|
|
11,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(17,567
|
)
|
|
|
(12,041
|
)
|
|
|
(6,244
|
)
|
|
|
(1,515
|
)
|
|
|
3,973
|
|
|
|
99
|
|
|
|
1,096
|
|
Other income (expense)
net
|
|
|
(31
|
)
|
|
|
19
|
|
|
|
(7
|
)
|
|
|
124
|
|
|
|
248
|
|
|
|
30
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
income taxes
|
|
|
(17,598
|
)
|
|
|
(12,022
|
)
|
|
|
(6,251
|
)
|
|
|
(1,391
|
)
|
|
|
4,221
|
|
|
|
129
|
|
|
|
1,253
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
(219
|
)
|
|
|
(13
|
)
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(17,598
|
)
|
|
|
(12,022
|
)
|
|
|
(6,251
|
)
|
|
|
(1,402
|
)
|
|
|
4,002
|
|
|
|
116
|
|
|
|
1,046
|
|
Stock dividends and accretion of
preferred stock
|
|
|
|
|
|
|
(38
|
)
|
|
|
(26
|
)
|
|
|
(32
|
)
|
|
|
(51
|
)
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders
|
|
$
|
(17,598
|
)
|
|
$
|
(12,060
|
)
|
|
$
|
(6,277
|
)
|
|
$
|
(1,434
|
)
|
|
$
|
3,951
|
|
|
$
|
103
|
|
|
$
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.86
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.06
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(1.86
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.05
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
Shares used in computing net income
(loss) per share available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,473,420
|
|
|
|
10,998,047
|
|
|
|
49,345,069
|
|
|
|
53,517,065
|
|
|
|
66,091,748
|
|
|
|
60,507,022
|
|
|
|
79,113,086
|
|
Diluted
|
|
|
9,473,420
|
|
|
|
10,998,047
|
|
|
|
49,345,069
|
|
|
|
53,517,065
|
|
|
|
84,867,945
|
|
|
|
72,912,729
|
|
|
|
101,904,114
|
|
Unaudited pro forma net income per
share available to common shareholders(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.00
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.00
|
|
Unaudited shares used in computing
pro forma net income per share available to common
shareholders(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299,256,117
|
|
|
|
|
|
|
|
312,277,455
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
318,032,314
|
|
|
|
|
|
|
|
335,068,483
|
|
29
(1) Includes stock-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of product revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
Cost of support and services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
14
|
|
|
|
5
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
17
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
97
|
|
General and administrative
|
|
|
|
|
|
|
446
|
|
|
|
45
|
|
|
|
82
|
|
|
|
45
|
|
|
|
9
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
|
|
|
$
|
446
|
|
|
$
|
45
|
|
|
$
|
82
|
|
|
$
|
82
|
|
|
$
|
23
|
|
|
$
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) See Note 2 to our consolidated financial
statements for a description of the method used to compute basic
and diluted net income (loss) per share available to common
shareholders. Unaudited pro forma basic and diluted net income
per share allocable to common shareholders have been computed to
give effect to assumed conversion of redeemable convertible
preferred stock upon the closing of this offering on an
if-converted basis for the fiscal year ended June 30, 2006
and the three months ended September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of June 30,
|
|
|
September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Consolidated balance sheet
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,182
|
|
|
$
|
3,451
|
|
|
$
|
723
|
|
|
$
|
5,373
|
|
|
$
|
12,333
|
|
|
$
|
13,290
|
|
Working capital
|
|
|
3,476
|
|
|
|
3,720
|
|
|
|
1,320
|
|
|
|
10,741
|
|
|
|
16,208
|
|
|
|
18,182
|
|
Total assets
|
|
|
13,426
|
|
|
|
8,231
|
|
|
|
7,962
|
|
|
|
20,960
|
|
|
|
30,885
|
|
|
|
34,611
|
|
Redeemable convertible preferred
stock
|
|
|
79,974
|
|
|
|
42,814
|
|
|
|
46,300
|
|
|
|
56,281
|
|
|
|
56,332
|
|
|
|
56,345
|
|
Total shareholders deficit
|
|
|
(74,721
|
)
|
|
|
(38,374
|
)
|
|
|
(44,596
|
)
|
|
|
(45,713
|
)
|
|
|
(41,168
|
)
|
|
|
(39,219
|
)
|
30
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with the consolidated financial statements and
related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ
materially from those discussed below. Factors that could cause
or contribute to such differences include, but are not limited
to, those identified below, and those discussed above in the
section entitled Risk Factors. We report results on
a fiscal year ending June 30. For ease of reference within
this section, 2006 refers to the fiscal year ended June 30,
2006, 2005 refers to the fiscal year ended June 30, 2005
and 2004 refers to the fiscal year ended June 30, 2004. The
consolidated financial data as of and for the three months ended
September 30, 2006 and September 30, 2005 are derived
from financial statements that are unaudited.
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 five models
of our switches and five models of our IP phones.
We sell our products primarily through channel partners that
market and sell our systems to enterprises across all
industries, including to small, medium and large companies and
public institutions. We believe our channel strategy allows us
to reach a larger number of prospective enterprise customers
more effectively than if we were to sell directly. The number of
our authorized channel partners has more than doubled since
June 30, 2004 to more than 400 as of December 31,
2006, including 30 in Europe. 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.
Our 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 switch products are manufactured by
a contract manufacturer in San Jose, California and our
phone products are manufactured by a contract manufacturer in
China. Our contract manufacturers provide us with a range of
operational and manufacturing services, including component
procurement and 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. We seek to
maintain sufficient levels of finished goods inventory to meet
our forecasted product sales with limited levels of inventory to
compensate for unanticipated shifts in sales volume and product
mix.
Although we have historically sold our systems primarily to
small and medium sized enterprises, we have recently begun to
expand our sales and marketing activities to increase our focus
on larger enterprise customers. Accordingly, we have implemented
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.
31
We are headquartered in Sunnyvale, California and the majority
of our personnel work at this location. Sales and support
personnel are located throughout the United States and, to a
lesser extent, in the United Kingdom, Germany, Spain and
Australia. While we expanded our operations to Europe in 2005
and to the Asia Pacific region in 2006, most of our enterprise
customers are located in the United States. Revenue from
international sales has been 2% or less of our total revenue for
2004, 2005, 2006 and the three months ended September 30,
2006, respectively. Although we intend to focus on increasing
international sales, we expect that sales to enterprise
customers in the U.S. will continue to comprise the
significant majority of our sales.
We have experienced significant growth in recent periods, with
our total revenue growing from $18.8 million for 2004 to
$61.6 million for 2006. This growth in revenue has largely
been driven by increased demand for IP telecommunications
systems from new enterprise customers, as well as sales of
additional products to our installed enterprise customer base.
Our operating expenses have also increased significantly from
$15.7 million for 2004 to $30.4 million for 2006. This
growth in operating expenses has primarily been driven by our
growth in headcount, from 76 employees at June 30, 2004 to
174 employees at June 30, 2006, and to 223 employees
at December 31, 2006. We expect to continue to add
personnel in all functional areas, including additional sales
and support personnel. However, we expect our total headcount to
grow at a slower rate as compared to recent periods.
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.
Nearly all system sales
include the purchase of post-contractual support contracts with
terms of up to five years, and our renewal rates on these
contracts have been high historically. We recognize support
revenue on a ratable basis over the term of the support
contract. Since we receive payment for support in advance of our
recognizing the related revenue, we carry a deferred revenue
balance on our consolidated balance sheet. This deferred revenue
helps provide predictability to our future support and services
revenue. Accordingly, the level of purchases of post-contractual
support with our product sales is an important metric for us
along with the renewal rates for these services. Our deferred
revenue balance at September 30, 2006 was
$7.8 million, of which $4.8 million is expected to be
recognized within one year.
Gross margin.
Our gross margin for products is
primarily affected by our ability to reduce hardware costs
faster than the decline in average overall system prices. We
have been able to increase our product gross margin by reducing
hardware costs and through product redesign and volume discount
pricing from our suppliers. For example, in 2004, we introduced
our current family of switches and IP phones, which generally
improved our gross margin. We have also introduced new, lower
cost hardware following these introductions, which has continued
to improve our product gross margin. In general, product gross
margin on our switches is greater than product gross margin on
our IP phones. As the prices and costs of our hardware
components have decreased over time, our software components,
which have lower costs than our hardware components, have
represented a greater percentage of our overall system sales. We
consider our ability to monitor and manage these factors to be a
key aspect of maintaining product gross margins and increasing
our profitability.
Gross margin for support and services is significantly lower
than gross margin for products, and is impacted primarily by
personnel costs and 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 margin for support and services through
economies of scale. However, the timing of additional
investments in our support and services infrastructure could
materially affect our cost of support and services revenue, both
in absolute dollars and as a percentage of support and services
revenue and total revenue, in any particular period.
32
Operating expense management.
To date, we have
managed our operating expenses so that they have generally
increased at a slower rate than our revenue growth, and we
intend to continue to do so in the future. Our operating
expenses are comprised primarily of compensation and benefits
for our employees and, therefore, the increase in operating
expenses has been related to increases in our headcount. We
intend to expand our workforce to support our anticipated
growth, and therefore our ability to forecast revenue is
critical to managing our operating expenses.
Basis of
Presentation
Revenue.
We derive our revenue from sales of
our IP telecommunications systems and related support and
services. Our typical system includes a combination of IP
phones, switches and software applications. Channel partners buy
our products directly from us. Prices to a given channel partner
depend on that channel partners volume and customer
satisfaction metrics, as well as our own strategic
considerations. In circumstances where we sell directly to the
enterprise customer in transactions that have been assisted by
channel partners, we report our revenue net of any associated
payment to the channel partners that assisted in such sales.
This results in recognized revenue from a direct sale
approximating the revenue that would have been recognized from a
sale of a comparable system through a channel partner. Product
revenue has accounted for 88%, 90%, 90% and 90% of our total
revenue for 2004, 2005, 2006 and the three months ended
September 30, 2006, respectively.
Support and services revenue primarily consists of
post-contractual support, and to a lesser extent revenue from
training services and installations that we perform.
Post-contractual support includes software updates which grant
rights to unspecified software license upgrades and maintenance
releases issued during the support period. Post-contractual
support also includes both Internet- and phone-based technical
support. Post-contractual support revenue is recognized ratably
over the contractual service period.
Cost of revenue.
Cost of product revenue
consists primarily of hardware costs, royalties and license fees
for third-party software included in our systems, salary and
related overhead costs of operations personnel, freight,
warranty costs and provision for excess inventory. The majority
of these costs vary with the unit volumes of product sold. Cost
of support and services revenue consists of salary and related
overhead costs of personnel engaged in support and services, and
hence is 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 allocated
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. We intend to continue to make significant
investments in our research and development efforts because we
believe they are essential to maintaining and improving our
competitive position. Accordingly, we expect research and
development expenses to continue to increase in absolute dollars.
Sales and marketing expenses.
Sales and
marketing expenses primarily include personnel costs, sales
commissions, travel, marketing promotional and lead generation
programs, trade shows, professional services fees and allocated
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 and information technology organizations.
Expenses primarily include personnel costs, professional fees
for legal, accounting, compliance and information systems,
travel, bad debt expense and allocated facilities expenses. We
expect that in connection with and following this offering, we
will incur significant additional accounting, legal and
compliance costs as well as additional insurance, investor
relations and other costs associated with being a public
company. In addition, as we expand our business, we expect to
increase our general and administrative expenses.
33
The operating lease for our headquarters office expires on
September 30, 2007. We anticipate negotiating a new lease
in the upcoming months for a larger headquarters facility at
prices reflective of those prevailing in the market at the time
of lease execution. Accordingly, we expect our operating lease
obligations to increase beginning in September 2007.
Other income (expense).
Other income (expense)
primarily consists of interest earned on cash balances.
Provision for income taxes.
Provision for
income taxes includes federal, state and foreign tax on our
income. From inception through 2005 we accumulated substantial
net operating loss and tax credit carryforwards. We fully
reserved the deferred tax asset from these losses and tax
credits on our financial statements. We were profitable in 2006
and had an effective tax rate of approximately 5% in 2006, as a
result of utilizing portions of the deferred tax asset and
reducing the related valuation allowance.
Our effective tax rate for the three months ended
September 30, 2006 was 16.5%. Our effective tax rate for
the remainder of 2007 is dependent upon a number of factors,
including the extent of the impact from stock-based compensation
and the extent of possible limitations on our ability to use net
operating loss and tax credit carryforwards. We believe we have
had multiple ownership changes, as defined under Section 382 of
the Internal Revenue Code, due to significant stock transactions
in previous years, which may limit the future realization of our
net operating losses and we are currently analyzing these
ownership changes to determine the limitations on our ability to
utilize our net operating loss and tax credit carryforwards
under Sections 382 and 383 of the Internal Revenue Code in
future periods. At June 30, 2006, we had $84.4 million
and $44.6 million of net operating loss carryforwards for
federal and state purposes, respectively. Based on estimates
prepared to date, we believe the provisions of Section 382
could result in the forfeiture of approximately $72 million
of net operating losses for U.S. federal income tax purposes. We
believe there could also be an impact on our ability to utilize
California net operating loss carryforwards and our research and
development tax credit carryforwards. As our analysis is
incomplete, these estimates are uncertain. After fiscal 2007, we
anticipate our effective tax rate will increase due to these
limitations on our ability to utilize net operating loss and tax
credit carryforwards, and the extent of the impact from
stock-based compensation.
34
Results
of Operations
The following table sets forth selected consolidated statements
of operations data for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
16,587
|
|
|
$
|
31,970
|
|
|
$
|
55,300
|
|
|
$
|
10,000
|
|
|
$
|
18,467
|
|
Support and services
|
|
|
2,241
|
|
|
|
3,512
|
|
|
|
6,308
|
|
|
|
1,214
|
|
|
|
1,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
18,828
|
|
|
|
35,482
|
|
|
|
61,608
|
|
|
|
11,214
|
|
|
|
20,415
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product (1)
|
|
|
7,725
|
|
|
|
13,961
|
|
|
|
21,855
|
|
|
|
4,044
|
|
|
|
6,507
|
|
Cost of support and services (1)
|
|
|
1,660
|
|
|
|
2,907
|
|
|
|
5,425
|
|
|
|
1,078
|
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
9,385
|
|
|
|
16,868
|
|
|
|
27,280
|
|
|
|
5,122
|
|
|
|
7,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,443
|
|
|
|
18,614
|
|
|
|
34,328
|
|
|
|
6,092
|
|
|
|
12,463
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development (1)
|
|
|
5,517
|
|
|
|
7,034
|
|
|
|
9,720
|
|
|
|
2,051
|
|
|
|
3,117
|
|
Sales and marketing (1)
|
|
|
8,004
|
|
|
|
10,050
|
|
|
|
15,699
|
|
|
|
3,067
|
|
|
|
5,677
|
|
General and administrative (1)
|
|
|
2,166
|
|
|
|
3,045
|
|
|
|
4,936
|
|
|
|
875
|
|
|
|
2,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,687
|
|
|
|
20,129
|
|
|
|
30,355
|
|
|
|
5,993
|
|
|
|
11,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(6,244
|
)
|
|
|
(1,515
|
)
|
|
|
3,973
|
|
|
|
99
|
|
|
|
1,096
|
|
Other income (expense)
net
|
|
|
(7
|
)
|
|
|
124
|
|
|
|
248
|
|
|
|
30
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
income tax
|
|
|
(6,251
|
)
|
|
|
(1,391
|
)
|
|
|
4,221
|
|
|
|
129
|
|
|
|
1,253
|
|
Provision for income taxes
|
|
|
|
|
|
|
(11
|
)
|
|
|
(219
|
)
|
|
|
(13
|
)
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(6,251
|
)
|
|
$
|
(1,402
|
)
|
|
$
|
4,002
|
|
|
$
|
116
|
|
|
$
|
1,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes stock-based compensation
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
Cost of support and services revenue
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
14
|
|
|
|
5
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
17
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
97
|
|
General and administrative
|
|
|
45
|
|
|
|
82
|
|
|
|
45
|
|
|
|
9
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
45
|
|
|
$
|
82
|
|
|
$
|
82
|
|
|
$
|
23
|
|
|
$
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
The following table sets forth selected consolidated statements
of operations data as a percentage of total revenue for each of
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
88
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
89
|
%
|
|
|
90
|
%
|
Support and services
|
|
|
12
|
|
|
|
10
|
|
|
|
10
|
|
|
|
11
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
41
|
|
|
|
40
|
|
|
|
35
|
|
|
|
36
|
|
|
|
32
|
|
Cost of support and services
|
|
|
9
|
|
|
|
8
|
|
|
|
9
|
|
|
|
10
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
50
|
|
|
|
48
|
|
|
|
44
|
|
|
|
46
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50
|
|
|
|
52
|
|
|
|
56
|
|
|
|
54
|
|
|
|
61
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
29
|
|
|
|
20
|
|
|
|
16
|
|
|
|
18
|
|
|
|
15
|
|
Sales and marketing
|
|
|
43
|
|
|
|
28
|
|
|
|
26
|
|
|
|
27
|
|
|
|
28
|
|
General and administrative
|
|
|
11
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
83
|
|
|
|
56
|
|
|
|
50
|
|
|
|
53
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(33
|
)
|
|
|
(4
|
)
|
|
|
6
|
|
|
|
1
|
|
|
|
5
|
|
Other income (expense)
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
income tax
|
|
|
(33
|
)
|
|
|
(4
|
)
|
|
|
6
|
|
|
|
1
|
|
|
|
6
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(33
|
)%
|
|
|
(4
|
)%
|
|
|
6
|
%
|
|
|
1
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2006 compared to three months
ended September 30, 2005
Revenue.
Total revenue increased
$9.2 million, or 82%, from $11.2 million in the three
months ended September 30, 2005 to $20.4 million in
the three months ended September 30, 2006. This increase
was primarily attributable to increased sales of our products
and services. Product revenue increased by $8.5 million, or
85%, from $10.0 million in the three months ended
September 30, 2005 to $18.5 million in the three
months ended September 30, 2006. Support and services
revenue increased $734,000, or 60%, from $1.2 million in
the three months ended September 30, 2005 to
$1.9 million in the three months ended September 30,
2006 as a result of increased revenue associated with
post-contractual support contracts accompanying new system sales
and post-contractual support contract renewals and, to a lesser
extent, revenue from training services and installations.
Gross margin.
Total gross margin increased
from 54% in the three months ended September 30, 2005, to
61% in the three months ended September 30, 2006. Product
gross margin increased from 60% in the three months ended
September 30, 2005, to 65% in the three months ended
September 30, 2006. The increase in product gross margin
was due to improved margins on hardware products as a result of
sales of new hardware products with higher margins and reduced
costs for some existing hardware products. Support and services
gross margin increased from 11% in the three months ended
September 30, 2005 to 26% in the three months ended
September 30, 2006. The increase was due to support and
service revenue increasing at a higher rate than service costs
over the period. This contributed to an improvement in overall
gross margin from the three months ended September 30, 2005
to the same period in 2006.
Research and development.
Research and
development expenses increased $1.0 million, or 52%, from
$2.1 million in the three months ended September 30,
2005, to $3.1 million in the three months ended
September 30, 2006. These expenses represented 18% and 15%
of total revenue, respectively, in those periods. Compensation
for research and development employees accounted for $811,000 of
the increase, as headcount increased from 39
36
employees at September 30, 2005 to 59 employees at
September 30, 2006. Additionally, professional services,
test equipment and software usage fees accounted for $150,000,
$51,000 and $45,000, respectively, of the increase.
Sales and marketing.
Sales and marketing
expenses increased $2.6 million, or 85%, from
$3.1 million in the three months ended September 30,
2005 to $5.7 million in the three months ended
September 30, 2006. These expenses represented 27% and 28%
of total revenue, in those periods. Salaries, related benefits
and sales commissions represented $1.8 million of this
increase, as headcount doubled from 38 employees at
September 30, 2005 to 76 employees at September 30,
2006. Additionally, promotional and lead generation programs,
travel and stock-based compensation accounted for $574,000,
$227,000 and $57,000, respectively, of the increase.
General and administrative.
General and
administrative expenses increased $1.7 million, or 194%,
from $875,000 in the three months ended September 30, 2005
to $2.6 million in the three months ended
September 30, 2006. These expenses represented 8% and 13%
of total revenue, respectively, in those periods. Salaries and
benefits of general and administrative employees accounted for
$270,000 of the increase, as headcount increased from
16 employees at September 30, 2005 to 19 employees at
September 30, 2006. Additionally, stock-based compensation,
professional services and bad debt expenses accounted for
$693,000, $368,000 and $107,000, respectively, of the increase.
The remainder of the increase was attributable to various
expenses including travel expenses and allocated facility
expenses. In addition, general and administrative expenses for
the quarter ended September 30, 2006 include $699,000 of
stock-based compensation associated with an outstanding option
granted prior to the adoption of SFAS 123(R) that is
subject to variable accounting. As a result of the variable
accounting related to this option grant, we may have additional
non-cash compensation expense in future periods.
Other income.
Other income increased $127,000
from $30,000 in the three months ended September 30, 2005
to $157,000 in the three months ended September 30, 2006.
The increase was due to an increase in interest income due to
higher average cash balances in the three months ended
September 30, 2006 over average cash balances in the three
months ended September 30, 2005.
Provision for income taxes.
The provision for
income taxes increased $194,000 from $13,000 in the three months
ended September 30, 2005 to $207,000 in the three months
ended September 30, 2006, primarily due to an increase in
our taxable income.
Fiscal
2006 compared to Fiscal 2005
Revenue.
Total revenue increased
$26.1 million, or 74%, from $35.5 million in 2005 to
$61.6 million in 2006. This increase was primarily
attributable to increased sales of our products, including
hardware and software, and services. Product revenue increased
by $23.3 million, or 73%, from $32.0 million in 2005
to $55.3 million in 2006. Support and services revenue
increased by $2.8 million, or 80%, from $3.5 million
in 2005 to $6.3 million in 2006 as a result of increased
revenue associated with post-contractual support contracts
accompanying new system sales and post-contractual support
contract renewals and, to a lesser extent, revenue from training
services and installations. The increase in support and services
revenue reflected our increasing strategic focus on large
enterprise customers and overall growth in system sales.
Gross margin.
Total gross margin increased
from 52% in 2005 to 56% in 2006. Product gross margin increased
from 56% in 2005 to 60% in 2006. The increase in product gross
margin was due to improved margins on hardware products as a
result of sales of new hardware products with higher margins and
reduced costs for some existing hardware products. Support and
services gross margin decreased from 17% in 2005 to 14% in 2006.
The decrease was due to hiring new support and services
employees to build our infrastructure at a faster rate than the
growth in our support and service revenue.
Research and development.
Research and
development expenses increased $2.7 million, or 38%, from
$7.0 million in 2005 to $9.7 million in 2006. These
expenses represented 20% and 16% of total revenue in 2005 and
2006, respectively. Of the increase, $2.0 million was for
salaries and benefits as headcount increased from 37 employees
at June 30, 2005 to 48 employees at June 30, 2006.
Engineering costs for new products, prototype expenses,
allocated facilities expenses and software usage fees accounted
for $288,000, $133,000, $104,000 and $99,000, respectively, of
the increase.
37
Sales and marketing.
Sales and marketing
expenses increased $5.6 million, or 56%, from
$10.1 million in 2005 to $15.7 million in 2006. These
expenses represented 28% and 26% of total revenue in 2005 and
2006, respectively. Of the increase, $3.7 million was for
salaries, sales commissions and related employee benefits as
headcount increased from 34 employees at the end of 2005 to 66
employees at the end of 2006. Promotional and lead generation
programs, travel, recruiting, training and professional services
accounted for $959,000, $583,000, $140,000, $114,000 and
$93,000, respectively, of the increase.
General and administrative.
General and
administrative expenses increased $1.9 million, or 62%,
from $3.0 million in 2005 to $4.9 million in 2006.
These expenses represented 8% and 8% of total revenue in 2005
and 2006, respectively. Of the increase, $949,000 was for
salaries and benefits as headcount increased from 14 employees
at the end of 2005 to 18 employees at the end of 2006.
Professional services and facilities maintenance costs accounted
for $576,000 and $153,000, respectively, of the increase. The
remainder of the increase was attributable to various expenses
including allocated facilities expenses, expensed equipment, and
an increase in the allowance for bad debts.
Other income.
Other income increased $124,000
from $124,000 in 2005 to $248,000 in 2006. The increase was
primarily due to an increase in interest income, partially
offset by an increase in foreign currency exchange losses and
interest expense. Interest income increased $155,000 due to
higher average cash balances in 2006.
Provision for income taxes.
The provision for
income taxes increased $208,000 from $11,000 in 2005 to $219,000
in 2006, primarily due to an increase in our taxable income.
Fiscal
2005 compared to Fiscal 2004
Revenue.
Total revenue increased
$16.7 million, or 88%, from $18.8 million in 2004 to
$35.5 million in 2005. This increase was primarily
attributable to increased sales of our products and services.
Product revenue increased by $15.4 million, or 93%, from
$16.6 million in 2004 to $32.0 million in 2005.
Support and services revenue increased by $1.3 million, or
57%, from $2.2 million in 2004 to $3.5 million in 2005
as a result of increased revenue associated with
post-contractual support contracts accompanying new system sales
and post-contractual support contract renewals and, to a lesser
extent, revenue from training services and installations
performed by us. Revenue from these other services, primarily
training, increased to $524,000 in 2005.
Gross margin.
Total gross margin increased
from 50% 2004 to 52% in 2005. Product gross margin increased
from 53% in 2004 to 56% in 2005. The increase in product gross
margin was due to sales of our IP phones following their
introduction in June 2004, as these phones had higher margins
than the third-party phones sold with our systems prior to that
time. Support and services gross margin decreased from 26% in
2004 to 17% in 2005. The decrease was due to support and service
employee related costs increasing faster than support and
service revenue over 2004. Support and services headcount
increased from 11 employees at June 30, 2004 to 21
employees at June 30, 2005, due to our ongoing efforts to
build our support and services functions. The reduction in
support and services gross margin resulted in reduction of total
gross margin.
Research and development.
Research and
development expenses increased $1.5 million, or 27%, from
$5.5 million in 2004 to $7.0 million in 2005. These
expenses represented 29% and 20% of total revenue in 2004 and
2005, respectively. Of the increase, $689,000 was for salaries
and benefits as headcount increased from 24 employees at
June 30, 2004 to 37 employees at June 30, 2005.
Professional services, recruiting, engineering costs and
software usage fees accounted for $417,000, $165,000, $145,000
and $136,000, respectively, of the increase.
Sales and marketing.
Sales and marketing
expenses increased $2.0 million, or 26%, from
$8.0 million in 2004 to $10.0 million in 2005. These
expenses represented 43% and 28% of total revenue in 2004 and
2005, respectively. Of the increase, $796,000 was for salaries,
sales commissions and benefits as headcount increased from 26
employees at June 30, 2004 to 34 employees at June 30,
2005. Promotional and lead generation programs, professional
services and travel accounted for $995,000 and $208,000,
respectively, of the increase.
General and administrative.
General and
administrative expenses increased $879,000, or 41%, from
$2.2 million in 2004 to $3.1 million in 2005. These
expenses represented 11% and 8% of total revenue in 2004 and
2005, respectively. Of the increase, $362,000 was for salaries
and benefits as headcount increased from 10 employees at
June 30, 2004 to 14 employees at June 30, 2005.
Professional services, travel and bad debt expense
38
accounted for $316,000, $215,000 and $176,000, respectively, of
the increase. This was offset by reductions in various other
expenses, including depreciation.
Other income (expense).
Other income (expense)
increased from $(7,000) in 2004 to $124,000 in 2005. The
increase is primarily due to increases in interest income and
other income of $128,000 and $2,000, respectively. In 2004,
interest expense on borrowings of $22,000 exceeded interest and
other income.
Provision for income taxes.
The provision for
income taxes increased $11,000 from $0 in 2004 to $11,000 in
2005.
Quarterly
Results of Operations
The following table sets forth our unaudited quarterly condensed
consolidated statement of operations data in dollars and as a
percentage of total revenue for each of our last five quarters
in the period ended September 30, 2006. The quarterly data
presented below have been prepared on a basis consistent with
the audited consolidated financial statements included elsewhere
in this prospectus, and in the opinion of management reflect all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of this information. You
should read this information together with our consolidated
financial statements and related notes included elsewhere in
this prospectus. Our quarterly results of operations may
fluctuate in the future due to a variety of factors. As a
result, comparing our operating results on a
period-to-period
basis may not be meaningful. Our results for these quarterly
periods are not necessarily indicative of the results of
operations for a full year or any future period.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
10,000
|
|
|
$
|
13,498
|
|
|
$
|
14,474
|
|
|
$
|
17,328
|
|
|
$
|
18,467
|
|
Support and services
|
|
|
1,214
|
|
|
|
1,219
|
|
|
|
2,119
|
|
|
|
1,756
|
|
|
|
1,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
11,214
|
|
|
|
14,717
|
|
|
|
16,593
|
|
|
|
19,084
|
|
|
|
20,415
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product(1)
|
|
|
4,044
|
|
|
|
5,668
|
|
|
|
6,011
|
|
|
|
6,132
|
|
|
|
6,507
|
|
Support and services(1)
|
|
|
1,078
|
|
|
|
1,109
|
|
|
|
1,755
|
|
|
|
1,483
|
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
5,122
|
|
|
|
6,777
|
|
|
|
7,766
|
|
|
|
7,615
|
|
|
|
7,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,092
|
|
|
|
7,940
|
|
|
|
8,827
|
|
|
|
11,469
|
|
|
|
12,463
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
2,051
|
|
|
|
2,083
|
|
|
|
2,386
|
|
|
|
3,200
|
|
|
|
3,117
|
|
Sales and marketing(1)
|
|
|
3,067
|
|
|
|
3,873
|
|
|
|
3,916
|
|
|
|
4,843
|
|
|
|
5,677
|
|
General and administrative(1)
|
|
|
875
|
|
|
|
995
|
|
|
|
1,238
|
|
|
|
1,828
|
|
|
|
2,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,993
|
|
|
|
6,951
|
|
|
|
7,540
|
|
|
|
9,871
|
|
|
|
11,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
99
|
|
|
|
989
|
|
|
|
1,287
|
|
|
|
1,598
|
|
|
|
1,096
|
|
Other income net
|
|
|
30
|
|
|
|
6
|
|
|
|
61
|
|
|
|
151
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
tax
|
|
|
129
|
|
|
|
995
|
|
|
|
1,348
|
|
|
|
1,749
|
|
|
|
1,253
|
|
Provision for income tax
|
|
|
(13
|
)
|
|
|
(51
|
)
|
|
|
(76
|
)
|
|
|
(79
|
)
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
116
|
|
|
$
|
944
|
|
|
$
|
1,272
|
|
|
$
|
1,670
|
|
|
$
|
1,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share available to
common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based
compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
Cost of support and services
revenue
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
5
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
8
|
|
|
|
17
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
5
|
|
|
|
97
|
|
General and administrative
|
|
|
9
|
|
|
|
13
|
|
|
|
2
|
|
|
|
21
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
23
|
|
|
$
|
13
|
|
|
$
|
10
|
|
|
$
|
36
|
|
|
$
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
As a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
89
|
%
|
|
|
92
|
%
|
|
|
87
|
%
|
|
|
91
|
%
|
|
|
90
|
%
|
Support and services
|
|
|
11
|
|
|
|
8
|
|
|
|
13
|
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
36
|
|
|
|
39
|
|
|
|
36
|
|
|
|
32
|
|
|
|
32
|
|
Support and services
|
|
|
10
|
|
|
|
7
|
|
|
|
11
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
46
|
|
|
|
46
|
|
|
|
47
|
|
|
|
40
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
54
|
|
|
|
54
|
|
|
|
53
|
|
|
|
60
|
|
|
|
61
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
18
|
|
|
|
14
|
|
|
|
14
|
|
|
|
17
|
|
|
|
15
|
|
Sales and marketing
|
|
|
27
|
|
|
|
26
|
|
|
|
24
|
|
|
|
25
|
|
|
|
28
|
|
General and administrative
|
|
|
8
|
|
|
|
7
|
|
|
|
7
|
|
|
|
10
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
53
|
|
|
|
47
|
|
|
|
45
|
|
|
|
52
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1
|
|
|
|
7
|
|
|
|
8
|
|
|
|
8
|
|
|
|
5
|
|
Other income net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
tax
|
|
|
1
|
|
|
|
7
|
|
|
|
8
|
|
|
|
9
|
|
|
|
6
|
|
Provision for income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1
|
%
|
|
|
7
|
%
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue has increased sequentially in each of the quarters
presented due to increased sales of our products and an increase
in the number of channel partners and company sales staff and
additional products sold to new and existing enterprise
customers. Because of the rapid growth of our revenue, we have
not yet experienced the effects of seasonality on a
quarter-to-quarter
basis, but we expect that, over the longer term, we will
experience seasonally reduced activity in the first and third
quarters of each calendar year, as is the case with comparable
companies in our industry. Support and services revenue and
related cost of support and services revenue in the quarter
ended March 31, 2006 increased due to installation revenue
associated with one large sale. Product gross margins improved
in the quarter ended June 30, 2006 primarily as a result of
newly introduced hardware products that have higher margins than
products that were replaced. Operating expenses increased
sequentially in each of the quarters presented as we continued
to add personnel and related costs to accommodate our growth. We
have invested substantially in research and development in
recent quarters as we believe technology leadership is an
important element to our continued growth. Starting largely in
the quarter ended June 30, 2006 we also increased general
and administrative spending in information technology systems,
outside audit and Sarbanes-Oxley-related consulting services. In
addition, general and administrative expenses for the quarter
ended September 30, 2006 included $699,000 of non-cash
stock-based compensation associated with an outstanding option
granted prior to the adoption of SFAS 123(R) that is
subject to variable accounting.
Liquidity
and Capital Resources
As of September 30, 2006, our principal sources of
liquidity consisted of cash and cash equivalents of
$13.3 million and accounts receivable of
$13.9 million. Our primary sources of cash historically
have been proceeds from the issuance of redeemable convertible
preferred stock and payments for our products and services. From
June 1998 through October 2004, we issued redeemable convertible
preferred stock with aggregate net proceeds of
$101.3 million. We have a $12.0 million line of credit
with Silicon Valley Bank, which has a borrowing base equal to
80% of the amount of eligible accounts receivable plus 25% of
the value of eligible inventory. Interest will accrue on any
outstanding borrowings under the line of credit at a rate equal
to the prime rate in effect plus 0.5% per annum,
41
except the rate will be equal to the prime rate plus
1.5% per annum if our adjusted quick ratio is less than 1.5
to 1.0. At September 30, 2006, no balance was outstanding
under the line of credit. The line of credit is secured by
substantially all of our assets, and contains a financial
covenant requiring us to maintain a tangible net worth of not
less than $5.0 million. As of September 30, 2006, we
were in compliance with all related financial covenants and
restrictions. The line of credit terminates on June 26,
2007.
Our principal uses of cash historically have consisted of the
purchase of finished goods inventory from our contract
manufacturers, payroll and other operating expenses and
purchases of property and equipment to support employee needs
and the development of new products.
We believe that our $13.3 million of cash and cash
equivalents at September 30, 2006, together with cash flows
from our operations and the net proceeds from this offering,
will be sufficient to fund our operating requirements for at
least 12 months. However, we may need to raise additional
capital or incur indebtedness to continue to fund our operations
in the future. Our future capital requirements will depend on
many factors, including our rate of revenue growth, the
expansion of our sales and marketing activities, the timing and
extent of our expansion into new territories, the timing of
introductions of new products and enhancements to existing
products, and the continuing market acceptance of our products.
We may enter into agreements relating to potential investments
in, or acquisitions of, complementary businesses or technologies
in the future, which could also require us to seek additional
equity or debt financing. Additional funds may not be available
on terms favorable to us or at all.
The following table shows our cash flows from operating
activities, investing activities and financing activities for
the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash provided by (used in)
operating activities
|
|
$
|
(5,392
|
)
|
|
$
|
(4,957
|
)
|
|
$
|
7,266
|
|
|
$
|
(1,091
|
)
|
|
$
|
1,384
|
|
Cash used in investing activities
|
|
|
(653
|
)
|
|
|
(590
|
)
|
|
|
(1,293
|
)
|
|
|
(174
|
)
|
|
|
(508
|
)
|
Cash provided by financing
activities
|
|
|
3,317
|
|
|
|
10,197
|
|
|
|
987
|
|
|
|
1,158
|
|
|
|
81
|
|
Cash
flows from operating activities
Our cash flows from operating activities are significantly
influenced by our cash expenditures to support the growth of our
business in operating expense areas such as research and
development, sales and marketing and administration. Our
operating cash flows are also influenced by our working capital
needs to support growth and fluctuations in inventory, accounts
receivable, vendor accounts payable and other current assets and
liabilities. We procure finished goods inventory from our
contract manufacturers and typically pay them in 30 days.
We extend credit to our channel partners and typically collect
in 50 to 60 days. We also prepay for license rights to
third-party products in advance of sales.
Net cash provided by (used in) operating activities was
($1.1) million and $1.4 million in the three months
ended September 30, 2005 and September 30, 2006,
respectively. Net cash used in operating activities in the three
months ended September 30, 2005 consisted primarily of net
income of $116,000, depreciation and amortization expense of
$142,000 and a use of $1.4 million related to net changes
in operating assets and liabilities. Of this $1.4 million,
inventory increased by $1.5 million largely as a result of
units shipped in the quarter being below the forecasted
quantities. Net cash provided by operating activities in the
three months ended September 30, 2006 consisted primarily
of net income of $1.0 million, stock compensation expense
of $822,000, depreciation and amortization expense of $236,000
and a use of $720,000 related to net changes in operating assets
and liabilities. Of this $720,000, accounts receivable increased
$2.4 million as a result of increased revenue and increased
average days to collect. Accrued liabilities and accrued
employee compensation decreased $786,000, largely due to the
payment to employees of bonuses earned for the six months ended
June 30, 2006. Offsetting these uses of working capital
were sources of cash provided by increased accounts payable of
$1.3 million and deferred support revenue of
$1.2 million.
42
Net cash provided by (used in) operating activities was
($5.4) million, ($5.0) million and $7.3 million
in 2004, 2005 and 2006, respectively. Net cash used in operating
activities in 2004 primarily consisted of net losses of
$6.3 million, reduced by depreciation and amortization
expense of $721,000 in 2004, and accounts receivable increase of
$2.8 million primarily related to revenue growth. This
increase in accounts receivable was largely offset by sources of
cash provided by increased accounts payable of $1.2 million
and deferred support revenue of $1.2 million. Net cash used
in operating activities in 2005 primarily consisted of net
losses of $1.4 million, reduced by depreciation and
amortization expense of $592,000 and a use of $4.2 million
related to net changes in operating assets and liabilities. Of
this $4.2 million, the increased accounts receivable and
inventory were $4.5 million and $3.5 million,
respectively. These increases were partially offset by cash
provided due to increased accounts payable of $1.0 million
and payments for deferred support contracts of
$2.8 million. Net cash provided by operating activities in
2006 primarily consisted of net income of $4.0 million,
depreciation and amortization expense of $716,000 and an
increase of $2.3 million related to net changes in
operating assets and liabilities. Of this $2.3 million, the
primary sources of cash were $1.9 million increase to
accrued employee compensation, largely employee bonuses relating
to company performance achievements in the three months ended
March 31 and June 30, 2006, increased deferred revenue
relating to support contracts of $1.5 million and increased
accounts payable of $809,000.
Cash
flows from investing activities
Cash flows from investing activities primarily relate to capital
expenditures to support our growth.
Net cash used in investing activities in the three months ended
September 30, 2005 was $174,000 for capital expenditures.
Net cash used in investing activities in the three months ended
September 30, 2006 was $508,000 for capital expenditures,
primarily related to manufacturing tooling for the production of
our hardware products, and to computer equipment for our
research and development lab and to support our growth in
company headcount. We expect additional capital expenditures of
approximately $1.5 million for the remainder of fiscal year
2007. The operating lease for our headquarters office expires in
September 2007. We anticipate negotiating a new lease in the
upcoming months for a larger headquarters facility and may incur
capital expenditures in conjunction with it. Our requirements
for additional capital expenditures are subject to change
depending upon industry conditions.
Net cash used in investing activities was $653,000, $590,000 and
$1.3 million in 2004, 2005 and 2006, respectively. Net cash
used in investing activities in 2004 was for capital
expenditures, primarily related to manufacturing tooling for
production of our hardware products. Net cash used in investing
activities in 2005 was for capital expenditures, primarily
related to computer equipment to support our growth in
headcount. Net cash used in investing activities in 2006 was for
capital expenditures, primarily related to computer equipment to
support our growth in headcount and to manufacturing tooling for
production of our hardware products.
Cash
flows from financing activities
Net cash provided by financing activities was $1.2 million
and $81,000 in the three months ended September 30, 2005
and September 30, 2006, respectively. In the three months
ended September 30, 2005, we borrowed $1.0 million
under our line of credit and generated $159,000 cash from the
exercise of stock options. In the three months ended
September 30, 2006, we generated $70,000 from the exercise
of stock options and $12,000 from the repayment of shareholder
notes issued in connection with stock option exercises.
Net cash provided by financing activities was $3.3 million,
$10.2 million and $1.0 million in 2004, 2005 and 2006
respectively. In 2004, we issued Series G redeemable
convertible preferred stock for net proceeds of
$3.4 million and made capital lease payments of $142,000.
In 2005, we issued Series H redeemable convertible
preferred stock for net proceeds of $9.9 million and
received $222,000 from the repayment of shareholder notes issued
in connection with stock option exercises. In 2006, we generated
$1.0 million from the exercise of stock options.
43
Contractual
Obligations
The following is a summary of our contractual obligations as of
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations
|
|
$
|
898
|
|
|
$
|
712
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
Purchase obligations(1)
|
|
|
7,120
|
|
|
|
7,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,018
|
|
|
$
|
7,832
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Purchase obligations represent commitments under non-cancelable
orders for finished goods inventory with our contract
manufacturers. At September 30, 2006, our purchase
obligations increased by $942,000 as a result of increased sales.
|
We anticipate entering into a new lease for a larger
headquarters facility prior to the expiration of our
headquarters lease in September 2007. As a result, we anticipate
that we will have increased operating lease obligations over a
longer period than currently reflected in the table above.
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.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America, or GAAP. These accounting principles require
us to make certain estimates and judgments that can affect the
reported amounts of assets and liabilities as of the dates of
the consolidated financial statements, the disclosure of
contingencies as of the dates of the consolidated financial
statements, and the reported amounts of revenue and expenses
during the periods presented. Although we believe that our
judgments and estimates are reasonable under the circumstances,
actual results may differ from those estimates.
We believe the following to be our critical accounting policies
because they are important to the portrayal of our financial
condition and results of operations and they require critical
management judgments and estimates about matters that are
uncertain:
|
|
|
|
|
Revenue recognition;
|
|
|
|
Allowance for doubtful accounts;
|
|
|
|
Stock-based compensation;
|
|
|
|
Inventory valuation; and
|
|
|
|
Accounting for income taxes.
|
If actual results or events differ materially from those
contemplated by us in making these estimates, our reported
financial condition and results of operations for future periods
could be materially affected. See Risk Factors for
certain matters that may affect our future financial condition
or results of operations.
44
Revenue
Recognition
Product
Revenue
Our software is integrated with our hardware and is essential to
the functionality of the integrated system product. Product
sales generally include a perpetual license to our software. We
recognize revenue for these sales in accordance with Statement
of Position (SOP)
No. 97-2,
Software Revenue Recognition
, or Staff Accounting
Bulletin (SAB) No. 104,
Revenue Recognition in Financial
Statements
, as applicable, depending on whether the hardware
is sold in a multiple-element arrangement with software and
post-contractual support or on a standalone basis if the
enterprise customer purchases hardware, software, or maintenance
support separately. For the initial sale, we generally bundle
together the hardware, software, and post-contractual support
contracts with terms of up to five years. Thereafter, if the
enterprise customer increases the number of end user deployments
and/or
functionality, it may add more hardware, software, and related
post-contractual support by purchasing them separately. We have
established vendor-specific objective evidence, or VSOE, of fair
value for post-contractual support and other undelivered
elements as noted below.
We recognize product revenue when persuasive evidence of an
arrangement exists, product has shipped or delivery has occurred
(depending on when title passes), the sales price is fixed or
determinable and free of contingencies and significant
uncertainties, and collection is probable. Our fee is considered
fixed or determinable at the execution of an agreement, based on
specific products and quantities to be delivered at specified
prices. Our agreements generally do not include rights of return
or acceptance provisions. To the extent that our agreements
contain such terms, we recognize revenue once the acceptance
provisions have been met or the right of return lapses. We
maintain a reserve for sales returns based on historical
experience. Payment terms generally range from net 30 to net
60 days. In the event payment terms are extended materially
from our standard business practices, the fees are deemed to not
be fixed or determinable and revenue is recognized when the
payments become due. We assess the ability to collect from
channel partners based on a number of factors, including
creditworthiness and past transaction history. If the channel
partner is not deemed creditworthy, we defer all revenue from
the arrangement until payment is received and all other revenue
recognition criteria have been met. Shipping charges are
included in product revenue and the related shipping costs are
included in cost of product revenue.
We monitor and analyze the accuracy of sales returns estimates
by reviewing actual returns and adjust it for future
expectations to determine the adequacy of our current and future
reserve needs. If actual future returns and allowances differ
from past experience and expectation, additional allowances may
be required.
We have arrangements with channel partners to reimburse them for
cooperative marketing costs meeting specified criteria. In
accordance with EITF Issue
No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(including a Reseller of the Vendors Products)
, we
record advertising costs meeting such specified criteria within
sales and marketing expenses in the accompanying consolidated
statements of operations. For those advertising costs that do
not meet the criteria set forth in EITF Issue
No. 01-9,
the amounts are recorded as a reduction to product revenue.
Post-Contractual
Support
Our support and services revenue is primarily derived from
post-contractual support. We account for post-contractual
support revenue based on
SOP 97-2,
which states that if an arrangement includes multiple elements,
the fee should be allocated to the various elements based on
VSOE of fair value, regardless of any separate prices stated
within the contract for each element. VSOE of fair value is
limited to the price charged when the same element is sold
separately. VSOE is established for support through prior
renewals of post-contractual support contracts, which
establishes a price which is based on a standalone sale.
We use the residual method, as allowed by
SOP No. 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition With Respect to Certain
Transactions,
to determine the amount of product revenue to
be recognized. Under the residual method, the fair value of the
undelivered elements, such as post-contractual support,
installation services and training, are deferred and the
remaining portion of the sales amount is recognized as product
revenue. The fair value of the support and services is
recognized as support and services revenue on a straight-line
basis over the term of the related support period, which can be
up to five years in length.
45
Installation
and training
Installation services are sold on an elective basis. Channel
partners or enterprise customers generally perform installations
without our involvement, so we do not recognize substantial
revenue from installation services. As installation is typically
performed by the channel partner or enterprise customer, it is
not considered essential to the functionality of the delivered
elements. Installation is generally priced at established rates
based on estimated hours to install our systems. Training
services are also sold on an elective basis, both to channel
partners and to enterprise customers, and is purchased both with
system orders and on a standalone basis. VSOE of fair value is
established for training through sales made independent of a
bundled order. We recognize revenue related to installation
services and training upon delivery of the service.
Allowance
for Doubtful Accounts
We review our allowance for doubtful accounts on a quarterly
basis by assessing individual accounts receivable that
materially exceed due dates. Risk assessment for these accounts
includes historical collections experience with the specific
account and with our similarly situated accounts coupled with
other related credit factors that may evidence a risk of default
and loss to us. Accordingly, the amount of this allowance will
fluctuate based upon changes in revenue levels, collection of
specific balances in accounts receivable and estimated changes
in channel partner credit quality or likelihood of collection.
If the financial condition of our channel partners were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. The allowance
for doubtful accounts represents managements best
estimate, but changes in circumstances, including unforeseen
declines in market conditions and collection rates, may result
in additional allowances in the future or reductions in
allowances due to future recoveries.
Stock-Based
Compensation
Prior to July 1, 2006, we accounted for employee stock
options using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25,
Accounting
for Stock Issued to Employees
, or APB 25, and Financial
Accounting Standards Board Interpretation No. (FIN) 44,
Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB No. 25
, and had
adopted the disclosure only provisions of Statement of Financial
Accounting Standards, or SFAS No. 123,
Accounting
for Stock-Based Compensation
, or SFAS 123, and
SFAS No. 148,
Accounting for Stock-Based
Compensation Transition and Disclosure
, or
SFAS 148.
In accordance with APB 25, stock-based compensation
expense, which is a non-cash charge, resulted from stock option
grants at exercise prices that, for financial reporting
purposes, were deemed to be below the estimated fair value of
the underlying common stock on the date of grant.
Effective July 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123(revised 2004),
Share-Based Payment
, or SFAS 123(R), using the
prospective transition method, which requires us to apply the
provisions of SFAS 123(R) only to awards newly granted,
modified, repurchased or cancelled, after the adoption date.
Under this transition method, our stock-based compensation
expense recognized beginning July 1, 2006 is based on the
grant date fair value of stock option awards we grant or modify
after July 1, 2006. We recognize this expense on a
straight-line basis over the options expected vesting
terms. We estimated the grant date fair value of stock option
awards under the provisions of SFAS 123(R) using the
Black-Scholes option valuation model with the following
assumptions:
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
September 30, 2006
|
|
|
Expected life
|
|
|
6.08 years
|
|
Interest rate range
|
|
|
4.8
|
%
|
Volatility
|
|
|
68
|
%
|
Dividend yield
|
|
|
0
|
%
|
During the three months ended September 30, 2006, we
recorded non-cash stock-based compensation expense of $100,000
under SFAS 123(R). In future periods, stock-based
compensation expense is expected to increase as we issue
additional equity-based awards to continue to attract and retain
key employees. Additionally, SFAS 123(R) requires that we
recognize compensation expense only for the portion of stock
options that are expected to vest, assuming an expected
forfeiture rate in determining stock-based compensation expense,
which could affect the stock-based compensation expense recorded
if there is a significant difference between actual and
estimated
46
forfeiture rates. Our estimated forfeiture rate in the three
months ended September 30, 2006 was 13%. As of
September 30, 2006, total unrecognized compensation cost
related to stock-based awards granted to employees and
non-employee directors was $995,000, net of estimated
forfeitures of $319,000. This cost will be amortized on a
straight-line basis over a weighted-average period of
approximately four years. As a result of adopting
SFAS 123(R) on July 1, 2006, our net income for the
three months ended September 30, 2006, was $64,000 lower
than if we had continued to account for stock-based compensation
under APB 25. Basic and diluted net income per share for
the three months ended September 30, 2006 are no different
than if we had continued to account for stock-based compensation
under APB 25.
Inventory
Valuation
Inventories consist principally of finished goods and are stated
at the lower of cost or market value, with cost being determined
under a standard cost method that approximates
first-in,
first out. A small portion of our inventory also relates to
evaluation units located at enterprise customer locations and
service inventory. Inventory valuation reserves are established
to reduce the carrying amounts of our inventories to their net
estimated realizable values. Inventory valuation reserves are
based on historical usage, expected demand and, with respect to
evaluation units, conversion rate and age. Inherent in our
estimates of market value in determining inventory valuation
reserves are estimates related to economic trends, future demand
for our products and technological obsolescence of our products.
If future demand or market conditions are less favorable than
our projections, additional inventory valuation reserves could
be required and would be reflected in cost of product revenue in
the period in which the reserves are taken. Inventory valuation
reserves were $495,000, $598,000 and $685,000 as of
June 30, 2005, June 30, 2006 and September 30,
2006, respectively. Once a reserve is established, it is
maintained until the unit to which it relates is sold or
scrapped. The reduced costs associated with the revenue from
this unit results in an increase in gross profit and gross
margin.
Accounting
for Income Taxes
We account for income taxes using an asset and liability
approach, in accordance with SFAS No. 109,
Accounting for Income Taxes
, which requires recognition
of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in our
financial statements, but have not been reflected in our taxable
income. A valuation allowance is established to reduce deferred
tax assets to their estimated realizable value. Therefore, we
provide a valuation allowance to the extent we do not believe it
is more likely than not that we will generate sufficient taxable
income in future periods to realize the benefit of our deferred
tax assets. To date, as a result of our uncertainty regarding
the realizability of our deferred tax assets, consisting
principally of net operating loss and tax credit carryforwards,
we have recorded a 100% valuation allowance.
At June 30, 2006, we had $84.4 million and
$44.6 million of net operating loss carryforwards for
federal and state purposes, respectively. Net operating loss
carryforwards will begin to expire in 2017 and 2007 for federal
and California purposes, respectively. As part of the process of
preparing our consolidated financial statements, we are required
to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves estimating our actual
current tax exposure, including assessing the risks associated
with tax audits, and assessing temporary differences resulting
from different treatment of items for tax and accounting
purposes. The ability to maintain our current effective tax rate
is contingent upon existing tax laws in both the U.S. and the
respective countries in which our international subsidiaries are
located, and the availability of our net operating loss and tax
credit carryforwards.
We believe we have had multiple ownership changes as defined
under Section 382 of the Internal Revenue Code and we are
currently analyzing these ownership changes to determine the
limitations on our ability to utilize our net operating loss and
tax credit carryforwards under Sections 382 and 383 of the
Internal Revenue Code in future periods due to significant stock
transactions in previous years, which may limit the future
realization of our net operating losses and tax credits. Based
on estimates prepared to date, we believe the provisions of
Section 382 could result in the forfeiture of up to
$72 million of net operating losses for U.S. federal income
tax purposes. We believe there could also be an impact on our
ability to utilize California net operating loss carryforwards
as well. As our analysis is incomplete, these estimates are
uncertain.
As of June 30, 2006, we had research and development tax
credit carryforwards of approximately $2.5 million and
$2.8 million, which can be used to reduce future federal
and California income taxes, respectively. Federal
47
research and development tax credit carryforwards will expire
beginning in fiscal 2012 through 2026. California research and
development tax credits will carry forward indefinitely. In
addition, a portion of the federal research tax credit
carryforwards may be subject to forfeiture due to
Section 383 limitations. We are in the process of
determining the impact of Section 383 on the tax credit
carryforwards. As our analysis is incomplete, these estimates
are uncertain.
Recent
Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 154,
Accounting Changes and Error
Corrections
(SFAS 154) that replaces
Accounting Principals Board Opinions No. 20
Accounting
Changes
and SFAS No. 3,
Reporting Accounting
Changes in Interim Financial Statements An Amendment
of APB Opinion No 28
. SFAS 154 provides guidance on the
accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the
latest practicable date, as the required method for reporting a
change in accounting principle and the reporting of a correction
of an error. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005.
In June 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 applies to all tax
positions within the scope of FASB Statement No. 109,
applies a more likely than not threshold for tax
benefit recognition, identifies a defined methodology for
measuring benefits and increases the disclosure requirements for
companies. FIN 48 is mandatory for years beginning after
December 15, 2006. We are currently in the process of
evaluating the effects of this new accounting standard.
In September 2006, the SEC issued Staff Accounting Bulletin
(SAB) No. 108 regarding the process of
quantifying financial statement misstatements.
SAB No. 108 states that registrants should use both a
balance sheet approach and an income statement approach when
quantifying and evaluating materiality of a misstatement. The
interpretations in SAB No. 108 contain guidance on
correcting errors under the dual approach as well as provide
transition guidance for correcting errors. This interpretation
does not change the requirements within SFAS No. 154
for the correction of an error in financial statements.
SAB No. 108 is effective for annual financial
statements covering the first fiscal year ending after
November 15, 2006. We will be required to adopt this
interpretation in fiscal year 2007.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). This Statement defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or
permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is
the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. This statement
is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. We do not expect the adoption of
SFAS No. 157 in 2008 to have a material impact on our
results of operations or financial position.
Quantitative
and Qualitative Disclosures about Market Risk
Interest
Rate Risk
As of September 30, 2006, we had cash and cash equivalents
of $13.3 million, which consisted of highly liquid money
market instruments with original maturities of three months or
less. Because of the short-term nature of these instruments, a
sudden change in market interest rates would not be expected to
have a material effect on our financial condition or results of
operations.
Foreign
Currency Risk
As we expand, we expect that many of our international
enterprise customers will be invoiced in foreign currencies and
our international sales and marketing operations will incur
expenses that are denominated in foreign currencies. These
revenues and expenses could be materially affected by currency
fluctuations. Changes in currency exchange rates could adversely
affect our consolidated results of operations or financial
position. Additionally, our international sales and marketing
operations maintain cash balances denominated in foreign
currencies. As a result, we could incur unanticipated
translation gains and losses. To date, the foreign currency
effect on our cash and cash equivalents has been immaterial and
we have not hedged our exposure to changes in foreign currency
exchange rates.
48
BUSINESS
Overview
We are a leading provider of IP telecommunications systems for
enterprises. Our systems are based on our distributed software
architecture and switch-based hardware platform which enable
multi-site enterprises to be served by a single
telecommunications system. Our systems enable a single point of
management, easy installation and a high degree of scalability
and reliability, and provide end users with a consistent, full
suite of features across the enterprise, regardless of location.
As a result, we believe our systems enable enhanced end user
productivity and provide lower total cost of ownership and
higher customer satisfaction than alternative systems.
Our solution is comprised of ShoreGear switches, ShorePhone IP
phones and ShoreWare software applications. We provide our
systems to enterprises across all industries, including to
small, medium and large companies and public institutions. Our
enterprise customers include multi-site Fortune
500 companies with tens of thousands of employees. To date,
we have sold our IP telecommunications systems to over 4,000
enterprise customers, including CNET Networks, Robert Half
International and the City of Oakland, California. We sell our
systems through our extensive network of approximately 400
channel partners.
We have achieved broad industry recognition for our technology
and high customer satisfaction. Our enterprise IP
telecommunications systems received PC Magazines Best of
the Year 2005 Editors Choice designation. For the last
three years, IT executives surveyed by Nemertes Research, an
independent research firm, have rated ShoreTel highest in
customer satisfaction among leading enterprise
telecommunications systems providers.
Industry
Background
Enterprises have historically operated separate networks for
voice and data communications which resulted in significant
complexity and high cost. Multi-site enterprises typically
operated separate telecommunications systems at each of their
sites that often were difficult to install and manage. These
systems also required significant additional investments to
scale and did not enable delivery of a uniform set of features
and functions across all sites. Enterprises are increasingly
migrating to a single IP network for both voice and data
communications to reduce costs and network complexity and
increase end user productivity. This migration has created a
significant market opportunity for enterprise IP
telecommunications systems providers. Gartner, Inc., an
independent research firm, estimates that worldwide enterprise
telephony systems equipment end user revenue was
$17.2 billion in 2006, including legacy TDM PBX/KTS
equipment,
IP-enabled
PBX equipment and
IP-PBX
equipment. According to Gartner, the
IP-PBX
market was estimated to have been $3.9 billion in 2006 and
is expected to grow to $7.9 billion by 2010, which
represents a 19.1% compound annual growth rate. We refer to the
TDM PBX/KTS equipment as TDM systems,
IP-enabled
PBX equipment as hybrid systems, and
IP-PBX
equipment as IP systems.
Multi-site enterprises typically have deployed one of three
primary types of telecommunications systems: TDM systems, hybrid
systems or IP systems, which include server-centric and
switch-based systems. These systems are comprised of multiple
phones that are independently connected to a switch within the
enterprise, called the private branch exchange, or PBX. This
switch aggregates the calls from these phones and transports
them across the telecommunications network. In evaluating
telecommunications systems, enterprises consider several
factors, including: cost, scalability, reliability, ease of use,
functionality, ease of management and installation and ability
to integrate with existing applications.
Challenges
of TDM-based enterprise telecommunications systems
Developed in the 1980s, TDM systems require a dedicated
voice network that consists of circuits and phones, as well as a
separate PBX switch for each office site, which results in a
series of standalone telecommunications systems within a single
enterprise. These multiple independent systems are connected by
private, dedicated lines. Although enterprises can scale their
TDM systems by adding switches, the associated installation and
integration costs and on-going management and maintenance costs
are usually significant. Enterprises deploying TDM systems
typically also incur other telecommunications services expenses,
such as costs associated with dedicated circuits
49
and service charges. As a result of these characteristics, TDM
systems are complicated and costly to install, upgrade, scale,
manage and maintain. In addition, because these systems operate
on dedicated voice networks, independent of the data network, an
enterprise cannot integrate its voice applications, such as
voicemail, fax, end user presence and outbound call initiation
and handling, with software that operates on its data network,
such as customer relationship management applications.
Challenges
of hybrid enterprise telecommunications systems
In an effort to address some of the limitations of TDM systems
and to extend the life of their existing telecommunications
infrastructure, some enterprises implement hybrid systems. A
hybrid system is a modification of a TDM system that supports IP
phones and enables voice signals to be sent as IP packets over
data networks, such as local area networks, or LANs, and wide
area networks, or WANs, instead of dedicated TDM lines. Although
hybrid system technology enables enterprises to migrate some of
their existing TDM infrastructure to an
IP-based
system, all switching is still accomplished with the TDM
infrastructure. Thus, a hybrid system suffers from some of the
same disadvantages of a TDM system. In addition, hybrid systems
require enterprises to maintain two telecommunications systems,
further increasing management complexity and cost and leading to
inconsistent features for end users across the enterprise.
Accordingly, we believe increased operating costs associated
with maintaining two networks typically outweigh the short-term
capital savings realized from implementing a hybrid system. In
order to achieve the full benefits of a converged voice and data
network, enterprises will ultimately need to implement an all-IP
telecommunications system.
Challenges
of server-centric enterprise IP telecommunications
systems
Server-centric IP systems seek to address the limitations of TDM
and hybrid systems by allowing enterprises to combine their
voice and data networks into a single IP network. Some vendors
offer server-centric enterprise IP telecommunications systems
that rely on servers and routers with IP telecommunications
modules for call management and applications. These systems
typically have a centralized software architecture and require
system management to be performed on a
site-by-site
basis. Although the management and control of these systems can
be carried out from a single computer, management often must be
performed on an
application-by-application
basis. In addition, these systems also run on operating systems
that were not optimized for real-time voice processing which can
result in lower reliability and decreased performance. Most
applications require a dedicated server to run on these systems,
increasing the cost and complexity of adding applications to the
existing network. In addition, server-centric IP systems can be
costly to scale because significant additional equipment is
often required to accommodate growth while maintaining adequate
redundancy. Server-centric IP systems also tend to be less
reliable because they require mechanical disk drives to be
available for placing and receiving calls. Further, to achieve
higher reliability, server-centric IP systems typically maintain
a backup server for each primary server, which increases the
cost and complexity of the enterprises entire
telecommunications system.
The
Opportunity
Because of the limitations of TDM, hybrid and server-centric IP
systems, we believe enterprises need an
IP-based
telecommunications system that provides management of the entire
system using a single software application from any computer, is
easy to install and use, provides scalability and reliability,
provides end users with a consistent, full suite of features
across the enterprise, regardless of location, and has a low
total cost of ownership.
Our
Solution
We provide switch-based IP telecommunications systems for
enterprises that address the limitations of TDM, hybrid and
server-centric IP systems. Our systems consist of our ShoreGear
switches, ShorePhone IP phones and ShoreWare software
applications, all based on our proprietary distributed software
architecture and switch-based hardware platform. In contrast to
server-centric IP systems, our switch-based hardware platform
uses flash memory and an embedded operating system, which
minimizes the use of expensive servers. As such, our solution is
designed to provide a more reliable, secure and scalable system.
Our proprietary software applications are distributed across
50
each site of an enterprise, providing end users with a
consistent, full suite of features across the enterprise,
regardless of location. Our Personal Call Manager and other
desktop applications are easy to use and enable improved end
user productivity. Our browser-based system management provides
enterprises with a single point of management, enabling IT
administrators to view and manage the entire telecommunications
system of the enterprise using a single application at any
location. Through our distributed software architecture and
innovative switch design, we believe our system provides
scalability and reliability, a single point of management, is
easy to install and use and provides end users with a
consistent, full suite of features across the enterprise,
regardless of location, all for a low total cost of ownership.
Benefits
of our distributed software architecture and switch-based
hardware platform
As a result of our distributed software architecture and
switch-based hardware platform, we provide enterprise customers
with a number of key benefits, including:
Ease of use.
We provide a wide range of
innovative, high performance phones that we combine with our
feature-rich desktop software application, Personal Call
Manager. Personal Call Manager allows end users to control their
phones from their PCs, regardless of their location and
integrates with enterprise software applications, such as
Microsoft Outlook and salesforce.com. With the click of a mouse,
the end user can make phone calls from contact lists, convene
and manage participation in conference calls, listen to
voicemail and check the availability of others on the network.
Ease of installation and management.
Our
systems are easy to install as a result of our proprietary
installation software, which automatically recognizes and
configures the elements of our solution as they are added to the
systems. Our systems also feature a single point of management
with a simple, intuitive interface that allows IT managers to
modify their systems from anywhere through a web browser, which
reduces administrative complexity, resulting in reduced IT
management costs for enterprises. As a result of our
architecture, we believe our systems are also easier to install
and manage because they require fewer hardware elements than
alternative systems.
Scalability.
We believe our distributed
software architecture and the modular design of our system
hardware allow enterprises to incrementally scale our systems
more cost-effectively than alternative systems, which can
require replacement of substantial amounts of system equipment
to increase capacity. In contrast, all of the investment an
enterprise customer makes in our systems will continue to
operate as their implementation of our systems expand to support
their growth. Our systems are designed to seamlessly support
more than 10,000 lines and enterprises may scale beyond
that size by adding additional ShoreTel systems. As a result,
our systems can cost-effectively scale to support enterprises of
all sizes.
Reliability.
Our switches are designed to be
highly reliable and operate independently. Each switch in the
system is capable of independently establishing and terminating
calls without relying on a centralized call control server, as
is the case with alternative systems. As a result, enterprise
telecommunications based on our systems can survive a variety of
LAN, WAN and hardware failures using our systems. For increased
reliability, a single additional switch can be added
cost-effectively to the site to create n+1
redundancy, rather than requiring dedicated, redundant switches
to improve reliability, as needed by alternative systems.
