##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                    to
 Commission File Number 001-33506
 SHORETEL, INC.
  Delaware
(State or other jurisdiction of incorporation or organization
    
    77-0443568
(I.R.S. Employer Identification No.)960 Stewart Drive, Sunnyvale, California
(Address of principal executive offices)
    
    94085-3913
(Zip Code)
 (408) 331-3300
(Registrants telephone number, including area code)
 þ o
  Large accelerated
filer o
    
    Accelerated filer o
    
    Non-accelerated
filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



SHORETEL, INC.
FORM 10-Q for the Quarter Ended December 31, 2007
 INDEX
 PagePART I: Financial InformationItem 1
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of December 31, 2007 and June 30, 2007
    
    3Condensed Consolidated Statements of Income for the three months and six months ended December 31,
2007 and 2006
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2007 and 2006
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    16Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    25Item 4
    
    Controls and Procedures
    
    25PART II: Other informationItem 1
    
    Legal Proceedings
    
    26Item 1A
    
    Risk Factors.
    
    26Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    40Item 3
    
    Defaults Upon Senior Securities
    
    40Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    40Item 5
    
    Other Information
    
    41Signatures
    
    42Exhibit Index
    
    43EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1: FINANCIAL STATEMENTS (Unaudited)
 
 SHORETEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 December 31,
    
    
    June 30,2007
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    86,724
    
    
    $
    17,326Short-term investments
    
    
    18,680
    
    
    
    Accounts receivable, net of allowance
of $398 and $320
as of December 31, 2007 and June 30,
2007, respectively
    
    
    20,432
    
    
    
    19,411Inventories
    
    
    7,783
    
    
    
    7,057Prepaid expenses and other current assets
    
    
    3,221
    
    
    
    3,372Total current assets
    
    
    136,840
    
    
    
    47,166PROPERTY AND EQUIPMENT  Net
    
    
    3,460
    
    
    
    2,933OTHER ASSETS
    
    
    148
    
    
    
    2,935TOTAL
    
    $
    140,448
    
    
    $
    53,034LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK,
ANDSHAREHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    6,209
    
    
    $
    7,433Accrued liabilities and other
    
    
    3,989
    
    
    
    2,807Accrued employee compensation
    
    
    3,695
    
    
    
    3,782Deferred revenue
    
    
    12,263
    
    
    
    10,126Total current liabilities
    
    
    26,156
    
    
    
    24,148LONG-TERM LIABILITIES:Preferred stock warrant liability
    
    
    
    
    
    
    549Long-term deferred revenue
    
    
    4,497
    
    
    
    3,825Total long-term liabilities
    
    
    4,497
    
    
    
    4,374Total liabilities
    
    
    30,653
    
    
    
    28,522COMMITMENTS AND CONTINGENCIES (Note 11)REDEEMABLE CONVERTIBLE PREFERRED STOCK,
authorized, 23,586 shares; issued and
outstanding 0 and 23,316 shares as of
December 31, 2007 and June 30, 2007,
respectively (aggregate liquidation
preference of $44,250 at June 30, 2007)
    
    
    
    
    
    
    56,341SHAREHOLDERS EQUITY (DEFICIT):Preferred stock, par value $.001 per
share, authorized 5,000 and 0 shares
as of December 31, 2007 and June 30,
2007, respectively; none issued and
outstanding
    
    
    
    
    
    
    Common stock, par value $.001 per
share, authorized 500,000 shares as of
December 31, 2007 and June 30, 2007,
respectively; issued and outstanding,
42,729 and 10,132 shares as of
December 31, 2007 and June 30, 2007,
respectively
    
    
    190,389
    
    
    
    53,206Deferred stock compensation
    
    
    (186
    )
    
    
    (237
    )Other comprehensive loss
    
    
    (4
    )
    
    
    Accumulated deficit
    
    
    (80,404
    )
    
    
    (84,798
    )Total shareholders equity (deficit)
    
    
    109,795
    
    
    
    (31,829
    )TOTAL
    
    $
    140,448
    
    
    $
    53,034
  3




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##### Table of Contents



SHORETEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
 Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUE:Product
    
    $
    26,257
    
    
    $
    19,864
    
    
    $
    54,382
    
    
    $
    38,331Support and services
    
    
    4,304
    
    
    
