Filed On 6/13/07 2:15pm ET · SEC File 333-140630 · Accession Number 950134-7-13351
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
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1: S-1/A Amendment to Form S-1 HTML 1,430K
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As filed with the Securities and Exchange Commission on
June 13, 2007
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)
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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
(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
(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, P.C.
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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
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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7,900,000 Shares
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
$10.50 per share.
We have applied to have our common stock approved for quotation
on the NASDAQ Global Market under the symbol “SHOR.”
Investing in our common stock involves risks. See “Risk
Factors” beginning on page 7.
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Per Share
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Total
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Initial public offering price
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$
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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
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.
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| Piper
Jaffray |
JMP
Securities |
Wedbush
Morgan Securities |
Prospectus
dated ,
2007
TABLE OF
CONTENTS
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Page
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1
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7
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24
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25
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25
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26
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28
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30
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32
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56
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67
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74
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90
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92
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95
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99
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101
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106
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106
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106
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F-1
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| 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.
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
“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
1
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:
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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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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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7,900,000 shares |
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Shares of common stock to be outstanding after this offering |
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41,255,916 shares |
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Use of proceeds |
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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.” |
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Proposed NASDAQ Global Market symbol |
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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:
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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;
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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;
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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
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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.
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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
23,316,406 shares of common stock effective upon the
completion of this offering;
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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;
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reflects a 1-for-10 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 1,185,000 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 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.
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Year Ended June 30,
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Nine Months Ended March 31,
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2004
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2005
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2006
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2006
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2007
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(Dollars in thousands, except 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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37,972
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$
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61,473
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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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4,552
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7,431
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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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42,524
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68,904
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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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15,723
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21,271
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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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3,942
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4,853
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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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19,665
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26,124
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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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22,859
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42,780
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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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6,520
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11,450
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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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10,855
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18,441
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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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3,108
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8,383
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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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|
|
|
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
|
|
5
|
|
|
|
(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.
|
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 $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;
|
| |
| |
•
|
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;
|
| |
| |
•
|
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;
|
9
|
|
|
| |
•
|
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);
|
| |
| |
•
|
the timing of costs related to the development or acquisition of
technologies or businesses;
|
| |
| |
•
|
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
affecting the Internet and telecommunications industries;
|
| |
| |
•
|
seasonality in our target markets; and
|
| |
| |
•
|
the purchasing and budgeting cycles of enterprise customers.
|
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 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.
Approximately 92% of our total revenue in fiscal 2006 was
generated through indirect channel sales. These indirect sales
channels consist of third-party resellers that market and sell
telecommunications systems and other products and services to
customers. 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
third-party resellers of telecommunications products and
services. 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. As of
June 30, 2005 and
2006, we had
approximately 210 and 340, respectively, third-party resellers
in our channel partner program. Historically, we have
experienced relatively low turnover of the resellers in our
program, with 13 and 19 members leaving the program in fiscal
2005 and fiscal 2006, respectively.
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.
10
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 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:
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the timing of enterprise customers’ budget cycles and
approval processes;
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a technical evaluation or trial by potential enterprise
customers;
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our ability to introduce new products, features or functionality
in a manner that suits the needs of a particular enterprise
customer;
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the announcement or introduction of competing products; and
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the strength of existing relationships between our competitors
and potential enterprise customers.
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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. We do not have supply agreements with our sole
source suppliers, and the components for our products are
typically procured by our
contract manufacturers. 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:
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supplier capacity constraints;
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price increases;
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timely delivery; and
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component quality.
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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. For example, in December 2004, our power supply
component vendor was unable to provide sufficient components,
and we had to obtain this component from another source. Also,
from time to time we have experienced component quality issues
with products obtained from our
contract manufacturers. For
example, in the first quarter of our 2005 fiscal year, we had to
expend resources to fix keys that were not working properly on
some of our phones. 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
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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.
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 or costly for us to change the
contract manufacturer
of our phones or to arrange for an alternate of or a replacement
for these products in a timely manner should a transition be
required. This could also subject us to the risk that our
competitors could obtain phones containing technology that is
the same as or similar to the technology in our phones.
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.
12
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 make necessary improvements to address material
weaknesses and significant deficiencies in our internal control
over financial reporting noted by our independent registered
public accounting firm, we may not be able to report our
financial results accurately and timely or prevent fraud, any of
which could harm our business, reputation and cause the price of
our common stock to decline.
In connection with the audit of our financial statements for the
six-month period ended
December 31, 2006, our independent
registered public accounting firm noted in their report to our
audit committee that we had the following material weaknesses in
our internal control over financial reporting as of
December 31, 2006:
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we do not have a sufficient number of accounting personnel with
the relevant technical accounting and financial reporting
experience and skills to facilitate the preparation of timely
and accurate consolidated financial statements; and
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we do not have sufficient internal controls related to the
identification of all products and services associated with a
sales arrangement, including commitments made by our sales and
marketing personnel and channel partners to provide specified
upgrades, services or additional products to customers in the
future, including through product roadmap presentations to
customers.