Low total cost of ownership.
Our systems allow
enterprise customers to lower the overall capital expenditures
and on-going operating expenses typically associated with the
deployment and management of enterprise telecommunications
systems. In particular, the scalable nature and the lack of
multiple redundant units required in our systems can
significantly reduce investments in equipment. Although the
initial capital expenditure associated with the implementation
of our systems may be greater than those required to extend a
TDM system to a hybrid system, we believe that the total
expenditures required to deploy, maintain and upgrade ShoreTel
systems result in significantly lower total cost of ownership
over time. We also believe enterprises that use our systems
incur lower operating, maintenance and upgrade costs than those
that use competing systems.
51
We believe that as a result of these key benefits and our
superior customer service, we maintain the industrys
highest level of customer satisfaction. According to Nemertes
Research, for the last three years, we have delivered the
highest level of customer satisfaction of any leading
IP-based
telecommunications vendor rated in its enterprise benchmarks
across all surveyed criteria, including value, technology,
value-added reseller expertise, customer service, solution
experience, product features, installation/troubleshooting and
performance.
Our
Strategy
Our goal is to become the leading provider of IP
telecommunications systems for enterprises. Key elements of our
strategy include:
Extend our technology advantage.
We believe
that our distributed software architecture and switch-based
hardware platform provide us with a key competitive advantage.
To further differentiate our systems, we intend to continue our
research and development activities to enhance the functionality
of our systems, feature set and end user experience. We also
intend to develop new and expand existing relationships with
technology partners to provide additional system applications,
such as multi-media capabilities. We also intend to continue to
develop additional applications for our systems and expand the
interoperability of our systems with additional enterprise
applications.
Grow our distribution network.
We intend to
increase our market penetration and extend our geographic reach
by expanding our business with existing channel partners and by
adding channel partners that serve specific target markets. We
are focused on expanding relationships with channel partners
that will enable us to increase adoption of our systems by large
enterprises. We also intend to further develop our relationships
with channel partners that operate in strategic international
markets. We believe international markets represent a
significant growth opportunity, since those markets are expected
to increasingly adopt IP telecommunications systems.
Maintain focus on customer satisfaction.
We
believe that satisfied enterprise customers are likely to
purchase more of our products and to serve as advocates for our
systems. We intend to continue to work closely with enterprise
customers to gain valuable knowledge about their existing and
future product requirements to help us develop new products and
product enhancements that address their evolving requirements.
We also intend to actively measure, and develop programs to
continue to enhance, customer satisfaction.
Increase our brand awareness.
We believe that
increased visibility and awareness of the ShoreTel brand will
enhance our ability to participate in enterprise customer
evaluations of telecommunications systems, and will enable us to
continue growing our enterprise customer base. We intend to
increase our sales and marketing activities with both channel
partners and enterprise customers through targeted marketing
programs, such as participation in seminars, trade shows and
conferences, and advertising and public relations initiatives.
Increase penetration of our installed base.
We
plan to leverage our installed enterprise customer base to
increase future sales. Since many organizations initially deploy
our systems at a single location, we believe we can drive
further penetration of our systems at multiple locations within
these enterprises. By increasing our penetration, we believe we
can continue to realize increased operating efficiencies while
driving a wider adoption of our systems.
Products
We provide a switch-based IP telecommunications system for
enterprises. Our systems are based on our distributed software
architecture and switch-based hardware platform that enable a
single telecommunications system to serve multi-site
enterprises. This architecture provides high network reliability
and allows for a single point of management and administration
of a system across all sites of a multi-site enterprise. System
administrators can make changes anywhere throughout the system
through a web browser interface that presents a user-friendly
view of the systems configuration. Our architecture also
provides end users with a consistent and full set of features
across an enterprise, regardless of location.
52
We introduced our first suite of products in 1998 and have
continued to add features and functionality throughout our
history. Our solution is comprised of ShoreGear switches,
ShorePhone IP phones and ShoreWare software applications. As new
software versions of our solution have been released, existing
enterprise customers have been able to upgrade their switches,
phones and applications, allowing them to preserve their
ShoreTel investment.
ShoreGear switches.
Our switches provide call
management functionality, and each switch in the system is
capable of independently establishing and terminating calls
without relying on a centralized call control server. As a
result, enterprise telecommunications can survive a variety of
LAN, WAN and hardware failures. The high reliability of our
switches is enhanced by two key design features: the use of
flash memory in lieu of disk drives and running an embedded
operating system optimized for real-time processing, such as
call management. Unlike disk drives, flash memory does not rely
on mechanical movement, and therefore is less likely to break
down and cause our systems to fail. Furthermore, our embedded
operating system enables a higher performing and more reliable
software platform relative to server-centric IP systems because
it is optimized for real-time processing. The reliability of
each site within the system can be further improved by adding a
single additional switch to that site to create n+1
redundancy, rather than requiring a dedicated back-up switch for
each primary switch to improve reliability as needed by
alternative systems. In addition, our switches connect to the
public telephone network via one of several interfaces,
including T1 and E1 interfaces for high-density connectivity to
the public telephone network. We offer five switches of varying
sizes to meet the needs of enterprises of all sizes. The modular
nature of our switches allows our enterprise customers to easily
expand their system capacity by deploying additional switches
across their network.
ShorePhone IP phones.
We offer a range of
innovative, high performance phones to meet the needs of the
different types of end users across the enterprise. Our phones
are designed to provide a superior combination of ergonomics,
sound quality and appearance. We offer five phones that vary by
size, display features and line capacity. ShorePhone IP phones
are designed to function without any configuration, simplifying
installation. Our systems also support Wi-Fi phones for mobile
workers. Our range of IP phones include the following models,
which are offered in silver and black:
ShoreWare software applications.
Our ShoreWare
software features a number of applications that facilitate the
end user experience and enterprise system management. In
addition, we offer additional business applications
53
that integrate with core business processes to provide improved
functionality and enhanced end user productivity. An industry
standard server is used to support these applications, as
opposed to the call management functions of our systems, which
run entirely on ShoreGear switches. Our ShoreWare software
consists of our proprietary software as well as third-party
applications and includes:
|
|
|
|
|
ShoreWare desktop applications.
ShoreWare
desktop applications for end users include the following primary
offerings: Personal Call Manager, Unified Messaging, Office
Anywhere, Automated Attendant and a softphone.
|
|
|
|
|
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Personal Call Manager.
Personal Call Manager
is an application that allows end users to manage their voice
communications from their desktops. With the click of a mouse,
end users can initiate, manage, terminate, and receive calls,
convene and manage conference calls, and see the availability of
others on the network. This functionality is enhanced by the
integration of our Personal Call Manager application with
Microsoft Outlook, which allows the end user to initiate calls
from a contact list.
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Unified Messaging.
Unified Messaging
integrates our voicemail application with Microsoft Outlook.
This enables end users to receive, send, be notified of and play
voice mail messages through their Microsoft Outlook email.
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Office Anywhere.
Office Anywhere enables end
users outside the office to manage calls with Personal Call
Manager and to enjoy the same call handling productivity
benefits as their office-based colleagues. Communications
directed to the end users office phone are forwarded to
the end users location, and the end users outbound
calls appear to the called party as if they originated in the
end users office. Using Office Anywhere, end users have
the same call management and unified messaging features and
functionality at remote locations as they have in their offices.
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Softphone.
ShoreTels softphone
application allows an end user to turn a PC into an IP phone by
simply connecting a headset to the PC and activating the
application.
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Automated Attendant.
Automated Attendant
provides end users with a
24-hour
automated call answering and routing capability that enables the
enterprise to direct callers to appropriate individuals,
workgroups or messages.
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Workgroup.
Workgroup is an entry-level contact
center application that provides real-time handling of incoming
calls to enterprises, with call routing, queuing and reporting
tools.
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ShoreWare system management.
Our browser-based
system management applications consist of ShoreWare Director and
ShoreWare System Monitor.
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ShoreWare Director.
ShoreWare Director
provides enterprises with a single point of system management,
enabling IT administrators to view and manage the entire
telecommunications system of the enterprise from any location
using a single application. A new end users extension,
mailbox and automated attendant profile can be added from a
single management screen, avoiding the additional work required
with most PBXs, voice mail systems and automated attendants.
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ShoreWare System Monitor.
ShoreWare System
Monitor is an IP voice management tool that is designed to
continuously measure the performance of every link in the
network, enabling an enterprise to identify and address voice
quality issues.
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Additional business applications.
We offer
other business applications, such as ShoreTel Contact Center,
ShoreTel Converged Conferencing and salesforce.com integration.
ShoreTel Contact Center allows enterprises to efficiently manage
significant inbound or outbound call activities. ShoreTel
Converged Conferencing enables enterprises to conduct large
audio conferences and provides collaboration tools for
application sharing, desktop sharing, instant messaging and end
user availability information. Our salesforce.com integration
application is designed to improve the productivity of end users
that use salesforce.com by seamlessly integrating voice
communications capabilities into their data driven workflow.
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54
ShoreTel
Global Services
We complement our product offerings with a broad range of
services that help us maintain and expand our relationships with
enterprise customers and channel partners and, in the case of
post-contractual support, provide us with recurring revenue.
Typically, our channel partners provide many of these services,
although we provide back up and escalation support as needed, or
if requested by the enterprise customer, we provide these
services directly.
The ShoreTel Global Services include post-contractual support,
training, system design and installation, and professional
services.
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Post-contractual support services include web-based access
support services and tools, access to technical support
engineers, hardware replacement and software updates. These
services are typically offered under support contracts with
terms of up to five years.
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Training services include certification programs for channel
partners, training programs at enterprise customer or channel
partner locations and self-paced, desktop training programs.
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System design and installation services include the assessment
of the telecommunications requirements of a particular
enterprise, the configuration of a system to maximize its
efficiency, the management of the installation, and the
subsequent testing and implementation of our systems.
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Professional services include software development to improve
system performance, enable integration of our systems with third
party applications or legacy systems, streamline business
processes and address enterprise customer-specific business
opportunities.
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Technology
Our systems are based on a combination of our proprietary
software, industry-standard interfaces and protocols, and
customized and
off-the-shelf
hardware components. We have developed proprietary technologies
that are critical to the operation of the servers and ShoreGear
switches within our systems and provide our systems with the
properties that distinguish them from alternative IP systems.
The key elements of our distributed software architecture are:
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software that monitors all call activity on ShoreGear switches,
and enables integration of ShoreTel and third-party applications;
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software that enables calling between switches and allows calls
to be distributed among switches instead of using a single
centralized switch;
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software that provides a graphical user interface for our phones;
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software that coordinates the functions of all servers on the
system, allowing them to perform as a single, virtual server;
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software that enables remote ShoreTel and third-party
applications to access and modify our systems;
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software that enables ShoreGear switches to obtain call routing
information;
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software that enables the switch to communicate with the
application server, and receive system configuration information;
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software that allows each switch to maintain a comprehensive
view of the system; and
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software that monitors the bandwidth consumed on each WAN
segment and prevents the system from exceeding bandwidth
limitations.
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Our switch-based software also uses industry-standard Media
Gateway Control Protocol, or MGCP, and Session Initiation
Protocol, or SIP, for setting up calls.
ShoreGear switches are comprised of
off-the-shelf,
embedded microprocessors and networking components, such as
Ethernet controllers, and customized integrated circuits. These
switches run on Wind River VxWorks, a
55
widely-used embedded operating system, and use random access
memory and flash memory and our switch call management software
for application processing. ShorePhone IP phones are comprised
of enterprise IP phone chips manufactured by Broadcom
Corporation and customized LCD displays, microphones and speaker
circuitry.
Enterprise
Customers
Our enterprise customers include small, medium and large
companies and public institutions in a wide range of vertical
markets, including the financial services, government,
education, health care, manufacturing, non-profit organization,
professional services and technology industries. As of
September 30, 2006, we had approximately 4,000 enterprise
customers, including CNET Networks, Robert Half International
and the City of Oakland, California. Our broad enterprise
customer base reflects our historical strength in the small and
medium-sized business and public institution sectors.
We believe that maintaining the highest possible levels of
customer satisfaction is critical to our ability to retain
existing and gain new enterprise customers. We believe that
satisfied enterprise customers will purchase more of our
products and serve as advocates for our systems, and we work
closely with them as they deploy and use our systems. We follow
every implementation with a formal review with the enterprise
customer that involves contacts with our internal staff and
third-party technical personnel, and take prompt action to
resolve any issues that might have been identified. We also have
frequent follow-up contacts with our enterprise customers to
promptly resolve issues and to ensure that they are fully
satisfied with their system. We also survey enterprise customers
that use technical support services to ensure that high-quality
support services are being provided. Through this process, we
gain valuable insights into the existing and future requirements
of our enterprise customers activities and this helps us
develop product enhancements that address the evolving
requirements of enterprises.
Additionally, to promote high-quality support throughout our
services organization, we measure key performance indicators and
operational metrics of our services organization, including call
answer times, call abandon rates, customer satisfaction with
technical support, time to issue resolution, call interaction
quality, as well as customer satisfaction with system
implementation, training services and technical support, and use
the results to direct the management of our services
organization.
We also monitor our enterprise customers satisfaction with
our channel partners by surveying our enterprise customers after
the system is installed. We actively encourage our channel
partners to maintain and improve our enterprise customers
levels of satisfaction. We also monitor our channel
partners satisfaction with ShoreTel, as their satisfaction
with and advocacy of ShoreTel is also very important to our
success.
Sales and
Marketing
We sell our products and services primarily through an extensive
network of approximately 400 channel partners. These channel
partners range in size from single-site, regional firms with
specialized products and services to multi-national firms that
provide a full range of IT products and services. Our channel
partners market and sell our products into both the large
enterprise and
small-to-medium
enterprise markets. We maintain a sales organization that
recruits, qualifies and trains new channel partners,
participates in sales presentations to potential enterprise
customers and assesses customer feedback to assist in developing
product roadmaps. As part of our increased focus on sales to
large accounts, we have also implemented a major accounts
program whereby senior sales executives assist our channel
partners in selling to and providing support for large
enterprise customer accounts. No single channel partner
accounted for 10% or more of our revenue in the fiscal year
ended June 30, 2006 or the three months ended
September 30, 2006. As of December 31, 2006, we had 83
personnel in sales and marketing activities.
We believe our channel partner network allows us to effectively
sell our systems without the need to build large dedicated
in-house sales and service capabilities. We continue to work
with existing channel partners to expand their sales of our
systems and to recruit new channel partners with a focus on
increasing market coverage.
Our internal marketing team focuses on increasing brand
awareness, communicating product advantages and generating
qualified leads for our sales force and channel partners. In
addition to providing marketing materials, we
56
communicate product and service offerings through our installed
base and news letters, direct mail campaigns, web postings,
press releases and web-based training.
Research
and Development
We believe that our ability to enhance our current products,
develop and introduce new products on a timely basis, maintain
technological competitiveness and meet enterprise customer
requirements is essential to our success. To this end, we have
assembled a team of engineers with expertise in various fields,
including voice and IP communications, telecommunications
network design, data networking and software engineering. Our
principal research and development activities are conducted in
Sunnyvale, California. We have invested significant time and
financial resources into the development of our architecture,
including our switches and related software. We intend to
continue to expand our product offerings, improve the features
available on our products and integrate our systems with third
party enterprise applications. As of December 31, 2006, we
had a total of 69 personnel in research and development and
related technical service and support functions. Research and
development expenses were $5.5 million, $7.0 million,
$9.7 million and $3.1 million in fiscal 2004, 2005 and
2006, and the three months ended September 30, 2006,
respectively.
Manufacturing
and Suppliers
We outsource the manufacturing of our hardware products. This
outsourcing allows us to:
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avoid costly capital expenditures for the establishment of
manufacturing operations;
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focus on the design, development, sales and support of our
hardware products; and
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leverage the scale, expertise and purchasing power of
specialized contract manufacturers.
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Currently, we have arrangements for the production of our
switches with Jabil Circuit, Inc., a contract manufacturer in
California, and we have arrangements for the production of our
phones with Giant Electronics Ltd., a contract manufacturer
located in China. Our contract manufacturers provide us with a
range of operational and manufacturing services, including
component procurement and performing final testing and assembly
of our products. We depend on our contract manufacturers to
procure components and to maintain adequate manufacturing
capacity. We typically fulfill product orders out of our
Sunnyvale, California offices.
We regularly provide forecasts for orders, and we order products
from our contract manufacturers based on our projected sales
levels. However, enterprise customers may generally cancel or
reschedule orders without penalty, and delivery schedules
requested by enterprise customers in these orders frequently
vary based upon each enterprise customers particular needs.
We also rely on sole or limited numbers of suppliers for several
key components utilized in the assembly of our products. For
example, our contract manufacturers purchase semiconductors that
are essential to the production of our phones from a single
source supplier, and we have not identified any alternative
suppliers for these components. This reliance is amplified by
the fact that we and our contract manufacturers maintain
relatively low inventories and acquire components only as
needed. As a result, our ability to respond to enterprise
customer orders efficiently may be constrained by the
then-current availability or terms and pricing of these
components. We cannot assure you that we will be able to obtain
a sufficient quantity of these components in a timely manner to
meet the demands of our enterprise customers or that prices of
these components will not increase. These delays or any
disruption of the supply of these components could also
materially and adversely affect our operating results.
Competition
The market for enterprise IP telecommunications systems is
quickly evolving, highly competitive and subject to rapid
technological change. As a result of the convergence of voice
and data networking technologies that
57
characterize IP enterprise telecommunications systems, we
compete with providers of enterprise voice communications
systems, such as:
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Providers of IP systems, including 3Com and Cisco
Systems; and
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Providers of hybrid systems, including Alcatel-Lucent, Avaya,
Inter-Tel, Mitel Networks and Nortel Networks.
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In addition, because the market for our products is subject to
rapid technological change, as the market evolves we may face
competition in the future from companies that do not currently
compete in the enterprise communications market, including
companies that currently compete in other sectors of the
information technology, communications and software industries
or communications companies that serve residential rather than
enterprise customers. In particular, as more enterprises
converge their voice and data networks, the business information
technology and communication applications deployed on converged
networks become more integrated. We may face increased
competition from current leaders in information technology
infrastructure, information technology, personal and business
applications and the software that connects the network
infrastructure to those applications, such as Microsoft. We
could also face competition from new market entrants, whether
from new ventures or from established companies moving into the
market. Competition from these and other potential market
entrants may take many forms, including offering products and
applications similar to those we offer as part of a larger,
bundled offering. In addition, technological developments and
consolidation within the communications industry result in
frequent changes to our group of competitors. Many of our
current and potential competitors are substantially larger than
we are and have significantly greater financial, sales,
marketing, distribution, technical, manufacturing and other
resources.
We believe that we compete favorably with regard to the
principal competitive factors applicable to our products, which
include:
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price of products and services and total cost of ownership;
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system reliability;
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voice quality and product features;
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ease of administration and installation, including system
scalability;
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customer service and technical support;
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relationships with buyers and decision makers and brand
recognition;
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an installed base of similar or related products;
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the ability to integrate various products into an enterprise
customers existing networks, including the ability of a
providers products to interoperate with other
providers communications products; and
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size and financial stability of our operations compared to those
of our competitors.
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For more information concerning competition, please see
Risks Related To Our Business The market in
which we operate is intensely competitive, and many of our
competitors are larger, more established and better capitalized
than we are and As voice and data
networks converge, we are likely to face increased competition
from companies in the information technology, personal and
business applications and software industries.
Intellectual
Property
Our success as a company depends upon our ability to protect our
core technology and intellectual property. To accomplish this,
we rely on a combination of intellectual property rights,
including patents, trade secrets, copyrights and trademarks, as
well as customary contractual protections.
We have three patents issued in the United States, which expire
in 2019, 2023 and 2023, and have eleven patent applications in
the United States. We also have one issued and nine patent
applications in foreign countries relating to our
U.S. patents. We intend to file other counterparts for
these patents and patent applications in foreign jurisdictions
around the world.
58
ShoreTel, our logo, ShorePhone, ShoreGear and ShoreWare are
registered trademarks of ShoreTel.
The steps we have taken to protect our intellectual property
rights may not be adequate. Third parties may infringe or
misappropriate our intellectual property rights and may
challenge our issued patents. In addition, other parties may
independently develop similar or competing technologies designed
around any patents that are or may be issued to us. We intend to
enforce our intellectual property rights vigorously, and from
time to time, we may initiate claims against third parties that
we believe are infringing on our intellectual property rights if
we are unable to resolve matters satisfactorily through
negotiation. If we fail to protect our proprietary rights
adequately, our competitors could offer similar products,
potentially significantly harming our competitive position and
decreasing our revenue.
Employees
As of December 31, 2006, we had 223 employees in North
America, Europe and Australia, of which 83 were in sales and
marketing, 69 were in engineering, 36 were in Global Support
Services, 22 were in general and administrative functions and 13
were in operations. None of our employees are represented by
labor unions, and we consider current employee relations to be
good.
Facilities
Our headquarters is located in a leased facility in Sunnyvale,
California and consists of approximately 64,000 square
feet. Our headquarters lease expires in September 2007. We also
maintain leased sales offices in Europe and Australia. We are
evaluating other office space to serve as our headquarters
facility.
We believe that our current facilities are suitable and adequate
to meet our current needs, and we intend to add new facilities
or expand existing facilities as we add employees. We believe
that suitable additional or substitute space will be available
on commercially reasonable terms as needed to accommodate our
operations.
Legal
Proceedings
We are not a party to any material legal proceedings. We could
become involved in litigation from time to time relating to
claims arising out of our ordinary course of business or
otherwise.
59
MANAGEMENT
Executive
Officers and Directors
The following table sets forth information about our executive
officers and directors as of February 10, 2007:
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Name
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Age
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Position
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John W. Combs
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59
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Chairman, President and Chief
Executive Officer
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Edwin J. Basart
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Founder, Chief Technology Officer
and Director
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John Finegan
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57
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Chief Financial Officer
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Pedro E. Rump
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51
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Vice President, Engineering and
Operations
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Stephen G. Timmerman
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47
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Vice President, Marketing
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Joseph A. Vitalone
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45
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Vice President, Sales
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Walter Weisner
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50
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Vice President, Global Support
Services
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Charles D. Kissner(1)(3)
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59
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Director
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Seth D. Neiman(2)
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52
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Director
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Thomas van Overbeek(2)
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57
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Director
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Brian K. Paul(1)(3)
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38
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Director
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Edward F. Thompson(1)(3)
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68
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Director
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(1)
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Member of our audit committee.
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(2)
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Member of our compensation committee.
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(3)
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Member of our corporate governance and nominating committee.
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John W. Combs
has served as our President and Chief
Executive Officer and as a director since July 2004 and as our
Chairman since February 2007. From July 2002 to May 2004,
Mr. Combs served as Chairman and Chief Executive Officer of
Littlefeet Inc., a wireless infrastructure supplier. From
September 1999 to July 2002, Mr. Combs served as Chief
Executive Officer of InternetConnect Inc., a broadband
networking solutions provider. Mr. Combs has also held
senior management positions at Nextel Communications, Inc., a
wireless digital communications system provider, L.A. Cellular,
a wireless network operator, Mitel Inc., a manufacturer of
private branch exchanges and Fujitsu Business Communication
Systems, Inc., a provider of telecommincations products.
Mr. Combs holds a B.S. in engineering from California
Polytechnic State University, San Luis Obispo.
Edwin J. Basart
co-founded ShoreTel in 1996 and has
served as our Chief Technology Officer and as a director since
inception. Prior to co-founding ShoreTel, Mr. Basart
co-founded Network Computing Devices, Inc., a provider of thin
client computing hardware and software, where he served as Vice
President of Engineering, and Ridge Computers, Inc. where he
served as Vice President of Software. Mr. Basart began his
career as a software engineer at Hewlett Packard.
Mr. Basart holds a B.S. in English from Iowa State
University and an M.S. in electrical engineering from Stanford
University.
John Finegan
has served as our Chief Financial Officer
since April 2003. From July 1989 to March 2003, Mr. Finegan
served as Chief Financial Officer of ActionPoint, Inc.
(previously named Cornerstone Imaging, Inc.), an enterprise
software company that later merged with Captiva Software
Corporation. Prior to joining Cornerstone Imaging,
Mr. Finegan served as Vice President of Finance and
Administration of Faraday Electronics Inc., a fabless
semiconductor company, and held senior management positions at
ECS Microsystems Inc., a computer terminal company and Beckman
Instruments Inc., a scientific instruments company.
Mr. Finegan holds a B.S. in engineering from Tufts
University and an M.B.A. from the University of Massachusetts.
Mr. Finegan has informed us that he intends to retire from
ShoreTel after a successor is identified and retained, but that
he intends to remain with ShoreTel through this offering and
through a reasonable transition period following the retention
of his successor.
Pedro E. Rump
has served as our Vice President of
Engineering and Operations since January 2006. From July 2004 to
January 2006, Mr. Rump served as Vice President of
Engineering and Operations at Dust Networks, Inc., a
60
developer of embedded wireless sensor networking products. From
January 2004 to July 2004, Mr. Rump served as Vice
President of Engineering at Sonim Technologies, Inc., a provider
of voice over IP applications. From January 2003 to January
2004, Mr. Rump served as Vice President of Engineering at
Littlefeet Inc. From January 2002 to October 2002, Mr. Rump
served as Vice President of Inviso, a developer of signal
transport and display solutions for television and
telecommunications. Mr. Rump holds a B.S. and M.S. in
electrical engineering from the Swiss Federal Institute of
Technology.
Stephen G. Timmerman
has served as our Vice President of
Marketing since January 2005. From February 2004 to December
2004, Mr. Timmerman was an independent marketing and
business consultant. From February 2003 to January 2004, he
served as Vice President for Bermai, Inc., a provider of
chipsets for wireless applications. From February 2002 to
November 2002, Mr. Timmerman served as Vice President of
Marketing for Proxim Wireless Corporation, a developer of
broadband wireless networking systems. Prior to joining Proxim,
Mr. Timmerman held management positions at Octel
Communications Corporation, a supplier of voicemail systems, and
at McKinsey & Company, a consulting firm.
Mr. Timmerman holds a B.S. in mechanical and aerospace
engineering from Princeton University and an M.B.A. from Harvard
University.
Joseph A. Vitalone
has served as our Vice President of
Sales since October 2005. From February 2003 to October 2005,
Mr. Vitalone served as Vice President of Worldwide Sales
for CoVI Technologies, Inc., a provider of digital surveillance
solutions. From June 2001 to July 2003, Mr. Vitalone served
as Senior Vice President of Sales for Wire One Communications,
Inc., a video conferencing solutions provider. Prior to joining
Wire One Communications, Mr. Vitalone served as Vice
President of Sales for Polycom, Inc., a provider of broadband
communications solutions, and held sales positions at ViaVideo
Communications, Inc., a developer of group video communications
systems, Mitel, PictureTel Corporation, a video conferencing
solutions provider, Siemens A.G., and AT&T Wireless
Services, Inc. Mr. Vitalone holds a B.A. in business and
public relations from Western Kentucky University.
Walter Weisner
has served as our Vice President of Global
Support Services since July 2005. From April 2002 to June 2005,
Mr. Weisner served as Vice President, Global Support
Services for Webex Communications, Inc., a web communications
services provider. From October 1999 to March 2002,
Mr. Weisner served as Executive Vice President of
Operations and Support for InternetConnect. Prior to joining
InternetConnect, Mr. Weisner served as Senior Director of
Customer Operations and Support for Nextel Communications,
Southwest region, and also held positions in product management
and product development with Nextel. Mr. Weisner holds a
B.A. in business administration from Cleveland State University.
Charles D. Kissner
has served as a director of ShoreTel
since April 2006. Mr. Kissner is Chairman of
Harris Stratex Networks, Inc., formerly Stratex Networks, a
provider of wireless transmission systems. He previously served
as Chairman of Stratex Networks from July 1995 to January 2007
and as its President and Chief Executive Officer from July 1995
to May 2000 as well as from October 2001 to May 2006. Prior to
joining Stratex Networks, Mr. Kissner served as Vice
President and General Manager of M/A-Com, Inc., a manufacturer
of radio and microwave communications products, as Executive
Vice President of Fujitsu Network Switching of America, Inc., a
switch manufacturer and as President and Chief Executive Officer
of Aristacom International, Inc., a provider of
computer/telephony integration solutions. Mr. Kissner also
previously held several executive positions at AT&T for over
thirteen years. He also serves on the board of directors of
SonicWALL, Inc., a provider of Internet security products.
Mr. Kissner is a member of the Advisory Board of
Santa Clara Universitys Leavey School of Business and
holds a B.S. in industrial management and engineering from
California State Polytechnic University and an M.B.A. from
Santa Clara University.
Seth D. Neiman
has served as a director of ShoreTel since
December 1996. Mr. Neiman has served as a General Partner
at Crosspoint Venture Partners, a venture capital firm, since
1996 and Associate Partner from 1994 to 1995. Before joining
Crosspoint, Mr. Neiman founded and served as Vice President
for Coactive Computing, Inc., a
peer-to-peer
networking company. Mr. Neiman holds a B.A. in philosophy
from the Ohio State University.
Thomas van Overbeek
has served as a director of ShoreTel
since February 2002. From February 2002 to July 2004,
Mr. van Overbeek served as Chief Executive Officer and
President of ShoreTel. He also served as a consultant to
ShoreTel from December 2001 to February 2002. Prior to joining
ShoreTel, Mr. van Overbeek served as President
61
and Chief Executive Officer of WavTrace Inc., a developer of
broadband wireless technology. Prior to joining WavTrace,
Mr. van Overbeek served as President and Chief
Executive Officer of Cornerstone Imaging.
Brian K. Paul
has served as a director of ShoreTel since
June 2001. Mr. Paul is a managing director in Private
Equity at Lehman Brothers Inc. and a partner in Lehman Brothers
Venture Partners. Prior to joining Private Equity in 1999,
Mr. Paul worked in Lehman Brothers Global Technology
and Healthcare Investment Banking Groups, in New York, London
and Los Angeles. Mr. Paul holds a B.S. in economics from
the Wharton School of the University of Pennsylvania and an
M.B.A. from the Kellogg Graduate School of Management.
Edward F. Thompson
has served as a director of ShoreTel
since January 2006. Mr. Thompson has served as a senior
advisor to Fujitsu Limited and as a director of several Fujitsu
subsidiaries or portfolio companies since 1995. From 1976
to 1994, Mr. Thompson held a series of management positions
with Amdahl Corporation including Chief Financial Officer and
Secretary from August 1983 to June 1994, and Chief Executive
Officer of Amdahl Capital Corporation from October 1985 to
June 1994. Mr. Thompson is a member of the board of
directors of Harris Stratex Networks, Inc. (formerly
Stratex Networks) and SonicWALL Inc., and also serves as audit
committee chair of those companies. He is also a member of the
Advisory Board of Santa Clara Universitys Leavey
School of Business. Mr. Thompson holds a B.S. in
aeronautical engineering from the University of Illinois, and an
M.B.A. with an emphasis in operations research from Santa Clara
University.
There are no family relationships between any of our directors
or executive officers.
Board
Composition
Our board currently consists of seven members. Each director is
elected at a meeting of stockholders and serves until our next
annual meeting or until his successor is duly elected and
qualified or until his earlier death, resignation or removal.
Any vacancy on our board, except for a vacancy created by the
removal of a director without cause, shall be filled by a person
selected by a majority of the remaining directors then in
office, or by a sole remaining director, unless the board of
directors determines that the particular vacancy will be filled
by the vote of the stockholders. Pursuant to a voting agreement
among us and our stockholders, investors affiliated with
Lehman Brothers Venture Partners, of which Mr. Paul is
a partner, have the right to designate representatives to serve
on our board of directors. Upon the completion of this offering,
this voting agreement will terminate, and no stockholders will
have any contractual rights with us regarding the election of
our directors.
Effective upon the completion of this offering, our board of
directors will be divided into three classes of directors who
will serve in staggered three-year terms. Our directors will be
assigned to a class prior to the completion of this offering.
Effective upon completion of this offering, our certificate of
incorporation will provide that the authorized number of
directors may be changed only by resolution of the board of
directors. Any additional directorships resulting from an
increase in the number of directors will be distributed among
the three classes with three-year terms so that, as nearly as
possible, each class will consist of one-third of the directors.
At each annual meeting of stockholders, the successors to
directors whose terms then expire will be elected to serve from
the time of election and qualification until the third annual
meeting following election. As a result, only one class of
directors will be elected at each annual meeting of our
stockholders, with the other classes continuing for the
remainder of their respective three-year terms. The division of
our board of directors into these three classes may delay or
prevent a change of our management or a change in control. See
Description of Capital Stock Anti-takeover
Provisions.
Board
Committees
Upon the completion of this offering, our board of directors
will have an audit committee, a compensation committee and a
governance and nominating committee. The composition and
responsibilities of each committee are described below. Members
serve on these committees until their resignation or until
otherwise determined by our board.
62
Audit
Committee
Our audit committee oversees our corporate accounting and
financial reporting process. Among other matters, the audit
committee:
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evaluates the qualifications, independence and performance of
our independent registered public accounting firm;
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determines the engagement of our independent registered public
accounting firm and reviews and approves the scope of the annual
audit and the audit fee;
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discusses with management and our independent registered public
accounting firm the results of the annual audit and the review
of our quarterly financial statements;
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approves the retention of our independent registered public
accounting firm to perform any proposed permissible non-audit
services;
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monitors the rotation of partners of our independent registered
public accounting firm on our engagement team as required by law;
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reviews our critical accounting policies and estimates; and
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annually reviews the audit committee charter and the
committees performance.
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Our audit committee currently consists of Edward F. Thompson,
Charles D. Kissner and Brian K. Paul. Upon the completion of
this offering, our audit committee is expected to consist of
three members of our board of directors, each of whom will then
meet the requirements for financial literacy under the
applicable rules and regulations of the SEC and the NASDAQ Stock
Market and will then meet the criteria for independence under
the applicable regulations of the SEC and under the applicable
rules of the NASDAQ Stock Market. At least one of these
individuals will be a financial expert as defined under the
applicable rules of the SEC and therefore will have the
requisite financial sophistication required under the applicable
rules and regulations of the NASDAQ Stock Market. The audit
committee operates under a written charter that satisfies the
applicable standards of the SEC and the NASDAQ Stock Market.
Compensation
Committee
Our compensation committee currently consists of Seth D. Neiman
and Thomas van Overbeek. Our compensation committee reviews and
recommends policy relating to compensation and benefits of our
officers and employees. The compensation committee reviews and
approves corporate goals and objectives relevant to compensation
of our chief executive officer and other executive officers,
evaluates the performance of these officers in light of those
goals and objectives and sets the compensation of these officers
based on such evaluations. The compensation committee also
administers the issuance of stock options and other awards under
our equity award plans. The compensation committee will review
and evaluate, at least annually, the performance of the
compensation committee and its members, including compliance of
the compensation committee with its charter. Upon the completion
of this offering, our compensation committee is expected to
consist of at least two members of our board of directors, each
of whom will meet the criteria for independence and be an
outside director under the applicable rules and regulations of
the NASDAQ Stock Market and the Internal Revenue Service,
respectively.
Governance
and Nominating Committee
Our goverance and nominating committee currently consists of
Brian K. Paul, Edward F. Thompson and Charles D. Kissner. Our
governance and nominating committee makes recommendations to the
board of directors regarding candidates for directorships and
the size and composition of the board of directors and its
committees. In addition, the governance and nominating committee
oversees our corporate governance guidelines and reporting and
makes recommendations to the board of directors concerning
governance matters. Upon the completion of this offering, our
governance and nominating committee is expected to consist of at
least two members of our board of directors, each of whom will
then meet the criteria for independence under the applicable
rules of the NASDAQ Stock Market.
63
Compensation
Committee Interlocks and Insider Participation
During our 2006 fiscal year, our compensation committee
consisted of Seth D. Neiman and Thomas van Overbeek. None of the
members of the compensation committee has at any time during the
last fiscal year ever been an officer or employee of our company
or any of its subsidiaries, and none have had any relationships
with our company of the type that is required to be disclosed
under Item 404 of
Regulation S-K.
None of our executive officers has served as a member of the
board of directors, or as a member of the compensation or
similar committee, of any entity that has one or more executive
officers who served on our board of directors or compensation
committee during our 2006 fiscal year.
Director
Compensation
The following table provides information for our fiscal year
ended June 30, 2006 regarding all plan and non-plan
compensation awarded to, earned by or paid to each person who
served as a non-employee director for some portion or all of
fiscal 2006. Other than as set forth in the table and the
narrative that follows it, to date we have not paid any fees to
or reimbursed any expenses of our directors, made any equity or
non-equity awards to directors, or paid any other compensation
to directors.
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Fees Earned
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Non-Equity
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or Paid
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Option
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Incentive Plan
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All Other
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Name
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in Cash
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Awards(1)
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Compensation
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Compensation
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Total
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Edwin J. Basart
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John W. Combs
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Charles D. Kissner
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(2)
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Seth D. Neiman
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Thomas van Overbeek
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Brian K. Paul
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Edward J. Thompson
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(3)
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(1)
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Under the SFAS 123(R) modified prospective transition
method, we did not record any amounts in our consolidated
financial statements for fiscal 2006 with respect to these
awards.
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(2)
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As of June 30, 2006, Mr. Kissner held an immediately
exercisable stock option to purchase 500,000 shares of our
common stock that was granted during fiscal 2006, which option
vests as to 25% of the shares in April 2007 and as to 1/48 of
the shares each month over three years thereafter.
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(3)
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As of June 30, 2006, Mr. Thompson held
500,000 shares of our common stock issued upon early
exercise of a stock option that was granted during fiscal 2006,
which shares vest as to 25% of the shares in January 2007 and as
to 1/48 of the shares each month over three years thereafter.
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Thomas van Overbeek served as our chief executive officer from
February 2002 until July 2004. He has continued to serve on our
board of directors since that time. Mr. van Overbeek
received salary, bonuses and stock options to purchase an
aggregate of 13,596,299 shares of our common stock in his
capacity as chief executive officer. In July 2004, we entered
into a separation agreement with Mr. van Overbeek that
provides for the continued vesting of his outstanding stock
options and other equity so long as he continues to serve on our
board of directors. In addition, the separation agreement
provides that we will use commercially reasonable efforts to
continue his health coverage as an active employee under the
companys group health plan so long as Mr. van
Overbeek continues to serve on the board of directors, and if we
are unable to do so, that we will reimburse COBRA premiums for
Mr. van Overbeek and his spouse.
64
EXECUTIVE
COMPENSATION
Compensation
discussion and analysis
Our executive compensation program is designed to attract, as
needed, individuals with the skills necessary for us to achieve
our business plan, to reward those individuals fairly over time,
to retain those individuals who continue to perform at or above
the levels that we expect and to closely align the compensation
of those individuals with the performance of our company on both
a short-term and long-term basis. To that end, our executive
officers compensation has three primary
components base compensation or salary, cash
performance bonuses and stock option awards. In addition, we
provide our executive officers a variety of benefits that in
most cases are available generally to all salaried employees.
General.
We view the components of
compensation as related but distinct. Although our compensation
committee reviews total compensation of our executive officers,
we do not believe that significant compensation derived from one
component of compensation should negate or reduce compensation
from other components. We determine the appropriate level for
each compensation component based in part, but not exclusively,
on competitive benchmarking consistent with our recruiting and
retention goals, our view of internal equity and consistency,
overall company performance and other considerations we deem
relevant. To this end, we review executive compensation surveys
of high technology companies located in the Silicon Valley area
when making a crucial executive officer hiring decision and
annually when we review executive compensation. Except as
described below, our compensation committee has not adopted any
formal or informal policies or guidelines for allocating
compensation between long-term and currently paid out
compensation, between cash and non-cash compensation or among
different forms of non-cash compensation. However, our
philosophy is to make a greater percentage of an employees
compensation performance-based and to keep cash compensation to
a competitive level while providing the opportunity to be well
rewarded through equity if the company performs well over time.
We also believe that for technology companies stock-based
compensation is the primary motivator in attracting employees,
rather than base salary or cash bonuses.
Our current intent is to perform at least annually a strategic
review of our executive officers overall compensation
packages to determine whether they provide adequate incentives
and motivation and whether they adequately compensate our
executive officers relative to comparable officers in other
companies with which we compete for executives. The most recent
overall compensation review occurred in October 2006. Board
meetings typically have included, for all or a portion of each
meeting, not only the compensation committee and board members
but also our chief executive officer. For compensation
decisions, including decisions regarding the grant of equity
compensation, relating to executive officers other than to our
chief executive officer, the board considers recommendations
from the compensation committee and also typically considers
recommendations from the chief executive officer.
At its October 2006 meeting, our board decided to set executive
officers total overall cash compensation at a level that
was at or near the
50
th
to
60
th
percentile
of salaries of executives with similar roles at comparable
pre-public companies, with incentive compensation targeted at
the
50
th
to
60
th
percentile
and base salary targeted at the
40
th
to
50
th
percentile.
Equity compensation was also targeted at the
50
th
percentile
of comparable companies. These allocations were consistent with
our goal of attracting and retaining superior employees, while
also aligning their interests with our performance. We realize
that using a benchmark may not always be appropriate but believe
that it is the best alternative at this point in the life cycle
of our company. In instances where an executive officer is
uniquely key to our success, our board may provide compensation
in excess of these percentiles. Our boards judgments with
regard to market levels of base compensation and aggregate
equity holdings were based on reports from an independent
consultant specializing in executive compensation, which was
engaged by our board to assist in the adjustment of the
compensation to our executives. The report compared our
executive compensation with the executive compensation at a
number of similarly situated private companies. Our choice of
the foregoing percentiles to apply to the data in the report
reflected consideration of our stockholders interests in
paying what was necessary, but not significantly more than
necessary, to achieve our corporate goals, while conserving cash
and equity as much as practicable. At its October 2006 meeting,
based on these benchmarks, our compensation committee
recommended and our board of directors subsequently approved
salary increases and additional option
65
grants to our executive officers. The numbers of shares subject
to the options granted in October 2006 to these officers are
reflected in the 2006 Grants of Plan-Based Awards
table below.
We account for equity compensation paid to our employees under
SFAS 123(R), which requires us to estimate and record an
expense over the service period of the award. Our cash
compensation is recorded as an expense at the time the
obligation is accrued. We receive a tax deduction for the
compensation expense. We structure cash bonus compensation so
that it is taxable to our executives at the time it becomes
available to them. We currently intend that all cash
compensation paid will be tax deductible for us. However, with
respect to equity compensation awards, while any gain recognized
by employees from nonqualified options granted at fair market
value should be deductible, to the extent that an option
constitutes an incentive stock option gain recognized by the
optionee will not be deductible if there is no disqualifying
disposition by the optionee. In addition, if we grant restricted
stock or restricted stock unit awards that are not subject to
performance vesting, they may not be fully deductible by us at
the time the award is otherwise taxable to employees.
Base compensation.
The salaries of
Messrs. Combs, Finegan, Weisner, Basart and Vitalone were
set at $275,000, $200,000, $225,000, $200,000 and $200,000 for
the fiscal year ended June 30, 2006. These were established
as part of our normal annual salary review process and reflect
our compensation committees review of the compensation
levels of similar positions at comparable companies. The
compensation committee increased the base salary of John Combs
effective in April 2006 to $325,000 per year, due to our
achieving positive cash flow, as specified under the terms of
his offer letter from July 2004.
Our board of directors approved, effective February 1,
2007, increases to the annual base salaries of our employees,
including our named executive officers, which generally ranged
from 3% to 5%.
Cash bonuses.
We utilize cash bonuses to
reward performance achievements. Bonus targets are established
every six months and are paid following each six month period.
These bonus targets are determined by our compensation committee
as a percentage of each executive officers base salary.
Our board also determines the performance measures and other
terms and conditions of these cash bonuses for executive
officers. For fiscal 2006, the bonus target for our chief
executive officer was 65% of his base salary, as provided in his
employment offer letter. The target bonus is 45% of base salary
for other executive officers. The bonus targets for each
executive officer is a pre-determined percentage of base salary
that is intended to provide a competitive level of compensation
if the executive officer achieves his or her performance
objectives as approved by our compensation committee. The bonus
criteria consist of: (1) company targets, which consist of
50% weighting for revenue, 25% weighting for profitability and
25% weighting for overall customer satisfaction,
(2) individual targets established by our chief executive
officer for the particular employee, and (3) a multiplier
ranging from 0 to 1.5 based on the executives overall
performance rating. The actual bonus award is determined
according to our companys and each executive
officers level of achievement against these performance
objectives. If the company objectives are within a specified
range, from 50% to 150% of the particular target could be
payable to the executives. The bonus for fiscal 2006 for our
chief executive officer was based on the boards review of
company performance targets, consisting of revenue,
profitability, customer satisfaction and its assessment of his
performance. For those executives that perform sales functions,
the individual targets will typically be based at least in part
on an individualized sales commission plan that is directly
related to the amount of products sold and that persons
role in the sale. The compensation committee chose revenue and
profitability level because it believed that, as a growth
company, we should reward revenue growth, but only if that
revenue growth is achieved cost effectively. Customer
satisfaction was also selected as a company target because of
our belief that customer satisfaction is critical to the success
of our business. The performance level multiplier was added
based on our belief that employees that might otherwise reach
various targets, may be contributing or not contributing to the
overall success of our company in a manner that promotes the
long-term growth and success of our company. Thus, we considered
the chosen metrics to be the best indicators of financial
success and stockholder value creation. We do not have a formal
policy regarding adjustment or recovery of awards or payments if
the relevant performance measures upon which they are based are
restated or otherwise adjusted in a manner that would reduce the
size of the award or payment.
For fiscal 2006, Messrs. Combs, Finegan, Weisner, Basart,
and Vitalone each earned a bonus equal to $188,162, $55,000,
$80,000, $65,000, and $60,000. These were paid in August 2006 as
a result of having achieved, and in some cases exceeded, the
bonus targets specified for the second six months of fiscal
2006. In addition,
66
Mr. Vitalone earned sales commissions of $74,767 during
fiscal year 2006. No bonuses were paid to the named executive
officers with respect to the first half of 2006, as the
performance targets were not met.
In October 2006, our board of directors approved a bonus plan
for the first six months of fiscal 2007. These target bonuses
were based on the overall metrics and formulas used for fiscal
2006, with adjustments in the target company financial
performance goals to reflect our growth. The bonus target for
our chief executive officer is 75% of base salary, pursuant to
the terms of his employment offer letter, and the target bonuses
remain at 45% of base salary for our other executive officers.
In addition, our chief financial officer is entitled to a
performance bonus that provides for a payout at the 150% level
under the bonus plan for the second half of fiscal 2007 so long
as he remains employed with our company at June 30, 2007
and has met his performance goals. He will also be entitled to
receive a similar bonus if he is employed by us at
December 31, 2007.
Stock options and equity awards.
We utilize
stock options to ensure that our executive officers have a
continuing stake in our long-term success. Because our executive
officers are awarded stock options with an exercise price equal
to the fair market value of our common stock on the date of
grant, the determination of which is discussed below, these
options will have value to our executive officers only if the
market price of our common stock increases after the date of
grant. Typically, our stock options vest at a rate of 25% of the
shares subject to the option on the first anniversary of the
grant date, and with respect to approximately 2.1% of the shares
each month thereafter. The stock options that we have granted
under our 1997 stock option plan to executive officers may be
exercised by the recipient at any time, however, any shares
purchased are subject to a lapsing right of repurchase in our
favor. This repurchase right lapses on the same schedule as the
vesting of the option.
Authority to make stock option grants to executive officers has
historically rested with our board of directors, and we expect
our board of directors will delegate that authority to our
compensation committee in the future. In determining the size of
stock option grants to executive officers, our board of
directors considers our performance against the strategic plan,
individual performance against the individuals objectives,
comparative share ownership data from compensation surveys of
high technology companies in our area, the extent to which
shares subject to previously granted options are vested and the
recommendations of our chief executive officer and other members
of management.
In fiscal 2006, we hired an independent valuation firm to assist
in the determination of the fair market value of our common
stock in January, July, September and December 2006. Prior to
the engagement of an outside valuation firm, our board of
directors determined the value of our common stock based on
internal reports and other relevant factors.
We do not have any program, plan or obligation that requires us
to grant equity compensation on specified dates and, because we
have not been a public company, we have not made equity grants
in connection with the release or withholding of material
non-public information. However, we intend to implement policies
to ensure that equity awards are granted at fair market value on
the date that the grant action occurs.
During fiscal 2006, we granted to Mr. Weisner a stock option to
purchase 1,800,000 shares of common stock in connection
with his joining our company in April 2005. We believed that
this grant was consistent with our overall approach of remaining
competitive in the marketplace, and was also necessary in order
to retain the services of Mr. Weisner. We also made an
additional grant of 200,000 shares of our common stock to
Mr. Weisner in January 2006, in order to reward him
commensurate with his contribution to the company. We also
granted an option to purchase 2,655,000 shares of our
common stock to Mr. Vitalone. The size of the grant to
Mr. Vitalone was determined pursuant to the offer letter we
negotiated with him in October 2005 when he joined our company.
We believed that this grant was consistent with our overall
approach of remaining competitive in the marketplace, and was
also necessary in order to retain the services of
Mr. Vitalone.
In October 2006, we granted Mr. Weisner an option to
purchase 400,000 shares of common stock, Mr. Basart an
option to purchase 450,000 shares of common stock, and
Mr. Vitalone an option to purchase 500,000 shares of
common stock, each at an exercise price of $0.32 per share. Each
stock option vests as to 50% of the shares in October 2008, and
as to 1/24 of the shares each month over the following two
years. Each stock option is immediately exercisable in full;
however, any unvested shares issued upon exercise will be a
subject to a right to repurchase by us upon termination of
employment, which right lapses in accordance with the vesting
schedule
67
described above. These grants were made by our board of
directors as part of our process of reviewing the equity
positions of our employees, and the board determined that, in
light of the individuals performances, equity ownership
and level of vesting, it was appropriate to provide additional
incentive for each of these personnel, particularly in order to
retain these individuals through and following the initial
public offering process, and to incentivize them to help our
company achieve the growth targets it has set.
In general, our stock option grants through January 2007 were
made under our 1997 stock option plan. In February 2007, we
adopted a new equity incentive plan and a new employee stock
purchase plan. The 2007 equity incentive plan replaces our 1997
stock option plan and affords greater flexibility in making a
wide variety of equity awards, including stock options, shares
of restricted stock and stock appreciation rights, to executive
officers and our other employees. The 2007 employee stock
purchase plan will enable eligible employees to periodically
purchase shares of our common stock at a discount during periods
following this offering. Participation in the 2007 employee
stock purchase plan will be available to all executive officers
following this offering on the same basis as our other
employees. See Management Equity Incentive
Plans for further descriptions of our 1997 stock option
plan, 2007 equity incentive plan and 2007 employee stock
purchase plan.
Other than the equity plans described above, we do not have any
equity security ownership guidelines or requirements for our
executive officers.
Severance and change of control payments.
Each
of our named executive officers (as defined in the Summary
Compensation Table below) is entitled to receive acceleration of
vesting of stock options in amounts ranging from
12 months vesting to 100% of the then-unvested shares
in the event such officer is terminated following a change of
control of ShoreTel. Mr. Combs earns his vesting
acceleration so long as he does not voluntarily terminate his
employment with an acquiring company for six months following a
change of control, and Mr. Finegan receives his vesting
acceleration automatically upon a change of control. We believe
these change of control arrangements, the value of which are
contingent on the value obtained in a change of control
transaction, effectively create incentives for our executive
team to build shareholder value and to obtain the highest value
possible should the company be acquired in the future, despite
the risk of losing employment and potentially not having the
opportunity to otherwise vest in equity awards which comprise a
significant component of each executives compensation.
These arrangements are intended to attract and retain qualified
executives that could have other job alternatives that may
appear to them to be less risky absent these arrangements,
particularly given the significant level of acquisition activity
in the technology sector. All of our change of control
arrangements are double trigger, meaning that
acceleration of stock option vesting is not awarded upon a
change of control unless the executive option holders
employment is terminated within a specified period of time
following the transaction. We believe this structure strikes a
balance between the incentives and the executive hiring and
retention effects described above, without providing these
benefits to executives who continue to enjoy employment with an
acquiring company in the event of a change of control
transaction. We also believe this structure is more attractive
to potential acquiring companies, who may place significant
value on retaining members of our executive team and who may
perceive this goal to be undermined if executives receive
significant acceleration payments in connection with such a
transaction and are no longer required to continue employment to
earn the remainder of their equity awards.
In addition, our chief executive officer is entitled to receive
a severance payment equal to one years base salary
(payable over 12 months) and acceleration of stock option
vesting by one year in the event his employment is terminated
involuntarily or he is constructively terminated. We agreed to
this provision as part of the negotiation of our chief executive
officers compensation package when he joined us, and we
believed it was necessary to agree to such a provision in order
to retain his services.
For a description and quantification of these severance and
change of control benefits, please see the section entitled
Management Executive Compensation
Employment, severance and change of control arrangements.
Other benefits.
Executive officers are
eligible to participate in all of our employee benefit plans,
such as medical, dental, vision, group life, disability, and
accidental death and dismemberment insurance and our 401(k)
plan, in each case on the same basis as other employees, subject
to applicable law. We also provide vacation and other paid
holidays to all employees, including our executive officers,
which are comparable to those provided at peer companies. In
fiscal 2006, Messrs. Combs and Weisner received
reimbursement for commuting expenses from their permanent homes
to the San Francisco Bay Area. Messrs. Combs and
Weisner also received a housing allowance.
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We agreed to pay these amounts to these executives as the
Compensation Committee believed that it was necessary to attract
and retain these executives who would not relocate to the
San Francisco Bay Area on a full time basis.
Executive
compensation tables
The following table presents compensation information for our
fiscal year ended June 30, 2006 paid to or accrued for our
Chief Executive Officer, Chief Financial Officer and each of our
three other most highly compensated executive officers whose
aggregate salary and bonus was more than $100,000. We refer to
these executive officers as our named executive
officers elsewhere in this prospectus.
Summary
Compensation Table
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Non-Equity
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All Other
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Name and Principal Position
|
|
Salary(1)
|
|
Bonus
|
|
Awards(2)
|
|
Compensation(3)
|
|
Compensation
|
|
Total
|
|
John W. Combs
|
|
$
|
287,500
|
|
|
|
|
|
|
|
|
|
|
$
|
188,162
|
|
|
$
|
21,110
|
(4)
|
|
$
|
496,772
|
|
President and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Finegan
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
|
|
|
|
|
|
255,000
|
|
Chief Financial
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walter Weisner
|
|
|
214,038
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
23,483
|
(4)
|
|
|
317,521
|
|
Vice President,
Global Support Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph A. Vitalone
|
|
|
155,000
|
|
|
|
|
|
|
|
|
|
|
|
134,767
|
(5)
|
|
|
|
|
|
|
289,767
|
|
Vice President, Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edwin J. Basart
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
65,000
|
|
|
|
|
|
|
|
265,000
|
|
Chief Technology
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts in this column include payments by us in respect of
accrued vacation, holidays, and sick days, as well as any salary
contributed by the named executive officer to our 401(k) plan.
|
|
(2)
|
|
Under the SFAS 123(R) modified prospective transition
method, we did not record any amounts in our consolidated
financial statements for fiscal year 2006 with respect to option
awards.
|
|
(3)
|
|
Except as otherwise noted below, all non-equity incentive plan
compensation were paid pursuant to the ShoreTel Executive Bonus
Incentive Plan for the second half of fiscal 2006. For a
description of this plan, see Executive
Compensation Compensation Discussion and
Analysis Cash bonuses.
|
|
(4)
|
|
Represents travel expenses and rent.
|
|
(5)
|
|
Also includes $74,767 in sales commissions.
|
For a description of the material terms of offer letters for the
named executive officers in the above table, please see the
section entitled Employment agreements, severance and
change of control agreements.
Our board of directors approved 3% to 5% increases to the annual
base salaries of our employees, including our named executive
officers, effective February 1, 2007.
69
Grants of
Plan-Based Awards During the 2006 Fiscal Year
The following table provides information with regard to each
stock option granted to each named executive officer during our
fiscal year ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
|
|
|
Under Non-Equity
|
|
|
Securities
|
|
|
Price of
|
|
|
|
Grant
|
|
|
Incentive Plan Awards(1)
|
|
|
Underlying
|
|
|
Option
|
|
Name
|
|
Date
|
|
|
Target
|
|
|
Maximum
|
|
|
Options(2)
|
|
|
Awards(3)
|
|
|
John W. Combs
|
|
|
|
|
|
$
|
105,625
|
|
|
$
|
237,656
|
|
|
|
|
|
|
$
|
|
|
John Finegan
|
|
|
|
|
|
|
45,000
|
|
|
|
101,250
|
|
|
|
|
|
|
|
|
|
Walter Weisner
|
|
|
9/8/2005
|
|
|
|
|
|
|
|
|
|
|
|
1,800,000
|
(4)
|
|
|
0.04
|
|
|
|
|
1/12/2006
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
(5)
|
|
|
0.08
|
|
|
|
|
|
|
|
|
50,625
|
|
|
|
113,906
|
|
|
|
|
|
|
|
|
|
Joseph A. Vitalone
|
|
|
10/3/2005
|
|
|
|
|
|
|
|
|
|
|
|
2,655,000
|
(6)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
45,000
|
|
|
|
101,250
|
|
|
|
|
|
|
|
|
|
Edwin J. Basart
|
|
|
|
|
|
|
45,000
|
|
|
|
101,250
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents bonuses payable pursuant to the ShoreTel Executive
Bonus Incentive Plan for the second half of fiscal 2006. For a
description of this plan, see Executive
Compensation Additional Employee Benefit
Plans Executive Bonus Plans.
|
|
(2)
|
|
Each stock option was granted pursuant to our 1997 Stock Option
Plan.
|
|
(3)
|
|
Represents the fair market value of a share of our common stock
on the grant date of the option, as determined by our board of
directors.
|
|
(4)
|
|
Vested as to 25% of the shares in July 2006, and vests as to
1/48 of the shares each month over the next three years
thereafter.
|
|
(5)
|
|
Vests as to 1/48 of the shares each month over four years.
|
|
(6)
|
|
Vested as to 25% of the shares in October 2006, and vests as to
1/48 of the shares each month over the next three years
thereafter.
|
Each of the stock options in the above table is immediately
exercisable in full; however, unvested shares issued upon
exercise are subject to a right to repurchase by us upon
termination of employment, which right lapses in accordance with
the vesting schedule described above. Each of these stock
options expires 10 years from the date of grant. These
stock options are also subject to accelerated vesting upon
involuntary termination or constructive termination following a
change of control of ShoreTel, as discussed below in
Management Executive compensation
Employment, severance and change of control arrangements.
70
Outstanding
Option Awards at June 30, 2006
The following table presents the outstanding option awards held
as of June 30, 2006 by each named executive officer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
Option
|
|
|
|
Number of Securities Underlying Unexercised Options(1)
|
|
|
Exercise
|
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price(2)
|
|
|
Date
|
|
|
John W. Combs(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Finegan
|
|
|
598,125
|
(4)
|
|
|
|
|
|
$
|
0.01
|
|
|
|
5/7/2013
|
|
|
|
|
47,917
|
(5)
|
|
|
|
|
|
|
0.03
|
|
|
|
3/2/2014
|
|
|
|
|
60,000
|
(6)
|
|
|
|
|
|
|
0.04
|
|
|
|
3/14/2015
|
|
Walter Weisner
|
|
|
1,600,000
|
(7)
|
|
|
|
|
|
|
0.04
|
|
|
|
9/8/2015
|
|
Joseph A. Vitalone
|
|
|
1,327,500
|
(8)
|
|
|
|
|
|
|
0.04
|
|
|
|
10/3/2015
|
|
Edwin J. Basart
|
|
|
825,000
|
(9)
|
|
|
|
|
|
|
0.10
|
|
|
|
8/1/2011
|
|
|
|
|
23,100
|
(9)
|
|
|
|
|
|
|
0.01
|
|
|
|
1/7/2013
|
|
|
|
|
1,235,000
|
(10)
|
|
|
|
|
|
|
0.01
|
|
|
|
1/7/2013
|
|
|
|
|
1,430,000
|
(11)
|
|
|
|
|
|
|
0.03
|
|
|
|
3/2/2014
|
|
|
|
|
200,000
|
(12)
|
|
|
|
|
|
|
0.04
|
|
|
|
3/14/2015
|
|
|
|
|
(1)
|
|
Each stock option was granted pursuant to our 1997 Stock Option
Plan. The vesting and exercisability of each stock option is
described in the footnotes below for each option. Each of these
stock options expires 10 years from the date of grant.
These stock options are also subject to accelerated vesting upon
involuntary termination or constructive termination following a
change of control of ShoreTel, as discussed below in
Management Executive compensation
Employment, severance and change of control arrangements.
|
|
(2)
|
|
Represents the fair market value of a share of our common stock
on the options grant date, as determined by our board of
directors.
|
|
(3)
|
|
Mr. Combs early-exercised in full a stock option to
purchase 20,817,795 shares during fiscal 2005 and 2006, as
indicated in the table below. This option/shares vested as to
12.5% of the shares in January 2005, and vests as to 1/42 of the
shares each month thereafter.
|
|
(4)
|
|
Represents shares remaining subject to an immediately
exercisable stock option. Mr. Finegan has early-exercised
the remaining 2,011,875 shares subject to this option, as
indicated in the table below. The option/shares vested as to 25%
of the shares in March 2004, and vests as to 1/48 of the shares
each month thereafter.
|
|
(5)
|
|
Represents shares remaining subject to an outstanding stock
option. Mr. Finegan has exercised 52,083 shares
subject to this option, as indicated in the table below. The
option vests as to 1/48 of the shares each month over four years
from the date of grant.
|
|
(6)
|
|
Represents shares remaining subject to an outstanding stock
option. Mr. Finegan has exercised 20,000 shares
subject to this option, as indicated in the table below. The
option vested as to 25% of the shares in March 2006, and vests
as to 1/48 of the shares each month over three years thereafter.
|
|
(7)
|
|
Represents shares remaining subject to an immediately
exercisable stock option. Mr. Weisner has early-exercised
the remaining 200,000 shares subject to this option, as
indicated in the table below. The option/shares vested as to 25%
of the shares in July 2006, and vests as to 1/48 of the shares
each month over three years thereafter.
|
|
|
|
Mr. Weisner early-exercised in full another
immediately-exercisable stock option to purchase
200,000 shares during fiscal 2006, as indicated in the
table below. This option/shares vests as to 1/48 of the shares
each month over four years from the date of grant.
|
|
(8)
|
|
Represents shares remaining subject to an immediately
exercisable stock option. Mr. Vitalone has early-exercised
the remaining 1,327,500 shares subject to this option, as
indicated in the table below. The option/shares vested as to 25%
of the shares in October 2006, and vests as to 1/48 of the
shares each month over three years thereafter.
|
71
|
|
|
(9)
|
|
This stock option is fully vested.
|
|
(10)
|
|
Represents shares remaining subject to an immediately
exercisable stock option. Mr. Basart has early-exercised
the remaining 2,000,000 shares subject to this option as
indicated in the table below. These shares are fully vested.
|
|
(11)
|
|
Represents shares subject to an outstanding exercisable stock
option. This option vested as to 25% of the shares in October
2003, and vests as to 1/48 of the shares each month over the
next three years thereafter.
|
|
(12)
|
|
Represents shares subject to an outstanding exercisable stock
option. This option vested as to 25% of the shares in March
2006, and vests as to 1/48 of the shares each month over three
years thereafter.
|
In October 2006, we granted Mr. Weisner a stock option to
purchase 400,000 shares, Mr. Basart a stock option to
purchase 450,000 shares, and Mr. Vitalone a stock
option to purchase 500,000 shares, each at an exercise
price of $0.32 per share. Each stock option vests as to 50% of
the shares in October 2008, and as to 1/24 of the shares each
month over the following two years. Each stock option is
immediately exercisable in full; however, any unvested shares
issued upon exercise will be a subject to a right to repurchase
by us upon termination of employment, which right lapses in
accordance with the vesting schedule described above.
Option
Exercises During the 2006 Fiscal Year
The following table shows the number of shares acquired pursuant
to the exercise of options by each named executive officer
during our fiscal year ended June 30, 2006 and the
aggregate dollar amount realized by the named executive officer
upon exercise of the option:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Value Realized
|
|
Name
|
|
Acquired on Exercise
|
|
|
on Exercise(1)
|
|
|
John W. Combs
|
|
|
20,817,795
|
(2)
|
|
$
|
|
|
John Finegan
|
|
|
2,083,958
|
(3)
|
|
|
|
|
Walter Weisner
|
|
|
400,000
|
(4)
|
|
|
|
|
Joseph A. Vitalone
|
|
|
1,327,500
|
(5)
|
|
|
|
|
Edwin J. Basart
|
|
|
2,000,000
|
(6)
|
|
|
|
|
|
|
|
(1)
|
|
The aggregate dollar amount realized upon the exercise of an
option represents the difference between the aggregate market
price of the shares of our common stock underlying that option
on the date of exercise (assumed to be the midpoint of the price
range set forth on the cover page of this prospectus) and the
aggregate exercise price of the option.
|
|
(2)
|
|
Represents the exercise of an immediately exercisable stock
option that continued to be subject to vesting, as described in
footnote 3 to the Outstanding Option Awards at
June 30, 2006 table above. Of these shares, 5,204,448
became vested during fiscal year 2006.
|
|
(3)
|
|
Represents the exercise of immediately exercisable stock options
that continued to be subject to vesting, as described in
footnotes 4-6 to the Outstanding Option Awards at
June 30, 2006 table above. Of these shares, 702,500
became vested during fiscal year 2006.
|
|
(4)
|
|
Represents the exercise of immediately exercisable stock options
that continued to be subject to vesting, as described in
footnote 7 to the Outstanding Option Awards at
June 30, 2006 table above. Of these shares, 20,833
became vested during fiscal year 2006.
|
|
(5)
|
|
Represents the exercise of an immediately exercisable stock
option that continued to be subject to vesting, as described in
footnote 8 to the Outstanding Option Awards at
June 30, 2006 table above. None of these shares
vested during fiscal year 2006.
|
|
(6)
|
|
Represents the exercise of an immediately exercisable stock
option that continued to be subject to vesting, as described in
footnote 10 to the Outstanding Option Awards at
June 30, 2006 table above. Of these shares, 808,750
became vested during fiscal year 2006.
|
72
Employment,
Severance and Change of Control Arrangements
John W. Combs, our president and chief executive officer,
executed an offer letter in July 2004. The offer letter provides
for at-will employment without any specific term. The offer
letter established his starting annual base salary at $275,000,
subject to annual review by the compensation committee of the
Board and further subject to an increase to $325,000 following
two consecutive quarters of cash flow positive operations. His
annual base salary was increased to $325,000 in April 2006 as a
result of this milestone having been satisfied. In addition, the
offer letter entitles Mr. Combs to an incentive bonus, as
determined by the board, of up to 85% of his then-current base
salary. Pursuant to the offer letter, Mr. Combs received a
stock option grant of 20,817,795 shares of common stock
with an exercise price equal to the fair market value of our
common stock on the date of grant. In the event his employment
is terminated by us without cause, or Mr. Combs resigns for
good reason, as such terms are defined in the offer letter,
Mr. Combs will be entitled to receive monthly continuation
of his then-current base salary for a period of 12 months
and acceleration of his unvested stock options in an amount
equal to the number of shares that would have vested had his
employment continued for an additional 12 months. If his
employment is terminated without cause within six months of
a change of control, as such terms are defined in the offer
letter, Mr. Combs will receive accelerated vesting of 100%
of any then unvested shares, options and other equity he holds
at the time.