    2,616
    
    
    
    8,154
    
    
    
    4,564Total revenue
    
    
    30,561
    
    
    
    22,480
    
    
    
    62,536
    
    
    
    42,895COST OF REVENUE:Product (1)
    
    
    8,724
    
    
    
    6,767
    
    
    
    18,128
    
    
    
    13,274Support and services (1)
    
    
    2,180
    
    
    
    1,595
    
    
    
    4,339
    
    
    
    3,040Total cost of revenue
    
    
    10,904
    
    
    
    8,362
    
    
    
    22,467
    
    
    
    16,314GROSS PROFIT
    
    
    19,657
    
    
    
    14,118
    
    
    
    40,069
    
    
    
    26,581OPERATING EXPENSES:Research and development (1)
    
    
    6,257
    
    
    
    4,051
    
    
    
    12,464
    
    
    
    7,168Sales and marketing (1)
    
    
    8,804
    
    
    
    5,755
    
    
    
    17,126
    
    
    
    11,432General and administrative (1)
    
    
    4,478
    
    
    
    2,837
    
    
    
    8,201
    
    
    
    5,410Total operating expenses
    
    
    19,539
    
    
    
    12,643
    
    
    
    37,791
    
    
    
    24,010INCOME FROM OPERATIONS
    
    
    118
    
    
    
    1,475
    
    
    
    2,278
    
    
    
    2,571OTHER INCOME (EXPENSE):Interest income
    
    
    1,262
    
    
    
    184
    
    
    
    2,423
    
    
    
    345Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Change in fair value of warrants
    
    
    
    
    
    
    (579
    )
    
    
    
    
    
    
    (579
    )Other
    
    
    (65
    )
    
    
    
    
    
    
    (23
    )
    
    
    Total other income (expense)
    
    
    1,197
    
    
    
    (395
    )
    
    
    2,400
    
    
    
    (238
    )INCOME BEFORE (PROVISION FOR) BENEFIT FROM INCOME TAXES
    
    
    1,315
    
    
    
    1,080
    
    
    
    4,678
    
    
    
    2,333(PROVISION FOR) BENEFIT FROM INCOME TAXES
    
    
    522
    
    
    
    22
    
    
    
    (284
    )
    
    
    (185
    )NET INCOME
    
    
    1,837
    
    
    
    1,102
    
    
    
    4,394
    
    
    
    2,148ACCRETION OF PREFERRED STOCK
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (25
    )NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    1,837
    
    
    $
    1,089
    
    
    $
    4,394
    
    
    $
    2,123Net income per common share available to common shareholders:Basic
    
    $
    .04
    
    
    $
    0.13
    
    
    $
    0.10
    
    
    $
    0.26Diluted
    
    $
    .04
    
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.06Shares used in computing net income per share available to
common shareholders:Basic
    
    
    42,140
    
    
    
    8,236
    
    
    
    42,011
    
    
    
    8,074Diluted
    
    
    45,021
    
    
    
    35,495
    
    
    
    44,974
    
    
    
    35,374(1) Includes stock-based compensation expense as follows:Cost of product revenue
    
    $
    17
    
    
    $
    3
    
    
    $
    25
    
    
    $
    4Cost of support and services revenue
    
    
    130
    
    
    
    24
    
    
    
    188
    
    
    
    29Research and development
    
    
    492
    
    
    
    82
    
    
    
    746
    
    
    
    99Sales and marketing
    
    
    572
    
    
    
    111
    
    
    
    1,023
    
    
    
    208General and administrative
    
    
    502
    
    
    
    415
    
    
    
    796
    
    
    
    1,117Total stock-based compensation expense
    
    $
    1,713
    
    
    $
    635
    
    
    $
    2,778
    
    
    $
    1,457
  4




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##### Table of Contents



SHORETEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months EndedDecember 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    4,394
    
    
    $
    2,148Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    722
    
    
    
    426Accretion of discount on investments
    
    
    (121
    )
    
    
    Stock compensation expense
    
    
    2,778
    
    
    
    1,457Loss on disposal of property and equipment
    
    
    41
    
    
    
    31Provision for doubtful accounts receivable
    
    
    (156
    )
    
    
    (120
    )Change in fair value of warrants
    
    
    