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If vendor-specific objective evidence, or VSOE, of fair value
does not exist for commitments to provide specified upgrades,
services or additional products to customers in the future, as
has been the case from time to time in the past, we defer all
revenue from the arrangement until the earlier of the point at
which VSOE of fair value does exist or all such elements from
the arrangement have been delivered.
Additionally, the following two significant deficiencies in the
design or operation of our internal control over financial
reporting were noted:
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we do not accurately maintain data sufficient to readily track
and validate the existence of fixed assets and we have no formal
procedures in place to ensure that fixed assets continue to be
held and used; and
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we do not have adequate procedures for identifying and recording
period-ended accrued expenses and in-transit inventory.
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A material weakness and significant deficiency are defined as a
control deficiency, or combination of control deficiencies, that
adversely affect an entity’s ability to initiate,
authorize, record, process or report financial data reliably in
accordance with generally accepted accounting principles such
that there is more than a remote likelihood that a material
misstatement (with respect to a material weakness) of the
entity’s financial statements or a misstatement that is
more than inconsequential (with respect to a significant
deficiency) will not be prevented or detected by the
entity’s internal control over financial reporting.
These material weaknesses and significant deficiencies resulted
in a number of audit adjustments to our consolidated financial
statements for the six-month period ended
December 31, 2006
that were noted during the course of the audit. In addition,
these material weaknesses and significant deficiencies
contributed to delays in the completion of the audit.
We are in the process of taking steps intended to remedy these
material weaknesses and significant deficiencies, and we will
not be able to fully address these material weaknesses and
significant deficiencies until these steps have been completed.
If we fail to further increase and maintain the number and
expertise of our staff for our accounting and finance functions
and to improve and maintain internal control over financial
reporting adequate to meet the demands that will be placed upon
us as a public company, including the requirements of the
Sarbanes-
13
Oxley Act, we may be unable to report our financial results
accurately and prevent fraud. If we cannot do so, our business,
reputation and stock price may decline.
Furthermore, SEC rules require that, as a publicly-traded
company following completion of this offering, we file periodic
reports containing our financial statements within a specified
time following the completion of quarterly and annual periods.
Prior to this offering, we have never been required to have our
financial statements completed and reviewed or audited within a
specified period, and, as such, we may experience difficulty in
meeting the SEC’s reporting requirements in a timely
manner. Any failure by us to timely file our periodic reports
with the SEC could harm our reputation and reduce the market
price of our common stock.
Even if we are able to report our financial statements
accurately and timely, if we do not make all the necessary
improvements to address the material weaknesses, continued
disclosure of our material weaknesses will be required in future
filings with the SEC, which could cause our reputation to be
harmed and our stock price to decline.
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
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 control over
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 control 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 continues to
note or identify deficiencies in our internal control 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 cause us to reduce costs in other areas of our business
or increase the prices of our products or services to offset the
effect of such increased costs. Additionally, if these
requirements divert our management’s attention from other
business concerns, they could have a material adverse effect on
our business, financial condition 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 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, regardless of its
merit, is costly and may divert management’s attention and
adversely affect the market’s 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.
15
Our
business could be harmed by adverse economic conditions in our
target markets or reduced spending on information technology and
telecommunication products.
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 in our target markets, 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 reduced unit 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.
Our future success will depend, to a significant extent, on our
ability to attract, integrate and retain our key personnel,
namely our management team and experienced sales and engineering
personnel. For example, we hired Michael E. Healy as our
new Chief Financial Officer, effective
May 10, 2007, and we
have also recently hired other personnel in our finance
department. We may experience difficulty assimilating our newly
hired personnel, which may adversely affect our business. In
addition, 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, integrate and retain key employees,
our ability to manage and 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; and
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new and different sources of competition.
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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
foreign patent application
relating to one of our U.S. patents. 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.
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 alleging that we infringed on two patents,
and, in
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April 2007, we were named as the defendant in a lawsuit
regarding this alleged infringement. This lawsuit was settled in
May 2007. However, 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 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
18
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, and we derived approximately 4% and 7% of our
total revenue from sales to educational institutions in fiscal
2006 and the nine-month period ended
March 31, 2007. 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 customer’s 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.
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.
19
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.
Although we anticipate that our current cash on hand and the
proceeds from this offering will be sufficient to meet our
currently anticipated cash needs for the next twelve months, 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.
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
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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20
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regulatory developments in the United States, foreign countries
or both;
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economic conditions and trends in our industry;
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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 company’s 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 management’s 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
May 31, 2007, upon the
completion of this offering, assuming no outstanding options are
exercised prior to the completion of this offering, we will have
approximately 41,267,249 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
33,367,249 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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32,899,655 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.,
however, we have no current intention to request that any shares
be released from lock-up restrictions prior to the expiration of
the lock-up period; and
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the remainder of the shares will be eligible for sale in the
public market from time to time thereafter upon the lapse of our
right to repurchase with respect to any unvested shares.
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Furthermore, following this offering, certain holders
of shares of our common stock and common stock issued upon
conversion of our preferred stock and warrants will be entitled
to rights with respect to the registration of a total of
27,487,771 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.