In addition, we entered into a change of control agreement with
Mr. Combs effective as of August 5, 2004. This
agreement augments the terms provided for by his offer letter.
The agreement provides that, in the event of a change of control
of ShoreTel, so long as Mr. Combs either remains employed
with the company or its successor for six months following the
change of control, or if Mr. Combs is terminated without
cause or resigns for good reason during the six months following
such change of control, then Mr. Combs will receive
accelerated vesting of 100% of his initial stock option grant.
John Finegan, our chief financial officer, executed an offer
letter in March 2003. The offer letter provides for at-will
employment without any specific term. The offer letter
established Mr. Finegans starting annual base salary
at $200,000. In addition, Mr. Finegan is eligible for an
annual incentive bonus. Pursuant to the offer letter,
Mr. Finegan received a stock option grant of
2,610,000 shares of common stock with an exercise price
equal to the fair market value of our common stock on the date
of grant. In the event Mr. Finegans employment is
involuntarily terminated without cause or constructively
terminated, in either case within 12 months following a
change of control, as such terms are defined in the offer
letter, Mr. Finegan will receive accelerated vesting of
100% of any then unvested shares, options, and other equity he
holds at the time.
In addition, we entered into a change of control agreement with
Mr. Finegan effective as of May 7, 2003. This
agreement augments the terms provided for by
Mr. Finegans offer letter. The agreement provides
that, in the event of a change of control of ShoreTel,
Mr. Finegans stock option to purchase
2,610,000 shares will immediately become exercisable as to
that number of shares that would have vested if Mr. Finegan
had remained continuously employed by ShoreTel for a period of
12 months following the change of control. In addition, if
this benefit would result in excise tax as a parachute
payment, Mr. Finegan would be entitled to receive
either his vesting acceleration benefit, or such portion of his
vesting acceleration benefit as would result in no excise tax,
depending on which would result in a greater net benefit.
In February 2007, we entered into a retention arrangement with
Mr. Finegan that provides for a bonus payout at the 150%
level under the bonus plan for the second half of fiscal 2007 so
long as he either remains employed with the company during that
period or if his employment is terminated prior to the end of
that period. This retention arrangement will remain in place for
the first half of fiscal 2008 if Mr. Finegan is requested
to remain with the company during that period.
Walter Weisner, our vice president of global support services,
executed an offer letter in April 2005 with a start date in July
2005. The offer letter provides for at-will employment without
any specific term. The offer letter established
Mr. Weisners starting annual base salary at $225,000.
In addition, Mr. Weisner is eligible for an annual
incentive bonus. In connection with his joining our company in
April 2005, Mr. Weisner received a stock option grant of
1,800,000 shares of common stock with an exercise price
equal to the fair market value of our common stock on the date
of such grant. In the event Mr. Weisners employment
is involuntarily terminated without cause or constructively
terminated, in either case within 12 months following a
change of control, as such terms are defined
73
in the offer letter, Mr. Weisner will receive accelerated
vesting of 50% of any then unvested shares, options and other
equity he holds at the time.
We entered into a change of control agreement with Edwin J.
Basart, our founder and Chief Technology Officer, effective
August 1, 2001. The agreement provides that, in the event
of a change of control of ShoreTel, Mr. Basarts stock
option to purchase 825,000 shares will immediately become
exercisable as to that number of shares that would have vested
if Mr. Basart had remained continuously employed by
ShoreTel for a period of 12 months following the change of
control. In addition, if this benefit would result in excise tax
as a parachute payment, Mr. Basart would be
entitled to receive either his vesting acceleration benefit, or
such portion of his vesting acceleration benefit as would result
in no excise tax, depending on which would result in a greater
net benefit.
Joseph A. Vitalone, our vice president of sales, executed an
offer letter in September 2005 with a start date in October
2005. The offer letter provides for at-will employment without
any specific term. The offer letter established
Mr. Vitalones starting annual base salary at
$200,000. In addition, Mr. Vitalone is eligible for an
annual incentive bonus and participates in the executive
management bonus program. Pursuant to the offer letter,
Mr. Vitalone received a stock option grant of
2,655,000 shares of common stock with an exercise price
equal to the fair market value of our common stock on the date
of such grant. In the event Mr. Vitalones employment
is involuntarily terminated without cause or constructively
terminated, in either case within 12 months following a
change of control, as such terms are defined in the offer
letter, Mr. Vitalone will receive accelerated vesting of
50% of any then unvested shares, options and other equity he
holds at the time.
The following table summarizes the benefits payable to each
named executive officer pursuant to the arrangements described
above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Change of Control
|
|
|
|
|
|
|
Acceleration of
|
|
|
|
|
|
Acceleration of
|
|
Name
|
|
Salary
|
|
|
Equity Vesting(1)
|
|
|
Salary
|
|
|
Equity Vesting(1)
|
|
|
John W. Combs
|
|
$
|
325,000
|
(2)
|
|
|
|
(3)
|
|
|
|
|
|
|
(4
|
)
|
John Finegan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Walter Weisner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Joseph A. Vitalone
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Edwin J. Basart
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
(1)
|
|
Calculated based on the termination or change of control taking
place as of June 30, 2006, the last day of our most recent
fiscal year, and based on assumed initial public offering price
of $ per share, the midpoint
of the range set forth on the cover page of this prospectus.
|
|
(2)
|
|
Reflects continued base salary for 12 months following
termination.
|
|
(3)
|
|
Reflects accelerated vesting as if the officer had continued to
be employed for an additional 12 months.
|
|
(4)
|
|
Reflects acceleration of vesting as to 100% of the shares.
|
|
(5)
|
|
Reflects acceleration of vesting as to 50% of the shares.
|
Equity
Incentive Plans
This section contains a summary of our equity incentive plans.
To date, substantially all options to purchase shares of our
common stock have been granted under our 1997 stock option plan.
Our 1997 stock option plan has terminated, and we now grant
options to purchase shares of our common stock only from our
2007 equity incentive plan. The following descriptions are
qualified by the terms of the actual plans filed as exhibits to
the registration statement, of which this prospectus is a part.
2007
Equity Incentive Plan
Background.
The 2007 equity incentive plan
serves as the successor equity compensation plan to our 1997
stock option plan. Our board of directors adopted our 2007
equity incentive plan in February 2007. This plan became
effective upon adoption and will terminate in February 2017. The
2007 equity incentive plan provides for
74
the grant of incentive stock options, nonqualified stock
options, restricted stock awards, stock appreciation rights,
restricted stock units and stock bonuses.
Administration.
The 2007 equity incentive plan
is administered by our compensation committee. This committee
acts as the plan administrator and determines which individuals
are eligible to receive awards under the plan, the time or times
when such awards are to be made, the number of shares subject to
each such award, the status of any granted option as either an
incentive stock option or a nonqualified stock option under
United States federal tax laws, the vesting schedule applicable
to an award and the maximum term for which any award is to
remain outstanding (subject to the limits set forth in the 2007
equity incentive plan). The committee also determines the
exercise price of options granted, the purchase price for rights
to purchase restricted stock and, if applicable, restricted
units and the strike price for stock appreciation rights. Unless
the committee provides otherwise, the plan does not allow for
the transfer of awards and only the recipient of an award may
exercise an award during his or her lifetime.
Share Reserve.
We have reserved
50,000,000 shares of our common stock for issuance under
the 2007 equity incentive plan. Additionally, our 2007 equity
incentive plan provides for automatic increases in the number of
shares available for issuance under it as follows:
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|
|
|
|
on the first day of each January from 2008 through 2017, the
number of shares of our common stock will be increased by 5% of
the number of shares of our common stock issued and outstanding
on the preceding
December 31
st
; or
|
|
|
|
a lesser number of shares of our common stock as determined by
our board of directors.
|
Equity Awards.
Our 2007 equity incentive plan
permits us to grant the following types of awards:
Stock Options.
The 2007 equity incentive plan
provides for the grant of incentive stock options (commonly
referred to as ISOs), and nonqualified stock options (commonly
referred to as NSOs), to employees, directors and consultants.
ISOs may only be granted to employees. Options may be granted
with terms determined by the committee, provided that ISOs are
subject to statutory limitations. The committee determines the
exercise price for a stock option, within the terms and
conditions of the plan and applicable law, provided that the
exercise price of an ISO may not be less than 100% (or higher in
the case of ISOs granted to certain types of recipients) of the
fair market value of our common stock on the date of grant. No
more than 450,000,000 shares may be issued pursuant to the
exercise of ISOs granted under the plan.
Options granted under the 2007 equity incentive plan will vest
at the rate specified by the committee and such vesting schedule
will be set forth in the stock option agreement pursuant to
which such stock option grant relates. Generally, the committee
determines the term of stock options granted under the plan, up
to a term of ten years, except in the case of certain incentive
stock options for which the term can be no more than five years.
After termination of an optionee, he or she may exercise his or
her vested option for the period of time stated in the stock
option agreement to which such option relates. Generally, if
termination is due to death or disability, the vested option
will remain exercisable for 12 months. In all other cases,
the vested option will generally remain exercisable for three
months. However, an option may not be exercised later than its
expiration date. Notwithstanding the foregoing, if an optionee
is terminated for cause (as defined in our 2007 equity incentive
plan), then the optionees options shall expire on the
optionees termination date or at such later time and on
such conditions as determined by our compensation committee.
Restricted Stock.
A restricted stock award is
an offer by us to sell shares of our common stock subject to
restrictions that the committee may impose. These restrictions
may be based on completion of a specified period of service with
us or upon the completion of performance goals during a
performance period (or a combination of the foregoing). The
price of a restricted stock award will be determined by the
committee. Unless otherwise determined by the committee at the
time of award, vesting ceases on the date the participant no
longer provides services to us and unvested shares are forfeited
to us or subject to repurchase by us.
Stock Appreciation Rights.
Stock appreciation
rights provide for a payment, or payments, in cash or shares of
common stock, to the holder based upon the difference between
the fair market value of our common
75
stock on the date of exercise over the stated exercise price.
Stock appreciation rights may vest based on time or achievement
of performance conditions (or a combination of the foregoing).
Restricted Stock Units.
Restricted stock units
represent the right to receive shares of our common stock at a
specified date in the future, subject to forfeiture of such
right due to termination of employment
and/or
failure to achieve specified performance conditions. If the
restricted stock unit has not been forfeited, then on the date
specified in the restricted stock unit agreement, we will
deliver to the holder of the restricted stock unit whole shares
of our common stock, cash or a combination of our common stock
and cash.
Stock Bonuses.
Stock bonuses are granted as
additional compensation for performance, and therefore, are not
issued in exchange for cash.
Change of Control.
In the event of a
liquidation, dissolution or change in control transaction,
outstanding awards may be assumed or replaced by the successor
company (if any). Outstanding awards that are not assumed or
replaced by the successor company (if any) will expire on the
consummation of the liquidation, dissolution or change in
control transaction at such time and on such conditions as our
board of directors determines (including, without limitation,
full or partial vesting and exercisability of any or all
outstanding awards issued under our 2007 equity incentive plan).
Transferability of Awards.
Generally, a
participant may not transfer an award other than by will or the
laws of descent and distribution unless, in the case of awards
other than ISOs, the committee permits the transfer of an award
to certain authorized transferees (as set forth in our 2007
equity incentive plan).
Eligibility.
The individuals eligible to
participate in our 2007 equity incentive plan include our
officers and other employees, our non-employee board of
directors members and any consultants.
Payment for Purchase of Shares of our Common
Stock.
Payment for shares of our common stock
purchased pursuant to the 2007 equity incentive plan may be made
by any of the following methods (provided such method is
permitted in the applicable award agreement to which such shares
relate): (i) cash (including by check),
(ii) cancellation of indebtedness, (iii) surrender of
shares, (iv) waiver of compensation due or accrued for
services rendered; (v) through a same day sale
program or through a margin commitment or
(vi) by another other method approved by our board of
directors.
Limit on Awards.
Under our 2007 equity
incentive plan, during any calendar year, no participant will be
eligible to receive more than 25,000,000 shares of our
common stock.
Amendment and Termination.
Our board of
directors may amend or terminate the 2007 equity incentive plan
at any time. Notwithstanding the foregoing, neither the board of
directors nor the committee shall, without stockholder approval,
amend the plan in any manner that requires stockholder approval.
In addition, no amendment that is detrimental to a plan
participant may be made to an outstanding option without the
consent of the affected participant.
1997
Stock Option Plan
Our board of directors of directors adopted and our shareholders
approved our 1997 stock option plan in January 1997. As of
December 31, 2006, options to purchase
36,927,695 shares of our common stock were outstanding
under our 1997 stock option plan. This plan terminated in
January 2007, and no additional options may be granted under
this plan. However, all stock options outstanding on the
termination of the 1997 stock option plan will continue to be
governed by the terms and conditions of the 1997 stock option
plan. Options granted under the 1997 stock option plan are
subject to terms substantially similar to those described above
with respect to options granted under the 2007 equity incentive
plan.
2007
Employee Stock Purchase Plan
Background.
Our 2007 employee stock purchase
plan is designed to enable eligible employees to periodically
purchase shares of our common stock at a discount. Purchases are
accomplished through participation in discrete offering periods.
Our 2007 employee stock purchase plan is intended to qualify as
an employee stock purchase plan under Section 423 of the
Internal Revenue Code. Our board of directors adopted our 2007
employee
76
stock purchase plan in February 2007 and our stockholders are
expected to approve the plan before the completion of this
offering.
Share Reserve.
We have initially reserved
5,000,000 shares of our common stock for issuance under our
2007 employee stock purchase plan. The number of shares reserved
for issuance under our 2007 employee stock purchase plan will
increase automatically on the first day of each January,
starting with January 1, 2008, by the number of shares
equal to 1% of our total outstanding shares as of the
immediately preceding
December 31
st
(rounded to the nearest whole share). Our board of directors or
compensation committee may reduce the amount of the increase in
any particular year. No more than 50,000,000 shares of our
common stock may be issued under our 2007 employee stock
purchase plan and no other shares may be added to this plan
without the approval of our stockholders.
Administration.
Our compensation committee
will administer our 2007 employee stock purchase plan.
Participation is limited to our employees. Our employees
generally are eligible to participate in our 2007 employee stock
purchase plan if they are employed by us, or a subsidiary of
ours that we designate, for more than 20 hours per week and
more than five months in a calendar year. Employees who are 5%
stockholders, or would become 5% stockholders as a result of
their participation in our 2007 employee stock purchase plan,
are ineligible to participate in our 2007 employee stock
purchase plan. We may impose additional restrictions on
eligibility as well. Under our 2007 employee stock purchase
plan, eligible employees may acquire shares of our common stock
by accumulating funds through payroll deductions. Our eligible
employees may select a rate of payroll deduction between 1% and
15% of their cash compensation. We also have the right to amend
or terminate our 2007 employee stock purchase plan and offering
periods thereunder. Our 2007 employee stock purchase plan will
terminate on the tenth anniversary of the first offering date,
unless it is terminated earlier by our board of directors.
Purchase Rights.
When an offering period
commences, our employees who meet the eligibility requirements
for participation in that offering period are automatically
granted a non-transferable option to purchase shares in that
offering period. Each offering period may run for no more than
24 months. An employees participation automatically
ends upon termination of employment for any reason.
Except for the first offering period, each offering period will
be for six months (commencing with the first February 15 or
August 15 to occur on or after the date that is six months
following the date of this prospectus) and will run February 15
to August 14 or August 15 to February 14, as the case may
be. The first offering period will begin upon the date of this
prospectus and will end on the first February 14 or August 14 to
occur on or after the date that is six months following the date
of this prospectus.
No participant will have the right to purchase our shares at a
rate which, when aggregated with purchase rights under all our
employee stock purchase plans that are also outstanding in the
same calendar year(s), have a fair market value of more than
$25,000, determined as of the first day of the applicable
offering period, for each calendar year in which such right is
outstanding. The purchase price for shares of our common stock
purchased under our 2007 employee stock purchase plan will be
90% of the lesser of the fair market value of our common stock
on (i) the first trading day of the applicable offering
period and (ii) the last trading day of the applicable
offering period.
Change in Control.
In the event of a change in
control transaction, our 2007 employee stock purchase plan and
any offering periods that commenced prior to the completion of
the proposed transaction may terminate on the completion of the
proposed transaction and the final purchase of shares will occur
on that date, but our compensation committee may instead
terminate any such offering period at a different date.
Additional
Employee Benefit Plans
Executive
Bonus Plans
In January 2006, our board of directors approved a bonus plan
for the second six months of fiscal 2006. The plan specified a
bonus target for our chief executive officer equal to 65% of his
base salary, and 45% of base salary for other executive
officers. The bonus criteria consist of: (1) company
targets, which consist of 50% weighting for revenue, 25%
weighting for profitability and 25% weighting for overall
customer satisfaction, (2) individual targets established
by our chief executive officer for the particular employee, and
(3) a multiplier ranging from 0 to 1.5
77
based on the executives overall performance rating. The
actual bonus award is determined according to our companys
and each executive officers level of achievement against
these performance objectives. If the company objectives are
within a specified range, from 50% to 150% of the particular
target could be payable. The bonus for fiscal 2006 for our chief
executive officer was based entirely on company performance
targets, consisting of revenue, profitability and customer
satisfaction. For those executives that perform sales functions,
the individual targets will typically be based at least in part
on an individualized sales commission plan that is directly
related to the amount of products sold and that persons
role in the sale.
In October, 2006, our board of directors approved a bonus plan
for the first six months of fiscal 2007. These target bonuses
were based on the overall metrics and formulas used for fiscal
2006, with adjustments in the target company financial
performance goals to reflect our growth. The bonus target for
our chief executive officer increased to 75% of base salary and
the target bonuses remain at 45% of base salary for our other
executive officers.
401(k)
Plan
We offer a 401(k) plan to all employees who meet specified
eligibility requirements. The plan provides for voluntary tax
deferred contributions of 1 to 20% of gross compensation subject
to certain IRS limitations. Based on approval by our board of
directors, we may make matching contributions to the plan. No
matching contributions had been made as of December 31,
2006.
Indemnification
of Directors and Executive Officers and Limitation of
Liability
Our restated certificate of incorporation and bylaws to be in
effect upon the completion of this offering will provide that we
will indemnify our directors and officers to the fullest extent
permitted by Delaware law, as it now exists or may in the future
be amended, against all expenses and liabilities reasonably
incurred in connection with their service for or on our behalf.
Our bylaws provide that we will advance the expenses incurred by
a director or officer in advance of the final disposition of an
action or proceeding, and permit us to secure insurance on
behalf of any officer, director, employee or other agent for any
liability arising out of his or her action in that capacity,
regardless of whether Delaware law would otherwise permit
indemnification. In addition, the restated certificate of
incorporation provides that our directors will not be personally
liable for monetary damages to us for breaches of their
fiduciary duty as directors, unless they violate their duty of
loyalty to us or our stockholders, act in bad faith, knowingly
or intentionally violate the law, authorize illegal dividends or
redemptions or derive an improper personal benefit from their
action as directors.
We have entered into indemnification agreements with each of our
directors and officers. These agreements provide for
indemnification for related expenses including attorneys
fees, judgments, fines and settlement amounts incurred by any of
these individuals in any action or proceeding, and obligate us
to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. At present,
we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees
or agents in which indemnification would be required or
permitted. We believe provisions in our restated certificate of
incorporation and indemnification agreements are necessary to
attract and retain qualified persons as directors and officers.
In addition, we maintain liability insurance which insures our
directors and officers against certain losses under certain
circumstances.
The limitation of liability and indemnification provisions in
our restated certificate of incorporation and bylaws may
discourage stockholders from bringing a lawsuit against our
directors for breach of their fiduciary duty. They may also
reduce the likelihood of derivative litigation against our
directors and officers, even though an action, if successful,
might benefit us and other stockholders. Furthermore, a
stockholders investment may be adversely affected to the
extent that we pay the costs of settlement and damage awards
against directors and officers as required by these
indemnification provisions. At present, we are not aware of any
pending litigation or proceeding involving any of our directors,
officers or employees for which indemnification is sought, and
we are not aware of any threatened litigation that may result in
claims for indemnification.
78
RELATED
PARTY TRANSACTIONS
In addition to the executive and director compensation
arrangements discussed above under Management, the
following is a description of transactions since July 1,
2003 to which we have been a party, in which the amount involved
in the transaction exceeds or will exceeds $120,000, and in
which any of our directors, executive officers or beneficial
holders of more than 5% of our capital stock, or any immediate
family member of, or person sharing the household with, any of
these individuals, had or will have a direct or indirect
material interest.
Sales of
our Series G preferred stock
In March 2004, we sold an aggregate of 20,114,943 shares of
our Series G preferred stock at $0.174 per share for
an aggregate purchase price of approximately $3.5 million.
Each share of Series G preferred will convert automatically
into one share of our common stock upon the completion of this
offering. The following table identifies the number of shares of
Series G preferred stock purchased by current holders of
more than 5% of our outstanding stock. None of our executive
officers or directors purchased Series G preferred stock,
although certain of our executive officers or directors may
currently be considered to beneficially own shares held by
entities with which they are affiliated. Please see
Principal Stockholders. The terms of these purchases
were the same as those made available to unaffiliated purchasers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Series G
|
|
|
Aggregate
|
|
|
Percentage of
|
|
Investor
|
|
Preferred Stock
|
|
|
Purchase Price
|
|
|
Total Issued
|
|
|
Entities affiliated with
Crosspoint Venture Partners(1)
|
|
|
7,063,793
|
|
|
$
|
1,229,099.98
|
|
|
|
35.1
|
%
|
Entities affiliated with Lehman
Brothers Venture Partners(2)
|
|
|
6,074,258
|
|
|
|
1,056,920.89
|
|
|
|
30.2
|
|
Entities affiliated with
Foundation Capital(3)
|
|
|
5,042,233
|
|
|
|
877,348.54
|
|
|
|
25.1
|
|
Entities affiliated with
J.P. Morgan Direct Venture Capital(4)
|
|
|
1,329,301
|
|
|
|
231,298.37
|
|
|
|
6.6
|
|
|
|
|
(1)
|
|
Represents 6,338,547 shares held by Crosspoint Venture
Partners 2000 Q L.P. and 725,246 shares held by Crosspoint
Venture Partners 2000 L.P. Seth D. Neiman, one of our directors,
is a General Partner of Crosspoint Venture Partners.
|
|
(2)
|
|
Represents 3,515,706 shares held by LB I Group, Inc.;
1,162,613 shares held by Lehman Brothers P.A LLC;
736,274 shares held by Lehman Brothers Venture Capital
Partners II, L.P.; 523,814 shares held by Lehman
Brothers Partnership Account 2000/2001, L.P.; and
135,851 shares held by Lehman Brothers Offshore Partnership
Account 2000/2001, L.P. Brian K. Paul, one of our
directors, is a managing director in Private Equity at Lehman
Brothers and a partner of Lehman Brothers Venture Partners.
|
|
(3)
|
|
Represents 4,911,135 shares held by Foundation Capital
Leadership Fund, L.P. and 131,098 shares held by Foundation
Capital Leadership Principals Fund, LLC.
|
|
(4)
|
|
Represents 1,167,115 shares held by JP Morgan Direct
Venture Capital Institutional Investors LLC; 155,540 shares
held by J.P. Morgan Direct Venture Capital Private
Investors LLC and 6,646 shares held by 522 Fifth Avenue
Fund, L.P.
|
Sales of
our Series H Preferred Stock
In October 2004, we sold an aggregate of 47,169,812 shares
of our Series H preferred stock at $0.212 per share
for an aggregate purchase price of approximately
$10.0 million. Each share of preferred will convert
automatically into one share of our common stock upon the
completion of this offering. The following table identifies the
number of shares of Series H preferred stock purchased by
current holders of more than 5% of our outstanding stock. None
of our executive officers or directors purchased Series H
preferred stock, although certain of our executive officers or
directors may currently be considered to beneficially own shares
held by entities with which they are affiliated.
79
Please see Principal Stockholders. The terms of
these purchases were the same as those made available to
unaffiliated purchasers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Series H
|
|
|
Aggregate
|
|
|
Percentage of
|
|
Investor
|
|
Preferred Stock
|
|
|
Purchase Price
|
|
|
Total Issued
|
|
|
Entities affiliated with
Crosspoint Venture Partners(1)
|
|
|
17,295,753
|
|
|
$
|
3,666,699.64
|
|
|
|
36.7
|
%
|
Entities affiliated with Lehman
Brothers Venture Partners(2)
|
|
|
14,244,101
|
|
|
|
3,019,749.41
|
|
|
|
30.2
|
|
Entities affiliated with
Foundation Capital(3)
|
|
|
12,345,945
|
|
|
|
2,617,340.34
|
|
|
|
26.2
|
|
Entities affiliated with
J.P. Morgan Direct Venture Capital(4)
|
|
|
3,254,805
|
|
|
|
690,018.66
|
|
|
|
6.9
|
|
|
|
|
(1)
|
|
Represents 15,519,982 shares held by Crosspoint Venture
Partners 2000 Q L.P. and 1,755,771 shares held by
Crosspoint Venture Partners 2000 L.P. Seth D. Neiman, one of our
directors, is a General Partner of Crosspoint Venture Partners.
|
|
(2)
|
|
Represents 8,244,311 shares held by LB I Group, Inc.;
2,726,321 shares held by Lehman Brothers P.A LLC;
1,726,558 shares held by Lehman Brothers venture capital
Partners II, L.P.; 1,228,341 shares held by Lehman
Brothers partnership Account 2000/2001, L.P.; and
318,570 shares held by Lehman Brothers Offshore Partnership
Account 2000.2001, L.P. Brian K. Paul, one of our
directors, is a managing director in Private Equity at Lehman
Brothers and a partner of Lehman Brothers Venture Partners.
|
|
(3)
|
|
Represents 12,025,272 shares held by Foundation Capital
Leadership Fund, L.P. and 320,673 shares held by Foundation
Capital Leadership Principals Fund, LLC.
|
|
(4)
|
|
Represents 2,857,691 shares held by JP Morgan Direct
Venture Capital Institutional Investors LLC; 380,841 shares
held by J.P. Morgan Direct Venture Capital Private
Investors LLC and 16,273 shares held by 522 Fifth Avenue
Fund, L.P.
|
Stockholder
and other agreements
In connection with the sale of our Series G and
Series H Preferred Stock, we entered into agreements that
grant customary preferred stock rights to all of our major
preferred stock investors, including holders of more than 5% of
our outstanding stock. These rights include registration rights,
rights of first refusal, information rights, co-sale rights with
respect to stock transfers, a voting agreement providing for the
election of investor designees to the board of directors,
information rights and other similar rights. The Seventh Amended
and Restated Rights Agreement, which contains the registration
rights and many of the other rights described above, is filed as
an exhibit to the registration statement of which this
prospectus is a part. All of these rights, other than the
registration rights, will terminate upon the completion of this
offering. For a description of the registration rights, please
see the section entitled Description of Capital
Stock Registration Rights.
Underwriters
Lehman Brothers Inc. and J.P. Morgan Securities Inc. are
acting as underwriters of this offering, and we will enter into
an underwriting agreement with them. For a description of the
terms of the underwriting agreement, see the section entitled
Underwriting. Entities affiliated with Lehman
Brothers Inc. and J.P. Morgan Securities Inc. beneficially
own approximately 23.0% and 5.4%, respectively, of our
outstanding capital stock as of December 31, 2006.
80
PRINCIPAL
STOCKHOLDERS
The following table presents information as to the beneficial
ownership of our common stock as of December 31, 2006, as
adjusted to reflect the sale of common stock offered by us in
this offering, by:
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|
|
|
|
each of the executive officers listed in the summary
compensation table;
|
|
|
|
each of our directors;
|
|
|
|
all of our directors and executive officers as a group; and
|
|
|
|
each stockholder known by us to be the beneficial owner of more
than 5% of our common stock.
|
We have determined beneficial ownership in accordance with the
rules of the SEC. Unless otherwise indicated below, to our
knowledge, the persons and entities named in the table have sole
voting and sole investment power with respect to all shares
beneficially owned, subject to applicable community property
laws. Shares of our common stock subject to options that are
currently exercisable or exercisable within 60 days of
December 31, 2006 are deemed to be outstanding and to be
beneficially owned by the person holding the options for the
purpose of computing the percentage ownership of that person but
are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
The number of shares beneficially owned and percentage of our
common stock outstanding before the offering is based on
328,685,301 shares of our common stock outstanding on
December 31, 2006, assuming the conversion of all
outstanding shares of our preferred stock into
233,164,369 shares of common stock immediately prior to the
completion of this offering. The number of shares of common
stock outstanding after this offering includes the shares of
common stock offered under this prospectus. Except as otherwise
noted below, the address for each person or entity listed in the
table is c/o ShoreTel, Inc., 960 Stewart Drive, Sunnyvale,
CA 94085.
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Number of
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Percentage of Shares
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Shares
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Beneficially Owned
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Beneficially
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Before
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After
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Name of Beneficial Owner
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Owned
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Offering
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Offering
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Directors and Named Executive
Officers
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John W. Combs(1)
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20,817,795
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6.3
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%
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John Finegan(2)
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2,721,249
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*
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Walter Weisner(3)
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2,400,000
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*
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Joseph A. Vitalone(4)
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3,155,000
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1.0
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Edwin J. Basart(5)
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7,753,933
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2.3
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Charles D. Kissner(6)
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500,000
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*
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Seth D Neiman(7)
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93,215,530
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28.4
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Thomas van Overbeek(8)
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13,460,882
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4.1
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Brian K. Paul(9)
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75,688,402
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23.0
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Edward F. Thompson(10)
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500,000
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*
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All directors and executive
officers as a group (12 persons)(11)
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225,567,791
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65.7
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5% Stockholders
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Entities affiliated with
Crosspoint Venture Partners(12)
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93,215,530
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28.4
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Entities affiliated with
Foundation Capital(13)
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68,156,860
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20.7
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Entities affiliated with
J.P. Morgan Direct Venture Capital(14)
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17,605,608
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5.4
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Entities affiliated with Lehman
Brothers Venture Partners(15)
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75,688,402
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23.0
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*
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Less than 1%
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(1)
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Consists of shares issued upon early exercise of a stock option,
a portion of which shares remain subject to vesting. The vesting
schedule for these shares is described in footnote 3 to the
Outstanding Option Awards at June 30, 2006
table under Management Executive
Compensation.
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(2)
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Consists of 2,083,958 shares issued upon early exercise of
stock options, a portion of which shares remain subject to
vesting, and 637,291 shares subject to outstanding stock
options, which options are immediately exercisable subject to
our lapsing right of repurchase. The vesting schedules for these
shares and stock options are described in footnotes 4-6 to
the Outstanding Option Awards at June 30, 2006
table under Management Executive
Compensation.
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(3)
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Consists of 400,000 shares issued upon early exercise of a
stock option, a portion of which shares remain subject to
vesting, and 2,000,000 shares subject to immediately
exercisable stock options subject to our lapsing right of
repurchase. The vesting schedules for these shares and stock
option are described in footnote 7 to the Outstanding
Option Awards at June 30, 2006 table under
Management Executive Compensation.
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(4)
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Consists of 1,327,500 shares issued upon early exercise of
a stock option, a portion of which shares remain subject to
vesting, and 1,827,500 shares subject to outstanding stock
options, which options are immediately exercisable subject to
our lapsing right of repurchase. The vesting schedules for these
shares and stock option are described in footnote 8 to the
Outstanding Option Awards at June 30, 2006
table under Management Executive
Compensation.
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(5)
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Consists of 3,695,000 shares held by Mr. Basart, and
4,058,933 shares subject to outstanding stock options,
which options are immediately exercisable subject to our lapsing
right of repurchase. The vesting schedules for these stock
options are described in footnotes 9-12 to the
Outstanding Option Awards at June 30, 2006
table under Management Executive
Compensation.
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(6)
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Consists of shares issued upon early exercise of a stock option,
all of which shares remain subject to vesting in accordance with
the vesting schedule described in footnote 2 to the
Director Compensation table.
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(7)
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Consists of shares held by entities affiliated with Crosspoint
Venture Partners (see note 12). Mr. Neiman, a
Crosspoint representative on our board of directors, is also a
managing partner of Crosspoint Venture Partners. As a result,
Mr. Neiman may be deemed to beneficially own all of the
shares held by the entities affiliated with Crosspoint Venture
Partners. Mr. Neiman disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
The address of Mr. Neiman is 2925 Woodside Road, Woodside,
CA 94062.
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(8)
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Consists of 10,840,900 shares held and
2,619,982 shares issuable upon exercise of outstanding
stock options, all except 135,417 of which shares will be fully
vested within 60 days of December 31, 2006.
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(9)
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Consists of shares held by entities affiliated with Lehman
Brothers Venture Partners (see note 15). Mr. Paul, a
Lehman Brothers representative on our board of directors, is
also a partner of Lehman Brothers Venture Partners. As a result,
Mr. Paul may be deemed to beneficially own all of the
shares held by the entities affiliated with Lehman Brothers
Venture Partners. Mr. Paul disclaims beneficial ownership
of such shares except to the extent of his pecuniary interest
therein. The address of Mr. Paul is 3000 Sand Hill Road,
Building 3, Suite 190, Menlo Park, CA 94025.
Mr. Paul is a partner of Lehman Brothers Ventures Partners,
an entity affiliated with Lehman Brothers Inc., which is acting
as an underwriter of this offering.
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(10)
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Consists of shares issued upon early exercise of a stock option,
of which 500,000 shares remain subject to vesting in
accordance with the vesting schedule described in
footnote 3 to the Director Compensation table.
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(11)
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Includes shares held by entities affiliated with directors
described in notes 12 and 14. Also includes
1,929,582 shares subject to options that are immediately
exercisable, and remain subject to vesting, and
11,394,124 shares which were issued pursuant to immediately
exercisable stock options, a portion of which remain subject to
our right of repurchase upon termination of employment, which
rights lapse according to the vesting schedule of the original
options.
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(12)
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Consists of 71,323,739 shares held by Crosspoint Venture
Partners 2000 Q L.P., 8,160,746 shares held by Crosspoint
Venture Partners 2000 L.P., 8,123,146 shares held by
Crosspoint Venture Partners 1996, and 5,607,902 shares held
by Crosspoint Venture Partners LS2000 L.P., each of which is
affiliated with Crosspoint Venture Partners. The address of
Crosspoint Venture Partners is 2925 Woodside Road, Woodside, CA
94062.
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(13)
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Consists of 40,983,958 shares held by Foundation Capital,
L.P., 22,031,492 shares held by Foundation Capital
Leadership Fund, L.P., 4,553,770 shares held by Foundation
Capital Entrepreneurs Fund, LLC and 587,640 shares held by
Foundation Capital Leadership Principals Fund, LLC, each of
which is affiliated with Foundation Capital. The address of
Foundation Capital is 70 Willow Road, Suite 200, Menlo
Park, CA 94025.
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82
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(14)
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Consists of 15,318,977 shares held by J.P. Morgan
Direct Venture Capital Institutional Investors LLC,
1,929,900 shares held by J.P. Morgan Direct Venture
Capital Private Investors LLC and 356,731 shares held by
522 Fifth Avenue Fund, L.P., each of which is affiliated with
J.P. Morgan Direct Venture Capital. The address of
J.P. Morgan Direct Venture Capital is 522 Fifth Avenue, New
York, NY 10036. These entities are affiliated with Lehman
Brothers Inc., which is acting as an underwriter of this
offering.
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(15)
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Consists of 32,035,934 shares held by Lehman Brothers VC
Partners 2002 L.P., 14,482,932 shares held by Lehman
Brothers P.A. LLC, 11,760,017 shares held by LB I Group
Inc., 9,171,928 shares held by Lehman Brothers Venture
Capital Partners II, L.P., 6,525,266 shares held by
Lehman Brothers Partnership Account 2000/2001, L.P. and
1,692,325 shares held by Lehman Brothers Offshore
Partnership
Account 2000/2001,
L.P., each of which is affiliated with Lehman Brothers Venture
Partners. The address of Lehman Brothers Venture Partners is
3000 Sand Hill Road, Building 3, Suite 190, Menlo
Park, CA 94025. These entities are affiliated with
J.P. Morgan Securities Inc., which is acting as an
underwriter of this offering.
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83
DESCRIPTION
OF CAPITAL STOCK
Upon consummation of this offering, our authorized capital stock
will consist of 500,000,000 shares of common stock,
$0.001 par value per share, and 5,000,000 shares of
preferred stock, $0.001 par value per share. A description
of the material terms and provisions of our certificate of
incorporation and bylaws affecting the rights of holders of our
capital stock is set forth below. The description is intended as
a summary, and is qualified in its entirety by reference to the
form of our restated certificate of incorporation and the form
of our bylaws to be adopted prior to the completion of this
offering that will be filed with the registration statement of
which this prospectus is a part.
As of December 31, 2006, and after giving effect to the
automatic conversion of all of our outstanding preferred stock
into common stock upon completion of this offering, there were
outstanding:
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328,685,301 shares of our common stock held by
approximately 208 stockholders;
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38,177,695 shares issuable upon exercise of outstanding
stock options; and
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708,851 shares issuable upon exercise of outstanding
warrants.
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Common
Stock
Dividend Rights.
Subject to preferences that
may apply to shares of preferred stock outstanding at the time,
the holders of outstanding shares of our common stock are
entitled to receive dividends out of funds legally available if
our board of directors, in its discretion, determines to issue
dividends and only then at the times and in the amounts that our
board of directors may determine.
Voting Rights.
Each holder of common stock is
entitled to one vote for each share of common stock held on all
matters submitted to a vote of stockholders. Our certificate of
incorporation eliminates the right of stockholders to cumulate
votes for the election of directors. Our certificate of
incorporation establishes a classified board of directors, to be
divided into three classes with staggered three-year terms. Only
one class of directors will be elected at each annual meeting of
our stockholders, with the other classes continuing for the
remainder of their respective three-year terms.
No Preemptive or Similar Rights.
Our common
stock is not entitled to preemptive rights and is not subject to
conversion, redemption or sinking fund provisions.
Right to Receive Liquidation
Distributions.
Upon our dissolution, liquidation
or
winding-up,
the assets legally available for distribution to our
shareholders are distributable ratably among the holders of our
common stock, subject to prior satisfaction of all outstanding
debt and liabilities and the preferential rights and payment of
liquidation preferences, if any, on any outstanding shares of
preferred stock.
Preferred
Stock
Upon the completion of this offering, each outstanding share of
preferred stock will be converted into common stock.
Following this offering, we will be authorized, subject to
limitations prescribed by Delaware law, to issue preferred stock
in one or more series, to establish from time to time the number
of shares to be included in each series and to fix the
designation, powers, preferences and rights of the shares of
each series and any of its qualifications, limitations or
restrictions. Our board of directors can also increase or
decrease the number of shares of any series, but not below the
number of shares of that series then outstanding, without any
further vote or action by our stockholders. Our board of
directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the
voting power or other rights of the holders of the common stock.
The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate
purposes, could, among other things, have the effect of
delaying, deferring or preventing a change in control of our
company and may adversely affect the market price of our common
stock and the voting and other rights of the holders of common
stock. We have no current plan to issue any shares of preferred
stock.
84
Options
As of December 31, 2006, we had outstanding options to
purchase 38,177,695 shares of our common stock under our
1997 stock option plan and a non-plan stock option.
Warrants
As of December 31, 2006, we had outstanding four warrants
to purchase an aggregate of 708,851 shares of our common
stock at a weighted average exercise price of $0.28. The
exercise price of each warrant may be paid either in cash or by
surrendering the right to receive shares of common stock having
a value equal to the exercise price. The largest of the four
warrants is a warrant to purchase 623,675 shares that
expires in 2013.
Registration
Rights
Following this offering, the holders of 287,878,041 shares
of our common stock issued upon conversion of our preferred
stock and warrants will be entitled to rights with respect to
the registration of these shares under the Securities Act, as
described below.
Demand registration rights.
At any time
beginning six months after the completion of this offering, upon
the request of holders of at least a majority of the shares
having registration rights, or of holders requesting
registration of shares having an aggregate value of at least
$20 million, we will be obligated to use our best efforts
to register such shares. We are required to file no more than
two registration statements upon exercise of these demand
registration rights. We may postpone the filing of a
registration statement for up to 90 days once in a
12-month
period if we determine that the filing would be seriously
detrimental to us and our stockholders.
Piggyback registration rights.
If we register
any of our securities for public sale, the stockholders with
registration rights will have the right to include their shares
in the registration statement. However, this right does not
apply to a registration relating to any of our employee benefit
plans or a corporate reorganization. The managing underwriter of
any underwritten offering will have the right to limit, due to
marketing reasons, the number of shares registered by these
holders to 25% of the total shares covered by the registration
statement.
Form S-3
registration rights.
If we register any
securities for public sale, the holders of at least 20% of the
shares having registration rights can request that we register
all or a portion of their shares on
Form S-3
if we are eligible to file a registration statement on
Form S-3
and the aggregate price to the public of the shares offered is
at least $1.0 million. We are required to file no more than
two registration statements on
Form S-3
upon exercise of these rights 3 per
12-month
period. We may postpone the filing of a registration statement
on
Form S-3
for up to 90 days once in a
12-month
period if we determine that the filing would be seriously
detrimental to us and our stockholders.
Registration expenses.
We will pay all
expenses incurred in connection with each of the registrations
described above, except for underwriters and brokers
discounts and commissions. However, we will not pay for any
expenses of any demand registration if the request is
subsequently withdrawn by a majority of the holders requesting
that we file such a registration statement, subject to limited
exceptions.
Expiration of registration rights.
The
registration rights described above will expire five years after
this offering is completed. The registration rights will
terminate earlier with respect to a particular stockholder to
the extent the shares held by and issuable to such holder may be
sold under Rule 144 of the Securities Act in any
90 day period.
Holders of substantially all of our shares with these
registration rights have signed agreements with the underwriters
prohibiting the exercise of their registration rights for
180 days, subject to a possible extension of up to 34
additional days beyond the end of such
180-day
period, following the date of this prospectus. These agreements
are described below under the section entitled
Underwriting.
Anti-takeover
Provisions
Some of the provisions of Delaware law, our restated certificate
of incorporation and our bylaws may have the effect of delaying,
deferring or discouraging another person from acquiring control
of our company.
85
Delaware
Law
After we reincorporate in Delaware, we will be subject to the
provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section
prevents some Delaware corporations from engaging, under some
circumstances, in a business combination, which includes a
merger or sale of at least 10% of the corporations assets
with any interested stockholder, meaning a stockholder who,
together with affiliates and associates, owns or, within three
years prior to the determination of interested stockholder
status, did own 15% or more of the corporations
outstanding voting stock, unless:
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the transaction is approved by the board of directors prior to
the time that the interested stockholder became an interested
stockholder;
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upon consummation of the transaction which resulted in the
stockholders becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of
the corporation outstanding at the time the transaction
commenced; or
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at or subsequent to such time that the stockholder became an
interested stockholder the business combination is approved by
the board of directors and authorized at an annual or special
meeting of stockholders by at least two-thirds of the
outstanding voting stock which is not owned by the interested
stockholder.
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A Delaware corporation may opt out of these
provisions with an express provision in its original certificate
of incorporation or an express provision in its certificate or
incorporation or bylaws resulting from a stockholders
amendment approved by at least a majority of the outstanding
voting shares. We do not plan to opt out of these
provisions. The statute could prohibit or delay mergers or other
takeover or change in control attempts and, accordingly, may
discourage attempts to acquire us.
Charter
and Bylaw Provisions
After we reincorporate in Delaware, we expect that our restated
certificate of incorporation or bylaws will provide that:
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following the completion of this offering, no action shall be
taken by our stockholders except at an annual or special meeting
of our stockholders called in accordance with our bylaws and
that our stockholders may not act by written consent;
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our stockholders may not call special meetings of our
stockholders or fill vacancies on our board of directors;
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our board of directors is divided into three classes and the
directors in each class will serve for a three-year term, with
our stockholders electing one class each year;
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our board of directors may designate the terms of and issue a
new series of preferred stock with voting or other rights
without stockholder approval;
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the approval of holders of two-thirds of the shares entitled to
vote at an election of directors will be required to adopt,
amend or repeal our bylaws or amend or repeal the provisions of
our bylaws or repeal the provisions of our certificate of
incorporation regarding the fixing of the authorized number of
directors, the election and removal of directors the
classification of our board of directors into three classes,
indemnification of directors and the ability of stockholders to
take action or call special meetings of stockholders;
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a majority of the authorized number of directors will have the
power to adopt, amend or repeal our bylaws without stockholder
approval
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our stockholders may not cumulate votes in the election of
directors;
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directors can only be removed for cause by the holders of at
least two-thirds of the shares entitled to vote at an election
of directors;
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we will indemnify directors and officers against losses that
they may incur in investigations and legal proceedings resulting
from their services to us, which may include services in
connection with takeover defense measures.
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86
These provisions of our restated certificate of incorporation or
bylaws may have the effect of delaying, deferring or
discouraging another person or entity from acquiring control of
us.
NASDAQ
Global Market Listing
We have applied to list our common stock on the NASDAQ Global
Market under the trading symbol SHOR.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock
is .
87
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock, and we cannot predict the effect, if any, that
market sales of shares of our common stock or the availability
of shares of our common stock for sale will have on the market
price of our common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock,
including shares issued upon exercise of outstanding options and
warrants, in the public market after this offering could
adversely affect market prices prevailing from time to time and
could impair our ability to raise capital through the sale of
our equity securities.
Upon the completion of this offering, based on the number of
shares outstanding as of December 31, 2006, and after
giving effect to the automatic conversion of all outstanding
shares of our preferred stock into common stock immediately
prior to completion of this offering, we will
have shares
of common stock outstanding, assuming no exercise of the
underwriters option to purchase additional shares and no
exercise of outstanding options and warrants. All of the shares
sold in this offering will be freely tradable, except that any
shares held by our affiliates (as that term is defined in
Rule 144 under the Securities Act) may only be sold in
compliance with the limitations described below.
Sales of
Restricted Securities
The remaining 328,685,301 shares of common stock will be
deemed restricted securities as defined under Rule 144.
Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the
Securities Act, which rules are summarized below. In addition,
as a result of the
lock-up
agreements described below and the provisions of Rule 144
and Rule 701 (subject in some cases to a right of
repurchase by us), these shares of our common stock (excluding
the shares sold in this offering) will be available for sale in
the public market as follows (subject in some cases to volume
limitations under Rule 144):
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no shares will be eligible for sale on the date of this
prospectus;
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321,221,572 shares will be eligible for sale upon the
expiration of
lock-up
agreements, as described below under Underwriters,
beginning on the 181st day (subject to a possible extension
of up to 34 additional days), after the date of this prospectus,
subject to early release by Lehman Brothers Inc. and
J.P. Morgan Securities Inc., in their sole discretion and
subject in some cases to the provisions of Rule 144 under
the Securities Act of 1933; and
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the remainder of the shares will be eligible for sale from time
to time thereafter upon the lapse of our right of repurchase
with respect to any unvested shares.
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Lock-up
Agreements
We will enter into a
lock-up
agreement with the underwriters, and all of our directors and
officers and the holders of substantially all of our outstanding
shares, stock options and warrants have entered into or will
enter into
lock-up
agreements with the underwriters. Under the agreement, we may
not issue any new shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of
common stock, and the holders of common stock, options and
warrants may not sell, transfer or dispose of, directly or
indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of
our common stock without the prior written consent of Lehman
Brothers Inc. and J.P. Morgan Securities Inc. for a period
of 180 days, subject to specified exceptions and a possible
extension of up to 34 additional days beyond the end of such
180 day period, after the date of this prospectus. These
agreements are described below under the section entitled
Underwriting.
Rule 144
In general, under Rule 144 promulgated under the Securities
Act as currently in effect, a person, or group of persons whose
shares are required to be aggregated, who has beneficially owned
shares that are restricted securities
88
as defined in Rule 144 for at least one year is entitled to
sell, within any three-month period commencing 90 days
after the date of this prospectus, a number of shares that does
not exceed the greater of:
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1% of the then outstanding shares of our common stock, which
will be
approximately shares
immediately after this offering; or
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the average weekly trading volume in our common stock on the
NASDAQ Global Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such
sale.
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In addition, a person who is not deemed to have been an
affiliate at any time during the three months preceding a sale
and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell these shares
under Rule 144(k) without regard to the requirements
described above. To the extent that shares were acquired from
one of our affiliates, a persons holding period for the
purpose of effecting a sale under Rule 144 would commence
on the date of transfer from the affiliate.
Rule 701
In general, under Rule 701 of the Securities Act, any of
our employees, directors, officers, consultants or advisors who
purchased shares from us in connection with a compensatory stock
or option plan or other written agreement is eligible to resell
those shares in reliance on Rule 144, but without
compliance with specified restrictions, including the holding
period contained in Rule 144. However, all shares issued
under Rule 701 are subject to 180 day
lock-up
agreements and will only become eligible for sale at the
expiration of such agreements.
Registration
Rights
Following this offering, the holders of 287,878,041 shares
of our common stock issued upon conversion of our preferred
stock and warrants, or their transferees, will be entitled to
rights with respect to the registration of these shares under
the Securities Act, as described above. For a description of
these registration rights, please see Description of
Capital Stock Registration Rights. After these
shares are registered, they will be freely tradable without
restriction under the Securities Act.
Stock
Options
As of December 31, 2006, options to purchase a total of
38,177,695 shares of our common stock were outstanding. We
intend to file a registration statement on
Form S-8
under the Securities Act to register all shares of our common
stock subject to outstanding options, all shares of our common
stock issued upon exercise of stock options and all shares of
our common stock issuable under our equity incentive and
employee stock purchase plans. Accordingly, shares of our common
stock issued under these plans will be eligible for sale in the
public markets, subject to vesting restrictions and the
lock-up
agreements described above.
89
UNDERWRITING
Lehman Brothers Inc. and J.P. Morgan Securities Inc. are
acting as the representatives of the underwriters and the joint
book-running managers of this offering. Subject to the terms and
conditions of an underwriting agreement, each of the
underwriters named below has severally agreed to purchase from
us the respective number of common stock shown opposite its name
below:
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|
|
|
|
Underwriters
|
|
Number of Shares
|
|
|
Lehman Brothers Inc.
|
|
|
|
|
J.P. Morgan Securities Inc.
|
|
|
|
|
Piper Jaffray & Co.
|
|
|
|
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JMP Securities LLC
|
|
|
|
|
Wedbush Morgan Securities
Inc.
|
|
|
|
|
|
|
|
|
|
Total
|
|
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|
|
|
|
|
|
|
The underwriters are committed to purchase all the shares of
common stock offered by us if they purchase any shares. The
underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting
underwriters may also be increased or the offering may be
terminated.
The underwriting agreement provides that the underwriters
obligation to purchase shares of common stock depends on the
satisfaction of the conditions contained in the underwriting
agreement including:
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|
|
|
|
the representations and warranties made by us to the
underwriters are true;
|
|
|
|
there is no material change in our business or the financial
markets; and
|
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|
|
we deliver customary closing documents to the underwriters.
|
Commissions
and Expenses
The following table summarizes the underwriting discounts and
commissions we will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the
underwriters option to purchase additional shares. The
underwriting fee is the difference between the initial price to
the public and the amount the underwriters pay to us for the
shares.
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|
|
|
|
|
|
|
|
|
No Exercise
|
|
|
Full Exercise
|
|
|
Per share
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of common stock
directly to the public at the public offering price on the cover
of this prospectus and to selected dealers, which may include
the underwriters, at such offering price less a selling
concession not in excess of $ per
share. After the offering, the representatives may change the
offering price and other selling terms.
The expenses of the offering that are payable by us are
estimated to be $ (excluding
underwriting discounts and commissions).
Option to
Purchase Additional Shares
We have granted the underwriters an option exercisable for
30 days after the date of this prospectus, to purchase,
from time to time, in whole or in part, up to an aggregate
of shares
at the public offering price less underwriting discounts and
commissions. This option may be exercised if the underwriters
sell more
than shares
in connection with this offering. To the extent that this option
is exercised, each underwriter will be obligated, subject to
certain conditions, to purchase its pro rata portion of these
additional shares based on the underwriters underwriting
commitment in the offering as indicated in the table at the
beginning of this Underwriting Section.
90
Lock-Up
Agreements
We, our executive officers and directors, and substantially all
of our securityholders have agreed that, subject to certain
exceptions, without the prior written consent of each of Lehman
Brothers Inc. and J.P. Morgan Securities Inc., we and they
will not directly or indirectly, (1) offer for sale, sell,
contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right
or warrant to purchase, pledge, or otherwise transfer or dispose
of (or enter into any transaction or device that is designed to,
or could be expected to, result in the disposition by any person
at any time in the future of) any shares of common stock
(including, without limitation, shares of common stock that may
be deemed to be beneficially owned by us or them in accordance
with the rules and regulations of the Securities and Exchange
Commission and shares of common stock that may be issued upon
exercise of any options or warrants) or securities convertible
into or exercisable or exchangeable for common stock,
(2) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the
economic consequences of ownership of the common stock,
(3) make any demand for or exercise any right or file or
cause to be filed a registration statement, including any
amendments thereto, with respect to the registration of any
shares of common stock or securities convertible, exercisable or
exchangeable into common stock or any of our other securities,
or (4) publicly disclose the intention to do any of the
foregoing for a period of 180 days after the date of this
prospectus.
The
180-day
restricted period described in the preceding paragraph will be
extended if:
|
|
|
|
|
during the last 17 days of the
180-day
restricted period we issue an earnings release or material news
or a material event relating to us occurs; or
|
|
|
|
prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period,
|
in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day
period beginning on and including the date of the issuance of
the earnings release or the announcement of the material news or
occurrence of a material event, unless such extension is waived
in writing by Lehman Brothers Inc. and J.P. Morgan
Securities Inc.
Offering
Price Determination
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
negotiated between the representatives and us. In determining
the initial public offering price of our common stock, the
representatives will consider:
|
|
|
|
|
the history and prospects for the industry in which we compete;
|
|
|
|
our financial information;
|
|
|
|
the ability of our management and our business potential and
earning prospects;
|
|
|
|
the prevailing securities markets at the time of this
offering; and
|
|
|
|
the recent market prices of, and the demand for, publicly traded
shares of generally comparable companies.
|
We have applied to list our common stock on the NASDAQ Global
Market under the trading symbol SHOR.
Neither we nor the underwriters can assure investors that an
active trading market will develop for our common stock, or that
the shares will trade in the public market at or above the
initial public offering price.
Indemnification
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, and
to contribute to payments that the underwriters may be required
to make for these liabilities.
91
Stabilization,
Short Positions and Penalty Bids
The representatives may engage in stabilizing transactions,
short sales and purchases to cover positions created by short
sales, and penalty bids or purchases for the purpose of pegging,
fixing or maintaining the price of the common stock, in
accordance with Regulation M under the Securities Exchange
Act of 1934:
|
|
|
|
|
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
|
|
|
|
A short position involves a sale by the underwriters of shares
in excess of the number of shares the underwriters are obligated
to purchase in the offering, which creates the syndicate short
position. This short position may be either a covered short
position or a naked short position. In a covered short position,
the number of shares involved in the sales made by the
underwriters in excess of the number of shares they are
obligated to purchase is not greater than the number of shares
that they may purchase by exercising their option to purchase
additional shares. In a naked short position, the number of
shares involved is greater than the number of shares in their
option to purchase additional shares. The underwriters may close
out any short position by either exercising their option to
purchase additional shares
and/or
purchasing shares in the open market. In determining the source
of shares to close out the short position, the underwriters will
consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which
they may purchase shares through their option to purchase
additional shares. A naked short position is more likely to be
created if the underwriters are concerned that there could be
downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase
in the offering.
|
|
|
|
Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions.
|
|
|
|
Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
|
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result,
the price of the common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the NASDAQ Global Market or otherwise and, if
commenced, may be discontinued at any time.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common stock. In addition, neither we nor any of the
underwriters make any representation that the representatives
will engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without
notice.
Electronic
Distribution
A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by
one or more of the underwriters
and/or
selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view
offering terms online and, depending upon the particular
underwriter or selling group member, prospective investors may
be allowed to place orders online. The underwriters may agree
with us to allocate a specific number of shares for sale to
online brokerage account holders. Any such allocation for online
distributions will be made by the representatives on the same
basis as other allocations.
Other than the prospectus in electronic format, the information
on any underwriters or selling group members web
site and any information contained in any other web site
maintained by an underwriter or selling group member is not part
of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved
and/or
endorsed by us or any underwriter or selling group member in its
capacity as underwriter or selling group member and should not
be relied upon by investors.
92
Discretionary
Sales
The underwriters have informed us that they do not intend to
confirm sales to discretionary accounts that exceed 5% of the
total number of shares offered by them or without the prior
specific written approval of the customer.
Stamp
Taxes
If you purchase shares of common stock offered in this
prospectus, you may be required to pay stamp taxes and other
charges under the laws and practices of the country of purchase,
in addition to the offering price listed on the cover page of
this prospectus.
Relationships/NASD
Conduct Rules
Certain of the underwriters and their affiliates may provide
from time to time in the future certain commercial banking,
financial advisory, investment banking and other services for us
in the ordinary course of their business, for which they may
receive customary fees and commissions. In addition, from time
to time, certain of the underwriters and their affiliates may
effect transactions for their own account or the account of
customers, and hold on behalf of themselves or their customers,
long or short positions in our debt or equity securities or
loans.
Immediately prior to the consummation of this offering,
affiliates of Lehman Brothers Inc. beneficially owned
approximately 23% of our outstanding voting securities, and
affiliates J.P. Morgan Securities Inc. beneficially owned
approximately 5% of our outstanding voting securities. In
addition, Brian K. Paul, a partner at Lehman Brothers Venture
Partners, which is an affiliate of Lehman Brothers Inc., is a
member of our board of directors. Because of these
relationships, this offering is being conducted in accordance
with Rule 2720 of the National Association of Securities
Dealers, Inc., or NASD. This rule requires that the initial
public offering price for our shares cannot be higher than the
price recommended by a qualified independent
underwriter, as defined by the NASD. Piper
Jaffray & Co. is serving as a qualified independent
underwriter and will assume the customary responsibilities of
acting as a qualified independent underwriter in pricing the
offering and conducting due diligence. We have agreed to
indemnify Piper Jaffray & Co. against any liabilities
arising in connection with its role as a qualified independent
underwriter, including liabilities under the Securities Act.
Selling
Restrictions
European
Economic Area
In relation to each member state of the European Economic Area
that has implemented the Prospectus Directive (each, a relevant
member state), with effect from and including the date on which
the Prospectus Directive is implemented in that relevant member
state (the relevant implementation date), an offer of shares
described in this prospectus may not be made to the public in
that relevant member state prior to the publication of a
prospectus in relation to the shares that has been approved by
the competent authority in that relevant member state or, where
appropriate, approved in another relevant member state and
notified to the competent authority in that relevant member
state, all in accordance with the Prospectus Directive, except
that, with effect from and including the relevant implementation
date, an offer of securities may be offered to the public in
that relevant member state at any time:
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|
|
|
to any legal entity that is authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in
securities; or
|
|
|
|
to any legal entity that has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts; or
|
|
|
|
in any other circumstances that do not require the publication
of a prospectus pursuant to Article 3 of the Prospectus
Directive.
|
93
Each purchaser of shares described in this prospectus located
within a relevant member state will be deemed to have
represented, acknowledged and agreed that it is a
qualified investor within the meaning of
Article 2(1)(e) of the Prospectus Directive.
For purposes of this provision, the expression an offer to
the public in any relevant member state means the
communication in any form and by any means of sufficient
information on the terms of the offer and the securities to be
offered so as to enable an investor to decide to purchase or
subscribe the securities, as the expression may be varied in
that member state by any measure implementing the Prospectus
Directive in that member state, and the expression
Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each relevant
member state.
The sellers of the shares have not authorized and do not
authorize the making of any offer of shares through any
financial intermediary on their behalf, other than offers made
by the underwriters with a view to the final placement of the
shares as contemplated in this prospectus. Accordingly, no
purchaser of the shares, other than the underwriters, is
authorized to make any further offer of the shares on behalf of
the sellers or the underwriters.
United
Kingdom
This prospectus is only being distributed to, and is only
directed at, persons in the United Kingdom that are qualified
investors within the meaning of Article 2(1)(e) of the
Prospectus Directive (Qualified Investors) that are
also (i) investment professionals falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 (the Order) or
(ii) high net worth entities, and other persons to whom it
may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons
together being referred to as relevant persons).
This prospectus and its contents are confidential and should not
be distributed, published or reproduced (in whole or in part) or
disclosed by recipients to any other persons in the United
Kingdom. Any person in the United Kingdom that is not a relevant
persons should not act or rely on this document or any of its
contents.
France
Neither this prospectus nor any other offering material relating
to the shares described in this prospectus has been submitted to
the clearance procedures of the Autorité des Marchés
Financiers or by the competent authority of another member state
of the European Economic Area and notified to the Autorité
des Marchés Financiers. The shares have not been offered or
sold and will not be offered or sold, directly or indirectly, to
the public in France. Neither this prospectus nor any other
offering material relating to the shares has been or will be:
|
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|
|
released, issued, distributed or caused to be released, issued
or distributed to the public in France; or
|
|
|
|
used in connection with any offer for subscription or sale of
the shares to the public in France.
|
Such offers, sales and distributions will be made in France only:
|
|
|
|
|
to qualified investors (investisseurs qualifiés)
and/or
to a
restricted circle of investors (cercle restreint
dinvestisseurs), in each case investing for their own
account, all as defined in, and in accordance with,
Article L.411-2,
D.411-1, D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of the
French Code monétaire et financier; or
|
|
|
|
to investment services providers authorized to engage in
portfolio management on behalf of third parties; or
|
|
|
|
in a transaction that, in accordance with article
L.411-2-II-1º-or-2º-or 3ºof the French Code
monétaire et financier and
article 211-2
of the General Regulations (Règlement Général) of
the Autorité des Marchés Financiers, does not
constitute a public offer (appel public à
lépargne).
|
The shares may be resold directly or indirectly, only in
compliance with
Articles L.411-1,
L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the French
Code monétaire et financier.
94
LEGAL
MATTERS
The validity of the shares of common stock offered hereby will
be passed upon for us by Fenwick & West LLP, Mountain
View, California. Wilson Sonsini Goodrich Rosati, Professional
Corporation, is acting as counsel to the underwriters.
EXPERTS
The consolidated financial statements of ShoreTel, Inc. and
subsidiaries at June 30, 2005 and 2006, and for each of the
three years in the period ended June 30, 2006, included in
this prospectus have been audited by Deloitte & Touche
LLP, an independent registered public accounting firm, as stated
in their report appearing herein, and are included in reliance
upon the report of such firm given upon their authority as
experts in accounting and auditing.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of common
stock offered hereby. This prospectus, which constitutes a part
of the registration statement, does not contain all of the
information set forth in the registration statement or the
exhibits and schedules filed therewith. For further information
about us and the common stock offered hereby, we refer you to
the registration statement and the exhibits and schedules filed
thereto. Statements contained in this prospectus regarding the
contents of any contract or any other document that is filed as
an exhibit to the registration statement are not necessarily
complete, and each such statement is qualified in all respects
by reference to the full text of such contract or other document
filed as an exhibit to the registration statement. Upon
completion of this offering, we will be required to file
periodic reports, proxy statements, and other information with
the SEC pursuant to the Securities Exchange Act of 1934. You may
read and copy this information at the Public Reference Room of
the SEC, 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information on the
operation of the public reference rooms by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet website that contains
reports, proxy statements and other information about issuers,
like us, that file electronically with the SEC. The address of
that site is www.sec.gov.
95
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ShoreTel, Inc.
