<PAGE>
As filed with the Securities and Exchange Commission on August 27, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
SonicWALL, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
California 7372 77-0270079
(State or other
jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Code Number) Identification No.)
</TABLE>
5400 Betsy Ross Drive Santa Clara, California 95054 (408) 844-9900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Sreekanth Ravi
Chairman, President and Chief Executive Officer
SonicWALL, Inc.
5400 Betsy Ross Drive Santa Clara, California 95054 (408) 844-9900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Jerrold F. Petruzzelli Gregory K. Miller
William T. Quicksilver John B. Turner
David M. Pike Latham & Watkins
Manatt, Phelps & Phillips, LLP 505 Montgomery Street, Suite 1900
3030 Hansen Way, Suite 100 San Francisco, California 94111
Palo Alto, California 94301 Telephone: (415) 391-0600
Telephone: (650) 856-1200 Facsimile: (415) 395-8095
Facsimile: (650) 856-1344
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
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. [_]
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. [_]
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. [_]
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. [_]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEES
<TABLE>
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to be Registered Registered(1) Per Share(2) Offering Price Fee
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value...... $ $46,000,000 $12,788
- -------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Includes shares which the underwriters have the option to purchase in
over-allotment, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
---------------
The Registrant hereby amends this Registration Statement on such dates as
may be necessary to delay its effective date until the Registrant files a
further amendment which specifically states that this Registration Statement
will thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement becomes effective
on such date as the Commission, acting pursuant to Section 8(a), may
determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell our common stock until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is offering +
+to sell our common stock, and seeking offers to buy our common stock, only in +
+states where the offer or sale is permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1999
[LOGO OF SONICWALL, INC.]
Shares of Common Stock
$ per share
-----------
This is the initial public offering of SonicWALL, Inc. We are selling
shares of our common stock. In addition, the shareholders listed on page
have granted the underwriters a 30-day option to purchase up to an additional
shares of common stock to cover any over-allotments. We will not receive
any of the proceeds from the sale of shares by the selling shareholders.
We expect the initial public offering price to be between $ and $ per
share. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol SNWL.
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 6.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price...........................................
Underwriting discounts and commissions..........................
Proceeds, before expenses to us.................................
</TABLE>
-----------
The underwriters may purchase up to an additional shares from certain
selling shareholders at the initial public offering price less the underwriting
discount, solely to cover over-allotments.
The underwriters expect to deliver the shares in San Francisco, California on
or about , 1999.
-----------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Thomas Weisel Partners LLC
The date of this prospectus is August , 1999
<PAGE>
[SonicWALL, Inc. LOGO]
GATEFOLD ARTWORK TEXT:
1. With SonicWALL, small to medium size businesses can deploy robust,
affordable Internet security. SonicWALL DMZ allows organizations to deploy
public servers, such as Web and E-commerce servers. While access to the DMZ
is public, servers on the DMZ are protected against Internet based attacks.
2. A SonicWALL may be deployed at each branch office for complete Internet
security: firewalling, VPN, and content filtering. A VPN can be created
between each branch office and headquarters by using SonicWALLs at the
branch office and an enterprise VPN/firewall solution, such as Check Point's
Firewall-1, at headquarters.
3. With SonicWALL, mobile workers can use VPN to connect securely to the
office.
4. With SonicWALL, schools & libraries can protect children from objectionable
Web sites as well as securing the network from Internet hackers.
5. With SonicWALL, telecommuters with Cable Modem or DSL Internet accounts can
get a secure Internet connection, use VPN to connect securely to the office
and provide content filtering for children at home.
GATEFOLD ARTWORK DESCRIPTION OF GRAPHICS:
Diagram showing the Internet as an oval symbol and lines connecting from the
Internet through depiction of SonicWALL products to graphic for SME (office
building), telecommuter (house), school (school), branch office (office
building), corporate headquarters (office building), and mobile worker (laptop
computer).
Image of firefighters behind graphic of SME. Image of devil behind graphic
of telecommuter. Image of woman behind graphic of school. Image of man holding
briefcase behind graphic of branch office and graphic of mobile worker.
<PAGE>
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
regarding our company and the common stock being sold in this offering and our
consolidated financial statements and related notes to financial statements
appearing elsewhere in this prospectus. Because this is only a summary, you
should read the rest of the prospectus before you invest in our common stock.
Read this entire prospectus carefully, especially the risks described under
"Risk Factors."
Unless otherwise indicated, the information in this prospectus assumes the
automatic conversion of each outstanding share of redeemable Series A
convertible preferred stock into two shares of common stock and no exercise of
the underwriter's option to purchase additional shares.
SonicWALL, Inc.
SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the small to medium enterprise, or
SME, branch office, telecommuter and education markets. Our SonicWALL solution
is a high-performance, solid state appliance that provides robust, reliable,
easy-to-use and affordable Internet security. Our products enable our customers
to securely utilize Internet applications and services as an integral part of
their business. As of August 15, 1999, we have shipped more than 16,000 of our
Internet security appliances worldwide.
Businesses and consumers are increasingly accessing the Internet for a wide
variety of uses including communications, information gathering and commerce.
Recently, new high-speed technologies have emerged that can better satisfy the
bandwidth requirements of the SME, branch office, telecommuter and education
markets at a fraction of the cost of traditional solutions. These technologies
include digital subscriber line, or DSL, and cable modems, which provide access
speeds of up to 100 times faster than traditional 28.8 kilobits per second, or
kbps, analog modems. Yankee Group estimates that in the United States DSL
subscribers will increase from 0 to 1.5 million from 1997 to 2001 and cable
modem subscribers will increase from 100,000 to 3.0 million over the same
period. "Always-on" Internet connections, such as DSL and cable, present unique
security issues and increase the risk that proprietary data or other sensitive
information might be compromised.
Although the need for Internet security solutions is widespread, security
vendors generally have focused on providing solutions for large enterprises
with highly complex needs and extensive information technology, or IT, support
organizations. These solutions have typically involved expensive enterprise
firewall software that runs on a dedicated server or personal computer, or PC,
and require extensive support, constant monitoring, and regular updates to
maintain effectiveness. The expense and complexity of these solutions, which
often require additional products to incorporate virtual private networking, or
VPN, capabilities, Internet Protocol, or IP, address management, content
filtering, and other security features, are impractical for the majority of
SMEs, branch offices, telecommuters, and education users. These users are
increasingly demanding robust, reliable, easy-to-use and affordable Internet
security.
Our SonicWALL product line provides our customers with a comprehensive
integrated security solution that includes firewall, content filtering and VPN
functionality so users can enjoy affordable, secure Internet communications.
The SonicWALL product family delivers a plug and play appliance solution that
is easy to install and use and minimizes the purchase, installation, and
maintenance costs of Internet security. With suggested retail prices ranging
from $495 to $2,995, versus competitive products which range in price from
approximately $5,000 to more than $15,000, our products enable customers to
reduce purchase costs and avoid hiring costly IT personnel. By using an
embedded single purpose operating system and a solid state design without
moving parts, our SonicWALL products are designed to maximize reliability and
uptime. The SonicWALL product line is scalable for networks ranging in size
from 1 to 1,000 users and is fully compatible with more expensive enterprise
wide security solutions offered by, among others, Check Point Software
Technologies, Ltd. and Cisco Systems, Inc.
3
<PAGE>
Our strategy is to become the industry standard Internet security solution
for broadband access users in the SME, branch office, telecommuter and
education markets. The key elements of our strategy include extending our
leadership position in our target markets, strengthening our SonicWALL brand
name, expanding our indirect distribution channels, developing our strategic
original equipment manufacturer, or OEM, relationships, leveraging our
installed base to sell new products and services, and continuing to develop new
products and reduce our manufacturing costs.
We initially incorporated in California in 1991 as Sonic Systems. In August
1999 we changed our name to SonicWALL, Inc. References to "we," "our," "us" and
"the Company" in this prospectus refer to SonicWALL, Inc. Our executive offices
are located at 5400 Betsy Ross Drive, Santa Clara, California 95054, and our
telephone number is (408) 844-9900. Our Web site is located at
http://www.sonicwall.com. Any information that is included on or linked to our
Web site is not a part of this prospectus.
We own or have rights to various trademarks and trade names used in our
business. These include the SonicWALL name and our logo. This prospectus also
includes trademarks, service marks and trade names of other companies, which
remain the property of their owners.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by
SonicWALL, Inc.................. shares
Common stock to be outstanding
after this offering............. shares
Use of proceeds.................. General corporate purposes including working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol.......................... SNWL
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based upon shares outstanding as of June 30, 1999. This number excludes
shares of common stock reserved for issuance under our stock plans
and shares of common stock issuable upon exercise of outstanding
stock options.
----------
Except where stated otherwise, the information we present in this prospectus
(1) gives effect to a 2 for 1 split of our common stock effected on August 25,
1999, (2) assumes the conversion of all outstanding shares of our redeemable
Series A convertible preferred stock into 2,876,754 shares of common stock at
the closing of this offering, and (3) assumes no exercise by the underwriters
of their over-allotment option.
4
<PAGE>
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December Six Months
31, Ended June 30,
----------------------- ---------------
1996 1997 1998 1998 1999
------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue
Internet Security.................. $ -- $ 250 $ 2,349 $ 405 $ 5,474
Ethernet........................... 9,356 9,092 5,166 2,901 1,216
------ ------ ------- ------ -------
Total revenue..................... 9,356 9,342 7,515 3,306 6,690
Cost of revenue..................... 5,915 4,842 3,308 1,652 1,998
------ ------ ------- ------ -------
Gross margin........................ 3,441 4,500 4,207 1,654 4,692
------ ------ ------- ------ -------
Operating expenses..................
Research and development........... 1,048 1,983 1,739 847 962
Sales and marketing................ 1,665 2,468 2,907 1,425 1,854
General and administrative......... 432 644 753 310 694
Deferred stock compensation........ -- -- 42 -- 783
------ ------ ------- ------ -------
Total operating expenses.......... 3,145 5,095 5,441 2,582 4,293
Income (loss) from operations....... 296 (595) (1,234) (928) 399
Other income (expense), net......... 22 29 54 22 132
------ ------ ------- ------ -------
Income (loss) before income taxes... 318 (566) (1,180) (906) 531
Benefit from (provision for) income
taxes.............................. (350) 99 (6) -- (493)
------ ------ ------- ------ -------
Net income (loss) .................. $ (32) $ (467) $(1,186) $ (906) $ 38
====== ====== ======= ====== =======
Basic net income (loss) per share... $ -- $(0.06) $ (0.11) $(0.11) $ --
====== ====== ======= ====== =======
Diluted net income (loss) per
share.............................. $ -- $(0.06) $ (0.11) $(0.11) $ --
====== ====== ======= ====== =======
Shares used in computing basic net
income (loss) per share............ 8,460 8,461 11,251 8,461 16,322
====== ====== ======= ====== =======
Shares used in computing diluted net
income (loss) per share............ 8,460 8,461 11,251 8,461 19,320
====== ====== ======= ====== =======
Pro forma basic net income per
share.............................. $ --
=======
Pro forma diluted net income per
share.............................. $ --
=======
Shares used in computing pro forma
basic net income per share......... 18,420
=======
Shares used in computing pro forma
diluted net income per share....... 19,320
=======
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------
Pro Forma
Actual Pro Forma as Adjusted
------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 6,769 $ 6,769
Total assets............ 11,277 11,277
Redeemable Series A
convertible preferred
stock.................. 4,971 --
Total shareholders'
equity................. 318 5,289
</TABLE>
The preceding table summarizes
. actual balance sheet data;
. pro forma balance sheet data assuming the conversion of all outstanding
redeemable Series A convertible preferred stock into shares of common
stock; and
. pro forma balance as adjusted sheet data to give effect to (1) the sale
by SonicWALL, Inc. of shares of common stock in this
offering at an assumed initial public offering price of $ per
share, after deducting underwriting discounts and commissions and
estimated offering expenses and (2) the conversion of all outstanding
redeemable Series A convertible preferred stock into 2,876,754 shares of
common stock.
See Note 1 of Notes to Financial Statements for information concerning the
calculation of pro forma basic and diluted net income per share.
5
<PAGE>
RISK FACTORS
An investment in our shares involves a high degree of risk. In addition to
the other information contained in this prospectus, you should consider
carefully the following risks before purchasing our common stock. If any of
these risks actually occurs, our business, financial condition or operating
results could be adversely affected. In that case, the trading price of our
common stock could decline and you could lose all or part of your investment.
We have just recently entered the emerging market for broadband Internet
security appliances, and we do not know if we will be successful in marketing
our products to our target customers.
From inception in 1991, we were in the business of providing Ethernet
connectivity products for Apple Macintosh computers. In late 1997, we made a
strategic decision to concentrate our resources in the Internet security market
and introduced our SonicWALL line of products. We expect to stop shipment of
Ethernet products by December 1999.
We believe that many potential customers in our target markets are not fully
aware of the need for Internet security products and services. Historically,
only enterprises having substantial resources have developed or purchased
Internet security solutions. Also, there is a perception that Internet security
is costly and difficult to implement. Therefore, we will not succeed unless we
can educate our target markets about the need for Internet security and
convince potential customers of our ability to provide this security in a cost-
effective and easy-to-use manner. Although we have spent, and will continue to
spend, considerable resources educating potential customers about the need for
Internet security and the benefits of our products and services, our efforts
may be unsuccessful.
Even if we convince our target markets about the importance of and need for
Internet security, we do not know if this will result in the sale of our
products. We currently expect that almost all of our future revenue will be
generated through sales of our SonicWALL family of products, including related
services such as subscription and license fees. Our success depends on market
acceptance of our products and services.
We may be unable to manage our growth, and if we cannot do so, it could have a
material adverse effect on our business.
Our business has grown rapidly in size and complexity in the last year. At
the end of 1998, we had 26 employees. At June 30, 1999, we had 45 employees, an
increase of approximately 73%. This rapid expansion has placed significant
strain on our administrative, operational and financial resources and has
resulted in ever-increasing responsibilities for our management personnel. If
our revenue increases, our current systems, management and resources will be
inadequate, and our organization will need to grow rapidly in order to meet the
demands placed on our business. If we cannot manage our growth effectively, our
business prospects will be materially adversely affected.
We incurred losses during the last three years and were marginally profitable
in the six months ended June 30, 1999. We do not know if we will remain
profitable in the future.
We incurred losses in 1996, 1997 and 1998 and were marginally profitable for
the six months ended June 30, 1999. We do not know if we will remain profitable
in the future.
If we are unable to establish brand awareness, we may not be able to penetrate
our target markets and our sales may not increase.
We believe that it is important to establish the SonicWall brand as quickly
as possible in order to successfully penetrate our target markets and increase
our revenue. Our failure to establish our brand could result in an inability:
. to execute our sales and marketing strategy;
6
<PAGE>
. to maintain current and develop new relationships with key value
added resellers, or VARs, distributors and systems integrators; and
. to expand our domestic and international sales efforts.
We have a limited operating history in the market for Internet security
products which makes our historical financial information of limited value in
evaluating our prospects.
Because we changed our business focus from Ethernet connectivity products
for Macintosh computers to Internet security products in late 1997, our
historical financial information is of limited value in projecting future
operating results. We believe that comparing different periods of our operating
results is not meaningful and you should not rely on the results for any period
as an indication of our future performance.
Our operating results could fluctuate on a quarterly or annual basis and
fall below expectations of public market analysts and investors, resulting in a
significant decrease in our stock price.
We anticipate that our operating results will vary significantly on a
quarterly basis. As a result, we may perform below the expectations of public
market analysts and investors. If our results were to fall below expectations,
the price of our common stock may fall substantially.
Due to the recent emergence of the market for Internet security appliances,
we cannot predict with certainty our revenue for a given period. We base our
spending levels for product development, sales and marketing, and other
operating expenses largely on our expected future revenue. A large proportion
of our expenses is fixed for a particular quarter or year, and therefore we may
be unable to decrease our spending in time to compensate for any unexpected
quarterly or annual shortfall in revenue. As a result, any shortfall in revenue
could cause our operating results to decline significantly, resulting in a
decrease in our stock price.
We have limited experience in forecasting customer buying habits on a
quarterly or monthly basis. Although we have not yet experienced fluctuations
in our customers' purchases of our Internet security products on a seasonal
basis, companies in the computer industry frequently experience such
seasonality, and in the future this could happen to us.
We depend on two major customers for over 40% of our revenue, and if they or
others cancel or delay purchase orders, our revenue may decline and the price
of our stock may fall.
To date, sales to a limited number of distributors and OEMs have accounted
for a significant portion of our revenue. In 1998, sales to Ingram Micro, Inc.
accounted for 34% of our revenue. For the six months ended June 30, 1999, sales
to Ingram Micro and Tech Data Corp. accounted for 32% and 9% of our revenue,
respectively. We cannot assure you that either of these existing customers will
continue to place orders with us, that orders by these existing customers will
continue at the levels of previous periods or that we will be able to obtain
large orders from new customers.
If any of our major distributors or OEMs stops or delays its purchase of our
products, our revenue and profitability would be adversely affected. We
anticipate that sales of our products to relatively few customers will continue
to account for a significant portion of our revenue.
Our sales are usually done on a purchase order basis and we have no binding
purchase commitments from our distributors, resellers or OEMs, which could
result in a lack of sales.
We sell our products to end users through distributors, resellers and OEMs.
Our success depends in large part on their performance. These customers:
. are not obligated to purchase or market our products and can stop
doing so at any time;
. have no exclusive arrangements with us, and are not obligated to
renew their agreements with us;
7
<PAGE>
. receive discounts based upon expected volumes of products purchased
or resold in a given period; and
. may, under certain circumstances, return products to us.
Average selling prices of our products may decrease, which may reduce our gross
margins.
The average selling prices for our products may decline as a result of
competitive pricing pressures, promotional programs and customers who negotiate
price reductions in exchange for longer term purchase commitments. The pricing
of products depends on the specific features and functions of the products,
purchase volumes and the level of sales and service support. We expect
competition to increase in the future, and as we experience pricing pressure,
we anticipate that the average selling prices and gross margins for our
products will decrease over product life cycles. We cannot assure you that we
will be successful in developing and introducing on a timely basis new products
with enhanced features, or that these products, if introduced, will enable us
to maintain our average selling prices and gross margins at current levels.
If any of our major distributors, resellers or OEMs is unable to pay us, it
could have an adverse effect on our business.
We have a high concentration of accounts receivable with a few customers.
Although we attempt to closely monitor the outstanding receivables which we
have with our major customers, their inability to pay us would have a material
adverse effect on our business. Their failure to pay us would adversely affect
our payments to suppliers and our creditworthiness which would make it more
difficult to conduct business. Any of these circumstances could materially
adversely affect our results of operations or financial condition.
We offer price protection to our major distributors, which could adversely
affect our results of operations.
We provide our major distributors with price protection rights for
inventories of our products held by them. If we lower our prices for those
products, we may experience significant price adjustments for which we may not
have adequate allowances. New product introductions or price reductions by us
or our competitors could result in significant price adjustments.
If we experience delays in deliveries from suppliers or are unable to purchase
components or technologies from our key suppliers, our revenue could decline
and adversely affect our results of operations.
Our SonicWALL products incorporate certain components or technologies which
are only available from single or limited sources of supply. We purchase such
products under purchase orders and technology licenses. Specifically, our
products rely upon microprocessors from Motorola, Inc. and Intel Corporation
and incorporate software products from third-party vendors. If we are unable to
purchase such components or maintain licenses from these suppliers, this may
delay or prevent product shipments and result in a loss of sales. We may not be
able to replace any of these supply sources on economically advantageous terms.
We are dependent on the widespread adoption of broadband access services, which
are currently in early stages of development, and if such services are not
widely adopted or we are unable to address the issues associated with the
development of such services, our sales will be adversely affected.
Sales of our products depend on the increased use and widespread adoption of
broadband access services, such as cable, DSL, Integrated Services Digital
Network, or ISDN, Frame Relay and T-1. Our business, prospects, results of
operations and financial condition would be materially adversely affected if
the use of
8
<PAGE>
broadband access services does not increase as anticipated or if our customers'
access to broadband services is limited. Critical issues concerning use of
broadband access services are unresolved and will likely affect the use of
broadband access services. These issues include:
. security;
. reliability;
. bandwidth;
. congestion;
. cost;
. ease of access; and
. quality of service.
Even if these issues are resolved, if the market for products that provide
broadband access to the Internet fails to develop, or develops at a slower pace
than we project, our business, prospects, results of operations and financial
condition would be materially adversely affected.
The broadband access services market is new and is characterized by rapid
technological change, frequent enhancements to existing products and new
product introductions, changes in customer requirements and evolving industry
standards. We may be unable to respond quickly or effectively to these
developments. The introduction of new products by competitors, market
acceptance of products based on new or alternative technologies, or the
emergence of new industry standards, could render our existing or future
products obsolete, which would materially adversely affect our business,
prospects, results of operations and financial condition.
The emergence of new industry standards might require us to redesign our
products. If our products fail to comply with widely adopted industry
standards, our customers and potential customers may not purchase our products.
This would have a material adverse effect on our business, prospects, results
of operations and financial condition.
If we are unable to compete successfully in the highly competitive market for
Internet security products and services, our business will fail.