    
    
    
    579Changes in assets and liabilities:Accounts receivable
    
    
    (865
    )
    
    
    (4,230
    )Inventories
    
    
    (726
    )
    
    
    (160
    )Prepaid expenses and other current assets
    
    
    151
    
    
    
    (1,089
    )Other assets
    
    
    (79
    )
    
    
    (180
    )Accounts payable
    
    
    (1,382
    )
    
    
    251Accrued liabilities and other
    
    
    1,300
    
    
    
    1,008Accrued employee compensation
    
    
    (87
    )
    
    
    317Deferred revenue
    
    
    2,809
    
    
    
    2,830Net cash provided by operating activities
    
    
    8,779
    
    
    
    3,268CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (1,199
    )
    
    
    (417
    )Purchase of investments
    
    
    (18,563
    )
    
    
    Net cash used in investing activities
    
    
    (19,762
    )
    
    
    (417
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from initial public offering, net of underwriting discounts
    
    
    80,265
    
    
    
    Repayment of capital leases
    
    
    
    
    
    
    (1
    )Exercise of common stock options (including proceeds from unvested shares)
    
    
    116
    
    
    
    122Repayment of shareholder notes issued in connection with stock option exercises
    
    
    
    
    
    
    12Net cash provided by financing activities
    
    
    80,381
    
    
    
    133NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    69,398
    
    
    
    2,984CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    17,326
    
    
    
    12,333CASH AND CASH EQUIVALENTS  End of period
    
    $
    86,724
    
    
    $
    15,317NONCASH INVESTING AND FINANCING ACTIVITIES:Conversion of redeemable convertible preferred stock to common stock
    
    $
    56,341
    
    
    $
    Reclassification of initial public offering costs from Other Assets to Common stock
    
    $
    2,866
    
    
    $
    Reclassification of preferred stock warrant liability to common stock
    
    $
    549
    
    
    $
    Vesting of accrued early exercised stock options
    
    $
    120
    
    
    $
    83Purchase of property and equipment included in period-end accounts payable
    
    $
    89
    
    
    $
    128
  5




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SHORETEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. Description of Business
   2. Basis of Presentation and Significant Accounting Policies
   Computation of Net Income per Share
  Cash and Cash Equivalents
  6




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Investments
   Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
 Fair Value Measurements Effective Date of FASB Statement
No. 157
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of Accounting Research Bulletin No. 51
 7




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##### Table of Contents



Reclassifications
  3. Balance Sheet Details
  December 31,
    
    
    June 30,2007
    
    
    2007(in thousands)Inventories:Raw materials
    
    $
    
    
    
    $
    47Inventory in process/transit
    
    
    363
    
    
    
    325Finished goods
    
    
    7,420
    
    
    
    6,685Total inventories
    
    $
    7,783
    
    
    $
    7,057Prepaid expenses and other current assets:Prepaid expenses
    
    $
    2,133
    
    
    $
    2,600Deferred cost of revenue
    
    
    808
    
    
    
    772Deferred taxes
    
    
    280
    
    
    
    Total prepaid expenses and other current assets
    
    $
    3,221
    
    
    $
    3,372Property and equipment:Computer equipment and tooling
    
    $
    4,698
    
    
    $
    3,573Software
    
    
    1,082
    
    
    
    982Furniture and fixtures
    
    
    657
    
    
    
    403Leasehold improvements
    
    
    193
    
    
    
    203Total property and equipment
    
    
    6,630
    
    
    
    5,161Less accumulated depreciation and amortization
    
    
    3,170
    
    
    
    2,228Property and equipment  net
    
    $
    3,460
    
    
    $
    2,933Deferred Revenue  current and long-term:Product
    
    $
    2,783
    
    
    $
    2,618Support and services
    
    
    13,977
    
    
    
    11,333$
    16,760
    
    
    $
    13,951
   Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairDecember 31, 2007
    
    Cost
    
    Gains
    
    Losses
    
    ValueCorporate notes and bonds
    
    $
    18,684
    
    
    $
    
    
    
    $
    (4
    )
    
    $
    18,680Total
    
    $
    18,684
    
    
    $
    
    
    
    $
    (4
    )
    