Sunnyvale, CA
We have audited the accompanying consolidated balance sheets of
ShoreTel, Inc. and subsidiaries (collectively, the
Company) as of June 30, 2005 and 2006, and the
related consolidated statements of operations, redeemable
convertible preferred stock and shareholders deficit, and
cash flows for each of the three years in the period ended
June 30, 2006. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
ShoreTel, Inc. and subsidiaries as of June 30, 2005 and
2006, and the results of their operations and their cash flows
for each of the three years in the period ended June 30,
2006, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
October 14, 2006
F-2
SHORETEL,
INC. AND SUBSIDIARIES
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,373
|
|
|
$
|
12,333
|
|
|
$
|
13,290
|
|
|
|
|
|
Restricted cash
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of
allowances of $200, $378 and $422 as of June 30, 2005,
June 30, 2006 and September 30, 2006, respectively
|
|
|
9,334
|
|
|
|
11,479
|
|
|
|
13,855
|
|
|
|
|
|
Inventories
|
|
|
4,663
|
|
|
|
4,656
|
|
|
|
4,855
|
|
|
|
|
|
Prepaid expenses and other current
assets
|
|
|
517
|
|
|
|
852
|
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
19,902
|
|
|
|
29,320
|
|
|
|
32,743
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
Net
|
|
|
1,045
|
|
|
|
1,556
|
|
|
|
1,859
|
|
|
|
|
|
OTHER ASSETS
|
|
|
13
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
20,960
|
|
|
$
|
30,885
|
|
|
$
|
34,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK, AND
SHAREHOLDERS EQUITY
(DEFICIT)
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,070
|
|
|
$
|
3,958
|
|
|
$
|
5,321
|
|
|
|
|
|
Accrued liabilities and other
|
|
|
1,185
|
|
|
|
2,272
|
|
|
|
2,075
|
|
|
|
|
|
Accrued employee compensation
|
|
|
1,062
|
|
|
|
2,918
|
|
|
|
2,317
|
|
|
|
|
|
Deferred revenue
|
|
|
3,837
|
|
|
|
3,963
|
|
|
|
4,848
|
|
|
|
|
|
Current portion of capital lease
obligations
|
|
|
7
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,161
|
|
|
|
13,112
|
|
|
|
14,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease
obligations
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred revenue
|
|
|
1,230
|
|
|
|
2,609
|
|
|
|
2,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
1,231
|
|
|
|
2,609
|
|
|
|
2,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,392
|
|
|
|
15,721
|
|
|
|
17,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
(Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REDEEMABLE CONVERTIBLE PREFERRED
STOCK, $0.01 par value; authorized,
235,862,612 shares; issued and outstanding
233,164,369 shares as of June 30, 2005, June 30,
2006 and September 30, 2006 (aggregate liquidation
preference of $44,250)
|
|
|
56,281
|
|
|
|
56,332
|
|
|
|
56,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value;
authorized, 415,000,000 shares; issued and outstanding,
59,927,915, 92,883,927 and 94,180,191 shares as of
June 30, 2005, June 30, 2006 and September 30,
2006, respectively, and 327,344,560 shares outstanding pro
forma
|
|
|
587
|
|
|
|
958
|
|
|
|
1,040
|
|
|
|
3,372
|
|
Additional paid-in capital
|
|
|
48,989
|
|
|
|
49,319
|
|
|
|
50,105
|
|
|
|
104,118
|
|
Deferred compensation
|
|
|
(36
|
)
|
|
|
(335
|
)
|
|
|
(312
|
)
|
|
|
(312
|
)
|
Notes receivable from shareholders
|
|
|
(372
|
)
|
|
|
(231
|
)
|
|
|
(219
|
)
|
|
|
(219
|
)
|
Accumulated deficit
|
|
|
(94,881
|
)
|
|
|
(90,879
|
)
|
|
|
(89,833
|
)
|
|
|
(89,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
(deficit)
|
|
|
(45,713
|
)
|
|
|
(41,168
|
)
|
|
|
(39,219
|
)
|
|
$
|
17,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
20,960
|
|
|
$
|
30,885
|
|
|
$
|
34,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-3
SHORETEL,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
16,587
|
|
|
$
|
31,970
|
|
|
$
|
55,300
|
|
|
$
|
10,000
|
|
|
$
|
18,467
|
|
Support and services
|
|
|
2,241
|
|
|
|
3,512
|
|
|
|
6,308
|
|
|
|
1,214
|
|
|
|
1,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
18,828
|
|
|
|
35,482
|
|
|
|
61,608
|
|
|
|
11,214
|
|
|
|
20,415
|
|
COST OF REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
7,725
|
|
|
|
13,961
|
|
|
|
21,855
|
|
|
|
4,044
|
|
|
|
6,507
|
|
Support and services
|
|
|
1,660
|
|
|
|
2,907
|
|
|
|
5,425
|
|
|
|
1,078
|
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
9,385
|
|
|
|
16,868
|
|
|
|
27,280
|
|
|
|
5,122
|
|
|
|
7,952
|
|
GROSS PROFIT
|
|
|
9,443
|
|
|
|
18,614
|
|
|
|
34,328
|
|
|
|
6,092
|
|
|
|
12,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,517
|
|
|
|
7,034
|
|
|
|
9,720
|
|
|
|
2,051
|
|
|
|
3,117
|
|
Sales and marketing
|
|
|
8,004
|
|
|
|
10,050
|
|
|
|
15,699
|
|
|
|
3,067
|
|
|
|
5,677
|
|
General and administrative
|
|
|
2,166
|
|
|
|
3,045
|
|
|
|
4,936
|
|
|
|
875
|
|
|
|
2,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,687
|
|
|
|
20,129
|
|
|
|
30,355
|
|
|
|
5,993
|
|
|
|
11,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
(6,244
|
)
|
|
|
(1,515
|
)
|
|
|
3,973
|
|
|
|
99
|
|
|
|
1,096
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9
|
|
|
|
137
|
|
|
|
292
|
|
|
|
34
|
|
|
|
161
|
|
Interest expense
|
|
|
(22
|
)
|
|
|
(21
|
)
|
|
|
(31
|
)
|
|
|
(1
|
)
|
|
|
|
|
Other
|
|
|
6
|
|
|
|
8
|
|
|
|
(13
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(7
|
)
|
|
|
124
|
|
|
|
248
|
|
|
|
30
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES
|
|
|
(6,251
|
)
|
|
|
(1,391
|
)
|
|
|
4,221
|
|
|
|
129
|
|
|
|
1,253
|
|
INCOME TAX PROVISION
|
|
|
|
|
|
|
(11
|
)
|
|
|
(219
|
)
|
|
|
(13
|
)
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
(6,251
|
)
|
|
|
(1,402
|
)
|
|
|
4,002
|
|
|
|
116
|
|
|
|
1,046
|
|
ACCRETION OF PREFERRED STOCK
|
|
|
(26
|
)
|
|
|
(32
|
)
|
|
|
(51
|
)
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS
|
|
$
|
(6,277
|
)
|
|
$
|
(1,434
|
)
|
|
$
|
3,951
|
|
|
$
|
103
|
|
|
$
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.06
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.05
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income
(loss) per share available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
49,345,069
|
|
|
|
53,517,065
|
|
|
|
66,091,748
|
|
|
|
60,507,022
|
|
|
|
79,113,086
|
|
Diluted
|
|
|
49,345,069
|
|
|
|
53,517,065
|
|
|
|
84,867,945
|
|
|
|
72,912,729
|
|
|
|
101,904,114
|
|
Unaudited pro forma net income per
common share available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited shares used in computing
pro forma net income per share available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
299,256,117
|
|
|
|
|
|
|
|
312,277,455
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
318,032,314
|
|
|
|
|
|
|
|
335,068,483
|
|
See notes to consolidated financial statements
F-4
SHORETEL,
INC. AND SUBSIDIARIES
AND SHAREHOLDERS DEFICIT
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
|
|
|
|
Convertible Preferred
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Receivable
|
|
|
|
|
|
Total
|
|
|
|
Stock
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stock
|
|
|
from
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Shareholders
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
(Dollars in thousands)
|
|
BALANCES, July 1, 2003
|
|
|
165,879,614
|
|
|
$
|
42,814
|
|
|
|
|
56,416,382
|
|
|
$
|
564
|
|
|
$
|
49,047
|
|
|
$
|
(163
|
)
|
|
$
|
(594
|
)
|
|
$
|
(87,228
|
)
|
|
$
|
(38,374
|
)
|
Issuance of Series G preferred
stock net of issuance costs of $51
|
|
|
20,114,943
|
|
|
|
3,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of issuance costs
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
Exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
991,400
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Warrants on Series F preferred
stock
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Net loss and comprehensive net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,251
|
)
|
|
|
(6,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE June 30,
2004
|
|
|
185,994,557
|
|
|
|
46,300
|
|
|
|
|
57,407,782
|
|
|
|
574
|
|
|
|
49,021
|
|
|
|
(118
|
)
|
|
|
(594
|
)
|
|
|
(93,479
|
)
|
|
|
(44,596
|
)
|
Issuance of Series H preferred
stock net of issuance costs of $51
|
|
|
47,169,812
|
|
|
|
9,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
Exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
2,520,133
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
Repayment of shareholder note
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
222
|
|
Net loss and comprehensive net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,402
|
)
|
|
|
(1,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE June 30,
2005
|
|
|
233,164,369
|
|
|
|
56,281
|
|
|
|
|
59,927,915
|
|
|
|
587
|
|
|
|
48,989
|
|
|
|
(36
|
)
|
|
|
(372
|
)
|
|
|
(94,881
|
)
|
|
|
(45,713
|
)
|
Accretion of preferred stock
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
Exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
34,286,679
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
381
|
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
82
|
|
Repurchase of shares exercised
under note receivable
|
|
|
|
|
|
|
|
|
|
|
|
(460,000
|
)
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
Repurchase of shares early exercised
|
|
|
|
|
|
|
|
|
|
|
|
(870,667
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
Net income and comprehensive net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,002
|
|
|
|
4,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE June 30,
2006
|
|
|
233,164,369
|
|
|
|
56,332
|
|
|
|
|
92,883,927
|
|
|
|
958
|
|
|
|
49,319
|
|
|
|
(335
|
)
|
|
|
(231
|
)
|
|
|
(90,879
|
)
|
|
|
(41,168
|
)
|
Accretion of preferred stock*
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
Exercise of common stock options*
|
|
|
|
|
|
|
|
|
|
|
|
1,296,264
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
Stock-based compensation expense*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
799
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
822
|
|
Repayment of note receivable from
shareholder*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
Vesting of accrued early exercised
stock options*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Net income and comprehensive net
income*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,046
|
|
|
|
1,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
September 30, 2006*
|
|
|
233,164,369
|
|
|
$
|
56,345
|
|
|
|
|
94,180,191
|
|
|
$
|
1,040
|
|
|
$
|
50,105
|
|
|
$
|
(312
|
)
|
|
$
|
(219
|
)
|
|
$
|
(89,833
|
)
|
|
$
|
(39,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* unaudited
See notes to consolidated financial statements
F-5
SHORETEL,
INC. AND SUBSIDIARIES
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(6,251
|
)
|
|
$
|
(1,402
|
)
|
|
$
|
4,002
|
|
|
$
|
116
|
|
|
$
|
1,046
|
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
721
|
|
|
|
592
|
|
|
|
716
|
|
|
|
142
|
|
|
|
236
|
|
Stock-based compensation expense
|
|
|
45
|
|
|
|
82
|
|
|
|
82
|
|
|
|
23
|
|
|
|
822
|
|
Loss on disposal of property and
equipment
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
Interest expense on warrants
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,788
|
)
|
|
|
(4,486
|
)
|
|
|
(2,145
|
)
|
|
|
(317
|
)
|
|
|
(2,376
|
)
|
Inventories
|
|
|
(80
|
)
|
|
|
(3,537
|
)
|
|
|
7
|
|
|
|
(1,526
|
)
|
|
|
(199
|
)
|
Prepaid expenses and other current
assets
|
|
|
352
|
|
|
|
(338
|
)
|
|
|
(335
|
)
|
|
|
58
|
|
|
|
109
|
|
Other assets
|
|
|
11
|
|
|
|
39
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
|
|
Accounts payable
|
|
|
1,199
|
|
|
|
1,020
|
|
|
|
809
|
|
|
|
244
|
|
|
|
1,332
|
|
Accrued liabilities and other
|
|
|
(103
|
)
|
|
|
198
|
|
|
|
605
|
|
|
|
37
|
|
|
|
(185
|
)
|
Accrued employee compensation
|
|
|
324
|
|
|
|
34
|
|
|
|
1,856
|
|
|
|
(112
|
)
|
|
|
(601
|
)
|
Deferred revenue
|
|
|
1,167
|
|
|
|
2,841
|
|
|
|
1,505
|
|
|
|
245
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
(5,392
|
)
|
|
|
(4,957
|
)
|
|
|
7,266
|
|
|
|
(1,091
|
)
|
|
|
1,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(653
|
)
|
|
|
(590
|
)
|
|
|
(1,308
|
)
|
|
|
(174
|
)
|
|
|
(508
|
)
|
Decrease in restricted cash
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(653
|
)
|
|
|
(590
|
)
|
|
|
(1,293
|
)
|
|
|
(174
|
)
|
|
|
(508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under line of credit
agreement
|
|
|
|
|
|
|
6,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
Repayments under line of credit
agreement
|
|
|
|
|
|
|
(6,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
Repayment of capital leases
|
|
|
(142
|
)
|
|
|
(26
|
)
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Net proceeds from issuance of
redeemable convertible preferred stock
|
|
|
3,449
|
|
|
|
9,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options
(including proceeds from unvested shares)
|
|
|
10
|
|
|
|
52
|
|
|
|
1,003
|
|
|
|
159
|
|
|
|
70
|
|
Repurchase of early exercised shares
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
Repayment of shareholder notes
issued in connection with stock option exercises
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
3,317
|
|
|
|
10,197
|
|
|
|
987
|
|
|
|
1,158
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
|
|
|
(2,728
|
)
|
|
|
4,650
|
|
|
|
6,960
|
|
|
|
(107
|
)
|
|
|
957
|
|
CASH AND CASH
EQUIVALENTS Beginning of period
|
|
|
3,451
|
|
|
|
723
|
|
|
|
5,373
|
|
|
|
5,373
|
|
|
|
12,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS End of period
|
|
$
|
723
|
|
|
$
|
5,373
|
|
|
$
|
12,333
|
|
|
$
|
5,266
|
|
|
$
|
13,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for
interest
|
|
$
|
9
|
|
|
$
|
21
|
|
|
$
|
31
|
|
|
$
|
12
|
|
|
$
|
|
|
Cash paid during the period for
income taxes
|
|
|
11
|
|
|
|
11
|
|
|
|
82
|
|
|
|
5
|
|
|
|
61
|
|
NONCASH FINANCING AND INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of issuance costs
|
|
$
|
26
|
|
|
$
|
32
|
|
|
$
|
51
|
|
|
$
|
13
|
|
|
$
|
13
|
|
Assets acquired under capital leases
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of shares issued under
notes receivable
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
141
|
|
|
|
|
|
Purchase of property and equipment
included in period-end accounts payable
|
|
|
3
|
|
|
|
28
|
|
|
|
79
|
|
|
|
22
|
|
|
|
31
|
|
Warrants on Series F preferred
stock
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of loaned inventory from
property and equipment to inventory
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-6
SHORETEL,
INC. AND SUBSIDIARIES
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE
THREE MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
|
|
1.
|
THE
COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
|
The Company
ShoreTel, Inc. was incorporated
in California on September 17, 1996. In April 2004, the
Companys Board of Directors approved the change in the
Companys name from Shoreline Communications, Inc to
ShoreTel, Inc. ShoreTel, Inc. and its subsidiaries
(collectively, the Company) provide enterprise
internet protocol (IP) telecommunications systems.
The Company sells systems that generally include hardware,
software licenses, post-contractual customer support and, in
some cases, additional elements.
Fiscal Year End
The Company operates on a
fiscal year ending June 30.
Consolidation
The accompanying
consolidated financial statements include the accounts of the
Companys wholly owned subsidiaries located in Germany and
the United Kingdom. All transactions and balances between the
parent and the subsidiaries have been eliminated in
consolidation. The functional currency of the subsidiaries is
the U.S. dollar. Functional currency assets and liabilities
are translated at the rates of exchange on the balance sheet
date, and local currency revenues and expenses are translated at
average rates of exchange during the period.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Certain Significant Risks and Uncertainties
The Company participates in a dynamic high-technology industry.
Changes in any of the following areas could have a material
adverse effect on the Companys future financial position,
results of operations, or cash flows: reliance on sole-source
suppliers; advances and trends in new technologies; competitive
pressures; changes in the overall demand for its future
products; acceptance of the Companys products; litigation
or claims against the Company based on intellectual property,
patent, regulatory, or other factors; and the Companys
ability to attract and retain employees necessary to support its
growth.
Unaudited Financial Information
The
accompanying unaudited consolidated balance sheet as of
September 30, 2006, consolidated statements of operations
and of cash flows for the three months ended September 30,
2005 and September 30, 2006, consolidated statement of
redeemable convertible preferred stock and shareholders
deficit for the three months ended September 30, 2006 and
related interim information contained in the notes to the
consolidated financial statements are unaudited. In the opinion
of management, the unaudited interim consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America,
and include all adjustments, consisting only of normal and
recurring adjustments, necessary for the fair statement of the
Companys financial position as of September 30, 2006
and its results of operations and its cash flows for the three
months ended September 30, 2005 and September 30,
2006. The results for the three months ended September 30,
2006 are not necessarily indicative of the results to be
expected for the fiscal year ending June 30, 2007.
Unaudited Pro Forma Shareholders Equity
In February 2007, the Companys board of directors
authorized the Company to file a Registration Statement with the
Securities and Exchange Commission to permit the Company to
proceed with an initial public offering of its common stock.
Upon consummation of this offering, all of the Companys
outstanding shares of redeemable convertible preferred stock
will convert to an equivalent number of shares of the
Companys common stock. Unaudited pro forma
shareholders equity as of September 30, 2006 as
adjusted for the impact of these conversions, assuming the
offering was consummated on September 30, 2006, is
disclosed on the accompanying consolidated balance sheets.
F-7
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Concentration of Credit Risk
Financial
instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and
cash equivalents and accounts receivable. The Company places its
cash and cash equivalents in money market accounts with high
credit quality financial institutions. The Company performs
ongoing credit evaluations and collateral is generally not
required for trade receivables. At June 30, 2005,
June 30, 2006 and September 30, 2006, no enterprise
customer or channel partner comprised more than 10% of total
accounts receivable.
Fair Value of Financial Instruments
The
estimated fair value of all financial instruments, including
accounts receivable and the line of credit, was not materially
different from the carrying values presented in the balance
sheet as they have short maturities
and/or
interest rates that have not fluctuated significantly.
Dependence on Suppliers
The Company depends
in part upon contractors to manufacture, assemble, and deliver
items in a timely and satisfactory manner. The Company obtains
certain components and subsystems from a single or a limited
number of sources. A significant interruption in the delivery of
such items could have a material adverse effect on the
Companys operations.
Cash and Cash Equivalents and Restricted Cash
For the purposes of the consolidated financial statements, the
Company considers all highly liquid investments with original
maturities of three months or less when acquired to be cash
equivalents. Restricted cash as of June 30, 2005, was
required to secure the Companys account with its merchant
bank card processor.
Accounts Receivable
Accounts receivable is
stated net of allowance for doubtful accounts.
The change in allowance for doubtful accounts is summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Allowance for doubtful
accounts beginning
|
|
$
|
135
|
|
|
$
|
119
|
|
|
$
|
200
|
|
|
$
|
378
|
|
Current period accrual
|
|
|
|
|
|
|
202
|
|
|
|
250
|
|
|
|
160
|
|
Write-offs charged to accrual
|
|
|
(16
|
)
|
|
|
(121
|
)
|
|
|
(72
|
)
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts ending
|
|
$
|
119
|
|
|
$
|
200
|
|
|
$
|
378
|
|
|
$
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories, which consist
principally of finished goods and inventory in process/transit,
are stated at the lower of cost or market, with cost being
determined under a standard cost method that approximates
first-in,
first-out.
Property and Equipment
Property and equipment
are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the
assets, which range from two to five years. Leasehold
improvements are amortized over the shorter of the estimated
useful lives of the asset or the lease term.
Long-Lived Assets
The Company periodically
evaluates the carrying value of long-lived assets to be held and
used including intangible assets, when events or circumstances
warrant such a review. The carrying value of a long-lived asset
to be held and used is considered impaired when the anticipated
separately identifiable undiscounted cash flows from such an
asset are less than the carrying value of the asset. In that
event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the long-lived asset.
Fair value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved.
Revenue Recognition
The Companys
revenue is related to the sale of enterprise IP
telecommunications systems, which include hardware, primarily
phones and voice switches, and software components and may also
include training, installation and post-contractual support for
the products. The Companys business strategy is centered
on selling to enterprise customers through channel partners,
rather than directly. Hence, sales transactions
F-8
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
are generally made to a channel partner. Certain larger
enterprise customers prefer to purchase directly from the
Company. Many of these large account sales are channel
partner-assisted and the Company compensates the channel partner
in much the same way as if the channel partner had made the sale
directly. The compensation to the channel partner is recorded as
an offset to the revenues associated with the direct sale to the
enterprise customer.
Product Revenue.
The Companys software
is integrated with hardware and is essential to the
functionality of the integrated system product. Revenue is
recognized for these sales in accordance with Statement of
Position (SOP)
No. 97-2,
Software Revenue Recognition
, as amended, and Securities
and Exchange Commission Staff Accounting Bulletin (SAB)
No. 104,
Revenue Recognition
, as applicable,
depending on whether the hardware is sold in a multiple-element
arrangement with software and post-contractual support or on a
stand alone basis if the customer purchases hardware, software,
or post-contractual support separately. At the initial purchase,
the customer generally bundles together the hardware, software
components 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, and related
post-contractual support by purchasing them separately. The
Company has established vendor-specific objective evidence
(VSOE) of fair value for post-contractual support and other
undelivered elements as noted below.
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 Companys agreements contain acceptance terms, the
Company recognizes revenue upon product acceptance. Even though
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 Companys 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.
The Company has arrangements with channel partners of their
products to reimburse the channel partners for cooperative
marketing costs meeting specified criteria. In accordance with
Emerging Issues Task Force (EITF) Issue
No. 01-9
(EITF 01-9),
Accounting for Consideration Given by a Vendor to a Customer
(including a Reseller of the Vendors Products)
, the
Company records advertising costs meeting such specified
criteria within sales and marketing expenses in the accompanying
consolidated statements of operations. For those advertising
costs that do not meet the criteria set forth in
EITF 01-9,
the amounts are recorded as a reduction to product revenue.
Post-Contractual Support.
The Companys
support and service revenues are primarily derived from
post-contractual support. The Company accounts for
post-contractual support revenues based on
SOP 97-2,
which states that If an arrangement includes multiple
elements, the fee should be allocated to the various elements
based on vendor-specific objective evidence of fair value,
regardless of any separate prices stated within the contract for
each element. VSOE of fair value is limited to the price
charged when the same element is sold separately. VSOE of fair
value is established for support through prior renewals of
support from existing customers, which establishes a price based
on a stand alone sale.
The Company offers one, three and five year support contracts.
The decision to procure support is elected by the enterprise
customer, but most channel partners and their enterprise
customers desire post-contractual support so an initial system
sale usually includes post-contractual support. The majority of
support contracts are sold to
F-9
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
channel partners, under which the channel partner provides first
level support to the enterprise customer and the Company
provides support, as needed, to the channel partner. In a lesser
number of cases, the Company provides support directly to the
enterprise customer.
The Company uses the residual method, as allowed by
SOP 98-9,
modification of SOP 97-2 with respect of certain
transactions, to determine the amount of product revenue to be
recognized. Under the residual method, the fair value of the
undelivered element, support and services, is deferred and the
remaining portion of the sales amount is recognized as product
revenue. The fair value of the support and services is
recognized on a straight-line basis over the term of the related
support period, which is typically one to five years.
Installation and Training.
Installation is
sold on an elective basis. As installation is typically
performed by the channel partner or enterprise customer, and it
is not considered essential to the functionality of the
delivered elements. Installation, when performed by the Company,
is by its nature sold only with an accompanying system order.
Installation is generally priced at established rates based on
estimated hours required to install the accompanying system.
Training is also sold on an elective basis both to channel
partners and to their enterprise customers and is purchased both
with system orders and on a standalone basis. VSOE of fair value
is established for training through sales made independent of a
bundled order.
The Company recognizes revenue related to installation services
and training upon delivery of the service.
Provisions for returns allowances and product warranties are
recorded at the time revenue is recognized based on the
Companys historical experience.
Warranties
In November 2002, the Financial
Accounting Standard Board (FASB) issued Financial Interpretation
(FIN) No. 45 (FIN 45),
Guarantors
Accounting and Disclosure Requirements for Guarantee, Including
Indirect Guarantees of Indebtedness of Others.
FIN 45
requires a guarantor to include disclosures of certain
obligations, and if applicable, at the inception of the
guarantee, recognize a liability for the fair value of other
obligations undertaken in issuing a guarantee.
The majority of the Companys products are covered by a
one-year limited manufacturers warranty. Estimated
contractual warranty obligations are recorded when related sales
are recognized based on historical experience. The determination
of such provision requires the Company to make estimates of
product return rates and expected costs to repair or replace the
product under warranty. If actual costs differ significantly
from these estimates, additional amounts are recorded when such
costs are probable and can be reasonably estimated.
The change in accrued warranty expense is summarized as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Accrued warranty
balance beginning
|
|
$
|
70
|
|
|
$
|
112
|
|
|
$
|
100
|
|
|
$
|
206
|
|
Current period accrual
|
|
|
124
|
|
|
|
190
|
|
|
|
646
|
|
|
|
106
|
|
Warranty expenditures charged to
accrual
|
|
|
(82
|
)
|
|
|
(202
|
)
|
|
|
(540
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued warranty
balance end
|
|
$
|
112
|
|
|
$
|
100
|
|
|
$
|
206
|
|
|
$
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Costs
Research and
development expenditures, which include software development
costs, are expensed as incurred. Software development costs
incurred subsequent to the time a products technological
feasibility has been established through the time the product is
available for general release to customers are subject to
capitalization. To date, all software development costs incurred
subsequent to the
F-10
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
establishment of technological feasibility have been immaterial.
Accordingly, the Company has not capitalized any software
development costs.
Income Taxes
The Company accounts for income
taxes using the asset and liability method as prescribed by
Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes.
Deferred income taxes are
recognized by applying enacted statutory tax rates applicable to
future years to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period
that includes the enactment date. The measurement of deferred
tax assets is reduced, if necessary, by a valuation allowance
for any tax benefit of which future realization is uncertain.
Stock-Based Compensation
On July 1,
2006, the Company adopted SFAS No. 123 (revised 2004)
(SFAS 123R),
Share-Based Payment
, which
requires companies to measure the cost of employee services
received in exchange for an award of equity instruments based on
the grant date fair value of the award. The Company has elected
to use the Prospective Transition method such that
SFAS 123R applies to new awards and to awards modified,
repurchased or canceled after the effective date. The Company
has a stock-based employee compensation plan (Option Plan).
Generally, stock options granted to employees vest 25% one year
from the grant date and 1/48 each month thereafter, and have a
term of ten years. The Company recognizes stock-based
compensation expense over the requisite service period of the
individual grants, generally, equal to the vesting period.
Prior to July 1, 2006, the Company accounted for these
plans using the intrinsic value method in accordance with
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
, and
FIN No. 44,
Accounting for Certain Transactions
involving Stock Compensation an interpretation of
APB Opinion No. 25.
Accordingly, no compensation
expense is recognized for employee stock options granted with
exercise prices greater than or equal to the fair value of the
underlying common stock at date of grant. If the exercise price
is less than the market value at the date of grant, the
difference is recognized as deferred compensation expense, which
is amortized over the vesting period. Compensation costs for the
portion of awards for which the required service period has not
been rendered (such as unvested options) that were outstanding
as of July 1, 2006 shall be recognized as the remaining
required services are rendered.
The following table shows total stock-based compensation expense
included in the accompanying Consolidated Statements of
Operations for the years ended June 30, 2004, 2005 and 2006
and the three months ended September 30, 2005 and
September 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Cost of product revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
Cost of support and services
revenue
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
14
|
|
|
|
5
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
17
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
97
|
|
General and administrative
|
|
|
45
|
|
|
|
82
|
|
|
|
45
|
|
|
|
9
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
45
|
|
|
$
|
82
|
|
|
$
|
82
|
|
|
$
|
23
|
|
|
$
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no tax benefit associated with stock-based
compensation expense for the years ended June 30, 2004 and
2005, and the three months ended September 30, 2005.
The income tax benefit associated with stock-based compensation
expense for the year ended June 30, 2006 and the
three months ended September 30, 2006 was not
significant.
F-11
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Had compensation expense under the Companys stock-based
compensation plans been recorded under APB Opinion No. 25,
the effect on income from continuing operations, net income and
basic and diluted earnings per share for the three months ended
September 30, 2006, would have been as follows:
|
|
|
|
a)
|
Income from continuing operations would have been $71,000 higher
for the three months ended September 30, 2006.
|
|
|
b)
|
Net income would have been $64,000 higher for the three months
ended September 30, 2006.
|
|
|
c)
|
Basic and diluted earnings per share would have no difference
for the three months ended September 30, 2006.
|
The Company accounts for stock issued to nonemployees in
accordance with the provisions of SFAS 123 and EITF Issue
No. 96-18,
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services.
The Company uses the Black-Scholes
option-pricing model to value options granted to nonemployees.
The related expense is recorded over the period in which the
related services are received.
Determining
Fair Value of Stock Compensation
Valuation and amortization method
The Company
estimates the fair value of stock options granted using the
Black-Scholes option-pricing formula and a single option award
approach. This fair value is then amortized on a straight-line
basis over the requisite service periods of the awards, which is
generally the vesting period.
Expected Term
The expected term represents
the period that the Companys stock-based awards are
expected to be outstanding. The Company has elected to use the
safe harbor method described in SAB 107 to compute expected
term. The Companys stock plan provides for a 10 year
term to expiration. The options granted during the three months
ended September 30, 2006 vest over four years with a one
year cliff. Based on the above, the Company computed an expected
term of 6.08 years under the safe harbor method. The
Company will review the expected term annually to ensure that
assumptions remain appropriate.
Expected Volatility
Management estimates
volatility for option grants by evaluating the average
historical volatility of its peer group for the period
immediately preceding the option grant for a term that is
approximately equal to the options expected term. For the
three months ended September 30, 2006, the Company has
estimated future volatility (based on its peer group) to be
approximately 68%. Management believes historical volatility to
be the best estimate of future volatility. Volatility will be
analyzed on an annual basis unless management becomes aware of
events that would indicate more frequent analysis is necessary.
Risk-Free Interest Rate
The risk-free
interest rate used in the Black-Scholes valuation method is
based on the implied yield currently available on
U.S. Treasury zero-coupon issues with an equivalent
remaining term. For the three months ended September 30,
2006 the rate used was 4.8%
Expected Dividend
The Company has not issued
dividends to date and does not anticipate issuing dividends.
Foreign currency translation
The
Companys foreign operations are subject to exchange rate
fluctuations and foreign currency transaction costs, however,
the majority of sales transactions are denominated in
U.S. dollars. Foreign currency denominated sales, costs and
expenses are recorded at the average exchange rates during the
year. Gains or losses resulting from foreign currency
transactions are included in other income (expense) in the
consolidated statements of operations.
F-12
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Other income (expense)
Other income (expense)
includes net foreign currency transaction (gains) losses of $0,
$2,000 and $19,000 in the years ended June 30, 2004, 2005
and 2006, respectively, and $3,000 and $(1,000) in the three
months ended September 30, 2005 and 2006, respectively.
Comprehensive Income/Loss
The Company has no
components of other comprehensive income (loss), therefore net
income (loss) equals comprehensive income (loss) for all periods
presented.
Recent
Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154
(SFAS 154),
Accounting Changes and Error Corrections
that replaces APB No. 20
Accounting Changes
and
SFAS No. 3,
Reporting Accounting Changes in Interim
Financial Statements An Amendment of APB Opinion No
28.
SFAS 154 provides guidance on the accounting for
and reporting of accounting changes and error corrections. It
establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in
accounting principle and the reporting of a correction of an
error. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005.
In June 2006, the FASB issued FIN No. 48
(FIN 48),
Accounting for Uncertainty in Income
Taxes
. FIN 48 applies to all tax positions within the
scope of FASB Statement No. 109, applies a more
likely than not threshold for tax benefit recognition,
identifies a defined methodology for measuring benefits and
increases the disclosure requirements for companies. FIN 48
is mandatory for years beginning after December 15, 2006.
The Company is currently in the process of evaluating the
effects of this new accounting standard.
In September 2006, the Securities and Exchange Commission (SEC)
issued SAB 108 regarding the process of quantifying
financial statement misstatements. SAB 108 states that
registrants should use both a balance sheet approach and an
income statement approach when quantifying and evaluating
materiality of a misstatement. The interpretations in
SAB 108 contain guidance on correcting errors under the
dual approach as well as provide transition guidance for
correcting errors. This interpretation does not change the
requirements within SFAS 154 for the correction of an error
in financial statements. SAB 108 is effective for annual
financial statements covering the first fiscal year ending after
November 15, 2006. The Company will be required to adopt
this interpretation in fiscal year 2007.
In September 2006, the FASB issued SFAS No. 157
(SFAS 157),
Fair Value Measurements
. This Statement
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or
permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is
the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. This Statement
is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. The Company does not expect the
adoption of SFAS 157 in 2008 to have a material impact on
its results of operations or financial position.
|
|
2.
|
NET
INCOME (LOSS) PER COMMON SHARE AND UNAUDITED PRO FORMA NET
INCOME PER COMMON SHARE
|
Basic net income (loss) per share is determined by dividing net
income (loss) by the weighted average number of common shares
outstanding during the period. Diluted income per share is
determined by dividing net income (loss) by the weighted average
number of common shares used in the basic net income (loss) per
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.
Unaudited pro forma basic net income per share allocable to
common shareholders has been computed to give effect to the
assumed conversion of redeemable convertible preferred stock at
September 30, 2006 into common stock upon the closing of
the Companys initial public offering on an if-converted
basis for the year ended June 30, 2006 and the three months
ended September 30, 2006.
F-13
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
The following table is a reconciliation of the numerators and
denominators used in computing basic and diluted net income
(loss) per share (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders
|
|
$
|
(6,277
|
)
|
|
$
|
(1,434
|
)
|
|
$
|
3,951
|
|
|
$
|
103
|
|
|
$
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding net of common shares subject to repurchase (basic)
|
|
|
49,345,069
|
|
|
|
53,517,065
|
|
|
|
66,091,748
|
|
|
|
60,507,022
|
|
|
|
79,113,086
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equivalent shares from
options to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
18,152,522
|
|
|
|
12,405,707
|
|
|
|
22,167,353
|
|
Common equivalent shares from
common stock warrants
|
|
|
|
|
|
|
|
|
|
|
623,675
|
|
|
|
|
|
|
|
623,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding (diluted)
|
|
|
49,345,069
|
|
|
|
53,517,065
|
|
|
|
84,867,945
|
|
|
|
72,912,729
|
|
|
|
101,904,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.06
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.05
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma adjustments to reflect
assumed conversion of redeemable convertible preferred stock*
|
|
|
|
|
|
|
|
|
|
|
233,164,369
|
|
|
|
|
|
|
|
233,164,369
|
|
Shares used in computing pro forma
net income per common share available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic*
|
|
|
|
|
|
|
|
|
|
|
299,256,117
|
|
|
|
|
|
|
|
312,277,455
|
|
Diluted*
|
|
|
|
|
|
|
|
|
|
|
318,032,314
|
|
|
|
|
|
|
|
335,068,483
|
|
Pro forma net income per common
share available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic*
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted*
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common equivalent shares related to stock options
excluded from the calculation of diluted shares were
approximately 5,591,467, 8,765,140 and 8,018,124 for the years
ended June 30, 2004, 2005 and 2006, respectively, and
5,898,233 and 1,155,120 for the three months ended
September 30, 2005 and 2006, respectively.
F-14
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Anti-dilutive common equivalent shares from common stock
warrants were approximately 78,318 for the year ended
June 30, 2006 and the three months ended September 30,
2005 and 2006.
|
|
3.
|
BALANCE
SHEET COMPONENTS
|
Balance sheet components consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of June 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
256
|
|
|
$
|
|
|
|
$
|
|
|
Inventory in process/transit
|
|
|
2,058
|
|
|
|
100
|
|
|
|
981
|
|
Finished goods
|
|
|
2,349
|
|
|
|
4,556
|
|
|
|
3,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
4,663
|
|
|
$
|
4,656
|
|
|
$
|
4,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
517
|
|
|
$
|
786
|
|
|
$
|
738
|
|
Contract manufacturing receivables
|
|
|
|
|
|
|
66
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other
current assets
|
|
$
|
517
|
|
|
$
|
852
|
|
|
$
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and tooling
|
|
$
|
3,057
|
|
|
$
|
4,143
|
|
|
$
|
4,649
|
|
Software
|
|
|
946
|
|
|
|
1,034
|
|
|
|
1,071
|
|
Furniture and fixtures
|
|
|
283
|
|
|
|
350
|
|
|
|
350
|
|
Construction in progress
|
|
|
220
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
202
|
|
|
|
311
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
4,708
|
|
|
|
5,838
|
|
|
|
6,381
|
|
Less accumulated depreciation and
amortization
|
|
|
3,663
|
|
|
|
4,282
|
|
|
|
4,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
net
|
|
$
|
1,045
|
|
|
$
|
1,556
|
|
|
$
|
1,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005, June 30, 2006 and
September 30, 2006, computer equipment and tooling included
$112,000, $0, and $92,000, respectively, of inventory items held
within various departments of the Company for testing and
development purposes, net of accumulated depreciation.
As of June 30, 2005, June 30, 2006 and
September 30, 2006, computer equipment and tooling also
included amounts for equipment acquired under capital leases of
$890,000 with related accumulated amortization of $879,000,
$890,000 and $890,000, respectively.
|
|
4.
|
RELATED-PARTY
TRANSACTIONS
|
Unsecured Promissory Note
In October 1997,
the Company issued an unsecured promissory note in the principal
amount of $350,000 to an officer and shareholder. The note bears
interest at 6.34% per annum. The principal and any accrued
but unpaid interest were due on the earlier of
(a) October 27, 2004 or (b) two years after the
termination of the officers employment, the Companys
initial public offering or a merger or acquisition of the
Company. In 2002, the Company forgave $230,000 and the remaining
balance in default was fully reserved.
F-15
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Capital Leases
In August 2003, the Company
entered into a capital equipment lease for $19,000 with payments
due monthly over a
36-month
term. As of June 30, 2005, June 30, 2006 and
September 30, 2006, the Company had a balance of $8,000,
$1,000 and $0, respectively, due under the lease.
Bank Agreement
In connection with a previous
loan agreement, in 2004 the Company issued to the bank a vested
warrant to purchase 623,675 shares of common stock at
$0.08 per share. The value attributable to the warrants was
estimated using the Black-Scholes option pricing model with the
following assumptions: contractual life equal to 1 year;
risk free interest rate of 4.09%; volatility of 60%; and no
dividends during the expected term. The estimated fair value of
the warrants of $11,000 was recorded as interest expense over
the life of the loan. As of September 30, 2006, all such
warrants remained outstanding.
On June 27, 2005, the Company modified its Loan and
Security agreement dated September 29, 2003, and amended
July 30, 2004, with the bank. For the period commencing
June 27, 2005 through and including June 26, 2006, the
debt is not to exceed the lesser of $8 million or the
Companys Borrowing Base. For the period
commencing June 27, 2006 through and including
June 26, 2007, the debt is not to exceed the lesser of
$12 million or the Borrowing Base. The Borrowing Base
equals the sum of (i) 80% of the amount of eligible
accounts plus (ii) 25% of the value of eligible inventory.
Interest will accrue on outstanding borrowings at a rate equal
to the sum of (i) the prime rate in effect plus
(ii) 0.50% per annum, provided, however, that if the
Companys adjusted quick ratio is less than 1.50:1.00, the
foregoing margin over the prime rate shall be increased to
1.50% per annum. The loan matures June 26, 2007. The
line of credit includes two financial covenants. The Company
must (i) maintain a tangible net worth of not less than
$5 million and (ii) shall maintain an adjusted quick
ratio of not less than 1.50:1.00, provided, however, that the
Companys failure to maintain the stated adjusted quick
ratio shall not be considered an event of default under the Loan
Agreement and shall instead be a condition precedent upon which
the satisfaction of certain additional obligations of the
Company shall be effective.
The loan agreement is collateralized by substantially all of the
Companys assets. At September 30, 2006, no balance
was outstanding on the line of credit.
The provision for income taxes consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
4
|
|
|
$
|
114
|
|
|
$
|
3
|
|
|
$
|
151
|
|
State
|
|
|
|
|
|
|
|
|
|
|
99
|
|
|
|
8
|
|
|
|
51
|
|
Foreign
|
|
|
|
|
|
|
7
|
|
|
|
6
|
|
|
|
2
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
219
|
|
|
$
|
13
|
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
The difference between the income tax provision and the amount
computed by applying the federal statutory income tax rate to
income (loss) before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Income tax provision (benefit) at
federal statutory rate
|
|
$
|
|
|
|
$
|
(478
|
)
|
|
$
|
1,450
|
|
Federal effect of state deferred
taxes
|
|
|
|
|
|
|
(214
|
)
|
|
|
(242
|
)
|
Credits
|
|
|
|
|
|
|
(284
|
)
|
|
|
(284
|
)
|
State taxes
|
|
|
|
|
|
|
|
|
|
|
99
|
|
Other
|
|
|
|
|
|
|
129
|
|
|
|
327
|
|
Change in valuation allowance
|
|
|
|
|
|
|
858
|
|
|
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
11
|
|
|
$
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of deferred tax assets at June 30 consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Net operating loss carryforwards
|
|
$
|
32,848
|
|
|
$
|
31,246
|
|
Tax credit carryforwards
|
|
|
3,915
|
|
|
|
4,514
|
|
Other
|
|
|
2,038
|
|
|
|
1,908
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
38,801
|
|
|
|
37,668
|
|
Less valuation allowance
|
|
|
(38,801
|
)
|
|
|
(37,668
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, the Company had approximately
$84.4 million and $44.6 million of federal and
California net operating loss carryforwards, respectively. The
Company believes it has had multiple ownership changes as
defined by Section 382 of the Internal Revenue Code (IRC),
due to significant stock transactions in previous years, that
may limit the future realization of its net operating loss
carryforwards. Based on estimates prepared to date, the Company
believes Section 382 could result in the forfeiture of
approximately $72 million of net operating loss
carryforwards for federal income tax purposes. Management
believes there could also be an impact on the Companys
ability to utilize California net operating loss carryforwards
as a result of Section 382. As the Companys analysis
is incomplete, these estimates are uncertain. The net operating
loss carryforwards begin to expire in 2017 and 2007 for federal
and California purposes, respectively.
As of June 30, 2006, the Company had research and
development tax credit carryforwards of approximately
$2.5 million and $2.8 million, which can be used to
reduce future federal and California income taxes, respectively.
Federal research and development tax credit carryforwards will
expire beginning in fiscal 2012 through 2026. California
research and development tax credits will carry forward
indefinitely. In addition, a portion of the federal research tax
credit carryforwards may be subject to forfeiture due to
Section 382 ownership changes under IRC Section 383.
Management is in the process of determining the impact of
Section 383 on the tax credit carryforwards.
As of June 30, 2006, the Company had unused California
manufacturers investment credits of approximately $85,000,
which will expire beginning in fiscal 2007 through 2010. As of
June 30, 2006, the Company also has Alternative Minimum Tax
credits of approximately $107,000 and $19,000 for federal and
for California respectively, which may be carried forward
indefinitely.
The Company had recorded a 100% valuation allowance against its
net deferred tax assets, due to the uncertainty regarding the
magnitude of the Section 382 and 383 limitations as well as
uncertainty concerning future taxable income.
F-17
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
|
|
7.
|
REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK
WARRANTS
|
Redeemable convertible preferred stock and preferred stock
warrants consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Carrying
|
|
|
Redemption and
|
|
Series
|
|
Authorized
|
|
|
Outstanding
|
|
|
Value
|
|
|
Liquidation Value
|
|
|
|
(Unaudited)
|
|
|
E
|
|
|
33,864,118
|
|
|
|
31,789,550
|
|
|
$
|
29,749,000
|
|
|
$
|
20,000,000
|
|
F
|
|
|
134,713,739
|
|
|
|
134,090,064
|
|
|
|
10,716,000
|
|
|
|
10,750,000
|
|
G
|
|
|
20,114,943
|
|
|
|
20,114,943
|
|
|
|
3,478,000
|
|
|
|
3,500,000
|
|
H
|
|
|
47,169,812
|
|
|
|
47,169,812
|
|
|
|
9,972,000
|
|
|
|
10,000,000
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
2,430,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,862,612
|
|
|
|
233,164,369
|
|
|
$
|
56,345,000
|
|
|
$
|
44,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Carrying
|
|
|
Redemption and
|
|
Series
|
|
Authorized
|
|
|
Outstanding
|
|
|
Value
|
|
|
Liquidation Value
|
|
|
E
|
|
|
33,864,118
|
|
|
|
31,789,550
|
|
|
$
|
29,746,000
|
|
|
$
|
20,000,000
|
|
F
|
|
|
134,713,739
|
|
|
|
134,090,064
|
|
|
|
10,712,000
|
|
|
|
10,750,000
|
|
G
|
|
|
20,114,943
|
|
|
|
20,114,943
|
|
|
|
3,475,000
|
|
|
|
3,500,000
|
|
H
|
|
|
47,169,812
|
|
|
|
47,169,812
|
|
|
|
9,969,000
|
|
|
|
10,000,000
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
2,430,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,862,612
|
|
|
|
233,164,369
|
|
|
$
|
56,332,000
|
|
|
$
|
44,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Carrying
|
|
|
Redemption and
|
|
Series
|
|
Authorized
|
|
|
Outstanding
|
|
|
Value
|
|
|
Liquidation Value
|
|
|
E
|
|
|
33,864,118
|
|
|
|
31,789,550
|
|
|
$
|
29,732,000
|
|
|
$
|
20,000,000
|
|
F
|
|
|
134,713,739
|
|
|
|
134,090,064
|
|
|
|
10,698,000
|
|
|
|
10,750,000
|
|
G
|
|
|
20,114,943
|
|
|
|
20,114,943
|
|
|
|
3,464,000
|
|
|
|
3,500,000
|
|
H
|
|
|
47,169,812
|
|
|
|
47,169,812
|
|
|
|
9,957,000
|
|
|
|
10,000,000
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
2,430,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,862,612
|
|
|
|
233,164,369
|
|
|
$
|
56,281,000
|
|
|
$
|
44,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The holders of preferred stock have various rights and
preferences as follows:
Redemption
At any time beginning on
October 14, 2007, each series of preferred stock may make a
written request for redemption of the preferred stock, and upon
consent of a majority of the then-outstanding shares of such
series of preferred stock, with each such series of preferred
stock voting as a single class, the Company must redeem the
specified percentage of Series E, F, G, and H preferred
stock at a price equal to $0.629, $0.080, $0.174, and
$0.212 per share, respectively, plus all declared but
unpaid dividends on such shares. The Company shall effect such
redemption, from any source of funds legally available
therefore, in four equal installments with the first installment
being made 45 days after receiving the redemption request,
and thereafter in three equal installments on each of the
following three anniversaries of the initial redemption date.
F-18
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Voting
Each share of preferred stock has
voting rights equal to the equivalent number of shares of common
stock into which it is convertible and generally votes together
as one class with the common stock.
As long as at least 30,000,000 shares of preferred stock
are outstanding, the holders of the preferred stock, voting
together as a single class shall be entitled to elect three
directors to the Board of Directors. If less than
30,000,000 shares of preferred stock is outstanding,
holders of preferred stock and common stock, voting together as
a single class on an as-converted basis, will be entitled to
elect such directors to the Board.
In addition, so long as at least 30,000,000 shares of
preferred stock remain outstanding, the Company shall not
without first obtaining the approval of the holders of a
majority of the preferred shares then outstanding, voting
together as a single class: (i) repurchase or redeem any
shares of preferred shares; (ii) repurchase any shares of
common stock (other than common stock that are subject to
restricted stock purchase/stock option exercise agreements where
the Company has the option to repurchase the shares);
(iii) authorize, create, or issue any other equity security
having rights or preferences senior to or on par with the
holders of preferred stock; (iv) declare or pay any
dividend with respect to common stock; (v) consummate an
acquisition; (vi) permit a subsidiary to sell shares;
(vii) increase or decrease the number of authorized shares
of preferred stock; (viii) materially and adversely alter
or change any of the rights, preferences, privileges, or
restrictions of any series of preferred stock;
(ix) increase or decrease the authorized number of
directors constituting the board; and (x) liquidate or
dissolve the Company or voluntarily file for bankruptcy.
Dividends
Holders of the preferred stock
shall be entitled to receive noncumulative dividends at the per
annum rate of 8% of the original issue price, when and if
declared by the Board. No dividends were declared by the board
of directors during the years ended June 30, 2004, 2005 and
2006 or the three months ended September 30, 2005 and 2006.
Liquidation
In the event of any liquidation,
dissolution or winding up of the Company, whether voluntary or
involuntary, the holders of each share of preferred stock then
outstanding shall be entitled to be paid, out of the available
funds and assets, and prior and in preference to any payment or
distribution on any shares of common stock, an amount per share
equal to the original issue price for the applicable series of
preferred stock, plus all declared but unpaid dividends. If,
upon any liquidation, dissolution or winding up of the Company,
the available funds and assets shall be insufficient to permit
the payment to holders of the preferred stock of their full
preferential amounts, then all of the available funds and assets
shall be distributed among the holders of the then outstanding
preferred stock pro rata, on an equal priority, pari passu
basis, according to the respective liquidation preference for
each series as set forth above. The remaining assets, if any,
shall be distributed ratably among the holders of common stock
and the holders of preferred stock on an as-if-converted basis.
Conversion
Each share of preferred stock is
convertible into one share of common stock at the option of the
holder. The conversion ratio into common stock is subject to
certain adjustments to prevent dilution. Each share of preferred
stock automatically converts into the number of shares of common
stock at the then effective conversion ratio upon: (i) the
closing of a public offering of common stock at a price per
share of at least $0.645 and an aggregate gross offering price
to the public of at least $20,000,000; or (ii) the consent
of the majority of holders of preferred stock, voting as a
single class on an as-converted basis.
Each share of preferred stock is convertible into the number of
shares of common stock which results from dividing the original
issue price for such series of preferred stock by the conversion
price for such series of preferred stock that is in effect that
the time of conversion. The initial conversion price for each
series of preferred stock was the original issue price for such
series of preferred stock. The conversion price for each series
of preferred stock is subject to adjustment from time to time.
F-19
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Preferred Stock Warrants
In prior
years, the Company issued warrants to purchase preferred stock.
The Company recorded the fair value of the warrants at the time
of grant using the Black-Scholes option-pricing model. As a
result of the Series F preferred stock financing,
outstanding warrants for Series C and Series D
preferred stock became exercisable for common stock as follows:
|
|
|
|
|
Warrants to purchase 6,858 shares of common stock issued
with respect to the equipment lease line signed in June 1998,
exercisable at $2.12 per share.
|
|
|
|
|
|
Warrants to purchase 12,713 shares of common stock issued
with respect to the equipment lease line signed in March 2000,
exercisable at $3.93 per share.
|
|
|
|
|
|
Warrants to purchase 12,243 shares of common stock issued
in February 2001 for consulting services, exercisable at $2.62
per share.
|
The Company also has the following Series E and
Series F preferred stock warrants outstanding as of
September 30, 2006.
|
|
|
|
|
Warrants to purchase 53,362 shares of Series E preferred
stock issued with respect to the line of credit in March 2001,
exercisable at $0.94 per share which shares are convertible
to 53,362 shares of common stock.
|
|
|
|
Warrants to purchase 623,675 shares of Series F preferred
stock issued with respect to the line of credit in September
2003, exercisable at $0.08 per share which shares are
convertible to 623,675 shares of common stock.
|
While the value of these warrants is fixed, the quantity of
shares and the price per share may vary for certain of the
warrants upon the subsequent offering of preferred stock at a
lower price per share.
At September 30, 2006, 13,798,641 shares of common
stock were subject to repurchase in connection with the early
exercise of incentive stock options under the Companys
stock option plan.
Common
Shares Reserved for Issuance
At September 30, 2006, the Company has reserved shares of
common stock for issuance as follows:
|
|
|
|
|
Reserved under stock option plan
|
|
|
38,716,582
|
|
Conversion of Series E
preferred stock
|
|
|
31,789,550
|
|
Conversion of Series F
preferred stock
|
|
|
134,090,064
|
|
Conversion of Series G
preferred stock
|
|
|
20,114,943
|
|
Conversion of Series H
preferred stock
|
|
|
47,169,812
|
|
Reserved for warrants
|
|
|
708,851
|
|
|
|
|
|
|
Total
|
|
|
272,589,802
|
|
|
|
|
|
|
In January 1997, the Board of Directors and shareholders adopted
the 1997 stock option plan (the 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 Companys board of directors increased the number of
shares authorized and reserved for issuance under
F-20
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
the Plan to 94,833,247 shares of common stock. In
accordance with the Plan, the stated exercise price shall not be
less than 100% and 85% of the estimated fair market value of
common stock on the date of grant for ISOs and NSOs,
respectively, as determined by the Board of Directors. The 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. During fiscal year 2006, 870,667
unvested shares issued upon exercise of options were repurchased
under this provision. There were no repurchases in fiscal years
2004 or 2005 or in the three months ended September 30,
2006. The Companys repurchase right for such options
lapses as the options vest, generally over a four-year period.
During fiscal years 2006 and 2005, the Company had outstanding
loans to certain executives and employees pursuant to the Plan
for the purchase of stock upon the exercise of incentive stock
options in the aggregate amounts of $231,000 and $372,000,
respectively. The loan agreements allow the Company to
repurchase the unvested shares within 60 days of
termination at a price equal to the original exercise price. The
loans bear interest at rates ranging from 6.4%
8.0% per annum and are due upon the earlier of termination
of employment or four years from the option exercise date. All
loans are due by June 30, 2006. In fiscal 2002, as part of
his termination settlement, the Company repurchased unvested
shares and amended the terms of the remaining notes issued to
the former CEO, such that they are nonrecourse. In March 2003,
the Company amended the terms of the remaining loans, such that
they are nonrecourse. Of the 2,717,900 shares purchased,
1,274,176 were unvested at the time of the note amendments. Due
to the conversion of these full recourse notes to non-recourse,
the deemed new awards will be subject to variable accounting. As
such, additional stock-based compensation expense will be
recorded to the extent the Companys share price
appreciates above the value for which the Company has already
recorded compensation charges. Stock-based compensation expense
recorded for these awards in fiscal 2004, 2005, 2006 and the
three month periods ended September 30, 2005 and 2006, was
$45,000, $82,000, $54,000, $23,000 and $699,000 respectively.
During fiscal 2006, one employee was terminated and the Company
repurchased 460,000 unvested shares issued upon exercise of
options and wrote off the balance of his loan of $141,000 plus
accrued interest of $40,000. During fiscal 2005, one employee
repaid his loan in the amount of $222,000 plus accrued interest
of $40,000. During the three months ended September 30,
2006, one employee repaid his loan in the amount of $12,000 plus
accrued interest of $7,000.
F-21
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Transactions under the Plan are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
|
|
|
|
Shares
|
|
|
Subject to
|
|
|
Average
|
|
|
|
Available
|
|
|
Options
|
|
|
Exercise
|
|
|
|
for Grant
|
|
|
Outstanding
|
|
|
Price
|
|
|
Outstanding
July 1, 2003
|
|
|
15,058,689
|
|
|
|
21,309,657
|
|
|
$
|
0.07
|
|
Adjustment to shares authorized on
issuance of Series F preferred stock
|
|
|
(205,750
|
)
|
|
|
|
|
|
|
|
|
Options granted (weighted average
fair value of $0.01 per share)
|
|
|
(9,046,000
|
)
|
|
|
9,046,000
|
|
|
|
0.03
|
|
Options exercised
|
|
|
|
|
|
|
(991,400
|
)
|
|
|
0.01
|
|
Options canceled
|
|
|
2,628,808
|
|
|
|
(2,628,808
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
June 30, 2004
|
|
|
8,435,747
|
|
|
|
26,735,449
|
|
|
$
|
0.07
|
|
Shares authorized on issuance of
Series H preferred stock
|
|
|
25,317,795
|
|
|
|
|
|
|
|
|
|
Options granted (weighed-average
fair value of $0.01 per share)
|
|
|
(29,806,295
|
)
|
|
|
29,806,295
|
|
|
|
0.03
|
|
Options exercised
|
|
|
|
|
|
|
(2,520,133
|
)
|
|
|
0.09
|
|
Options canceled
|
|
|
662,577
|
|
|
|
(662,577
|
)
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
June 30, 2005
|
|
|
4,609,824
|
|
|
|
53,359,034
|
|
|
$
|
0.04
|
|
Shares authorized
|
|
|
15,000,000
|
|
|
|
|
|
|
|
|
|
Options granted (weighed-average
fair value of $0.04 per share)
|
|
|
(13,000,500
|
)
|
|
|
13,000,500
|
|
|
|
0.07
|
|
Options exercised
|
|
|
|
|
|
|
(34,286,679
|
)
|
|
|
0.03
|
|
Options repurchased
|
|
|
1,330,667
|
|
|
|
|
|
|
|
0.11
|
|
Options canceled
|
|
|
1,294,233
|
|
|
|
(1,294,233
|
)
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
June 30, 2006
|
|
|
9,234,224
|
|
|
|
30,778,622
|
|
|
$
|
0.06
|
|
Options granted (weighed-average
fair value of $0.44 per share) (unaudited)
|
|
|
(3,261,500
|
)
|
|
|
3,261,500
|
|
|
|
0.17
|
|
Options exercised (unaudited)
|
|
|
|
|
|
|
(1,296,264
|
)
|
|
|
0.05
|
|
Options canceled (unaudited)
|
|
|
396,917
|
|
|
|
(396,917
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
September 30, 2006 (unaudited)
|
|
|
6,369,641
|
|
|
|
32,346,941
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
September 30, 2006 (unaudited)
|
|
|
|
|
|
|
14,339,313
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
The following table summarizes information about outstanding and
exercisable options at the period end shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006
|
|
|
As of September 30, 2006
|
|
|
|
Shares
|
|
|
Weighted
|
|
|
|
|
|
Shares
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Subject
|
|
|
Average
|
|
|
Weighted
|
|
|
Subject
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
to
|
|
|
Remaining
|
|
|
Average
|
|
|
to
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
$0.01
|
|
|
5,138,657
|
|
|
|
6.62
|
|
|
$
|
0.01
|
|
|
|
4,674,391
|
|
|
|
6.38
|
|
|
$
|
0.01
|
|
|
|
|
|
$0.03
|
|
|
5,385,880
|
|
|
|
7.58
|
|
|
$
|
0.03
|
|
|
|
5,170,360
|
|
|
|
7.33
|
|
|
$
|
0.03
|
|
|
|
|
|
$0.04
|
|
|
9,037,122
|
|
|
|
8.92
|
|
|
$
|
0.04
|
|
|
|
8,598,685
|
|
|
|
8.67
|
|
|
$
|
0.04
|
|
|
|
|
|
$0.08
|
|
|
3,691,667
|
|
|
|
9.54
|
|
|
$
|
0.08
|
|
|
|
3,628,334
|
|
|
|
9.28
|
|
|
$
|
0.08
|
|
|
|
|
|
$0.10
|
|
|
6,959,701
|
|
|
|
7.11
|
|
|
$
|
0.10
|
|
|
|
8,273,076
|
|
|
|
7.39
|
|
|
$
|
0.10
|
|
|
|
|
|
$0.20
|
|
|
132,345
|
|
|
|
3.40
|
|
|
$
|
0.20
|
|
|
|
132,345
|
|
|
|
2.85
|
|
|
$
|
0.20
|
|
|
|
|
|
$0.25
|
|
|
|
|
|
|
.00
|
|
|
$
|
|
|
|
|
1,436,500
|
|
|
|
9.92
|
|
|
$
|
0.25
|
|
|
|
|
|
$0.30
|
|
|
129,000
|
|
|
|
3.69
|
|
|
$
|
0.30
|
|
|
|
129,000
|
|
|
|
3.44
|
|
|
$
|
0.30
|
|
|
|
|
|
$0.60
|
|
|
304,250
|
|
|
|
4.22
|
|
|
$
|
0.60
|
|
|
|
304,250
|
|
|
|
3.96
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Outstanding
|
|
|
30,778,622
|
|
|
|
7.87
|
|
|
$
|
0.06
|
|
|
|
32,346,941
|
|
|
|
7.83
|
|
|
$
|
0.07
|
|
|
$
|
18,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
13,100,934
|
|
|
|
6.52
|
|
|
$
|
0.07
|
|
|
|
14,339,313
|
|
|
|
6.44
|
|
|
$
|
0.06
|
|
|
$
|
8,417
|
|
Vested and expected to vest
|
|
|
30,778,622
|
|
|
|
0.70
|
|
|
$
|
0.06
|
|
|
|
29,136,093
|
|
|
|
0.68
|
|
|
$
|
0.07
|
|
|
$
|
16,939
|
|
|
|
10.
|
COMMITMENTS
AND CONTINGENCIES
|
Leases
The Company leases its facilities
under noncancelable operating leases which expire by September
2007. The leases provide for the lessee to pay all cost of
utilities, insurance, and taxes. On October 1, 2005, the
Company renegotiated its lease with its landlord. The square
footage was increased on its primary facility under lease.
Future minimum lease payments under the noncancelable leases as
of June 30, 2006, were as follows (in thousands):
|
|
|
|
|
Years Ending June 30
|
|
|
|
|
2007
|
|
$
|
712
|
|
2008
|
|
|
186
|
|
|
|
|
|
|
|
|
$
|
898
|
|
|
|
|
|
|
Lease obligations for the Companys foreign offices are
cited in foreign currencies, which were converted herein to
U.S. dollars at the average exchange rate on June 30,
2006.
Rent expense for the years ended June 30, 2004, 2005 and
2006, was $453,000, $475,000 and $594,000, respectively, and
$111,000 and $183,000 during the three months ended
September 30, 2005 and 2006, respectively.
Purchase commitments
As of June 30, 2006
and September 30, 2006, the Company had non-cancelable
purchase commitments with contract manufacturers totaling
approximately $7,120,000 and $8,062,000, respectively, for
finished goods.
F-23
SHORETEL,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(INFORMATION AS OF SEPTEMBER 30, 2006 AND FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2005 AND 2006 IS UNAUDITED)
Litigation
The Company is from time to time
subject to various lawsuits. The Company does not believe that
the outcome of any pending litigation is likely to be material,
but due to the inherent uncertainties of litigation, there is a
risk that the outcome of pending or any future litigation could
have a material adverse effect on the Companys business,
financial condition, cash flows, or results of operations.
Indemnification
Under the
indemnification provisions of the Companys 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
Companys 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.
|
|
11.
|
EMPLOYEE
BENEFIT PLAN
|
The Company adopted a defined contribution retirement plan which
has been determined by the Internal Revenue Service
(IRS) to be qualified as a 401(k) plan (the
Plan). The Plan covers substantially all employees. The
Plan provides for voluntary tax deferred contributions of
1 20% of gross compensation, subject to certain IRS
limitations. Based on approval by the Board of Directors, the
Company may make matching contributions to the Plan. No matching
contributions have been made as of September 30, 2006.
SFAS No. 131 (SFAS 131),
Disclosures About
Segments of an Enterprise and Related Information
,
established standards for reporting information about operating
segments. Operating segments are defined as components of an
enterprise for which separate financial information is available
and evaluated regularly by the chief operating decision-maker,
or decision-making group, in deciding how to allocate resources
and in assessing performance. The Company is organized as, and
operates in, one reportable segment: the development and sale of
IP voice communication systems. The Companys chief
operating decision-maker is its Chief Executive Officer. The
Companys Chief Executive Officer reviews financial
information presented on a consolidated basis, accompanied by
information about revenue by geographic region, for purposes of
evaluating financial performance and allocating resources. The
Company has operations in North America and Europe; however, the
portion of revenues that Europe contributes is less than 10% of
consolidated revenues. As such, it does not meet the requirement
under SFAS 131 to be reported as a separate segment.
Revenue is attributed by geographic location based on the
location of the billing address of the channel partner or
enterprise customer if sold directly to the enterprise customer.
The Companys assets are primarily located in the United
States of America and not allocated to any specific region.
The following presents total revenue by geographic region (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
North America
|
|
$
|
18,633
|
|
|
$
|
34,863
|
|
|
$
|
60,954
|
|
|
$
|
11,021
|
|
|
$
|
20,210
|
|
Europe
|
|
|
195
|
|
|
|
619
|
|
|
|
654
|
|
|
|
193
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,828
|
|
|
$
|
35,482
|
|
|
$
|
61,608
|
|
|
$
|
11,214
|
|
|
$
|
20,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* * * * * *
F-24
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
ITEM 13.
|
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
|
The following table sets forth the fees and expenses, other than
underwriting discounts and commissions, payable in connection
with the registration of common stock hereunder. All amounts are
estimates except the SEC registration fee, the NASD filing fee
and the NASDAQ Global Market listing fee.
|
|
|
|
|
|
|
Amount to be Paid
|
|
|
SEC Registration Fee
|
|
$
|
9,095
|
|
NASD Filing Fee
|
|
|
9,125
|
|
NASDAQ Global Market Initial
Listing Fee
|
|
|
5,000
|
|
Legal Fees and Expenses
|
|
|
*
|
|
Accounting Fees and Expenses
|
|
|
*
|
|
Printing and Engraving Expenses
|
|
|
*
|
|
Blue Sky Fees and Expenses
|
|
|
*
|
|
Transfer Agent and Registrar Fees
|
|
|
*
|
|
Miscellaneous Expenses
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
*
|
|
To be completed by amendment.
|
|
|
ITEM 14.
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS.
|
Section 145 of the Delaware General Corporation Law
authorizes a court to award, or a corporations board of
directors to grant, indemnity to directors and officers under
certain circumstances and subject to certain limitations. The
terms of Section 145 of the Delaware General Corporation
Law are sufficiently broad to permit indemnification under
certain circumstances for liabilities, including reimbursement
of expenses incurred, arising under the Securities Act of 1933.
As permitted by the Delaware General Corporation Law, the
Registrants certificate of incorporation includes a
provision that eliminates, to the fullest extent permitted by
law, the personal liability of a director for monetary damages
resulting from breach of his fiduciary duty as a director.