The market for Internet security products is highly competitive, and we
expect competition to intensify in the future. There are few substantial
barriers to entry, and additional competition from existing competitors and new
market entrants will likely occur in the future. Current and potential
competitors in our markets include, but are not limited to:
. enterprise firewall software vendors such as Check Point Software
and Axent Technologies, Inc.;
. network equipment manufacturers such as Cisco Systems, Lucent
Technologies, Inc., Nortel Networks Corp., 3COM Corporation and
Nokia Corp.;
. computer or network component manufacturers such as Intel
Corporation;
. operating system software vendors such as Microsoft Corporation,
Novell, Inc., and Sun Microsystems, Inc.; and
. security appliance suppliers such as Watchguard Technologies, Inc.
Most of our competitors to date have generally targeted large enterprises'
security needs with firewall products that range in price from approximately
$5,000 to more than $15,000. At any time, any of these competitors may adapt
existing products for our target markets. Many of our current or potential
competitors have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical, marketing and
other resources than we do. Nothing prevents or hinders these actual or
9
<PAGE>
potential competitors from entering our target markets at any time. In
addition, our competitors may bundle products competitive to ours with other
products that they may sell to our current or potential customers. These
customers may accept these bundled products rather than separately purchasing
our products. If these companies were to use their greater financial, technical
and marketing resources in our target markets, it could adversely affect our
business.
Rapid changes in technology and industry standards could render our products
and services unmarketable or obsolete, and we may be unable to successfully
introduce new products and services.
To succeed, we must continually change and improve our products in response
to rapid technological developments and changes in operating systems, broadband
Internet access, application and networking software, computer and
communications hardware, programming tools, computer language technology and
other security threats. We may be unable to develop new products and services
or achieve and maintain market acceptance of them once they have come to
market. Product development for Internet security appliances requires
substantial engineering time and testing. Releasing new products and services
prematurely may result in quality problems, and delays may result in loss of
customer confidence and market share. In the past, we have on occasion
experienced delays in the scheduled introduction of new and enhanced products
and services, and we may experience delays in the future. When we do introduce
new or enhanced products and services, we may be unable to manage the
transition from the older products and services to minimize disruption in
customer ordering patterns, avoid excessive inventories of older products and
deliver enough new products and services to meet customer demand.
We may have to defend lawsuits or pay damages in connection with any alleged or
actual failure of our products and services.
Because our products and services provide and monitor Internet security and
may protect valuable information, we may face claims for product liability,
tort or breach of warranty. Anyone who circumvents our security measures could
misappropriate the confidential information or other property of end-users
using our products and services or interrupt their operations. If that happens,
affected end-users or others may sue us. In addition, we may face liability for
breaches caused by faulty installation of our products by resellers or end-
users. Although we attempt to reduce the risk of losses from claims through
contractual warranty disclaimers and liability limitations, these provisions
may be unenforceable. Some courts, for example, have found contractual
limitations of liability in standard computer and software contracts to be
unenforceable in certain circumstances. Defending a suit, regardless of its
merit, could be costly and could divert management attention. Although we
currently maintain business liability insurance, this coverage may be
inadequate or may be unavailable in the future on acceptable terms, if at all.
A security breach of our internal systems or those of our customers could harm
our business.
Because we provide Internet security, we may become a greater target for
attacks by computer hackers. We will not succeed unless the marketplace is
confident that we provide effective Internet security protection. Networks
protected by our products may be vulnerable to electronic break-ins. Because
the techniques used by computer hackers to access or sabotage networks change
frequently and generally are not recognized until launched against a target, we
may be unable to anticipate these techniques. If an actual or perceived breach
of Internet security occurs in our internal systems or those of our end-user
customers, regardless of whether we cause the breach, it could adversely affect
the market perception of our products and services. This could cause us to lose
current and potential customers, resellers, distributors or other business
partners.
We rely on contract manufacturers for all of our product manufacturing and
assembly, and if we cannot obtain such services, we may not be able to ship
products.
We outsource all of our hardware manufacturing and assembly to third-party
manufacturers and assembly houses. We do not have long-term manufacturing
contracts with these vendors and while these vendors have
10
<PAGE>
produced hardware with acceptable quality, quantity and cost in the past, they
may be unable or unwilling to meet our future demands. Our operations could be
disrupted if we have to switch to a replacement vendor or if our hardware
supply is interrupted for an extended period. This could result in loss of
customer orders and revenue.
We may have to reduce or cease operations if we are unable to obtain the
funding necessary to meet our working capital requirements.
We believe that the net proceeds from this offering, together with our
existing cash balances and our existing line of credit, will be sufficient to
meet our capital requirements for at least the next 12 months. However, if our
future revenue is insufficient to support the expenses of our operations and
the expansion of our business, we may need additional equity or debt capital to
finance our operations. If we are unable to generate sufficient cash flow from
operations or obtain funds through additional financing, we may have to reduce
some or all of our development and sales and marketing efforts or cease
operations. Our funding requirements depend on several factors, including the
rate of market acceptance of our products and services, our ability to expand
our customer base and the growth of our sales and marketing capabilities. If
our funding requirements vary from our current plans, we may require additional
financing sooner than we anticipate. To the extent that the proceeds of this
offering and our existing sources of cash and cash flow from operations, if
any, are insufficient to fund our activities, we may need to raise additional
funds. If we issue additional stock to raise capital, your percentage ownership
in our Company would be reduced. Additional financing may not be available when
needed and, if such financing is available, it may not be available on terms
favorable to us.
We may be unable to adequately protect our proprietary rights, which may limit
our ability to compete effectively.
Unauthorized parties may misappropriate or infringe our trade secrets,
copyrights, trademarks and similar proprietary rights. We have not received any
patent protection for our technology or products. Even if we obtain such
patents, that does not guarantee that our patent rights are valuable, create a
competitive barrier, or will be free from infringement. We face additional risk
when conducting business in countries that have poorly developed or
inadequately enforced intellectual property laws. In any event, competitors may
independently develop similar or superior technologies or duplicate the
technologies we have developed, which could substantially limit the value of
our intellectual property.
Potential intellectual property claims and litigation could subject us to
significant liability for damages and invalidation of our proprietary rights.
In the future, we may have to resort to litigation to protect our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Any litigation,
regardless of its success, would probably be costly and require significant
time and attention of our key management and technical personnel. Litigation
could also force us to:
. stop or delay selling, incorporating or using products that
incorporate the challenged intellectual property;
. pay damages;
. enter into licensing or royalty agreements, which may be unavailable
on acceptable terms; or
. redesign products or services that incorporate infringing
technology.
We may face infringement claims from third parties in the future. The
computer industry has seen frequent litigation over intellectual property
rights. We expect that infringement claims will be more frequent for Internet
participants as the number of products, services and competitors grows and
functionality of products and services overlaps.
11
<PAGE>
Undetected product errors or defects could result in loss of revenue, delayed
market acceptance and claims against us.
Our products and services may contain undetected errors or defects,
especially when first released. Despite extensive testing, some errors are
discovered only after a product has been installed and used by customers. Any
errors discovered after commercial release could result in loss of revenue and
claims against us.
If we do not retain our key employees and obtain other new employees, our
ability to execute our business strategy will be impaired.
We compete for employees in California's Silicon Valley, one of the most
difficult employer environments in the United States. Our future success will
depend largely on the efforts and abilities of our current senior management
and our ability to attract and retain additional key development, technical,
operations, information systems, customer support and sales and marketing
personnel. We do not have employment contracts with any of our key employees,
who may leave us at any time. Specifically, the services of Sreekanth Ravi,
President and Chief Executive Officer, and Sudhakar Ravi, Vice President of
Engineering, would be difficult to replace. We do not maintain life insurance
for any of our key personnel. See "Management" for detailed information on our
key personnel.
Because of their significant stock ownership, our officers and directors will
be able to exert significant control over our future direction.
Executive officers, directors, and entities affiliated with them, will, in
the aggregate, beneficially own approximately % of our outstanding common
stock following the completion of this offering. These shareholders, if acting
together, would be able to significantly influence all matters requiring
shareholder approval, including the election of directors, mergers or other
forms of business combinations. See "Principal and Selling Shareholders."
Governmental regulations affecting Internet security could affect our revenue.
Any additional governmental regulation of imports or exports or failure to
obtain required export approval of our encryption technologies could adversely
affect our international and domestic sales. The United States and various
foreign governments have imposed controls, export license requirements and
restrictions on the import or export of certain technologies, especially
encryption technology. In addition, from time to time governmental agencies
have proposed additional regulation of encryption technology, such as requiring
the escrow and governmental recovery of private encryption keys. Additional
regulation of encryption technology could delay or prevent the acceptance and
use of encryption products and public networks for secure communications. This,
in turn, could decrease demand for our products and services.
In addition, some foreign competitors are subject to less stringent controls
on exporting their encryption technologies. As a result, they may be able to
compete more effectively than we can in the United States and international
Internet security market.
Recently, political attention has resulted in legislative efforts to make
the Internet safe for children at schools and other educational institutions
receiving federal assistance by linking the receipt of federal funds to the
existence of content filtering and security software for such institutions'
Internet connections. Some have questioned the constitutionality or other
legality of such efforts, but we believe that any government controls or
attempts to regulate the Internet could have a material effect on our business.
A government requirement of Internet security for schools receiving federal
funds would encourage purchases of our SonicWALL products; a court ruling that
prohibited such a requirement after the requirement was in place might reduce
sales to these market segments.
12
<PAGE>
Our failure or the failure of our key suppliers and customers to be Year 2000
compliant could negatively impact our business.
The Year 2000 computer issue creates a variety of risks for us. If systems
do not correctly recognize date information when the year changes to 2000, our
business, results of operations and financial condition could be materially
adversely affected. The risks involve:
. potential warranty or other claims by our customers;
. errors in systems we use to run our business;
. errors in systems used by our suppliers;
. errors in systems used by our customers; and
. potential reduced spending by other companies on broadband Internet
access products as a result of significant information systems
spending on Year 2000 remediation.
Our internal systems include both our information technology and non-
information technology systems. We have conducted an initial audit of our
material internal information technology systems, including both our own
software products and third-party software and hardware technology. We have not
yet initiated an assessment of our non-information technology systems. To the
extent that we are unable to test the technology provided by third-party
vendors, we are seeking assurances from these vendors that their systems are
Year 2000 compliant. We may experience material unanticipated problems and
costs caused by undetected errors or defects in the technology used in our
internal information technology and non-information technology systems. These
unanticipated problems and costs could have a material adverse effect on our
business, results of operations and financial condition.
We have contacted our critical suppliers to determine if the suppliers'
operations and the products and services provided to us are Year 2000
compliant. Where practicable, we will attempt to mitigate our risks with
respect to the failure of our suppliers to be Year 2000 compliant by locating
Year 2000 compliant replacement suppliers. However, our failure to mitigate our
Year 2000 risks remains a possibility and could have a material adverse impact
on our business, results of operations and financial condition.
We have been informed by our contract manufacturers that they are working to
ensure that their manufacturing systems are Year 2000 compliant. However, they
may experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in their internal information
technology and non-information technology systems. These unanticipated problems
and costs could cause manufacturing delays or difficulties for our products.
Additionally, we do not know whether our manufacturers' suppliers are Year 2000
compliant. The failure of a supplier to be Year 2000 compliant could also
adversely affect our manufacturers' operations. Any of these events could
materially adversely affect our business, results of operations and financial
condition.
We believe that our SonicWALL product line is Year 2000 compliant. However,
despite testing by us and by current and potential customers, and despite
assurances from developers of products incorporated into SonicWALL, our
products may contain undetected errors or defects associated with Year 2000
date functions. We have assured our customers that SonicWALL is Year 2000
compliant. If our products are not Year 2000 compliant, this would result in
numerous customer claims, which could have a material adverse impact on our
business, results of operations and financial condition.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or potential customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, spending on Year 2000 issues
could reduce or eliminate the budgets that our current or potential customers
could have for purchases of our products. As a result, our business, results of
operations and financial condition could be materially adversely affected.
13
<PAGE>
To date, our Year 2000 related costs have not been material. We have funded
these costs from available cash without separately accounting for these costs.
Although our future Year 2000 compliance costs are not expected to be
significant, we may experience unanticipated material problems and costs
associated with Year 2000 compliance that could adversely affect our business,
results of operations and financial condition. We are currently developing a
contingency plan to address situations that may result if we are unable to
achieve Year 2000 readiness of our critical operations. The cost of developing
and implementing a Year 2000 contingency plan may be material.
If our internal systems, our products or the internal systems at our
manufacturers are not Year 2000 compliant, our business, results of operation
and financial condition would be materially adversely affected.
Our management has broad discretion as to how to use the proceeds from this
offering and the proceeds may not be used appropriately.
We expect to use the net proceeds of this offering primarily for working
capital and other general corporate purposes. In particular, we intend to
increase our spending on sales and marketing, research and development and
product management. We may also use some of the proceeds to acquire other
businesses, products or technology which would complement our existing
products, expand our market coverage or enhance our technological capabilities.
We have no specific plan as to how we will spend the proceeds of this offering.
If our management uses poor judgment in spending the proceeds, our business
will be adversely affected. We cannot assure you that investment of the
proceeds will yield a favorable return or any return. See "Use of Proceeds."
The price of our common stock may be volatile.
The trading price of the shares being sold in this offering may fluctuate
widely as a result of a number of factors, most of which are outside our
control. Some of these factors include:
. quarter-to-quarter variations in our operating results;
. our announcements about the performance of our products and our
competitors' announcements about performance of their products;
. changes in earnings estimates by, or failure to meet the
expectations of, analysts;
. government regulatory action;
. increased price competition;
. developments or disputes concerning intellectual property rights;
and
. general conditions in the computer industry.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology and computer software companies and which have often been unrelated
to the operating performance of these companies.
We have negotiated the initial offering price of the common stock with our
underwriters. However, the initial offering price may not be indicative of the
prices that will prevail in the public market after the offering, and the
market price of the common stock could fall below the initial offering price.
See "Underwriting."
Charter and bylaw provisions contain certain limitations in the authority of
shareholders to govern our affairs.
Upon completion of this offering, our board of directors will have the
authority to issue shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
those shares without any further vote or action by shareholders. The rights of
the holders of common stock will be
14
<PAGE>
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock.
Our charter documents also provide for limitations on the ability of
shareholders to call special meetings and act by written consent and prohibit
cumulative voting for directors. The charter documents also limit the persons
who may call special meetings of the shareholders, prohibit shareholder actions
by written consent and establish advance notice requirements for nominations
for election to the board of directors or for proposing matters that can be
acted on by shareholders at shareholder meetings.
As our currently outstanding stock becomes eligible for sale, the introduction
of this stock into the market may cause our stock price to decline.
If our shareholders sell substantial amounts of our common stock in the
public market following this offering, including shares issued upon the
exercise of outstanding options, the trading price of our common stock could
fall. Such sales also might make it more difficult for us to raise capital in
the future at a time and price that we deem appropriate. Upon completion of
this offering, we will have outstanding shares of common stock
(based upon shares outstanding as of June 30, 1999), assuming no exercise of
outstanding options after June 30, 1999. Of these shares, the shares
sold in this offering will be freely tradable. Other shares will be eligible
for sale in the public market after the date of this prospectus, substantially
all of which are subject to lock up agreements, as follows:
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ----------
<S> <C>
180 days after the date of this prospectus...................... 16,589,194
At various times after 180 days, when one-year holding periods
expire......................................................... 2,711,400
</TABLE>
After this offering, if certain conditions are met, the holders of
approximately 2,876,754 shares of common stock will be entitled to require us
to register their shares under the Securities Act of 1933, as amended (the
"Act"). These holders and holders of approximately 2,301,400 shares of common
stock have the right to participate in any registration of shares we undertake
on our own (except a registration of shares in connection with an employee
benefit plan or merger). If these shareholders exercise their registration
rights, a large number of our shares may be registered and sold in the public
market. This could adversely affect the trading price for our shares. If we
attempted to raise money through a registration and sale of our stock and these
shareholders forced us to allow them to participate in the registration, our
ability to raise the amount of money we need to execute our business plan could
be adversely affected. See "Description of Capital Stock--Registration Rights."
Bear, Stearns & Co. Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. See "Shares Eligible for Future Sale."
You will experience substantial dilution in the value of your shares
immediately following this offering.
The price of the shares is substantially higher than the net tangible book
value per share. If you buy any shares in the offering, you will incur
immediate and substantial dilution in the pro forma net tangible book value of
each share. If others exercise options to purchase our common stock, you will
suffer further dilution. See "Dilution."
15
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things:
. implementing our business strategy;
. developing and introducing new products;
. obtaining and expanding market acceptance of the products we offer;
. meeting our requirements with our customers; and
. competition in the Internet security market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. These statements are based on our current beliefs, expectations
and assumptions and are subject to a number of risks and uncertainties. A
description of certain risks that could cause our results to vary appears under
the caption "Risk Factors" and elsewhere in this prospectus. These forward-
looking statements are made as of the date of this prospectus, and we assume no
obligation to update them or to explain the reasons why actual results may
differ. In light of these assumptions, risks and uncertainties, the forward-
looking events discussed in this prospectus might not occur.
16
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale and issuance of shares of common
stock will be approximately $ million, at an offering price of $ per
share and after deducting the estimated underwriting discounts and commissions
and the estimated offering expenses payable by the Company.
We intend to use the proceeds of this offering for working capital and to
fund our operations, including expansion of our sales and marketing operations
and our product offerings. We retain broad discretion as to how the proceeds of
this offering will be allocated among these purposes as well as other purposes
that may arise.
We may use a portion of the net proceeds to acquire complementary
businesses, products or technologies. From time to time, we evaluate these
potential acquisitions and we anticipate continuing to make such evaluations.
We have no current plans, agreements or commitments with respect to any such
acquisitions. Pending any of these uses, we intend to invest the net proceeds
of this offering in short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain any future earnings for use
in our business. Our line of credit arrangement prohibits us from paying
dividends without the lender's prior consent.
17
<PAGE>
CAPITALIZATION
The following table shows as of June 30, 1999:
. our actual capitalization;
. our pro forma capitalization assuming the conversion of all
outstanding redeemable Series A convertible preferred stock into
shares of common stock;
. our pro forma capitalization as adjusted to reflect the sale by us
of shares of common stock at an assumed initial public
offering price of $ per share, after deducting underwriting
discounts and commissions and estimated expenses we expect to pay.
This table should be read in conjunction with the consolidated financial
statements and notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -------------
(In thousands, except share data)
<S> <C> <C> <C>
Preferred Stock: 10,000,000 preferred
shares authorized,
1,438,377 shares of redeemable Series A
convertible preferred stock issued and
outstanding, actual; no shares issued and
outstanding, pro forma and pro forma as
adjusted.................................. $ 4,971 $ -- $ --
Shareholders' equity:
Common stock: 200,000,000 shares
authorized; 16,723,840 shares issued and
outstanding, actual; 19,600,594 shares
issued and outstanding, pro forma;
shares issued and outstanding, pro forma
as adjusted............................. 3,499 8,470
Deferred stock compensation.............. (1,994) (1,994)
Notes receivable from shareholders....... (492) (492)
Accumulated deficit...................... (695) (695)
----------- ----------- ---------
Total shareholders' equity............. 318 5,289
----------- ----------- ---------
Total capitalization................... $ 5,289 $ 5,289 $
=========== =========== =========
</TABLE>
The number of shares of common stock issued and outstanding as of June 30,
1999 excludes:
. 1,558,648 shares available for grant under our stock option plans;
. 1,760,000 shares of common stock issuable upon exercise of options
outstanding under our stock option plans, at a weighted average
exercise price of $0.48 per share, of which options to purchase
437,498 shares are currently exercisable; and
. 250,000 shares of common stock available for issuance under our
employee stock purchase plan.
18
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share
and the net tangible book value per share after this offering. We calculate net
tangible book value per share by dividing the net tangible book value, which is
total assets less intangible assets and total liabilities, by the number of
then outstanding shares of common stock.
Our pro forma net tangible book value at June 30, 1999, after giving effect
to the conversion of all outstanding redeemable Series A convertible preferred
stock into common stock, was $ , or $ per share of common stock.
After giving effect to the sale of shares of common stock by us
offered through this prospectus at an assumed initial public offering price of
$ per share, less underwriting discounts and commissions and estimated
expenses we expect to pay, our net tangible book value at June 30, 1999 would
have been $ million, or $ per share. This represents an immediate
increase in the net tangible book value of $ per share to existing
shareholders and an immediate dilution of $ per share to new investors,
or approximately % of the assumed initial offering price of $ per
share. The following table illustrates this per-share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $
Net tangible book value per share at June 30, 1999........... $
Increase due to the conversion of redeemable Series A
convertible preferred stock.................................
Pro forma net tangible book value per share at June 30,
1999........................................................
Increase per share attributable to the offering .............
-----
Net tangible book value per share after this offering..........
-----
Dilution per share to new investors............................ $
=====
</TABLE>
The following table shows, at June 30, 1999, the number of shares of common
stock purchased from us, after giving effect to the conversion of all
outstanding redeemable Series A convertible preferred stock into common stock,
the total consideration paid and the average price paid per share by existing
shareholders and by new investors purchasing common stock in this offering.
<TABLE>
<CAPTION>
Shares
Purchased Total Consideration
-------------- -------------------- Average Price
Number Percent Amount Percent Per-Share
------ ------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders...... $ $
New Investors..............
