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ShoreTel Inc · S-1/A · On 6/13/07

Filed On 6/13/07 2:15pm ET   ·   SEC File 333-140630   ·   Accession Number 950134-7-13351

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  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 6/13/07  ShoreTel Inc                      S-1/A                  2:249                                    Bowne of Dallas I..01/FA

Pre-Effective Amendment to Registration Statement (General Form)   ·   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Amendment to Form S-1                               HTML  1,430K 
 2: EX-23.2     Consent of Experts or Counsel                       HTML      5K 


S-1/A   ·   Amendment to Form S-1
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page
"Table of Contents
"Prospectus Summary
"Risk Factors
"Special Note Regarding Forward-Looking Statements and Industry Data
"Use of Proceeds
"Dividend Policy
"Capitalization
"Dilution
"Selected Consolidated Financial Data
"Management s Discussion and Analysis of Financial Condition and Results of Operations
"Business
"Management
"Executive Compensation
"Related Party Transactions
"Principal Stockholders
"Description of Capital Stock
"Shares Eligible For Future Sale
"Underwriting
"Legal Matters
"Experts
"Where You Can Find Additional Information
"Index to Consolidated Financial Statements
"Report of Independent Registered Public Accounting Firm
"Consolidated Balance Sheets
"Consolidated Statements of Operations
"Consolidated Statements of Redeemable Convertible Preferred Stock and Shareholders Deficit
"Consolidated Statements of Cash Flows
"Notes to Consolidated Financial Statements

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Table of Contents

As filed with the Securities and Exchange Commission on June 13, 2007
Registration No. 333-140630
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Pre-Effective
Amendment No. 4 to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
SHORETEL, INC.
(Exact name of Registrant as specified in its charter)
 
         
  3661   77-0443568
(State or other jurisdiction of
incorporation or organization)
  (Primary standard industrial
code number)
  (I.R.S. employer
identification no.)
 
 
 
 
960 Stewart Drive
Sunnyvale, CA 94085-3913
(408) 331-3300
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
 
 
 
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:
 
     
Dennis DeBroeck, Esq.    Jeffrey D. Saper, Esq.
Jeffrey R. Vetter, Esq.    Steven V. Bernard, Esq.
Fenwick & West LLP   Wilson Sonsini Goodrich & Rosati, P.C.
801 California Street   650 Page Mill Road
Mountain View, California 94041   Palo Alto, California 94304
(650) 988-8500   (650) 493-9300
 
 
 
 
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
 
 
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.
 



Table of Contents

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.
 
SUBJECT TO COMPLETION. DATED JUNE 13, 2007.
 
7,900,000 Shares
 
Image -- (SHORETEL LOGO)
Common Stock
 
 
 
 
This is our initial public offering, and no public market currently exists for our shares of common stock. We are offering 7,900,000 shares of common stock. We anticipate that the initial public offering price will be between $8.50 and $10.50 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.
 
 
                 
    Per Share     Total  
 
Initial public offering price
  $           $        
Underwriting discount
  $       $    
Proceeds, before expenses, to ShoreTel
  $       $  
 
To the extent that the underwriters sell more than 7,900,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,185,000 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.
 
 
 
 
Lehman Brothers JPMorgan
 
 
 
 
Piper Jaffray JMP Securities Wedbush Morgan Securities
 
Prospectus dated          , 2007



Table of Contents

Image -- (SHORETEL LOGO)



 

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  F-1
 EXHIBIT 23.2
 
 
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 dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.


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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 “Management’s 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 Internet Protocol, or 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. As of March 31, 2007, we had sold our IP telecommunications systems to more than 4,500 enterprise customers, including CNET Networks, Robert Half International and the City of Oakland, California. We sell our systems through our extensive network of more than 400 channel partners.
 
We have achieved broad industry recognition for our technology and high customer satisfaction. Our enterprise IP telecommunications systems received PC Magazine’s Best of the Year 2005 Editors’ Choice designation. For the last four 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 $4.2 million for the nine-month period ended March 31, 2007. As of March 31, 2007, we had an accumulated deficit of $86.7 million and total shareholders’ deficit of $34.5 million.
 
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


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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. 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 enterprise’s 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:
 
  •  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.
 
  •  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.
 
  •  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.
 
  •  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.
 
  •  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.
 
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 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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  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.
 
  •  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.
 
  •  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.
 
  •  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.
 
  •  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.
 
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.


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Table of Contents

THE OFFERING
 
Shares of common stock offered by ShoreTel 7,900,000 shares
 
Shares of common stock to be outstanding after this offering 41,255,916 shares
 
Use of proceeds We estimate that we will receive net proceeds of $67.6 million from our sale of the 7,900,000 shares of common stock offered by us in this offering, based on an assumed initial public offering price of $9.50 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. In addition, we may use up to $5.0 million of the net proceeds of this offering to acquire technology to extend and enhance the functionality of our existing products. See “Use of Proceeds.”
 
Proposed NASDAQ Global Market symbol SHOR
 
The number of shares of common stock to be outstanding after this offering is based on 33,355,916 shares outstanding as of March 31, 2007, and excludes:
 
  •  3,243,485 shares of common stock issuable upon exercise of outstanding options as of March 31, 2007, at a weighted average exercise price of $1.31 per share;
 
  •  1,302,038 shares of common stock issuable upon exercise of options granted between April 1, 2007 and June 13, 2007, at a weighted average exercise price of $11.34 per share;
 
  •  70,883 shares of common stock issuable upon exercise of outstanding warrants as of March 31, 2007, at a weighted average exercise price of $2.77 per share; and
 
  •  3,697,962 shares of common stock reserved for future grant or issuance under our 2007 equity incentive plan and 500,000 shares of common stock to be available for issuance under our 2007 employee stock purchase plan effective upon the completion of this offering.
 