    $
    18,680
  Amortized
    
    
    FairCost
    
    
    ValueLess than 1 year
    
    $
    17,182
    
    
    $
    17,178Due in 1 to 2 years
    
    
    1,502
    
    
    
    1,502Total
    
    $
    18,684
    
    
    $
    18,680
 8




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##### Table of Contents



4. Related Party Transactions
 Unsecured Promissory Note
 5 Income Taxes
    Accounting for Uncertainty
in Income Taxesan interpretation of FASB Statement No. 109 Accounting for Income Taxes
    9




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6. Redeemable Convertible Preferred Stock and Stock Warrants
  Preferred Stock Warrants
  
    
    Warrants to purchase 685 shares of common stock issued with respect to an equipment
lease line signed in June 1998, exercisable at $21.18 per share.
    
    Warrants to purchase 1,224 shares of common stock issued in February 2001 for consulting
services, exercisable at $26.22 per share.
 Issuers Accounting under FASB Statement No. 150 for Freestanding
Warrants and Other Similar Instruments on Shares that are Redeemable.
  7. Common Stock
 Reverse Stock Split
  Initial Public Offering
  10




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Common Shares Subject to Repurchase
  Common Shares Reserved for Issuance
  Reserved under stock option plans
    
    
    7,919Reserved under employee stock purchase plan
    
    
    500Conversion of warrants
    
    
    2Total
    
    
    8,421
 8. Stock-Based Compensation
 Accounting for Stock
Issued to Employees Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No.
25 Accounting for Stock-Based Compensation Accounting
for Stock-Based Compensation  Transition and Disclosure
  Share-Based Payment
 Six Months EndedSix Months Ended
    
    December 31, 2006December 31, 2007
    
    Class One
    
    Class TwoExpected life of option plan
    
    6.08 years
    
    6.08 years
    
    4.0 yearsExpected life of Employee Stock Purchase Plan (ESPP)
    
    0.50 years
    
    
    
    
    
    
    Risk-free interest rate range for option plan
    
    
    3.79-4.50
    %
    
    
    4.6 - 4.8
    %
    
    
    4.6 - 4.8
    %Risk-free interest rate for ESPP
    
    
    3.46
    %
    
    
    
    
    
    
    Volatility for option plan
    
    
    62
    %
    
    
    68 - 71
    %
    
    
    55
    %Volatility for ESPP
    
    
    47
    %
    
    
    
    
    
    
    Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  11




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9. Stock Option Plan
     12




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##### Table of Contents



Shares
    
    
    Weighted-Shares
    
    
    Subject to
    
    
    AverageAvailable
    
    
    Options
    
    
    Exercisefor Grant
    
    
    Outstanding
    
    
    Price(Amounts in thousands, except per share amounts)Outstanding  June 30, 2007
    
    
    4,504
    
    
    
    4,626
    
    
    $
    4.57Termination of remaining shares available for grant under the
1997 Option Plan
    
    
    (1,076
    )
    
    
    
    
    
    
    Options granted  (weighted average fair value of $8.90 per share)
    
    
    (2,384
    )
    
    
    2,384
    
    
    
    14.65Options exercised
    
    
    
    
    
    
    (135
    )
    
    
    0.86Options canceled
    
    
    167
    
    
    
    (167
    )
    
    
    8.73Outstanding  December 31, 2007
    
    
    1,211
    
    
    
    6,708
    
    
    $
    8.12Options exercisable at December 31, 2007
    
    
    
    
    
    
    2,254
    
    
    $
    1.29
   WeightedAverage
    
    WeightedRemaining
    
    Average
    
    AggregateExercise
    
    Options
    
    Contractual
    
    Exercise
    
    IntrinsicPrices
    
    Outstanding
    
    Life (Years)
    
    Price
    
    Value(Amounts in thousands, except per share data)$0.10  0.30
    
    
    680
    
    
    
    5.72
    
    
    $
    0.21$0.40  0.80
    
    
    928
    
    
    
    7.64
    
    
    $
    0.53$1.00  3.20
    
    
    1,197
    
    
    
    8.20
    
    
    $
    2.37$3.60  10.50
    
    
    319
    
    
    
    8.86
    
    
    $
    8.23$11.30
    
    
    717
    
    
    
    9.28
    
    
    $
    11.30$11.40  13.44
    
    
    699
    
    
    