In connection with this offering, we intend to register on a
registration statement on
Form S-8
up to approximately 3,243,485 shares of common stock that
are authorized for issuance pursuant to outstanding stock
options granted under our 1997 stock option plan and a non-plan
stock option, 5,000,000 shares of common stock that are
subject to outstanding stock options or authorized for future
issuance or grant under our 2007 stock option plan and
500,000 shares of common stock that are authorized for
issuance under our 2007 employee stock purchase plan. As of
May 31, 2007, 4,515,431 shares were subject to
outstanding options under our 1997 stock option plan, our 2007
equity incentive plan and a non-plan stock option, of which
1,195,766 shares were vested as of that date, and of which
an additional 828,600 shares will become vested as of
May 31, 2008 (assuming no changes in current vesting
schedules and continuous employment of the holders of these
options). No shares were subject to outstanding purchase rights
under our 2007 employee stock purchase plan as of the date of
this prospectus. All of these shares when issued will be
subject to the lock-up agreements referred to above and
28,280,486 shares held by our affiliates will be subject to
Rule 144 restrictions. To the extent 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.
21
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
May 31, 2007, our current
directors, executive officers, holders of more than 5% of our
common stock, including funds affiliated with Crosspoint Venture
Partners, Foundation Capital and Lehman Brothers, and their
respective affiliates will, in the aggregate, beneficially own
approximately 69.4% 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
management’s 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 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 in the pro
forma net tangible book value per share of $7.31 per share,
based on an assumed initial public offering price of
$9.50 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 pro forma
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
22
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.
23
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY
DATA
This prospectus, particularly in the sections entitled
“Prospectus Summary,” “Risk Factors,”
“Management’s 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.
24
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 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 $78.1 million. Each $1.00 increase or
decrease in the assumed initial public offering price of
$9.50 per share would increase or decrease the net proceeds
to us from this offering by approximately $7.3 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. We may use up to $5.0 million
of the net proceeds of this offering to acquire technology from
an unrelated third party that we expect will extend and enhance
the functionality of our existing products. In addition, we may
use a portion of the proceeds of this offering for other
possible acquisitions of complementary businesses, technologies
or other assets. We have no current agreements or commitments
with respect to any material 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.
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 lender’s consent.
25
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of
March 31, 2007:
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on a pro forma basis to reflect (1) the conversion of all
outstanding redeemable convertible preferred stock into common
stock upon the completion of this offering, (2) the
increase in the authorized number of shares of common stock
under our certificate of incorporation from
40,000,000 shares to 500,000,000 shares upon
completion of this offering and (3) the reclassification of
the preferred stock warrant liability to common stock upon the
conversion of warrants to purchase shares of our redeemable
convertible preferred stock into warrants to purchase shares of
our 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 $9.50 per share, the midpoint of
the range set forth on the cover page of this prospectus, after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
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You should read this table together with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our audited consolidated financial
statements and the related notes, each included elsewhere in
this prospectus.
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As of
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March 31, 2007
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Pro
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Pro Forma as
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Actual
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Forma
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Adjusted(1)
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(In thousands, except share and
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per share data)
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Cash and cash equivalents
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$
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16,811
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$
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16,811
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$
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84,458
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Preferred stock warrant liability
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666
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—
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—
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Redeemable convertible preferred
stock: 23,586,252 shares authorized, 23,316,406 shares
issued or outstanding, actual; no shares authorized, no shares
issued and outstanding, pro forma and pro forma as adjusted
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56,329
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|
|
—
|
|
|
|
—
|
|
|
Shareholders’ equity
(deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock: no shares
authorized, issued or outstanding, actual; 5,000,000 shares
authorized, no shares issued and outstanding, pro forma and pro
forma as adjusted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common stock:
40,000,000 shares authorized, 10,039,510 shares issued
and outstanding, actual; 500,000,000 shares authorized,
33,355,916 shares issued and outstanding, pro forma;
500,000,000 shares authorized, 41,255,916 shares
issued and outstanding, pro forma as adjusted
|
|
|
52,522
|
|
|
|
109,517
|
|
|
|
177,164
|
|
|
Deferred compensation
|
|
|
(284
|
)
|
|
|
(284
|
)
|
|
|
(284
|
)
|
|
Accumulated deficit
|
|
|
(86,691
|
)
|
|
|
(86,691
|
)
|
|
|
(86,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
(deficit)
|
|
$
|
(34,453
|
)
|
|
$
|
22,542
|
|
|
$
|
90,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
22,542
|
|
|
$
|
22,542
|
|
|
$
|
90,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Each $1.00 increase or decrease in
the assumed public offering price of $9.50 per share would
increase or decrease, respectively, the amount of cash and cash
equivalents, common stock and total shareholders’ (deficit)
equity 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.
|
26
The information in the preceding page 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.