As permitted by the Delaware General Corporation Law, the
Registrants bylaws provide that:
|
|
|
|
|
the Registrant is required to indemnify its directors and
officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to certain limited exceptions;
|
|
|
|
the Registrant may also indemnify its other employees and agents
in its discretion;
|
|
|
|
the Registrant is required to advance expenses, as incurred, to
its directors and officers in connection with a legal proceeding
subject to certain limited exceptions, and to the extent the
Delaware General Corporation Law so requires, such advances may
be conditioned on the director or officers agreement to
repay any such advanced expenses if it is determined that the
director or officer is not entitled to be indemnified under the
Registrants bylaws; and
|
|
|
|
the rights conferred in the bylaws are not exclusive.
|
In addition, the Registrant has entered into indemnity
agreements with each of its current directors and officers.
These agreements provide for the indemnification of directors
and officers for all reasonable expenses and liabilities
incurred in connection with any action or proceeding brought
against them by reason of the fact that they are or were agents
of the Registrant, subject to limited exceptions. Some of the
directors of the Registrant have entered into
II-1
agreements with investment entities with which they are
affiliated that provide for the indemnification of such
directors (entered into in connection with such entities
investments in the Registrant).
The Registrant currently carries liability insurance for its
directors and officers.
The Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification by the
underwriters of the Registrant and its directors and officers
for certain liabilities under the Securities Act of 1933, or
otherwise.
Reference is made to the following documents filed as exhibits
to this Registration Statement regarding relevant
indemnification provisions described above and elsewhere herein:
|
|
|
|
|
Exhibit Document
|
|
Number
|
|
|
Form of Underwriting Agreement
|
|
|
1.1
|
|
Certificate of Incorporation of
the Registrant
|
|
|
3.1
|
|
Third Restated Certificate of
Incorporation of the Registrant, to be filed upon the completion
of this offering
|
|
|
3.2
|
|
Registrants Bylaws
|
|
|
3.3
|
|
Form of Amended and Restated
Bylaws of the Registrant, to be effective following the
completion of this offering
|
|
|
3.4
|
|
Form of Indemnity Agreement
|
|
|
10.1
|
|
|
|
ITEM 15.
|
RECENT
SALES OF UNREGISTERED SECURITIES
|
Since January 1, 2004, the Registrant has issued and sold
the following securities:
1. From January 1, 2004 to February 12, 2007, we
granted stock options to purchase an aggregate of
62,605,295 shares of our common stock at a weighted average
exercise price of $0.10 per share, respectively, to our
employees, consultants, directors and other service providers
under our 1997 Stock Option Plan and a non-plan stock option.
2. From January 1, 2004 to February 12, 2007, we
issued and sold an aggregate of 43,113,263 shares of our
common stock to employees, consultants, directors and other
service providers at prices ranging from $0.01 to $0.60 per
share under direct issuances or exercises of options granted
under our 1997 Stock Option Plan.
3. On March 1, 2004, we issued 20,114,943 shares
of our Series G Preferred Stock to private investors at a
price of $0.174 per share for an aggregate purchase price
of approximately $3.5 million in reliance on
Section 4(2) of the Securities Act
and/or
Regulation D promulgated under the Securities Act. Each
share of Series G Preferred Stock will convert
automatically into common stock upon the completion of this
offering.
4. On October 20, 2004, we issued
47,169,812 shares of Series H Preferred Stock to
private investors at a price of $0.212 per share for an
aggregate purchase price of approximately $10 million in
reliance on Section 4(2) of the Securities Act
and/or
Regulation D promulgated under the Securities Act. Each
share of Series H Preferred Stock will convert
automatically into common stock upon the completion of this
offering.
All sales of common stock made pursuant to our 1997 Stock Option
Plan or any non-plan stock option, including pursuant to
exercise of stock options, were made in reliance on
Rule 701 under the Securities Act or Section 4(2) of
the Securities Act.
All sales indicated as having been made in reliance on
Section 4(2) of the Securities Act
and/or
Regulation D promulgated under the Securities Act were made
without general solicitation or advertising. Each purchaser was
a sophisticated investor with access to all relevant information
necessary to evaluate the investment and represented to the
Registrant that the shares were being acquired for investment.
II-2
|
|
ITEM 16.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
|
(a)
The following exhibits are filed herewith:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
3
|
.1
|
|
Certificate of Incorporation of
the Registrant.
|
|
3
|
.2
|
|
Third Restated Certificate of
Incorporation of the Registrant, to be filed upon completion of
this offering with the Delaware Secretary of State.
|
|
3
|
.3
|
|
Bylaws of the Registrant.
|
|
3
|
.4*
|
|
Form of Amended and Restated
Bylaws of the Registrant, to be effective upon completion of
this offering.
|
|
4
|
.1*
|
|
Form of Registrants Common
Stock certificate.
|
|
4
|
.2
|
|
Seventh Amended and Restated
Rights Agreement dated October 20, 2004 by and among the
Registrant and certain of its equityholders.
|
|
5
|
.1*
|
|
Opinion of Fenwick & West
LLP.
|
|
10
|
.1*
|
|
Form of Indemnity Agreement
between the Registrant and each of its directors and executive
officers.
|
|
10
|
.2
|
|
1997 Stock Option Plan and forms
of stock option agreement and stock option exercise agreement.
|
|
10
|
.3
|
|
2007 Equity Incentive Plan and
forms of stock option agreement and stock option exercise
agreement.
|
|
10
|
.4
|
|
2007 Employee Stock Purchase Plan.
|
|
10
|
.5
|
|
Shoretel Executive Bonus Incentive
Plan for the second half of fiscal 2006.
|
|
10
|
.6*
|
|
Shoretel Executive Bonus Incentive
Plan for the first half of fiscal 2007.
|
|
10
|
.7
|
|
Offer Letter, dated as of
July 14, 2004, by the Registrant and John W. Combs.
|
|
10
|
.8
|
|
Offer Letter, dated as of
March 10, 2003, by the Registrant and John Finegan.
|
|
10
|
.9
|
|
Offer Letter, dated as of
September 8, 2005, by the Registrant and Joseph A. Vitalone.
|
|
10
|
.10
|
|
Offer Letter, dated as of
April 13, 2005, by the Registrant and Walter Weisner.
|
|
10
|
.11
|
|
Change of Control Agreement, dated
as of August 5, 2004, between the Registrant and John W.
Combs.
|
|
10
|
.12
|
|
Change of Control Agreement, dated
as of May 7, 2003, between the Registrant and John Finegan.
|
|
10
|
.13
|
|
Change of Control Agreement, dated
as of August 1, 2001, between the Registrant and Edwin J.
Basart.
|
|
10
|
.14
|
|
Separation Agreement, dated as of
August 9, 2004, between the Registrant and Thomas van
Overbeek.
|
|
10
|
.15
|
|
Sublease, dated as of October
1998, between Registrant and Applied Materials, Inc., as amended.
|
|
10
|
.16
|
|
ODM Product Development and
Purchase Agreement, dated as of March 19, 2004, between
Registrant and Giant Electronics Ltd., as amended.
|
|
10
|
.17
|
|
Manufacturing Services Agreement,
dated October 28, 2005, between Registrant and Jabil
Circuit, Inc.
|
|
23
|
.1*
|
|
Consent of Fenwick & West
LLP (included in Exhibit 5.1).
|
|
23
|
.2
|
|
Consent of Deloitte &
Touche LLP, independent registered public accounting firm.
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24
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.1
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|
Power of Attorney (see signature
page hereto).
|
|
|
|
*
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|
To be filed by amendment.
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|
|
|
|
|
An application for confidential treatment of selected portions
of this agreement has been filed with the Commission.
|
(b)
Financial Statement Schedules.
II-3
All schedules have been omitted because they are either
inapplicable or the required information has been given in the
consolidated financial statements or the notes thereto.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the completion specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions
described under Item 14 above, or otherwise, the Registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or Rule 497(h) under the
Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Sunnyvale, State of California, on
February 11, 2007.
SHORETEL, INC.
John W. Combs
Chairman, President and Chief Executive Officer
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose
signature appears below constitutes and appoints John W. Combs
and John Finegan, and each of them, his or her true and lawful
attorneys-in-fact
and agents with full power of substitution, for him or her and
in his or her name, place and stead, in any and all capacities,
to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any
registration statement for the same offering covered by the
Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities
Act, and all post-effective amendments thereto, and to file the
same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting
unto said
attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby
ratifying and confirming all that said
attorneys-in-fact
and agents or any of them, or his, her or their substitute or
substitutes, may lawfully do or cause to be done or by virtue
hereof.
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
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|
|
|
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|
Name
|
|
Title
|
|
Date
|
|
/s/
John
W. Combs
John
W. Combs
|
|
Chairman, President and Chief
Executive Officer (Principal Executive Officer)
|
|
February 11, 2007
|
|
|
|
|
|
/s/
John
Finegan
John
Finegan
|
|
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
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|
February 11, 2007
|
|
|
|
|
|
/s/
Edwin J.
Basart
Edwin J.
Basart
|
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Director
|
|
February 11, 2007
|
|
|
|
|
|
/s/
Charles
D. Kissner
Charles
D. Kissner
|
|
Director
|
|
February 11, 2007
|
|
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|
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|
/s/
Seth
Neiman
Seth
Neiman
|
|
Director
|
|
February 11, 2007
|
II-5
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|
|
|
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Name
|
|
Title
|
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Date
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/s/
Thomas
van
Overbeek
Thomas
van Overbeek
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Director
|
|
February 11, 2007
|
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|
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/s/
Brian
K. Paul
Brian
K. Paul
|
|
Director
|
|
February 11, 2007
|
|
|
|
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|
/s/
Edward
F. Thompson
Edward
F. Thompson
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Director
|
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February 11, 2007
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II-6
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
3
|
.1
|
|
Certificate of Incorporation of
the Registrant.
|
|
3
|
.2
|
|
Third Restated Certificate of
Incorporation of the Registrant, to be filed upon completion of
this offering with the Delaware Secretary of State.
|
|
3
|
.3
|
|
Bylaws of the Registrant.
|
|
3
|
.4*
|
|
Form of Amended and Restated
Bylaws of the Registrant, to be effective upon completion of
this offering.
|
|
4
|
.1*
|
|
Form of Registrants Common
Stock certificate.
|
|
4
|
.2
|
|
Seventh Amended and Restated
Rights Agreement dated October 20, 2004 by and among the
Registrant and certain of its equityholders.
|
|
5
|
.1*
|
|
Opinion of Fenwick & West
LLP.
|
|
10
|
.1*
|
|
Form of Indemnity Agreement
between the Registrant and each of its directors and executive
officers.
|
|
10
|
.2
|
|
1997 Stock Option Plan and forms
of stock option agreement and stock option exercise agreement.
|
|
10
|
.3
|
|
2007 Equity Incentive Plan and
forms of stock option agreement and stock option exercise
agreement.
|
|
10
|
.4
|
|
2007 Employee Stock Purchase Plan.
|
|
10
|
.5
|
|
Shoretel Executive Bonus Incentive
Plan for the second half of fiscal 2006.
|
|
10
|
.6*
|
|
Shoretel Executive Bonus Incentive
Plan for the first half of fiscal 2007.
|
|
10
|
.7
|
|
Offer Letter, dated as of
July 14, 2004, by the Registrant and John W. Combs.
|
|
10
|
.8
|
|
Offer Letter, dated as of
March 10, 2003, by the Registrant and John Finegan.
|
|
10
|
.9
|
|
Offer Letter, dated as of
September 8, 2005, by the Registrant and Joseph A. Vitalone.
|
|
10
|
.10
|
|
Offer Letter, dated as of
April 13, 2005, by the Registrant and Walter Weisner.
|
|
10
|
.11
|
|
Change of Control Agreement, dated
as of August 5, 2004, between the Registrant and John W.
Combs.
|
|
10
|
.12
|
|
Change of Control Agreement, dated
as of May 7, 2003, between the Registrant and John Finegan.
|
|
10
|
.13
|
|
Change of Control Agreement, dated
as of August 1, 2001, between the Registrant and Edwin J.
Basart.
|
|
10
|
.14
|
|
Separation Agreement, dated as of
August 9, 2004, between the Registrant and Thomas van
Overbeek.
|
|
10
|
.15
|
|
Sublease, dated as of October
1998, between Registrant and Applied Materials, Inc., as amended.
|
|
10
|
.16
|
|
ODM Product Development and
Purchase Agreement, dated as of March 19, 2004, between
Registrant and Giant Electronics Ltd., as amended.
|
|
10
|
.17
|
|
Manufacturing Services Agreement,
dated October 28, 2005, between Registrant and Jabil
Circuit, Inc.
|
|
23
|
.1*
|
|
Consent of Fenwick & West
LLP (included in Exhibit 5.1).
|
|
23
|
.2
|
|
Consent of Deloitte &
Touche LLP, independent registered public accounting firm.
|
|
24
|
.1
|
|
Power of Attorney (see signature
page hereto).
|
|
|
|
*
|
|
To be filed by amendment.
|
|
|
|
An application for confidential treatment of selected portions
of this agreement has been filed with the Commission.
|
Exhibit 10.2
SHORELINE COMMUNICATIONS, INC
1997 STOCK OPTION PLAN
(Amended on October 2, 2002)
1.
Establishment, Purpose and Term of Plan
1.1
Establishment.
The Shoreline Communications, Inc. 1997 Stock Option Plan (the
Plan
) was
established and became effective on January 28, 1997 (the
Effective Date
).
1.2
Purpose.
The purpose of the Plan is to advance the interests of the Participating Company
Group and its shareholders by providing an incentive to attract, retain and reward persons
performing services for the Participating Company Group and by motivating such persons to
contribute to the growth and profitability of the Participating Company Group.
1.3
Term of Plan.
The Plan shall continue in effect until the earlier of its termination by
the Board or the date on which all of the shares of Stock available for issuance under the Plan
have been issued and all restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Options shall be granted, if
at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the
date the Plan is duly approved by the shareholders of the Company.
2.
Definitions and Construction
.
2.1
Definitions.
Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a)
Board
means the Board of Directors of the Company. If one or more Committees have been
appointed by the Board to administer the Plan, Board also means such Committee(s).
(b)
Code
means the Internal Revenue Code of 1986, as amended, and any applicable regulations
promulgated thereunder.
(c)
Committee
means the Compensation Committee or other committee of the Board duly
appointed to administer the Plan and having such powers as shall be specified by the Board. Unless
the powers of the Committee have been specifically limited, the Committee shall have all of the
powers of the Board granted herein, including, without limitation, the power to amend or terminate
the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by
law.
(d)
Company
means Shoreline Communications, Inc., a California corporation, or any successor
corporation thereto.
Exhibit 10.2 1997 Stock Plan
(e)
Consultant
means any person, including an advisor, engaged by a Participating Company to
render services other than as an Employee or a Director.
(f)
Director
means a member of the Board or of the board of directors of any other
Participating Company.
(g)
Employee
means any person treated as an employee (including an officer or a Director who
is also treated as an employee) in the records of a Participating Company;
provided, however,
that
neither service as a Director nor payment of a directors fee shall be sufficient to constitute
employment for purposes of the Plan.
(h)
Exchange Act
means the Securities Exchange Act of 1934, as amended.
(i)
Fair Market Value
means, as of any date, the value of a share of Stock or other property
as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if
such determination is expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share
of Stock shall be the closing sale price of a share of Stock (or the mean of the closing bid and
asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq
National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange
or market system constituting the primary market for the Stock, as reported in
The Wall Street
Journal
or such other source as the Company deems reliable. If the relevant date does not fall
on a day on which the Stock has traded on such securities exchange or market system, the date on
which the Fair Market Value shall be established shall be the last day on which the Stock was so
traded prior to the relevant date, or such other appropriate day as shall be determined by the
Board, in its sole discretion.
(ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a
share of Stock shall be as determined by the Board without regard to any restriction other than a
restriction which, by its terms, will never lapse.
(j)
Incentive Stock Option
means an Option intended to be (as set forth in the Option
Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of
the Code.
(k)
Insider
means an officer or a Director of the Company or any other person whose
transactions in Stock are subject to Section 16 of the Exchange Act.
(l)
Nonstatutory Stock Option
means an Option not intended to be (as set forth in the Option
Agreement) or which does not qualify as an Incentive Stock Option.
(m)
Option
means a right to purchase Stock (subject to adjustment as provided in Section
4.2) pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock
Option or a Nonstatutory Stock Option.
Exhibit 10.2 1997 Stock Plan
-2-
(n)
Option Agreement
means a written agreement between the Company and an Optionee setting
forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares
acquired upon the exercise thereof.
(o)
Optionee
means a person who has been granted one or more Options.
(p)
Parent Corporation
means any present or future parent corporation of the Company, as
defined in Section 424(e) of the Code.
(q)
Participating Company
means the Company or any Parent Corporation or Subsidiary
Corporation.
(r)
Participating Company Group
means, at any point in time, all corporations collectively
which are then Participating Companies.
(s)
Rule 16b-3
means Rule 16b-3 under the Exchange Act, as amended from time to time, or any
successor rule or regulation.
(t)
Stock
means the common stock, without par value, of the Company, as adjusted from time
to time in accordance with Section 4.2.
(u)
Subsidiary Corporation
means any present or future subsidiary corporation of the
Company, as defined in Section 424(f) of the Code.
(v)
Ten Percent Owner Optionee
means an Optionee who, at the time an Option is granted to
the Optionee, owns stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the
Code.
2.2
Construction.
Captions and titles contained herein are for convenience only and shall not
affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated
by the context, the singular shall include the plural and the plural shall include the singular.
Use of the term or is not intended to be exclusive, unless the context clearly requires
otherwise.
3.
Administration
.
3.1
Administration by the Board
. The Plan shall be administered by the Board. All questions
of interpretation of the Plan or of any Option shall be determined by the Board, and such
determinations shall be final and binding upon all persons having an interest in the Plan or such
Option. Any officer of a Participating Company shall have the authority to act on behalf of the
Company with respect to any matter, right, obligation, determination or election which is the
responsibility of or which is allocated to the Company herein, provided the officer has apparent
authority with respect to such matter, right, obligation, determination or election.
Exhibit 10.2 1997 Stock Plan
-3-
3.2
Administration with Respect to Insiders
.
With respect to participation by Insiders in the
Plan, at any time that any class of equity security of the Company is registered pursuant to
Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements,
if any, of Rule 16b-3.
3.3
Powers of the Board
.
In addition to any other powers set forth in the Plan and subject to
the provisions of the Plan, the Board shall have the full and final power and authority, in its
sole discretion:
(a) to determine the persons to whom, and the time or times at which, Options shall be granted
and the number of shares of Stock to be subject to each Option;
(b) to designate Options as Incentive Stock Options or Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or other property;
(d) to determine the terms, conditions and restrictions applicable to each Option (which need
not be identical) and any shares acquired upon the exercise thereof, including, without limitation,
(i) the exercise price of the Option, (ii) the method of payment for shares purchased upon the
exercise of the Option, (iii) the method for satisfaction of any tax withholding obligation arising
in connection with the Option or such shares, including by the withholding or delivery of shares of
stock, (iv) the timing, terms and conditions of the exercisability of the Option or the vesting of
any shares acquired upon the exercise thereof, (v) the time of the expiration of the Option, (vi)
the effect of the Optionees termination of employment or service with the Participating Company
Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to
the Option or such shares not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new Option in substitution for, any Option
or to waive any restrictions or conditions applicable to any Option or any shares acquired upon the
exercise thereof;
(g) to amend the exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionees termination of
employment or service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to
adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the
Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or
custom of, foreign jurisdictions whose citizens may be granted Options; and
(i) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or
any Option Agreement and to make all other determinations and take
Exhibit 10.2 1997 Stock Plan
-4-
such other actions with respect to the Plan or any Option as the Board may deem advisable to
the extent consistent with the Plan and applicable law.
4.
Shares Subject to Plan
.
4.1
Maximum Number of Shares Issuable
. Subject to adjustment as provided in Section 4.2, the
maximum aggregate number of shares of Stock that may be issued under the Plan shall be
Fifty-Four
Million Seven Hundred Twenty-One Thousand, Two Hundred and Two (54,721,202)
and shall consist of
authorized but unissued or reacquired shares of Stock or any combination thereof. If an
outstanding Option for any reason expires or is terminated or canceled, or if shares of Stock
acquired, subject to repurchase, upon the exercise of an Option are repurchased by the Company, the
shares of Stock allocable to the unexercised portion of such Option or such repurchased shares of
Stock shall again be available for issuance under the Plan.
4.2
Adjustments for Changes in Capital Structure
. In the event of any stock dividend, stock
split, reverse stock split, recapitalization, combination, reclassification or similar change in
the capital structure of the Company, appropriate adjustments shall be made in the number and class
of shares subject to the Plan and to any outstanding Options and in the exercise price per share of
any outstanding Options. If a majority of the shares which are of the same class as the shares
that are subject to outstanding Options are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change Event, as defined in Section 8.1) shares of another
corporation (the
New Shares
), the Board may unilaterally amend the outstanding Options to provide
that such Options are exercisable for New Shares. In the event of any such amendment, the number
of shares subject to, and the exercise price per share of, the outstanding Options shall be
adjusted in a fair and equitable manner as determined by the Board, in its sole discretion.
Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this
Section 4.2 shall be rounded up or down to the nearest whole number, as determined by the Board,
and in no event may the exercise price of any Option be decreased to an amount less than the par
value, if any, of the stock subject to the Option. The adjustments determined by the Board
pursuant to this Section 4.2 shall be final, binding and conclusive.
5.
Eligibility and Option Limitations
.
5.1
Persons Eligible for Options
.
Options may be granted only to Employees, Consultants, and
Directors. For purposes of the foregoing sentence, Employees, Consultants and Directors
shall include prospective Employees, prospective Consultants and prospective Directors to whom
Options are granted in connection with written offers of employment or other service relationship
with the Participating Company Group. Eligible persons may be granted more than one (1) Option.
5.2
Option Grant Restrictions
.
Any person who is not an Employee on the effective date of the
grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive
Stock Option granted to a prospective Employee upon the condition that such person become an
Employee shall be deemed granted effective on the date such person commences service with a
Participating Company, with an exercise price determined as of such date in accordance with Section
6.1.
Exhibit 10.2 1997 Stock Plan
-5-
5.3
Fair Market Value Limitation
. To the extent that options designated as Incentive Stock
Options (granted under all stock option plans of the Participating Company Group, including the
Plan) become exercisable by an Optionee for the first time during any calendar year for stock
having an aggregate Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the
portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options.
For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into
account in the order in which they were granted, and the Fair Market Value of stock shall be
determined as of the time the option with respect to such stock is granted. If the Code is amended
to provide for a different limitation from that set forth in this Section 5.3, such different
limitation shall be deemed incorporated herein effective as of the date and with respect to such
Options as required or permitted by such amendment to the Code. If an Option is treated as an
Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the
limitation set forth in this Section 5.3, the Optionee may designate which portion of such Option
the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to
have exercised the Incentive Stock Option portion of the Option first. Separate certificates
representing each such portion shall be issued upon the exercise of the Option.
6.
Terms and Conditions of Options
. Options shall be evidenced by Option Agreements
specifying the number of shares of Stock covered thereby, in such form as the Board shall from time
to time establish. Option Agreements may incorporate all or any of the terms of the Plan by
reference and shall comply with and be subject to the following terms and conditions:
6.1
Exercise Price.
The exercise price for each Option shall be established in the sole
discretion of the Board;
provided, however,
that (a) the exercise price per share for an Incentive
Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date
of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be
not less than eighty-five percent (85%) of the Fair Market Value of a share of Stock on the
effective date of grant of the Option, and (c) no Option granted to a Ten Percent Owner Optionee
shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market
Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the
foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be
granted with an exercise price lower than the minimum exercise price set forth above if such Option
is granted pursuant to an assumption or substitution for another option in a manner qualifying
under the provisions of Section 424(a) of the Code.
6.2
Exercise Period
.
Options shall be exercisable at such time or times, or upon such event or
events, and subject to such terms, conditions, performance criteria, and restrictions as shall be
determined by the Board and set forth in the Option Agreement evidencing such Option;
provided,
however,
that (a) no Option shall be exercisable after the expiration of ten (10) years after the
effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent
Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date
of grant of such Option, and (c) no Option granted to a prospective Employee, prospective
Consultant or prospective Director may become exercisable prior to the date on which such person
commences service with a Participating Company.
Exhibit 10.2 1997 Stock Plan
-6-
6.3
Payment of Exercise Price
.
(a)
Forms of Consideration Authorized.
Except as otherwise provided below, payment of the
exercise price for the number of shares of Stock being purchased pursuant to any Option shall be
made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of Stock
owned by the Optionee having a Fair Market Value (as determined by the Company without regard to
any restrictions on transferability applicable to such stock by reason of federal or state
securities laws or agreements with an underwriter for the Company) not less than the exercise
price, (iii) by the assignment of the proceeds of a sale or loan with respect to some or all of the
shares being acquired upon the exercise of the Option (including, without limitation, through an
exercise complying with the provisions of Regulation T as promulgated from time to time by the
Board of Governors of the Federal Reserve System) (a
Cashless Exercise
), (iv) by the Optionees
promissory note in a form approved by the Company, (v) by such other consideration as may be
approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption of or by
amendment to the standard forms of Option Agreement described in Section 7, or by other means,
grant Options which do not permit all of the foregoing forms of consideration to be used in payment
of the exercise price or which otherwise restrict one or more forms of consideration.
(b)
Tender of Stock
. Notwithstanding the foregoing, an Option may not be exercised by tender
to the Company of shares of Stock to the extent such tender of Stock would constitute a violation
of the provisions of any law, regulation or agreement restricting the redemption of the Companys
stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to the
Company of shares of Stock unless such shares either have been owned by the Optionee for more than
six (6) months or were not acquired, directly or indirectly, from the Company.
(c)
Cashless Exercise
. The Company reserves, at any and all times, the right, in the
Companys sole and absolute discretion, to establish, decline to approve or terminate any program
or procedures for the exercise of Options by means of a Cashless Exercise.
(d)
Payment by Promissory Note
. No promissory note shall be permitted if the exercise of an
Option using a promissory note would be a violation of any law. Any permitted promissory note
shall be on such terms as the Board shall determine at the time the Option is granted. The Board
shall have the authority to permit or require the Optionee to secure any promissory note used to
exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other
collateral acceptable to the Company. Unless otherwise provided by the Board, if the Company at
any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in connection with the
Companys securities, any promissory note shall comply with such applicable regulations, and the
Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to
comply with such applicable regulations.
6.4
Tax Withholding
.
The Company shall have the right, but not the obligation, to deduct from
the shares of Stock issuable upon the exercise of an Option, or to accept from the Optionee the
tender of, a number of whole shares of Stock having a Fair Market Value, as
Exhibit 10.2 1997 Stock Plan
-7-
determined by the Company, equal to all or any part of the federal, state, local and foreign
taxes, if any, required by law to be withheld by the Participating Company Group with respect to
such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its
sole discretion, the Company shall have the right to require the Optionee, through payroll
withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate
provision for any such tax withholding obligations of the Participating Company Group arising in
connection with the Option or the shares acquired upon the exercise thereof. The Company shall
have no obligation to deliver shares of Stock or to release shares of Stock from an escrow
established pursuant to the Option Agreement until the Participating Company Groups tax
withholding obligations have been satisfied by the Optionee.
6.5
Repurchase Rights
.
Shares issued under the Plan may be subject to a right of first
refusal, one or more repurchase options, or other conditions and restrictions as determined by the
Board, in its sole discretion, at the time the Option is granted. The Company shall have the right
to assign at any time any repurchase right it may have, whether or not such right is then
exercisable, to one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer restrictions prior to
the receipt of shares of Stock hereunder and shall promptly present to the Company any and all
certificates representing shares of Stock acquired hereunder for the placement on such certificates
of appropriate legends evidencing any such transfer restrictions.
7.
Standard Forms of Option Agreement
.
7.1
Incentive Stock Options
.
Unless otherwise provided by the Board at the time the Option is
granted, an Option designated as an Incentive Stock Option shall comply with and be subject to
the terms and conditions set forth in the form of Immediately Exercisable Incentive Stock Option
Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time
to time.
7.2
Nonstatutory Stock Options
.
Unless otherwise provided by the Board at the time the Option
is granted, an Option designated as a Nonstatutory Stock Option shall comply with and be subject
to the terms and conditions set forth in the form of Immediately Exercisable Nonstatutory Stock
Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
7.3
Standard Term of Options
.
Except as otherwise provided in Section 6.2 or by the Board in
the grant of an Option, any Option granted hereunder shall have a term of ten (10) years from the
effective date of grant of the Option.
7.4
Authority to Vary Terms
.
The Board shall have the authority from time to time to vary the
terms of any of the standard forms of Option Agreement described in this Section 7 either in
connection with the grant or amendment of an individual Option or in connection with the
authorization of a new standard form or forms;
provided
,
however
, that the terms and conditions of
any such new, revised or amended standard form or forms of Option Agreement are not inconsistent
with the terms of the Plan. Such authority shall include, but not by way of limitation, the
authority to grant Options which are not immediately exercisable.
Exhibit 10.2 1997 Stock Plan
-8-
8.
Transfer of Control
.
8.1
Definitions
.
(a) An
Ownership Change Event
shall be deemed to have occurred if any of the following
occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or series of related transactions by
the shareholders of the Company of more than fifty percent (50%) of the voting stock of the
Company;
(ii) a merger or consolidation in which the Company is a party;
(iii) the sale, exchange, or transfer of all or substantially all of the assets of the
Company; or
(iv) a liquidation or dissolution of the Company.
(b) A
Transfer of Control
shall mean an Ownership Change Event or a series of related
Ownership Change Events (collectively, the
Transaction
) wherein the shareholders of the Company
immediately before the Transaction do not retain immediately after the Transaction, in
substantially the same proportions as their ownership of shares of the Companys voting stock
immediately before the Transaction, direct or indirect beneficial ownership of more than fifty
percent (50%) of the total combined voting power of the outstanding voting stock of the Company or
the corporation or corporations to which the assets of the Company were transferred (the
"
Transferee Corporation(s)
), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest resulting from
ownership of the voting stock of one or more corporations which, as a result of the Transaction,
own the Company or the Transferee Corporation(s), as the case may be, either directly or through
one or more subsidiary corporations. The Board shall have the right to determine whether multiple
sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are
related, and its determination shall be final, binding and conclusive.
8.2
Effect of Transfer of Control on Options
. In the event of a Transfer of Control, the
surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the
case may be (the
Acquiring Corporation
), may either assume the Companys rights and obligations
under outstanding Options or substitute for outstanding Options substantially equivalent options
for the Acquiring Corporations stock. For purposes of this Section 8.2, an Option shall be deemed
assumed if, following the Transfer of Control, the Option confers the right to purchase in
accordance with its terms and conditions, for each share of Stock subject to the Option immediately
prior to the Transfer of Control, the consideration (whether stock, cash or other securities or
property) to which a holder of a share of Stock on the effective date of the Transfer of Control
was entitled. Any Options which are neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer
of Control shall terminate and cease to be outstanding effective as of the date of the Transfer of
Control. Notwithstanding the foregoing, shares acquired upon exercise of an Option prior to the
Exhibit 10.2 1997 Stock Plan
-9-
Transfer of Control and any consideration received pursuant to the Transfer of Control with
respect to such shares shall continue to be subject to all applicable provisions of the Option
Agreement evidencing such Option except as otherwise provided in such Option Agreement.
Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the
outstanding Options immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation and immediately after
such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its
voting stock is held by another corporation or by other corporations that are members of an
affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions
of Section 1504(b) of the Code, the outstanding Options shall not terminate unless the Board
otherwise provides in its sole discretion.
9.
Provision of Information
. At least annually, copies of the Companys balance sheet
and income statement for the just completed fiscal year shall be made available to each Optionee
and purchaser of shares of Stock upon the exercise of an Option. The Company shall not be required
to provide such information to persons whose duties in connection with the Company assure them
access to equivalent information.
10.
Nontransferability of Options
. During the lifetime of the Optionee, an Option
shall be exercisable only by the Optionee or the Optionees guardian or legal representative. No
Option shall be assignable or transferable by the Optionee, except by will or by the laws of
descent and distribution.
11.
Transfer of Companys Rights
. In the event any Participating Company assigns,
other than by operation of law, to a third person, other than another Participating Company, any of
the Participating Companys rights to repurchase any shares of Stock acquired upon the exercise of
an Option, the assignee shall pay to the assigning Participating Company the value of such right as
determined by the Company in the Companys sole discretion. Such consideration shall be paid in
cash. In the event such repurchase right is exercisable at the time of such assignment, the value
of such right shall be not less than the Fair Market Value of the shares of Stock which may be
repurchased under such right (as determined by the Company) minus the repurchase price of such
shares. The requirements of this Section 11 regarding the minimum consideration to be received by
the assigning Participating Company shall not inure to the benefit of the Optionee whose shares of
Stock are being repurchased. Failure of a Participating Company to comply with the provisions of
this Section 11 shall not constitute a defense or otherwise prevent the exercise of the repurchase
right by the assignee of such right.
12.
Indemnification
. In addition to such other rights of indemnification as they may
have as members of the Board or officers or employees of the Participating Company Group, members
of the Board and any officers or employees of the Participating Company Group to whom authority to
act for the Board or the Company is delegated shall be indemnified by the Company against all
reasonable expenses, including attorneys fees, actually and necessarily incurred in connection
with the defense of any action, suit or proceeding, or in connection with any appeal therein, to
which they or any of them may be a party by reason of any action taken or failure to act under or
in connection with the Plan, or any right granted hereunder, and against all amounts paid by them
in settlement thereof (provided such settlement is approved by independent legal counsel
Exhibit 10.2 1997 Stock Plan
-10-
selected by the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be adjudged in such action,
suit or proceeding that such person is liable for gross negligence, bad faith or intentional
misconduct in duties;
provided, however,
that within sixty (60) days after the institution of such
action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at
its own expense to handle and defend the same.
13.
Termination or Amendment of Plan
. The Board may terminate or amend the Plan at
any time. However, subject to changes in applicable law, regulations or rules that would permit
otherwise, without the approval of the Companys shareholders there shall be (a) no increase in the
maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation
of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive
Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the
Companys shareholders under any applicable law, regulation or rule. In any event, no termination
or amendment of the Plan may adversely affect any then outstanding Option or any unexercised
portion thereof, without the consent of the Optionee, unless such termination or amendment is
required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive
Stock Option or is necessary to comply with any applicable law, regulation or rule.
14.
Shareholder Approval
. The Plan or any increase in the maximum number of shares of
Stock issuable thereunder as provided in Section 4.1 (the
Maximum Shares
) shall be approved by
the shareholders of the Company within twelve (12) months of the date of adoption thereof by the
Board. Options granted prior to shareholder approval of the Plan or in excess of the Maximum
Shares previously approved by the shareholders shall become exercisable no earlier than the date of
shareholder approval of the Plan or such increase in the Maximum Shares, as the case may be.
**********
Exhibit 10.2 1997 Stock Plan
-11-
SHORETEL, INC.
1997 STOCK OPTION PLAN
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
(Form B Executives Only, Exercisable Subject to $100,000 Annual Limit)
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE
PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS
UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR
25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW
TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933.
SHORETEL, INC.
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
(including Notice of Stock Option Grant)
THIS IMMEDIATELY EXERCISABLE INCENTIVE STOCK OPTION AGREEMENT (the Option Agreement) is made
and entered into as of «Date_of_Grant», by and between ShoreTel, Inc., a California corporation,
and «Name» (the Optionee).
The Company has granted to the Optionee pursuant to the ShoreTel, Inc. 1997 Stock Option Plan
(the Plan) an option to purchase certain shares of the common stock of the Company (the Stock),
upon the terms and conditions set forth in this Option Agreement (the Option). The Option shall
in all respects be subject to the terms and conditions of the Plan, the provisions of which are
incorporated herein by reference.
1.
Definitions and Construction
.
1.1
Definitions
. Unless otherwise defined herein, capitalized terms shall have the meanings
assigned to such terms in the Plan. Whenever used herein, the following terms shall have their
respective meanings set forth below:
(a) Date of Option Grant means «Date_of_Grant».
(b) Number of Option Shares means «Number_of_Shares» shares of Stock, as adjusted from time
to time pursuant to Section 9.
-2-
(c) Exercise Price means $«price_per_share» per share of Stock, as adjusted from time to
time pursuant to Section 9.
(d) Initial Exercise Date means the Date of Option Grant.
(e) Initial Vesting Date means the date occurring Twelve (12) months after (check one):
___the Date of Option Grant.
___«Commencement_Date»
(f) Vested Ratio means, on any relevant date, the ratio determined as follows:
|
|
|
|
|
|
|
Vested Ratio
|
Prior to Initial Vesting Date
|
|
|
0
|
|
|
|
|
|
|
On Initial Vesting Date, provided the Optionees Service has
not terminated prior to such date
|
|
|
1/4
|
|
|
|
|
|
|
Plus
|
|
|
|
|
|
|
|
|
|
For each full month of the Optionees continuous Service from
the Initial Vesting Date until the Vested Ratio equals 1/1,
an additional
|
|
|
1/48
|
|
(g) Option Expiration Date means the date ten (10) years after the Date of Option Grant.
(h) Company means ShoreTel, Inc., a California corporation, or any successor corporation
thereto.
(i) Disability means the inability of the Optionee, in the opinion of a qualified physician
acceptable to the Company, to perform the major duties of the Optionees position with the
Participating Company Group because of the sickness or injury of the Optionee.
(j) Securities Act means the Securities Act of 1933, as amended.
(k) Service means the Optionees employment or service with the Participating Company Group,
whether in the capacity of an Employee, a Director or a Consultant. The Optionees Service shall
not be deemed to have terminated merely because of the change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption or termination of
the Optionees Service. Furthermore, the Optionees Service with the Participating Company Group
shall not be deemed to have terminated if the Optionee takes any
-3-
military leave, sick leave, or other bona fide leave of absence approved by the Company;
provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day
of such leave the Optionees Service shall be deemed to have terminated unless the Optionees right
to return to Service with the Participating Company Group is guaranteed by statute or contract.
Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a
leave of absence shall not be treated as Service for purposes of determining Optionees Vested
Ratio. The Optionees Service shall be deemed to have terminated either upon an actual termination
of Service or upon the corporation for which the Optionee performs Service ceasing to be a
Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall
determine whether the Optionees Service has terminated and the effective date of such termination.
1.2
Construction
. Captions and titles contained herein are for convenience only and shall not
affect the meaning or interpretation of any provision of this Option Agreement. Except when
otherwise indicated by the context, the singular shall include the plural and the plural shall
include the singular. Use of the term or is not intended to be exclusive, unless the context
clearly requires otherwise.
2.
Tax Consequences
.
2.1
Tax Status of Option
. This Option is intended to be an Incentive Stock Option within the
meaning of Section 422(b) of the Code and is not intended to be subject to Section 409A of the
Code, but the Company does not represent or warrant that this Option qualifies as an Incentive
Stock Option, nor does the Company represent or warrant that this Option is not subject to Section
409A of the Code. The Optionee should consult with the Optionees own tax advisor regarding the
tax effects of this Option and the requirements necessary to obtain favorable income tax treatment
under Sections 409A and 422 of the Code, including, but not limited to, the Exercise Price and
holding period requirements. (NOTE: If the aggregate Exercise Price of the Option (that is, the
Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of
other Incentive Stock Options held by the Optionee (whether granted pursuant to the Plan or any
other stock option plan of the Participating Company Group) is greater than One Hundred Thousand
Dollars ($100,000), the Optionee should contact the Chief Financial Officer of the Company to
ascertain whether the entire Option qualifies as an Incentive Stock Option).
2.2
Election Under Section 83(b) of the Code
. If the Optionee exercises this Option to
purchase shares of Stock that are both nontransferable and subject to a substantial risk of
forfeiture, the Optionee understands that the Optionee should consult with the Optionees tax
advisor regarding the advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days after the date on
which the Optionee exercises the Option. Shares acquired upon exercise of the Option are
nontransferable and subject to a substantial risk of forfeiture if, for example, (a) they are
unvested and are subject to a right of the Company to repurchase such shares at the Optionees
original purchase price if the Optionees Service terminates, (b) the Optionee is an Insider and
exercises the Option within six (6) months of the Date of Option Grant (if a class of equity
security of the Company is registered under Section 12 of the Exchange Act), or (c) the Optionee is
subject to a restriction on transfer to comply with Pooling-of-Interests Accounting rules.
Failure to file an election under Section 83(b), if appropriate, may result in adverse tax
consequences to the Optionee. The Optionee acknowledges
-4-
that the Optionee has been advised to consult with a tax advisor prior to the exercise of the
Option regarding the tax consequences to the Optionee of the exercise of the Option. AN ELECTION
UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE PURCHASES
SHARES THAT ARE SUBJECT TO A SUBSTANTIAL RISK OF FORFEITURE OR NONTRANSFERABLE. THIS TIME PERIOD
CANNOT BE EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS
THE OPTIONEES SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE
TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
3.
Administration
. All questions of interpretation concerning this Option Agreement
shall be determined by the Board. All determinations by the Board shall be final and binding upon
all persons having an interest in the Option. Any officer of a Participating Company shall have
the authority to act on behalf of the Company with respect to any matter, right, obligation, or
election which is the responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation, or election.
4.
Exercise of the Option
.
4.1
Right to Exercise
.
(a) Except as otherwise provided herein, the Option shall be exercisable on and after the
Initial Exercise Date and prior to the termination of the Option (as provided in Section 6) in an
amount not to exceed the Number of Option Shares less the number of shares previously acquired upon
exercise of the Option, subject to the Optionees agreement that any shares purchased upon exercise
are subject to the Companys repurchase rights set forth in Section 11. Notwithstanding the
foregoing, except as set forth in Section 4.1(b), the aggregate Fair Market Value of the shares of
Stock with respect to which the Optionee may exercise the Option for the first time during any
calendar year, when added to the aggregate Fair Market Value of the shares subject to any other
options designated as Incentive Stock Options granted to the Optionee under all stock option plans
of the Participating Company Group prior to the Date of Option Grant with respect to which such
options are exercisable for the first time during the same calendar year, shall not exceed One
Hundred Thousand Dollars ($100,000). For purposes of the preceding sentence, options designated as
Incentive Stock Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of shares of stock shall be determined as of the time the option with respect
to such shares is granted. Such limitation on exercise shall be referred to in this Option
Agreement as the ISO Exercise Limitation. If Section 422 of the Code is amended to provide for a
different limitation from that set forth in this Section 4.1(a), the ISO Exercise Limitation shall
be deemed amended effective as of the date required or permitted by such amendment to the Code.
The ISO Exercise Limitation shall terminate upon the earlier of (i) the Optionees termination of
Service, (ii) the day immediately prior to the effective date of a Transfer of Control in which the
Option is not assumed or substituted for by the Acquiring Corporation as provided in Section 8, or
(iii) the day ten (10) days prior to the Option Expiration Date. Upon such termination of the ISO
Exercise Limitation, the Option shall be deemed a Nonstatutory Stock Option to the extent of the
number of shares subject to the Option which would otherwise exceed the ISO Exercise Limitation.
-5-
(b) Notwithstanding any other provision of this Option Agreement, if compliance with the ISO
Exercise Limitation as set forth in Section 4.1(a) will result in the exercisability of any Vested
Shares (as defined in Section 11.2) being delayed more than thirty (30) days beyond the date such
shares become Vested Shares (the Vesting Date), the Option shall be deemed to be two (2) options.
The first option shall be for the maximum portion of the Number of Option Shares that can comply
with the ISO Exercise Limitation without causing the Option to be unexercisable in the aggregate as
to Vested Shares on the Vesting Date for such shares. The second option, which shall not be treated
as an Incentive Stock Option as described in Section 422(b) of the Code, shall be for the balance
of the Number of Option Shares; that is, those such shares which, on the respective Vesting Date
for such shares, would be unexercisable if included in the first option and thereby made subject to
the ISO Exercise Limitation. Shares treated as subject to the second option shall be exercisable
on the same terms and at the same time as set forth in this Option Agreement; provided, however,
that (i) the second sentence of Section 4.1(a) shall not apply to the second option and (ii) each
such share shall become a Vested Share on the Vesting Date on which such share must first be
allocated to the second option pursuant to the preceding sentence. Unless the Optionee
specifically elects to the contrary in the Optionees written notice of exercise, the first option
shall be deemed to be exercised first to the maximum possible extent and then the second option
shall be deemed to be exercised.
4.2
Method of Exercise
. Exercise of the Option shall be by written notice to the Company
which must state the election to exercise the Option, the number of whole shares of Stock for which
the Option is being exercised and such other representations and agreements as to the Optionees
investment intent with respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be delivered in
person, by certified or registered mail, return receipt requested, by confirmed facsimile
transmission, or by such other means as the Company may permit, to the Chief Financial Officer of
the Company, or other authorized representative of the Participating Company Group, prior to the
termination of the Option as set forth in Section 6, accompanied by (i) full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased and (ii) an executed
copy, if required, herein, of the then current forms of escrow and security agreement referenced
below. The Option shall be deemed to be exercised upon receipt by the Company of such written
notice, the aggregate Exercise Price, and, if required by the Company, such executed agreements.
4.3
Payment of Exercise Price
.
(a)
Forms of Consideration Authorized.
Except as otherwise provided below, payment of the
aggregate Exercise Price of the number of shares of Stock for which the Option is being exercised
shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole
shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company
without regard to any restrictions on transferability applicable to such stock by reason of federal
or state securities laws or agreements with an underwriter for the Company) not less than the
aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or
(iv) by any combination of the foregoing.
(b)
Tender of Stock
. Notwithstanding the foregoing, the Option may not be exercised by tender
to the Company of shares of Stock to the extent such tender of Stock would
-6-
constitute a violation of the provisions of any law, regulation or agreement restricting the
redemption of the Companys stock. The Option may not be exercised by tender to the Company of
shares of Stock unless such shares either have been owned by the Optionee for more than six (6)
months or were not acquired, directly or indirectly, from the Company.
(c)
Cashless Exercise.
A Cashless Exercise means the assignment in a form acceptable to the
Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock
acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the provisions of Regulation T
as promulgated from time to time by the Board of Governors of the Federal Reserve System). The
Company reserves, at any and all times, the right, in the Companys sole and absolute discretion,
to decline to approve or terminate any such program or procedure.
4.4
Tax Withholding
. At the time the Option is exercised, in whole or in part, or at any time
thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and
any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for
(including by means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding obligations of the
Participating Company Group, if any, which arise in connection with the Option, including, without
limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the
transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of
any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is
cautioned that the Option is not exercisable unless the tax withholding obligations of the
Participating Company Group are satisfied. Accordingly, the Optionee may not be able to exercise
the Option when desired even though the Option is vested, and the Company shall have no obligation
to issue a certificate for such shares or release such shares from any escrow provided for herein.
4.5
Certificate Registration
. Except in the event the Exercise Price is paid by means of a
Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be
registered in the name of the Optionee, or, if applicable, in the names of the heirs of the
Optionee.
4.6
Restrictions on Grant of the Option and Issuance of Shares
. The grant of the Option and
the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all
applicable requirements of federal, state or foreign law with respect to such securities. The
Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a
violation of any applicable federal, state or foreign securities laws or other law or regulations
or the requirements of any stock exchange or market system upon which the Stock may then be listed.
In addition, the Option may not be exercised unless (i) a registration statement under the
Securities Act shall at the time of exercise of the Option be in effect with respect to the shares
issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the
shares issuable upon exercise of the Option may be issued in accordance with the terms of an
applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS
CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE
OPTION IS VESTED.
-7-
Questions concerning this restriction should be directed to the Chief Financial Officer of the
Company. The inability of the Company to obtain from any regulatory body having jurisdiction the
authority, if any, deemed by the Companys legal counsel to be necessary to the lawful issuance and
sale of any shares subject to the Option shall relieve the Company of any liability in respect of
the failure to issue or sell such shares as to which such requisite authority shall not have been
obtained. As a condition to the exercise of the Option, the Company may require the Optionee to
satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any
applicable law or regulation and to make any representation or warranty with respect thereto as may
be requested by the Company.
4.7
Fractional Shares
. The Company shall not be required to issue fractional shares upon the
exercise of the Option.
5.
Nontransferability of the Option
. The Option may be exercised during the lifetime
of the Optionee only by the Optionee or the Optionees guardian or legal representative and may not
be assigned or transferred in any manner except by will or by the laws of descent and distribution.
Following the death of the Optionee, the Option, to the extent provided in Section 7, may be
exercised by the Optionees legal representative or by any person empowered to do so under the
deceased Optionees will or under the then applicable laws of descent and distribution.
6.
Termination of the Option
. The Option shall terminate and may no longer be
exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising
the Option following termination of the Optionees Service as described in Section 7, or (c) a
Transfer of Control to the extent provided in Section 8.
7.
Effect of Termination of Service
.
7.1
Option Exercisability
.
(a)
Disability.
If the Optionees Service with the Participating Company Group is terminated
because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on
the date on which the Optionees Service terminated, may be exercised by the Optionee (or the
Optionees guardian or legal representative at any time prior to the expiration of six (6) months
after the date on which the Optionees Service terminated, but in any event no later than the
Option Expiration Date. (NOTE: If the Option is exercised more than three (3) months after the
date on which the Optionees Service as an Employee terminated as a result of a Disability other
than a permanent and total disability as defined in Section 22(e)(3) of the Code, the Option will
be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent
required by Section 422 of the Code.)
(b)
Death
. If the Optionees Service with the Participating Company Group is terminated
because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the
date on which the Optionees Service terminated, may be exercised by the Optionees legal
representative or other person who acquired the right to exercise the Option by reason of the
Optionees death at any time prior to the expiration of six (6) months after the date on which the
Optionees Service terminated, but in any event no later than the Option Expiration Date.
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The Optionees Service shall be deemed to have terminated on account of the death if the
Optionee dies within thirty (30) days after the Optionees termination of Service.
(c)
Other Termination of Service
. If the Optionees Service with the Participating Company
Group terminates for any reason, except Disability or death, the Option, to the extent unexercised
and exercisable by the Optionee on the date on which the Optionees Service terminated, may be
exercised by the Optionee within thirty (30) days (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the Optionees Service
terminated, but in any event no later than the Option Expiration Date.
7.2
Additional Limitations on Option Exercise
. Notwithstanding the provisions of Section 7.1,
the Option may not be exercised after the Optionees termination of Service to the extent that the
shares to be acquired upon exercise of the Option would be subject to the Unvested Share Repurchase
Option as provided in Section 11.
7.3
Extension if Exercise Prevented by Law
. Notwithstanding the foregoing, if the exercise of
the Option within the applicable time periods set forth in Section 7.1 is prevented by the
provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the
date the Optionee is notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date. The Company makes no representation as to the tax
consequences of any such delayed exercise. The Optionee should consult with the Optionees own tax
advisor as to the tax consequences to the Optionee of any such delayed exercise.
7.4
Extension if Optionee Subject to Section 16(b)
. Notwithstanding the foregoing, if a sale
within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of
the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date
on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the
one hundred and ninetieth (190th) day after the Optionees termination of Service, or (iii) the
Option Expiration Date. The Company makes no representation as to the tax consequences of any such
delayed exercise. The Optionee should consult with the Optionees own tax advisor as to the tax
consequences to the Optionee of any such delayed exercise.
8.
Transfer of Control
.
8.1
Definitions
.
(a) An Ownership Change Event shall be deemed to have occurred if any of the following
occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or series of related transactions by
the shareholders of the Company of more than fifty percent (50%) of the voting stock of the
Company;
(ii) a merger or consolidation in which the Company is a party;
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(iii) the sale, exchange, or transfer of all or substantially all of the assets of the
Company; or
(iv) a liquidation or dissolution of the Company.
(b) A Transfer of Control shall mean an Ownership Change Event or a series of related
Ownership Change Events (collectively, the Transaction) wherein the shareholders of the Company
immediately before the Transaction do not retain immediately after the Transaction, in
substantially the same proportions as their ownership of shares of the Companys voting stock
immediately before the Transaction, direct or indirect beneficial ownership of more than fifty
percent (50%) of the total combined voting power of the outstanding voting stock of the Company or
the corporation or corporations to which the assets of the Company were transferred (the
Transferee Corporation(s)), as the case may be. For purposes of the preceding sentence, indirect
beneficial ownership shall include, without limitation, an interest resulting from ownership of the
voting stock of one or more corporations which, as a result of the Transaction, own the Company or
the Transferee Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether multiple sales or
exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and
its determination shall be final, binding and conclusive.
8.2
Effect of Transfer of Control on Option
. In the event of a Transfer of Control, the
surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the
case may be (the Acquiring Corporation), may either assume the Companys rights and obligations
under the Option or substitute for the Option a substantially equivalent option for the Acquiring
Corporations stock. For purposes of this Section 8.2, the Option shall be deemed assumed if,
following the Transfer of Control, the Option confers the right to purchase in accordance with its
terms and conditions, for each share of Stock subject to the Option immediately prior to the
Transfer of Control, the consideration (whether stock, cash or other securities or property) to
which a holder of a share of Stock on the effective date of the Transfer of Control was entitled.
The Option shall terminate and cease to be outstanding effective as of the date of the Transfer of
Control to the extent that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer
of Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to
the Transfer of Control and any consideration received pursuant to the Transfer of Control with
respect to such shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the
corporation the stock of which is subject to the Option immediately prior to an Ownership Change
Event described in Section 8.1(a)(i) constituting a Transfer of Control is the surviving or
continuing corporation and immediately after such Ownership Change Event less than fifty percent
(50%) of the total combined voting power of its voting stock is held by another corporation or by
other corporations that are members of an affiliated group within the meaning of Section 1504(a) of
the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not
terminate unless the Board otherwise provides in its sole discretion.
9.
Adjustments for Changes in Capital Structure
. In the event of any stock dividend,
stock split, reverse stock split, recapitalization, combination, reclassification, or similar
change in the
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capital structure of the Company, appropriate adjustments shall be made in the number,
Exercise Price and class of shares of stock subject to the Option. If a majority of the shares
which are of the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares
of another corporation (the New Shares), the Board may unilaterally amend the Option to provide
that the Option is exercisable for New Shares. In the event of any such amendment, the Number of
Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as
determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional
share resulting from an adjustment pursuant to this Section 9 shall be rounded up or down to the
nearest whole number, as determined by the Board, and in no event may the Exercise Price be
decreased to an amount less than the par value, if any, of the stock subject to the Option. The
adjustments determined by the Board pursuant to this Section 9 shall be final, binding and
conclusive.
10.
Rights as a Shareholder, Employee or Consultant
. The Optionee shall have no
rights as a shareholder with respect to any shares covered by the Option until the date of the
issuance of a certificate for the shares for which the Option has been exercised (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized transfer agent of the
Company). No adjustment shall be made for dividends, distributions or other rights for which the
record date is prior to the date such certificate is issued, except as provided in Section 9. If
the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise
provided in a separate, written employment agreement between a Participating Company and the
Optionee, the Optionees employment is at will and is for no specified term. Nothing in this
Option Agreement shall confer upon the Optionee, whether an Employee or Consultant, any right to
continue in the Service of a Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionees Service as an Employee or Consultant, as
the case may be, at any time.
11.
Unvested Share Repurchase Option
.
11.1
Grant of Unvested Share Repurchase Option
. In the event the Optionees Service with the
Participating Company Group is terminated for any reason or no reason, with or without cause, or if
the Optionee, the Optionees legal representative, or other holder of shares acquired upon exercise
of the Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of (other than
pursuant to an Ownership Change Event) any shares acquired upon exercise of the Option which exceed
the Vested Shares as defined in Section 11.2 below (the Unvested Shares), the Company shall have
the right to repurchase the Unvested Shares under the terms and subject to the conditions set forth
in this Section 11 (the Unvested Share Repurchase Option).
11.2
Vested Shares and Unvested Shares Defined
. The Vested Shares shall mean, on any given
date, a number of shares of Stock equal to the Number of Option Shares multiplied by the Vested
Ratio determined as of such date and rounded down to the nearest whole share. On such given date,
the Unvested Shares shall mean the number of shares of Stock acquired upon exercise of the Option
which exceed the Vested Shares determined as of such date.
11.3
Exercise of Unvested Share Repurchase Option
. The Company may exercise the Unvested
Share Repurchase Option by written notice to the Optionee within sixty (60)
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days after (a) termination of the Optionees Service (or exercise of the Option, if later) or
(b) the Company has received notice of the attempted disposition of Unvested Shares. If the
Company fails to give notice within such sixty (60) day period, the Unvested Share Repurchase
Option shall terminate unless the Company and the Optionee have extended the time for the exercise
of the Unvested Share Repurchase Option. The Unvested Share Repurchase Option must be exercised,
if at all, for all of the Unvested Shares, except as the Company and the Optionee otherwise agree.
11.4
Payment for Shares and Return of Shares to Company.
The purchase price per share being
repurchased by the Company shall be an amount equal to the Optionees original cost per share, as
adjusted pursuant to Section 9 (the Repurchase Price). The Company shall pay the aggregate
Repurchase Price to the Optionee in cash within thirty (30) days after the date of the written
notice to the Optionee of the Companys exercise of the Unvested Share Repurchase Option. For
purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating
Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal
and any accrued interest canceled. The shares being repurchased shall be delivered to the Company
by the Optionee at the same time as the delivery of the Repurchase Price to the Optionee.
11.5
Assignment of Unvested Share Repurchase Option.
The Company shall have the right to
assign the Unvested Share Repurchase Option at any time, whether or not such option is then
exercisable, to one or more persons as may be selected by the Company.
11.6
Ownership Change Event
. Upon the occurrence of an Ownership Change Event, any and all
new, substituted or additional securities or other property to which the Optionee is entitled by
reason of the Optionees ownership of Unvested Shares shall be immediately subject to the Unvested
Share Repurchase Option and included in the terms Stock and Unvested Shares for all purposes of
the Unvested Share Repurchase Option with the same force and effect as the Unvested Shares
immediately prior to the Ownership Change Event. While the aggregate Repurchase Price shall remain
the same after such Ownership Change Event, the Repurchase Price per Unvested Share upon exercise
of the Unvested Share Repurchase Option following such Ownership Change Event shall be adjusted as
appropriate. For purposes of determining the Vested Ratio following an Ownership Change Event,
credited Service shall include all Service with any corporation which is a Participating Company at
the time the Service is rendered, whether or not such corporation is a Participating Company both
before and after the Ownership Change Event.
12.
Escrow
.
12.1
Establishment of Escrow
. To ensure that shares subject to the Unvested Share Repurchase
Option will be available for repurchase, the Company may require the Optionee to deposit the
certificate evidencing the shares which the Optionee purchases upon exercise of the Option with an
escrow agent designated by the Company under the terms and conditions of escrow and security
agreements approved by the Company. If the Company does not require such deposit as a condition of
exercise of the Option, the Company reserves the right at any time to require the Optionee to so
deposit the certificate in escrow. Upon the occurrence of an Ownership Change Event or a change,
as described in Section 9, in the character or amount of any of the outstanding stock of the
corporation the stock of which is subject to the provisions of this Option Agreement, any and all
new, substituted or additional securities or other property to which the Optionee is entitled by
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reason of the Optionees ownership of shares of Stock acquired upon exercise of the Option
that remain, following such Ownership Change Event or change described in Section 9, subject to the
Unvested Share Repurchase Option or any security interest held by the Company shall be immediately
subject to the escrow to the same extent as such shares of Stock immediately before such event.
The Company shall bear the expenses of the escrow.
12.2
Delivery of Shares to Optionee
. As soon as practicable after the expiration of the
Unvested Share Repurchase Option, but not more frequently than twice each calendar year, the escrow
agent shall deliver to the Optionee the shares and any other property no longer subject to such
restrictions.
12.3
Notices and Payments
. In the event the shares and any other property held in escrow are
subject to the Companys exercise of the Unvested Share Repurchase Option the notices required to
be given to the Optionee shall be given to the escrow agent, and any payment required to be given
to the Optionee shall be given to the escrow agent. Within thirty (30) days after payment by the
Company, the escrow agent shall deliver the shares and any other property which the Company has
purchased to the Company and shall deliver the payment received from the Company to the Optionee.
13.
Stock Distributions Subject to Option Agreement
. If, from time to time, there is
any stock dividend, stock split or other change, as described in Section 9, in the character or
amount of any of the outstanding stock of the corporation the stock of which is subject to the
provisions of this Option Agreement, then in such event any and all new, substituted or additional
securities to which the Optionee is entitled by reason of the Optionees ownership of the shares
acquired upon exercise of the Option shall be immediately subject to the Unvested Share Repurchase
Option and any security interest held by the Company with the same force and effect as the shares
subject to the Unvested Share Repurchase Option and such security interest immediately before such
event.
14.
Notice of Sales Upon Disqualifying Disposition
. The Optionee shall dispose of the
shares acquired pursuant to the Option only in accordance with the provisions of this Option
Agreement. In addition, the Optionee shall promptly notify the Chief Financial Officer of the
Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one
(1) year after the date the Optionee exercises all or part of the Option or within two (2) years
after the Date of Option Grant and shall provide the Company with a description of the terms and
circumstances of such disposition. Until such time as the Optionee disposes of such shares in a
manner consistent with the provisions of this Option Agreement, unless otherwise expressly
authorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in
the Optionees name (and not in the name of any nominee) for the one-year period immediately after
the exercise of the Option and the two-year period immediately after Date of Option Grant. At any
time during the one-year or two-year periods set forth above, the Company may place a legend on any
certificate representing shares acquired pursuant to the Option requesting the transfer agent for
the Companys stock to notify the Company of any such transfers. The obligation of the Optionee to
notify the Company of any such transfer shall continue notwithstanding that a legend has been
placed on the certificate pursuant to the preceding sentence.
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15.
Legends
. The Company may at any time place legends referencing the Unvested Share
Repurchase Option and any applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this Option Agreement. The
Optionee shall, at the request of the Company, promptly present to the Company any and all
certificates representing shares acquired pursuant to the Option in the possession of the Optionee
in order to carry out the provisions of this Section. Unless otherwise specified by the Company,
legends placed on such certificates may include, but shall not be limited to, the following:
15.1 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY,
STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
15.2 Any legend required to be placed thereon by the Commissioner of Corporations of the State
of California.
15.3 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN UNVESTED SHARE REPURCHASE
OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDERS PREDECESSOR IN INTEREST, A COPY OF WHICH IS
ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION.
15.4 THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE
REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (ISO). IN ORDER TO OBTAIN THE PREFERENTIAL TAX
TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO THE TERMINATION OF THE
REPURCHASE RIGHT OF THE COMPANY. SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES
PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE
CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE
STOCK OPTION IN THE REGISTERED HOLDERS NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS
DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE.
16.
Public Offering
. The Optionee hereby agrees that in the event of any underwritten
public offering of stock, including an initial public offering of stock, made by the Company
pursuant to an effective registration statement filed under the Securities Act, the Optionee shall
not offer, sell, contract to sell, pledge, hypothecate, grant any option to purchase or make any
short sale of, or
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otherwise dispose of any shares of stock of the Company or any rights to acquire stock of the
Company for such period of time from and after the effective date of such registration statement as
may be established by the underwriter for such public offering; provided, however, that such period
of time shall not exceed one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such public offering. The foregoing limitation shall not
apply to shares registered in the public offering under the Securities Act. The Optionee shall be
subject to this Section provided and only if the officers and directors of the Company are also
subject to similar arrangements.
17.
Restrictions on Transfer of Shares
. No shares acquired upon exercise of the
Option may be sold, exchanged, transferred (including, without limitation, any transfer to a
nominee or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed of,
including by operation of law, in any manner which violates any of the provisions of this Option
Agreement and, except pursuant to an Ownership Change Event, until the date on which such shares
become Vested Shares, and any such attempted disposition shall be void. The Company shall not be
required (a) to transfer on its books any shares which will have been transferred in violation of
any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares or
to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares
will have been so transferred.
18.
Binding Effect
. Subject to the restrictions on transfer set forth herein, this
Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their
respective heirs, executors, administrators, successors and assigns.
19.
Termination or Amendment
. The Board may terminate or amend the Plan or the Option
at any time; provided, however, that except as provided in Section 8.2 in connection with a
Transfer of Control, no such termination or amendment may adversely affect the Option or any
unexercised portion hereof without the consent of the Optionee unless such termination or amendment
is necessary to comply with any applicable law or government regulation or is required to enable
the Option to qualify as an Incentive Stock Option. No amendment or addition to this Option
Agreement shall be effective unless in writing.
20.
Notices
. Any notice required or permitted hereunder shall be given in writing and
shall be deemed effectively given (except to the extent that this Option Agreement provides for
effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail, with postage and fees prepaid,
addressed to the other party at the address shown below that partys signature or at such other
address as such party may designate in writing from time to time to the other party.
21.
Integrated Agreement
. This Option Agreement and the Plan constitute the entire
understanding and agreement of the Optionee and the Participating Company Group with respect to the
subject matter contained herein or therein, and there are no agreements, understandings,
restrictions, representations, or warranties among the Optionee and the Participating Company Group
with respect to such subject matter other than those as set forth or provided for herein or
therein. To the extent contemplated herein or therein, the provisions of this Option Agreement
shall survive any exercise of the Option and shall remain in full force and effect.
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22.
Sections 409A and 422 Release and Reimbursement Agreement
. Unless expressly
determined otherwise by the Committee or Board, this Option is intended to be compliant with
Sections 409A and 422 of the Code, including, without limitation, the Exercise Price underlying
this Option being set at not less than 100% of the Fair Market Value at the Date of Grant of this
Option. Optionee acknowledges that, if the Exercise Price is less than the Fair Market Value as of
the Date of Grant of this Option, then Optionee may have significant tax liabilities with respect
to this Option. Optionee further acknowledges that, at any time hereafter, it may be determined by
the Committee, a court of law, the Internal Revenue Service or other governmental entity that this
Option is subject to Section 409A of the Code and not subject to Section 422 of the Code,,
including without limitation because the Exercise Price underlying this Option is less than the
Fair Market Value as of the Date of Grant of this Option (a
Determination
). Optionee expressly
agrees, by accepting this Option and in partial consideration for the grant of this Option to
Optionee, as follows:
22.1 Optionee hereby irrevocably waives and releases any and all claims or causes of action
that Optionee may have against the Participating Company Group, its agents, officers, stockholders,
employees, directors, attorneys, subscribers, subsidiaries, affiliates, successors and assigns, for
any damages, injury or loss arising out of, related to or connected with such a Determination or
otherwise under Sections 409A and 422 of the Code, including without limitation with respect to
taxes, interest and penalties that may be due from Optionee with respect to this Option under
Section 409A of the Code; and
22.2 Optionee agrees to promptly reimburse the Participating Company Group upon its request,
whether by way of a deduction from wages due (if and to the extent permitted by law) or otherwise,
as determined by the Participating Company Group in its sole discretion, and regardless of whether
or not Optionee is then an employee, for any taxes (together with interest due thereon) paid by the
Participating Company Group on Optionees behalf in connection with such a Determination.