Total.................... $
</TABLE>
The number of shares of common stock issued and outstanding as of June 30,
1999 excludes:
. 1,558,648 shares available for grant under our stock option plans;
. 1,760,000 shares of common stock issuable upon exercise of options
outstanding under our stock option plans, at a weighted average
exercise price of $0.48 per share, of which options to purchase
437,498 shares are currently exercisable; and
. 250,000 shares of common stock available for issuance under our
employee stock purchase plan.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this prospectus. The consolidated statements
of operations data for each of the years in the three year period ended
December 31, 1998 and the six months ended June 30, 1999 and the balance sheet
data at December 31, 1997, 1998 and June 30, 1999 are derived from the audited
consolidated financial statements included elsewhere in this prospectus. The
consolidated statement of operations data for the years ended December 31, 1994
and 1995 and the balance sheet data at December 31, 1994, 1995 and 1996 are
derived from audited financial statements which are not included in this
prospectus. The consolidated statement of operations data for the six months
ended June 30, 1998 are derived from unaudited financial statements included
elsewhere in this prospectus which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for fair presentation of our financial position and results of
operations for that period. The historical results are not necessarily
indicative of the operating results to be expected in the future.
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
---------------------------------------- --------------
1994 1995 1996 1997 1998 1998 1999
------ ------- ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue
Internet security..... $ -- $ -- $ -- $ 250 $ 2,349 $ 405 $5,474
Ethernet.............. 8,996 10,482 9,356 9,092 5,166 2,901 1,216
------ ------- ------ ------ ------- ------ ------
Total revenue....... 8,996 10,482 9,356 9,342 7,515 3,306 6,690
Cost of revenue......... 5,971 6,411 5,915 4,842 3,308 1,652 1,998
------ ------- ------ ------ ------- ------ ------
Gross margin............ 3,025 4,071 3,441 4,500 4,207 1,654 4,692
------ ------- ------ ------ ------- ------ ------
Operating expenses
Research and
development.......... 1,077 1,241 1,048 1,983 1,739 847 962
Sales and marketing... 1,322 1,856 1,665 2,468 2,907 1,425 1,854
General and
administrative....... 221 529 432 644 753 310 694
Deferred stock
compensation......... -- -- -- -- 42 -- 783
------ ------- ------ ------ ------- ------ ------
Total operating
expenses........... 2,620 3,626 3,145 5,095 5,441 2,582 4,293
------ ------- ------ ------ ------- ------ ------
Income (loss) from
operations............. 405 445 296 (595) (1,234) (928) 399
Other income (expense),
net.................... (8) (30) 22 29 54 22 132
------ ------- ------ ------ ------- ------ ------
Income (loss) before
income taxes........... 397 415 318 (566) (1,180) (906) 531
Benefit from (provision
for) income taxes...... (99) (164) (350) 99 (6) -- (493)
------ ------- ------ ------ ------- ------ ------
Net income (loss)....... $ 298 $ 251 $ (32) $ (467) $(1,186) $ (906) $ 38
====== ======= ====== ====== ======= ====== ======
Basic net income (loss)
per share.............. $ 0.03 $ 0.03 $ -- $(0.06) $ (0.11) $(0.11) $ --
====== ======= ====== ====== ======= ====== ======
Diluted net income
(loss) per share....... $ 0.03 $ 0.02 $ -- $(0.06) $ (0.11) $(0.11) $ --
====== ======= ====== ====== ======= ====== ======
Shares used in
calculation of basic
net income (loss) per
share.................. 9,294 9,626 8,460 8,461 11,251 8,461 16,322
====== ======= ====== ====== ======= ====== ======
Shares used in
calculation of diluted
net income (loss) per
share.................. 9,748 11,224 8,460 8,461 11,251 8,461 19,320
====== ======= ====== ====== ======= ====== ======
Pro forma basic net
income per share....... $ --
======
Pro forma diluted net
income per share....... $ --
======
Shares used in the
calculation of pro
forma basic net income
per share.............. 18,420
======
Shares used in the
calculation of pro
forma diluted net
income per share....... 19,320
======
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------- June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........ $ 241 $ 145 $1,036 $ 787 $1,051 $ 6,769
Total assets..................... 3,320 2,810 3,448 2,374 2,584 11,277
Redeemable Series A convertible
preferred stock................. -- -- -- -- -- 4,971
Total shareholders' equity
(deficit)....................... $ 702 $ 964 $ 932 $ 465 $ (679) $ 318
</TABLE>
See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of basic and diluted net loss per share and pro
forma basic and diluted net loss per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the financial
statements and related notes contained elsewhere in this prospectus. The
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In many cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "intend" or "continue," or
the negative of such terms and other comparable terminology. These statements
are only predictions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this prospectus.
Overview
SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the small to medium enterprise,
branch office, telecommuter and education markets. Our SonicWALL solution is a
high-performance, solid state appliance that provides robust, reliable, easy-
to-use and affordable Internet security. Our products enable our customers to
securely utilize Internet applications and services as an integral part of
their business. As of August 15, 1999, we have shipped more than 16,000 of our
Internet security appliances worldwide.
From inception through 1996, our operating activities focused on the
development and marketing of Ethernet connectivity products for Apple Macintosh
computers. In late 1997, we introduced our first Internet security appliance,
the SonicWALL DMZ, and began volume shipments in 1998. We now focus all our
development, marketing and sales efforts on the Internet security appliance
market. While we continue to ship our Ethernet products, we plan to terminate
shipment of those products by December 1999. This has not required any
significant restructuring of our personnel, facilities, manufacturing or
operations. We do not expect any significant charges related to our Ethernet
product inventories or warranty obligations.
Our SonicWALL product family is sold primarily through our distribution
partners who then resell our products to VARs and selected retail outlets.
These resellers then sell our products to end-users. In 1998 and the six months
ended June 30, 1999, sales to Ingram Micro accounted for 34% and 32% of our
total revenue, respectively. In the six months ended June 30, 1999, sales to
Tech Data accounted for 9% of our total revenue.
Our revenue consists primarily of product sales and, to a lesser extent,
subscription fees from content filtering services and extended warranty
contract fees. We generally recognize revenue when we ship products to our
customers. Certain agreements with our distribution partners provide for rights
of return, stock rotation and co-op advertising rights. We provide an allowance
for sales returns and reserves for warranty and co-op advertising costs at the
time of revenue recognition. Ingram Micro has an unlimited right to return or
rotate its stock on-hand, and therefore we recognize revenue for product sales
to Ingram Micro when it has sold the product to its customers. Subscription
fees and extended warranty fees are deferred and amortized over the period of
the related contracts. Subscription and extended warranty fees to date have not
been material.
To date, a significant portion of our revenue has been dependent on large
purchase orders from a limited number of distribution partners. These purchase
orders typically have short lead times and are subject to delay or cancellation
without penalty. We anticipate that our operating results for a given period
will continue to depend on a small number of customers. If we experience a
decline in revenue from any of our significant distribution partners in a given
quarter, our revenue for that quarter, or following quarters, will be adversely
affected. This could adversely affect our business, prospects, results of
operations and financial condition. Furthermore, if any of our significant
customers experience financial difficulties, our sales to these customers may
be reduced and we may have difficulty in collecting accounts receivable from
these customers. Any delay in large customer orders or customer financial
difficulties could have a material adverse effect on our business, prospects,
results of operations and financial condition.
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<PAGE>
We currently use contract manufacturers to manufacture our products. We also
rely on single or limited source suppliers to provide key components of our
products. A significant portion of our cost of revenue is related to these
manufacturing and component suppliers. These relationships are subject to a
variety of risks.
In 1998, we recorded total deferred stock compensation of approximately
$48,000 in connection with stock and stock options granted during 1998 at
prices subsequently deemed to be below fair market value on the date of grant.
Options granted are typically subject to a four year vesting period. Restricted
stock acquired through the exercise of unvested stock options is subject to our
right to repurchase the unvested stock at the price paid, which right lapses
over a four year period. We are amortizing the deferred stock compensation over
the vesting periods of the applicable options and the repurchase periods for
the restricted stock. In 1999, we have recorded approximately $2.8 million in
additional deferred stock compensation for stock options granted in the six
months ended June 30, 1999 at prices subsequently deemed to be below fair
market value on the date of grant. We amortized approximately $0.8 million of
deferred stock compensation for the six months ended June 30, 1999.
Results of Operations
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue:
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
--------------------- -----------------
1996 1997 1998 1998 1999
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue
Internet Security................. -- % 2.7% 31.3% 12.3% 81.8%
Ethernet.......................... 100.0 97.3 68.7 87.7 18.2
----- ----- ----- ------- -------
Total revenue.................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue.................... 63.2 51.8 44.0 50.0 29.9
----- ----- ----- ------- -------
Gross margin....................... 36.8 48.2 56.0 50.0 70.1
----- ----- ----- ------- -------
Operating expenses
Research and development.......... 11.2 21.3 23.1 25.6 14.4
Sales and marketing............... 17.8 26.4 38.7 43.1 27.7
General and administrative........ 4.6 6.9 10.0 9.4 10.3
Deferred stock compensation....... -- -- 0.6 -- 11.7
----- ----- ----- ------- -------
Total operating expenses......... 33.6 54.6 72.4 78.1 64.1
----- ----- ----- ------- -------
Income (loss) from operations 3.2 (6.4) (16.4) (28.1) 6.0
Other income (expense), net........ 0.2 0.3 0.7 0.7 2.0
----- ----- ----- ------- -------
Income (loss) before income taxes.. 3.4 (6.1) (15.7) (27.4) 8.0
Benefit from (provision for) income
taxes............................. (3.7) 1.1 (0.1) -- (7.4)
----- ----- ----- ------- -------
Net income (loss).................. (0.3)% (5.0)% (15.8)% (27.4)% 0.6%
===== ===== ===== ======= =======
</TABLE>
Six Months Ended June 30, 1999 and 1998
Internet security revenue. We shipped our first Internet security appliance
product, the SonicWALL DMZ, near the end of 1997, and in the first six months
of 1998 we were in the early stages of our sales and marketing efforts for this
product. Accordingly, Internet security revenue in the six months ended June
30,
23
<PAGE>
1998 was minimal. Revenue from sales of our security appliance products
increased to $5.5 million in the six months ended June 30, 1999 from $0.4
million in the six months ended June 30, 1998. This revenue growth was due
primarily to the introduction of our second security appliance product, the
SonicWALL, in August 1998, and the introduction of our SonicWALL Pro product in
May 1999.
Ethernet revenue. Revenue from our Ethernet products declined to $1.2
million in the six months ended June 30, 1999 from $2.9 million in the six
months ended June 30, 1998. This decrease was directly related to our 1997
decision to focus our development, sales and marketing efforts on our Internet
security appliance products. We expect revenue from our Ethernet products to
continue to decline through the remainder of 1999. We expect to stop shipment
of Ethernet products by December 1999.
Cost of revenue; gross margin. Cost of revenue includes all costs associated
with the production of our products, including cost of materials, manufacturing
and assembly costs paid to contract manufacturers and related overhead costs
associated with our manufacturing operations personnel. Additionally, all
warranty costs and any inventory provisions or write-downs are expensed as cost
of revenue. Cost of revenue increased to $2.0 million in the six months ended
June 30, 1999 from $1.7 million in the six months ended June 30, 1998,
primarily as a result of increased product sales. Gross margin increased to
$4.7 million, or 70% of total revenue, in the six months ended June 30, 1999
from $1.7 million, or 50% of total revenue, in the six months ended June 30,
1998. The increase in gross margin relates primarily to the increase in sales
of higher gross margin security appliance products, and a decrease in sales of
lower gross margin Ethernet products. In addition, as the volume of units
shipped has increased, our cost of revenues has declined as a percentage of
revenue as a result of lower component costs due to higher purchase volumes,
and lower manufacturing and overhead costs per unit related to economies of
scale. Our gross margins are affected by fluctuations in manufacturing volumes,
component costs and the mix of products sold. In addition, an increase in total
sales to OEMs compared to total sales to our distribution partners will result
in a decrease in gross margins. We must manage each of these factors
effectively for our gross margins to remain at current levels.
Research and development. Research and development expenses primarily
consist of personnel costs related to engineering and technical support,
contract consultants, outside testing services and equipment and supplies
associated with enhancing existing products and developing new products.
Research and development expenses increased to $1.0 million in the six months
ended June 30, 1999 from $0.8 million in the six months ended June 30, 1998.
Research and development spending increased in the six months ended June 30,
1999 by approximately $0.5 million related to the hiring of additional
personnel and increased overhead and consulting costs. This increase was offset
by a decrease of approximately $0.3 million in compensation paid to a founder
in the six months ended June 30, 1999.
Sales and marketing. Sales and marketing expenses primarily consist of
personnel costs, including commissions, costs associated with the development
of our business and corporate identification, and costs related to customer
support, travel, trade shows, promotional and advertising costs. Sales and
marketing expenses increased to $1.9 million in the six months ended June 30,
1999 from $1.4 million in the six months ended June 30, 1998. This increase in
absolute dollars primarily relates to increased hiring of sales and marketing
personnel, increased travel and attendance at trade shows, increases in
customer support personnel and expanded sales and marketing efforts in
international markets. These increases were partially offset by a decrease in
compensation paid to a founder of $0.3 million in the six months ended June 30,
1999. We intend to increase sales and marketing expenses as we add personnel to
support our domestic and international sales and marketing efforts.
General and administrative. General and administrative expenses primarily
consist of personnel costs for administrative officers and support personnel,
legal, accounting and consulting fees, and facility expenses. Our general and
administrative expenses increased to $0.7 million for the six months ended June
30, 1999 from $0.3 million in the six months ended June 30, 1998. This increase
was primarily due to increases in staffing and related personnel costs to
support our growth, as well as increased professional services costs.
24
<PAGE>
Deferred stock compensation. Amortization of deferred stock compensation was
$783,000 in the six months ended June 30, 1999. This amortization relates to
deferred compensation of $2.8 million, related to stock options granted in the
six months ended June 30, 1999. We are amortizing this amount over the vesting
periods of the applicable options. There was no amortization of deferred stock
compensation in the six months ended June 30, 1998.
Other income (expense), net. Other income (expense), net consists primarily
of interest income on the Company's cash and cash equivalents, and increased to
$0.1 million for the six months ended June 30, 1999 from $22,000 in the six
months ended June 30, 1998. This increase was related primarily to higher
interest earnings on cash that increased in amount from $1.1 million to $6.8
million in the comparable period.
Provision for income taxes. The provision for income taxes in the six months
ended June 30, 1999 was $0.5 million. There was no provision for income taxes
in the comparable 1998 period. In both periods, the provision for income taxes
is based on an estimated effective rate for each of the respective calendar
years. The effective tax rate in the six months ended June 30, 1999 was 37%
before the effect of amortization of deferred compensation, a permanent, non-
deductible book/tax difference. This effective rate reflects statutory federal
and state tax rates net of the estimated realization of deferred tax assets.
The Company incurred a loss in 1998 so there was no provision for income taxes
in the six months ended June 30, 1998.
Years Ended December 31, 1998, 1997 and 1996
Internet security revenue. Internet security revenue increased to $2.3
million in 1998 from $0.3 million in 1997 and related primarily to a full year
of shipments of our expanded SonicWALL product offerings in 1998. There was no
Internet security revenue in 1996.
Ethernet revenue. Ethernet revenue declined to $5.2 million in 1998 from
$9.1 million in 1997, which declined from $9.4 million in 1996. These declines
in Ethernet revenue related to our 1997 decision to focus development, sales
and marketing efforts on our Internet security appliance products. Our
development, marketing and sales efforts are now entirely focused on the
Internet security appliance market, and while we continue to ship our Ethernet
products, we plan to terminate shipment of these products by December 1999.
Gross margin. In 1998, gross margin was $4.2 million, or 56% of revenue,
compared to $4.5 million, or 48% of revenue, in 1997. The percentage increase
in gross margin from 1997 to 1998 relates primarily to the increase in sales of
higher margin Internet security appliance products. In 1996, gross margin was
$3.4 million, or 37% of revenue. The increase in gross margin percentage from
1996 to 1997 is primarily attributable to the cost reduction associated with
the commencement of turnkey, offshore manufacturing of certain Ethernet
products in January 1997.
Research and development. Research and development expenses decreased to
$1.7 million in 1998 from $2.0 million in 1997, and increased from $1.0 million
in 1996. This decrease from 1997 to 1998 relates primarily to a reduction in
compensation paid to a founder. The research and development expense increase
in 1997 over 1996 of $0.9 million was primarily related to increased personnel
and consulting costs associated partly with the development of the security
appliance products which commenced in 1997.
Sales and marketing. Sales and marketing expenses increased to $2.9 million
in 1998 from $2.5 million in 1997 and from $1.7 million in 1996. These
increases were primarily due to the hiring of additional sales and marketing
personnel, as well as increases in travel, trade shows, promotional and
advertising costs.
General and administrative. General and administrative expenses increased to
$0.8 million in 1998 from $0.6 million in 1997, and increased from $0.4 million
in 1996. These increases were due mainly to the addition of administrative
personnel, professional services fees and facility expenses to support the
growth of our operations.
25
<PAGE>
Deferred stock compensation. During 1998, we recorded deferred compensation
of $48,000 in connection with stock option grants of which $42,000 was
amortized in the year ended December 31, 1998. We are amortizing this amount
over the vesting periods of the applicable options.
Quarterly Results of Operations
The following tables set forth our unaudited quarterly results of
operations, in dollars and as a percentage of total revenue, for the six
quarters ended June 30, 1999. You should read the following tables in
conjunction with the financial statements and related notes contained elsewhere
in this prospectus. We have prepared this unaudited information on the same
basis as our audited financial statements. These tables include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for the quarters presented. You should not draw any conclusions about
our future results from the results of operations for any quarter.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Internet Security..... $ 157 $ 248 $ 519 $1,425 $2,251 $3,223
Ethernet.............. 1,546 1,355 1,555 710 813 403
------ ------ ------ ------ ------ ------
Total revenue....... 1,703 1,603 2,074 2,135 3,064 3,626
------ ------ ------ ------ ------ ------
Cost of revenue......... 833 819 833 823 943 1,055
------ ------ ------ ------ ------ ------
Gross margin............ 870 784 1,241 1,312 2,121 2,571
Operating expenses
Research and
development.......... 398 449 432 460 448 514
Sales and marketing... 674 752 694 787 811 1,043
General and
administrative....... 184 125 232 212 332 362
Deferred stock
compensation......... -- -- -- 42 15 768
------ ------ ------ ------ ------ ------
Total operating
expenses........... 1,256 1,326 1,358 1,501 1,606 2,687
------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (386) (542) (117) (189) 515 (116)
Other income (expense),
net.................... 9 13 14 18 41 91
------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... (377) (529) (103) (171) 556 (25)
Provision for income
taxes.................. -- -- -- 6 214 279
------ ------ ------ ------ ------ ------
Net income (loss)....... $ (377) $ (529) $ (103) $ (177) $ 342 $ (304)
====== ====== ====== ====== ====== ======
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
As a Percentage of Revenue
-----------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Internet Security..... 9.2 % 15.5 % 25.0 % 66.7 % 73.5% 88.9 %
Ethernet.............. 90.8 84.5 75.0 33.3 26.5 11.1
----- ----- ----- ----- ----- -----
Total revenue....... 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- -----
Cost of revenue......... 48.9 51.1 40.2 38.5 30.8 29.1
----- ----- ----- ----- ----- -----
Gross margin............ 51.1 48.9 59.8 61.5 69.2 70.9
Operating expenses
Research and
development.......... 23.4 28.0 20.8 21.5 14.6 14.1
Sales and marketing... 39.6 46.9 33.5 36.9 26.5 28.8
General and
administrative....... 10.8 7.8 11.2 9.9 10.8 10.0
Deferred stock
compensation......... -- -- -- 2.0 0.5 21.2
----- ----- ----- ----- ----- -----
Total operating
expenses........... 73.8 82.7 65.5 70.3 52.4 74.1
Income (loss) from
operations............. (22.7) (33.8) (5.7) (8.8) 16.8 (3.2)
Other income (expense),
net.................... 0.5 0.8 0.7 0.8 1.3 2.5
----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... (22.2) (33.0) (5.0) (8.0) 18.1 (0.7)
Provision for income
taxes.................. -- -- -- 0.3 7.0 7.7
----- ----- ----- ----- ----- -----
Net income (loss)....... (22.2)% (33.0)% (5.0)% (8.3)% 11.1% (8.4)%
===== ===== ===== ===== ===== =====
</TABLE>
Internet security revenue. Internet security revenue has increased in each
of the six quarters ended June 30, 1999, due to increasing market acceptance of
our security appliance solution and the expansion of our product line to
include the SonicWALL in August 1998 and SonicWALL Pro in May 1999.
Ethernet revenue. Ethernet revenue remained relatively flat through the
first three quarters of 1998, and decreased significantly in the fourth quarter
of 1998 and the first two quarters of 1999. The overall decline in Ethernet
revenue relates primarily to our decision to focus our development, sales and
marketing resources exclusively on the security appliance product family. We
expect to stop shipment of Ethernet products by December 1999.
Gross margin. Our gross margin has generally increased each quarter since
the quarter ended March 31, 1998. These increases have been due to the
introduction of our new security appliance products, which have higher average
selling prices and higher gross margins, the reduction of production costs on a
per unit basis as manufacturing volumes have increased, the reduction in
materials costs due to increased purchase volumes, and improved absorption of
manufacturing infrastructure costs.