|
27
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
March 31, 2007, we had a pro forma net tangible book
value of $22.5 million, or $0.68 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 (1) the conversion of all outstanding
shares of redeemable convertible preferred stock into common
stock upon the completion of this offering and (2) the
reclassification of the preferred stock warrant liability
reflected on our consolidated balance sheet to common stock upon
conversion of warrants to purchase shares of our redeemable
convertible preferred stock into warrants to purchase shares of
our 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
7,900,000 shares of common stock offered by us under this
prospectus at an assumed public offering price of $9.50 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
March 31, 2007 would have been approximately
$90.2 million, or approximately $2.19 per share of
common stock. This represents an immediate increase in pro forma
net tangible book value of $1.51 per share to our existing
stockholders and an immediate dilution in pro forma net tangible
book value of $7.31 per share to new investors purchasing
shares in this offering. The following table illustrates this
per share dilution:
| |
|
|
|
|
|
|
|
|
|
Assumed initial public offering
price per share
|
|
|
|
|
|
$
|
9.50
|
|
Pro forma net tangible book value
per share as of March 31, 2007, before
giving effect to this offering
|
|
$
|
0.68
|
|
|
|
|
|
|
Increase in pro forma net tangible
book value per share attributable to this
offering
|
|
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible
book value per share after giving effect to this offering
|
|
|
|
|
|
|
2.19
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible
book value per share to new investors in this offering
|
|
|
|
|
|
$
|
7.31
|
|
|
|
|
|
|
|
|
|
|
|
Each $1.00 increase or decrease in the assumed public offering
price of $9.50 per share would increase or decrease,
respectively, our pro forma as adjusted net tangible book value
after giving effect to this offering by $7.3 million and
correspondingly decrease or increase, respectively, the dilution
in pro forma net tangible book value per share to new investors
in this offering by $0.18 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 estimated
underwriting discounts and commissions payable by us.
The following table shows, as of
March 31, 2007, 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 $9.50 per share, which is the
28
midpoint of the range set forth on the cover page of this
prospectus, and before deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price per
|
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
|
|
Existing stockholders
|
|
|
33,355,916
|
|
|
|
80.9
|
%
|
|
$
|
103,813,500
|
|
|
|
58.0
|
%
|
|
$
|
3.11
|
|
|
New investors
|
|
|
7,900,000
|
|
|
|
19.1
|
|
|
|
75,050,000
|
|
|
|
42.0
|
|
|
|
9.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
41,255,916
|
|
|
|
100.0
|
%
|
|
|
178,863,500
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Each $1.00 increase or decrease in the assumed initial public
offering price of $9.50 per share would increase or decrease,
respectively, the total consideration paid by new investors and
total consideration paid by all stockholders by
$7.9 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 1,185,000 additional shares from us in this offering, our pro
forma as adjusted net tangible book value per share as of
March 31, 2007 will be $2.37, representing an immediate
increase in pro forma net tangible book value per share
attributable to this offering of $1.70 to our existing
stockholders and an immediate dilution per share to new
investors in this offering of $7.13. If the underwriters’
option to purchase additional shares is exercised in full, our
existing stockholders would own 78.6% and our new investors
would own 21.4% of the total number of shares of our common
stock outstanding after this offering.
The information in the tables above 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.
|
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.
The following table assumes the exercise of all options and
warrants outstanding as of
March 31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price
|
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per Share
|
|
|
|
|
Existing stockholders
|
|
|
33,355,916
|
|
|
|
74.9
|
%
|
|
$
|
103,813,500
|
|
|
|
56.6
|
%
|
|
$
|
3.11
|
|
|
Shares subject to options and
warrants(1)
|
|
|
3,320,368
|
|
|
|
7.4
|
|
|
|
4,456,116
|
|
|
|
2.4
|
|
|
|
1.34
|
|
|
New investors
|
|
|
7,900,000
|
|
|
|
17.7
|
|
|
|
75,050,000
|
|
|
|
41.0
|
|
|
|
9.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
44,576,284
|
|
|
|
100.0
|
%
|
|
$
|
183,319,616
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Because some of the warrants may be
exercised on a “net exercise” basis, the actual number
of shares of common stock that may be issued upon exercise of
the warrants may be lower. In addition, warrants to purchase
3,180 shares of common stock have exercise prices that
exceed $9.50, the midpoint of the range set forth on the cover
page of this prospectus. Accordingly, these warrants may never
be exercised.