23.
Applicable Law
. This Option Agreement shall be governed by the laws of the State
of California as such laws are applied to agreements between California residents entered into and
to be performed entirely within the State of California.
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SHORETEL, INC.,
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a California corporation
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By:
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, President and
Chief Executive Officer
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Address:
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960 Stewart Drive
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Sunnyvale, California 94085
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The Optionee represents that the Optionee is familiar with the terms and provisions of this
Option Agreement, including the Unvested Share Repurchase Option set forth in Section 11 and hereby
accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Option Agreement. The undersigned acknowledges receipt of a copy of
the Plan.
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OPTIONEE
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Date: «Date_of_Grant»
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«Name»
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Optionee Address:
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«Address»
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1997 STOCK OPTION PLAN
EXERCISE NOTICE
ShoreTel, Inc.
Attention: Stock Option Administration
1.
Exercise of Option
. Effective as of today, «Exercise_date», the undersigned
(Optionee) hereby elects to exercise Optionees option to purchase «Number_of_Shares» shares of
the Common Stock (the Shares) of ShoreTel, Inc. (the Company) under and pursuant to the 1997
Stock Option Plan, as amended (the Plan) and the Immediately Exercisable Incentive Stock Option
Agreement dated «Date_of_Grant» (the Option Agreement).
2.
Representations of Optionee
. Optionee acknowledges that Optionee has received,
read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their
terms and conditions.
3.
Rights as Shareholder
. Until the stock certificate evidencing such Shares is
issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is
exercised. No adjustment will be made for a dividend or other right for which the record date is
prior to the date the stock certificate is issued, except as provided in Section 4.2 of the Plan.
Optionee shall enjoy rights as a shareholder until such time as Optionee disposes of the
Shares or the Company and/or its assignee(s) exercises the Unvested Share Repurchase Option
pursuant to the Option Agreement. Upon such exercise, Optionee shall have no further rights as a
holder of the Shares so purchased except the right to receive payment for the Shares so purchased
in accordance with the provisions of this Agreement, and Optionee shall forthwith cause the
certificate(s) evidencing the Shares so purchased to be surrendered to the Company for transfer or
cancellation.
4.
Tax Consultation
. Optionee understands that Optionee may suffer adverse tax
consequences as a result of Optionees purchase or disposition of the Shares. Optionee represents
that Optionee has consulted with any tax consultants Optionee deems advisable in connection with
the purchase or disposition of the Shares and that Optionee is not relying on the Company for any
tax advice.
5.
Restrictive Legends and Stop-Transfer Orders
.
a.
Legends
. Optionee understands and agrees that the Company shall cause the legends
set forth below or legends substantially equivalent thereto, to be placed upon any
-1-
certificate(s) evidencing ownership of the Shares together with any other legends that may be
required by state or federal securities laws or as the Company may otherwise determine:
(i) THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY,
STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
(ii) Any legend required to be placed thereon by the Commissioner of Corporations of the State
of California.
(iii) If applicable: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN UNVESTED
SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT
BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDERS PREDECESSOR IN INTEREST, A COPY
OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION.
(iv) If applicable: THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION
TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF
THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (ISO). IN ORDER TO OBTAIN THE PREFERENTIAL TAX
TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO THE TERMINATION OF THE
REPURCHASE RIGHT OF THE COMPANY. SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES
PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE
CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE
STOCK OPTION IN THE REGISTERED HOLDERS NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS
DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE.
b.
Stop-Transfer Notices
. Optionee agrees that, in order to ensure compliance with
the restrictions referred to herein, the Company may issue appropriate stop transfer instructions
to its transfer agent, if any, and that, if the Company transfers its own securities, it may make
appropriate notations to the same effect in its own records.
c.
Refusal to Transfer
. The Company shall not be required (i) to transfer on its
books any Shares that have been sold or otherwise transferred in violation of any of the provisions
of
-2-
this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay
dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.
6.
Successors and Assigns
. The Company may assign any of its rights under this
Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the
successors and assigns of the Company. Subject to the restrictions on transfer herein set forth,
this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators,
successors and assigns.
7.
Interpretation
. Any dispute regarding the interpretation of this Agreement shall
be submitted by Optionee or by the Company forthwith to the Companys Board of Directors or the
committee thereof that administers the Plan, which shall review such dispute at its next regular
meeting. The resolution of such a dispute by the Board or committee shall be final and binding on
the Company and on Optionee.
8.
Governing Law; Severability
. This Agreement shall be governed by and construed in
accordance with the laws of the State of California excluding that body of law pertaining to
conflicts of law. Should any provision of this Agreement be determined by a court of law to be
illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain
enforceable.
9.
Notices
. Any notice required or permitted hereunder shall be given in writing and
shall be deemed effectively given upon personal delivery or upon deposit in the United States mail
by certified mail, with postage and fees prepaid, addressed to the other party at its address as
shown below beneath its signature, or to such other address as such party may designate in writing
from time to time to the other party.
10.
Further Instruments
. The parties agree to execute such further instruments and to
take such further action as may be reasonably necessary to carry out the purposes and intent of
this Agreement.
11.
Delivery of Payment
. Optionee herewith delivers to the Company the full Exercise
Price for the Shares.
12.
Entire Agreement
. The Plan and Notice of Grant/Option Agreement are incorporated
herein by reference. This Agreement, the Plan, the Option Agreement (including without limitation
the Unvested Share Repurchase Option of Sec. 11 thereof), and the Investment Representation
Statement constitute the entire agreement of the parties and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the subject matter hereof.
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Submitted by:
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Accepted by:
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OPTIONEE:
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SHORETEL, INC.
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By:
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«Name»
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, President and
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Address:
«Address»
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Chief Executive Officer
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-3-
INVESTMENT REPRESENTATION STATEMENT
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OPTIONEE
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«Name»
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COMPANY
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SHORETEL, INC.
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SECURITY
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COMMON STOCK
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AMOUNT
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$«Total_price»
«number_of_shares» Shares
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DATE
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«Exercise_date»
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In connection with the purchase of the above-listed Securities, the undersigned Optionee represents
to the Company the following:
(a) Optionee is aware of the Companys business affairs and financial condition and has
acquired sufficient information about the Company to reach an informed and knowledgeable decision
to acquire the Securities. Optionee is acquiring these Securities for investment for Optionees
own account only and not with a view to, or for resale in connection with, any distribution
thereof within the meaning of the Securities Act of 1933, as amended (the Securities Act).
(b) Optionee acknowledges and understands that the Securities constitute restricted
securities under the Securities Act and have not been registered under the Securities Act in
reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the
bona fide nature of Optionees investment intent as expressed herein. In this connection, Optionee
understands that, in the view of the Securities and Exchange Commission, the statutory basis for
such exemption may be unavailable if Optionees representation was predicated solely upon a present
intention to hold these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the market price of the
Securities, or for a period of one year or any other fixed period in the future. Optionee further
understands that the Securities must be held indefinitely unless they are subsequently registered
under the Securities Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register the Securities.
Optionee understands that the certificate evidencing the Securities will be imprinted with a legend
which prohibits the transfer of the Securities unless they are registered or such registration is
not required in the opinion of counsel satisfactory to the Company, a legend prohibiting their
transfer without the consent of the Commissioner of Corporations of the State of California and any
other legend required under applicable state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under
the Securities Act, which, in substance, permit limited public resale of restricted securities
acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to
-1-
the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under
Rule 701 at the time of the grant of the Option to the Optionee, the exercise will be exempt from
registration under the Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days
thereafter (or such longer period as any market stand-off agreement may require) the Securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions
specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited
brokers transaction or in transactions directly with a market maker (as said term is defined
under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability
of certain public information about the Company, (3) the amount of Securities being sold during any
three month period not exceeding the limitations specified in Rule 144(e), and (4) the timely
filing of a Form 144, if applicable.
(d) In the event that the Company does not qualify under Rule 701 at the time of grant of the
Option, then the Securities may be resold in certain limited circumstances subject to the
provisions of Rule 144, which requires the resale to occur not less than two years after the later
of the date the Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than
three years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the
paragraph immediately above.
(e) Optionee further understands that in the event all of the applicable requirements of Rule
701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A,
or some other registration exemption will be required; and that, notwithstanding the fact that
Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has
expressed its opinion that persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden
of proof in establishing that an exemption from registration is available for such offers or sales,
and that such persons and their respective brokers who participate in such transactions do so at
their own risk. Optionee understands that no assurances can be given that any such other
registration exemption will be available in such event.
(f) Optionee understands that the certificate evidencing the Securities will be imprinted with
a legend which prohibits the transfer of the Securities without the consent of the Commissioner of
Corporations of California. Optionee has read the applicable Commissioners Rules with respect to
such restriction, a copy of which is attached.
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Signature of Optionee:
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«Name»
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Date: «Exercise_date»
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-2-
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I,
, hereby sell, assign and transfer unto
(
) shares of the Common Stock of
ShoreTel, Inc. standing in my name of the books of said corporation represented by Certificate No.
herewith and do hereby irrevocably constitute and appoint
to transfer
the said stock on the books of the within named corporation with full power of substitution in the
premises.
This Stock Assignment may be used only in accordance with the Joint Escrow Instructions
between
and the undersigned dated
,
.
Dated:
,
Signature:
INSTRUCTIONS:
Please do not fill in any blanks other than the signature line. The purpose of this
assignment is to enable the Company to exercise its repurchase option, as set forth in the
Agreement, without requiring additional signatures on the part of the Purchaser.
-3-
JOINT ESCROW INSTRUCTIONS
«Exercise_date»
ShoreTel, Inc.
Corporate Secretary
960 Stewart Drive
Sunnyvale, California 94085
Dear Corporate Secretary:
As Escrow Agent for both ShoreTel, Inc. (the Company), and the undersigned purchaser of
stock of the Company (the Purchaser), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Immediately Exercisable Incentive
Stock Option Agreement (Agreement) between the Company and the undersigned, in accordance with
the following instructions:
1. In the event the Company and/or any assignee of the Company (referred to collectively for
convenience herein as the Company) exercises the Companys repurchase option set forth in Section
11 of the Agreement, the Company shall give to Purchaser and you a written notice specifying the
number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder
at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and
direct you to close the transaction contemplated by such notice in accordance with the terms of
said notice.
2. At the closing, you are directed (a) to date the stock assignments necessary for the
transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver
same, together with the certificate evidencing the shares of stock to be transferred, to the
Company or its assignee, against the simultaneous delivery to you of the purchase price (by cash, a
check, or some combination thereof) for the number of shares of stock being purchased pursuant to
the exercise of the Companys repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any certificates
evidencing shares of stock to be held by you hereunder and any additions and substitutions to said
shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you
as Purchasers attorney-in-fact and agent for the term of this escrow to execute with respect to
such securities all documents necessary or appropriate to make such securities negotiable and to
complete any transaction herein contemplated, including but not limited to the filing with any
applicable state blue sky authority of any required applications for consent to, or notice of
transfer of, the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the stock is held by you.
4. If the Company has not otherwise directed you to hold all certificates, then: (A) upon
written request of the Purchaser, but no more than once per calendar year, unless the Companys
repurchase option has been exercised, you will deliver to Purchaser a certificate or certificates
-1-
representing so many shares of stock as are not then subject to the Companys repurchase
option; and (B) within 120 days after cessation of Purchasers continuous employment by or services
to the Company, or any parent or subsidiary of the Company, you will deliver to Purchaser a
certificate or certificates representing the aggregate number of shares held or issued pursuant to
the Agreement and not purchased by the Company or its assignees pursuant to exercise of the
Companys repurchase option.
5. If at the time of termination of this escrow you should have in your possession any
documents, securities, or other property belonging to Purchaser, you shall deliver all of the same
to Purchaser and shall be discharged of all further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed
by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are specifically set
forth herein and may rely and shall be protected in relying or refraining from acting on any
instrument reasonably believed by you to be genuine and to have been signed or presented by the
proper party or parties. You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any
act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive
evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings given by any of the
parties hereto or by any other person or corporation, excepting only orders or process of courts of
law and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree, you shall not be liable
to any of the parties hereto or to any other person, firm or corporation by reason of such
compliance, notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity, authorities or rights of
the parties executing or delivering or purporting to execute or deliver the Agreement or any
documents or papers deposited or called for hereunder.
10. You shall not be liable for the outlawing of any rights under the Statute of Limitations
with respect to these Joint Escrow Instructions or any documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts as you may deem
necessary properly to advise you in connection with your obligations hereunder, may rely upon the
advice of such counsel, and may pay such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be
an officer or agent of the Company or if you shall resign by written notice to each party. In the
event of any such termination, the Company shall appoint a successor Escrow Agent.
-2-
13. If you reasonably require other or further instruments in connection with these Joint
Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in
furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect to the delivery
and/or ownership or right of possession of the securities held by you hereunder, you are authorized
and directed to retain in your possession without liability to anyone all or any part of said
securities until such disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of competent jurisdiction
after the time for appeal has expired and no appeal has been perfected, but you shall be under no
duty whatsoever to institute or defend any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing and shall be deemed
effectively given upon personal delivery or upon deposit in the United States Post Office, by
registered or certified mail with postage and fees prepaid, addressed to each of the other parties
thereunto entitled at the following addresses or at such other addresses as a party may designate
by ten days advance written notice to each of the other parties hereto.
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COMPANY:
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ShoreTel, Inc.
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960 Stewart Drive
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Sunnyvale, CA 94085
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PURCHASER:
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«Name»
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«Address»
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ESCROW AGENT:
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ShoreTel, Inc.
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Corporate Secretary
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960 Stewart Drive
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Sunnyvale, California 94085
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16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose
of said Joint Escrow Instructions; you do not become a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and
their respective successors and permitted assigns.
-3-
18. These Joint Escrow Instructions shall be governed by, and construed and enforced in
accordance with, the laws of the State of California.
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ShoreTel, Inc.
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By:
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, President and
Chief Executive Officer
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Purchaser:
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«Name»
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Escrow Agent:
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(Signature)
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-4-
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code
of 1986, as amended, to include in taxpayers gross income for the current taxable year the amount
of any compensation taxable to taxpayer in connection with taxpayers receipt of the property
described below:
1.
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The name, address, taxpayer identification number and taxable year of the undersigned are as
follows:
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TAXPAYER:
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SPOUSE:
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NAME:
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«Name»
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ADDRESS:
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«Address»
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IDENTIFICATION NO.:
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TAXABLE YEAR:
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2.
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The property with respect to which the election is made is described as follows:
«number_of_shares» shares (the Shares) of the Common Stock of ShoreTel, Inc. (the
Company).
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3.
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The date on which the property was transferred is: «Exercise_date»
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4.
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The property is subject to the following restrictions:
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The Shares may not be transferred and are subject to forfeiture under the terms of an
agreement between the taxpayer and the Company. These restrictions lapse upon the
satisfaction of certain conditions contained in such agreement.
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5.
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The fair market value at the time of transfer, determined without
regard to any restriction other than a restriction which by its
terms will never lapse, of such property is: $«Total_price»
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6.
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The amount (if any) paid for such property is: $«Total_price»
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The undersigned has submitted a copy of this statement to the person for whom the services were
performed in connection with the undersigneds receipt of the above-described property. The
transferee of such property is the person performing the services in connection with the transfer
of said property.
The undersigned understands that the foregoing election may not be revoked except with the
consent of the Commissioner
.
The undersigned spouse of taxpayer joins in this election.
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Dated:
,
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Spouse of Taxpayer Signature
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-5-
SHORETEL, INC.
1997 STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have the same defined
meanings in this Option Agreement.
I.
NOTICE OF STOCK OPTION GRANT
«Name»
«Address»
The undersigned Optionee has been granted an Option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as follows:
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Date of Grant
:
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«Date_of_Grant»
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Vesting Commencement Date:
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«Commencement_Date»
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Exercise Price per Share
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$«price_per_share»
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Total Number of Shares Granted:
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«number_of_shares»
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Total Exercise Price
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$«total_price»
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Type of Option:
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þ
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Incentive Stock Option
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Nonstatutory Stock Option
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Term/Expiration Date:
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«Expiration_Date»
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Vesting Schedule
:
This Option shall be exercisable, in whole or in part, according to the following vesting
schedule:
25% of the Stock subject to the Option shall vest twelve months after the Vesting Commencement
Date, and 1/48 of the Stock subject to the Option shall vest each month thereafter, subject to
Optionees continuing to be an Employee, Director or Consultant (a Service Provider) on such
dates.
Termination Period
:
This Option shall be exercisable for three months after Optionee ceases to be a Service
Provider. Upon Optionees death or Disability (defined in Paragraph 2(d) below), this Option may
be exercised for one year after Optionee ceases to be a Service Provider. In no event may Optionee
exercise this Option after the Term/Expiration Date as provided above.
II.
AGREEMENT
1.
Grant of Option
. The Board hereby grants to the Optionee named in the Notice of
Stock Option Grant (the Optionee), an option (the Option) to purchase the number of shares of
Stock set forth in the Notice of Stock Option Grant, at the exercise price per share of Stock set
forth in the Notice of Stock Option Grant (the Exercise Price), and subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to Section 13 of the
Plan, in the event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Stock Option Grant as an Incentive Stock Option (ISO), this
Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code.
Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option
shall be treated as a Nonstatutory Stock Option (NSO).
2.
Exercise of Option
.
(a)
Right to Exercise
. This Option shall be exercisable during its term in accordance
with the Vesting Schedule set out in the Notice of Stock Option Grant and with the applicable
provisions of the Plan and this Option Agreement. Except in the case of Options granted to (i) a
person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and
the rules and requirements promulgated thereunder (an Officer), (ii) Directors and (iii)
Consultants, Options shall become exercisable at a rate of no less than 20% per year over five (5)
years from the date the Options are granted. Unless the Board provides otherwise, vesting of
Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be
exercised for a fraction of a share of Stock.
(b)
Method of Exercise
. This Option shall be exercisable by delivery of an exercise
notice in the form attached as Exhibit A (the Exercise Notice) which shall state the election to
exercise the Option, the number of shares of Stock with respect to which the Option is being
exercised, and such other representations and agreements as may be required by the Company. The
Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised
Stock. An Option shall be deemed exercised when the Company receives: (i) written or electronic
notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise
the Option, and (ii) full payment for the shares of Stock with respect to which the Option is
exercised. Stock issued upon exercise of an Option shall be issued in the name of the Optionee or,
if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Stock
is issued (as evidenced by the appropriate entry on the books of the Company or of a dully
authorized transfer agent of the Company), no right to vote or receive dividends or any other
rights as a
-2-
shareholder shall exist with respect to the Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Stock promptly after the Option is exercised.
No adjustment will be made for a dividend or other right for which the record date is prior to the
date the Stock is issued, except as provided in the Plan.
No Stock shall be issued pursuant to the exercise of an Option unless such issuance and such
exercise complies with U.S. state corporate laws, U.S. federal and state securities laws, the Code,
any stock exchange or quotation system on which the Common Stock is listed or quoted and the
applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan (Applicable Law). Assuming such compliance, for income tax purposes the
Stock shall be considered transferred to the Optionee on the date on which the Option is exercised
with respect to such Stock.
(c)
Termination of Relationship as a Service Provider
. If an Optionee ceases to be a
Service Provider, such Optionee may exercise his or her Option within such period of time as is
specified in Section I of this Option Agreement to the extent that the Option is vested on the date
of termination (but in no event later than the expiration of the term of the Option as set forth in
the Option Agreement). In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for three (3) months following the Optionees termination. If, on the
date of termination, the Optionee is not vested as to his or her entire Option, the Stock covered
by the unvested portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the Board, the Option
shall terminate, and the Stock covered by such Option shall revert to the Plan.
(d)
Disability of Optionee
. If an Optionee ceases to be a Service Provider as a
result of the Optionees total and permanent disability as defined in Section 22(e)(3) of the Code
(Disability), the Optionee may exercise his or her Option within such period of time as is
specified in Section I of the Option Agreement (of at least six (6) months) to the extent the
Option is vested on the date of termination (but in no event later than the expiration of the term
of such Option as set forth in the Option Agreement). In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for twelve (12) months following the
Optionees termination. If, on the date of termination, the Optionee is not vested as to his or
her entire Option, the Stock covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Optionee does not exercise his or her Option within the time
specified herein, the Stock Option shall terminate, and the Stock covered by such Option shall
revert to the Plan.
(e)
Death of Optionee
. If an Optionee dies while a Service Provider, the Option may
be exercised within such period of time as is specified in Section I of this Option Agreement to
the extent that the Option is vested on the date of death (but in no event later than the
expiration of the term of such Option as set forth in the Option Agreement) by the Optionees
estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In
the absence of a specified time in the Option Agreement, the Option shall remain exercisable for
twelve (12) months following the Optionees termination. If, at the time of death, the Optionee is
not vested as to the entire Option, the Stock covered by the unvested portion of the Option shall
immediately revert to the Plan. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Stock covered by such Option shall revert to the Plan.
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(f)
Buy out Provisions
. The Board may at any time offer to buy out for a payment in
cash or Stock, an Option previously granted, based on such terms and conditions as the Board shall
establish and communicate to the Optionee at the time that such offer is made.
3.
Optionees Representations
. In the event the Stock has not been registered under
the Securities Act of 1933, as amended (the Securities Act), at the time this Option is
exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or
any portion of this Option, deliver to the Company his or her Investment Representation Statement
in the form attached hereto as Exhibit B and shall read the applicable rules of the Commissioner of
Corporations attached to such Investment Representation Statement.
4.
Lock-Up Period
. Optionee hereby agrees that, if so requested by the Company or any
representative of the underwriters (the Managing Underwriter) in connection with any registration
of the offering of any securities of the Company under the Securities Act, Optionee shall not sell
or otherwise transfer any Stock or other securities of the Company during the 180-day period (or
such other period as may be requested in writing by the Managing Underwriter and agreed to in
writing by the Company) (the Market Standoff Period) following the effective date of a
registration statement of the Company filed under the Securities Act. Such restriction shall apply
only to the first registration statement of the Company to become effective under the Securities
Act that includes securities to be sold on behalf of the Company to the public in an underwritten
public offering under the Securities Act. The Company may impose stop-transfer instructions with
respect to securities subject to the foregoing restrictions until the end of such Market Standoff
Period.
5.
Method of Payment
. Payment of the aggregate Exercise Price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
(a) cash or check;
(b) consideration received by the Company under a formal cashless exercise program adopted by
the Company in connection with the Plan; or
(c) surrender of other Stock which, (i) in the case of Stock acquired upon exercise of an
option, have been owned by the Optionee for more than six (6) months on the date of surrender, and
(ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the
exercised Stock.
6.
Restrictions on Exercise
. This Option may not be exercised until such time as the
Plan has been approved by the shareholders of the Company, or if the issuance of such Stock upon
such exercise or the method of payment of consideration for such shares would constitute a
violation of any requirements relating to the administration of stock option plans under Applicable
Law.
7.
Non-Transferability of Option
. This Option may not be transferred in any manner
otherwise than by will or by the laws of descent or distribution and may be exercised during the
lifetime of Optionee only by Optionee. The terms of the Plan and this Option Agreement shall be
binding upon the executors, administrators, heirs, successors and assigns of the Optionee.
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8.
Term of Option
. This Option may be exercised only within the term set out in the
Notice of Stock Option Grant, and may be exercised during such term only in accordance with the
Plan and the terms of this Option.
9.
Tax Consequences
. Set forth below is a brief summary as of the date of this Option
of some of the federal tax consequences of exercise of this Option and disposition of the Stock.
THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE STOCK.
(a)
Exercise of ISO
. If this Option qualifies as an ISO, there will be no regular
federal income tax liability upon the exercise of the Option, although the excess, if any, of the
Fair Market Value of the Stock on the date of exercise over the Exercise Price will be treated as
an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee
to the alternative minimum tax in the year of exercise.
(b)
Exercise of NSO
. There may be a regular federal income tax liability upon the
exercise of an NSO. The Optionee will be treated as having received compensation income (taxable
at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Stock on
the date of exercise over the Exercise Price. If Optionee is an Employee or a former Employee, the
Company will be required to withhold from Optionees compensation or collect from Optionee and pay
to the applicable taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Stock if
such withholding amounts are not delivered at the time of exercise.
(c)
Disposition of Stock
. In the case of an NSO, if Stock is held for at least one
year, any gain realized on disposition of the Stock will be treated as long-term capital gain for
federal income tax purposes. In the case of an ISO, if Stock transferred pursuant to the Option is
held for at least one year after exercise and of at least two years after the Date of Grant, any
gain realized on disposition of the Stock will also be treated as long-term capital gain for
federal income tax purposes. If Stock purchased under an ISO is disposed of within one year after
exercise or two years after the Date of Grant, any gain realized on such disposition will be
treated as compensation income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (1) the Fair Market Value of the Stock on the date of
exercise, or (2) the sale price of the Stock. Any additional gain will be taxed as capital gain,
short-term or long-term depending on the period that the ISO Stock was held.
(d)
Notice of Disqualifying Disposition of ISO Stock
. If the Option granted to
Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Stock acquired
pursuant to the ISO on or before the later of (1) the date two years after the Date of Grant, or
(2) the date one year after the date of exercise, the Optionee shall immediately notify the Company
in writing of such disposition. Optionee agrees that Optionee may be subject to income tax
withholding by the Company on the compensation income recognized by the Optionee.
10.
Entire Agreement; Governing Law
. The Plan is incorporated herein by reference.
Capitalized terms not otherwise defined herein shall have the same meaning as used in the Plan.
The
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Plan and this Option Agreement (including all exhibits attached hereto) constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede in their entirety
all prior undertakings and agreements of the Company and Optionee with respect to the subject
matter hereof, and may not be modified adversely to the Optionees interest except by means of a
writing signed by the Company and Optionee. This agreement is governed by the internal substantive
laws but not the choice of law rules of California.
11.
No Guarantee of Continued Service
. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE
VESTING OF STOCK PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION
OR ACQUIRING STOCK HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN
EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD,
FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEES RIGHT OR THE
COMPANYS RIGHT TO TERMINATE OPTIONEES RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
12.
Sections 409A and 422 Release and Reimbursement Agreement
. Unless expressly
determined otherwise by the Committee or Board, this Option is intended to be compliant with
Sections 409A and 422 of the Code, including, without limitation, the Exercise Price per Share
underlying this Option being set at not less than 100% of the Fair Market Value of such Share at
the Date of Grant of this Option. Optionee acknowledges that, if the Exercise Price per Share is
less than the Fair Market Value of such Share as of the Date of Grant of this Option, then Optionee
may have significant tax liabilities with respect to this Option. Optionee further acknowledges
that, at any time hereafter, it may be determined by the Committee, a court of law, the Internal
Revenue Service or other governmental entity that this Option is subject to Section 409A of the
Code, and not subject to Section 422 of the Code, including without limitation because the Exercise
Price per Share underlying this Option is less than the Fair Market Value of such Share as of the
Date of Grant of this Option (a Determination). Optionee expressly agrees, by accepting this
Option and in partial consideration for the grant of this Option to Optionee, as follows:
(a) Optionee hereby irrevocably waives and releases any and all claims or causes of action
that Optionee may have against the Participating Company Group, its agents, officers, stockholders,
employees, directors, attorneys, subscribers, subsidiaries, affiliates, successors and assigns, for
any damages, injury or loss arising out of, related to or connected with such a Determination or
otherwise under Sections 409A and 422 of the Code, including without limitation with respect to
taxes, interest and penalties that may be due from Optionee with respect to this Option under
Section 409A of the Code; and
(b) Optionee agrees to promptly reimburse the Participating Company Group upon its request,
whether by way of a deduction from wages due (if and to the extent permitted by law) or otherwise,
as determined by the Participating Company Group in its sole discretion, and regardless of whether
or not Optionee is then an employee, for any taxes (together with interest due
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thereon) paid by the Participating Company Group on Optionees behalf in connection with such
a Determination.
Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar
with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms
and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had
an opportunity to obtain the advice of counsel prior to executing this Option and fully understands
all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final
all decisions or interpretations of the Board upon any questions arising under the Plan or this
Option. Optionee further agrees to notify the Company upon any change in the residence address
indicated below.
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OPTIONEE:
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SHORETEL, INC.
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By:
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«Name»
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President and Chief Executive Officer
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«Address»
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SHORETEL, INC.
1997 STOCK OPTION PLAN
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
(Form A Executives Only, Fully Exercisable)
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN
QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR
RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM
QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS
THE SALE IS SO EXEMPT.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW
TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933.
SHORETEL, INC.
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
(including Notice of Stock Option Grant)
THIS IMMEDIATELY EXERCISABLE INCENTIVE STOCK OPTION AGREEMENT (the Option Agreement) is made and entered into as of «Date_of_Grant», by and between
ShoreTel, Inc., a California corporation, and «Name» (the Optionee).
The Company has granted to the Optionee pursuant to the ShoreTel, Inc. 1997 Stock Option Plan
(the Plan) an option to purchase certain shares of the common stock of the Company (the Stock),
upon the terms and conditions set forth in this Option Agreement (the Option). The Option shall
in all respects be subject to the terms and conditions of the Plan, the provisions of which are
incorporated herein by reference.
1.
Definitions and Construction
.
1.1
Definitions
. Unless otherwise defined herein, capitalized terms shall have the meanings
assigned to such terms in the Plan. Whenever used herein, the following terms shall have their
respective meanings set forth below:
(a)
Date of Option Grant means «Date_of_Grant».
(b)
Number of Option Shares means «Number_of_Shares» shares of Stock, as adjusted from time to time pursuant to Section 9.
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(c) Exercise Price means $«price_per_share» per share of Stock, as adjusted from time to time pursuant to Section 9.
(d) Initial Exercise Date means the Date of Option Grant.
(e) Initial Vesting Date means the date occurring Twelve (12) months after (check one):
___ the Date of Option Grant.
___ «Commencement_Date»
(f) Vested Ratio means, on any relevant date, the ratio determined as follows:
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Vested Ratio
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Prior to Initial Vesting Date
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0
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On Initial Vesting Date, provided the Optionees Service has
not terminated prior to such date
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1/4
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Plus
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For each full month of the Optionees continuous Service from
the Initial Vesting Date until the Vested Ratio equals 1/1,
an additional
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1/48
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(g) Option Expiration Date means the date ten (10) years after the Date of Option Grant.
(h) Company means ShoreTel, Inc., a California corporation, or any successor corporation
thereto.
(i) Disability means the inability of the Optionee, in the opinion of a qualified physician
acceptable to the Company, to perform the major duties of the Optionees position with the
Participating Company Group because of the sickness or injury of the Optionee.
(j) Securities Act means the Securities Act of 1933, as amended.
(k) Service means the Optionees employment or service with the Participating Company Group,
whether in the capacity of an Employee, a Director or a Consultant. The Optionees Service shall
not be deemed to have terminated merely because of the change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption or termination of
the Optionees Service. Furthermore, the Optionees Service with the Participating Company Group
shall not be deemed to have terminated if the Optionee takes any
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military leave, sick leave, or
other bona fide leave of absence approved by the Company; provided, however, that if any such leave
exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionees Service shall
be deemed to have terminated unless the Optionees right to return to Service with the
Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing,
unless otherwise designated by the Company or required by law, a leave of absence shall not be
treated as Service for purposes of determining Optionees Vested Ratio. The Optionees Service
shall be deemed to have terminated either upon an actual termination of Service or upon the
corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject
to the foregoing, the Company, in its sole discretion, shall determine whether the Optionees
Service has terminated and the effective date of such termination.
1.2
Construction
. Captions and titles contained herein are for convenience only and shall not
affect the meaning or interpretation of any provision of this Option Agreement. Except when
otherwise indicated by the context, the singular shall include the plural and the plural shall
include the singular. Use of the term or is not intended to be exclusive, unless the context
clearly requires otherwise.
2.
Tax Consequences
.
2.1
Tax Status of Option
. This Option is intended to be an Incentive Stock Option within the
meaning of Section 422(b) of the Code and is not intended to be subject to Section 409A of the
Code, but the Company does not represent or warrant that this Option qualifies as an Incentive
Stock Option, nor does the Company represent or warrant that this Option is not subject to Section
409A of the Code. The Optionee should consult with the Optionees own tax advisor regarding the
tax effects of this Option and the requirements necessary to obtain favorable income tax treatment
under Sections 409A and 422 of the Code, including, but not limited to, the Exercise Price and
holding period requirements. (NOTE: If the aggregate Exercise Price of the Option (that is, the
Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of
other Incentive Stock Options held by the Optionee (whether granted pursuant to the Plan or any
other stock option plan of the Participating Company Group) is greater than One Hundred Thousand
Dollars ($100,000), the Optionee should contact the Chief Financial Officer of the Company to
ascertain whether the entire Option qualifies as an Incentive Stock Option).
2.2
Election Under Section 83(b) of the Code
. If the Optionee exercises this Option to
purchase shares of Stock that are both nontransferable and subject to a substantial risk of
forfeiture, the Optionee understands that the Optionee should consult with the Optionees tax
advisor regarding the advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days after the date on
which the Optionee exercises the Option. Shares acquired upon exercise of the Option are
nontransferable and subject to a substantial risk of forfeiture if, for example, (a) they are
unvested and are subject to a right of the Company to repurchase such shares at the Optionees
original purchase price if the Optionees Service terminates, (b) the Optionee is an Insider and
exercises the Option within six (6) months of the Date of Option Grant (if a class of equity
security of the Company is registered under Section 12 of the Exchange Act), or (c) the Optionee is
subject to a restriction on transfer to comply with Pooling-of-Interests Accounting rules.
Failure to file an election under Section 83(b), if appropriate, may result in adverse tax
consequences to the Optionee. The Optionee acknowledges
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that the Optionee has been advised to
consult with a tax advisor prior to the exercise of the Option regarding the tax consequences to
the Optionee of the exercise of the Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN
30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE PURCHASES SHARES THAT ARE SUBJECT TO A SUBSTANTIAL
RISK OF FORFEITURE OR NONTRANSFERABLE. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE
ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEES SOLE RESPONSIBILITY,
EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER
BEHALF.
3.
Administration
. All questions of interpretation concerning this Option Agreement
shall be determined by the Board. All determinations by the Board shall be final and binding upon
all persons having an interest in the Option. Any officer of a Participating Company shall have
the authority to act on behalf of the Company with respect to any matter, right, obligation, or
election which is the responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation, or election.
4.
Exercise of the Option
.
4.1
Right to Exercise
. Except as otherwise provided herein, the Option shall be exercisable
on and after the Initial Exercise Date and prior to the termination of the Option (as provided in
Section 6) in an amount not to exceed the Number of Option Shares less the number of shares
previously acquired upon exercise of the Option, subject to the Optionees agreement that any
shares purchased upon exercise are subject to the Companys repurchase rights set forth in Section
11.
4.2
Method of Exercise
. Exercise of the Option shall be by written notice to the Company
which must state the election to exercise the Option, the number of whole shares of Stock for which
the Option is being exercised and such other representations and agreements as to the Optionees
investment intent with respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be delivered in
person, by certified or registered mail, return receipt requested, by confirmed facsimile
transmission, or by such other means as the Company may permit, to the Chief Financial Officer of
the Company, or other authorized representative of the Participating Company Group, prior to the
termination of the Option as set forth in Section 6, accompanied by (i) full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased and (ii) an executed
copy, if required, herein, of the then current forms of escrow and security agreement referenced
below. The Option shall be deemed to be exercised upon receipt by the Company of such written
notice, the aggregate Exercise Price, and, if required by the Company, such executed agreements.
4.3
Payment of Exercise Price
.
(a)
Forms of Consideration Authorized.
Except as otherwise provided below, payment of the
aggregate Exercise Price of the number of shares of Stock for which the Option is being exercised
shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole
shares of Stock owned by the Optionee having a Fair Market Value (as
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determined by the Company
without regard to any restrictions on transferability applicable to such stock by reason of federal
or state securities laws or agreements with an underwriter for the Company) not less than the
aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or
(iv) by any combination of the foregoing.
(b)
Tender of Stock
. Notwithstanding the foregoing, the Option may not be exercised by tender
to the Company of shares of Stock to the extent such tender of Stock would constitute a violation
of the provisions of any law, regulation or agreement restricting the redemption of the Companys
stock. The Option may not be exercised by tender to the Company of shares of Stock unless such
shares either have been owned by the Optionee for more than six (6) months or were not acquired,
directly or indirectly, from the Company.
(c)
Cashless Exercise.
A Cashless Exercise means the assignment in a form acceptable to the
Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock
acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the provisions of Regulation T
as promulgated from time to time by the Board of Governors of the Federal Reserve System). The
Company reserves, at any and all times, the right, in the Companys sole and absolute discretion,
to decline to approve or terminate any such program or procedure.
4.4
Tax Withholding
. At the time the Option is exercised, in whole or in part, or at any time
thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and
any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for
(including by means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding obligations of the
Participating Company Group, if any, which arise in connection with the Option, including, without
limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the
transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of
any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is
cautioned that the Option is not exercisable unless the tax withholding obligations of the
Participating Company Group are satisfied. Accordingly, the Optionee may not be able to exercise
the Option when desired even though the Option is vested, and the Company shall have no obligation
to issue a certificate for such shares or release such shares from any escrow provided for herein.
4.5
Certificate Registration
. Except in the event the Exercise Price is paid by means of a
Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be
registered in the name of the Optionee, or, if applicable, in the names of the heirs of the
Optionee.
4.6
Restrictions on Grant of the Option and Issuance of Shares
. The grant of the Option and
the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all
applicable requirements of federal, state or foreign law with respect to such securities. The
Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a
violation of any applicable federal, state or foreign securities laws or other law or regulations
or the requirements of any stock exchange or market system upon which the Stock may then be listed.
In addition, the Option may not be exercised unless (i) a registration statement under
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the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares
issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the
shares issuable upon exercise of the Option may be issued in accordance with the terms of an
applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS
CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE
OPTION IS VESTED. Questions concerning this restriction should be directed to the Chief Financial
Officer of the Company. The inability of the Company to obtain from any regulatory body having
jurisdiction the authority, if any, deemed by the Companys legal counsel to be necessary to the
lawful issuance and sale of any shares subject to the Option shall relieve the Company of any
liability in respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of the Option, the Company
may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to
evidence compliance with any applicable law or regulation and to make any representation or
warranty with respect thereto as may be requested by the Company.
4.7
Fractional Shares
. The Company shall not be required to issue fractional shares upon the
exercise of the Option.
5.
Nontransferability of the Option
. The Option may be exercised during the lifetime
of the Optionee only by the Optionee or the Optionees guardian or legal representative and may not
be assigned or transferred in any manner except by will or by the laws of descent and distribution.
Following the death of the Optionee, the Option, to the extent provided in Section 7, may be
exercised by the Optionees legal representative or by any person empowered to do so under the
deceased Optionees will or under the then applicable laws of descent and distribution.
6.
Termination of the Option
. The Option shall terminate and may no longer be
exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising
the Option following termination of the Optionees Service as described in Section 7, or (c) a
Transfer of Control to the extent provided in Section 8.
7.
Effect of Termination of Service
.
7.1
Option Exercisability
.
(a)
Disability.
If the Optionees Service with the Participating Company Group is terminated
because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on
the date on which the Optionees Service terminated, may be exercised by the Optionee (or the
Optionees guardian or legal representative at any time prior to the expiration of six (6) months
after the date on which the Optionees Service terminated, but in any event no later than the
Option Expiration Date. (NOTE: If the Option is exercised more than three (3) months after the
date on which the Optionees Service as an Employee terminated as a result of a Disability other
than a permanent and total disability as defined in Section 22(e)(3) of the Code, the Option will
be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent
required by Section 422 of the Code.)
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(b)
Death
. If the Optionees Service with the Participating Company Group is terminated
because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the
date on which the Optionees Service terminated, may be exercised by the Optionees legal
representative or other person who acquired the right to exercise the Option by reason of the
Optionees death at any time prior to the expiration of six (6) months after the date on which the
Optionees Service terminated, but in any event no later than the Option Expiration Date. The
Optionees Service shall be deemed to have terminated on account of the death if the Optionee dies
within thirty (30) days after the Optionees termination of Service.
(c)
Other Termination of Service
. If the Optionees Service with the Participating Company
Group terminates for any reason, except Disability or death, the Option, to the extent unexercised
and exercisable by the Optionee on the date on which the Optionees Service terminated, may be
exercised by the Optionee within thirty (30) days (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the Optionees Service
terminated, but in any event no later than the Option Expiration Date.
7.2
Additional Limitations on Option Exercise
. Notwithstanding the provisions of Section 7.1,
the Option may not be exercised after the Optionees termination of Service to the extent that the
shares to be acquired upon exercise of the Option would be subject to the Unvested Share Repurchase
Option as provided in Section 11.
7.3
Extension if Exercise Prevented by Law
. Notwithstanding the foregoing, if the exercise of
the Option within the applicable time periods set forth in Section 7.1 is prevented by the
provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the
date the Optionee is notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date. The Company makes no representation as to the tax
consequences of any such delayed exercise. The Optionee should consult with the Optionees own tax
advisor as to the tax consequences to the Optionee of any such delayed exercise.
7.4
Extension if Optionee Subject to Section 16(b)
. Notwithstanding the foregoing, if a sale
within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of
the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date
on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the
one hundred and ninetieth (190th) day after the Optionees termination of Service, or (iii) the
Option Expiration Date. The Company makes no representation as to the tax consequences of any such
delayed exercise. The Optionee should consult with the Optionees own tax advisor as to the tax
consequences to the Optionee of any such delayed exercise.
8.
Transfer of Control
.
8.1
Definitions
.
(a) An Ownership Change Event shall be deemed to have occurred if any of the following
occurs with respect to the Company:
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(i) the direct or indirect sale or exchange in a single or series of related transactions by
the shareholders of the Company of more than fifty percent (50%) of the voting stock of the
Company;
(ii) a merger or consolidation in which the Company is a party;
(iii) the sale, exchange, or transfer of all or substantially all of the assets of the
Company; or
(iv) a liquidation or dissolution of the Company.
(b) A Transfer of Control shall mean an Ownership Change Event or a series of related
Ownership Change Events (collectively, the Transaction) wherein the shareholders of the Company
immediately before the Transaction do not retain immediately after the Transaction, in
substantially the same proportions as their ownership of shares of the Companys voting stock
immediately before the Transaction, direct or indirect beneficial ownership of more than fifty
percent (50%) of the total combined voting power of the outstanding voting stock of the Company or
the corporation or corporations to which the assets of the Company were transferred (the
Transferee Corporation(s)), as the case may be. For purposes of the preceding sentence, indirect
beneficial ownership shall include, without limitation, an interest resulting from ownership of the
voting stock of one or more corporations which, as a result of the Transaction, own the Company or
the Transferee Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether multiple sales or
exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and
its determination shall be final, binding and conclusive.
8.2
Effect of Transfer of Control on Option
. In the event of a Transfer of Control, the
surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the
case may be (the Acquiring Corporation), may either assume the Companys rights and obligations
under the Option or substitute for the Option a substantially equivalent option for the Acquiring
Corporations stock. For purposes of this Section 8.2, the Option shall be deemed assumed if,
following the Transfer of Control, the Option confers the right to purchase in accordance with its
terms and conditions, for each share of Stock subject to the Option immediately prior to the
Transfer of Control, the consideration (whether stock, cash or other securities or property) to
which a holder of a share of Stock on the effective date of the Transfer of Control was entitled.
The Option shall terminate and cease to be outstanding effective as of the date of the Transfer of
Control to the extent that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer
of Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to
the Transfer of Control and any consideration received pursuant to the Transfer of Control with
respect to such shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the
corporation the stock of which is subject to the Option immediately prior to an Ownership Change
Event described in Section 8.1(a)(i) constituting a Transfer of Control is the surviving or
continuing corporation and immediately after such Ownership Change Event less than fifty percent
(50%) of the total combined voting power of its voting stock is held by another corporation or by
other corporations that are
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members of an affiliated group within the meaning of Section 1504(a) of
the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not
terminate unless the Board otherwise provides in its sole discretion.
9.
Adjustments for Changes in Capital Structure
. In the event of any stock dividend,
stock split, reverse stock split, recapitalization, combination, reclassification, or similar
change in the capital structure of the Company, appropriate adjustments shall be made in the
number, Exercise Price and class of shares of stock subject to the Option. If a majority of the
shares which are of the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares
of another corporation (the New Shares), the Board may unilaterally amend the Option to provide
that the Option is exercisable for New Shares. In the event of any such amendment, the Number of
Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as
determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional
share resulting from an adjustment pursuant to this Section 9 shall be rounded up or down to the
nearest whole number, as determined by the Board, and in no event may the Exercise Price be
decreased to an amount less than the par value, if any, of the stock subject to the Option. The
adjustments determined by the Board pursuant to this Section 9 shall be final, binding and
conclusive.
10.
Rights as a Shareholder, Employee or Consultant
. The Optionee shall have no
rights as a shareholder with respect to any shares covered by the Option until the date of the
issuance of a certificate for the shares for which the Option has been exercised (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized transfer agent of the
Company). No adjustment shall be made for dividends, distributions or other rights for which the
record date is prior to the date such certificate is issued, except as provided in Section 9. If
the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise
provided in a separate, written employment agreement between a Participating Company and the
Optionee, the Optionees employment is at will and is for no specified term. Nothing in this
Option Agreement shall confer upon the Optionee, whether an Employee or Consultant, any right to
continue in the Service of a Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionees Service as an Employee or Consultant, as
the case may be, at any time.
11.
Unvested Share Repurchase Option
.
11.1
Grant of Unvested Share Repurchase Option
. In the event the Optionees Service with the
Participating Company Group is terminated for any reason or no reason, with or without cause, or if
the Optionee, the Optionees legal representative, or other holder of shares acquired upon exercise
of the Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of (other than
pursuant to an Ownership Change Event) any shares acquired upon exercise of the Option which exceed
the Vested Shares as defined in Section 11.2 below (the Unvested Shares), the Company shall have
the right to repurchase the Unvested Shares under the terms and subject to the conditions set forth
in this Section 11 (the Unvested Share Repurchase Option).
11.2
Vested Shares and Unvested Shares Defined
. The Vested Shares shall mean, on any given
date, a number of shares of Stock equal to the Number of Option Shares
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multiplied by the Vested
Ratio determined as of such date and rounded down to the nearest whole share. On such given date,
the Unvested Shares shall mean the number of shares of Stock acquired upon exercise of the Option
which exceed the Vested Shares determined as of such date.
11.3
Exercise of Unvested Share Repurchase Option
. The Company may exercise the Unvested
Share Repurchase Option by written notice to the Optionee within sixty (60) days after (a)
termination of the Optionees Service (or exercise of the Option, if later) or (b) the Company has
received notice of the attempted disposition of Unvested Shares. If the Company fails to give
notice within such sixty (60) day period, the Unvested Share Repurchase Option shall terminate
unless the Company and the Optionee have extended the time for the exercise of the Unvested Share
Repurchase Option. The Unvested Share Repurchase Option must be exercised, if at all, for all of
the Unvested Shares, except as the Company and the Optionee otherwise agree.
11.4
Payment for Shares and Return of Shares to Company.
The purchase price per share being
repurchased by the Company shall be an amount equal to the Optionees original cost per share, as
adjusted pursuant to Section 9 (the Repurchase Price). The Company shall pay the aggregate
Repurchase Price to the Optionee in cash within thirty (30) days after the date of the written
notice to the Optionee of the Companys exercise of the Unvested Share Repurchase Option. For
purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating
Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal
and any accrued interest canceled. The shares being repurchased shall be delivered to the Company
by the Optionee at the same time as the delivery of the Repurchase Price to the Optionee.
11.5
Assignment of Unvested Share Repurchase Option.
The Company shall have the right to
assign the Unvested Share Repurchase Option at any time, whether or not such option is then
exercisable, to one or more persons as may be selected by the Company.
11.6
Ownership Change Event
. Upon the occurrence of an Ownership Change Event, any and all
new, substituted or additional securities or other property to which the Optionee is entitled by
reason of the Optionees ownership of Unvested Shares shall be immediately subject to the Unvested
Share Repurchase Option and included in the terms Stock and Unvested Shares for all purposes of
the Unvested Share Repurchase Option with the same force and effect as the Unvested Shares
immediately prior to the Ownership Change Event. While the aggregate Repurchase Price shall remain
the same after such Ownership Change Event, the Repurchase Price per Unvested Share upon exercise
of the Unvested Share Repurchase Option following such Ownership Change Event shall be adjusted as
appropriate. For purposes of determining the Vested Ratio following an Ownership Change Event,
credited Service shall include all Service with any corporation which is a Participating Company at
the time the Service is rendered, whether or not such corporation is a Participating Company both
before and after the Ownership Change Event.
12.
Escrow
.
12.1
Establishment of Escrow
. To ensure that shares subject to the Unvested Share Repurchase
Option will be available for repurchase, the Company may require the Optionee to deposit the
certificate evidencing the shares which the Optionee purchases upon exercise of the Option with an
escrow agent designated by the Company under the terms and conditions of escrow
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and security
agreements approved by the Company. If the Company does not require such deposit as a condition of
exercise of the Option, the Company reserves the right at any time to require the Optionee to so
deposit the certificate in escrow. Upon the occurrence of an Ownership Change Event or a change,
as described in Section 9, in the character or amount of any of the outstanding stock of the
corporation the stock of which is subject to the provisions of this Option Agreement, any and all
new, substituted or additional securities or other property to which the Optionee is entitled by
reason of the Optionees ownership of shares of Stock acquired upon exercise of the Option that
remain, following such Ownership Change Event or change described in Section 9, subject to the
Unvested Share Repurchase Option or any security interest held by the Company shall be immediately
subject to the escrow to the same extent as such shares of Stock immediately before such event.
The Company shall bear the expenses of the escrow.
12.2
Delivery of Shares to Optionee
. As soon as practicable after the expiration of the
Unvested Share Repurchase Option, but not more frequently than twice each calendar year, the escrow
agent shall deliver to the Optionee the shares and any other property no longer subject to such
restrictions.
12.3
Notices and Payments
. In the event the shares and any other property held in escrow are
subject to the Companys exercise of the Unvested Share Repurchase Option the notices required to
be given to the Optionee shall be given to the escrow agent, and any payment required to be given
to the Optionee shall be given to the escrow agent. Within thirty (30) days after payment by the
Company, the escrow agent shall deliver the shares and any other property which the Company has
purchased to the Company and shall deliver the payment received from the Company to the Optionee.
13.
Stock Distributions Subject to Option Agreement
. If, from time to time, there is
any stock dividend, stock split or other change, as described in Section 9, in the character or
amount of any of the outstanding stock of the corporation the stock of which is subject to the
provisions of this Option Agreement, then in such event any and all new, substituted or additional
securities to which the Optionee is entitled by reason of the Optionees ownership of the shares
acquired upon exercise of the Option shall be immediately subject to the Unvested Share Repurchase
Option and any security interest held by the Company with the same force and effect as the shares
subject to the Unvested Share Repurchase Option and such security interest immediately before such
event.
14.
Notice of Sales Upon Disqualifying Disposition
. The Optionee shall dispose of the
shares acquired pursuant to the Option only in accordance with the provisions of this Option
Agreement. In addition, the Optionee shall promptly notify the Chief Financial Officer of the
Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one
(1) year after the date the Optionee exercises all or part of the Option or within two (2) years
after the Date of Option Grant and shall provide the Company with a description of the terms and
circumstances of such disposition. Until such time as the Optionee disposes of such shares in a
manner consistent with the provisions of this Option Agreement, unless otherwise expressly
authorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in
the Optionees name (and not in the name of any nominee) for the one-year period immediately after
the exercise of the Option and the two-year period immediately after Date of Option Grant. At any
time during the one-year or two-year periods set forth above, the Company may place a legend on any
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certificate representing shares acquired pursuant to the Option requesting the transfer agent for
the Companys stock to notify the Company of any such transfers. The obligation of the Optionee to
notify the Company of any such transfer shall continue notwithstanding that a legend has been
placed on the certificate pursuant to the preceding sentence.
15.
Legends
. The Company may at any time place legends referencing the Unvested Share
Repurchase Option and any applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this Option Agreement. The
Optionee shall, at the request of the Company, promptly present to the Company any and all
certificates representing shares acquired pursuant to the Option in the possession of the Optionee
in order to carry out the provisions of this Section. Unless otherwise specified by the Company,
legends placed on such certificates may include, but shall not be limited to, the following:
15.1 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY,
STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
15.2 Any legend required to be placed thereon by the Commissioner of Corporations of the State
of California.
15.3 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN UNVESTED SHARE REPURCHASE
OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDERS PREDECESSOR IN INTEREST, A COPY OF WHICH IS
ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION.
15.4 THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE
REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (ISO). IN ORDER TO OBTAIN THE PREFERENTIAL TAX
TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO THE TERMINATION OF THE
REPURCHASE RIGHT OF THE COMPANY. SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES
PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE
CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE
STOCK OPTION IN THE REGISTERED HOLDERS NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS
DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE.
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16.
Public Offering
. The Optionee hereby agrees that in the event of any underwritten public offering of stock, including an initial public
offering of stock, made by the Company pursuant to an effective registration statement filed under the Securities Act, the Optionee shall not offer,
sell, contract to sell, pledge, hypothecate, grant any option to purchase or make any short sale of, or otherwise dispose of any shares of stock of the
Company or any rights to acquire stock of the Company for such period of time from and after the effective date of such registration statement as may be
established by the underwriter for such public offering; provided, however, that such period of time shall not exceed one hundred eighty (180) days from the
effective date of the registration statement to be filed in connection with such public offering. The foregoing limitation shall not apply to shares registered in the
public offering under the Securities Act. The Optionee shall be subject to this Section provided and only if the officers and directors of the Company are also subject to
similar arrangements.
17.
Restrictions on Transfer of Shares
. No shares acquired upon exercise of the Option may be sold, exchanged, transferred (including, without limitation,
any transfer to a nominee or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner
which violates any of the provisions of this Option Agreement and, except pursuant to an Ownership Change Event, until the date on which such shares become
Vested Shares, and any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any shares which will have been
transferred in violation of any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares or to accord the right to vote as such
owner or to pay dividends to any transferee to whom such shares will have been so transferred.
18.
Binding Effect
. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators, successors and assigns.
19.
Termination or Amendment
. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in
Section 8.2 in connection with a Transfer of Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without
the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation or is required to enable
the Option to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing.
20.
Notices
. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option
Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered
or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that partys signature or at such other address as such party may
designate in writing from time to time to the other party.
21.
Integrated Agreement
. This Option Agreement and the Plan constitute the entire understanding and agreement of the Optionee and the Participating
Company Group with respect to the subject matter contained herein or therein, and there are no agreements, understandings,
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restrictions, representations, or warranties among the Optionee and the Participating Company
Group with respect to such subject matter other than those as set forth or provided for herein or
therein. To the extent contemplated herein or therein, the provisions of this Option Agreement
shall survive any exercise of the Option and shall remain in full force and effect.
22.
Sections 409A and 422 Release and Reimbursement Agreement
. Unless expressly
determined otherwise by the Committee or Board, this Option is intended to be compliant with
Sections 409A and 422 of the Code, including, without limitation, the Exercise Price underlying
this Option being set at not less than 100% of the Fair Market Value at the Date of Grant of this
Option. Optionee acknowledges that, if the Exercise Price is less than the Fair Market Value as of
the Date of Grant of this Option, then Optionee may have significant tax liabilities with respect
to this Option. Optionee further acknowledges that, at any time hereafter, it may be determined by
the Committee, a court of law, the Internal Revenue Service or other governmental entity that this
Option is subject to Section 409A of the Code and not subject to Section 422 of the Code,,
including without limitation because the Exercise Price underlying this Option is less than the
Fair Market Value as of the Date of Grant of this Option (a
Determination"
). Optionee expressly
agrees, by accepting this Option and in partial consideration for the grant of this Option to
Optionee, as follows:
22.1 Optionee hereby irrevocably waives and releases any and all claims or causes of action
that Optionee may have against the Participating Company Group, its agents, officers, stockholders,
employees, directors, attorneys, subscribers, subsidiaries, affiliates, successors and assigns, for
any damages, injury or loss arising out of, related to or connected with such a Determination or
otherwise under Sections 409A and 422 of the Code, including without limitation with respect to
taxes, interest and penalties that may be due from Optionee with respect to this Option under
Section 409A of the Code; and
22.2 Optionee agrees to promptly reimburse the Participating Company Group upon its request,
whether by way of a deduction from wages due (if and to the extent permitted by law) or otherwise,
as determined by the Participating Company Group in its sole discretion, and regardless of whether
or not Optionee is then an employee, for any taxes (together with interest due thereon) paid by the
Participating Company Group on Optionees behalf in connection with such a Determination.
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23.
Applicable Law
. This Option Agreement shall be governed by the laws of the State
of California as such laws are applied to agreements between California residents entered into and
to be performed entirely within the State of California.
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SHORETEL, INC.,
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a California corporation
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By:
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, President and
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Chief Executive Officer
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Address:
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960 Stewart Drive
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Sunnyvale, California 94085
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The Optionee represents that the Optionee is familiar with the terms and provisions of this
Option Agreement, including the Unvested Share Repurchase Option set forth in Section 11 and hereby
accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Option Agreement. The undersigned acknowledges receipt of a copy of
the Plan.
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OPTIONEE
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Date: «Date_of_Grant»
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«Name»
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Optionee Address:
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«Address»
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1997 STOCK OPTION PLAN
EXERCISE NOTICE
ShoreTel, Inc.
Attention: Stock Option Administration
1.
Exercise of Option
. Effective as of today, «Exercise_date», the undersigned
(Optionee) hereby elects to exercise Optionees option to purchase «Number_of_Shares» shares of
the Common Stock (the Shares) of ShoreTel, Inc. (the Company) under and pursuant to the 1997
Stock Option Plan, as amended (the Plan) and the Immediately Exercisable Incentive Stock Option
Agreement dated «Date_of_Grant» (the Option Agreement).
2.
Representations of Optionee
. Optionee acknowledges that Optionee has received,
read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their
terms and conditions.
3.
Rights as Shareholder
. Until the stock certificate evidencing such Shares is
issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is
exercised. No adjustment will be made for a dividend or other right for which the record date is
prior to the date the stock certificate is issued, except as provided in Section 4.2 of the Plan.
Optionee shall enjoy rights as a shareholder until such time as Optionee disposes of the
Shares or the Company and/or its assignee(s) exercises the Unvested Share Repurchase Option
pursuant to the Option Agreement. Upon such exercise, Optionee shall have no further rights as a
holder of the Shares so purchased except the right to receive payment for the Shares so purchased
in accordance with the provisions of this Agreement, and Optionee shall forthwith cause the
certificate(s) evidencing the Shares so purchased to be surrendered to the Company for transfer or
cancellation.
4.
Tax Consultation
. Optionee understands that Optionee may suffer adverse tax
consequences as a result of Optionees purchase or disposition of the Shares. Optionee represents
that Optionee has consulted with any tax consultants Optionee deems advisable in connection with
the purchase or disposition of the Shares and that Optionee is not relying on the Company for any
tax advice.
5.
Restrictive Legends and Stop-Transfer Orders
.
a.
Legends
. Optionee understands and agrees that the Company shall cause the legends
set forth below or legends substantially equivalent thereto, to be placed upon any
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certificate(s) evidencing ownership of the Shares together with any other legends that may be
required by state or federal securities laws or as the Company may otherwise determine:
(i) THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY,
STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
(ii) Any legend required to be placed thereon by the Commissioner of Corporations of the State
of California.
(iii) If applicable: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN UNVESTED
SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT
BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDERS PREDECESSOR IN INTEREST, A COPY
OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION.
(iv) If applicable: THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION
TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF
THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (ISO). IN ORDER TO OBTAIN THE PREFERENTIAL TAX
TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO THE TERMINATION OF THE
REPURCHASE RIGHT OF THE COMPANY. SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES
PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE
CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE
STOCK OPTION IN THE REGISTERED HOLDERS NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS
DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE.
b.
Stop-Transfer Notices
. Optionee agrees that, in order to ensure compliance with
the restrictions referred to herein, the Company may issue appropriate stop transfer instructions
to its transfer agent, if any, and that, if the Company transfers its own securities, it may make
appropriate notations to the same effect in its own records.
c.
Refusal to Transfer
. The Company shall not be required (i) to transfer on its
books any Shares that have been sold or otherwise transferred in violation of any of the provisions
of
-2-
this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay
dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.
6.
Successors and Assigns
. The Company may assign any of its rights under this
Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the
successors and assigns of the Company. Subject to the restrictions on transfer herein set forth,
this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators,
successors and assigns.
7.
Interpretation
. Any dispute regarding the interpretation of this Agreement shall
be submitted by Optionee or by the Company forthwith to the Companys Board of Directors or the
committee thereof that administers the Plan, which shall review such dispute at its next regular
meeting. The resolution of such a dispute by the Board or committee shall be final and binding on
the Company and on Optionee.
8.
Governing Law; Severability
. This Agreement shall be governed by and construed in
accordance with the laws of the State of California excluding that body of law pertaining to
conflicts of law. Should any provision of this Agreement be determined by a court of law to be
illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain
enforceable.
9.
Notices
. Any notice required or permitted hereunder shall be given in writing and
shall be deemed effectively given upon personal delivery or upon deposit in the United States mail
by certified mail, with postage and fees prepaid, addressed to the other party at its address as
shown below beneath its signature, or to such other address as such party may designate in writing
from time to time to the other party.
10.
Further Instruments
. The parties agree to execute such further instruments and to
take such further action as may be reasonably necessary to carry out the purposes and intent of
this Agreement.
11.
Delivery of Payment
. Optionee herewith delivers to the Company the full Exercise
Price for the Shares.
12.
Entire Agreement
. The Plan and Notice of Grant/Option Agreement are incorporated
herein by reference. This Agreement, the Plan, the Option Agreement (including without limitation
the Unvested Share Repurchase Option of Sec. 11 thereof), and the Investment Representation
Statement constitute the entire agreement of the parties and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the subject matter hereof.
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Submitted by:
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Accepted by:
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OPTIONEE:
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SHORETEL, INC.
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By:
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, President and
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Address
: «Address»
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Chief Executive Officer
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-3-
INVESTMENT REPRESENTATION STATEMENT
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OPTIONEE
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:
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«Name»
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COMPANY
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:
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SHORETEL, INC.
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SECURITY
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:
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COMMON STOCK
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AMOUNT
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:
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$«Total_price»
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«number_of_shares» Shares
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DATE
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:
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«Exercise_date»
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In connection with the purchase of the above-listed Securities, the undersigned Optionee represents
to the Company the following:
(a) Optionee is aware of the Companys business affairs and financial condition and has
acquired sufficient information about the Company to reach an informed and knowledgeable decision
to acquire the Securities. Optionee is acquiring these Securities for investment for Optionees
own account only and not with a view to, or for resale in connection with, any distribution
thereof within the meaning of the Securities Act of 1933, as amended (the Securities Act).
(b) Optionee acknowledges and understands that the Securities constitute restricted
securities under the Securities Act and have not been registered under the Securities Act in
reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the
bona fide nature of Optionees investment intent as expressed herein. In this connection, Optionee
understands that, in the view of the Securities and Exchange Commission, the statutory basis for
such exemption may be unavailable if Optionees representation was predicated solely upon a present
intention to hold these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the market price of the
Securities, or for a period of one year or any other fixed period in the future. Optionee further
understands that the Securities must be held indefinitely unless they are subsequently registered
under the Securities Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register the Securities.
Optionee understands that the certificate evidencing the Securities will be imprinted with a legend
which prohibits the transfer of the Securities unless they are registered or such registration is
not required in the opinion of counsel satisfactory to the Company, a legend prohibiting their
transfer without the consent of the Commissioner of Corporations of the State of California and any
other legend required under applicable state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under
the Securities Act, which, in substance, permit limited public resale of restricted securities
acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to
- 1 -
the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under
Rule 701 at the time of the grant of the Option to the Optionee, the exercise will be exempt from
registration under the Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days
thereafter (or such longer period as any market stand-off agreement may require) the Securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions
specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited
brokers transaction or in transactions directly with a market maker (as said term is defined
under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability
of certain public information about the Company, (3) the amount of Securities being sold during any
three month period not exceeding the limitations specified in Rule 144(e), and (4) the timely
filing of a Form 144, if applicable.
(d) In the event that the Company does not qualify under Rule 701 at the time of grant of the
Option, then the Securities may be resold in certain limited circumstances subject to the
provisions of Rule 144, which requires the resale to occur not less than two years after the later
of the date the Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than
three years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the
paragraph immediately above.
(e) Optionee further understands that in the event all of the applicable requirements of Rule
701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A,
or some other registration exemption will be required; and that, notwithstanding the fact that
Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has
expressed its opinion that persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden
of proof in establishing that an exemption from registration is available for such offers or sales,
and that such persons and their respective brokers who participate in such transactions do so at
their own risk. Optionee understands that no assurances can be given that any such other
registration exemption will be available in such event.
(f) Optionee understands that the certificate evidencing the Securities will be imprinted with
a legend which prohibits the transfer of the Securities without the consent of the Commissioner of
Corporations of California. Optionee has read the applicable Commissioners Rules with respect to
such restriction, a copy of which is attached.
Signature of Optionee:
«Name»
Date: «Exercise_date»
- 2 -
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I,
, hereby sell, assign and transfer unto
(
)shares of the Common Stock of
ShoreTel, Inc. standing in my name of the books of said corporation represented by Certificate No.
herewith and do hereby irrevocably constitute and appoint
to transfer
the said stock on the books of the within named corporation with full power of substitution in the
premises.