Operating expenses. Our operating expenses have increased in each of the six
quarters ended June 30, 1999 to $2.7 million in the quarter ended June 30, 1999
from $1.3 million in the quarter ended March 31, 1998. These increases related
primarily to development of new products, increased marketing of new products,
and increased investments in our internal infrastructure to support our growth.
Liquidity and Capital Resources
Since our inception, we have financed our operations through cash flows from
operations, private sales of securities and, to a lesser extent, bank
borrowings. During the six months ended June 30, 1999, we generated $0.7
million in cash from operating activities. This increase resulted from a
significant increase in Internet security revenue, offset in part by a $1.3
million increase in accounts receivable and a $0.3 million increase in
inventories. We expect that accounts receivable and inventory will continue to
increase if our revenue continues to rise and that we will continue to increase
our investment in capital assets to expand our operations. During
27
<PAGE>
1998, we generated $0.4 million in cash from operating activities, compared to
a $0.4 million decrease from operating activities in 1997. Investing activities
related to purchases of property and equipment used cash of $0.1 million in
1998 and $0.1 million in the six months ended June 30, 1999. In 1996 and 1997
purchases of property and equipment were immaterial.
In February 1999, the Company completed a private placement of approximately
$5.0 million of redeemable Series A convertible preferred stock. The Company
conducted no significant financing activities in 1997 or 1998.
Our principal source of liquidity as of June 30, 1999 consisted of $6.8
million in cash and cash equivalents. As of June 30, 1999 we have a credit
facility that provides for borrowings up to the lesser of $1.0 million or 80%
of eligible accounts receivable, as defined in the credit facility. Our line of
credit bears interest at the bank's reference rate plus 1.75% and borrowings
are secured by accounts receivable, inventories, property and equipment. The
credit facility may be terminated by the lender or us on thirty days prior
notice. As of June 30, 1999, there were no borrowings outstanding under this
credit facility.
We believe that the market risk arising from our holdings of financial
instruments is not material.
We believe the net proceeds of this offering, together with our existing
cash balances and available line of credit, will be sufficient to meet our cash
requirements at least through the next twelve months. However, we may be
required, or could elect, to seek additional funding prior to that time. Our
future capital requirements will depend on many factors, including our rate of
revenue growth, the timing and extent of spending to support product
development efforts and expansion of sales and marketing, the timing of
introductions of new products and enhancements to existing products, and market
acceptance of our products. We cannot assure you that additional equity or debt
financing, if required, will be available on acceptable terms or at all.
Year 2000 Readiness Disclosure
Internal Operations
Historically, computer programs used two digits rather than four to
designate specific years. Computer programs that use two digits to designate a
specific year may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in normal business activities.
This is known as the Year 2000 problem.
We have relationships with, and are to varying degrees dependent upon, a
large number of third parties that provide information, goods and services to
us or who manufacture and ship our products. Our business, results of
operations and financial condition could be materially adversely affected if
any of the third parties with whom we have relationships were to experience
significant Year 2000 related problems. In addition, our business, results of
operations and financial condition could be materially adversely affected if
any of our key customers encounter significant Year 2000 related problems that
cause them to delay or cancel substantial purchase orders or product
deliveries.
We have been informed by Flash Electronics, Inc. and All Quality Services,
Inc., or AQS, our contract manufacturers, that their manufacturing systems are
Year 2000 compliant or they are working to ensure compliance. However, they may
experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in their internal information
technology and non-information technology systems. These unanticipated problems
and costs could have a material adverse effect on their business, results of
operations and financial condition. The failure of a supplier to Flash
Electronics or AQS to be Year 2000 compliant could adversely affect either
firm's operations, which in turn could materially adversely affect our
business, results of operations and financial condition.
28
<PAGE>
Our products are ultimately used with a number of different hardware and
software products, and to the extent any third-party products are not Year 2000
compliant, the interoperability of our products could be adversely affected.
Given the large number of third-party components used in conjunction with our
products and our limited resources, we do not expect to review third-party
products for Year 2000 compliance.
We have conducted an initial audit of our critical internal financial,
informational and operational systems to identify and evaluate those areas that
may be affected as a result of the Year 2000 problem. To date, we have not
incurred material expense associated with our efforts to become Year 2000
compliant and do not anticipate that any future costs associated with our Year
2000 remediation efforts will exceed $100,000. In addition, we have not
deferred any material information technology projects as a result of our Year
2000 problem activities.
Although we plan to complete modifications or upgrades of our systems prior
to the year 2000, we may not be able to develop and implement a plan that
adequately addresses the Year 2000 problem in a timely manner. If we are not
able to address the Year 2000 problem adequately, we may be unable to conduct
our business. This would have a material adverse effect on our results of
operations and financial condition.
Products
We have tested and continue to test all our SonicWALL product offerings for
Year 2000 problems. To date, we know of no such problems which have not been
corrected. We do not currently expect any significant Year 2000 problems to
arise with our products. We have generally represented to our channel partners
and our end users that our products are Year 2000 compliant. If that turns out
to be untrue, these parties, and others, may make claims against us which may
result in litigation, product returns, or falling sales.
The discussion of our efforts and expectations relating to Year 2000
compliance are forward-looking statements. Our ability to achieve Year 2000
compliance and the level of incremental costs associated with compliance could
be adversely affected by, among other things, availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unidentified problems, identified in the ongoing
compliance review.
Disclosures About Market Risk
Our exposure to market risk for changes in interest rates relates primarily
to our cash and cash equivalents. We do not use derivative financial
instruments in our investment portfolio. As stated in our investment policy, we
are averse to principal loss and ensure the safety and preservation of our
invested funds by limiting default and market risk. We mitigate default risk by
investing in only investment-grade instruments.
We invoice all of our foreign customers from the United States in U.S.
dollars and all revenue is collected in U.S. dollars. In addition, we do not
have any cash balances denominated in foreign currencies. As a result, we do
not have significant market risks associated with foreign currencies or related
to sales and collections.
29
<PAGE>
BUSINESS
Overview
SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the SME, branch office, telecommuter
and education markets. Our SonicWALL solution is a high-performance, solid
state appliance that provides robust, reliable, easy-to-use and affordable
Internet security. Our products enable our customers to securely utilize
Internet applications and services as an integral part of their business. As of
August 15, 1999, we have shipped more than 16,000 of our Internet security
appliances worldwide.
Our SonicWALL product line provides our customers with a comprehensive
integrated security solution that includes firewall, content filtering, and VPN
functionality so users can enjoy affordable, secure Internet communications.
The SonicWALL product family delivers a plug and play appliance solution that
is easy to install and use and minimizes the purchase, installation, and
maintenance costs of Internet security. With suggested retail prices ranging
from $495 to $2,995, versus competitive products which range in price from
approximately $5,000 to more than $15,000, our products enable customers to
reduce purchase costs and avoid hiring costly IT personnel. By using an
embedded single purpose operating system and a solid state design without
moving parts, our SonicWALL products are designed to maximize reliability and
uptime. The SonicWALL product line is scalable for networks ranging in size
from 1 to 1,000 users and is fully compatible with more expensive enterprise
wide security solutions offered by, among others, Check Point Software and
Cisco Systems.
Industry Background
Growth of Internet Usage By Small to Medium Enterprise, Branch Office,
Telecommuter, and Education Markets
Businesses and consumers are increasingly accessing the Internet for a wide
variety of uses including communications, information gathering and commerce.
Because it is an affordable means of achieving global reach and brand
awareness, the Internet is a particularly attractive vehicle for small and
medium size businesses as they endeavor to access and share information with a
large number of geographically dispersed customers, employees and business
partners. For example, of the 87.4 million devices estimated by IDC to have
Internet access in 1998, approximately 60% were used by small businesses and
home offices. IDC estimates that the proportion of small businesses, those with
less than 100 people, accessing the Internet in the United States will increase
from approximately 50% in 1998 to approximately 65% by 2001, to a total of 4.7
million businesses.
Today's large business enterprise is characterized by many branch offices,
mobile workers, and telecommuters, all of whom connect electronically to the
corporate office and each other. Because of the confidential nature of business
data, these connections must be secure. Virtual private networks provide secure
Internet connections between the business enterprise and dispersed employees
and business partners. Communicating using VPNs offers significant cost savings
over alternative solutions such as private leased line or frame relay networks.
In fact, TeleChoice estimates that VPNs can cut telecommunication costs by as
much as 90% over private leased line networks, and for this reason, VPN use is
expected to grow rapidly. Infonetics Research projects worldwide expenditures
on VPNs will grow by 100% per year through 2001 when they are expected to reach
$11.9 billion.
The Internet also has become a vital tool of information access and
communication for schools and libraries. According to the National Center for
Education Statistics, there were over 96,000 K-12 public schools and libraries
in the United States in 1998, of which 89% of schools and 35% of libraries were
connected to the Internet. The growth in Internet connectivity in this market,
combined with the proliferation of objectionable Web sites, has created a need
for Internet security products that include content filtering capabilities.
Increasing Demand for Broadband Access Technologies
Many SMEs and branch offices have addressed the need for Internet access by
installing a single computer with a dial-up connection that is shared
throughout the office, or by installing a dedicated network data
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<PAGE>
connection at a significantly greater expense, such as a T-1 line. Recently,
new high-speed technologies have emerged that can better satisfy the bandwidth
requirements of SMEs at a fraction of the cost of traditional solutions. These
technologies include DSL and cable modems, which provide access speeds of up to
100 times faster than traditional 28.8 kbps analog modems. In addition, new
generations of Internet-based applications, such as business to business e-
commerce, sales force automation and enterprise resource planning, or ERP,
continue to emerge that require higher bandwidth than is available through
dial-up solutions. As DSL and cable services have become more affordable and
widely available, SMEs, branch offices, and telecommuters are increasingly
deploying these technologies as their Internet access solution. Yankee Group
estimates that in the United States DSL subscribers will increase from 0 to 1.5
million from 1997 to 2001, and cable modem subscribers will increase from
100,000 to 3.0 million over the same period.
Importance of Internet Security
Secure access to the Internet is a growing concern for most Internet users.
"Always-on" Internet connections, such as DSL and cable, present unique
security issues for SMEs, branch offices, and telecommuters and increase the
risk that computer hackers, disgruntled employees, contractors or competitors
might successfully access proprietary data or other sensitive information. In
addition, as more Web-enabled, mission critical business applications are
developed and offered by vendors such as Oracle Corp., PeopleSoft Inc., Siebel
Systems Inc., and SAP AG, the amount of sensitive data transmitted over the
Internet has increased and led organizations to look for high performance,
robust solutions to address these security needs.
Many Internet users also seek solutions that enable control over access to
undesirable content, either to avoid potential legal liability or to eliminate
distracting activity by employees or other users. In addition, public attention
has recently focused on the advantages of using filtering software to screen
offensive material for children accessing the Internet at libraries, schools,
and other public institutions.
The market for Internet security products includes a variety of applications
to address these issues, such as firewall, content filtering, Internet
Protocol, address management and VPN. According to IDC, the market for Internet
security products increased over 45% in 1998 to $3.2 billion and is expected to
grow at a compounded annual growth rate of 21% to $8.3 billion by 2003.
Firewall products represent the fastest growing segment, with an expected
compounded annual growth rate of 27% over the same period.
Lack of a Cost Effective, High Performance Security Solution for the Broadband
Access Market
Although the need for Internet security solutions is widespread, security
vendors generally have focused on providing solutions for large enterprises
with highly complex needs and extensive information technology support
organizations. These solutions have typically involved expensive enterprise
firewall software that runs on a dedicated server or personal computer and
requires extensive support, constant monitoring and regular updates by IT
personnel to maintain its effectiveness. The expense and complexity of these
solutions, which often require additional products to incorporate VPN
capabilities, IP address management or content filtering, are impractical for
the majority of SMEs due to their more limited resources. While there are low
cost security products currently on the market, we believe these products
generally provide limited functionality, are difficult to install and
configure, and provide relatively low performance.
The SonicWALL Solution
SonicWALL is a leading provider of Internet security solutions designed for
broadband access customers in the SME, branch office, telecommuter and
education markets. Our SonicWALL solution is a high performance, solid state
appliance that provides robust, reliable, easy-to-use and affordable Internet
security. SonicWALL products enable our customers to securely utilize Internet
applications and services as an integral part of their business. As of August
15, 1999, we have shipped more than 16,000 of our Internet security appliances
worldwide. The SonicWALL solution provides our customers with the following key
benefits:
. High Performance, Robust Security. The SonicWALL product family
provides a comprehensive integrated security solution that includes
firewall, content filtering and VPN
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<PAGE>
functionality. Our firewall security protects private networks
against Internet-based theft, destruction, or modification of data,
and automatically notifies customers if their network is under
attack. SonicWALL has been awarded the internationally recognized
International Computer Security Association, or ICSA, Firewall
Certification, the same certification awarded to significantly more
expensive products sold by Check Point Software and Cisco Systems.
Our VPN capabilities enable affordable, secure communications among
remote offices, mobile employees and business partners over the
Internet. Our content filtering enables businesses, schools and
libraries to restrict access to objectionable or inappropriate Web
sites.
. Ease of Installation and Use. The SonicWALL product family delivers
a plug-and-play appliance solution that is designed for easy
installation and use. Installation involves simply connecting
SonicWALL between the private network and the broadband Internet
access device. SonicWALL is easily configured and managed through a
Web browser-based interface. No reconfiguration of any PC
application is required. Our solution is pre-configured to interface
with all major Internet access technologies, including cable, DSL,
ISDN, Frame Relay, and T-1. In addition, SonicWALL's AutoUpdate
capability automatically notifies all registered customers via e-
mail when bug fixes or new features and products that have been
purchased are available for download from our Web site.
. Low Total Cost of Ownership. The SonicWALL product design minimizes
the purchase, installation and maintenance costs of Internet
security. The suggested retail prices of our products range from
$495 to $2,995, versus competitive products which range in price
from approximately $5,000 to more than $15,000. Our affordable,
easy-to-manage Internet security appliances also enable customers to
avoid the expense of hiring costly information technology personnel
who may otherwise be required to implement and maintain an effective
Internet security solution.
. Reliability. The SonicWALL product design maximizes reliability and
uptime. Our product uses an embedded single purpose operating system
and a solid state design which contains no moving parts. Most
competitors' products consist of software installed on general
purpose host computers which use the Windows NT or UNIX operating
systems. General purpose operating systems such as these are
designed to run multiple applications, creating an environment in
which random system crashes are commonplace. Moreover, since general
purpose computers contain many moving parts, such as hard disk
drives, floppy drives, fans and switching power supplies, they are
more prone to hardware failures over time. These software and
hardware failures can compromise Internet security.
. Scalability and Compatibility. The SonicWALL product family is
designed to provide comprehensive Internet security for networks
ranging in size from 1 to 1,000 users. Our products consist of three
separate models designed to serve the specific security needs of our
target markets. Our products vary with respect to the number of
supported users, the number of ports and feature options such as VPN
or content filtering. In addition to serving the security needs of
the SME market, SonicWALL products are a fully compatible, perimeter
security solution for large, distributed enterprises and their
branch offices and telecommuters. Our products are designed to
interoperate with enterprise security products offered by, among
others, Check Point Software and Cisco Systems.
Strategy
Our goal is to extend our leadership position and become the industry
standard Internet security solution for broadband access users in our target
markets--the SME, branch office, telecommuter, and education markets. Key
elements of our strategy include:
. Extend Our Leadership Position in Target Markets. We believe that we
have established a market leadership position as a provider of
Internet security solutions designed for our target
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<PAGE>
markets by offering robust, reliable, easy-to-use products at
attractive prices. We intend to continue to focus our product
development efforts, distribution strategies, and marketing programs
to satisfy the growing needs of these markets. We believe that
security solutions currently offered by most vendors are relatively
expensive, technically complex, and generally unable to satisfy
these target markets.
. Strengthen the SonicWALL Brand. We believe that strong brand
recognition in our target markets is important to our long term
success. We intend to continue to strengthen our SonicWALL brand
name through industry trade shows, our Web site, advertising, direct
mailings to both our VARs and our end users, and public relations.
Our reputation as a reliable, high performance, easy-to-use and
affordable Internet security solution contributes to our resellers'
sales efforts.
. Expand Our Indirect Channel. Our target markets are generally served
by a two-tier distribution channel. We have successfully penetrated
these markets with over 800 VARs, systems integrators, and
distributors, who sell our products in over thirty countries,
including large distributors such as Ingram Micro and Tech Data. We
intend to build and expand our base of indirect channel
relationships through additional marketing programs, hiring
additional marketing staff, and increased advertising.
. Develop Strategic OEM Relationships. We intend to leverage the brand
awareness and worldwide channels of major networking and
telecommunications equipment suppliers to further penetrate our
target markets. We presently have OEM agreements with two companies
shipping our products: Ramp Networks, a manufacturer of shared
Internet access devices for small offices, and COM21, a supplier of
cable modems. We are pursuing relationships with other broadband
access equipment providers with the intent of further penetrating
our target markets.
. Leverage Our Installed Base. We intend to develop new subscription
services and add on products to generate additional revenue from our
installed base. We have dedicated marketing personnel and programs
that focus on selling products and services to this existing base of
customers. We have actively sought registration of our customers
through our AutoUpdate feature and we have experienced a
registration rate of nearly 50% to date. This has enabled us to
pursue cost effective, targeted marketing campaigns to our installed
base. Each SonicWALL model is configured to allow end-users to
easily and conveniently download new features and products that have
been purchased, either through our resellers or our Web site. Such
sales could include additional functionality such as VPN or
additional recurring revenue opportunities such as content filtering
services.
. Continue to Develop New Products and Reduce Manufacturing Costs. We
intend to use our product design and development expertise to expand
our product offerings and reduce our manufacturing costs. New
products and services may include offerings such as bandwidth
management, e-mail spam filtering and virus scanning. We are working
to achieve a higher level of Application Specific Integrated
Circuit, or ASIC, design and integration to reduce product costs and
increase product performance. We believe that these new product
offerings and associated cost reductions will strengthen our market
position and assist us in penetrating new markets.
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<PAGE>
Products and Services
The SonicWALL product family provides cost effective and high performance
Internet security solutions for the small and medium size enterprise, branch
office, telecommuter, and education markets. We design our products to address
the specific needs of customers within each of these market segments. Our
products vary with respect to the number of supported users, the number of
ports, product features, processor speed and scalability. All of our products
provide firewall security and are capable of delivering features such as
content filtering and VPN in a single, integrated security appliance that is
managed through an intuitive and easy-to-use Web browser-based interface.
[DESCRIPTION OF GRAPHICS:
Diagram showing WebServer, E-Commerce Server and three PC's connected to a
SonicWALL DMZ or PRO security appliance on the left side, which is
connected to a modem router in the middle of the graphic which is connected
to an oval on the right side of the graphic with the words "THE INTERNET"
in the center of the oval.]
SonicWALL. SonicWALL has two 10Base-T Ethernet ports and is designed to
provide security for smaller networks using broadband connections to the
Internet such as cable and DSL. SonicWALL provides protection against
unauthorized access to the private network, filters out objectionable Web
sites, and manages the complexity of IP addressing. It also has a VPN option to
give telecommuters and small remote offices affordable and secure connectivity
to the main office. SonicWALL supports 10, 50 or unlimited user connections
depending on the model purchased.
SonicWALL DMZ. SonicWALL DMZ is designed to meet the Internet security needs
of small and medium size networks in business and education. In addition to the
features provided by SonicWALL, SonicWALL DMZ provides a third port, a DMZ, or
De-Militarized Zone, that enables the use of public Web and e-commerce servers
by supporting different security options to be defined for two different
network zones. Public servers on the DMZ port are accessible from the Internet
and the private network, but are protected from Internet-based attacks.
SonicWALL DMZ supports unlimited users.
SonicWALL PRO. SonicWALL PRO has three 10/100Base-T Fast Ethernet ports and
is designed to meet the Internet security needs of medium and large size
businesses and branch offices. SonicWALL PRO supports all of the features found
in other SonicWALL models, and offers a more powerful and scalable platform for
larger networks requiring Fast Ethernet connectivity, high performance VPN and
future expansion options. SonicWALL PRO supports unlimited users.
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<PAGE>
The following table provides a summary of SonicWALL models:
<TABLE>
<CAPTION>
SonicWALL Model SonicWALL SonicWALL DMZ SonicWALL PRO
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Target Markets . Telecommuter . Small to medium . Medium to large
size business size business
. Small to medium . Education . Branch offices
size business
- ----------------------------------------------------------------------------------------
Virtual Private Networking Optional Optional Standard
- ----------------------------------------------------------------------------------------
Number of Users 10, 50, Unlimited Unlimited Unlimited
- ----------------------------------------------------------------------------------------
LAN and WAN Ports X X X
- ----------------------------------------------------------------------------------------
DMZ Port for Public Servers X X
- ----------------------------------------------------------------------------------------
Expandable Memory and PCI X
Expansion Slot
- ----------------------------------------------------------------------------------------
Type of Ports 10Base-T 10Base-T 10/100Base-T
(Ethernet) (Ethernet) (Fast Ethernet)
- ----------------------------------------------------------------------------------------
Microprocessor Motorola Motorola Intel
33MHz MC 68360 33MHz MC 68360 233MHz StrongARM
- ----------------------------------------------------------------------------------------
List Price $495 - $1,495 $1,795 $2,995
</TABLE>
End users may also purchase various product upgrades and subscriptions, such
as updated content filter lists, VPN, number of user upgrades, and extended
warranties and premium support contracts.