|
29
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
consolidated balance sheet data as of
June 30, 2002,
2003
and
2004 and the consolidated statements of operations data for
the fiscal 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 nine-month periods ended
March 31,
2006 and
2007 and the consolidated balance sheet data as of
March 31, 2007 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
“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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
Year Ended June 30,
|
|
|
March 31,
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statement of
operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
5,302
|
|
|
$
|
8,537
|
|
|
$
|
16,587
|
|
|
$
|
31,970
|
|
|
$
|
55,300
|
|
|
$
|
37,972
|
|
|
$
|
61,473
|
|
|
Support and services
|
|
|
1,872
|
|
|
|
1,755
|
|
|
|
2,241
|
|
|
|
3,512
|
|
|
|
6,308
|
|
|
|
4,552
|
|
|
|
7,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
7,174
|
|
|
|
10,292
|
|
|
|
18,828
|
|
|
|
35,482
|
|
|
|
61,608
|
|
|
|
42,524
|
|
|
|
68,904
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product (1)
|
|
|
3,212
|
|
|
|
4,401
|
|
|
|
7,725
|
|
|
|
13,961
|
|
|
|
21,855
|
|
|
|
15,723
|
|
|
|
21,271
|
|
|
Support and services (1)
|
|
|
1,888
|
|
|
|
1,539
|
|
|
|
1,660
|
|
|
|
2,907
|
|
|
|
5,425
|
|
|
|
3,942
|
|
|
|
4,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
5,100
|
|
|
|
5,940
|
|
|
|
9,385
|
|
|
|
16,868
|
|
|
|
27,280
|
|
|
|
19,665
|
|
|
|
26,124
|
|
|
Gross profit
|
|
|
2,074
|
|
|
|
4,352
|
|
|
|
9,443
|
|
|
|
18,614
|
|
|
|
34,328
|
|
|
|
22,859
|
|
|
|
42,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development (1)
|
|
|
7,100
|
|
|
|
6,575
|
|
|
|
5,517
|
|
|
|
7,034
|
|
|
|
9,720
|
|
|
|
6,520
|
|
|
|
11,450
|
|
|
Sales and marketing (1)
|
|
|
8,519
|
|
|
|
6,934
|
|
|
|
8,004
|
|
|
|
10,050
|
|
|
|
15,699
|
|
|
|
10,855
|
|
|
|
18,441
|
|
|
General and administrative (1)
|
|
|
4,022
|
|
|
|
2,884
|
|
|
|
2,166
|
|
|
|
3,045
|
|
|
|
4,936
|
|
|
|
3,108
|
|
|
|
8,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,641
|
|
|
|
16,393
|
|
|
|
15,687
|
|
|
|
20,129
|
|
|
|
30,355
|
|
|
|
20,483
|
|
|
|
38,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(17,567
|
)
|
|
|
(12,041
|
)
|
|
|
(6,244
|
)
|
|
|
(1,515
|
)
|
|
|
3,973
|
|
|
|
2,376
|
|
|
|
4,506
|
|
|
Other income (expense) —
net
|
|
|
(31
|
)
|
|
|
19
|
|
|
|
(7
|
)
|
|
|
124
|
|
|
|
248
|
|
|
|
96
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
income taxes
|
|
|
(17,598
|
)
|
|
|
(12,022
|
)
|
|
|
(6,251
|
)
|
|
|
(1,391
|
)
|
|
|
4,221
|
|
|
|
2,472
|
|
|
|
4,499
|
|
|
Income tax provision
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
(219
|
)
|
|
|
(140
|
)
|
|
|
(311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(17,598
|
)
|
|
|
(12,022
|
)
|
|
|
(6,251
|
)
|
|
|
(1,402
|
)
|
|
|
4,002
|
|
|
|
2,332
|
|
|
|
4,188
|
|
|
Accretion of preferred stock
|
|
|
—
|
|
|
|
(38
|
)
|
|
|
(26
|
)
|
|
|
(32
|
)
|
|
|
(51
|
)
|
|
|
(38
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders
|
|
$
|
(17,598
|
)
|
|
$
|
(12,060
|
)
|
|
$
|
(6,277
|
)
|
|
$
|
(1,434
|
)
|
|
$
|
3,951
|
|
|
$
|
2,294
|
|
|
$
|
4,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
available to common shareholders(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(18.66
|
)
|
|
$
|
(10.97
|
)
|
|
$
|
(1.27
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
0.60
|
|
|
$
|
0.36
|
|
|
$
|
0.50
|
|
|
Diluted
|
|
$
|
(18.66
|
)
|
|
$
|
(10.97
|
)
|
|
$
|
(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
|
|
|
943,211
|
|
|
|
1,099,805
|
|
|
|
4,934,507
|
|
|
|
5,351,706
|
|
|
|
6,609,170
|
|
|
|
6,358,839
|
|
|
|
8,341,561
|
|
|
Diluted
|
|
|
943,211
|
|
|
|
1,099,805
|
|
|
|
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
|
|
30
(1) Includes stock-based compensation expense as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
Year Ended June 30,
|
|
|
March 31,
|
|
|
|
|
2002
|
|
|
2003
|
|
|
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
|
|
|
—
|
|
|
|
446
|
|
|
|
45
|
|
|
|
82
|
|
|
|
45
|
|
|
|
24
|
|
|
|
1,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
—
|
|
|
$
|
446
|
|
|
$
|
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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
As of June 30,
|
|
|
March 31,
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
|
|
Consolidated balance sheet
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,182
|
|
|
$
|
3,451
|
|
|
$
|
723
|
|
|
$
|
5,373
|
|
|
$
|
12,333
|
|
|
$
|
16,811
|
|
|
Working capital
|
|
|
3,476
|
|
|
|
3,720
|
|
|
|
1,320
|
|
|
|
10,741
|
|
|
|
16,208
|
|
|
|
22,443
|
|
|
Total assets
|
|
|
13,426
|
|
|
|
8,231
|
|
|
|
7,962
|
|
|
|
20,960
|
|
|
|
30,885
|
|
|
|
48,112
|
|
|
Redeemable convertible preferred
stock
|
|
|
79,974
|
|
|
|
42,814
|
|
|
|
46,300
|
|
|
|
56,281
|
|
|
|
56,332
|
|
|
|
56,329
|
|
|
Total shareholders’ equity
(deficit)
|
|
|
(74,721
|
)
|
|
|
(38,374
|
)
|
|
|
(44,596
|
)
|
|
|
(45,713
|
)
|
|
|
(41,168
|
)
|
|
|
(34,453
|
)
|
31
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 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 nine-month periods
ended March 31, 2006 and 2007 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 nine 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
March 31, 2007,
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.