This Stock Assignment may be used only in accordance with the Joint Escrow Instructions
between
and the undersigned dated
,
.
Dated: _______________, ___
Signature:______________________________
INSTRUCTIONS:
Please do not fill in any blanks other than the signature line. The purpose of this
assignment is to enable the Company to exercise its repurchase option, as set forth in the
Agreement, without requiring additional signatures on the part of the Purchaser.
- 3 -
JOINT ESCROW INSTRUCTIONS
«Exercise_date»
ShoreTel, Inc.
Corporate Secretary
960 Stewart Drive
Sunnyvale, California 94085
Dear Corporate Secretary:
As Escrow Agent for both ShoreTel, Inc. (the Company), and the undersigned purchaser of
stock of the Company (the Purchaser), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Immediately Exercisable Incentive
Stock Option Agreement (Agreement) between the Company and the undersigned, in accordance with
the following instructions:
1. In the event the Company and/or any assignee of the Company (referred to collectively for
convenience herein as the Company) exercises the Companys repurchase option set forth in Section
11 of the Agreement, the Company shall give to Purchaser and you a written notice specifying the
number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder
at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and
direct you to close the transaction contemplated by such notice in accordance with the terms of
said notice.
2. At the closing, you are directed (a) to date the stock assignments necessary for the
transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver
same, together with the certificate evidencing the shares of stock to be transferred, to the
Company or its assignee, against the simultaneous delivery to you of the purchase price (by cash, a
check, or some combination thereof) for the number of shares of stock being purchased pursuant to
the exercise of the Companys repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any certificates
evidencing shares of stock to be held by you hereunder and any additions and substitutions to said
shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you
as Purchasers attorney-in-fact and agent for the term of this escrow to execute with respect to
such securities all documents necessary or appropriate to make such securities negotiable and to
complete any transaction herein contemplated, including but not limited to the filing with any
applicable state blue sky authority of any required applications for consent to, or notice of
transfer of, the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the stock is held by you.
4. If the Company has not otherwise directed you to hold all certificates, then: (A) upon
written request of the Purchaser, but no more than once per calendar year, unless the Companys
repurchase option has been exercised, you will deliver to Purchaser a certificate or certificates
-1-
representing so many shares of stock as are not then subject to the Companys repurchase
option; and (B) within 120 days after cessation of Purchasers continuous employment by or services
to the Company, or any parent or subsidiary of the Company, you will deliver to Purchaser a
certificate or certificates representing the aggregate number of shares held or issued pursuant to
the Agreement and not purchased by the Company or its assignees pursuant to exercise of the
Companys repurchase option.
5. If at the time of termination of this escrow you should have in your possession any
documents, securities, or other property belonging to Purchaser, you shall deliver all of the same
to Purchaser and shall be discharged of all further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed
by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are specifically set
forth herein and may rely and shall be protected in relying or refraining from acting on any
instrument reasonably believed by you to be genuine and to have been signed or presented by the
proper party or parties. You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any
act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive
evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings given by any of the
parties hereto or by any other person or corporation, excepting only orders or process of courts of
law and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree, you shall not be liable
to any of the parties hereto or to any other person, firm or corporation by reason of such
compliance, notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity, authorities or rights of
the parties executing or delivering or purporting to execute or deliver the Agreement or any
documents or papers deposited or called for hereunder.
10. You shall not be liable for the outlawing of any rights under the Statute of Limitations
with respect to these Joint Escrow Instructions or any documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts as you may deem
necessary properly to advise you in connection with your obligations hereunder, may rely upon the
advice of such counsel, and may pay such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be
an officer or agent of the Company or if you shall resign by written notice to each party. In the
event of any such termination, the Company shall appoint a successor Escrow Agent.
-2-
13. If you reasonably require other or further instruments in connection with these Joint
Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in
furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect to the delivery
and/or ownership or right of possession of the securities held by you hereunder, you are authorized
and directed to retain in your possession without liability to anyone all or any part of said
securities until such disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of competent jurisdiction
after the time for appeal has expired and no appeal has been perfected, but you shall be under no
duty whatsoever to institute or defend any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing and shall be deemed
effectively given upon personal delivery or upon deposit in the United States Post Office, by
registered or certified mail with postage and fees prepaid, addressed to each of the other parties
thereunto entitled at the following addresses or at such other addresses as a party may designate
by ten days advance written notice to each of the other parties hereto.
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COMPANY:
|
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ShoreTel, Inc.
|
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960 Stewart Drive
|
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Sunnyvale, CA 94085
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PURCHASER:
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«Name»
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«Address»
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ESCROW AGENT:
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ShoreTel, Inc.
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Corporate Secretary
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960 Stewart Drive
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Sunnyvale, California 94085
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16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose
of said Joint Escrow Instructions; you do not become a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and
their respective successors and permitted assigns.
-3-
18. These Joint Escrow Instructions shall be governed by, and construed and enforced in
accordance with, the laws of the State of California.
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ShoreTel, Inc.
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By:
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,President and
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Chief Executive Officer
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Purchaser:
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«Name»
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Escrow Agent:
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(Signature)
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-4-
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code
of 1986, as amended, to include in taxpayers gross income for the current taxable year the amount
of any compensation taxable to taxpayer in connection with taxpayers receipt of the property
described below:
1.
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The name, address, taxpayer identification number and taxable year of the undersigned are as
follows:
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TAXPAYER:
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SPOUSE:
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NAME:
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«Name»
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ADDRESS:
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«Address»
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IDENTIFICATION NO.:
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TAXABLE YEAR:
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2.
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The property with respect to which the election is made is described as follows:
«number_of_shares» shares (the Shares) of the Common Stock of ShoreTel, Inc. (the
Company).
|
3.
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The date on which the property was transferred is: «Exercise_date»
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4.
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The property is subject to the following restrictions:
The Shares may not be transferred and are subject to forfeiture under the terms of an
agreement between the taxpayer and the Company. These restrictions lapse upon the
satisfaction of certain conditions contained in such agreement.
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5.
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The fair market value at the time of transfer, determined without $«Total_price»
regard to any restriction other than a restriction which by its
terms will never lapse, of such property is:
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6.
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The amount (if any) paid for such property is: $«Total_price»
|
The undersigned has submitted a copy of this statement to the person for whom the services were
performed in connection with the undersigneds receipt of the above-described property. The
transferee of such property is the person performing the services in connection with the transfer
of said property.
The undersigned understands that the foregoing election may not be revoked except with the
consent of the Commissioner
.
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Dated:
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,
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,
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«Name»
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The undersigned spouse of taxpayer joins in this election.
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Dated:
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,
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,
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Spouse of Taxpayer Signature
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-5-
Exhibit 10.15
* * * * * * * * * * * * * * * * * * * *
Sublease
OAKMEAD WEST BUILDINGS PROJECT
BUILDING G
960 STEWART DRIVE
FIRST FLOOR
* * * * * * * * * * * * * * * * * * * *
Between
APPLIED MATERIALS, INC.
(Sublandlord)
and
SHORELINE TELEWORKS
(Subtenant)
TABLE OF CONTENTS
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Page(s)
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SCHEDULE
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1
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1.
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SUBLEASE AGREEMENT
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4
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2.
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RENT
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5
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3.
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CONSTRUCTION OF INTERIOR IMPROVEMENTS AND POSSESSION
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12
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4.
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SERVICES AND UTILITIES
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13
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5.
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ALTERATIONS
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13
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6.
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USE OF PREMISES
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16
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7.
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GOVERNMENTAL REQUIREMENTS AND BUILDING RULES
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17
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8.
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REPAIR AND MAINTENANCE
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17
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9.
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WAIVER OF CLAIMS; INDEMNIFICATION; INSURANCE
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19
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10.
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FIRE AND OTHER CASUALTY
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21
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11.
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EMINENT DOMAIN
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22
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12.
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RIGHTS RESERVED TO LANDLORD AND SUBLANDLORD
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22
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13.
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SUBTENANTS DEFAULT
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24
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14.
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SUBLANDLORD REMEDIES
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24
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15.
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SURRENDER
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26
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16.
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HOLDOVER
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27
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17.
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SUBORDINATION TO GROUND LEASES AND MORTGAGES
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27
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18.
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ASSIGNMENT AND SUBLEASE
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28
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19.
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CONVEYANCE BY SUBLANDLORD OR LANDLORD
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30
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20.
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ESTOPPEL CERTIFICATE
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30
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21.
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FINANCIAL STATEMENTS
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31
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22.
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LEASE DEPOSIT
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31
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-i-
TABLE OF CONTENTS
(continued)
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Page(s)
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23.
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FORCE MAJEURE
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32
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24.
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NOTICES
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32
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25.
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QUIET POSSESSION
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32
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26.
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REAL ESTATE BROKERS
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33
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27.
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MISCELLANEOUS
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33
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28.
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UNRELATED BUSINESS INCOME
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35
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29.
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HAZARDOUS SUBSTANCES
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35
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30.
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EXCULPATION
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37
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31.
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EXTENSION OPTION
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37
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32.
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RIGHT OF FIRST OFFER
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38
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EXHIBITS
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EXHIBIT A
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DESCRIPTION OF PROJECT AND PREMISES/BUILDINGS
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EXHIBIT B
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RULES AND REGULATIONS
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EXHIBIT C
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WORK LETTER AGREEMENT
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EXHIBIT D
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MORTGAGES CURRENTLY AFFECTING THE PROJECT
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EXHIBIT E
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SHELL UPGRADES
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EXHIBIT F
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LETTER OF CREDIT
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EXHIBIT G
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LIST OF HAZARDOUS SUBSTANCES AND QUANTITIES
USED BY TENANT
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-ii-
SUBLEASE
THIS SUBLEASE (the
Sublease
) is made as of October _, 1998 (dated for reference
purposes only and referred to herein as the Effective Date) between
Applied Materials, Inc.
, a
Delaware corporation (the
Sublandlord
) and
Shoreline Teleworks
, a California corporation
(Subtenant). The term
Project
means the seven (7) buildings (
Buildings
) and
other improvements commonly known as the Oakmead West Buildings Project located on the land (the
Land
) in Sunnyvale, California, described on
EXHIBIT A-1
.
Sublandlord is lessee of the Project pursuant to the Lease dated September 9, 1997 (Master
Lease) between Sublandlord as Tenant and CarrAmerica Realty Corporation as Landlord.
The following schedule (the
Schedule
) is an integral part of this Sublease. Terms
defined in this Schedule shall have the same meaning throughout the Sublease.
SCHEDULE
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1.
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Subtenant:
Shoreline Teleworks.
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2.
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Premises:
The Premises means and includes the portions of the first floor of
Building G (the
Building
), 960 Stewart Drive, Sunnyvale, California,
designated Area A, Area B, and Area C on
EXHIBIT A-2
attached hereto, occupied
by Tenant at any time during the Term of this Sublease, together with (1) a
nonexclusive right, in common with other tenants of the Building, to use the Building
Common Areas, and (2) a nonexclusive right, in common with other tenants of the
Project, to use the Project Common Areas subject to the Master Lease.
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3.
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Rentable Square Footage of the Premises:
31,891 sq. ft.
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4.
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Subtenants Proportionate Share:
The Percentage listed below for Landlords
Operating Costs and Taxes and Sublandlords Operating Costs allocated to the Building,
plus the Percentage listed below for Landlords Operating Costs and Taxes but not
allocated to specific Buildings by Landlord.
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Proportionate Share
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Proportionate Share
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for Building
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for Project
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Area A
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34.49
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%
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5.16
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%
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Area A + Area B
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39.20
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%
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5.87
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%
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Area A + Area B + Area C
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50
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%
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7.49
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%
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*
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This percentage (7.49%) represents the ratio of the square footage of the Premises
to the aggregate square footage of all Buildings in the Project. As the aggregate
square footage of all Buildings subject to the Master Lease declines,
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1
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this percentage may be adjusted to a percentage equal to the ratio of the square
footage of the Premises to the aggregate square footage of the Buildings then
subject to the Master Lease, but the revised percentage would apply only against the
Landlord Operating Costs allocated to all Buildings then subject to the Master Lease
but not to any one Building.
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5.
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Lease Deposit:
$42,900.00 due upon execution of this Sublease, representing
advance payment of the first months rent (Advance Rent Deposit), plus a security
deposit in the form of an irrevocable letter of credit in the amount of $300,000.00
(subject to subsequent reduction as provided in Section 22).
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6.
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Permitted Use:
Office; storage and shipping of equipment and parts; assembly
(using parts manufactured elsewhere), repair and testing of machinery and equipment;
research, testing and demonstration laboratory; and ancillary uses permitted under
applicable laws.
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7.
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Subtenants Real Estate Broker for this Lease:
Cornish & Carey Commercial Real
Estate
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8.
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Sublandlords Real Estate Broker for this Lease:
Wayne Mascia Associates
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9.
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Tenant Improvements:
To be provided by Sublandlord. See Work letter.
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10.
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Commencement Date:
Area A Approximately February 1, 1999
Area B Approximately February 1, 2000
Area C Approximately October 1, 2000; See Paragraph 1.A.
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11.
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Term:
Commencing on the Commencement Date and expiring May 31, 2004
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12.
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Guarantor:
None
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13.
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Base Rent:
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Monthly/
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Monthly*
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Months
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Square Foot
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Base Rent
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1-12
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$
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1.95
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$
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42,900.00
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13-21
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$
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2.00
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$
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50,000.00
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*
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22-24
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$
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2.00
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$
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63,782.00
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*
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25-36
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$
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2.05
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$
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65,376.55
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37-48
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$
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2.10
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$
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66,971.10
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49-60
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$
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2.15
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$
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68,565.65
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61-64
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$
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2.20
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$
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70,160.20
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*
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Monthly Base Rent as shown assumes that the Commencement Date for Area B and for Area C is
the first day of the thirteen (13th) month and twenty-second (22) month, respectively
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2
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14.
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Master Lease:
Lease dated September 9, 1997 between Applied Materials, Inc. as
Tenant
and CarrAmerica Realty Corporation as Landlord
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15.
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Landlord or Master
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Landlord:
CarrAmerica Realty Corporation
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3
1.
SUBLEASE AGREEMENT
.
On the terms stated in this Sublease, Sublandlord leases the
Premises to Subtenant, and Subtenant leases the Premises from Sublandlord, for the Term beginning
on the Commencement Date and ending on the Termination Date unless sooner terminated pursuant to
this Sublease.
A.
Commencement Date
. The Commencement Date shall be the date established pursuant to
this section, and the Sublease shall expire on the date set forth in the Schedule.
(1)
The Commencement Date for Area A shall be the earliest occurring of the following:
(i) The date of Substantial Completion of the Tenant Improvements, as such term is defined in
the Work Letter Agreement attached hereto as
EXHIBIT C
(Work Letter Agreement); or
(ii) The date Subtenant commences occupancy of Area A.
(2)
The Commencement Date for Area B shall be the first day of the
thirteenth (13th) month of the Term.
(3)
The Commencement Date for Area C shall be the first day of the
twenty-second (22nd) month of the Term.
B.
Subtenant Delays
. If the Commencement Date for Area A has not occurred on or
before February 1, 1999 due to Subtenant Delays, the Commencement Date shall be the date on which
the Commencement Date would have occurred but for Subtenant Delays. Subtenant agrees that if
Sublandlord is unable to deliver possession of the Premises to Subtenant by February 1, 1999 (the
anticipated Commencement Date of the Sublease term), this Sublease shall not be void or voidable,
nor shall Sublandlord be liable to Subtenant for any loss or damage resulting therefrom, but in
such event the obligation to pay Rent shall be suspended from the anticipated Commencement Date
until the actual Commencement Date except to the extent such delay is due to Subtenant Delays.
Subtenant Delays shall include (i) those defined as Subtenant Delays in the Work Letter Agreement,
and (ii) interference with Sublandlords work caused by Subtenant or Subtenants employees or
contractors. If the Commencement Date has not occurred on or before April 1, 1999 (First
Termination Date), Subtenant may terminate this Sublease by written notice to Sublandlord on or
before April 15, 1999; provided, however, that the First Termination Date shall be extended by a
period of time equal to any delays due to the Subtenant Delays or due to causes beyond the
reasonable control of Sublandlord
(
force
majeure
)
such as rain, flooding, fire or
other casualty, labor disputes, civil disturbance, war, war-like operations, invasions, rebellion,
hostilities, sabotage, governmental regulations or control, inability to obtain materials, services
or governmental permits despite diligent efforts to do so, or acts of God. If the Commencement Date
has not occurred by August 1, 1999 (Final Delivery Date), through no fault of the terminating
party, either party may terminate this Sublease by written notice to the other on or before August
15, 1999. In either event, Sublandlord shall return the Advance Rent Deposit and the Security
Deposit within ten (10) business days.
4
C.
Early Occupancy
. During the period beginning thirty (30) days prior to the Initial
Commencement Date (the
Early Occupancy Period
), provided that Subtenants occupancy does
not interfere with or cause delays to Sublandlords construction obligations, Subtenant shall be
permitted to enter such Area for the sole purpose of installation of its equipment cabling,
telecommunications, furniture systems, and other installations necessary for the conduct of
Subtenants business. Notwithstanding any other provision herein to the contrary, Subtenants
occupancy of such Area during the Early Occupancy Period shall be subject to all of the terms,
covenants and conditions of this Sublease (including Subtenants obligations regarding indemnity
and insurance), provided, however, that Subtenants obligation to pay Rent with respect to such
Area during the Early Occupancy Period shall be waived. In any event, Subtenant shall be
responsible for any utility charges incurred by Landlord or Sublandlord in connection with
Subtenants use of any Area during the Early Occupancy Period.
2.
RENT
.
A.
Types of Rent
. Subtenant shall pay the following Rent in the form of a check (or
via wire transfer) to Sublandlord pursuant to instructions to be given by Sublandlord to Subtenant
prior to the Commencement Date.
(1)
Base Rent
in monthly installments in advance, the first monthly installment due on
or prior to the first day of the second (2nd) month following the Commencement Date (the Advance
Rent Deposit shall be applied against the first months Base Rent), and thereafter on or before the
first day of each month of the Term in the amount set forth on the Schedule.
(2)
Operating Cost Share Rent
in an amount equal to the sum of (i) Subtenants
Proportionate Share of the Operating Costs for the applicable fiscal year of the Sublease charged
to Sublandlord by Landlord pursuant to the Master Lease (Landlords Operating Costs), and (ii)
Sublandlords Operating Costs, as defined in Section 2.3, fairly allocable to the Premises and
Subtenants Proportionate Share of Sublandlords Operating Costs allocated to the Building but not
any one Premises in the Building; Operating Cost Share Rent shall be due monthly in advance in an
estimated amount, commencing with the Commencement Date, and thereafter on or before the first day
of each month of the Term. Definitions of Operating Costs and Subtenants Proportionate Share, and
the method for billing and payment of Operating Cost Share Rent are set forth in Sections 2B, 2C
and 2D.
(3)
Tax Share Rent
in an amount equal to the Subtenants Proportionate Share of the
Taxes applicable to the Building for the applicable fiscal year of this Sublease, paid
semi-annually as set forth in Section 2.B(1) below. A definition of Taxes and the method for
billing and payment of Tax Share Rent are set forth in Sections 2B, 2C and 2D.
(4)
Additional Rent
in the amount of all costs, expenses, liabilities, and amounts
which Subtenant is required to pay under this Sublease, excluding Base Rent, Operating Cost Share
Rent, and Tax Share Rent, but including any interest for late payment of any item of Rent.
5
(5)
Rent
as used in this Sublease means Base Rent, Operating Cost Share Rent, Tax
Share Rent, and Additional Rent. Subtenants agreement to pay Rent is an independent covenant, with
no right of setoff, deduction or counterclaim of any kind.
B.
Payment of Operating Cost Share Rent and Tax Share Rent
.
(1)
(a)
Payment of Estimated Operating Cost Share Rent and Tax Share Rent
. Pursuant
to the Master Lease, Landlord shall estimate the Landlord Operating Costs and Taxes of the Project
by April 1 of each fiscal year, or as soon as reasonably possible thereafter. Landlord may revise
these estimates whenever it obtains more accurate information, such as an increase in utility or
maintenance costs for the Project Common Areas; provided in no event shall the estimate be revised
more than once in any calendar year. Within ten (10) days after receiving the original or revised
estimate from Sublandlord, Subtenant shall pay Sublandlord one-twelfth (1/12th) of Subtenants
Proportionate Share of this estimate, multiplied by the number of months that have elapsed in the
applicable fiscal year to the date of such payment including the current month, minus payments
previously made by Subtenant for the months elapsed. On the first day of each month thereafter,
Subtenant shall pay Sublandlord one-twelfth (1/12th) of Subtenants Proportionate Share of this
estimate, until a new estimate becomes applicable. Notwithstanding the foregoing, Landlords
estimate excludes the portion of the Taxes payable semi-annually to the County of Santa Clara
pursuant to property tax bills for the Project (the Property Tax Bills). With respect to Taxes
payable in connection with Property Tax Bills, Sublandlord shall deliver copies of such bills to
Subtenant at least thirty (30) days prior to the Delinquency Date set forth therein, and Subtenant
shall pay to Sublandlord, at least fifteen (15) days prior to the Delinquency Date, Subtenants
Proportionate Share of the amount payable thereunder. Any interest or penalties payable by
Sublandlord as a result of Subtenants failure to timely pay such Taxes to Sublandlord shall be
deemed Additional Rent payable by Subtenant hereunder.
(b) (
Payment of Estimated Sublandlord Operating Cost
. Sublandlord shall estimate the
Sublandlords Operating Cost of the Building and the Premises prior to the Commencement Date and
thereafter by April 1 of each fiscal year, or as soon as reasonably possible thereafter.
Sublandlord may revise these estimates whenever it obtains more accurate information, such as an
increase in utility or maintenance costs for the Building Common Areas; provided that in no event
shall the estimate be revised more than once in any calendar year. Within ten (10) days after
receiving the original or revised estimate from Sublandlord, Subtenant shall pay Sublandlord
one-twelfth (1/12th) of Subtenants Proportionate Share of this estimate, multiplied by the number
of months that have elapsed in the applicable fiscal year to the date of such payment including the
current month, minus payments previously made by Subtenant for the months elapsed. On the first day
of each month thereafter, Subtenant shall pay Sublandlord one-twelfth (1/12th) of Subtenants
Proportionate Share of this estimate, until a new estimate becomes applicable. Notwithstanding the
foregoing, Sublandlords estimate excludes the portion of the Taxes payable semi-annually to the
County of Santa Clara pursuant to property tax bills for the Building, if the Tenant Improvements
for the Building are billed separately (the Building Property Tax Bills). With respect to Taxes
payable in connection with Building Property Tax Bills, Sublandlord shall deliver copies of such
bills to Subtenant at least thirty (30) days prior to the Delinquency Date set forth therein, and
Subtenant shall pay to Sublandlord, at least fifteen (15) days prior to the Delinquency Date,
Subtenants Proportionate
6
Share of the amount payable thereunder. Any interest or penalties payable by Sublandlord as a
result of Subtenants failure to timely pay such Taxes to Sublandlord shall be deemed Additional
Rent payable by Subtenant hereunder.
(2)
Correction of Operating Cost Share Rent
. Sublandlord shall deliver to Subtenant a
report for the previous fiscal year (the
Operating Cost Report
) promptly after receipt
from Landlord of landlords Operating Cost Report, which pursuant to the Master Lease shall be
April 1 of each year, or as soon as reasonably possible thereafter, setting forth (a) the actual
Sublandlord Operating Costs incurred and Landlord Operating Costs charged to Sublandlord, (b) the
amount of Operating Cost Share Rent due from Subtenant, and (c) the amount of Operating Cost Share
Rent paid by Subtenant. Within thirty (30) days after such delivery, Subtenant shall pay to
Sublandlord the amount due minus the amount paid. If the amount paid exceeds the amount due,
Sublandlord shall apply the excess to Subtenants payments of Operating Cost Share Rent next coming
due.
C.
Definitions
.
(1)
Included Operating Costs
.
Landlord Operating Costs
means any expenses,
costs and disbursements of any kind other than Taxes, paid or incurred by Landlord in connection
with the management, maintenance, operation, insurance, repair and other related activities in
connection with any part of the Project and of the personal property, fixtures, machinery,
equipment, systems and apparatus used in connection therewith, including the cost of providing
those services required to be furnished by Landlord under the Master Lease and a reasonable
management fee.
Sublandlord Operating Costs
means any expenses, costs and disbursements
of any kind other than Taxes, paid or incurred by Sublandlord in connection with the management,
maintenance, operation, insurance, repair and other related activities in connection with any part
of the Building and of the personal property, fixtures, machinery, equipment, systems and apparatus
used in connection therewith, including the cost of providing those services required to be
furnished by Sublandlord under this Sublease and a reasonable management fee. Operating Costs
shall mean Landlord Operating Costs or Sublandlord Operating Costs, as the case may be.
Operating Costs shall also include the costs of any capital improvements which are intended to
reduce Operating Costs or improve safety, and those made to keep the Project or the Building in
compliance with governmental requirements promulgated after the Effective Date, or to replace
existing capital improvements, facilities and equipment within the Building or the Project Common
Areas, such as the resurfacing of the parking areas (collectively,
Included Capital
Items
); provided, that the costs of any Included Capital Item shall be amortized by Landlord
or Sublandlord, as the case may be, together with an amount equal to interest at ten percent (10%)
per annum, over the estimated useful life of such item and only amortized costs are included in
Operating Costs, unless the cost of the Included Capital Item is less than Ten Thousand Dollars
($10,000) in which case it shall be expensed in the year in which it was incurred.
The term Landlord Operating Costs shall include (i) all Operating Costs fairly allocable to
the Building, including all Operating Costs paid with respect to the maintenance, repair,
replacement and use of the Building, and (ii) a proportionate share (based on the gross rentable
area of the Building as a percentage of the gross rentable area of all of the Buildings in the
Project) of all Landlord Operating Costs which relate to the Project in general and are not fairly
7
allocable to any one Building in the Project. The term Sublandlord Operating Costs shall
include (i) all Operating Costs fairly allocable to the Premises, including all Operating Costs
paid with respect to the maintenance, repair, replacement and use of the Premises, and (ii) a
proportionate share (based on the gross rentable area of the Premises as a percentage of the gross
rentable area of the Building) of all Sublandlord Operating Costs which relate to the Building in
general and are not fairly allocable to any one premises in the Building.
If the Project is not fully occupied during any portion of any fiscal year, Landlord may
adjust (an
Equitable Adjustment
) Operating Costs to equal what would have been incurred
by Landlord had the Project been fully occupied. This Equitable Adjustment shall apply only to
Operating Costs which are variable and therefore increase as occupancy of the Project increases.
Landlord may incorporate the Equitable Adjustment in its estimates of Operating Costs.
If Landlord does not furnish any particular service whose cost would have constituted a
Landlord Operating Cost to a tenant other than Subtenant who has undertaken to perform such service
itself, Landlord Operating Costs shall be increased by the amount which Landlord would have
incurred if it had furnished the service to such tenant.
(2)
Excluded Operating Costs
. Operating Costs shall not include:
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(a)
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costs of alterations of tenant
premises;
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(b)
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costs of capital improvements
other than Included Capital Items;
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(c)
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interest and principal payments
on mortgages or any other debt costs, or rental payments on any
ground lease of the Project;
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(d)
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real estate brokers leasing
commissions;
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(e)
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legal fees, space planner fees
and advertising expenses incurred with regard to leasing the
Project or Building or portions thereof;
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(f)
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any cost or expenditure for which
Landlord or Sublandlord may be reimbursed by others (e.g.,
insurance proceeds, warranties, or tort claims);
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(g)
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the cost of any service furnished
to any tenant of the Project which Landlord does not make
available to Subtenant or service to a tenant of the Building
which Sublandlord does not make available to Subtenant;
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(h)
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depreciation, amortization or
expense reserves (except costs of Included Capital Items as
provided in Section 2.C(1));
|
8
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(i)
|
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franchise or income taxes imposed
upon Landlord or Sublandlord;
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(j)
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costs of correcting defects in
construction of the Building (as opposed to the cost of normal
repair, maintenance and replacement expected with the
construction materials and equipment installed in the Building
in light of their specifications);
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(k)
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legal and auditing fees which are
for the benefit of Landlord or Sublandlord such as collecting
delinquent rents, preparing tax returns and other financial
statements;
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(l)
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the wages of any employee for
services not related directly to the management, maintenance,
operation and repair of the Building;
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(m)
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fines, penalties and interest;
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(n)
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any property management fee
charged by Landlord in excess of one and one/tenths percent
(1.1%) of the aggregate monthly Base Rent allocated to the
Building which is then being paid by Sublandlord as Tenant under
the Master Lease or a management fee charged by Sublandlord in
excess of three percent (3%) of the Sublandlord Operating Costs
and Taxes (excluding Landlord Operating Costs and Taxes)
allocated to the Premises;
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(o)
|
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any costs incurred in connection
with the repair and maintenance of the roof membrane on all of
the Buildings in excess of $35,000 per year; provided that (i)
the $35,000 cap (Cap) shall be increased by four percent (4%)
each year (i.e., $35,000 in the first year, $36,400 in the
second year, $37,856 in the third year, $39,370 in the fourth
year, $40,945 in the fifth year, $42,583 in the sixth, etc.);
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(p)
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any costs incurred in connection
with the replacement of the roof membrane of any of the
Buildings;
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(q)
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any costs incurred in connection
with the Pre-existing Contamination (as defined in Section 30)
or other contamination originating from a source either not
located on the Project or which is caused by other tenants
within the Project; and
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(r)
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any costs incurred in connection
with the repair of the structural parts of the Buildings, which
structural parts
|
9
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include only the foundation and subflooring of the Buildings
and the structural condition of the roof (except as provided
in subsection (o) above), and the exterior walls of the
Buildings (but excluding the interior surfaces of exterior
walls and exterior and interior of all windows (including
repairing, resealing or replacing thereof), doors, ceiling
and plateglass all of which shall be maintained, repaired
and/or replaced by Subtenant pursuant to Section 8).
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(3)
Taxes
.
Taxes
means any and all taxes, assessments and charges of any
kind, general or special, ordinary or extraordinary, levied against the Project, which Landlord or
Sublandlord shall pay or become obligated to pay in connection with the ownership, leasing,
renting, management, use, occupancy, control or operation of the Project or of the personal
property, fixtures, machinery, equipment, systems and apparatus used in connection therewith. Taxes
shall include real estate taxes, personal property taxes, sewer rents, water rents, special or
general assessments, transit taxes, ad valorem taxes, and any tax levied on the rents hereunder or
the interest of Landlord or Sublandlord under this Lease (the
Rent
Tax
). Taxes
shall also include all fees and other costs and expenses paid by Landlord or Sublandlord in seeking
a refund or reduction of any Taxes, whether or not the Landlord or Sublandlord is ultimately
successful; provided that the amount paid by Landlord or Sublandlord in any calendar year shall not
exceed the greater of (i) $5,000, or (ii) thirty five percent (35%) of the annual savings achieved
during that taxable year as a result of such refund or reassessment. Taxes shall also include any
assessments or fees paid to any business park owners association, or similar entity, which are
imposed against the Project pursuant to any Covenants, Conditions and Restrictions
(
CC&Rs
) recorded against the Land and any installments of principal and interest
required to pay annual debt service for any existing or future general or special assessments for
public improvements, services or benefits, and any increases resulting from reassessments imposed
in connection with any change in ownership or new construction.
For any year, the amount to be included in Taxes (a) from taxes or assessments payable in
installments, shall be the amount of the installments (with any interest) due and payable during
such year, and (b) from all other Taxes, at Landlords or Sublandlords election, as the case may
be, shall be the amount accrued, assessed, or otherwise imposed for such year or the amount due and
payable in such year. Any refund or other adjustment to any Taxes by the taxing authority shall
apply during the year in which the adjustment is made. Taxes shall not include any net income
(except Rent Tax), capital, stock, succession, transfer, franchise, gift, estate or inheritance
tax, except to the extent that such tax shall be imposed in lieu of any portion of Taxes.
(4)
Lease Year
.
Lease Year
means each consecutive twelve-month period
beginning on the Commencement Date, prorated for partial years.
(5)
Fiscal Year
.
Fiscal Year
means the calendar year, except that the first
fiscal year and the last fiscal year of the Term may be a partial calendar year.
10
(6)
Project Common Areas
means the areas and facilities within the Project,
exclusive of the Buildings and their interiors, provided and designated by Landlord for the general
use of the tenants of the Project, including plazas, benches, landscape areas, parking areas,
sidewalks, service areas, and trash disposal facilities, subject to the reasonable rules and
regulations promulgated from time to time by Landlord.
(7)
Building Common Areas
means all of the Building outside each tenants individual
premises, provided and designated for the general use of tenants of the Building, including the
Building entrance; common lobby; elevators; bathrooms; utility and equipment rooms; fire sprinkler
alarm; reception area; plumbing, water, and sewage lines; lobby skylight; Building signage;
electrical facilities and equipment; HVAC systems; Building mechanical, life safety and automatic
sprinkler systems; and all other appliances and equipment servicing the Building (but not
individual premises).
D.
Computation of Base Rent and Rent Adjustments
.
(1)
Prorations
. If this Sublease begins on a day other than the first day of a month,
the Base Rent, Operating Cost Share Rent and Tax Share Rent shall be prorated for such partial
month based on the actual number of days in such month. If this Sublease begins on a day other than
the first day, or ends on a day other than the last day, of the fiscal year, Operating Cost Share
Rent and Tax Share Rent shall be prorated for the applicable fiscal year.
(2)
Default Interest
. Any sum due from Subtenant to Sublandlord not paid when due
shall bear interest from the date due until paid at the lesser of eighteen percent (18%) per annum
or the maximum rate permitted by law.
(3)
Rent Adjustments
. The square footage of the Building and the Premises set forth
in the Schedule is conclusively deemed to be the actual square footage thereof, without regard to
any subsequent remeasurement of the Building or the Premises. If any Operating Cost paid in one
fiscal year relates to more than one fiscal year, Landlord or Sublandlord, as the case may be, may
proportionately allocate such Operating Cost among the related fiscal years.
(4)
Books and Records
. Pursuant to the Master Lease, Landlord shall maintain books
and records reflecting the Operating Costs and Taxes in accordance with sound accounting and
management practices. Sublandlord shall maintain books and records reflecting the Operating Costs
and Taxes charged to and paid by Sublandlord. Subtenant and its certified public accountant shall
have the right to inspect Sublandlords books and records regarding such matters at Sublandlords
offices in Santa Clara, California during the ninety (90) days following the delivery of the
Operating Cost Report. Sublandlord may, at its sole discretion, exercise any right Sublandlord may
have to inspect Landlords books and records under the Master Lease. Subtenant shall use good
faith, reasonable efforts and due diligence to keep confidential the results of any such inspection
of which Subtenant is informed. Unless Subtenant sends to Sublandlord any written exception to
either such report within thirty (30) days prior to expiration of said ninety (90) day period, such
report shall be deemed final and accepted by Subtenant. Subtenant shall pay the amount shown on
both reports in the manner prescribed in this Sublease, whether or not Subtenant takes any such
written exception, without any prejudice to such
11
exception. If Subtenant makes a timely exception, Sublandlord, on behalf of Subtenant, shall
exercise its right, with Landlord, to choose an independent certified public accountant or another
firm with at least five (5) years of experience in auditing the books and records of commercial
office projects to issue a final and conclusive resolution of Subtenants exception. Subtenant
shall pay the cost of such certification unless Landlord is required to pay such cost pursuant to
the Master Lease.
(5)
Miscellaneous
. So long as Subtenant is in default of any obligation under this
Sublease, Subtenant shall not be entitled to any refund of any amount from Sublandlord. If this
Sublease is terminated for any reason prior to the annual determination of Operating Cost Share
Rent or Tax Share Rent, either party shall pay the full amount due to the other within fifteen (15)
days after Sublandlords notice to Subtenant of the amount when it is determined. Sublandlord may
commingle any payments made with respect to Operating Cost Share Rent or Tax Share Rent, without
payment of interest.
3.
CONSTRUCTION OF INTERIOR IMPROVEMENTS AND POSSESSION.
A.
Building Shell
. As of the date hereof, Subtenant has received and approved final
drawings, plans and specifications (the
Shell Final Plans
) for the Building and the
improvements described in 3.A.(1) below (the Shell Upgrade Plans).
(1)
The
Building Shell
shall mean the Building structure, exterior walls, glass,
floor slab, utilities (phone, gas, electric, plumbing, fire, and water) to the Building, and roof,
and shall include the parking lot, landscaping and the base for the street monument sign. Landlord
is responsible for bringing phone, electrical, gas and plumbing service to the Building (i.e.,
stubbed but not distributed) and for installing the main fire sprinkler trunks (i.e., installed but
not distributed or dropped). The Building Shell does not include any elevators, stairs, HVAC,
roof screens or thermal insulation. Notwithstanding the foregoing, Landlord has installed all
elevators, and Sublandlord has installed the improvements listed on
EXHIBIT E
(the Shell
Upgrades).
(2)
Sublandlord represents that:
(i) The Building Shell (including the related landscaping and hard scape), elevator, and the
Shell Upgrades have been constructed in accordance the Shell Final Plans and Shell Upgrade Plans
delivered to and approved by Subtenant.
(ii) The Building Shell and elevator and Shell Upgrades have been designed and constructed in
accordance with applicable Building codes and laws, including the Americans With Disabilities Act
(ADA) as interpreted by the applicable governmental authority which issues the building permit.
(iii) The Building Shell and elevator and Shell Upgrades have been constructed in a good and
workmanlike manner, and of materials in accordance with specifications delivered to and approved by
Subtenant.
(iv) To the best of Sublandlords actual knowledge, the Building and its in-place operating
systems are in good working order and condition.
12
Notwithstanding anything to the contrary herein, Sublandlords warranties herein with respect
to the Building Shell and elevator are not warranties independent from Landlords warranties under
the Master Lease, and Sublandlords sole obligation under this section, and Subtenants sole remedy
for breach of such warranties, shall be that Sublandlord shall diligently pursue its remedies
against Landlord for breach of its warranties under the Master Lease.
B.
Construction of Interior Improvements
. Except for Sublandlords obligation to
install the Tenant Improvements in accordance with the Work Letter Agreement, Sublandlord is
leasing the Premises to Subtenant as is, without any obligation to alter, remodel, improve, or
decorate any part of the Premises or Project. Sublandlord shall cause the Tenant Improvements to be
completed in accordance with the terms, conditions and limitations set forth in the Work Letter
Agreement.
C.
Subtenants Possession/Condition of Premises and Project
. Sublandlord shall
deliver the Premises on the Commencement Date broom-clean and free of debris or construction
materials. Subtenants taking possession of any portion of the Premises shall be conclusive
evidence that the Premises were in good order, repair and condition, subject only to those punch
list items noted in writing to Sublandlord within the thirty (30) day period immediately following
the date on which Subtenant takes possession of such portion of the Premises.
4.
SERVICES AND UTILITIES
.
As of the Commencement Date (and, if applicable, during
the Early Occupancy Period), Subtenant shall promptly pay, as the same become due, all charges for
water, gas, electricity, telephone, sewer service, waste pick-up and any other utilities, materials
and services furnished directly to or used by Subtenant on or about the Premises during the Term,
including without limitation, (i) meter, use and/or connection fees, hook-up fees, or standby fees
(excluding any connection fees or hook-up fees which relate to making the existing electrical, gas,
and water service available to the Premises as of the Commencement Date), and (ii) penalties for
discontinued interrupted service. If any utility service is not separately metered to the Premises,
then Subtenant shall pay Subtenants Proportionate Share of the cost of such utility service with
all others served by the service not separately metered. However, if Sublandlord or Landlord
reasonably determine that Subtenant is using a disproportionate amount of any utility service not
separately metered, then Landlord or Sublandlord at its election may (i) periodically charge
Subtenant, as Additional Rent, a sum equal to Landlords or Sublandlords reasonable estimate of
the cost of Subtenants excess use of such utility service, or (ii) install, at Subtenants
expense, a separate meter to measure the utility service supplied to the Premises. Any interruption
or cessation of utilities resulting from any causes, including any entry for repairs pursuant to
this Sublease, and any renovation, redecoration or rehabilitation of any area of the Project shall
not render Sublandlord or Landlord liable for damages to either person or property or for
interruption or loss to Subtenants business, nor be construed as an eviction of Subtenant, nor
work an abatement of any portion of Rent, nor relieve Subtenant from fulfillment of any covenant or
agreement hereof; provided, however, in the event that an interruption of the Project or Building
services causes the Premises to be untenantable for a period of at least ten (10) consecutive
business days, monthly Rent shall be abated proportionately.
13
5.
ALTERATIONS
.
A.
Landlords and Sublandlords Consent and Conditions
.
Subtenant shall not make any
improvements or alterations to the Premises other than the Initial Tenant Improvements (defined in
Paragraph 5.E below) (the
Work
) without in each instance submitting plans and
specifications for the Work to Landlord and Sublandlord and obtaining Landlords and Sublandlords
prior written consent, which shall not be unreasonably withheld, unless (a) the cost thereof is
less than $50,000 per occurrence, (b) such Work does not impact the base structural components or
systems of the Building, (c) such Work will not impact any other tenants premises, and (d) such
Work is not visible from outside the Building. Provided that Sublandlord receives all necessary
information and plans from Subtenant, Sublandlord agrees to respond to Subtenants request for
Sublandlords prior written consent to such alterations within seven (7) business days in the case
of Work costing between $50,000 and $100,000, and within ten (10) business days for Work costing
over $100,000. For purposes of the $50,000 and $100,000 thresholds, Subtenant may exclude costs
associated with performing alterations which are solely cosmetic in nature, such as recarpeting and
repainting the Premises. However, even if Sublandlords or Landlords prior written consent is not
required, Subtenant shall provide Sublandlord and Landlord with prior written notice at least seven
(7) days in advance of commencing the Work so that Sublandlord and Landlord may post and record a
notice of nonresponsibility or other notices deemed appropriate before the commencement of such
Work. Subtenant shall pay Landlords and Sublandlords actual out-of-pocket costs incurred for
reviewing of all of the plans and all other items submitted by Subtenant. Landlord and/or
Sublandlord will be deemed to be acting reasonably in withholding its consent for any Work which
(a) impacts the base structural components or systems of the Building, and (b) impacts any other
tenants premises.
Subtenant shall pay for the cost of all Work, including the cost of any and all approvals,
permits, fees and other charges which may be required as a condition of performing such Work. Upon
completion all Work shall become the property of Landlord, except for Subtenants trade fixtures
and for items which Landlord requires Subtenant to remove at Subtenants cost at the termination of
the Sublease pursuant to Section 5E.
The following requirements shall apply to all Work:
(1)
Prior to commencement, Subtenant shall furnish to Sublandlord and Landlord building
permits, certificates of insurance satisfactory to Landlord and Sublandlord, and, at Landlords and
Sublandlords reasonable request, security for payment of all costs.
(2)
Subtenant shall perform all Work so as to maintain peace and harmony among other
contractors serving the Project and shall avoid interference with other work to be performed or
services to be rendered in the Project.
(3)
The Work shall be performed in a good and workmanlike manner, meeting the standard for
construction and quality of materials in the Building, and shall comply with all insurance
requirements and all applicable governmental laws, ordinances and regulations (
Governmental
Requirements
).
14
(4)
Subtenant shall perform all Work so as to minimize or prevent disruption to other tenants
of the Building or of the Project, and Subtenant shall comply with all reasonable requests of
Landlord or Sublandlord in response to complaints from other tenants.
(5)
Subtenant shall perform all Work in compliance with any Policies, Rules and Procedures
for Construction Projects which may be in effect at the time the Work is performed.
(6)
Subtenant shall permit Landlord and Sublandlord to observe all Work.
(7)
Upon completion, Subtenant shall furnish Landlord and Sublandlord with contractors
affidavits and full and final statutory waivers of liens covering all labor and materials, as-built
plans and specifications, and all other close-out documentation related to the Work, including any
other information required under any Policies, Rules and Procedures for Construction Projects
which may be in effect at such time.
B.
Damage to Systems
. If any part of the mechanical, electrical or other systems in
the Premises (e.g., HVAC, life safety or automatic fire extinguisher/sprinkler system) shall be
damaged during the performance of the Work, Subtenant shall promptly notify Sublandlord, and
Sublandlord, or Landlord at its election, shall repair such damage at Subtenants expense. Landlord
and Sublandlord may also at any reasonable time make any repairs or alterations which Landlord or
Sublandlord deems necessary for the safety or protection of the Project or the Building, or which
Landlord or Sublandlord is required to make by any court or pursuant to any Governmental
Requirement. The cost of any repairs made by Landlord or Sublandlord on account of Subtenants
default, or on account of the mis-use or neglect by Subtenant or its invitees, contractors or
agents anywhere in the Project, shall become Additional Rent payable by Subtenant on demand.
C.
No Liens
. Subtenant has no authority to cause or permit any lien or encumbrance of
any kind to affect Landlords or Sublandlords interests in the Project; any such lien or
encumbrance shall attach to Subtenants interest only. If any mechanics lien shall be filed or
claim of lien made for work or materials furnished to Subtenant, then Subtenant shall at its
expense within ten (10) days thereafter either discharge or contest the lien or claim. If Subtenant
contests the lien or claim, then Subtenant shall (i) within such ten (10) day period, provide
Landlord or Sublandlord adequate security for the lien or claim, (ii) contest the lien or claim in
good faith by appropriate proceedings that operate to stay its enforcement, and (iii) pay promptly
any final adverse judgment entered in any such proceeding. If Subtenant does not comply with these
requirements, Landlord or Sublandlord may discharge the lien or claim, and the amount paid, as well
as attorneys fees and other expenses incurred by Landlord or Sublandlord, as the case may be,
shall become Additional Rent payable by Subtenant on demand.
D.
Ownership of Improvements
. All Work as defined in this Section 5, hardware,
equipment, machinery and all other improvements and all fixtures except trade fixtures, constructed
in the Premises by
either Landlord, Sublandlord or Subtenant, (i) shall become Landlords property
upon installation without compensation to Subtenant, unless Landlord consents otherwise in writing,
and (ii) shall at Landlords and Sublandlords option
15
(which shall be stated at the time Landlord and Sublandlord consent to such Work) either (a)
be surrendered to Landlord with the Premises at the termination of the Sublease or of Subtenants
right to possession, or (b) be removed in accordance with Subsection 5E below (unless Landlord and
Sublandlord at the time each gives its consent to the performance of such construction expressly
waives in writing the right to require such removal). In the event that this Sublease is terminated
prior to the scheduled expiration date due to a default by Subtenant, Sublandlord shall have the
right to remove all Tenant Improvements and Work at Subtenants expense.
E.
Removal Upon Termination
. Upon the termination of this Sublease or Subtenants
right of possession, Subtenant shall remove from the Premises its trade fixtures, furniture,
moveable equipment and other personal property, any improvements which Landlord or Sublandlord
elects shall be removed by Subtenant pursuant to Section 5D, and any improvements to any portion of
the Building or Project other than the Premises. If Subtenant does not timely remove such property,
then Subtenant shall be conclusively presumed to have, at Sublandlords election (i) conveyed such
property to Sublandlord without compensation or (ii) abandoned such property, and Sublandlord may
dispose of or store any part thereof in any manner at Subtenants sole cost, without waiving
Sublandlords right to claim from Subtenant all expenses arising out of Subtenants failure to
remove the property, and without liability to Subtenant or any other person. Neither Landlord nor
Sublandlord shall have any duty to be a bailee of any such personal property. If Sublandlord elects
abandonment, Subtenant shall pay to Sublandlord, upon demand, any expenses incurred for
disposition. Notwithstanding the foregoing, Subtenant shall have no obligation to remove the Tenant
Improvements to be constructed in accordance with the Work Letter (Initial Tenant Improvements).
6.
USE OF PREMISES
.
A.
Limitation on Use
.
Subtenant shall use the Premises only for the Permitted Use
stated in the Schedule. Subtenant shall not allow any use of the Premises which will negatively
affect the cost of coverage of Landlords or Sublandlords insurance on the Project, unless
Subtenant pays any additional premiums as a result of such use. Subtenant shall not allow any
inflammable or explosive liquids or materials to be kept on the Premises, other than those
materials reasonably required for Subtenants Permitted Use under this Lease; provided that such
materials are handled in strict accordance with all applicable Governmental Requirements. Subtenant
shall not allow any use of the Premises which would cause the value or utility of any part of the
Premises to diminish or would interfere with any other tenant or with the operation of the Project
by Landlord or Sublandlord. Subtenant shall not permit any nuisance or waste upon the Premises, or
allow any offensive noise or odor in or around the Premises. At the end of each business day, or
more frequently if necessary, Subtenant shall deposit all garbage and other trash (excluding any
inflammable, explosive and/or hazardous materials) in trash bins or containers approved by
Sublandlord in locations designated by Sublandlord from time to time. If any governmental authority
shall deem the Premises to be a place of public accommodation under the Americans with
Disabilities Act or any other comparable law as a result of Subtenants peculiar use, Subtenant
shall either modify its use to cause such authority to rescind its designation or be responsible
for any alterations, structural or otherwise, required to be made to the Building under such laws.
16
B.
Signs
.
Subtenant shall not place on any portion of the Premises any sign, placard,
lettering, banner, displays or other advertising or communicative material which is visible from
the exterior of the Building without the prior written approval of Landlord and Sublandlord.
Sublandlord hereby agrees that Subtenant shall have the right to place its standard name and logo
sign on a Sublandlord or Landlord-installed Building monument in front of the Building and, subject
to Landlords and Sublandlords reasonable approval, to place its name on a Building Directory, if
any. Any approved signs shall strictly conform to all Governmental Requirements, any CC&Rs
recorded against the Project, and any sign criteria which may be established by Landlord or
Sublandlord and in effect at the time, and shall be installed (and removed upon the Termination
Date) at Subtenants expense. Subtenant, at its sole cost and expense, shall maintain such signs in
good condition and repair, including the repair of any damage caused to the Building and/or Project
upon the removal of such signs).
C.
Parking
.
Subtenant shall have the right to park in the Projects parking
facilities subject to the Master Lease in a number not to exceed the ratio of the rentable square
footage of the Premises then subject to this Sublease to the rentable square footage of the
facilities provided to Sublandlord under the Master Lease, upon terms and conditions as may from
time to time be established by Landlord or Sublandlord. Subtenant agrees not to overburden the
parking facilities (i.e., use more than its prorata share of the unallocated parking stalls
available) and agrees to cooperate with Landlord and Sublandlord and other tenants in the Project
in the use of the parking facilities. Under the Master Lease, Landlord has reserved the right in
its discretion to determine whether the parking facilities are becoming crowded and to allocate and
assign parking spaces among Subtenant and the other tenants in the Project. Neither Landlord nor
Sublandlord shall be liable to Subtenant, nor shall this Sublease be affected, if any parking is
impaired by moratorium, initiative, referendum, law, ordinance, regulation or order passed, issued
or made by any governmental or quasi-governmental body.
D.
Prohibition Against Use of Roof and Structure of Building
.
Subtenant shall be
prohibited from using any all or any portion of the roof of the Building or any portion of the
structure of the Building during the Term of this Sublease for any purposes (including without
limitation for the installation, maintenance and repair of a satellite dish and/or other
telecommunications equipment), without the prior written consent of Landlord and Sublandlord, which
consent Landlord and Sublandlord may withhold in their reasonable discretion. Subtenant shall be
solely responsible for repairing any damage to the roof and or Building caused by Subtenants
installation, operation or removal of any equipment. Upon the termination of this Sublease for any
reason, Subtenant, at its sole cost and expense, shall remove any equipment from the Building and
repair any damage cause to the roof or Building during such removal.
7.
GOVERNMENTAL REQUIREMENTS AND BUILDING RULES
.
Subtenant shall comply with all
Governmental Requirements applying to its use of the Premises. Subtenant shall also comply with all
reasonable rules for the Project which may be established and amended from time to time by Landlord
or Sublandlord. The present rules and regulations promulgated by Landlord are contained in
EXHIBIT B
. Failure by another tenant to comply with the rules or failure by Landlord or
Sublandlord to enforce them shall not relieve Subtenant of its obligation to comply with the rules
or make Landlord or Sublandlord responsible to Subtenant in any way. Sublandlord shall use
reasonable efforts to cause Landlord to apply the rules and regulations uniformly with respect to
Subtenant and tenants in the Project. In the event of
17
alterations and repairs performed by Subtenant, Subtenant shall comply with the provisions of
Section 5 of this Sublease and any applicable Policies, Rules and Regulations for Construction
Projects which may be established by Landlord and in effect at the time.
8.
REPAIR AND MAINTENANCE
.
A.
Landlords Obligations
.
Pursuant to the terms of the Master Lease, Landlord is
obligated to keep in good order, condition and repair (i) the structural parts of the Building,
which structural parts include only the foundation and subflooring of the Building and the
structural condition of the roof (including the roof membrane), and the exterior walls of the
Building (but excluding the interior surfaces of exterior walls and exterior and interior of all
windows, doors, ceiling and plateglass which shall be maintained and repaired by Subtenant), (ii)
the Building elevator, and (iii) the Project Common Areas, including all utilities and related
utility lines and pipes outside of the Building (Landlords Maintenance Obligations), and the
costs incurred by Landlord to perform the foregoing obligations with respect to the Building to the
extent they are deemed Operating Costs (as defined in Section 2C) shall be passed through to
Subtenant, except that any damage to any of the foregoing caused by the negligence or willful acts
or omissions of Subtenant or of Subtenants agents, employees or invitees, or by reason of the
failure of Subtenant to perform or comply with any terms of this Sublease, or caused by Subtenant
or Subtenants agents, employees or contractors during the performance of any work may be repaired
by Sublandlord, solely at Subtenants expense, or at Sublandlords election, such repairs shall be
made by Subtenant, at Subtenants expense, with contractors approved by Landlord and Sublandlord.
As between Sublandlord and Subtenant, Sublandlord shall be responsible for performance of
Landlords Maintenance Obligations if Landlord fails to do so and shall be entitled to charge
Subtenant the cost of such work on the terms and conditions of this Sublease. At Sublandlords
election, except in case of roof repairs, which shall be commenced within five (5) days after
notice to Sublandlord, or emergency repairs, Sublandlord may first demand in writing that Landlord
perform any work required to be done by Landlord with respect to Landlords Maintenance
Obligations, and use reasonable efforts to obtain Landlord performance. Subtenant agrees to
exercise reasonable efforts to give Landlord and Sublandlord prompt notification of the need for
any repairs or maintenance; provided that such notification shall not affect Landlords obligation
to perform periodic inspections of the Project during the Lease Term. Subtenant waives the
provisions of Sections 1941 and 1942 of the California Civil Code and any similar or successor law
regarding Subtenants right to make repairs and deduct the expenses of such repairs from the Rent
due under this Sublease.
B.
Sublandlords Obligations
.
Sublandlord shall keep the Building Common Area, other
than any portion maintained by Landlord in good order, condition and repair. Sublandlord shall also
be responsible for all pest control within the Building and for trash removal from the Building.
Sublandlord shall obtain HVAC systems preventive maintenance contracts with bimonthly or monthly
service in accordance with manufacturer recommendations, subject to the reasonable prior written
approval of Landlord, and which shall provide for and include replacement of filters, oiling and
lubricating of machinery, parts replacement, adjustment of drive belts, oil changes and other
preventive maintenance, including annual maintenance of duct work, interior unit drains and
caulking at sheet metal, and recaulking of jacks and vents on an annual basis. The costs incurred
by Sublandlord to perform the foregoing obligations to the extent they are deemed Operating Costs
(as defined in Section 2C) shall be passed through to
18
Subtenant and any other tenants in the Building, except that any damage to any of the
foregoing caused by the negligence or willful acts or omissions of Subtenant or of Subtenants
agents, employees or invitees, or by reason of the failure of Subtenant to perform or comply with
any terms of this Sublease, or caused by Subtenant or Subtenants agents, employees or contractors
during the performance of any work shall be repaired by Sublandlord solely at Subtenants expense,
or at Sublandlords election, such repairs shall be made by Subtenant, at Subtenants expense, with
contractors approved by Sublandlord. Subtenant agrees to exercise reasonable efforts to give
Sublandlord prompt notification of the need for any repairs or maintenance; provided that such
notification shall not affect Sublandlords obligation to perform periodic inspections of the
Building during the Lease Term. Subtenant waives the provisions of Section 1941 and 1942 of the
California Civil Code and any similar or successor law regarding Subtenants right to make repairs
and deduct the expenses of such repairs from the Rent due under this Sublease.
C.
Subtenants Obligations
.
Subtenant shall at all times and at its own expense
clean, keep and maintain in good order, condition and repair every part of the Premises (including
Subtenants trade fixtures and personal property) which is not within Sublandlords Maintenance
Obligation pursuant to Section 8B. Subtenants repair and maintenance obligations shall include,
without limitation, all plumbing and sewage facilities within the Premises, fixtures, interior
walls and ceiling, demising walls, floors, windows (including repairing, resealing, cleaning and
replacing, as necessary), doors, entrances, showcases skylights installed by Subtenant, all
electrical facilities and equipment, including lighting fixtures, lamps, fans and any exhaust
equipment and systems, electrical motors and all other appliances and equipment of every kind and
nature located in, upon or about the Premises. Landlord or Sublandlord may also perform any
maintenance or repairs, at Subtenants expense, to the extent Subtenant fails to perform such
maintenance or repairs as required herein.
9.
WAIVER OF CLAIMS; INDEMNIFICATION; INSURANCE
.
A.
Waiver of Claims
.
To the extent permitted by law, Subtenant waives any claims it
may have against Sublandlord or their officers, directors, employees or agents for business
interruption or damage to property sustained by Subtenant as the result of any act or omission of
Sublandlord, its agents, employees or invitees. To the extent permitted by law, Sublandlord waives
any claims it may have against Subtenant or its officers, directors, employees or agents for loss
of rents or damage to property sustained by Sublandlord as the result of any act or omission of
Subtenant, its agents, employees or invitees.
B.
Indemnification
.
Subtenant shall indemnify, defend and hold harmless Sublandlord
and Landlord and their officers, directors, employees and agents against any claim by any third
party for injury to any person or damage to or loss of any property occurring in the Project or
Building and arising from the use of the Premises or from any other act or omission or negligence
of Subtenant, its employees, agents or invitees, or Subtenants breach of its obligations under
this Sublease. Subtenants obligations under this section shall survive the termination of this
Sublease.
Sublandlord shall indemnify, defend and hold harmless Subtenant and its officers, directors,
employees and agents against any claim by any third party for injury to any person or
19
damage to or loss of any property occurring in the Premises caused by the negligence or
intentional misconduct of Sublandlord or any of Sublandlords employees or agents, or Sublandlords
breach of its obligations under this Sublease. Sublandlords obligations under this section shall
survive the termination of this Sublease.
C.
Subtenants Insurance
.
Subtenant shall maintain insurance as follows, with such
other terms, coverages and insurers, as Landlord or Sublandlord shall reasonably require from time
to time:
(1)
Commercial general liability insurance, with (a) contractual liability including the
indemnification provisions contained in this Sublease, (b) a severability of interest endorsement,
(c) limits of not less than Two Million Dollars ($2,000,000) combined single limit per occurrence
and not less than Two Million Dollars ($2,000,000) in the aggregate for bodily injury, sickness or
death, and property damage.
(2)
Property Insurance against All Risks of physical loss covering the replacement cost of
all improvements, fixtures and personal property. Subtenant waives all rights of subrogation, and
Subtenants property insurance shall include a waiver of subrogation in favor of Landlord and
Sublandlord.
(3)
Workers compensation or similar insurance in form and amounts required by law, and
Employers Liability with not less than the following limits:
|
|
|
|
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Each Accident
|
|
$
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1,000,000
|
|
DiseasePolicy Limit
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$
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1,000,000
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DiseaseEach Employee
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|
$
|
1,000,000
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|
Such insurance shall contain a waiver of subrogation provision in favor of Landlord and
Sublandlord and their agents.
Subtenants insurance shall be primary and not contributory to that carried by Sublandlord, or
Landlord, its agents, or mortgagee, if any. Sublandlord, Landlord, Landlords building manager or
agent, mortgagee and ground lessor shall be named as additional insureds as respects to insurance
required of the Subtenant in Sections 9C(1) and 9C(2) (for Tenant Improvements). The company or
companies writing any insurance which Subtenant is required to maintain under this Sublease, as
well as the form of such insurance, shall at all times be subject to Landlords written approval.
Such insurance companies shall have a A.M. Best rating of A VI or better.
(4)
Subtenant shall cause any general contractor of Subtenant performing Work on the Premises
to maintain insurance as follows, with such other terms, coverages and insurers, as Landlord shall
reasonably require from time to time:
(a) Commercial General Liability Insurance, including contractors liability coverage,
contractual liability coverage, completed operations coverage, broad form property damage
endorsement, and contractors protective liability coverage, to afford protection with limits, for
each occurrence, of not less than One Million Dollars
20
($1,000,000) with respect to personal injury, death or property damage. Such policy or
policies shall also cover any Work which is performed by subcontractors hired by the general
contractor.
(b) Workers compensation or similar insurance in form and amounts required by law, and
Employers Liability with not less than the following limits:
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|
|
|
|
Each Accident
|
|
$
|
1,000,000
|
|
DiseasePolicy Limit
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$
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1,000,000
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DiseaseEach Employee
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|
$
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1,000,000
|
|
Such insurance shall contain a waiver of subrogation provision in favor of Sublandlord,
Landlord and their agents.
Subtenants contractors insurance shall be primary and not contributory to that carried by
Subtenant, Sublandlord, or Landlord, its agents or mortgagees. Subtenant, Sublandlord and Landlord,
and if any, Landlords building manager or agent, mortgagee or ground lessor shall be named as
additional insured on Subtenants contractors insurance policies.
D.
Insurance Certificates
.
Subtenant shall deliver to Landlord and Sublandlord
certificates evidencing all insurance required to be maintained by Subtenant by the earlier of (a)
Subtenants entry of the Building pursuant to Paragraph 1C, or (b) five (5) days prior to the
Commencement Date, and thereafter five (5) days prior to each renewal date for such policies. Each
certificate will provide for thirty (30) days prior written notice of cancellation to Landlord,
Sublandlord and Subtenant.
E.
Landlords Insurance
.
Pursuant to the Master Lease, Landlord shall maintain
All-Risk property insurance at full replacement cost, including loss of rents for twelve (12)
months (including taxes and insurance), on the Building, and commercial general liability insurance
policies of not less that Five Million Dollars ($5,000,000.00) covering the common areas of the
Project, each with such terms, coverages and conditions as are normally carried by reasonably
prudent owners of properties similar to the Project, including coverage for personal injury,
property damage and contractual liability endorsement. With respect to property insurance,
Sublandlord and Subtenant mutually waive all rights of subrogation, and the respective All-Risk
coverage property insurance policies carried by Sublandlord, Landlord and Subtenant shall contain
enforceable waiver of subrogation endorsements.
10.
FIRE AND OTHER CASUALTY
.
A.
Termination
.
If a fire or other casualty causes substantial damage to the
Building, pursuant to the terms of the Master Lease, Landlord shall engage a registered architect
to certify within one (1) month of the casualty to both Landlord and Sublandlord the amount of time
needed to restore the Building to tenantability, using standard working methods without the payment
of overtime and other premiums. Sublandlord shall deliver a copy of such notice to Subtenant upon
receipt. If the time needed exceeds twelve (12) months from the beginning of the restoration, or
two (2) months therefrom if the restoration would begin during the last twelve (12) months of the
Sublease, then either Sublandlord or Subtenant may terminate this Sublease by notice to the other
party within ten (10) days after the notifying partys receipt of the architects certificate. If
sufficient insurance proceeds will not be available to Landlord to cover
21
the cost of any restoration to the Building or the Premises, because (i) the casualty was not
required to be insured against by the Master Lease and was not actually insured, or (ii) of
insolvency or financial condition of Landlords insurance carrier, Landlord may terminate the
Master Lease and this Sublease by written notice to Sublandlord. Any termination pursuant to this
Section 10A shall be effective thirty (30) days from the date of such termination notice and Rent
shall be paid by Subtenant to that date, with an abatement for any portion of the space which has
been untenantable after the casualty.
B.
Restoration
.
If a casualty causes damage to the Building but this Sublease is not
terminated for any reason, then subject to the rights of any mortgagees or ground lessors, pursuant
to the Master Lease, Landlord shall obtain the applicable insurance proceeds and diligently restore
the Building subject to current Governmental Requirements. Landlords obligation, should it elect
or be obligated to repair or rebuild, shall be limited to the Building Shell, and Subtenant shall,
at Subtenants expense, replace or fully repair its damaged improvements (including any Tenant
Improvements constructed within the Premises), personal property and fixtures. Rent shall be abated
on a per diem basis during the restoration for any portion of the Premises which is untenantable.
Subtenant shall not be entitled to any compensation or damages from Landlord or Sublandlord for
loss of the use of the Premises, damage to Subtenants personal property and trade fixtures or any
inconvenience occasioned by such damage, repair or restoration. Subtenant hereby waives the
provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil
Code, and the provisions of any similar law hereinafter enacted.
11.
EMINENT DOMAIN
.
If a part of the Premises is taken by eminent domain or deed in
lieu thereof which is so substantial that the Premises cannot reasonably be used by Subtenant for
the operation of its business, then either party may terminate this Sublease effective as of the
date of the taking. Rent shall abate from the date of the taking in proportion to any part of the
Premises taken. If there is a temporary taking of a part of the Premises which is so substantial
that the Premises cannot reasonably be used by Subtenant for the operation of its business, then
Rent shall abate from the date of the taking in proportion to any part of the Premises taken. The
entire award for a taking of any kind shall be paid to Landlord or Sublandlord, and Subtenant shall
have no right to share in the award, except (i) for the portion of any award based on the value of
the Tenant Improvements financed by Subtenant in excess of the Tenant Improvement Allowance;
provided, however, that nothing contained herein shall be deemed to give Landlord or Sublandlord
any interest in or require Subtenant to assign to Landlord or Sublandlord any separate award made
to Subtenant for the taking of Subtenants personal property and trade fixtures, or its relocation
costs, and (ii) in the event of a temporary taking in which there was no Rent abatement under this
Sublease, then Subtenant shall be entitled to any portion of the award which was intended to
compensate Sublandlord for lost rent during the period of the temporary taking. All obligations
accrued to the date of the taking shall be performed by each party.