<TABLE>
<CAPTION>
Upgrade or Subscription Description List Price
- ----------------------------------------------------------------------------------------
<S> <C> <C>
VPN Upgrade Activates optional virtual private
networking feature for SonicWALL and
SonicWALL DMZ models $495 - $695
- ----------------------------------------------------------------------------------------
Number of User Upgrade Adds support for additional users for
user-limited models (SonicWALL/10 and
SonicWALL/50) $650 - $1,300
- ----------------------------------------------------------------------------------------
Content Filter Subscription Annual subscription to a continuously
updated list of Internet sites $175 - $695 /
containing objectionable content year
- ----------------------------------------------------------------------------------------
Extended Warranty and Annual extended warranty on SonicWALL
Premium Support hardware and premium technical support $80 - $675 /
contract year
</TABLE>
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<PAGE>
[DESCRIPTION OF GRAPHICS:
Diagram showing the Internet as an oval symbol and lines connecting from
the Internet through depiction of SonicWALL products to graphic for SME
(office building), telecommuter (house), school or library (school), branch
office (office building), corporate headquarters (office building), and
mobile worker (laptop computer).]
The SonicWALL product family shares a common set of Internet security
features that have been tailored to meet the needs of our target markets:
Firewall Security. Our firewall security protects private networks against
Internet-based theft, destruction, or modification of data, and automatically
notifies customers if their networks are under attack. SonicWALL has been
awarded the internationally recognized ICSA Firewall Certification, the same
certification awarded to significantly more expensive products sold by Check
Point Software and Cisco Systems. In addition, SonicWALL is pre-configured to
automatically detect and thwart Denial of Service attacks such as Ping of
Death, SYN Flood, LAND Attack, and IP Spoofing.
Virtual Private Networking. Our VPN capabilities enable affordable and
secure communications over the Internet between branch offices, telecommuters,
mobile workers and business partners. SonicWALL VPN uses industry-standard data
encryption algorithms and interoperates with other VPN products such as Check
Point Software's Firewall-1.
Content Filtering. Our content filtering feature enables businesses,
families, schools and libraries to control access to objectionable or
inappropriate Web sites. SonicWALL can filter Internet content by URL or
keyword. We offer a content filter subscription service that provides a list of
objectionable Web sites that is automatically updated on a weekly basis.
IP Address Management. SonicWALL includes Network Address Translation, or
NAT, which allows a customer to connect multiple users on their private network
to the Internet using a single public IP address. SonicWALL also includes
Dynamic Host Configuration Protocol, or DHCP, Client and Server capabilities.
DHCP Client allows SonicWALL to automatically acquire its IP address settings
from the Internet Service Provider, or ISP. DHCP Server allows computers on the
private network to automatically acquire IP address settings from SonicWALL,
simplifying client PC configuration.
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<PAGE>
AutoUpdate. Our AutoUpdate feature automatically notifies all registered
customers via e-mail when bug fixes or new products that have been purchased
are available for download from our Web site. With AutoUpdate, we give our
customers an easy-to-use method to address rapidly evolving Internet security
issues.
Logging and Reporting. SonicWALL maintains an event log of potential
security concerns which can be viewed with a Web browser or automatically sent
to any e-mail address on a periodic basis. SonicWALL notifies the administrator
of high-priority security issues, such as an attack on a server, by immediately
sending an alert message to a priority e-mail account such as an e-mail pager.
SonicWALL also provides pre-defined reports that show different views of
Internet usage, such as the most commonly accessed Web sites.
Web Browser-Based Management. SonicWALL is easily and securely configured
and managed through a Web browser-based interface. The SonicWALL interface
effectively insulates the user from the underlying complexity of Internet
security, while providing enough flexibility to meet the diverse needs of our
customers.
Case Studies
SonicWALL customers range from home users with Internet cable or DSL access
to global companies with numerous branch offices and telecommuters. The
following case studies illustrate how our customers are using our products and
services.
Small to Medium Size Enterprise
The Charlotte Hornets professional basketball franchise depends on the
Internet for league communications, marketing and public relations. The
Hornets' office uses an always-on broadband Internet connection that requires
Internet security to protect confidential franchise and league information. A
SonicWALL DMZ is used to provide firewall protection for all computers on the
private network. Four Web sites and other servers are hosted on the DMZ port,
where they are accessible from the Internet, but protected from Internet
attacks.
Branch Office
Pixar, an Academy Award-winning computer animation studio with technical,
creative and production capabilities, develops well-known computer-animated
feature films. In addition to its headquarters in Richmond, California, Pixar
has six branch offices with always-on broadband Internet connections that
require firewall security to protect the computers on their private networks
and VPN connectivity to allow secure communications with headquarters. A
SonicWALL at each branch office provides Pixar with firewall security. With the
SonicWALL VPN upgrade at each branch office and Check Point Software's
Firewall-1 at headquarters, Pixar has created a secure distributed network that
allows employees in different offices to collaborate on projects and to
disseminate confidential information securely over the Internet throughout the
enterprise.
Telecommuter
Mr. Marshall subscribes to Excite@Home's high speed Internet cable access
service in Fremont, California. Recently, Mr. Marshall's employer installed a
SonicWALL PRO at the office to allow telecommuters to use VPN for secure access
to sensitive resources on the company's private network, such as file servers
and databases. Mr. Marshall installed a SonicWALL/10 with the VPN upgrade at
home to create a VPN connection to his company's private network, allowing him
to securely collaborate on projects and distribute private information with
other employees over the Internet.
Education
The Santa Clara County California Library system offers free Internet access
to all members of the community from any of its computer terminals located
throughout nine community libraries. Responding to
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<PAGE>
community concerns, the Library's governing body mandated the use of content
filtering to restrict access to sexually explicit Internet sites in the
children's rooms of all Library branches. Following a six-week study during
which multiple security and filtering products were analyzed, the Library
installed a SonicWALL DMZ with our content filtering subscription service to
restrict access to objectionable Web sites. SonicWALL DMZ is configured to
allow adult patrons to decide between filtered or unfiltered access while the
computers in the children's rooms are always filtered. In addition to content
filtering, SonicWALL DMZ provides firewall security for all of the Library's
computers.
Sales and Marketing
Our sales and marketing efforts focus on successfully penetrating the SME,
branch office, telecommuter, and education markets. Our marketing programs
promote SonicWALL brand awareness and reputation as a reliable, high
performance, easy-to-use, and affordable Internet security appliance. We try to
strengthen our brand through a variety of marketing programs which include on-
going public relations, our Web site, advertising, direct mail, industry and
regional trade shows and channel partner seminar participation. We intend to
rapidly expand our indirect channel relationships through additional marketing
programs, additional marketing staff, and increased advertising.
We believe that SonicWALL products are ideally suited for the indirect
channel. We primarily market and sell our products through a two-tiered
distribution structure consisting of distributors and value added resellers,
both in the United States and over 30 countries. Resellers include systems
integrators, ISPs, dealers, mail order catalogs, and on-line catalogs. This
network of over 800 VARs then sells our products to end-users in our target
markets. Our distribution agreements are non-exclusive. We also sell directly
to select partners in the United States that commit to certain volume and
training requirements.
We divide our sales organization regionally into three areas: the United
States and Canada; the Pacific Rim and Latin America; and Europe, the Middle
East, and Africa. Regional sales representatives manage our relationships with
our network of distributors, value added resellers and select direct partners,
help our value added reseller network sell and support key customer accounts,
and act as a liaison between our value added reseller network and our marketing
organization. The regional sales representative's primary responsibility is to
help the indirect channel succeed and grow within the territory. We also have
an inside tele-sales group that supports the indirect channel, and a dedicated
business development organization whose responsibilities include identifying,
promoting, and managing strategic partnerships with ISPs and industry leaders,
OEM relationships, and inbound technology license arrangements.
Domestic Channel. In the United States, our master distributors are Ingram
Micro and Tech Data. Ingram Micro accounted for 34% of our revenue in 1998 and
32% in the six months ended June 30, 1999. Tech Data began distributing our
products in February 1999, and in the six months ended June 30, 1999, accounted
for approximately 9% of total revenue.
We have designed three general programs for domestic value added resellers.
These offer various benefits and product discounts depending on the level of
purchases that the reseller commits to or achieves. The basic program is the
Sonic Reseller level which offers access to privileged information and sales
and marketing materials. Next we offer a Sonic Silver level, which extends
those benefits by adding access to an expanded set of sales and marketing
tools, as well as priority technical support. The top level is Sonic Gold,
where additional benefits such as sales leads and market development funds are
available. Sonic Reseller, Silver, and Gold Partners all source our products
through a master distributor. We also have a Sonic Platinum Partner program for
selected key strategic partners which includes Gold Partner benefits plus
access to additional discounted demonstration units and market development
funds. We work directly with these Platinum Partners.
International Channel. We believe there is a strong international market for
our products. International sales represented 32% of our revenue in 1998 and
approximately 35% of revenue in the six months ended June 30, 1999.
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<PAGE>
We direct all of our international VARs to the master distributor in each
territory. We support master distributor channel programs and marketing efforts
by offering customizable marketing materials, sales tools, leads, co-operative
marketing funds, joint advertising, discounted demonstration units, and
training. We also participate in regional press tours, trade shows, and
seminars. Our largest international distributor is Sumitomo Software
Development in Japan. Additional key international distributors include ME
Networks in Switzerland, Connect AS in Norway, Tekdata Distribution in England,
and Network Innovation in Sweden.
OEM Channel. We enter into select OEM relationships in order to leverage the
channels of well established companies that sell into our target markets. We
believe these partnerships expand our overall market while having a minor
impact on our own channel sales. We currently sell our products or services
through OEM partnerships with Com21, a leading provider of cable modems, and
Ramp Networks, a leading provider of networking equipment to small businesses.
Customer Service and Technical Support
We offer our customers a comprehensive range of support programs through a
customer service and technical support organization which provides product
maintenance and technical support services on a worldwide basis. Our technical
support staff is located in Santa Clara, California. In addition to standard
support, we offer premium support services which an end user customer located
in the United States can purchase from us or our channel partners.
Standard Support. Included during the warranty period, standard support is a
unique Web-based technical support mechanism whereby distributors, channel
partners, and end users can use our extensive on-line technical support
resource database. If the resource database does not answer a question, the
user can immediately enter a query or "trouble ticket" on-line and our customer
service organization will then generate a response via phone, fax, or e-mail.
Premium Support. Available for purchase only in the continental United
States, our annual subscription-based Premium Support program offers extended
benefits to the Standard Support offering. Premium Support benefits include:
.expedited response time;
.access to a dedicated toll-free support telephone number;
.overnight replacement of defective units; and
.free shipping for units which we authorize for return.
Our products include a standard one-year warranty, which can be extended at
additional cost. The warranty provides access to our standard technical support
services along with repair or replacement guarantees for units with product
defects.
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<PAGE>
Customers
As of August 15, 1999, we have shipped over 16,000 Internet Security
Appliances to our global reseller channel, which resells our products to a wide
variety of end users. The following is a partial list of select SonicWALL
distributors, resellers and end users:
<TABLE>
<S> <C>
End Users Distributors
. Albany County School District .Ingram Micro (US)
. American Express .Tech Data (US)
. Bank of Nova Scotia .Connect AS (Norway)
. Centurion/Bank of Ireland .ME Networks (Switzerland)
. Charlotte Hornets .Network Innovation (Sweden)
. City of Santa Cruz .Sumitomo Software Development (Japan)
. Comision Federal de Electricidad .Tekdata Distribution (UK)
. Commercial Bank of San Francisco
. Compaq Computer Corporation Resellers
. Duke University .Broadband Access Networking Group
. General Magic .CompUSA
. Johns Hopkins University .GE Network Services
. Los Angeles Lakers .Graybar
. Lucent Technologies .IKON
. Pixar .Inacom
. PricewaterhouseCoopers LLP .Nippon Telephone & Telegraph (Japan)
. Santa Clara County California Library .PSINet
. Sun Microsystems .Solunet
. Wells Fargo .SwissCom (Switzerland)
. Yankee Group .Verio
</TABLE>
Technology
We have designed our SonicWALL product family using a unique combination of
proprietary hardware and software that delivers comprehensive Internet security
with exceptional ease-of-use and industry-leading price/performance.
The SonicWALL product family currently has two base hardware configurations:
. SonicWALL and SonicWALL DMZ. These SonicWALL products use the 33MHz
Motorola 68360 microprocessor. Both products have two 10 megabit per
second (Mbps) Ethernet ports. A LAN port connects the SonicWALL to
the user's internal, private network. A Wide Area Network, or WAN,
port connects to the external, public network. The SonicWALL DMZ has
a third 10 Mbps Ethernet port (DMZ) which connects to public servers
that are separated from both the public and private networks but
still protected from security breaches.
. SonicWALL PRO. The SonicWALL PRO product uses Intel's 233MHz
StrongARM 110 microprocessor, and has three 10/100 Mbps Fast
Ethernet ports. These three ports function just like the SonicWALL
DMZ. For feature expansion, the SonicWALL PRO has an internal
Peripheral Component Interconnect, or PCI, interface, upgradeable
RAM, and flash memory.
The SonicWALL product family consists of the following core modules:
. Firewall. The core technology is the stateful packet inspection
firewall software. Stateful packet inspection is generally accepted
as the most advanced and secure method of implementing an Internet
firewall. It examines all layers of the packet (from the physical
layer
40
<PAGE>
up to application layer) and determines whether to accept or reject
the requested communication based on state information derived from
previous communications and the applications in use. Stateful packet
inspection dynamically adjusts based on the changing state of the
communication running across the firewall and is invisible to users
on the protected network. It therefore requires no client PC
configuration. Our SonicWALL firewall protects against a known set of
security threats.
. Content Filter. The SonicWALL Internet content filter blocks
objectionable content using a list of forbidden URLs and keywords. We
license Microsystems Software's CyberNOT list of URLs and adapt it
for our products. Each SonicWALL can automatically download an
updated URL list weekly to keep pace with the dynamic nature of
Internet content.
. IP Address Management. We have developed tools to hide the complexity
of IP addressing. NAT allows networks to share a small number of
valid public IP addresses with an equal or larger number of client
computers on the LAN. This is a common challenge in new broadband-
connected networks. Our DHCP Server and Client tools allow both the
firewall and the client computers behind it to obtain their
respective IP addresses dynamically from a server and thereby
eliminate the need for manual configuration.
. Virtual Private Networking. We developed VPN support for the
SonicWALL family to provide a means for our customers to use the
Internet for secure communication between LANs, and from remote
clients to LANs. SonicWALL VPN complies with the Internet Protocol
Security (IPSec) standard and supports three data encryption methods:
56 bit Data Encryption Standard (DES); 168 bit Data Encryption
Standard (Triple-DES); and 56 bit ARCFour (ARC4). By building our VPN
technology on industry standards--IPSec, DES and Triple-DES--we have
been able to establish VPN interoperability with other leading VPN
solutions such as Check Point Software's FW-1.
. Web Browser-Based Management Interface. Our products have an
intuitive and easy-to-use Web-based management interface for rapid
installation, configuration and maintenance, without the need for a
dedicated information technology staff to install and maintain the
solution. This interface can be easily accessed from any Web browser
on the internal, private network. This interface can also be accessed
remotely in a secure manner using the VPN feature described above.
Research and Development
We believe that our future competitive position will depend in large part
on our ability to develop new and enhanced Internet security solutions and our
ability to meet the rapidly changing needs of our target customers who have
broadband access to the Internet. We focus our research and development on
evolving Internet security needs. In addition, we have also made substantial
investments in hardware and ASIC technologies which are critical to drive
product cost reductions and higher performance solutions. Current activities
include:
. virtual private networking improvements such as public key
infrastructure support and strong authentication;
. other security and filtering improvements such as intrusion
detection, virus scanning and e-mail spam filtering; and
. new management capabilities such as bandwidth management and a new
distributed management framework.
All of our research and development activities are conducted at our
principal facility in Santa Clara, California.
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<PAGE>
Competition
The market for Internet security products is highly competitive, and we
expect competition to intensify in the future. There are few substantial
barriers to entry, and additional competition from existing competitors and new
market entrants will occur in the future. Current and potential competitors in
our markets include, but are not limited to:
. enterprise firewall software vendors such as Check Point Software
and Axent Technologies;
. network equipment manufacturers such as Cisco Systems, Lucent
Technologies, Nortel Networks, 3COM and Nokia;
. computer or network component manufacturers such as Intel
Corporation;
. operating system software vendors such as Microsoft Corporation,
Novell and Sun Microsystems; and
. security appliance suppliers such as Watchguard Technologies.
Most of our competitors to date have generally targeted large enterprises'
security needs with firewall products that are typically very complex and
expensive ranging in price from approximately $5,000 to more than $15,000, and
requiring active management by IT personnel. At any time, any of these
competitors may adapt existing products for our target markets. Many of our
current or potential competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical, marketing and other resources than we do. Nothing prevents or
hinders these actual or potential competitors from entering our target markets
at any time. In addition, our competitors may bundle products competitive to
ours with other products that they may sell to our current or potential
customers. These customers may accept these bundled products rather than
separately purchasing our products. If these companies were to use their
greater financial, technical and marketing resources in our target markets, it
could adversely affect our business.
Proprietary Rights
We currently rely on a combination of copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights. Despite our efforts to protect our proprietary rights,
unauthorized parties may misappropriate or infringe on our trade secrets,
copyrights, trademarks, service marks and similar proprietary rights. Although
we are currently investigating patent protection for certain proprietary
technology, we have not yet received any patent protection for our technology
or products. Even if we obtain such patents, that does not guarantee that our
patent rights are valuable, create a competitive barrier, or will be free from
infringement. We face additional risk when conducting business in countries
that have poorly developed or inadequately enforced intellectual property laws.
In any event, competitors may independently develop similar or superior
technologies or duplicate the technologies we have developed, which could
substantially limit the value of our intellectual property.
U.S. Government Export Regulation Compliance
Our products are subject to federal export restrictions on encryption
strength. Recent federal legislation, however, has increased exportable
encryption strength and allows the export of any-strength encryption to
designated business sectors overseas, including U.S. subsidiaries, banks,
financial institutions, insurance companies and health and medical end users.
In addition, we have obtained a federal export license that allows us to export
encryption technology to commercial entities in approved countries. With these
expanded export rights, we may export strong encryption to a wide range of
foreign end-users, subject to limitations and record-keeping requirements. To
comply with these constraints, we obtain from our distributors and resellers
detailed information about each foreign end-user customer that will obtain
strong encryption.
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<PAGE>
Manufacturing
We outsource our manufacturing to two contract manufacturers, Flash
Electronics and AQS. The manufacturing processes and procedures for both of
these manufacturers are ISO 9002 certified. Outsourcing our manufacturing
enables us to reduce fixed overhead and personnel costs and to provide
flexibility in meeting market demand.
We design and develop all the key components of our products, including
printed circuit boards and software. In addition, we determine the components
that are incorporated in our products and select the appropriate suppliers of
these components. Product testing and burn-in is performed by our contract
manufacturers using tests that we specify.
Employees
As of June 30, 1999, we had 45 employees. Of these, 23 were employed in
sales and marketing, 5 in finance and administration, 10 in research and
development and 7 in operations. We are not parties to any collective
bargaining agreements with our employees and we have not experienced any work
stoppages. We believe we have good relations with our employees.
Facilities
Our principal administrative, marketing, sales, development and operations
facility is located in Santa Clara, California. We occupy approximately 8,700
square feet in this facility, under a lease that expires in August 2001.
Legal Proceedings
We currently are not a party to any material legal proceeding.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The following table lists the executive officers, directors and key
employees of SonicWALL as of June 30, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Sreekanth Ravi(1)....... 33 Chairman of the Board, President and Chief Executive Officer
Sudhakar Ravi(1)........ 34 Vice President, Engineering and Director
Michael J. Sheridan(1).. 34 Vice President, Finance and Chief Financial Officer
Steven R. Perricone..... 38 Vice President, Sales
Richard Pearce.......... 38 Vice President, Business Development
Fara Zarrabi............ 58 Vice President, Operations
Jerrold F.
Petruzzelli(2)......... 46 Secretary and Director
David A. Shrigley(3).... 51 Director
Robert M.
Williams(2)(3)......... 44 Director
</TABLE>
- ----------
(1)Executive officer
(2)Member of audit committee
(3)Member of compensation committee
We have no employment agreements with our executive officers or key
employees.
Sreekanth Ravi has served as our Chairman of the Board, President and Chief
Executive Officer since co-founding SonicWALL, Inc. in February 1991. Prior to
SonicWALL, Inc., Mr. Ravi was the founder and chief executive officer of
Generation Systems, a manufacturer of high performance video products, which he
later sold to a publicly held computer products company in 1990. Mr. Ravi
received a bachelor of science degree in electrical engineering from the
University of Illinois, Champaign-Urbana. Sreekanth Ravi and Sudhakar Ravi are
brothers.
Sudhakar Ravi has served as our Vice President, Engineering and director
since co-founding SonicWALL, Inc. in February 1991. Prior to SonicWALL, Inc.,
Mr. Ravi was involved in semiconductor research at Stanford University. Mr.
Ravi received a bachelor of science degree from the University of Illinois,
Champaign-Urbana and a masters of science degree in computer science from
Stanford University. Sudhakar Ravi and Sreekanth Ravi are brothers.