32
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 3% or less of our total revenue for
2004, 2005, 2006 and the nine-month period ended
March 31,
2007, respectively. Although we intend to focus on increasing
international sales, we expect that sales to enterprise
customers in the United States will continue to comprise the
significant majority of our sales.
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 250 employees
at
March 31, 2007. 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
March 31, 2007 was $12.0 million,
of which $8.5 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.
33
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
for hardware and software products depend on that channel
partner’s volume and customer satisfaction metrics, as well
as our own strategic considerations. In circumstances where we
sell directly to the enterprise customer in transactions that
have been assisted by channel partners, we report our revenue
net of any associated payment to the channel partners that
assisted in such sales. This results in recognized revenue from
a direct sale approximating the revenue that would have been
recognized from a sale of a comparable system through a channel
partner. Product revenue has accounted for 88%, 90%, 90% and 89%
of our total revenue for 2004, 2005, 2006 and the nine-month
period ended
March 31, 2007, 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, tax, 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
34
associated with being a public company. In addition, as we
expand our business, we expect to increase our general and
administrative expenses.
In May 2007, we entered into a new lease for our existing
headquarters facility that extends until October 2009. In
addition, in May 2007, we executed a new two-year lease for
additional operational space in another location near our
corporate headquarters that expires in September 2009. As a
result of these new leases, our operating lease obligations will
increase significantly beginning in June 2007.
Other income (expense). Other income (expense)
primarily consists of interest earned on cash balances and the
change in fair value of preferred stock warrants.
Income tax provision. Income tax provision
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 nine-month period ended
March 31, 2007 was 7%. 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 approximately
$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.
35
Results
of Operations
The following table sets forth selected consolidated statements
of operations data for each of the periods indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
Year Ended June 30,
|
|
|
March 31,
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based compensation expense as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
Year Ended June 30,
|
|
|
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
expense
|
|
$
|
45
|
|
|
$
|
82
|
|
|
$
|
82
|
|
|
$
|
46
|
|
|
$
|
2,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
The following table sets forth selected consolidated statements
of operations data as a percentage of total revenue for each of
the periods indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
Year Ended June 30,
|
|
|
March 31,
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
88
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
89
|
%
|
|
|
89
|
%
|
|
Support and services
|
|
|
12
|
|
|
|
10
|
|
|
|
10
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
41
|
|
|
|
40
|
|
|
|
35
|
|
|
|
37
|
|
|
|
31
|
|
|
Support and services
|
|
|
9
|
|
|
|
8
|
|
|
|
9
|
|
|
|
9
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
50
|
|
|
|
48
|
|
|
|
44
|
|
|
|
46
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50
|
|
|
|
52
|
|
|
|
56
|
|
|
|
54
|
|
|
|
62
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
29
|
|
|
|
20
|
|
|
|
16
|
|
|
|
15
|
|
|
|
17
|
|
|
Sales and marketing
|
|
|
43
|
|
|
|
28
|
|
|
|
26
|
|
|
|
26
|
|
|
|
27
|
|
|
General and administrative
|
|
|
11
|
|
|
|
8
|
|
|
|
8
|
|
|
|
7
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
83
|
|
|
|
56
|
|
|
|
50
|
|
|
|
48
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(33
|
)
|
|
|
(4
|
)
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
Other income (expense) —
net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
income taxes
|
|
|
(33
|
)
|
|
|
(4
|
)
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
Income tax provision
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(33
|
)%
|
|
|
(4
|
)%
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Total revenue increased
$26.4 million, or 62%, from $42.5 million in the
nine-month period ended
March 31, 2006, to
$68.9 million in the nine-month period ended
March 31,
2007. This increase was primarily attributable to increased
sales of our products and services. Product revenue increased by
$23.5 million, or 62%, from $38.0 million in the
nine-month period ended
March 31, 2006, to
$61.5 million in the nine-month period ended
March 31,
2007. Support and services revenue increased $2.9 million,
or 63%, from $4.5 million in the nine-month period ended
March 31, 2006, to $7.4 million in the nine-month
period ended
March 31, 2007, as a result of increased
revenue associated with post-contractual support
contracts
accompanying new system sales, post-contractual support
contract
renewals and increased revenue from training services and
installations.