Except as otherwise noted, all information in this prospectus:
 
  •  reflects our reincorporation into Delaware and the filing of our restated certificate of incorporation prior to the completion of this offering;
 
  •  reflects the conversion of all our outstanding shares of redeemable convertible preferred stock into an aggregate of 23,316,406 shares of common stock effective upon the completion of this offering;
 
  •  reflects the conversion of all outstanding warrants to purchase shares of our redeemable convertible preferred stock into warrants to purchase an aggregate of 67,703 shares of common stock effective upon completion of this offering;
 
  •  reflects a 1-for-10 reverse split of our outstanding capital stock to be effective prior to the completion of this offering; and
 
  •  assumes no exercise of the underwriters’ option to purchase up to an additional 1,185,000 shares from us.


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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 nine-month periods ended March 31, 2006 and 2007 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 “Management’s 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.
 
                                         
    Year Ended June 30,     Nine Months Ended March 31,  
    2004     2005     2006     2006     2007  
    (Dollars in thousands, except per share amounts)  
 
Consolidated statement of operations data:
                                       
Revenue:
                                       
Product
  $ 16,587     $ 31,970     $ 55,300     $ 37,972     $ 61,473  
Support and services
    2,241       3,512       6,308       4,552       7,431  
                                         
Total revenue
    18,828       35,482       61,608       42,524       68,904  
Cost of revenue:
                                       
Product (1)
    7,725       13,961       21,855       15,723       21,271  
Support and services (1)
    1,660       2,907       5,425       3,942       4,853  
                                         
Total cost of revenue
    9,385       16,868       27,280       19,665       26,124  
Gross profit
    9,443       18,614       34,328       22,859       42,780  
                                         
Operating expenses:
                                       
Research and development (1)
    5,517       7,034       9,720       6,520       11,450  
Sales and marketing (1)
    8,004       10,050       15,699       10,855       18,441  
General and administrative (1)
    2,166       3,045       4,936       3,108       8,383  
                                         
Total operating expenses
    15,687       20,129       30,355       20,483       38,274  
                                         
Income (loss) from operations
    (6,244 )     (1,515 )     3,973       2,376       4,506  
Other income (expense) — net
    (7 )     124       248       96       (7 )
                                         
Income (loss) before provision for income taxes
    (6,251 )     (1,391 )     4,221       2,472       4,499  
Income tax provision
          (11 )     (219 )     (140 )     (311 )
                                         
Net income (loss)
    (6,251 )     (1,402 )     4,002       2,332       4,188  
Accretion of preferred stock
    (26 )     (32 )     (51 )     (38 )     (38 )
                                         
Net income (loss) available to common shareholders
  $ (6,277 )   $ (1,434 )   $ 3,951     $ 2,294     $ 4,150  
                                         
Net income (loss) per common share available to common shareholders (2):
                                       
Basic
  $ (1.27 )   $ (0.27 )   $ 0.60     $ 0.36     $ 0.50  
Diluted
  $ (1.27 )   $ (0.27 )   $ 0.39     $ 0.24     $ 0.34  
Shares used in computing net income (loss) per share available to common shareholders (2):
                                       
Basic
    4,934,507       5,351,706       6,609,170       6,358,839       8,341,561  
Diluted
    4,934,507       5,351,706       10,114,513       9,574,631       12,176,351  
Unaudited pro forma net income per share available to common shareholders (3):
                                       
Basic
                  $ 0.13             $ 0.13  
Diluted
                  $ 0.12             $ 0.12  
Unaudited shares used in computing pro forma net income per share available to common shareholders (3):
                                       
Basic
                    29,925,576               31,657,967  
Diluted
                    33,430,919               35,492,757  


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(1) Includes stock-based compensation expense as follows:
 
                                         
          Nine Months
 
    Year Ended June 30,     Ended March 31,  
    2004     2005     2006     2006     2007  
    (In thousands)  
 
Cost of product revenue
  $     $     $     $     $ 7  
Cost of support and services revenue
                16       14       55  
Research and development
                14       6       190  
Sales and marketing
                7       2       331  
General and administrative
    45       82       45       24       1,470  
                                         
Total stock-based compensation
  $         45     $         82     $          82     $          46     $       2,053  
                                         
 
(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, which gives effect to the 1-for-10 reverse split of our outstanding common stock prior to the closing of this offering.
 
(3) 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 available to common shareholders have been computed to give effect to the 1-for-10 reverse split of our outstanding common stock prior to the closing of this offering and the 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 nine-month period ended March 31, 2007.
 
The actual consolidated balance sheet data as of March 31, 2007 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. 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 and the reclassification of the preferred stock warrant liability to 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 7,900,000 shares of common stock offered by us at an assumed initial public offering price of $9.50 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 March 31, 2007  
                Pro Forma As
 
    Actual     Pro Forma     Adjusted(1)  
    (In thousands)  
 
Consolidated balance sheet data:
                       
Cash and cash equivalents
  $ 16,811     $ 16,811     $ 84,458  
Working capital
    22,443       22,443       90,090  
Total assets
    48,112       48,112       115,759  
Preferred stock warrant liability
    666              
Redeemable convertible preferred stock
    56,329              
Total shareholders’ equity (deficit)
    (34,453 )     22,542       90,189  
 
 
(1) Each $1.00 increase or decrease in the assumed initial public offering price of $9.50 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 $7.3 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.


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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 $86.7 million as of March 31, 2007. 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 (which recently announced plans to acquire Inter-Tel Incorporated) 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;