Michael J. Sheridan has served as our Chief Financial Officer since joining
SonicWALL, Inc. in May 1999. Mr. Sheridan joined SonicWALL, Inc. from Genesys
Telecommunications Laboratories, Inc., an enterprise software company in the
call center automation industry, where he served as Vice President of Finance
from January 1998 to May 1999, and served as Corporate Controller from November
1996 to December 1997. From August 1995 to November 1996, Mr. Sheridan was the
Corporate Controller for Network Appliance, Inc., a network file server
manufacturer. From 1986 to 1995, Mr. Sheridan was an audit professional with
Arthur Andersen, where he was involved primarily in high technology clients.
Mr. Sheridan received a bachelor's degree in commerce from Santa Clara
University and is a Certified Public Accountant.
Steven R. Perricone has served as our Vice President, Sales since joining
SonicWALL, Inc. in April 1998. Mr. Perricone joined SonicWALL, Inc. from
Structured Internetworks, an IP bandwidth management company, where he served
as Vice President of Worldwide Sales and Support from July 1997 to April 1998.
From July 1994 to June 1997, Mr. Perricone was Vice President of Worldwide
Sales at Network TeleSystems, a provider of TCP/IP client and server technology
for Internet access. Prior to Network TeleSystems, Mr. Perricone held various
sales management positions at Emulex and Xylogics (now part of Nortel Networks
Corp.). Mr. Perricone received a bachelor's degree in business from California
State University.
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<PAGE>
Richard Pearce, Ph.D. has served as our Vice President, Business Development
since joining SonicWALL, Inc. in June 1999. Dr. Pearce joined SonicWALL, Inc.
from WinNet MCS, Inc., a high-bandwidth wireless communications company where
he served as Vice President of Marketing from December 1998 to June 1999. Prior
to joining WinNet, Dr. Pearce was Director of Business Development for Bay
Networks (a Nortel Networks Corp. company) from August 1996 to November 1998,
responsible for defining and managing programs to add IP technology to Nortel's
product lines. He was also responsible for identifying and developing market
opportunities enabled by the innovative mixing of Nortel products and
technologies. Prior to Bay Networks' acquisition by Nortel, Dr. Pearce was
responsible for developing emerging market opportunities for Bay Networks. Dr.
Pearce received a bachelor of science degree in applied physics & electronics
and a Ph.D. in data networking from Durham University in the United Kingdom.
Fara Zarrabi has served as our Vice President, Operations since joining
SonicWALL, Inc. in July 1999. Mr. Zarrabi joined SonicWALL, Inc. from Genesys
Telecommunications Laboratories, Inc., where he was Director of Operations from
February 1997 to June 1999. Prior to Genesys Telecommunications, Mr. Zarrabi
was the Director of Operations at Network Appliance, Inc., from February 1996
to February 1997. From May 1994 to February 1996, Mr. Zarrabi was Director of
Manufacturing Operations at Radius, Inc., a manufacturer of computer graphics
and video hardware. Mr. Zarrabi received a bachelor's degree in electronic
engineering from the University of California, Berkeley.
Jerrold F. Petruzzelli has served as our Secretary and a director since
October 1993. Mr. Petruzzelli has been a partner of Manatt, Phelps & Phillips,
LLP, legal counsel to SonicWALL, Inc., since June 1999 and previously was a
partner of Holtzmann Wise & Shepard, legal counsel to the Company, from January
1990 to July 1995, and a partner of Wise & Shepard LLP, legal counsel to the
Company, from July 1995 to June 1999, at which time Wise & Shepard LLP merged
with Manatt, Phelps & Phillips, LLP. Mr. Petruzzelli received a bachelor of
arts degree from Yale University and a J.D. degree from the University of
Chicago.
David S. Shrigley has been a director since July 1999. From November 1996 to
April 1999, Mr. Shrigley was Executive Vice President, Sales and Services of
Nortel Networks Corp., a network telecommunications company. From December 1978
to November 1996, Mr. Shrigley was an employee of Intel Corporation, a
semiconductor manufacturing company, where he was last employed as Vice
President, Corporate Marketing. Mr. Shrigley received a bachelor of science
degree in business administration from Franklin University.
Robert M. Williams has been a director since May 1999. Since January 1998,
Mr. Williams has been a general partner of Bay Partners, a venture capital
firm. From May 1993 to December 1997, Mr. Williams was Vice President,
Marketing and Business Development of NetManage, Inc., a networking software
product development and sales company. Before then, Mr. Williams held various
marketing positions at several companies, including Verity, Inc., an Internet
text engine developer, and Ingres Corp., a developer of relational database
management software. Mr. Williams received a bachelor of arts degree from
Dartmouth College and a MBA from the Stanford Graduate School of Business.
Committees of the Board of Directors
The compensation committee of our board of directors consists of Messrs.
Shrigley and Williams. The compensation committee:
. reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plan; and
. makes recommendations to the board of directors regarding these
matters.
The audit committee consists of Messrs. Petruzzelli and Williams. The audit
committee:
. makes recommendations to the board of directors regarding the
selection of independent auditors;
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. reviews the results and scope of the audit and other services
provided by our independent auditors; and
. reviews and evaluates our audit and control functions.
We established these committees in August, 1999.
Director Compensation
We do not pay cash compensation to our directors for their services as
directors or members of committees of the board of directors, but we do
reimburse them for reasonable expenses they incur in attending meetings of the
board of directors. Directors of SonicWALL, Inc. are eligible to participate in
our stock option plans.
Director and Officer Indemnification and Liability
Our articles of incorporation limit the liability of directors to the full
extent permitted by California law. California law provides that a
corporation's articles of incorporation may eliminate or limit the personal
liability of directors for monetary damages for breach of their fiduciary
duties as directors, except liability for:
. acts or omissions that involve intentional misconduct or a knowing
and culpable violation of law;
. acts or omissions that a director believes to be contrary to the
best interest of the corporation or its shareholders or that involve
the absence of good faith on the part of the director;
. any transaction from which a director derived an improper personal
benefit;
. acts or omissions that show a reckless disregard for the director's
duty to the corporation or its shareholders in circumstances in
which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of
serious injury to the corporation or its shareholders;
. acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to
the corporation or its shareholders;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions, unlawful distribution of assets to shareholders or
unlawful loans or guarantees to directors, officers and others; or
. any transaction between a director and the Company.
Our bylaws provide that we will indemnify our directors and officers to the
fullest extent permitted by California law, including circumstances in which
indemnification is otherwise discretionary under California law. We have
entered into indemnification agreements with our directors and officers
containing provisions that are in some respects broader than the specific
indemnification provisions contained in the California Corporations Code. The
indemnification agreements may require us:
. to indemnify our directors and officers against liabilities that may
arise by reason of their status or service as directors or officers,
other than liabilities arising from willful misconduct of a culpable
nature;
. to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified; and
. to obtain directors' and officers' insurance if available on
reasonable terms.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation
46
<PAGE>
or proceeding that might result in a claim for indemnification. We believe that
our charter provisions and indemnification agreements are necessary to attract
and retain qualified persons as directors and officers.
The Securities and Exchange Commission has advised us that, in its opinion,
any indemnification of our directors and officers for liabilities arising under
the Act is against public policy as expressed in the Act and is therefore
unenforceable.
Compensation Committee Interlocks and Insider Participation
Our board of directors' compensation committee currently consists of Messrs.
Shrigley and Williams. None of these individuals has at any time been an
employee or officer of SonicWALL, Inc. Until the compensation committee was
formed in August 1999, the full board of directors made all decisions regarding
executive compensation. No member of our board of directors or of its
compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as members of its board of directors or its compensation committee.
Executive Compensation
The following table provides information concerning the compensation
received for services rendered to SonicWALL, Inc. in all capacities during the
year ended December 31, 1998, by our chief executive officer and each of the
other most highly compensated executive officers or key employees of SonicWALL,
Inc. whose compensation exceeded $100,000 in fiscal 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
----------------
Annual Compensation
-------------------- Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary ($) Bonus ($) Compensation ($) Options (#) Compensation ($)
- ------------------ ---- ---------- --------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Sreekanth Ravi........... 1998 $240,000 $732,345 N/A N/A $13,846(1)
President and Chief
Executive Officer
Sudhakar Ravi............ 1998 $240,000 $816,871 N/A N/A $13,846(1)
Vice President,
Engineering
Steven R. Perricone...... 1998 $ 78,231 $ 23,389 N/A 600,000 $ 1,538(1)
Vice President, Sales
Michael J. Sheridan(2)... 1998 N/A N/A N/A N/A N/A
Vice President, Finance
and Chief Financial
Officer
</TABLE>
- ----------
(1) Cash payment in lieu of vacation days
(2) Hired in May 1999
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<PAGE>
The following table provides information regarding stock options we granted
in fiscal 1998 to our chief executive officer and the other executive officers
or key employees whose compensation exceeded $100,000 in fiscal 1998. The table
includes the potential realizable value over the five-year term of the options,
based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. The assumed rates of appreciation are prescribed by the Securities
and Exchange Commission for illustrative purposes only and are not intended to
forecast or predict future stock prices. Any actual gains on option exercises
will depend on the future performance of our stock.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees in Price Expiration --------------------
Name Granted(#) Fiscal Year ($/Sh) Date 5%($) 10%($)
---- ---------- ------------- -------- ---------- -------------------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Sreekanth Ravi.......... N/A N/A N/A N/A N/A N/A
Sudhakar Ravi........... N/A N/A N/A N/A N/A N/A
Steven R. Perricone..... 600,000 59% $0.125 7/23/08 $ $
Michael J. Sheridan..... N/A N/A N/A N/A N/A N/A
</TABLE>
Options vest and become exercisable over four years, provided the employee
remains employed at the Company. In 1998, we granted options to purchase up to
an aggregate of 1,015,000 shares to employees, directors and consultants. We
granted all options under our stock option plans at exercise prices at the fair
market value of our common stock on the date of grant, as determined in good
faith by our board of directors.
The following table provides information regarding options exercised during
1998 and unexercised options held as of December 31, 1998 by our chief
executive officer and the other executive officers or key employees whose
compensation exceeded $100,000 in fiscal 1998. The value of realized and the
value of unexercised in-the-money options is calculated on the basis of an
assumed initial public offering price of $ per share as the fair market
value at December 31, 1998.
Aggregate Option Exercises FY-End Option Values
<TABLE>
<CAPTION>
Number of
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options at In-the-Money Options at
Acquired Fiscal Year End (#) Fiscal Year-End($)
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sreekanth Ravi.......... 1,067,440 0 0 $ $
Sudhakar Ravi........... 1,067,440 0 0
Steven R. Perricone..... 0 111,600 488,400
Michael J. Sheridan..... N/A N/A N/A N/A N/A
</TABLE>
Employee Benefit Plans
1998 and 1994 Stock Option Plans
The 1998 stock option plan provides for the grant of incentive stock
options, as defined in Section 422 of the Internal Revenue Code, to employees
and the grant of nonstatutory stock options to employees, non-employee
directors and consultants. The purposes of the 1998 stock option plan are:
. to attract and retain the best available personnel;
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<PAGE>
. to provide additional incentives to our employees and consultants;
and
. to promote the success of our business.
The 1998 stock option plan was adopted by our board of directors in July
1998, approved by our stockholders in July 1998, and amended by the
shareholders to increase the number of shares available for grant thereunder in
February 1999. Unless terminated earlier by the board of directors, the 1998
stock option plan will terminate in July 2008. The 1998 stock option plan was
amended by our board of directors in August 1999 to include some of the
provisions provided below. These amendments were approved by our shareholders
in August 1999. The number of shares reserved for issuance under the 1998 stock
option plan will be subject to an automatic annual increase in the first day of
2000 through 2008 equal to the lesser of:
. 2,000,000 shares;
. 4% of our outstanding common stock on the last day of the
immediately preceding fiscal year; or
. a number of shares determined by the administrator.
The compensation committee currently administers the 1998 stock option plan.
The administrator of the 1998 stock option plan determines numbers of shares
subject to options, vesting schedules and exercise prices for options granted
under the 1998 stock option plan.
The exercise price of incentive stock options must be at least equal to 100%
of the fair market value of our common stock on the date of grant, and at least
equal to 110% of the fair market value in the case of incentive stock options
granted to an employee who holds, at the time the option is granted, more than
10% of the total voting power of all classes of our stock or any parent's or
subsidiary's stock. Nonstatutory stock options will have an exercise price of
at least 85% of the fair market value of our stock. Payment of the exercise
price may be made in cash or other form of consideration approved by the
administrator. The administrator determines the term of options, which may not
exceed ten years, or five years in the case of an incentive stock option
granted to an employee who holds, at the time the option is granted, more than
10% of the total voting power of all classes of our stock or any parent's or
subsidiary's stock. No option may be transferred by the optionee other than by
will or the laws of descent or distribution, provided, however, that the
administrator may in its discretion provide for the transferability of
nonstatutory stock options. The administrator determines when options become
exercisable. Options granted under the 1998 stock option plan become
exercisable at a rate not less than 20% per year. To the extent an optionee
would have the right in any calendar year to exercise for the first time one or
more incentive stock options for shares having an aggregate fair market value
in excess of $100,000 as of the date the options were granted, the excess
options will be treated as nonstatutory stock options.
In the event of a change of control of SonicWALL, Inc., outstanding options
will be assumed or substituted by the successor corporation. If the successor
corporation does not agree to this assumption or substitution, the options will
terminate upon the closing of the transaction.
The board of directors may amend, modify or terminate the 1998 stock option
plan if any amendments, modification or termination does not impair existing
rights of plan participants. Additionally, shareholder approval is required for
an amendment to the extent required by applicable law, regulations or rules.
Options outstanding under the 1994 stock option plan are subject to
substantially the same terms as options under the 1998 stock option plan.
As of June 30, 1999:
. a total of 5,958,324 shares have been authorized for issuance under
the 1994 and 1998 stock option plans;
. options to purchase an aggregate of 1,760,000 shares of common stock
were outstanding under the 1994 stock option plan and 1998 stock
option plan at a weighed average exercise price of $0.48;
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<PAGE>
. 2,639,676 shares had been issued upon exercise of outstanding
options, net of repurchases, under the 1994 and 1998 stock option
plans; and
. 1,558,648 shares remained available for future grant under the 1994
and 1998 stock option plans.
1999 Employee Stock Purchase Plan
Our 1999 employee stock purchase plan was adopted by the board of directors
and shareholders in August 1999. The 1999 employee stock purchase plan becomes
effective on the effective date of this offering. A total of 250,000 shares of
common stock has been reserved for issuance under the 1999 employee stock
purchase plan.
The 1999 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, provides our employees with an
opportunity to purchase our common stock through accumulated payroll
deductions. The 1999 employee stock purchase plan will be administered by the
board of directors or by a committee appointed by the board of directors. The
1999 employee stock purchase plan permits an eligible employee to purchase
common stock through payroll deductions of up to 15% of that employee's
compensation. Employees, including officers and employee directors, of
SonicWALL, Inc., or of any majority-owned subsidiary designated by the board of
directors, are eligible to participate in the 1999 employee stock purchase plan
if they are employed by the Company or any designated subsidiary for at least
20 hours per week and more than five months per year. Unless the board of
directors or its committee determines otherwise, the 1999 employee stock
purchase plan will be implemented by a series of overlapping offering periods
generally of 24 months' duration with new offering periods commencing on
February 1 and August 1 of each year. Each offering period will be divided into
four consecutive purchase periods of approximately six months' duration. The
first offering period is expected to commence on the date of this offering and
end on July 31, 2001; the initial purchase period is expected to end six months
after the offering date. The price at which common stock will be purchased
under the 1999 employee stock purchase plan is equal to 85% of the fair market
value of the common stock on the first day of the applicable offering period or
the last day of the applicable purchase period, whichever is lower. Employees
may end their participation in an offering period at any time, and
participation automatically ends on termination of employment.
Under the 1999 employee stock purchase plan, no employee may be granted an
option if immediately after the grant the employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of our stock or that of our subsidiaries. In
addition, no employee may be granted an option under the 1999 employee stock
purchase plan if the option would permit the employee to purchase stock under
all of our employee stock purchase plans in an amount that exceeds $25,000 of
fair market value for each calendar year in which the option is outstanding at
any time. In addition, no employee may purchase more than 2,000 shares of
common stock under the 1999 employee stock purchase plan in any one purchase
period. If the fair market value of the common stock on a purchase date other
than the final purchase date of an offering period is less than the fair market
value at the beginning of the offering period, each participant in the 1999
employee stock purchase plan will automatically be withdrawn from the offering
period as of the purchase date and re-enrolled in a new 24-month offering
period on the first business day following the purchase date.
The 1999 employee stock purchase plan provides that, in the event of a
change of control of SonicWALL, Inc. each right to purchase stock under the
1999 employee stock purchase plan will be assumed or an equivalent right
substituted by the successor corporation. However, our board of directors will
shorten any ongoing offering period so that employees' rights to purchase stock
under the 1999 employee stock purchase plan are exercised prior to the
transaction if the successor corporation refuses to assume each purchase right
or to substitute an equivalent right.
The 1999 employee stock purchase plan will terminate in August 2009 unless
terminated earlier in accordance with its provisions. The board of directors
has the power to amend or terminate the 1999 employee
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<PAGE>
stock purchase plan if its action does not adversely affect any outstanding
rights to purchase stock thereunder. However, our board of directors may amend
or terminate the 1999 employee stock purchase plan or an offering period even
if it would adversely affect options in order to avoid our incurring adverse
accounting charges.
401(k) Plan
We maintain a 401(k) plan that covers all our employees who satisfy the
plan's eligibility requirements relating to minimum age, length of service and
hours worked. We may make an annual contribution for the benefit of eligible
employees in an amount determined by our board of directors. We have not made
any contribution to date and have no current plans to do so. Eligible employees
may make pretax elective contributions of up to 15% of their compensation,
subject to maximum limits on contributions prescribed by law.
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CERTAIN TRANSACTIONS
Since January 1, 1996, SonicWALL, Inc. has not been a party to any
transaction or series of similar transactions in which the amount involved
exceeds $60,000 and in which any director, executive officer, or holder of more
than 5% of our common stock had or will have a direct or indirect material
interest other than
. normal compensation arrangements which are described under
"Management--Executive Compensation" above; and
. the transactions described below.
Transactions with Executive Officers, Directors and Significant Shareholders
(1) On August 10, 1998, we issued an aggregate of 5,426,186 shares of common
stock to Sreekanth Ravi, Sudhakar Ravi, Bruce Wonnacott and Ravi Anne, each
a general partner of AckFin, a California general partnership, in
consideration of the purchase of all of the general partner interests of
AckFin and $150,000 cash. Sreekanth Ravi and Sudhakar Ravi are executive
officers and directors of the Company. Ravi Anne and Bruce Wonnacott each
hold more than 5% of the outstanding shares of common stock of SonicWALL,
Inc.
(2) On December 23, 1998, we extended two loans in the aggregate amount of
$96,069.60 to Sreekanth Ravi, Chief Executive Officer, President and a
director of SonicWALL, Inc. to pay the exercise price of options to
purchase 1,067,440 shares of our common stock. Each loan had an interest
rate of 8% per year, payable over four years and was secured by the shares
of common stock purchased upon the exercise of Mr. Ravi's stock options.
These loans were repaid in full in August 1999.
(3) On December 23, 1998, we extended two loans in the aggregate amount of
$96,069.60 to Sudhakar Ravi, Vice President Engineering and a director of
SonicWALL, Inc. to pay the exercise price of options to purchase 1,067,440
shares of our common stock. Each loan had an interest rate of 8% per year,
payable over four years and was secured by the shares of common stock
purchased upon the exercise of Mr. Ravi's stock options. These loans were
repaid in full in August 1999.
(4) On February 19, 1999, we issued an aggregate of 1,438,377 shares of our
redeemable Series A convertible preferred stock at a purchase price of
$3.48 per share to several investors, including 14,384 shares issued to
Robert Williams, a director of the Company, and 1,150,700 shares to Bay
Partners SBIC II, L.P. Mr. Williams is a partner of Bay Management Company
1997, the general partner of Bay Partners SBIC II, L.P. The purchasers of
redeemable Series A convertible preferred stock are entitled to
registration rights in respect of the common stock issued or issuable upon
conversion of the redeemable Series A convertible preferred stock.
(5) On May 26, 1999, we extended a loan in the amount of $300,000 to Michael
Sheridan, Vice President Finance and Chief Financial Officer of SonicWALL,
Inc. to pay the exercise price of options to purchase 300,000 shares of our
common stock. Mr. Sheridan has purchased the optioned shares, and the
Company has the right to repurchase the optioned shares for the purchase
price paid, which right lapses over four years. The loan has an interest
rate of 8% per year and is payable over four years. The loan is payable in
full if Mr. Sheridan is no longer an employee, officer, director or
consultant of the Company. As of June 30, 1999, aggregate principal and
interest of approximately $302,000 was outstanding.
(6) On August 6, 1999 Sreekanth Ravi, Chairman of the Board, President and
Chief Executive Officer and a director, and Sudhakar Ravi, Vice President
of Engineering and a director, sold an aggregate of 1,832,364 shares of
common stock to Bay Sonic Investors, LLC at a purchase price of $6.52 per
share. Two shareholders also sold an aggregate of 400,000 shares of common
stock to Bay Sonic Investors, LLC at a purchase price of $6.52 per share on
the same date. Robert Williams, a director of the Company, is a
52
<PAGE>
managing member of Bay Sonic Investors, LLC. In addition, Sreekanth Ravi
sold 38,354 shares of common stock to David Shrigley, a director of the
Company, at a purchase price of $6.52 per share and 30,682 shares of common
stock to John McNulty at a purchase price of $6.52 per share. The purchasers
of common stock in these transactions are entitled to registration rights in
respect of the common stock purchased.