Gross margin. Total gross margin increased
from 54% in the nine-month period ended
March 31, 2006, to
62% in the nine-month period ended
March 31, 2007. Product
gross margin increased from 59% in the nine-month period ended
March 31, 2006, to 65% in the nine-month period ended
March 31, 2007. The increase in product gross margin in the
nine-month period ended
March 31, 2007 was due to improved
margins on hardware products as a result of sales of hardware
products introduced in April 2006 that have higher margins
than the hardware products that they replaced. Support and
services gross margin increased from 13% in the nine-month
period ended
March 31, 2006, to 35% in the nine-month
period ended
March 31, 2007. The increase in support and
services gross margin in the nine-month period ended
March 31, 2007 was due to support and service revenue
increasing by 63% and service costs only increasing 23%,
compared to the same period in 2006. Compensation for support
and services employees, the largest category of support and
service costs, increased 45% in the nine-month period ended
March 31, 2007, as headcount increased from 26 employees at
March 31, 2006 to 44 employees at
March 31, 2007.
37
Research and development. Research and
development expenses increased $4.9 million, or 76%, from
$6.5 million in the nine-month period ended
March 31,
2006, to $11.5 million in the nine-month period ended
March 31, 2007. These expenses represented 15% and 17% of
total revenue, respectively, in those periods. Compensation for
research and development employees accounted for
$3.4 million of the increase, primarily as a result of an
increase in headcount, from 38 employees at
March 31, 2006,
to 81 employees at
March 31, 2007. Additionally, consulting
and professional services, equipment costs, and prototype
expenses accounted for $701,000, $187,000, $211,000,
respectively, of the increase.
Sales and marketing. Sales and marketing
expenses increased $7.6 million, or 70%, from
$10.9 million in the nine-month period ended
March 31,
2006, to $18.4 million in the nine-month period ended
March 31, 2007. These expenses represented 26% and 27% of
total revenue, respectively, in those periods. Compensation for
sales and marketing employees represented $5.2 million of
this increase, primarily as a result of an increase in
headcount, from 58 employees at
March 31, 2006 to 87
employees at
March 31, 2007. Additionally, promotional and
lead generation programs, travel, advertising and public
relations, and marketing shows and events accounted for
$766,000, $691,000, $346,000 and $383,000 respectively, of the
increase.
General and administrative. General and
administrative expenses increased $5.3 million, or 170%,
from $3.1 million in the nine-month period ended
March 31, 2006, to $8.4 million in the nine-month
period ended
March 31, 2007. These expenses represented 7%
and 12% of total revenue, respectively, in those periods.
Compensation for general and administrative employees accounted
for $2.3 million of the increase, primarily as a result of
an increase in headcount, from 18 employees at
March 31,
2006 to 24 employees at
March 31, 2007. General and
administrative expenses for the nine-month period ended
March 31, 2007 also included $1.5 million of
stock-based compensation expense associated with an outstanding
option granted prior to the adoption of SFAS 123(R) that is
subject to variable accounting. Variable accounting on this
outstanding option ceased in March 2007 upon the repayment of
the related note receivable in exchange for the surrender of
shares of our common stock having a value equal to the amounts
outstanding under the note. Audit and legal fees and
professional services accounted for $1.0 million and
$964,000, respectively, of the increase. The remainder of the
increase was primarily attributable to various expenses
including travel expenses and allocated facility expenses.
Other income (expense). Other income (expense)
decreased $103,000, from $96,000 of other income in the
nine-month period ended
March 31, 2006, to $7,000 of other
expense in the nine-month period ended
March 31, 2007. The
decrease was due to an expense of $624,000 associated with the
increase in fair value of preferred stock warrants issued in
2001 and 2003 in conjunction with a line of credit. The decrease
was partially offset by increased interest income of $471,000
associated with higher average cash balances and interest rates
in the nine-month period ended
March 31, 2007, as compared
to average cash balances and interest rates in the nine-month
period ended
March 31, 2006.
Income tax provision. The income tax provision
increased $171,000, from $140,000 in the
nine-month
period ended
March 31, 2006, to $311,000 in the nine-month
period ended
March 31, 2007, primarily due to an increase
in our taxable income and in our effective tax rate from 5.6% to
6.9%.
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
38
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 primarily as a result of an increase in
headcount, from 38 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.
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
primarily as a result of an increase in headcount, from 37
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, $912,000 was for
salaries and benefits primarily as a result of an increase in
headcount, from 14 employees at the end of 2005 to 17 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.
Income tax provision. The income tax provision
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 primarily as a result of an increase in headcount,
from 24 employees at
June 30, 2004 to 38 employees at
June 30, 2005. Professional services, recruiting,
engineering costs and software usage fees accounted for
$417,000, $165,000, $146,000 and $136,000, respectively, of the
increase.
39
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 primarily as a result of an
increase in headcount, from 26 employees at
June 30, 2004
to 37 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 primarily as a result of an increase in headcount,
from 10 employees at
June 30, 2004 to 14 employees at
June 30, 2005. Professional services, travel and bad debt
expense 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 of other expense in 2004 to $124,000 of
other income 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.