    9.44
    
    
    $
    11.71$13.73
    
    
    656
    
    
    
    9.65
    
    
    $
    13.73$14.61
    
    
    850
    
    
    
    9.91
    
    
    $
    14.61$15.38  15.41
    
    
    375
    
    
    
    9.88
    
    
    $
    15.40$17.00
    
    
    287
    
    
    
    9.77
    
    
    $
    17.00Total Outstanding
    
    
    6,708
    
    
    
    8.67
    
    
    $
    8.12
    
    
    $
    39,263Exercisable
    
    
    2,254
    
    
    
    7.19
    
    
    $
    1.29
    
    
    $
    28,579Vested and expected to vest
    
    
    5,561
    
    
    
    7.75
    
    
    $
    8.49
    
    
    $
    36,129
 10. Employee Stock Purchase Plan
  13




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11. Commitments and Contingencies
 Leases
  Years Ending June 30,2008 (remaining 6 months)
    
    $
    7862009
    
    
    1,5902010
    
    
    571$
    2,947
   Purchase commitments
 Litigation
   14




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##### Table of Contents



U.S. Federal Court litigation Watkins v. ShoreTel, Inc., et al Kelley v. ShoreTel, Inc., et al
 California State Court derivative action Berkovitz v. Combs, et al.
  Indemnification 
 12. Segment Information
 Disclosures About Segments of an Enterprise and Related Information
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006North America
    
    $
    28,790
    
    
    $
    21,610
    
    
    $
    59,702
    
    
    $
    41,820International
    
    
    1,771
    
    
    
    870
    
    
    
    2,834
    
    
    
    1,075Total
    
    $
    30,561
    
    
    $
    22,480
    
    
    $
    62,536
    
    
    $
    42,895
 15




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##### Table of Contents



13. Subsequent Events
   
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial statements and related
notes included elsewhere in this document. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from those discussed
below. Factors that could cause or contribute to such differences include, but are not limited to,
those identified below, and those discussed above in the section entitled Risk Factors.
 Overview
     16




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Key Business Metrics
  Initial and repeat sales orders.
 Deferred revenue.
 Gross margin.
  17




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Operating expense management.
 Basis of Presentation
 Revenue.
  Cost of revenue.
 Research and development expenses.
 Sales and marketing expenses.
 General and administrative expenses.
 18




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Other income (loss).
 Income tax provision.
 Critical Accounting Policies and Estimates
 Accounting for Uncertainty
of Income Taxes an interpretation of FASB Statement No. 109
 Results of Operations
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Revenue:Product
    
    $
    26,257
    
    
    $
    19,864
    
    
    $
    54,382
    
    
    $
    38,331Support and services
    
    
    4,304
    
    
    
    2,616
    
    
    
    8,154
    
    
    
    4,564Total revenue
    
    
    30,561
    
    
    
    22,480
    
    
    
    62,536
    
    
    
    42,895Cost of revenue:Product(1)
    
    
    8,724
    
    
    
    6,767
    
    
    
    18,128
    
    
    
    13,274Support and services(1)
    
    
    2,180
    
    
    
    1,595
    
    
    
    4,339
    
    
    
    3,040Total cost of revenue
    
    
    10,904
    
    
    
    8,362
    
    
    
    22,467
    
    
    
    16,314Gross profit
    
    
    19,657
    
    
    
    14,118
    
    
    
    40,069
    
    
    
    26,581Operating expenses:Research and development(1)
    
    
    6,257
    
    
    
    4,051
    
    
    
    12,464
    
    
    
    7,168Sales and marketing(1)
    
    
    8,804
    
    
    
    5,755
    
    
    
    17,126
    
    
    
    11,432General and administrative(1)
    
    
    4,478
    
    
    
    2,837
    
    
    
    8,201
    
    
    
    5,410Total operating expenses
    
    
    19,539
    
    
    
    12,643
    
    
    
    37,791
    
    
    
    24,010Operating income
    
    
    118
    
    
    
    1,475
    
    
    
    2,278
    
    
    
    2,571Other income (expense)  net
    
    
    1,197
    
    
    
    (395
    )
    
    
    2,400
    
    
    