Indemnification Agreements
We have entered into indemnification agreements with some of our officers
and directors. See "Management--Director and Officer Indemnification and
Liability."
Registration Rights Agreements
Some of our shareholders are entitled to have their shares registered by us
for resale. See "Description of Capital Stock--Registration Rights."
53
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
Principal Shareholders
The following table provides information regarding the actual beneficial
ownership of our outstanding common stock as of June 30, 1999, assuming the
conversion of all outstanding shares of our redeemable Series A convertible
preferred stock and as adjusted to reflect the sale of common stock offered by
this prospectus, for:
. each person or group that we know beneficially owns more than 5% of
our common stock;
. each of our directors;
. our chief executive officer;
. the other executive officers whose compensation exceeded $100,000 in
fiscal 1998; and
. all of our directors and executive officers as a group.
Percentage of beneficial ownership is based on 20,091,344 shares of common
stock outstanding as of June 30, 1999, together with options that are
exercisable within 60 days of June 30, 1999 for each shareholder. Under the
rules of the Securities and Exchange Commission, beneficial ownership includes
shares over which the indicated beneficial owner exercises voting and/or
investment power. Shares of common stock subject to options that are currently
exercisable or will become exercisable within 60 days are deemed outstanding
for computing the percentage ownership of the person holding the option, but
are not deemed outstanding for purposes of computing the percentage ownership
of any other person. The percentages for beneficial ownership after offering
assume that the underwriters do not exercise their over-allotment option.
Unless otherwise indicated in the footnotes below, we believe that the persons
and entities named in the table have sole voting and investment power with
respect to all shares beneficially owned, subject to applicable community
property laws. Unless otherwise indicated, the following beneficial owners can
be reached at our principal offices.
<TABLE>
<CAPTION>
Percentage of
Number of Shares Shares of Common
of Common Stock Stock Outstanding
Beneficially Owned -----------------
as of June 30, Before After
Name and Address 1999 Offering Offering
- ---------------- ------------------ -------- --------
<S> <C> <C> <C>
Sreekanth Ravi(1)........................ 6,143,986 30.6% %
Sudhakar Ravi(2)......................... 6,143,986 30.6% %
Steven R. Perricone(3)................... 210,800 1.0% %
Michael J. Sheridan...................... 300,000 1.5% %
Bay Partners SBIC II, L.P.(4)............ 2,301,400 11.5% %
Ravindra Anne............................ 1,356,546 6.8% %
Bruce Wonnacott.......................... 1,356,546 6.8% %
Jerrold F. Petruzzelli(5)................ 100,000 *% %
David Shrigley(6)........................ 50,000 *% %
Robert M. Williams(7).................... 28,768 *% %
All directors and executive officers as a
group (7 persons)(8).................... 15,278,940 76.0% %
</TABLE>
- ----------
* Less than 1%.
(1) Includes 600,000 shares transferred to a family trust subsequent to June
30, 1999.
(2) Includes 600,000 shares transferred to a family trust subsequent to June
30, 1999.
(3) Includes 210,800 shares of common stock issuable upon exercise of
immediately exercisable options.
(4) Represents 2,301,400 shares held by Bay Partners SBIC II, L.P. Robert
Williams, a director of SonicWALL, Inc. is a partner of Bay Management
Company 1997, the general partner of Bay Partners SBIC II, L.P. He shares
voting and investing power with respect to the shares held by this entity,
and disclaims beneficial ownership of shares in which he has no pecuniary
interest. The address for Bay Partners SBIC II, L.P. is 10600 N. De Anza
Boulevard, Suite 100, Cupertino, California 95014.
54
<PAGE>
(5) Includes 5,000 shares held on behalf of a minor child in an irrevocable
trust of which Mr. Petruzzelli is the sole trustee.
(6) The address for Mr. Shrigley is 471 Santa Rosa Drive, Los Gatos, California
95032.
(7) See note (4) above. The address for Mr. Williams is 10600 N. De Anza
Boulevard, Suite 100, Cupertino, California 95014.
(8) Includes 210,800 shares of common stock issuable upon exercise of
immediately exercisable options.
The preceding table excludes sales on August 6, 1999 by Sreekanth Ravi and
Sudhakar Ravi of an aggregate of 1,832,364 shares of common stock to Bay Sonic
Investors, LLC. Ravindra Anne and Bruce Wonnacott also sold an aggregate of
400,000 shares of common stock to Bay Sonic Investors, LLC on the same date. In
addition, Sreekanth Ravi sold 38,354 shares of common stock to David Shrigley
and 30,682 shares of common stock to John McNulty on the same date.
Selling Shareholders
If the underwriters exercise their over-allotment option in full, the
following directors, officers and shareholders will sell the number of shares
indicated below:
<TABLE>
<CAPTION>
Percentage of
Shares of
Beneficial Beneficial Common Stock
Ownership Ownership Outstanding
Prior to Number of After After
Over-allotment Shares Over-allotment Over-allotment
Name Exercise Being Offered Exercise Exercise
- ---- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
</TABLE>
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to two hundred million shares of common stock
and ten million shares of preferred stock. You should carefully read our
articles of incorporation, which are included as an exhibit to the registration
statement of which this prospectus is a part.
Common Stock
As of June 30, 1999, assuming conversion of all outstanding shares of
redeemable Series A convertible preferred stock, there were 19,600,594 shares
of common stock outstanding, held of record by approximately 27 shareholders.
Following this offering, there will be shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options. The holders of common stock are
entitled to one vote for each share held of record on all matters submitted to
a vote of shareholders. Subject to preferences of any outstanding shares of
preferred stock, the holders of common stock are entitled to receive ratably
any dividends the board of directors declares out of funds legally available
for paying dividends. If SonicWALL, Inc. is liquidated, dissolved or wound up,
the holders of common stock are entitled to share ratably in all assets
remaining after paying liabilities and liquidation preferences of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable.
Preferred Stock
At the closing of this offering, all outstanding shares of redeemable Series
A convertible preferred stock will be converted into 2,876,754 shares of common
stock. Under our articles of incorporation, the board of directors will then
have the authority, without further action by the shareholders, to issue up to
8,561,623 shares of preferred stock in one or more series and to fix the price,
rights, privileges, preferences and restrictions of that preferred stock, any
or all of which may be greater than the rights of the common stock. The board
of directors, without shareholder approval, can issue preferred stock with
voting, conversion or other rights that could adversely affect the voting power
and other rights of the holders of common stock. Preferred stock could thus be
issued quickly with terms that could decrease the amount of earnings and assets
available for distribution to common stock holders and could delay or prevent a
change of control of SonicWALL, Inc. or make removal of management more
difficult. Additionally, the issuance of preferred stock may decrease the
market price of the common stock and may adversely affect the voting and other
rights of the holders of common stock. The board of directors does not
currently intend to seek shareholder approval prior to any issuance of
preferred stock, unless required to do so by law. We have no current plans to
issue any preferred stock.
Anti-takeover Provisions
Upon completion of this offering, some provisions of our charter documents
may have the effect of delaying, deterring or preventing changes in control or
management of SonicWALL, Inc., including changes a shareholder might consider
to be favorable. This could have an adverse affect on the market price of our
common stock. These provisions include:
. authorizing the board to issue additional preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of shareholders;
. prohibiting shareholder actions by written consent; and
. establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that can
be acted on by shareholders at shareholder meetings.
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<PAGE>
Preferred Stock
Our charter documents grant the board of directors broad power to establish
the rights and preferences of the authorized but unissued preferred stock.
Preferred stock could be issued with terms that delay, deter or prevent a
change of control or management.
No Cumulative Voting for Directors
Our charter documents prohibit cumulative voting for directors. This may
limit or eliminate the power of minority shareholders to influence the
composition of our board of directors.
No Shareholder Action by Written Consent
Our charter documents provide that an action requiring or permitted to be
taken at any annual or special meeting of shareholders may only be taken at a
duly called annual or special meeting of our shareholders. This provision
prevents shareholders from initiating or effecting any such action by written
consent.
Notice Requirements
Our charter documents establish advance notice procedures with regard to all
shareholder proposals to be brought before meetings of our shareholders,
including relating to the nomination of candidates for election as directors,
the removal of directors and amendments to our articles of incorporation or
bylaws. These procedures provide that notice of these proposals must be given
in writing, no later than 60 days prior to the meeting to our Secretary and
must contain certain information specified in our charter documents.
Our stock option plans and stock purchase plan generally provide for
assumption of our benefit plans or substitution of equivalent options of a
successor corporation or, alternatively, at the discretion of the board of
directors, exercise of some or all of the options, including those for non-
vested shares, or acceleration of vesting of shares issued pursuant to stock
grants, upon a change of control or similar event.
These charter provisions may have the effect of delaying, deterring or
preventing a change of control of SonicWALL, Inc.
Registration Rights
Under the terms of a registration rights agreement, subject to certain
exceptions, if we propose to register any of our shares of common stock under
the Act, either for our own account or the account of any shareholder, in any
public offering, upon the completion of this offering, certain investors
holding an aggregate of 5,178,154 shares of our common stock will be entitled
to notice of such registration and will be entitled to include those
registrable securities in a registration under the Act.
In addition, upon completion of this offering, certain investors holding an
aggregate of 2,876,754 shares of our common stock will be entitled to
additional rights under this registration rights agreement as follows: the
holder or holders of an aggregate of at least 50% of the then outstanding
registrable securities shall have the right to require us to file a
registration statement on a form, other than Form S-3 under the Act, in order
to register the registrable securities then held by such holder or holders,
provided that:
. at least six months has passed since our initial public offering of
shares of common stock under a registration statement;
. the anticipated aggregate offering price to the public is at least
$2,000,000; and
. we shall not be required to file more than two such registration
statements.
57
<PAGE>
Further, a holder or holders of at least 20% of the then outstanding
registrable securities may require us to use our best efforts to file
additional registration statements on Form S-3, provided that:
. the anticipated aggregate offering price to the public is at least
$500,000; and
. we shall not be required to file more than one such registration
statement in any twelve-month period.
The right to include any of the above described registrable securities in
any registration is subject to certain limitations and conditions, including
the underwriters' right to limit the number of shares being registered by all
holders. We are required to indemnify holders of registrable securities and the
underwriters, if any, for these holders under certain circumstances. In
general, we are required to bear the expenses of registrations, except for the
selling shareholders' pro rata portion of the underwriting discounts and
commissions.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Bank Boston, N.A.
Nasdaq National Market Listing
We expect our common stock to be approved for quotation on the Nasdaq
National Market under the symbol SNWL, subject to official notice of issuance.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of shares of our common stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale,
as described below, sales of substantial amounts of common stock in the public
market after the restrictions lapse could adversely affect the prevailing
market price.
After this offering, shares of common stock will be outstanding,
assuming the conversion on a 2 for 1 basis of all outstanding shares of our
redeemable Series A convertible preferred stock and the issuance of an
aggregate of shares of common stock. The number of shares outstanding
after this offering is based on the number of shares outstanding as of June 30,
1999, and assumes no exercise of outstanding options. The shares sold
in this offering will be freely tradable without restriction under the Act. The
remaining shares of common stock outstanding upon completion of the
offering are restricted securities in that they may be sold in the public
market only if registered or if they qualify for an exemption from registration
under the Act or Rules 144, 144(k) or 701 of the Act. In addition, all
outstanding shares are subject to lock-up agreements either directly with
SonicWALL, Inc. or as described below.
All of the officers and directors, who hold an aggregate of
shares of common stock, and shareholders of SonicWALL, Inc. holding an
aggregate of shares of common stock have entered into lock-up
agreements generally providing that they will not offer, sell, contract to
sell, grant any option to purchase, pledge or otherwise dispose of, or, in any
manner, transfer all or a portion of the economic consequences associated with
the ownership of any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock beneficially owned by them
during the 180 day period following the date of this prospectus without the
prior written consent of Bear, Stearns & Co. Inc. Transfers may be made
earlier:
. as a bona fide gift or gifts, provided the donee or donees agree in
writing to be bound by this restriction;
. as a transfer to members of the undersigned's immediate family or to
trusts for the benefit of members of the undersigned's immediate
family, provided that the transferees agree in writing to be bound
by the terms of this restriction;
. as a distribution to partners, shareholders or beneficiaries of the
transferor, provided that the distributees agree in writing to be
bound by the terms of this restriction;
. with respect to dispositions of common stock acquired on the open
market;
. with respect to sales or purchases of common stock acquired on the
open market; or
. with the prior written consent of Bear, Stearns & Co. Inc.
Bear, Stearns & Co. Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. When determining whether or not to release shares from the lock-up
agreements, Bear, Stearns & Co. Inc. will consider, among other factors, the
shareholder's reasons for requesting the release, the number of shares for
which the release is being requested and market conditions at the time.
Following the expiration of the 180 day lock-up period, additional shares of
common stock will be available for sale in the public market subject to
compliance with Rule 144 or Rule 701.
In general, under Rule 144 as currently in effect, an affiliate of
SonicWALL, Inc. or a person, or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least one year, including the
holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of SonicWALL, Inc. common stock or
the average weekly trading volume of SonicWALL, Inc. common stock on the Nasdaq
National Market during the four calendar weeks preceding such sale. Sales under
Rule 144 are also
59
<PAGE>
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about SonicWALL, Inc. Any person, or
persons whose shares are aggregated, who is not deemed to have been an
affiliate of SonicWALL, Inc. at any time during the 90 days preceding a sale,
and who has beneficially owned shares for at least two years including any
period of ownership of preceding non-affiliated holders, would be entitled to
sell such shares under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, public information requirements or notice
requirements.
After the effective date of this offering, we intend to file a registration
statement on Form S-8 to register up to approximately shares of
common stock reserved for issuance under our stock option plans and our
employee stock purchase plan. That registration statement will become effective
automatically upon filing. After the filing of a registration statement on Form
S-8, shares issued under our stock option plans and our employee stock purchase
plan may be sold in the open market. Some holders, however, will be subject to
the Rule 144 limitations applicable to affiliates, the lock-up agreements and
vesting restrictions imposed by us.
In addition, following this offering, the holders of an aggregate of
2,876,754 shares of outstanding common stock will have rights to require us to
register their shares for future sale. These holders and holders of
approximately 2,301,400 shares of common stock have the right to participate in
any registration we undertake on our own (except a registration of shares in
connection with an employee benefit plan or merger).
60
<PAGE>
UNDERWRITING
The underwriters of this offering named below, for whom Bear, Stearns & Co.
Inc., Hambrecht & Quist LLC and Thomas Weisel Partners LLC are acting as
representatives, have severally agreed with SonicWALL, Inc., subject to the
terms and conditions of the Underwriting Agreement (the form of which has been
filed as an exhibit to the Registration Statement on Form S-1 of which this
prospectus is a part), to purchase from SonicWALL, Inc. the aggregate number of
shares of common stock set forth opposite their names below:
<TABLE>
<CAPTION>
Number
of
Underwriter Shares
----------- ------
<S> <C>
Bear, Stearns & Co. Inc. .............................................
Hambrecht & Quist LLC.................................................
Thomas Weisel Partners LLC............................................
Total...............................................................
</TABLE>
The nature of the respective obligations of the underwriters is such that
all of the shares of common stock (other than shares of common stock covered by
the over-allotment option described below) must be purchased if any are
purchased. Those obligations are subject, however, to various conditions,
including the approval of certain matters by counsel. We and certain selling
shareholders have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Act, and, where such
indemnification is unavailable, to contribute to payments that the underwriters
may be required to make in respect of such liabilities.
We have been advised that the underwriters propose to offer the shares of
common stock directly to the public initially at the public offering price set
forth on the cover page of this prospectus and to certain selected dealers at
such price less a concession not to exceed $ per share, that the
underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $ per share and that after the
commencement of this offering, the public offering price and the concessions
may be changed.
Certain selling shareholders have granted to the underwriters an option to
purchase in the aggregate up to additional shares of common stock
to be sold in this offering at the public offering price less the underwriting
discount set forth on the cover page of this prospectus, solely to cover over-
allotments, if any. The option may be exercised in whole or in part at any time
within 30 days after the date of this prospectus. To the extent the option is
exercised, the underwriters will be severally committed, subject to certain
conditions, including the approval of certain matters by counsel, to purchase
the additional shares of common stock in proportion to their respective
purchase commitments as indicated in the preceding table.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by the selling shareholders. Such
amounts are shown assuming both no exercise and full exercise of the
underwriters option to purchase additional shares.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per share.................................................. $ $
Total...................................................... $ $
</TABLE>
The offering of the shares is made for delivery, when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The underwriters have reserved for sale at the initial public offering price
up to 5% of the number of shares of common stock offered hereby for sale to
certain directors, officers, other employees, business
61
<PAGE>
affiliates and related persons of SonicWALL, Inc. who have expressed an
interest in purchasing shares. The number of shares available for sale to the
general public will be reduced to the extent any reserved shares are purchased.
Any reserved shares not so purchased will be offered by the underwriters on the
same basis as the other shares offered hereby.
SonicWALL, Inc. and our executive officers, directors and our current
shareholders, who own in the aggregate shares of common stock, have agreed
that, subject to certain limited exceptions, without the prior written consent
of Bear, Stearns & Co. Inc., they will not, directly or indirectly, offer,
sell, contract to sell, grant any option to purchase, pledge or otherwise
dispose of, or, in any manner, transfer all or a portion of the economic
consequences associated with the ownership of any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
beneficially owned by them during the 180 day period following the date of this
prospectus.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price will be determined
through negotiations among SonicWALL, Inc. and the representatives of the
underwriters. Among the factors considered in making such determination were
our financial and operating history and condition, market valuations of other
companies engaged in activities similar to ours, our prospects and prospects
for the industry in which we do business in general, our management, prevailing
equity market conditions and the demand for securities considered comparable to
those of SonicWALL, Inc.
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock, than have been sold to them by SonicWALL, Inc. The underwriters
may elect to cover any such short position by purchasing shares of common stock
in the open market or by exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or maintain the price
of the common stock by bidding for or purchasing shares of common stock in the
open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in this
offering are reclaimed if shares of common stock previously distributed in this
offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price of the common stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also affect the
price of the common stock to the extent that it discourages resales thereof. No
representation is made as to the magnitude or effect of any such stabilization
or other transactions. Such transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
60 filed public offerings of equity securities, of which 33 have been
completed, and has acted as a syndicate member in an additional 32 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
LEGAL MATTERS
The validity of the common stock offered in this offering will be passed
upon for us by Manatt, Phelps & Phillips, LLP of Palo Alto, California. Jerrold
F. Petruzzelli, a partner of Manatt, Phelps & Phillips, LLP, is the Secretary
and a director of SonicWALL, Inc. and owns 100,000 shares of SonicWALL, Inc.
common stock. Certain legal matters in connection with the offering will be
passed upon for the underwriters by Latham & Watkins, San Francisco,
California.
62
<PAGE>
EXPERTS
The consolidated financial statements as of December 31, 1997, 1998 and June
30, 1999 and for each of the three years in the period ended December 31, 1998,
and the six month period ended June 30, 1999 included in this Prospectus and
the financial statement schedules included in the Registration Statement have
been so included in reliance on PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting .
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission. This prospectus, which is part of the registration
statement, does not contain all the information included in the registration
statement. Because some information is omitted, you should refer to the
registration statement and its exhibits. For example, the descriptions in the
prospectus regarding the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. For copies of actual contracts or documents referred to in this
prospectus, you should refer to the exhibits attached to the registration
statement. You may review a copy of the registration statement, including the
attached exhibits and schedule, at the SEC's public reference facilities in
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the SEC at 7 World Trade Center, Suite 1300, New
York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You may also obtain copies of these materials from the
Public Reference Room of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. You may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-
0330. The SEC maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants,
such as SonicWALL, Inc., that file electronically with the SEC.
63
<PAGE>
SONICWALL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
SonicWALL, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
SonicWALL, Inc. and its subsidiary at December 31, 1997 and 1998 and June 30,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 and the six month period
ended June 30, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
August 25, 1999
F-2
<PAGE>
SONICWALL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
December 31, June Shareholders'
------------- 30, Equity
1997 1998 1999 June 30, 1999
------ ------ ------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............. $ 787 $1,051 $ 6,769
Accounts receivable, net of allowance
for doubtful accounts of $121, $193,
and $326............................. 564 677 1,839
Inventories........................... 351 331 649
Deferred income taxes................. 277 366 1,743
Prepaid expenses and other current
assets............................... 301 31 69
------ ------ -------
Total current assets................. 2,280 2,456 11,069
Property and equipment, net............. 55 107 187
Other assets............................ 39 21 21
------ ------ -------
Total assets....................... $2,374 $2,584 $11,277
====== ====== =======
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable...................... $ 663 $ 549 $ 836
Accrued payroll and related benefits.. 157 145 638
Other accrued liabilities ............ 310 748 1,059
Deferred revenue...................... 684 1,512 2,576
Income taxes payable.................. 95 309 879
------ ------ -------
Total current liabilities............ 1,909 3,263 5,988
------ ------ -------
Redeemable Series A convertible
preferred stock, no par value;
redemption and liquidation value of
$5,000, 1,438,377 shares issued and
outstanding............................ -- -- 4,971 $ --
Commitments and contingencies (Note 9)..