Income tax provision. The income tax provision
increased $11,000 from $0 in 2004 to $11,000 in 2005.
40
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 seven quarters
in the period ended
March 31, 2007. 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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
|
|
Consolidated Statement of
operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
10,000
|
|
|
$
|
13,498
|
|
|
$
|
14,474
|
|
|
$
|
17,328
|
|
|
$
|
18,467
|
|
|
$
|
19,864
|
|
|
$
|
23,142
|
|
|
Support and services
|
|
|
1,214
|
|
|
|
1,219
|
|
|
|
2,119
|
|
|
|
1,756
|
|
|
|
1,948
|
|
|
|
2,616
|
|
|
|
2,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
11,214
|
|
|
|
14,717
|
|
|
|
16,593
|
|
|
|
19,084
|
|
|
|
20,415
|
|
|
|
22,480
|
|
|
|
26,009
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product(1)
|
|
|
4,044
|
|
|
|
5,668
|
|
|
|
6,011
|
|
|
|
6,132
|
|
|
|
6,507
|
|
|
|
6,767
|
|
|
|
7,997
|
|
|
Support and services(1)
|
|
|
1,078
|
|
|
|
1,109
|
|
|
|
1,755
|
|
|
|
1,483
|
|
|
|
1,445
|
|
|
|
1,595
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
5,122
|
|
|
|
6,777
|
|
|
|
7,766
|
|
|
|
7,615
|
|
|
|
7,952
|
|
|
|
8,362
|
|
|
|
9,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,092
|
|
|
|
7,940
|
|
|
|
8,827
|
|
|
|
11,469
|
|
|
|
12,463
|
|
|
|
14,118
|
|
|
|
16,199
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
2,051
|
|
|
|
2,083
|
|
|
|
2,386
|
|
|
|
3,200
|
|
|
|
3,117
|
|
|
|
4,051
|
|
|
|
4,282
|
|
|
Sales and marketing(1)
|
|
|
3,067
|
|
|
|
3,873
|
|
|
|
3,916
|
|
|
|
4,843
|
|
|
|
5,677
|
|
|
|
5,755
|
|
|
|
7,009
|
|
|
General and administrative(1)
|
|
|
875
|
|
|
|
995
|
|
|
|
1,238
|
|
|
|
1,828
|
|
|
|
2,573
|
|
|
|
2,837
|
|
|
|
2,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,993
|
|
|
|
6,951
|
|
|
|
7,540
|
|
|
|
9,871
|
|
|
|
11,367
|
|
|
|
12,643
|
|
|
|
14,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
99
|
|
|
|
989
|
|
|
|
1,287
|
|
|
|
1,598
|
|
|
|
1,096
|
|
|
|
1,475
|
|
|
|
1,935
|
|
|
Other income (expense) —
net
|
|
|
30
|
|
|
|
6
|
|
|
|
61
|
|
|
|
151
|
|
|
|
157
|
|
|
|
(395
|
)
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
129
|
|
|
|
995
|
|
|
|
1,348
|
|
|
|
1,749
|
|
|
|
1,253
|
|
|
|
1,080
|
|
|
|
2,166
|
|
|
Income tax (provision) benefit
|
|
|
(13
|
)
|
|
|
(51
|
)
|
|
|
(76
|
)
|
|
|
(79
|
)
|
|
|
(207
|
)
|
|
|
22
|
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
116
|
|
|
$
|
944
|
|
|
$
|
1,272
|
|
|
$
|
1,670
|
|
|
$
|
1,046
|
|
|
$
|
1,102
|
|
|
$
|
2,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based
compensation as follows:
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Cost of support and services revenue
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
5
|
|
|
|
24
|
|
|
|
26
|
|
|
Research and development
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
|
|
8
|
|
|
|
17
|
|
|
|
82
|
|
|
|
91
|
|
|
Sales and marketing
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
5
|
|
|
|
97
|
|
|
|
111
|
|
|
|
123
|
|
|
General and administrative
|
|
|
9
|
|
|
|
13
|
|
|
|
2
|
|
|
|
21
|
|
|
|
702
|
|
|
|
415
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
23
|
|
|
$
|
13
|
|
|
$
|
10
|
|
|
$
|
36
|
|
|
$
|
822
|
|
|
$
|
635
|
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
As a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
89
|
%
|
|
|
92
|
%
|
|
|
87
|
%
|
|
|
91
|
%
|
|
|
90
|
%
|
|
|
88
|
%
|
|
|
89
|
%
|
|
Support and services
|
|
|
11
|
|
|
|
8
|
|
|
|
13
|
|
|
|
9
|
|
|
|
10
|
|
|
|
12
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
36
|
|
|
|
39
|
|
|
|
36
|
|
|
|
32
|
|
|
|
32
|
|
|
|
30
|
|
|
|
31
|
|
|
Support and services
|
|
|
10
|
|
|
|
7
|
|
|
|
11
|
|
|
|
8
|
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
46
|
|
|
|
46
|
|
|
|
47
|
|
|
|
40
|
|
|
|
39
|
|
|
|
37
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|