    (238
    )Income before (provision for) benefit from income tax
    
    
    1,315
    
    
    
    1,080
    
    
    
    4,678
    
    
    
    2,333(Provision for) benefit from income taxes
    
    
    522
    
    
    
    22
    
    
    
    (284
    )
    
    
    (185
    )Net income
    
    $
    1,837
    
    
    $
    1,102
    
    
    $
    4,394
    
    
    $
    2,148
 
 19




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(1)
    
    Includes stock-based compensation as follows: Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of product revenue
    
    $
    17
    
    
    $
    3
    
    
    $
    25
    
    
    $
    4Cost of support and services revenue
    
    
    130
    
    
    
    24
    
    
    
    188
    
    
    
    29Research and development
    
    
    492
    
    
    
    82
    
    
    
    746
    
    
    
    99Sales and marketing
    
    
    572
    
    
    
    111
    
    
    
    1,023
    
    
    
    208General and administrative
    
    
    502
    
    
    
    415
    
    
    
    796
    
    
    
    1,117Total stock-based compensation expense
    
    $
    1,713
    
    
    $
    635
    
    
    $
    2,778
    
    
    $
    1,457
  Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31,2007
    
    2006
    
    2007
    
    2006Revenue:Product
    
    
    86
    %
    
    
    88
    %
    
    
    87
    %
    
    
    89
    %Support and services
    
    
    14
    %
    
    
    12
    %
    
    
    13
    %
    
    
    11
    %Total revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenue:Product
    
    
    29
    %
    
    
    30
    %
    
    
    29
    %
    
    
    31
    %Support and services
    
    
    7
    %
    
    
    7
    %
    
    
    7
    %
    
    
    7
    %Total cost of revenue
    
    
    36
    %
    
    
    37
    %
    
    
    36
    %
    
    
    38
    %Gross profit
    
    
    64
    %
    
    
    63
    %
    
    
    64
    %
    
    
    62
    %Operating expenses:Research and development
    
    
    20
    %
    
    
    18
    %
    
    
    20
    %
    
    
    17
    %Sales and marketing
    
    
    29
    %
    
    
    26
    %
    
    
    27
    %
    
    
    27
    %General and administrative
    
    
    15
    %
    
    
    12
    %
    
    
    13
    %
    
    
    12
    %Total operating expenses
    
    
    64
    %
    
    
    56
    %
    
    
    60
    %
    
    
    56
    %Operating income
    
    
    0
    %
    
    
    7
    %
    
    
    4
    %
    
    
    6
    %Other income (expense), net
    
    
    4
    %
    
    
    (2
    %)
    
    
    4
    %
    
    
    (1
    %)Income before (provision for) benefit from income tax
    
    
    4
    %
    
    
    5
    %
    
    
    8
    %
    
    
    5
    %(Provision for) benefit from income taxes
    
    
    2
    %
    
    
    
    
    
    
    (1
    %)
    
    
    Net income
    
    
    6
    %
    
    
    5
    %
    
    
    7
    %
    
    
    5
    %
 Revenue.
  20




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Gross margin.
  Research and development.
  Sales and marketing.
  21




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General and administrative.
  Other income (expense).
  Income tax provision.
 22




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Liquidity and Capital Resources
 Balance Sheet and Cash Flows
   December 31,
    
    June 30,2007
    
    2007
    
    IncreaseCash and cash equivalents
    
    $
    86,724
    
    
    $
    17,326
    
    
    $
    69,398Short-term investments
    
    
    18,680
    
    
    
    
    
    
    
    18,680Total
    
    $
    105,404
    
    
    $
    17,326
    
    
    $
    88,078
     Six Months Ended December 31,2007
    
    2006(In thousands)Cash provided by operating activities
    
    $
    8,779
    
    
    $
    3,268Cash used in investing activities
    
    
    (19,762
    )
    
    
    (417
    )Cash provided by financing activities
    
    
    80,381
    
    
    
    133
 Cash flows from operating activities
   23




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Cash flows from investing activities
   Cash flows from financing activities
  Off-Balance Sheet Arrangements
  Contractual obligations and commitments
  Payments Due by PeriodLess than
    
    
    1-3
    
    
    4-5
    
    
    5 years andTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    afterOperating lease obligations
    