12.
RIGHTS RESERVED TO LANDLORD AND SUBLANDLORD
.
Landlord and Sublandlord may
exercise at any time any of the following rights respecting the operation of the Project or the
Building without liability to Subtenant of any kind:
22
A.
Name
. To change the name of all or any of the Buildings or the Project; provided,
however, that so long as Subtenant occupies fifty percent (50%) or more of the Building, then
Sublandlord may not change, and will not consent to a change of, the name of such Building without
Subtenants prior consent, which consent shall not be unreasonably withheld or delayed.
B.
Signs
. To install, modify and/or maintain necessary and appropriate signs on the
exterior and in the interior of the Building or on the Project, and to approve prior to
installation, any of Subtenants signs in the Premises visible from the exterior of the Building.
C.
Window Treatments
. To approve, at its discretion, prior to installation, any
shades, blinds, ventilators or window treatments of any kind, as well as any lighting within the
Premises that may be visible from the exterior of the Building.
D.
Keys
. To retain and use passkeys to enter the Premises or any door within the
Premises in accordance with Section 12E. Subtenant shall not alter or add any lock or bolt.
E.
Access
. To have access to the Premises with twenty-four hour prior notice and in
accordance with Subtenants reasonable security program procedures (except in the case of an
emergency in which case Landlord and Sublandlord shall have the right to immediate access) to
inspect the Premises, and to perform its obligations, or make repairs, alterations, additions or
improvements, as permitted by the Master Lease or this Sublease.
F.
Preparation for Reoccupancy
. To decorate, remodel, repair, alter or otherwise
prepare the Premises for reoccupancy at any time after Subtenant abandons the Premises, without
relieving Subtenant of any obligation to pay Rent.
G.
Heavy Articles
. To approve the weight, size, placement and time and manner of
movement within the Building of any safe, central filing system or other heavy article of
Subtenants property. Subtenant shall move its property entirely at its own risk.
H.
Show Premises
. To show the Premises to prospective purchasers, lenders,
mortgagees, investors, or rating agencies at any reasonable time, or prospective tenants during the
last twelve (12) months of the Term; provided that Landlord or Sublandlord, as the case may be,
gives prior notice to Subtenant and does not materially interfere with Subtenants use of the
Premises.
I.
Use of Lockbox
. To designate a lockbox collection agent for collections of amounts
due Sublandlord. In that case, the date of payment of Rent or other sums shall be the date of the
agents receipt of such payment or the date of actual collection if payment is made in the form of
a negotiable instrument thereafter dishonored upon presentment. However, Sublandlord may reject any
payment for all purposes as of the date of receipt or actual collection by mailing to Subtenant
within 21 days after such receipt or collection a check equal to the amount sent by Subtenant.
J.
Repairs and Alterations
. To make repairs or alterations to the Project and in
doing so transport any required material through the Premises, to close entrances, doors,
corridors, elevator and other facilities in the Building or the Project, to open any ceiling in the
23
Premises, or to temporarily suspend services or use of common areas in the Building. Without
limiting the foregoing, Sublandlord shall have the right to access the Premises for the
installation and/or alteration of the conduit connections among the Buildings within the Project.
Landlord or Sublandlord, as the case may be, may perform any such repairs or alterations during
ordinary business hours, except that Subtenant may require any work in the Premises to be done
after business hours if Subtenant pays Landlord or Sublandlord, as the case may be, for overtime
and any other additional expenses incurred. Landlord may do or permit any work on any nearby
building, land, street, alley or way.
K.
Sublandlords Agents
. If Subtenant is in default under this Sublease, possession
of Subtenants funds or negotiation of Subtenants negotiable instrument by any of Sublandlord s
agents shall not waive any breach by Subtenant or any remedies of Sublandlord under this Sublease.
L.
CC&Rs
. Landlord may at any time promulgate and record a set of CC&Rs which will
govern the access, parking, design, signage and other rights of the tenants in the Project, so long
as such CC&Rs do not impose any new payment obligation on Subtenant (i.e., a dues requirement) or
require Subtenant to modify any of the then existing improvements.
13.
SUBTENANTS DEFAULT
.
Any of the following shall constitute a default by
Subtenant:
A.
Rent Default
. Subtenant fails to pay any Rent within five (5) days after notice
that such payment was not paid when due, provided that Subtenant acknowledges that such notice
shall be in lieu of and not in addition to any notice required to be given by Sublandlord to
commence an unlawful detainer action (or similar eviction proceeding) under the then applicable
law;
B.
Assignment/Sublease or Hazardous Substances Default
. Subtenant defaults in its
obligations under Section 18 Assignment and Sublease or Section 29 Hazardous Substances;
C.
Other Performance Default
. Subtenant fails to perform any other obligation to
Sublandlord under this Sublease or commits any act, or fails to perform any act, which commission
or failure would constitute or cause a breach of the Master Lease, and this failure continues for
thirty (30) days after written notice from Landlord or Sublandlord, except that if Subtenant begins
to cure its failure within the thirty (30) day period but cannot reasonably complete its cure
within such period, then, so long as Subtenant continues to diligently attempt to cure its failure,
the thirty (30) day period shall be extended to one hundred twenty (120) days, or such lesser
period as is reasonably necessary to complete the cure;
D.
Credit Default
. One of the following credit defaults occurs:
(1)
Subtenant commences any proceeding under any law relating to bankruptcy, insolvency,
reorganization or relief of debts, or seeks appointment of a receiver, trustee, custodian or other
similar official for the Subtenant or for any substantial part of its property, or any such
proceeding is commenced against Subtenant and either remains
24
undismissed for a period of sixty (60) days or results in the entry of an order for relief
against Subtenant which is not fully stayed within seven (7) days after entry;
(2)
Subtenant becomes insolvent or bankrupt, does not generally pay its debts as they become
due, or admits in writing its inability to pay its debts, or makes a general assignment for the
benefit of creditors;
(3)
Any third party obtains a levy or attachment under process of law against Subtenants
leasehold interest; and
E.
Abandonment Default
. Subtenant abandons the Premises.
14.
SUBLANDLORD REMEDIES
.
Upon a default, Sublandlord shall have the following
remedies, in addition to all other rights and remedies provided by law or otherwise provided in
this Sublease, to which Sublandlord may resort cumulatively or in the alternative:
A.
Sublandlord may continue this Sublease in full force and effect, and this Sublease shall
continue in full force and effect as long as Sublandlord does not terminate this Sublease, and
Sublandlord shall have the right to collect Rent when due.
B.
Sublandlord may enter the Premises or any part thereof and release them or any part thereof
to third parties for Subtenants account for any period, whether shorter or longer than the
remaining Term. Subtenant shall be liable immediately to Sublandlord for all costs Sublandlord
incurs in reletting the Premises or any part thereof, including, without limitation, brokers
commissions, expenses of cleaning and redecorating the Premises required by the reletting and like
costs. Subtenant shall pay to Sublandlord the Rent and other sums due under this Sublease on the
date the Rent is due, less the rent and other sums received by Sublandlord from any releasing. No
act by Sublandlord other than giving written notice to Subtenant shall terminate this Sublease.
Acts of maintenance, efforts to relet the Premises or the appointment of a receiver on
Sublandlords initiative to protect Sublandlords interest under this Sublease shall not constitute
a termination of Subtenants right to possession.
C.
Sublandlord may terminate this Sublease by giving Subtenant written notice of termination,
in which event this Sublease shall terminate on the date for termination set forth in such notice.
Subtenant shall immediately vacate the Premises and deliver possession to Sublandlord, and
Sublandlord may repossess the Premises and may, at Subtenants sole cost, remove any of Subtenants
signs and any of its other property, without relinquishing its right to receive Rent or any other
right against Subtenant. On termination, Sublandlord has the right to recover from Subtenant as
damages:
(1)
The worth at the time of award of unpaid Rent and other sums due and payable which had
been earned at the time of termination; plus
(2)
The worth at the time of award of the amount by which the unpaid Rent and other sums due
and payable which after termination until the time of award exceeds the amount of such Rent loss
that Subtenant proves could have been reasonably avoided; plus
25
(3)
The worth at the time of award of the amount by which the unpaid Rent and other sums due
and payable for the balance of the Term after the time of award exceeds the amount of such Rent
loss that Subtenant proves could be reasonably avoided; plus
(4)
Any other amount necessary to compensate Sublandlord for all the detriment proximately
caused by Subtenants failure to perform Subtenants obligations under this Sublease, or which, in
the ordinary course of things, would be likely to result therefrom, including, without limitation,
any costs or expenses incurred by Sublandlord: (i) in retaking possession of the Premises; (ii) in
maintaining, repairing, preserving, restoring, replacing, cleaning, altering or rehabilitating the
Premises or any portion thereof, including such acts for reletting to a new tenant or tenants;
(iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the
Premises; plus
(5)
At Sublandlords election, such other amounts in addition to or in lieu of the foregoing
as may be permitted from time to time by the laws of the State of California.
The
worth at the time of award
of the amounts referred to in Sections 14C(1) and
14C(2) is computed by allowing interest at the maximum rate permitted by law on the unpaid rent and
other sums due and payable from the termination date through the date of award. The worth at the
time of award of the amount referred to in Section 14C(3) is computed by discounting such amount
at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%). Subtenant waives redemption or relief from forfeiture under California Code of Civil
Procedure Sections 1174 and 1179, or under any other present or future law, in the event Subtenant
is evicted or Landlord takes possession of the Premises by reason of any default of Subtenant
hereunder.
D.
Sublandlords Remedies Cumulative
. All of Sublandlords remedies under this
Sublease shall be in addition to all other remedies Sublandlord may have at law or in equity.
Waiver by Sublandlord of any breach of any obligation by Subtenant shall be effective only if it is
in writing, and shall not be deemed a waiver of any other breach, or any subsequent breach of the
same obligation. Sublandlords acceptance of payment by Subtenant shall not constitute a waiver of
any breach by Subtenant, and if the acceptance occurs after Sublandlords notice to Subtenant, or
termination of the Sublease or of Subtenants right to possession, the acceptance shall not affect
such notice or termination. Acceptance of payment by Sublandlord after commencement of a legal
proceeding or final judgment shall not affect such proceeding or judgment. Sublandlord may advance
such monies and take such other actions for Subtenants account as reasonably may be required to
cure or mitigate any default by Subtenant. Subtenant shall immediately reimburse Sublandlord for
any such advance, and such sums shall bear interest at the default interest rate until paid.
E.
WAIVER OF TRIAL BY JURY
.
EACH PARTY WAIVES TRIAL BY JURY IN THE EVENT OF ANY LEGAL
PROCEEDING BROUGHT BY THE OTHER IN CONNECTION WITH THIS SUBLEASE. EACH PARTY SHALL BRING ANY ACTION
AGAINST THE OTHER IN CONNECTION WITH THIS SUBLEASE IN A FEDERAL OR STATE COURT LOCATED IN
CALIFORNIA, CONSENTS TO THE JURISDICTION OF SUCH COURTS, AND WAIVES ANY RIGHT TO HAVE ANY
PROCEEDING
26
TRANSFERRED FROM SUCH COURTS ON THE GROUND OF IMPROPER VENUE OR INCONVENIENT FORUM.
F.
Litigation Costs
. If either party commences litigation to enforce or interpret any
provision of this Sublease, the prevailing party shall recover from the non-prevailing party its
reasonable attorneys fees and court costs.
15.
SURRENDER
.
Upon the expiration or earlier termination of this Sublease for any
reason, Subtenant shall surrender the Premises to Sublandlord in its condition existing as of the
Commencement Date (including Building standard Tenant Improvements even if not completed as of the
Commencement Date), normal wear and tear and damage by fire or other casualty excepted, with all
interior walls repaired and repainted if marked or damaged, all carpets shampooed and cleaned, all
broken, marred or nonconforming acoustical ceiling tiles replaced, all windows washed, the plumbing
and electrical systems and lighting in good order and repair, including replacement of any burned
out or broken light bulb or ballasts, and all floors cleaned and waxed, all to the reasonable
satisfaction of Sublandlord. Subtenant shall remove from the Premises all Subtenants personal
property and all of Subtenants alterations required to be removed pursuant to Sections 5D and 5E
(but not the Initial Tenant Improvements), and restore the Premises to its condition prior to their
installation. If Subtenant fails to remove any alterations and/or Subtenants personal property,
and such failure continues after the termination of this Sublease, Landlord or Sublandlord may
retain or dispose of such property and all rights of Subtenant with respect to it shall cease, or
Sublandlord may place all or any portion of such property in public storage for Subtenants
account. Subtenant shall be liable to Sublandlord for costs of removal of any such alterations and
Subtenants personal property and storage and transportation costs of same, and the cost of
repairing and restoring the Premises, together with interest at the Interest Rate from the date of
expenditure by Sublandlord. If the Premises are not so surrendered at the termination of this
Sublease, Subtenant shall indemnify Sublandlord against all loss or liability, including attorneys
fees and costs, resulting from delay by Subtenant in so surrendering the Premises.
16.
HOLDOVER
.
Subtenant shall have no right to holdover possession of the Premises
after the expiration or termination of this Sublease without Sublandlords prior written consent
which Sublandlord may withhold in its sole and absolute discretion. If, however, Subtenant retains
possession of any part of the Premises after the Term, Subtenant shall become a month-to-month
tenant for the entire Premises upon all of the terms of this Sublease as might be applicable to
such month-to-month tenancy, except that Subtenant shall pay all of Base Rent at one hundred fifty
percent (150%) of the rate in effect immediately prior to such holdover, plus Operating Cost Share
Rent and Tax Share Rent, computed on a monthly basis for each full or partial month Subtenant
remains in possession. Subtenant shall also pay Sublandlord all of Sublandlords direct and
consequential damages resulting from Subtenants holdover. No acceptance of Rent or other payments
by Sublandlord under these holdover provisions shall operate as a waiver of Sublandlords right to
regain possession or any other of Landlords remedies.
27
17.
SUBORDINATION TO GROUND LEASES AND MORTGAGES
.
A.
Subordination
. Landlord and Sublandlord shall have the right to cause this
Sublease to be subordinate to any future ground lease or mortgage respecting the Project, and any
amendments to such ground lease or mortgage, at the election of the ground lessor or mortgagee as
the case may be. Subtenant shall execute and deliver, within thirty (30) days after receipt of
written demand by Sublandlord or Landlord and in the form requested by Landlord or Sublandlord,
provided that such form is reasonably acceptable to Subtenant, any additional documents evidencing
the priority or subordination of this Sublease with respect to any such mortgage or deed of trust.
B.
Termination of Ground Lease or Foreclosure of Mortgage
. If any ground lease is
terminated or mortgage foreclosed or deed in lieu of foreclosure given and the ground lessor,
mortgagee, or purchaser at a foreclosure sale shall thereby become the owner of the Project, the
ground lessor or mortgagee or purchaser shall be liable as Landlord only during the time such
ground lessor or mortgagee or purchaser is the owner of the Project.
C.
Security Deposit
. Any ground lessor or mortgagee shall be responsible for the
return of any security deposit by Subtenant only to the extent the security deposit, if any, is
received by such ground lessor or mortgagee.
D.
Notice and Right to Cure
. The Project is subject to any ground lease and mortgage
identified with name and address of ground lessor or mortgagee in
EXHIBIT D
to this
Sublease (as the same may be amended from time to time by written notice to Subtenant). Subtenant
agrees to send by registered or certified mail to any ground lessor or mortgagee identified either
in such Exhibit or in any later notice from Landlord to Subtenant a copy of any notice of default
sent by Subtenant to Landlord or Sublandlord. If Landlord or Sublandlord fails to cure such default
within the required time period under this Sublease, but ground lessor or mortgagee begins to cure
within ten (10) days after such period and proceeds diligently to complete such cure, then ground
lessor or mortgagee shall have such additional time as is necessary to complete such cure,
including any time necessary to obtain possession if possession is necessary to cure, and Subtenant
shall not begin to enforce its remedies so long as the cure is being diligently pursued.
E.
Definitions
. As used in this Section 17, mortgage shall include trust deed and
deed of trust, and mortgagee shall include trustee, beneficiary
and the
mortgagee of any ground lessee, and ground lessor, mortgagee, and purchaser at a foreclosure
sale shall include, in each case, all of its successors and assigns, however remote.
18.
ASSIGNMENT AND SUBLEASE
.
A.
In General
. Subtenant shall not, without the prior consent of Landlord and
Sublandlord in each case, (i) make or allow any assignment or transfer, by operation of law or
otherwise, of any part of Subtenants interest in this Sublease, (ii) grant or allow any lien or
encumbrance, by operation of law or otherwise, upon any part of Subtenants interest in this
Sublease, (iii) sublet any part of the Premises, or (iv) permit anyone other than Subtenant and its
employees to occupy any part of the Premises. Subtenant shall remain primarily liable for all of
28
its obligations under this Sublease, notwithstanding any assignment or transfer. No consent
granted by Landlord and Sublandlord shall be deemed to be a consent to any subsequent assignment or
transfer, lien or encumbrance, sublease or occupancy. Subtenant shall pay all of Landlords and
Sublandlords attorneys fees and other expenses incurred in connection with any consent requested
by Subtenant or in reviewing any proposed assignment or subletting. Any assignment or transfer,
grant of lien or encumbrance, or sublease or occupancy without Landlords or Sublandlords prior
written consent shall be void. If Subtenant shall assign this Sublease to any entity other than a
Subtenant Affiliate (as defined in Section 18E), then Subtenants right to extend the Term of
this Sublease (as set forth in Section 31) shall be extinguished thereby and will not be
transferred to the assignee, all such rights being personal to the Subtenant named herein.
B.
Sublandlords Consent
. Sublandlord will not unreasonably withhold its consent to
any proposed assignment or subletting. It shall be reasonable for Landlord or Sublandlord to
withhold its consent to any assignment or sublease if (i) Subtenant is in default under this
Sublease, (ii) the proposed assignee or sublessee is a tenant in the Project or an affiliate of
such a tenant or a party that Landlord has identified as a prospective tenant in the Project, (iii)
the financial responsibility, nature of business, and character of the proposed assignee or
subtenant are not all reasonably satisfactory to Landlord or Sublandlord, (iv) in the reasonable
judgment of Landlord or Sublandlord the purpose for which the assignee or subtenant intends to use
the Premises (or a portion thereof) is inconsistent with the character of the Project as a first
class business park or would violate the terms of this Sublease or the Master Lease, or (v) the
proposed assignee or subtenant is a government entity. The foregoing shall not exclude any other
reasonable basis for Landlord or Sublandlord to withhold its consent.
C.
Procedure
. Subtenant shall notify Landlord and Sublandlord of any proposed
assignment or sub-sublease at least thirty (30) days prior to its proposed effective date. The
notice shall include the name and address of the proposed assignee or sub-subtenant, its corporate
affiliates in the case of a corporation and its partners in a case of a partnership, and sufficient
information to permit Landlord and Sublandlord to determine the financial responsibility and
character of the proposed assignee or sub-subtenant. As a condition to any effective assignment of
this Sublease, the assignee shall execute and deliver in form satisfactory to Sublandlord prior to
the effective date of the assignment, an assumption of all of the obligations of Subtenant under
this Sublease. As a condition to any effective sub-sublease, sub-subtenant shall execute and
deliver in form satisfactory to Sublandlord prior to the effective date of the sublease, an
agreement to comply with all of Subtenants applicable obligations under this Sublease, and at
Sublandlords option, an agreement (except for the economic obligations which sub-subtenant will
undertake directly to Subtenant) to attorn to Sublandlord under the terms of the sublease in the
event this Sublease terminates before the sub-sublease expires. Any proposed sublease shall be
subject to the terms and conditions of Section 19D below.
D.
Excess Payments
. If Subtenant shall assign this Sublease or sub-sublet any part of
the Premises for consideration in excess of the pro-rata portion of Rent applicable to the space
subject to the assignment or sub-sublet, then Subtenant shall pay to Sublandlord as Additional Rent
fifty percent (50%) of any such excess immediately upon receipt; provided that Subtenant shall be
first entitled to recover the reasonable costs actually incurred by Subtenant in
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connection with the sub-sublet for leasing commissions, interior improvements and attorneys
fees.
E.
Recapture Rights
.
(1)
If at any time during the Term of this Sublease, Subtenant desires to sub-sublease all or
a portion of the Premises (the Proposed Sub-Sublease Space), Subtenant shall notify Sublandlord
of its intention (Subtenants Notice), including proposed terms and conditions for such
sub-sublease if such Subtenants Notice is given pursuant to Section 18.E.3 of this Sublease.
(2)
If such proposed sub-sublease is for substantially the balance of the term of this
Sublease, Sublandlord shall have seven (7) days after receipt of Subtenants Notice to notify
Subtenant in writing of Sublandlords election to terminate this Sublease with respect to the
Proposed Sub-Sublease Space. If, however, Sublandlord fails to notify Subtenant of Sublandlords
election to terminate this Sublease, Sublandlord shall be deemed to have waived its right to
recapture the Proposed Sub-Sublease Space at such time and Subtenant shall have the right to lease
the Proposed Sub-Sublease Space to the third party without further notice to Sublandlord. For
purposes of this provision, for substantially the balance of the term of this Sublease shall mean
that less than six (6) months remain of the term of the Sublease.
(3)
If the Proposed Sub-sublease Space is not subject to recapture under 19.E.2, Sublandlord
shall have seven (7) days after receipt of Subtenants Notice to notify Subtenant in writing of
Sublandlords election to lease the Proposed Sub-Sublease Space on the terms stated in Subtenants
Notice. If Sublandlord notifies Subtenant within such seven-day period of Sublandlords desire to
lease the Proposed Sub-Sublease Space, Subtenant and Sublandlord shall enter into a lease on the
proposed terms an conditions stated in Subtenants Notice. If, however, Sublandlord fails to notify
Subtenant of Sublandlords election to lease the Proposed Sub-Sublease Space within such seven-day
period or, if Subtenant and Sublandlord, through no fault of Subtenant, fail to execute a lease
within thirty (30) days after the date of Sublandlords notice to Subtenant, Sublandlord shall be
deemed to have waived its right to lease the Proposed Sub-Sublease Space at such time and Subtenant
shall have the right to lease the Proposed Sub-Sublease Space to the third party on substantially
the terms stated in Subtenants Notice without further notice to Sublandlord.
F.
Assignment to Affiliates
. If no default on the part of Subtenant has occurred and
is continuing, Subtenant may assign this Sublease or sublet any portion of the Premises to a parent
or subsidiary of Subtenant, or to an entity into which Subtenant is merged or consolidated or to an
entity to which substantially all of tenants assets are transferred (collectively, Subtenant
Affiliate), without first obtaining Sublandlords written consent, if Subtenant notifies
Sublandlord at least ten (10) business days prior to the proposed transaction, providing
information satisfactory to Sublandlord in order to determine the net worth both of the successor
entity and of Subtenant immediately prior to such assignment, and showing the net worth of the
successor to be at least equal to the net worth of Subtenant.
19.
CONVEYANCE BY SUBLANDLORD OR LANDLORD
.
If Landlord or Sublandlord shall at any
time transfer its interest in the Project or this Sublease, Landlord or
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Sublandlord, as the case may be, shall be released of any obligations occurring after such
transfer, except the obligation to return to Subtenant any security deposit not delivered to its
transferee, and Subtenant shall look solely to Landlords or Sublandlords successors, as the case
may be, for performance of such obligations. This Sublease shall not be affected by any such
transfer.
20.
ESTOPPEL CERTIFICATE
.
Each party shall, within ten (10) days of receiving a
request from the other party, execute, acknowledge in recordable form, and deliver to the other
party or its designee a certificate stating, subject to a specific statement of any applicable
exceptions, that the Sublease as amended to date is in full force and effect, that the Subtenant is
paying Rent and other charges on a current basis, and that to the best of the knowledge of the
certifying party, the other party has committed no uncured defaults and has no offsets or claims.
The certifying party may also be required to state the date of commencement of payment of Rent, the
Commencement Date, the Termination Date, the Base Rent, the current Operating Cost Share Rent and
Tax Share Rent estimates, the status of any improvements required to be completed by Sublandlord,
and the amount of any security deposit. Failure to deliver such statement within the time required
shall be conclusive evidence against the non-certifying party that this Sublease, with any
amendments identified by the requesting party, is in full force and effect, that there are no
uncured defaults by the requesting party, that not more than one months Rent has been paid in
advance, that the non-certifying party has not paid any security deposit, and that the
non-certifying party has no claims or offsets against the requesting party.
21.
FINANCIAL STATEMENTS
.
Within ten (10) days after Sublandlords written request
therefor, Subtenant shall deliver to Sublandlord copies of Subtenants most recent publicly
reported financial statements.
22.
LEASE DEPOSIT
.
A.
Advance Rent Deposit
. Subtenant shall deposit with Sublandlord on the date
Subtenant executes and delivers this Sublease to Sublandlord the cash sum of Forty-Two Thousand
Nine Hundred and No/100ths Dollars ($42,900.00) as the Advance Rent Deposit. The Advance Rent
Deposit shall be applied by Sublandlord against the first months Base Rent payable hereunder.
B.
Security Deposit
. Upon execution of this Sublease, Subtenant shall provide
Sublandlord an irrevocable letter of credit, in the form of
EXHIBIT F
and otherwise
approved by Sublandlord in the amount of Three Hundred Thousand Dollars ($300,000.00), issued by a
bank approved by Sublandlord, and with an expiry date of no earlier than February 28, 2002 (or the
last day of the 37th month of the Term if that is later). If no monetary default by Subtenant
occurs prior to February 1, 2002, Subtenant may substitute a letter of credit, satisfying the same
conditions, in the amount of One Hundred Fifty Thousand Dollars ($150,000.00) with an expiry date
no later than the last day of the month following expiration of the Term, and upon delivery of the
Substitute Letter of Credit, the initial letter of credit shall be returned. If subtenant exercises
its option to extend the term, Subtenant shall replace the then letter of credit with a letter of
credit in the amount of Seventy Thousand One Hundred Sixty-Two and 20/100ths Dollars ($70,162.20)
plus the then monthly estimated total of Landlord Operating Costs and
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Taxes and Sublandlord Operating Costs allocated to the Premises and satisfying the same
conditions with an expiry date no earlier than the last day of the month following expiration of
the extended term. The letter of credit shall provide for partial draws and shall require only a
written statement from Sublandlord that it is being drawn upon in connection with this Sublease.
The letter of credit or any proceeds realized by draw thereon shall be security for Subtenants
faithful performance of Subtenants obligations hereunder. If Subtenant fails to pay Rent or other
charges due hereunder, or otherwise defaults with respect to any provision of this Sublease,
Sublandlord may draw upon the letter of credit, at Sublandlords election, in the amount of such
default, and if Subtenant fails to accept delivery of the Premises or fails to commence to pay Rent
on the Commencement Date for the Premises, Sublandlord may draw upon the letter of credit to the
full extent thereof, Sublandlord shall hold any amount realized by draw upon the letter of credit
as a security deposit (the deposit
). Sublandlord may use, apply or retain all or any
portion of said deposit for the payment of any rent or other charge in default or for the payment
of any other sum to which Sublandlord may become obligated by reason of Subtenants default, or to
compensate Sublandlord for any loss or damage which Sublandlord may suffer thereby. If Sublandlord
so uses or applies all or any portion of said deposit, Subtenant shall within ten (10) days after
written demand therefor deposit cash with Sublandlord in an amount sufficient to restore said
deposit to the full amount hereinabove stated and Subtenants failure to do so shall be a breach of
this Sublease. Sublandlord shall not be required to keep said deposit separate from its general
accounts. If Subtenant performs all of Subtenants obligations hereunder, said letter of credit, or
if it has been drawn upon, such deposit or so much thereof as had not theretofore been applied by
Sublandlord, shall be returned without payment of interest for its use, to Subtenant (or, at
Sublandlords option, to the last assignee, if any, of Subtenants interest hereunder) within ten
(10) days after the expiration of the term hereof or ten (10) days after the date Subtenant has
vacated the Premises, whichever is later.
23.
FORCE MAJEURE
.
Neither Sublandlord or Subtenant shall be in default under this
Sublease to the extent that party is unable to perform any of its obligations on account of any
strike or labor problem, equipment, material, supplies or energy shortages (i.e., such items cannot
be obtained at normal costs within a reasonable time because of limited availability), governmental
pre-emption or prescription, national emergency, or any other cause of any kind beyond the
reasonable control of the party required to act (provided that the foregoing shall not apply to any
monetary obligation) (
Force Majeure
).
24.
NOTICES
.
All notices, consents, approvals and similar communications to be given
by one party to the other under this Sublease, shall be given in writing, mailed or personally
delivered as follows:
A.
Sublandlord
. To Sublandlord as follows:
Applied Materials, Inc.
Global Real Estate and Facilities
3050 Bowers Avenue, M/S 2753
Santa Clara, California 95054
Attention: Real Estate Manager
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or to such other person at such other address as Sublandlord may designate by notice to Subtenant.
B.
Subtenant
. To Subtenant as follows:
Shoreline Teleworks
960 Stewart Drive, 1st Floor
Sunnyvale, CA 94086
Attn:
or to such other person at such other address as Subtenant may designate by notice to Sublandlord.
Mailed notices shall be sent by United States certified or registered mail, or by a reputable
national overnight courier service, postage prepaid. Mailed notices shall be deemed to have been
given on the earlier of actual delivery or three (3) business days after posting in the United
States mail in the case of registered or certified mail, and one business day in the case of
overnight courier.
25.
QUIET POSSESSION
.
So long as Subtenant shall perform all of its obligations under
this Sublease, Subtenant shall enjoy peaceful and quiet possession of the Premises, subject to all
of the terms of this Sublease.
26.
REAL ESTATE BROKERS
.
Subtenant and Sublandlord each represent that it has not
dealt with any real estate broker with respect to this Sublease except for the brokers listed in
the Schedule, and no other broker is in any way entitled to any brokers fee or other payment in
connection with this Sublease. Subtenant and Sublandlord shall each indemnify and defend the other
against any claims by any other broker or third party for any payment of any kind in connection
with this Sublease whose claim is based upon the acts or agreements of the indemnifying party.
Sublandlord shall pay the brokers identified in the Schedule a commission for this Sublease and for
any extension thereof pursuant to Section 32 pursuant to a separate agreement to be entered into
between Sublandlord and such brokers or among such brokers.
27.
MISCELLANEOUS
.
A.
Successors and Assigns
. Subject to the limits on Subtenants assignment contained
in Section 18, the provisions of this Sublease shall be binding upon and inure to the benefit of
all successors and assigns of Sublandlord and Subtenant.
B.
Date Payments Are Due
. Except for payments to be made by Subtenant under this
Sublease which are due upon demand, Subtenant shall pay to Sublandlord any amount for which
Sublandlord renders a statement of account within thirty (30) days of Subtenants receipt of
Sublandlords statement.
C.
Meaning of Sublandlord, Landlord, Re-Entry, including and Affiliate
. The
term Sublandlord means only the owner of the Sublandlords interest in this Sublease from time to
time. The term Landlord means only the owner of the Project and the lessors interest in the
Master Lease from time to time. The words re-entry and re-enter are
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not restricted to their technical legal meaning. The words including
and similar
words shall mean without limitation. The word affiliate shall mean a person or entity
controlling, controlled by or under common control with the applicable entity. Control shall mean
the power directly or indirectly, by contract or otherwise, to direct the management and policies
of the applicable entity.
D.
Time of the Essence
. Time is of the essence of each provision of this Sublease.
E.
No Option
. This document shall not be effective for any purpose until it has been
executed and delivered by both parties.
F.
Severability
. The unenforceability of any provision of this Sublease shall not
affect any other provision.
G.
Governing Law
. This Sublease shall be governed in all respects by the laws of the
state in which the Project is located, without regard to the principles of conflicts of laws.
H.
No Oral Modification
. No modification of this Sublease shall be effective unless
it is a written modification signed by both parties.
I.
Sublandlords Right to Cure
. If Sublandlord breaches any of its obligations under
this Sublease, Subtenant shall notify Sublandlord in writing and shall take no action respecting
such breach so long as Sublandlord promptly begins to cure the breach and diligently pursues such
cure to its completion. Sublandlord may cure any default by Subtenant; any expenses incurred shall
become Additional Rent due from Subtenant on demand by Sublandlord.
J.
Captions
. The captions used in this Sublease shall have no effect on the
construction of this Sublease.
K.
Authority
. Sublandlord and Subtenant each represents to the other that it has full
power and authority to execute and perform this Sublease.
L.
Sublandlords Enforcement of Remedies
. Sublandlord may enforce any of its remedies
under this Sublease either in its own name or through an agent.
M.
Entire Agreement
. This Sublease, together with all Appendices, constitutes the
entire agreement between the parties. No representations or agreements of any kind have been made
by either party which are not contained in this Sublease.
N.
Sublandlords Title
. Landlords title and Sublandlords interest under the Master
Lease shall always be paramount to the interest of Subtenant, and nothing in this Sublease shall
empower Subtenant to do anything which might in any way impair Landlords title or Sublandlords
interest under the Master Lease.
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O.
Light and Air Rights
. Neither Landlord nor Sublandlord has granted by this
Sublease any rights to light and air in connection with Project.
P.
Singular and Plural
. Wherever appropriate in this Sublease, a singular term shall
be construed to mean the plural where necessary, and a plural term the singular. For example, if at
any time two parties shall constitute Sublandlord or Subtenant, then the relevant term shall refer
to both parties together.
Q.
Exclusivity
. Sublandlord does not grant to Subtenant in this Sublease any
exclusive right except the right to occupy its Premises.
R.
No Construction Against Drafting Party
. The rule of construction that ambiguities
are resolved against the drafting party shall not apply to this Sublease.
S.
Survival
. All obligations of Sublandlord and Subtenant under this Sublease shall
survive the termination of this Sublease.
T.
Rent Not Based on Income
. No Rent or other payment in respect of the Premises
shall be based in any way upon net income or profits from the Premises. Subtenant may not enter
into or permit any sublease or license or other agreement in connection with the Premises which
provides for a rental or other payment based on net income or profit.
U.
Building Manager and Service Providers
. Sublandlord may perform any of its
obligations under this Sublease through its employees or third parties hired by the Sublandlord.
V.
Late Charge and Interest on Late Payments
. Without limiting the provisions of
Section 13A, if Subtenant fails to pay any installment of Rent or other charge to be paid by
Subtenant pursuant to this Sublease within five (5) business days after the same became due and
payable (collectively referred to herein as a Late Payment), then Subtenant shall pay a late
charge equal to the greater of five percent (5%) of the amount of such Late Payment or $250 (Late
Charge). In addition, interest shall be paid by Subtenant to Sublandlord on any Late Payments of
Rent from the date due until paid at the rate provided in Section 2D(2) (Late Interest). Such
Late Charge and Late Interest shall constitute Additional Rent due and payable by Subtenant to
Sublandlord upon the date of payment of the Late Payment. Notwithstanding the foregoing, Subtenant
shall not be liable for any Late Charge or Late Interest for the first Late Payment during any
calendar year so long as Sublandlord receives such Late Payment within five (5) days of Subtenants
receipt of Sublandlords written notice for the same. If Sublandlord does not receive Subtenants
Late Payment within such five (5) day period, then Subtenant shall also be liable for the Late
Charge and Late Interest as described above.
28.
UNRELATED BUSINESS INCOME
.
If Landlord is advised by its counsel at any time that
any part of the payments by Subtenant to Landlord under this Sublease may be characterized as
unrelated business income under the United States Internal Revenue Code and its regulations, then
Subtenant shall enter into any amendment proposed by Landlord to avoid such income, so long as the
amendment does not require Subtenant to make more payments or accept fewer services from Landlord,
than this Sublease provides.
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29.
HAZARDOUS SUBSTANCES
.
A.
Subtenants Environmental Indemnity
. Subtenant shall not cause or permit any
Hazardous Substances to be brought upon, stored, or used in, on or under the Project other than
such quantities of Hazardous Substances as are customary and reasonably necessary for the conduct
of the Permitted Uses listed in the Schedule to this Sublease, and which are listed in the
Hazardous Materials Inventory Sheets (collectively, the HMIS) to be attached hereto as
EXHIBIT G
after approval by Landlord and Sublandlord, unless Landlord and Sublandlord have
consented in writing to the storage or use of such Hazardous Substances, which consent shall not be
unreasonably withheld by Sublandlord. Subtenant shall also provide Landlord and Sublandlord with
copies of all documents or information provided to or documents, information or permits received
from applicable governmental agencies to the extent they relate to the use, transportation,
disposal or storage of Hazardous Substances at the Premises, including any HMISs, Material Safety
Data Sheets, discharge permits, Hazardous Materials Management Plans and transportation manifests.
Subtenant shall not cause or permit any Hazardous Substances to be produced, discharged or disposed
of in, on or under the Project. Any handling, transportation, storage, treatment, disposal or use
of any Hazardous Substances in or about the Project by Subtenant, its agents, employees,
contractors or invitees shall strictly comply with all applicable Governmental Requirements.
Subtenant shall indemnify, defend and hold Landlord and Sublandlord harmless from and against any
liabilities, claims, damages, penalties, fines, attorneys fees and court costs, remediation costs,
investigation costs and any other expenses which result from or arise out of the use, storage,
treatment, transportation, release, or disposal of any Hazardous Substances on or about the Project
by Subtenant, its agents, employees, contractors or invitees. Sublandlord shall notify Subtenant in
writing promptly upon receipt of notice of any claim to which the indemnification set forth herein
may apply. Sublandlord shall reasonably cooperate with Subtenant in the course of Subtenants
defense and indemnification as provided hereunder. Subtenant shall have the right to settle any
claim to which this paragraph may apply, subject to Sublandlords consent, which shall not be
unreasonably withheld.
B.
Hazardous Substances
means any hazardous or toxic substances, materials or waste
which are or become regulated by any local government authority, the state in which the Project is
located or the United States government, including those substances described in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601
et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq.,
any other applicable federal, state or local law, and the regulations adopted under these laws.
C.
Pre-existing Contamination
. Subtenant hereby acknowledges that Sublandlord has
informed Subtenant that certain chlorinated volatile organic compounds are present in the
groundwater under the Land as of the date of this Sublease (Pre-Existing
Contamination
). Subtenant hereby covenants for the benefit of Landlord and Sublandlord
that it will not use or store any chlorinated volatile organic compounds on the Premises or within
the Project.
Subtenant agrees and acknowledges that: (i) neither Sublandlord nor any of Sublandlords
representatives have made any representations or warranties about the environmental condition of
the Land or the accuracy or completeness of any environmental
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reports made available to Subtenant regarding the Land; (ii) it has had ample time and access
to the Land, to review the environmental condition of the Land and to conduct any tests which
Subtenant may deem desirable in connection with this Sublease; (iii) it is sophisticated,
knowledgeable and experienced in the analysis of environmental matters and that Subtenant has
entered into this Sublease with the intention of making and relying upon its own (or its experts)
investigation of the environmental condition of the Land; and (iv) Subtenant is not relying upon
any representations or warranties purportedly made by Sublandlord or anyone acting or claiming to
act on Landlords behalf concerning the Land.
D.
Sublandlords Environmental Indemnity
. Subject to the terms, conditions and
limitations set forth below and except to the extent such contamination was caused, exacerbated, or
contributed to by Subtenant, or Subtenants employees, agents, contractors or invitees, Sublandlord
shall indemnify Subtenant from and against any liability, claims, damages, penalties, fines,
attorneys fees and costs, remediation costs, investigation costs and other expenses arising from
any use, storage, treatment, transportation, release or disposal of Hazardous Substances on or
about the Project by Sublandlord, its agents, contractors, employees or invitees. For purposes of
the preceding sentence, the term Sublandlords contractors excludes Landlord under the Master
Lease. Sublandlords liability under the foregoing indemnity (i) is personal to Subtenant and may
not be assigned to or relied upon by any third party without Sublandlords prior written consent,
which may be withheld in Sublandlords sole and absolute discretion, (ii) is limited to Subtenants
actual, out of pocket costs incurred in complying with any applicable state or federal agencies
relating to the remediation, removal, disposal or monitoring (Compliance Order), and to
reasonable consultants fees and costs and reasonable attorneys fees and costs incurred in
defending against a proposed Compliance Order, so long as Sublandlord may select the attorney to
defend Subtenant and have sole authority to make all settlement and other decisions in regard to
the proceedings, including the decision whether to challenge the Compliance Order (and any related
order or action) by appeal or court challenge, and (iii) specifically excludes any claims, costs,
damages or losses for personal injury, property damage, punitive damages, damage to business, lost
profits or consequential damages incurred by Subtenant or any third party.
30.
EXCULPATION
.
Landlord shall have no personal liability under this Sublease.
Sublandlord shall have no personal liability under this Sublease; its liability shall be limited to
its equity interest in the Master Lease, and shall not extend to any other property or assets of
the Sublandlord. In no event shall any officer, director, employee, agent, shareholder, partner,
member or beneficiary of Landlord or Sublandlord be personally liable for any of
Landlord
s or Sublandlords obligations hereunder. The foregoing limitation shall not
limit Sublandlords liability pursuant to the indemnity obligation under Sections 9B and 29D
(collectively the Indemnity Obligations).
31.
EXTENSION OPTION
.
Subject to Subsection B below, Subtenant may at its option
extend the Term of this Lease for one period of approximately three (3) years and four (4) months,
expiring September 30, 2007. Such period is called the
Renewal Term
. The Renewal Term
shall be upon the same terms contained in this Sublease, except that (i) Sublandlord shall have no
obligation to provide Subtenant with any Tenant Improvement Allowances in connection with the
Renewal Term, (ii) the Base Rent during the Renewal Term shall be as set forth below, and (iii) any
reference in the Sublease to the Term of the Sublease shall be
37
deemed to include any Renewal Term and apply thereto, unless it is expressly provided
otherwise. Subtenant shall have no additional extension options.
A.
The Base Rent through and including the eight (8) month of the Renewal Term (the seventy
second (72nd) month of the Term as extended) shall be Seventy Thousand One Hundred Sixteen and
20/100ths Dollars ($70,116.20) (calculated at $2.20 per square foot per month). The Base Rent
commencing with the seventy third (73rd) month shall be $2.25 per square foot per month, and shall
be increased by $0.05 per square foot per month on each anniversary of the Commencement Date during
the Renewal Term.
B.
To exercise the option, Subtenant must deliver a binding notice to Sublandlord not sooner
than eight (8) months nor later than six (6) months prior to the expiration of the initial Term of
this Sublease. If Subtenant fails to timely give its notice of exercise, Subtenant will be deemed
to have waived its option to extend.
C.
Subtenants option to extend this Sublease is subject to the conditions that: (i) on the
date that Subtenant delivers its binding notice exercising an option to extend, Subtenant is not in
default under this Sublease after the expiration of any applicable notice and cure periods, and
(ii) Subtenant shall not have assigned the Sublease to any party.
32.
RIGHT OF FIRST OFFER
.
If upon expiration or earlier termination (of the initial
term or renewal term, if extended) of any sublease for the second (2nd) floor of the Building,
Sublandlord desires to sublease any space in the second floor (the Proposed Sublease Space),
Sublandlord shall notify Subtenant in writing of the proposed terms and conditions for such
sub-sublease (Sublandlords Notice). Subtenant shall have seven (7) days after receipt of
Sublandlords Notice to notify Sublandlord in writing of Sublandlords election to lease the
Proposed Sublease Space on the terms stated in Sublandlords Notice. If Subtenant notifies
Sublandlord within such seven-day period of Subtenants desire to lease the Proposed Sublease
Space, Subtenant and Sublandlord shall enter into a lease on the proposed terms an conditions
stated in Sublandlords Notice. If, however, Subtenant fails to notify Sublandlord of Subtenants
election to lease the Proposed Sublease Space within such seven-day period or, if Sublandlord and
Subtenant, through no fault of Sublandlord, fail to execute a lease within thirty (30) days after
the date of Subtenants notice to Sublandlord, Subtenant shall be deemed to have waived its right
to lease the Proposed Sublease Space at such time and Sublandlord shall have the right to lease the
Proposed Sublease Space to any third party on substantially the terms stated in Sublandlords
Notice without further notice to Subtenant.
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IN
WITNESS WHEREOF, the parties hereto have executed this Sublease.
SUBLANDLORD:
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APPLIED MATERIALS, INC.,
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a Delaware corporation
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By:
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/s/ Thomas M. Rohrs
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/s/ Joseph R. Brunson
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Print Name: Thomas Rohrs
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Joseph R. Brunson
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Print Title:
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Senior Vice President, CFO
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SUBTENANT:
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SHORELINE TELEWORKS,
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a California corporation
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By:
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/s/ John Fazio
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Print Name: John Fazio
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Print Title: President & CEO
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39
FIRST AMENDMENT TO SUBLEASE
THIS FIRST AMENDMENT TO SUBLEASE (this
Amendment
) is dated and effective as of November 6,
2003, between
Applied Materials, Inc.
, a Delaware corporation (
Sublandlord
) and
Shoreline
Communications, Inc.
, a California corporation (
Subtenant
).
RECITALS
A. Sublandlord and Subtenant (then known as Shoreline Teleworks, Inc.) entered into that
certain Sublease dated October ___, 1998 (the
Sublease
) for the first floor of Building G, 960
Stewart Drive, Sunnyvale, California (the
Premises
) as described in the Sublease.
B. Sublandlord and Subtenant desire to amend the Sublease as set forth herein.
NOW, THEREFORE
, for good and valuable consideration, receipt of which is hereby acknowledged,
Sublandlord and Subtenant agree to amend the Sublease as set forth herein.
1.
Amendment to Section 1 of the Schedule
. The name of the Subtenant is Shoreline
Communications, Inc.
2.
Amendment to Section 11 of the Schedule
. Section 11 of the Schedule shall be
amended to read in its entirety as follows:
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11.
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Term: Commencing on the Commencement Date and expiring
September 30, 2007.
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3.
Amendment to Section 13 of the Schedule
. Section 13 of the Schedule is hereby
deleted and replaced with the following to read in its entirety as follows:
Base Rent:
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Months
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Monthly/Square Foot
|
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Monthly Base Rent
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2/1/1999 - 1/31/2000
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$
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1.95
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$
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42,900.00
|
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2/1/2000 - 10/31/2000
|
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$
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2.00
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$
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50,000.00
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11/1/2000 - 1/31/2001
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$
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2.00
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$
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63,782.00
|
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2/1/2001 - 1/31/2/2002
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$
|
2.05
|
|
|
$
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65,376.55
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2/1/2002 - 1/31//2003
|
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$
|
2.10
|
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|
$
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66,971.10
|
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2/1/2003 - 4/30/2003
|
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$
|
2.15
|
|
|
$
|
68,566.65
|
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5/1/2003 - 5/14/2003
|
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$
|
2.15
|
|
|
$
|
30,965.58
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*
|
5/15/2003 - 5/14/2004
|
|
$
|
1.10
|
|
|
$
|
35,080.10
|
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5/15/2044 - 5/14/2005
|
|
$
|
1.13
|
|
|
$
|
36,036.83
|
|
5/15/2005 - 5/14/2006
|
|
$
|
1.16
|
|
|
$
|
36,993.56
|
|
5/15/2006 - 5/14/2007
|
|
$
|
1.19
|
|
|
$
|
37,950.29
|
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5/15/2007 - 9/30/2007
|
|
$
|
1.22
|
|
|
$
|
38,907.02
|
|
|
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*
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Monthly Base Rent prorated for partial month of May 1 through May 14
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1
Base Rent previously paid for the period May 15, 2003 through September 30, 2003 in excess of the
amounts stated above shall be credited against installments of Base Rent as they become due,
commencing with the Base Rent due October 1, 2003.
4.
Deletion of Section 31 of the Sublease
. Section 31 Extension Option of the
Sublease is hereby deleted in its entirety.
5.
Affirmation
. As amended herein, the Sublease is and remains in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above.
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Sublandlord
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Subtenant
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APPLIED MATERIALS,
INC., a Delaware corporation
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SHORELINE
COMMUNICATIONS, INC., a California corporation
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By:
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/s/ Carter Lake
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By:
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/s/ John Finegan
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Print Name: Carter Lake
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Print Name: John Finegan
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Its: Senior Director
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Its: CFO
|
Global Real Estate & Facilities
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Date: November 7, 2003
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Date:
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By:
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Print Name:
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Its:
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Date:
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2
FIRST AMENDMENT TO SUBLEASE CONSENT AND AGREEMENT
This FIRST AMENDMENT TO SUBLEASE CONSENT AND AGREEMENT (
Amendment
), dated for
reference purposes only as of ___, 2003, is made by and among CARRAMERICA REALTY
CORPORATION, a Maryland corporation (
Landlord
), APPLIED MATERIALS, INC., a Delaware
corporation (
Tenant
), and SHORELINE COMMUNICATIONS, INC., a California corporation, as
successor in interest to Shoreline Teleworks, a California corporation (
Subtenant
).
RECITALS
:
A. Landlord and Tenant have heretofore entered into a Lease, dated September 9, 1997
(hereinafter the
Master Lease
) for premises (hereinafter the
Premises
) in
Buildings A through G comprising the project commonly known as the Oakmead West Buildings Project,
located in Sunnyvale, California.
B. On or about. November 5, 1998, Tenant and Subtenant entered into a Sublease (the
Sublease
), pursuant to which Tenant subleases portions of Building G, consisting of
approximately 31,891 square feet (the
Subleased Premises
). On or about November 5, 1998,
Landlord consented to the Sublease pursuant to a certain Sublease Consent and Agreement (the
Original Sublease Consent
).
C. Tenant and Subtenant desire to extend the term of the Sublease from May 31, 2004 to
September 30, 2007, and to adjust the Base Rent due under the Sublease, pursuant to the proposed
First Amendment to Sublease Agreement dates
November 6, 2003
between Tenant and Subtenant
(the
First Amendment to Sublease
) a copy of which is attached hereto as
Exhibit
A
.
D. Landlord is wiling to consent to the First Amendment to Sublease upon the terms and
conditions set forth below.
AGREEMENT
:
NOW, THEREFORE, in consideration of the foregoing and the covenants, promises and undertakings
set forth herein, and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1.
Landlord Consent
. Landlord hereby consents to the First Amendment to Sublease in
the form attached hereto as
Exhibit A
. The Sublease shall not be further amended or
modified without the prior written consent of Landlord. This consent is granted only upon the
terms and conditions of this Amendment, and Tenant and Subtenant hereby agree to each of such terms
and conditions. From and after the effective date of this Amendment, all references to the
Sublease
in the Original Sublease Consent shall be deemed to refer to the Sublease, as amended by
the First Amendment to Sublease.
2.
Conditions to Landlords Consent
. Landlords consent to the First Amendment to
Sublease is expressly conditioned on Tenants reimbursement of Landlord for all of Landlords
attorneys fees and other expenses incurred in connection with this Amendment (collectively,
Transfer-Related Costs
). Tenant shall reimburse Landlord for the Transfer-Related Costs
incurred by Landlord within ten (10) days following Tenants receipt of an invoice.
3.
Representations of Tenant and Subtenant
.
1
3.1 Tenant and Subtenant represent and warrant to Landlord that a true copy of the First
Amendment to Sublease, and all exhibits, addendum, amendments, modifications and supplements
thereto, is attached hereto as
Exhibit A
.
3.2 Tenant and Subtenant represent and warrant to Landlord that, except as set forth in the
First Amendment to Sublease, Subtenant is not paying to Tenant any rent, additional rent or other
consideration whatsoever in connection with the First Amendment to Sublease (including, but not
limited to, payments for Tenants assets, trade fixtures, equipment and/or other equity ownership
of Tenant.)
3.3 Tenant and Subtenant represent and warrant that Landlord will not be liable for any
brokerage commission or finders fee in connection with the consummation of the First Amendment to
Sublease of this Amendment. Tenant and Subtenant, jointly and severally, shall protect, indemnify,
defend and hold Landlord harmless from and against any claims for any such commissions, fees or
costs, and for all costs, expenses and liabilities incurred in connection with such claims,
including, without limitation, attorneys fees and costs.
4.
Miscellaneous
.
4.1 Unless the context clearly requires otherwise, all capitalized terms used herein shall
have the defined meanings ascribed to them in the Original Sublease Consent.
4.2 Except as modified by this Amendment. all of the terms, conditions and provisions of the
Original Sublease Consent shall remain in full force and effect and are hereby ratified and
confirmed.
4.3 To the extent the terms of the Original Sublease Consent and this Amendment are
inconsistent, the terms of this Amendment shall control.
4.4 The submission of this Amendment to Tenant for examination or execution does not create an
option or constitute an offer to Tenant to amend the Original Sublease Consent on the terms and
editions contained herein, and Landlords consent hereunder shall not be effective until Landlord
has received a copy of this Amendment, fully executed with original signatures of Tenant and
Subtenant thereon. By executing and delivering this Amendment, the person or parsons signing on
behalf of Tenant and Subtenant represent and warrant that they have the requisite authority to bind
their respective party.
4.5 This Amendment contains the entire agreement of the parties hereto with respect to the
subject matter hereof. It is understood that there are no oral agreements between the parties
affecting the Original Sublease Consent as hereby amended, and this Amendment supersedes and
cancels any and all previous negotiations, representations, agreements and understandings, if any,
between the parties and their respective agents with respect to the subject matter thereof, and
none shall be used to interpret or construe the Original Sublease Comment as amended hereby.
[signatures on following page]
2
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the dates set forth
under their respective signatures below.
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LANDLORD
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TENANT
|
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CARRAMERICA REALTY CORPORATION, a
Maryland corporation
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APPLIED MATERIALS, INC.,
a Delaware corporation
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By:
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/s/
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Christopher Peatrass
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By:
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/s/
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Carter Lake
|
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Name: Christopher Peatrass
|
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Name: Carter Lake
|
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Title: Managing Director
|
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Title: Senior
Director
Global Real Estate & Facilities
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Date: 12/6/03
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Date:11/13/03
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SUBTENANT
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SHORELINE COMMUNICATIONS, INC.,
a California corporation
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By:
|
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/s/ John Finegan
|
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Name:
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John Finegan
|
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Title:
|
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CFO
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Date:
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11/12/03
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3
EXHIBIT A
FIRST AMENDMENT TO SUBLEASE AGREEMENT
See Attached
Applied Materials Rent Reconciliation
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|
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Rent paid
|
|
New rent
|
|
Monthly Diff
|
|
Cum Diff
|
|
|
May-03
|
|
$
|
68,565.65
|
|
|
$
|
35,080.10
|
|
|
$
|
16,742.78
|
|
|
$
|
16,742.78
|
|
|
@50%
|
Jun-03
|
|
$
|
68,565.65
|
|
|
$
|
35,080.10
|
|
|
$
|
33,485.55
|
|
|
$
|
50,228.33
|
|
|
|
Jul-03
|
|
$
|
68,565.65
|
|
|
$
|
35,080.10
|
|
|
$
|
33,485.55
|
|
|
$
|
83,713.88
|
|
|
|
Aug-03
|
|
$
|
68,565.65
|
|
|
$
|
35,080.10
|
|
|
$
|
33,485.55
|
|
|
$
|
117,199.43
|
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|
|
Sep-03
|
|
$
|
68,565.65
|
|
|
$
|
35,080.10
|
|
|
$
|
33,485.55
|
|
|
$
|
150,684.98
|
|
|
|
Oct-03
|
|
$
|
0.00
|
|
|
$
|
35,080.10
|
|
|
-$
|
35,080.10
|
|
|
$
|
115,604.88
|
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|
|
Nov-03
|
|
$
|
0.00
|
|
|
$
|
35,080.10
|
|
|
-$
|
35,080.10
|
|
|
$
|
80,524.78
|
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|
|
Dec-03
|
|
$
|
0.00
|
|
|
$
|
35,080.10
|
|
|
-$
|
35,080.10
|
|
|
$
|
45,444.68
|
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|
|
Jan-04
|
|
$
|
0.00
|
|
|
$
|
35,080.10
|
|
|
-$
|
35,080.10
|
|
|
$
|
10,364.58
|
|
|
|
Feb-04
|
|
$
|
24,715.53
|
|
|
$
|
35,080.10
|
|
|
-$
|
10,364.58
|
|
|
$
|
0.00
|
|
|
|
Mar-04
|
|
$
|
35,080.10
|
|
|
$
|
35,080.10
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
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|
|
2
SECOND AMENDMENT TO SUBLEASE
THIS SECOND AMENDMENT TO SUBLEASE (this
Second Amendment
) is dated and effective as of
September 12, 2005, between
Applied Materials, Inc.
, a Delaware corporation (
Sublandlord
) and
Shortel, Inc.
(formerly known as Shorline Communications, Inc.), a California corporation
(
Subtenant
).
RECITALS
A. Sublandlord and Subtenant (then known as Shoreline Teleworks, Inc.) entered into that
certain Sublease dated October ___, 1998, as amended by the First Amendment To Sublease dated as of
November 6, 2003 (together, the
Sublease
) for the first floor of Building G, 960 Stewart Drive,
Sunnyvale, California (the
Premises
) as described in the Sublease. Capitalized terms not defined
in this Second Amendment shall have the meanings given in the Sublease.
B. Sublandlord and Subtenant desire to amend the Sublease to add the second floor of the
Building to the Premises, on terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged,
Sublandlord and Subtenant agree to amend the Sublease as set forth herein.
1.
Amendment to Section 1 of the Schedule
. The name of the Subtenant is Shoretel,
Inc.
2.
Amendment to Sections 2, 3, and 4 of the Schedule
. Sections 2, 3 and 4 of the
Schedule shall be amended to read in its entirety as follows:
2. Premises: The Premises means and includes the portions of the first floor of
Building G (the Building), 960 Stewart Drive, Sunnyvale, California, designated Area A,
Area B, and Area C on Exhibit A-2 attached hereto, occupied by Tenant at any time during the
Term of this Sublease, together with (1) a nonexclusive right, in common with other tenants
of the Building, to use the Building Common Areas, and (2) a nonexclusive right, in common
with other tenants of the Project, to use the Project Common Areas subject to the Master
Lease. Commencing October 1, 2005, the Premises means and includes the first floor and
second floor of the Building, together with a nonexclusive right, in common with other
tenants of the Project, to use the Project Common Areas subject to the Master Lease.
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3.
|
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Rentable Square Footage of the Premises:
|
|
31,891 sq. ft.
|
|
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Commencing October 1, 2005
|
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63,781 sq. ft.
|
4. Subtenants Proportionate Share: The Percentage listed below for Landlords
Operating Costs and Taxes and Sublandlords Operating Costs allocated to the Building, plus
the Percentage listed below for Landlords Operating Costs and Taxes but not allocated to
specific Buildings by Landlord.
1
|
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Proportionate Share
|
|
Proportionate Share
|
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for Building
|
|
for Project*
|
Area A
|
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34.49
|
%
|
|
|
5.16
|
%
|
Area A + Area B
|
|
|
39.20
|
%
|
|
|
5.87
|
%
|
Area A + Area B + Area C
|
|
|
50
|
%
|
|
|
7.49
|
%
|
Second Floor
|
|
|
50
|
%***
|
|
|
14.28
|
%**, ***
|
|
|
|
*
|
|
This percentage (7.49%) represents the ratio of the square footage of the Premises to the
aggregate square footage of all Buildings in the Project. As the aggregate square footage of
all Buildings subject to the Master Lease declines, this percentage may be adjusted to a
percentage equal to the ratio of the square footage of the Premises to the aggregate square
footage of the Buildings then subject to the Master Lease, but the revised percentage would
apply only against the Landlord Operating Costs allocated to all Buildings then subject to
the Master Lease but not to any one Building.
|
|
**
|
|
As of October 1, 2005, representing Proportionate Share of Buildings in the Project
remaining subject to the Master Lease. Commencing October 6, 2005, 29.40% of a reduced
square footage subject to the Master Lease.
|
|
***
|
|
Second Floor monthly rent is a gross rent and Sublandlord is responsible for Building
Operating Costs and Landlords Operating Costs and Taxes allocated to the Second Floor of
the Building. Thus, the square footage of the second floor is not included in the
Proportionate Share calculations.
|
3.
Amendment to Section 10 of the Schedule
. Section 10 of the Schedule shall be
amended to read in its entirety as follows:
|
|
|
|
|
10. Commencement Date:
|
|
Area A
|
|
Approximately February 1, 1999
|
|
|
Area B
|
|
Approximately February 1, 2000
|
|
|
Area C
|
|
Approximately October 1, 2000
|
|
|
Second Floor
|
|
Approximately October 1, 2005
|
|
|
See Paragraph 1.A.
|
|
|
4.
Amendment to Section 13 of the Schedule
. Section 13 of the Schedule is hereby
deleted and replaced with the following to read in its entirety as follows:
2
Base Rent:
|
|
|
|
|
|
|
Months
|
|
Monthly/Square Foot
|
|
Monthly Base Rent
|
|
2/1/1999
1/31/2000
|
|
$1.95
|
|
$
|
42,900.00
|
|
2/1/2000
10/31/2000
|
|
$2.00
|
|
$
|
50,000.00
|
|
11/1/2000 1/31/2001
|
|
$2.00
|
|
$
|
63,782.00
|
|
2/1/2001 1/31/2/2002
|
|
$2.05
|
|
$
|
65,376.55
|
|
2/1/2002 1/31//2003
|
|
$2.10
|
|
$
|
66,971.10
|
|
2/1/2003
4/30/2003
|
|
$2.15
|
|
$
|
68,566.65
|
|
5/1/2003 5/14/2003
|
|
$2.15
|
|
$
|
30,965.58
|
*
|
5/15/2003 5/14/2004
|
|
$1.10
|
|
$
|
35,080.10
|
|
5/15/2004 5/14/2005
|
|
$1.13
|
|
$
|
36,036.83
|
|
5/15/2005 9/30/2005
|
|
$1.16
|
|
$
|
36,993.56
|
|
10/1/2005 5/14/2006
|
|
$1.16 Areas A-C
|
|
$
|
36,993.56
|
|
|
|
$0.26 Second Floor
|
|
$
|
8,291.66
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,285.22
|
|
5/14/2006 9/30/2006
|
|
$1.19 Areas A-C
|
|
$
|
37,950.29
|
|
|
|
$0.26 Second Floor
|
|
$
|
8,291.66
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,241.95
|
|
10/1/2006-5/14/2007
|
|
$1.19 Areas A-C
|
|
$
|
37,950.29
|
|
|
|
$0.52 Second Floor
|
|
$
|
16,583.32
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,533.61
|
|
5/15/2007 9/30/2007
|
|
$1.22 Areas A-C
|
|
$
|
38,907.02
|
|
|
|
$0.52 Second Floor
|
|
$
|
16,583.32
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,490.34
|
|
Base Rent previously paid for the period May 15, 2003 through September 30, 2003 in excess of the
amounts stated above shall be credited against installments of Base Rent as they become due,
commencing with the Base Rent due October 1, 2003.
5.
Amendment to Paragraph 1.A
. Paragraph 1.A of the Sublease is hereby amended to
read in its entirety as follows:
A. Commencement Date. The Commencement Date shall be the date established pursuant to
this section and the Sublease shall expire on the date set forth in the Schedule.
1. The Commencement Date for Area A shall be the earliest occurring of the following:
(i) The date of Substantial Completion of the Tenant Improvements, as such term
is defined in the Work Letter Agreement attached hereto as EXHIBIT C (Work Letter
Agreement) or;
(ii) The date Subtenant commences occupancy of Area A.
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2. The Commencement Date for Area B shall be the first day of the thirteenth (13th)
month of the Term.
3. The Commencement Date for Area C shall be the first day of the twenty-first (21st)
month of the Term.
4. The Commencement Date for the Second Floor shall be October 1, 2005.
6.
Amendment to Paragraph 3.B of the Sublease
. Paragraph 3.B of the Sublease is
amended to read in its entirety as follows
B.
Construction of Interior Improvements
. Except for Sublandlords obligation
to install the Tenant Improvements in the first floor in accordance with the Work Letter
Agreement, Sublandlord is leasing the Premises to Subtenant as is, without any obligation
to alter, remodel, improve, or decorate any part of the Premises or Project. Sublandlord
shall cause the Tenant Improvements to be completed in accordance with the terms, conditions
and limitations set forth in the Work Letter Agreement. Sublandlord shall deliver the second
floor professionally clean with all Building mechanical, electrical, plumbing, life safety,
lighting, windows and doors and roofing systems in good operating condition.
7.
Utilities
. Sublandlord and Subtenant shall transfer the utilities accounts for the
Building to Subtenants name after execution of a consent to this Amendment by Landlord and prior
to Subtenants entry into to the second floor pursuant to paragraph 9 below or Subtenants
occupancy of the second floor.
8.
Affirmation
. As amended herein, the Sublease is and remains in full force and
effect.
9.
Early Occupancy
. Upon execution of this Second Amendment and consent to this
Second Amendment by Master Landlord (the Early Occupancy Period), provided that Subtenants
activities do not interfere with or cause delays to Sublandlords obligations, Subtenant shall be
permitted to enter the second floor for the purpose of installation of its equipment, cabling,
telecommunications, furniture systems, and other installations necessary for the conduct of
Subtenants business. Notwithstanding any other provision herein to the contrary, Subtenants
occupancy of the second floor during the Early Occupancy Period shall be subject to all of the
terms, covenants and conditions of this Sublease (including Subtenant
s obligations
regarding indemnity and insurance), provided however, that Subtenants obligation to pay Rent with
respect to the second floor during the Early Occupancy Period shall be waived. In any event,
Subtenant shall be responsible for any utility charges incurred by Landlord or Sublandlord in
connection with Subtenants use of the second floor during the Early Occupancy Period.
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IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above.
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Sublandlord
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Subtenant
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APPLIED MATERIALS, INC., a Delaware
corporation
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SHORETEL, INC., a California corporation
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By:
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/S/ Jim Barnhart
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By:
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/s/ John Finegan
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Print Name:
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Jim Barnhart
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Print Name:
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John Finegan
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Its:
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Managing Director
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Its:
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CFO
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Date:
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September 26, 2005
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Date:
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9/13/05
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By:
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Print Name:
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Its:
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Date:
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