    $
    2,947
    
    
    $
    1,572
    
    
    $
    1,375
    
    
    $
    
    
    
    $
    Non-cancelable purchase commitments for finished goods
    
    
    19,300
    
    
    
    19,300
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    22,247
    
    
    $
    20,872
    
    
    $
    1,375
    
    
    $
    
    
    
    $
    
 24




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Market Risk
  Interest Rate Risk
   Decrease in interest rates
    
    Increase in interest rates(in thousands)
    
    -100BPS
    
    -75 BPS
    
    -50BPS
    
    50 BPS
    
    75 BPS
    
    100 BPSTotal Fair Market Value
    
    $
    18,757
    
    
    $
    18,738
    
    
    $
    18,718
    
    
    $
    18,641
    
    
    $
    18,621
    
    
    $
    18,602Percent Change in Fair Value
    
    
    0.41
    %
    
    
    0.31
    %
    
    
    0.21
    %
    
    
    (0.21
    )%
    
    
    (0.31
    )%
    
    
    (0.41
    )%
 
 ITEM 4. CONTROLS AND PROCEDURES
    25




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PART II: OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   U.S. Federal Court litigation Watkins v. ShoreTel, Inc., et al Kelley v. ShoreTel, Inc., et al
 California State Court derivative action Berkovitz v. Combs, et al.
  
 ITEM 1A. RISK FACTORS
 Risks Related to Our Business
 Our operating results may fluctuate in the future, which could cause our stock price to decline.
  
    
    the purchasing and budgeting cycles of enterprise customers;
    
    the timing and volume of shipments of our products during a quarter, particularly as we
have recently begun to experience an increased level of sales occurring towards the end of a
quarter;
    
    delays in purchasing decisions by our customers from one quarter to the next, or later;
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
    
    adverse conditions specific to the IP telecommunications market, including decreased
demand due to overall economic conditions or reduced discretionary spending by enterprises,
rates of adoption of IP telecommunications systems and introduction of new standards;
    
    the timing and success of new product introductions by us or our competitors;
    
    the timing of recognition of revenue from sales to our customers;
    
    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 Payment, or
SFAS 123(R);
    
    publicly-announced litigation, such as the lawsuit by Mitel or stockholder litigation,
and the impact of such litigation on our sales;
    
    the timing of costs related to the development or acquisition of technologies or
businesses;
    
    changes in domestic and international regulatory environments affecting the Internet and
telecommunications industries;
    
    seasonality in our target markets; and
    
    general economic conditions or economic recession.
  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.
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Our business could be harmed by adverse economic conditions in our target markets or reduced
spending on information technology and telecommunication products.
  The market in which we operate is intensely competitive, and many of our competitors are larger,
more established and better capitalized than we are.
  
    
    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.
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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.
   If the emerging market for enterprise IP telecommunications systems does not fully develop or is
delayed due to an economic slowdowns , our future business would be harmed.
  
    
    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;
 29




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
    
    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.
  We rely on third-party resellers to sell our products, and disruptions to, or our failure to
develop and manage our distribution channels and the processes and procedures that support them
could adversely affect our business.
   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 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
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
    
    the strength of existing relationships between our competitors and potential enterprise
customers.
  If we fail to forecast demand for our products accurately, we may have excess or insufficient
inventory, which may increase our operating costs, decrease our revenues and harm our business.
  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.
  
    
    supplier capacity constraints;
    
    price increases;
    
    purchasing lead times;
    
    timely delivery ; and
    
    component quality.
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Our business may be harmed if our contract manufacturers are not able to provide us with adequate
supplies.
        The gross margins on our products may decrease due to competitive pressures or otherwise, which
could negatively impact our profitability.
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If we fail to make necessary improvements to address a material weakness in our internal control
over financial reporting, we may not be able to report our financial results accurately and
timely, any of which could harm our business, reputation and cause the price of our common stock
to decline.
      We are incurring significant increased costs as a result of operating as a public company, and our
management is required to devote substantial time to public company compliance initiatives. These
added costs and required management focus could adversely affect our operating results.
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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.
  
    
    the ability of our products to compete with the products and solutions offered by our
competitors;
    
    the cost of our products;
    
    the reliability of our products;
    
    the timeliness of the introduction and delivery of our products; and
    
    the market acceptance of our products.
   If we fail to respond to technological changes and evolving industry standards, our products could
become obsolete or less competitive in the future.
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Our products are highly complex and may contain undetected software or hardware errors, which
could harm our reputation and future product sales.
  Our future success depends on our ability to attract, integrate and retain key personnel, and our
failure to do so could harm our ability to grow our business.
  If we fail to manage our growth effectively, our business could be harmed.
  We intend to expand our international operations, which could expose us to significant risks.
  
    
    our ability to comply with differing technical and environmental standards and
certification requirements outside the United States;
    
    difficulties and costs associated with staffing and managing foreign operations;
    
    greater difficulty collecting accounts receivable and longer payment cycles;
    
    the need to adapt our products for specific countries;
    
    availability of reliable broadband connectivity and wide area networks in targeted areas
for expansion;
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
    
    unexpected changes in regulatory requirements;
    
    difficulties in understanding and complying with local laws, regulations and customs in
foreign jurisdictions;
    
    tariffs, export controls and other non-tariff barriers such as quotas and local content
rules;
    
    more limited protection for intellectual property rights in some countries;
    
    adverse tax consequences;
    
    fluctuations in currency exchange rates, which could increase the price of our products
outside of the United States, increase the expenses of our international operations and
expose us to foreign currency exchange rate risk;
    
    restrictions on the transfer of funds; and
    
    new and different sources of competition.
  Failure to protect our intellectual property could substantially harm our business.
   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.
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Our products include third-party technology and intellectual property, which could present
additional risks.
  We face certain litigation risks.
  We are subject to environmental and other health and safety regulations that may increase our
costs of operations or limit our activities.
  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.
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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 products require reliable broadband connections, and we may be unable to sell our products in
markets where broadband connections are not yet widely available.
  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.
  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.
  
    
    issuing additional common stock or other equity securities;
    
    issuing debt securities; or
    
    borrowing funds under a credit facility.
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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.
  We are exposed to fluctuations in the market values of our money market funds and investments;
impairment of our money market funds or investments could harm our
earnings
   Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable
and could also limit the market price of our stock.
  
    
    prohibit stockholder action by written consent, thereby requiring all stockholder actions
to be taken at a meeting of our stockholders;
    
    limit who may call a special meeting of stockholders;
    
    establish a classified board of directors, so that not all members of our board of
directors may be elected at one time;
    
    provide our board of directors with the ability to designate the terms of and issue a new
series of preferred stock without stockholder approval;
    
    require the approval of two-thirds of the shares entitled to vote at an election of
directors to adopt, amend or repeal our bylaws or repeal certain provisions of our
certificate of incorporation;
    
    allow a majority of the authorized number of directors to adopt, amend or repeal our
bylaws without stockholder approval;
    
    do not permit cumulative voting in the election of our directors, which would otherwise
permit less than a majority of stockholders to elect directors; and
    
    set limitations on the removal of directors.
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ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Use of Proceeds from Public Offering of Common Stock
    
    
    Underwriting discount  $6,041,525
    
    Other expenses  approximately $2,900,000
    
    Total expenses  approximately $8,900,000
    
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Name
    
    Shares For
    
    Shares WithheldMark F. Bregman
    
    
    38,222,584
    
    
    
    176,469John W. Combs
    
    
    37,710,088
    
    
    
    688,965Edward F. Thompson
    
    
    38,176,422
    
    
    
    222,631
  40




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Shares For
    
    Shares Against
    
    Shares Abstaining38,213,963
    
    
    53,661
    
    
    
    32,429
 
 ITEM 5. OTHER INFORMATION
  41




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SIGNATURES
   ShoreTel, Inc.By:
    /s/ Michael E. HealyMichael E. HealyChief Financial Officer 42




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INDEX TO FINANCIAL STATEMENT SCHEDULES
 
 EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit Title31.1 (1)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2 (1)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1 (1)
    
    Section 1350 Certification of Chief Executive Officer.32.2 (1)
    
    Section 1350 Certification of Chief Financial Officer.
 
 (1)
    
    This certification accompanying this report pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 is not deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference into any filing of the Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934 (whether made before or after the date of the Report), irrespective
of any general incorporation language contained in such filing. Financial Statement Schedules.
  43