Shareholders' Equity (Deficit):
Preferred stock, no par value;
10,000,000 shares authorized......... -- -- -- --
Common stock, no par value;
200,000,000 shares authorized;
8,461,100, 16,272,164 and
16,723,840 shares issued and
outstanding.......................... 12 290 3,499 8,470
Deferred stock compensation........... -- (6) (1,994) (1,994)
Notes receivable from shareholders.... -- (230) (492) (492)
Retained earnings (accumulated
deficit)............................. 453 (733) (695) (695)
------ ------ ------- -------
Total shareholders' equity
(deficit)........................... 465 (679) 318 $ 5,289
------ ------ ------- -------
Total liabilities, redeemable
preferred stock and shareholders'
equity (deficit).................. $2,374 $2,584 $11,277
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SONICWALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
----------------------- ------------------
1996 1997 1998 1998 1999
------ ------ ------- ----------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue
Internet Security.............. $ -- $ 250 $ 2,349 $ 405 $5,474
Ethernet....................... 9,356 9,092 5,166 2,901 1,216
------ ------ ------- ------ ------
Total revenue................ 9,356 9,342 7,515 3,306 6,690
------ ------ ------- ------ ------
Cost of revenue
Internet Security.............. -- 225 1,035 375 1,475
Ethernet....................... 5,915 4,617 2,273 1,277 523
------ ------ ------- ------ ------
Total cost of revenue........ 5,915 4,842 3,308 1,652 1,998
------ ------ ------- ------ ------
Gross margin..................... 3,441 4,500 4,207 1,654 4,692
------ ------ ------- ------ ------
Operating expenses
Research and development....... 1,048 1,983 1,739 847 962
Sales and marketing............ 1,665 2,468 2,907 1,425 1,854
General and administrative..... 432 644 753 310 694
Deferred stock compensation.... -- -- 42 -- 783
------ ------ ------- ------ ------
Total operating expenses..... 3,145 5,095 5,441 2,582 4,293
------ ------ ------- ------ ------
Income (loss) from operations.... 296 (595) (1,234) (928) 399
Other income (expense), net...... 22 29 54 22 132
------ ------ ------- ------ ------
Income (loss) before income
taxes........................... 318 (566) (1,180) (906) 531
Benefit from (provision for)
income taxes.................... (350) 99 (6) -- (493)
------ ------ ------- ------ ------
Net income (loss)................ $ (32) $ (467) $(1,186) $ (906) $ 38
====== ====== ======= ====== ======
Net income (loss) per share
Basic.......................... $ -- $(0.06) $ (0.11) $(0.11) $ --
====== ====== ======= ====== ======
Diluted........................ $ -- $(0.06) $ (0.11) $(0.11) $ --
====== ====== ======= ====== ======
Shares used in computing net
income (loss) per share
Basic.......................... 8,460 8,461 11,251 8,461 16,322
====== ====== ======= ====== ======
Diluted........................ 8,460 8,461 11,251 8,461 19,320
====== ====== ======= ====== ======
Pro forma net income per share
Basic.......................... $ --
======
Diluted........................ $ --
======
Shares used in computing pro
forma net income per share
Basic.......................... 18,420
======
Diluted........................ 19,320
======
</TABLE>
F-4
<PAGE>
SONICWALL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Notes Retained Total
Common Stock Receivable Deferred Earnings Shareholders'
------------------ From Stock (Accumulated Equity
Shares Amount Shareholders Compensation Deficit) (Deficit)
---------- ------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 9,386,004 $ 81 $ (70) $ -- $ 952 $ 963
Repurchase of common
stock.................. (934,880) (70) 70 -- -- --
Issuance of common
stock.................. 9,976 1 -- -- -- 1
Net loss................ -- -- -- -- (32) (32)
---------- ------ ----- ------- ------- -------
Balance at December 31,
1996................... 8,461,100 12 -- -- 920 932
Net loss................ -- -- -- -- (467) (467)
---------- ------ ----- ------- ------- -------
Balance at December 31,
1997................... 8,461,100 12 -- -- 453 465
Issuance of common
stock.................. 7,811,064 230 (230) -- -- --
Deferred stock
compensation........... -- 48 -- (48) -- --
Amortization of deferred
stock compensation..... -- -- -- 42 -- 42
Net loss................ -- -- -- -- (1,186) (1,186)
---------- ------ ----- ------- ------- -------
Balance at December 31,
1998................... 16,272,164 290 (230) (6) (733) (679)
Issuance of common
stock.................. 451,676 438 (300) -- -- 138
Payments of notes
receivable from
shareholders........... -- -- 38 -- -- 38
Deferred stock
compensation........... -- 2,771 -- (2,771) -- --
Amortization of deferred
stock compensation..... -- -- -- 783 -- 783
Net income.............. -- -- -- -- 38 38
---------- ------ ----- ------- ------- -------
Balance at June 30,
1999................... 16,723,840 $3,499 $(492) $(1,994) $ (695) $ 318
========== ====== ===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SONICWALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
----------------------- -------------------
1996 1997 1998 1998 1999
------ ------ ------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).............. $ (32) $ (467) $(1,186) $(906) $ 38
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation.................. 78 63 55 9 22
Provision for allowance for
doubtful accounts............ -- 52 122 21 133
Amortization of deferred stock
compensation................. -- -- 42 -- 783
Changes in operating assets
and liabilities:
Accounts receivable......... 488 (252) (235) (29) (1,295)
Inventories................. (206) 1,031 20 27 (318)
Prepaid expenses and other
current assets............. (31) (235) 270 85 (38)
Deferred income taxes....... (73) 38 (89) -- (1,377)
Other assets................ -- (19) 18 19 --
Accounts payable............ (407) (150) (114) (91) 287
Accrued payroll and related
benefits................... -- 107 (12) (97) 493
Other accrued liabilities... 69 (43) 438 638 311
Deferred revenue............ 1,046 (362) 828 558 1,064
Income taxes payable........ 43 (158) 214 (2) 570
------ ------ ------- ----- -------
Net cash provided by (used in)
operating activities............ 975 (395) 371 232 673
------ ------ ------- ----- -------
Cash flows from investing
activities:
Purchase of property and
equipment..................... (10) (11) (107) (25) (102)
------ ------ ------- ----- -------
Cash flows from financing
activities:
Proceeds from exercise of stock
options....................... 1 -- -- -- 138
Proceeds from issuance of
redeemable Series A
convertible preferred stock... -- -- -- -- 4,971
Payments of notes receivable
from shareholders............. (25) 157 -- -- 38
Payments under line of credit
agreement..................... (50) -- -- -- --
------ ------ ------- ----- -------
Net cash provided by (used in)
financing activities............ (74) 157 -- -- 5,147
------ ------ ------- ----- -------
Net increase (decrease) in cash
and cash equivalents............ 891 (249) 264 207 5,718
Cash and cash equivalents at
beginning of period............. 145 1,036 787 787 1,051
------ ------ ------- ----- -------
Cash and cash equivalents at end
of period....................... $1,036 $ 787 $ 1,051 $ 994 $ 6,769
====== ====== ======= ===== =======
Supplemental disclosure of cash
flow information:
Cash paid for income taxes..... $ 380 $ 151 $ 1 $ -- $ 1,300
====== ====== ======= ===== =======
Supplemental disclosure of
noncash investing and financing
activities:
Issuance of notes receivable
upon the exercise of stock
options....................... $ -- $ -- $ 230 $ -- $ 300
====== ====== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
SonicWALL, Inc. (the "Company") was incorporated in California in February
1991. SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the small to medium enterprise, or
SME, branch office, telecommuter and education markets. The Company's SonicWALL
solution is a high-performance, solid state appliance that provides robust,
reliable, easy-to-use and affordable Internet security. The Company's products
enable our customers to securely utilize Internet applications and services as
an integral part of their business.
The following is a summary of the Company's significant accounting policies:
Consolidation
The consolidated financial statements include those of the Company and its
subsidiary. All significant intercompany accounts and transactions are
eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited interim results
The accompanying statements of operations and of cash flows for the six
months ended June 30, 1998 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results of these periods.
The data disclosed in the notes to the financial statements for this period is
unaudited.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Fair value
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their fair values due to their relatively short
maturities. The Company does not hold or issue financial instruments for
trading purposes.
Concentration of credit risk, foreign operations and significant customers
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its temporary cash investments in
money market accounts and mutual funds with high credit quality financial
institutions. The Company's accounts receivable are derived from revenue earned
from customers located in the U.S. and certain foreign countries and regions,
including Europe, Canada, Japan and Australia. Sales to foreign customers for
the year ended December 31, 1996, 1997, 1998 and the six months ended June 30,
1999, all of which were
F-7
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
denominated in U.S. dollars, accounted for 40%, 36%, 32% and 35% of total
revenue, respectively. The Company performs ongoing credit evaluations of its
customers' financial condition and requires no collateral from its customers.
The Company maintains an allowance for doubtful accounts receivable based upon
the expected collectibility of accounts receivable.
During the year ended December 31, 1998, one customer accounted for 34% of
the Company's revenue and at December 31, 1998, this one customer accounted for
39% of total gross receivables. During the six months ended June 30, 1999, two
customers accounted for 41% of the Company's revenue and at June 30, 1999, and
two customers accounted for 70% of total gross receivables.
The Company is dependent on third party contract manufacturers and some of
the key components in the Company's product come from single or limited sources
of supply.
Inventories
Inventories are stated at the lower of cost or market with cost being
determined on a first-in, first-out basis.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over their estimated useful lives, which range from
three to seven years. Depreciation expense for the years ended December 31,
1996, 1997 and 1998 was $78,000, $63,000 and $55,000, respectively.
Depreciation expense for the six months ended June 30, 1999 was $22,000.
Long-lived assets
The Company periodically evaluates the recoverability of its long-lived
assets based on expected undiscounted cash flows and recognizes impairment from
the carrying value of long-lived assets, if any, based on the fair value of
such assets.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25 ,
compensation costs is determined based on the difference, if any, on the grant
date between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock. Compensation expense is recognized over the
vesting period.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
96-18.
Revenue recognition
Revenue is generally recognized at the time of shipment if collectibility is
probable and no significant obligations remain. Sales to distributors are
subject to agreements allowing certain rights of return, cooperative
advertising, stock balancing rights and price protection. The largest
distributor has the right to return products that have not been sold to end
users for full credit subject to a restocking fee. Revenue from sales to this
F-8
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
distributor is deferred at the time of shipment and is recognized when the
distributor has sold the product to its customers. Certain other distributors
have limited rights of return which allow them to return a percentage of the
prior quarter's purchases by these distributors. Accordingly, reserves for
estimated returns and exchanges are provided at the time of shipment. These
reserves are estimated and adjusted periodically based upon historical rates of
returns and allowances, inventory levels at the distributors and other related
factors. Reserves for credits for price protection are provided at the time
price reductions are approved.
Revenue from extended warranty programs, premium technical assistance, and
subscriptions to content filtering services is recognized ratably over the term
of the contract or subscription.
The standard warranty provisions include technical assistance, insignificant
bug fixes and feature updates and repair or replacement guarantees for units
with product defects. The standard warranty period is one year. The estimated
costs associated with the standard warranty provisions are accrued at the time
of revenue recognition.
The Company has co-operative advertising agreements with certain of its
distributors. These agreements allow the distributors to be reimbursed by the
Company for approved promotional activities. The amounts available for
reimbursement are related to a percentage of the distributor's eligible
purchases from the Company. The Company accrues for co-operative advertising as
the related revenue is recognized.
Income taxes
The Company accounts for income taxes under the liability method, which
requires, among other things, that deferred income taxes be provided for
temporary differences between the tax bases of the Company's assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future benefit of utilizing net
operating losses, research and development credit carryforwards and temporary
differences. A valuation allowance is provided against deferred tax assets
unless it is more likely than not that they will be realized.
Research and development and capitalized software development costs
Software development costs incurred prior to the establishment of
technological feasibility are charged to research and development expense as
incurred. Technological feasibility is established upon completion of a working
model, which is typically demonstrated by initial beta shipment. Software
development costs incurred subsequent to the time a product's technological
feasibility has been established, through the time the product is available for
general release to customers, are capitalized if material. To date, software
development costs incurred subsequent to the establishment of technological
feasibility have been immaterial and accordingly have not been capitalized.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity during a
period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
F-9
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Computation of net income (loss) per share and pro forma net income (loss) per
share
The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common shares outstanding during the period.
Weighted average shares exclude shares subject to repurchase ("restricted
shares"). Diluted net income (loss) per share is computed by dividing the net
income (loss) for the period by the weighted average number of common and
common equivalent shares outstanding during the period, if dilutive. Common
equivalent shares are composed of unvested restricted shares and incremental
common shares issuable upon the exercise of stock options and upon the
conversion of Redeemable Series A Convertible Preferred Stock.
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's redeemable Series A convertible preferred stock
into shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on January 1,
1999, or at date of original issuance, if later.
The following table sets forth the computation of historical and pro forma
basic and diluted net income (loss) per share for the periods indicated (in
thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December Six Months
31, Ended June 30,
----------------------- ---------------
Historical 1996 1997 1998 1998 1999
- ---------- ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)................... $ (32) $ (467) $(1,186) $ (906) $ 38
------ ------ ------- ------ -------
Denominator:
Weighted average common shares
outstanding........................ 8,460 8,461 11,251 8,461 16,380
Weighted average unvested common
shares subject to repurchase....... -- -- -- -- 58
------ ------ ------- ------ -------
Denominator for basic calculation... 8,460 8,461 11,251 8,461 16,322
Common stock equivalents............ -- -- -- -- 2,998
------ ------ ------- ------ -------
Denominator for diluted
calculation........................ 8,460 8,461 11,251 8,461 19,320
Basic net income (loss) per share..... $ -- $(0.06) $ (0.11) $(0.11) $ --
====== ====== ======= ====== =======
Diluted net income (loss) per share... $ -- $(0.06) $ (0.11) $(0.11) $ --
====== ====== ======= ====== =======
<CAPTION>
Pro forma
- ---------
<S> <C> <C> <C> <C> <C>
Shares used above 16,322
Pro forma adjustment to reflect
weighted effect of assumed
conversion of redeemable
convertible preferred stock........ 2,098
-------
Shares used in computing pro forma
basic net income per share......... 18,420
=======
Pro forma basic net income per
share.............................. $ --
=======
Pro forma diluted..................... 19,320
=======
Pro forma diluted net income per
share.............................. $ --
=======
</TABLE>
F-10
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Outstanding options to purchase 2,396,880, 2,494,880, 1,163,676 and
1,760,000 shares of common stock at an average exercise price of $0.09, $0.10,
$0.13 and $0.48 per share have not been considered in the computation of
diluted net loss per share for the years ended December 31, 1996, 1997 and 1998
and the six months ended June 30, 1999, respectively, as their effect would
have been anti-dilutive.
The accompanying pro forma shareholders' equity at June 30, 1999 reflects
the conversion of the redeemable Series A convertible preferred stock at June
30, 1999. The conversion of such preferred stock is automatic upon the
completion of an initial public offering price of at least $5.00 per share and
with proceeds of at least $15,000,000.
In May 1999, the Company issued from the 1998 Plan 300,000 shares upon the
exercise of certain stock options. At June 30, 1999, 293,750 common shares are
subject to repurchase at the option of the Company. These shares vest ratably
over a 48 month period.
Note 2--Balance Sheet Components:
<TABLE>
<CAPTION>
December
31,
------------ June 30,
1997 1998 1999
----- ----- --------
(in thousands)
<S> <C> <C> <C>
Property and equipment:
Equipment........................................... $ 299 $ 161 $ 263
Leasehold improvements.............................. 5 5 5
Software............................................ 49 53 53
Transportation...................................... 38 94 94
----- ----- -----
391 313 415
Less: accumulated depreciation...................... (336) (206) (228)
----- ----- -----
$ 55 $ 107 $ 187
===== ===== =====
Inventories:
Raw materials....................................... $ 82 $ 49 $ 113
Work-in-process..................................... 2 13 32
Finished goods...................................... 267 269 504
----- ----- -----
$ 351 $ 331 $ 649
===== ===== =====
</TABLE>
Note 3--Line of Credit:
At June 30, 1999, the Company had a line-of-credit agreement with a bank
which allows the Company to borrow up to $1,000,000. Borrowings under the line
of credit bear interest at the bank's reference rate plus 1.75% (which equaled
9.5% at June 30, 1999), and are secured primarily by accounts receivable,
inventories, and property and equipment. The line of credit can be utilized at
a percentage of eligible receivables, as defined in the loan agreement. The
agreement contains certain covenants requiring the Company to maintain certain
levels of profitability, minimum tangible net worth, working capital and other
financial ratios and prohibits the payment of cash or stock dividends on common
stock over the life of the agreement. This line of credit will be in force
until terminated by either party by notice of not less than 30 days prior to
the effective date of such termination. No amounts were outstanding under the
line of credit at June 30, 1999.
Note 4--Stock Option Plan:
The Company's Stock Option Plans (the "Plans"), as amended, authorize the
Board of Directors to grant incentive stock options and nonstatutory stock
options to employees, directors and consultants to purchase up to
F-11
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a total of 5,958,324 shares of the Company's common stock. Under the Plans,
incentive stock options are granted at an exercise price that is not to be less
than 100% of the fair market value of the Company's common stock on the date of
grant, as determined by the Company's Board of Directors. Nonqualified stock
options are granted at a price that is not to be less than 85% of the fair
market value of the common stock on the date of grant, as determined by the
Board of Directors.
Generally, options granted under the Plans are exercisable for a period of
ten years after the date of grant, and vest over four years.
The following table summarizes option activity under the stock option plans:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------
Weighted
Average
Available Exercise Exercise
for Grant Shares Price Price
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1996... 550,000 2,396,880 $0.08-0.09 $0.09
Granted........................ (204,000) 204,000 $ 0.25 $0.25
Exercised...................... -- -- $ -- $ --
Canceled....................... 106,000 (106,000) $ 0.08 $0.08
---------- ---------- ---------- -----
Balance at December 31, 1997... 452,000 2,494,880 $0.08-0.25 $0.10
Authorized..................... 2,000,000 -- $ -- $ --
Granted........................ (1,015,000) 1,015,000 $ 0.13 $0.13
Exercised...................... -- (2,134,880) $ 0.09 $0.09
Canceled....................... 211,324 (211,324) $0.08-0.25 $0.19
---------- ---------- ---------- -----
Balance at December 31, 1998... 1,648,324 1,163,676 $0.08-0.25 $0.13
Authorized..................... 958,324
Granted........................ (1,058,000) 1,058,000 $0.50-1.50 $1.07
Exercised...................... -- (451,676) $0.08-1.50 $0.97
Canceled....................... 10,000 (10,000) $0.13-0.25 $0.19
---------- ---------- ---------- -----
Balance at June 30, 1999....... 1,558,648 1,760,000 $0.08-1.50 $0.48
========== ========== ========== =====
</TABLE>
The following table summarizes information regarding stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------- ----------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Contractual Exercise
Exercise Prices Price Shares Life (Years) Shares Price
--------------- -------- --------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
$0.08....................... $0.08 82,000 6.08 76,976 $0.08
$0.13....................... $0.13 960,000 9.12 272,168 $0.13
$0.25....................... $0.25 70,000 7.61 58,304 $0.25
$0.50-$0.75................. $0.73 253,000 9.82 18,706 $0.72
$1.00-$1.50................. $1.31 395,000 9.98 11,344 $1.22
----- --------- ---- ------- -----
$0.48 1,760,000 9.21 437,498 $0.19
===== ========= ==== ======= =====
</TABLE>
For financial reporting purposes, the Company has determined that the deemed
fair value on the date of grant of certain employee stock options granted in
1998 and 1999 was in excess of the exercise price of the options. The
difference of $48,000 and $2,771,000 in 1998 and 1999, respectively is
considered deferred stock compensation and is amortized against income over the
vesting period of the options.
F-12
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma stock compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the Company's stock
option plan in the accompanying statements of operations. Had compensation cost
for the Company's stock option plan been determined based on the fair market
value at the grant dates for stock options granted in 1998 and 1997 consistent
with the provisions of SFAS No. 123, the Company's net loss would have been
changed to the pro forma amounts indicated below, in thousands:
<TABLE>
<CAPTION>
Year Ended December
31, Six Months
--------------------- Ended June
1996 1997 1998 30, 1999
----- ----- ------- ----------
<S> <C> <C> <C> <C>
Net income (loss)--as reported............. $ (32) $(467) $(1,186) $38
Net income (loss)--pro forma............... $(189) $(471) $(1,194) $26
</TABLE>
The pro forma amounts reflect compensation expense related to 1996, 1997,
1998 and 1999 stock option grants only. In future years, the annual
compensation expense will increase relative to the fair value of the stock
options granted in those future years. The weighted average fair value of the
options granted in 1996, 1997, 1998 and the six months ended June 30, 1999 of
$0.02, $0.07, $0.03 and $0.20, respectively.
The fair value of each grant is estimated on the date of grant using the
minimum value method with the following assumptions:
<TABLE>
<CAPTION>
1996 1997 1998 1999
------- ------- ------------ -------------
<S> <C> <C> <C> <C>
Expected volatility........... 0% 0% 0% 0%
Risk-free interest rate....... 6.0% 6.0% 4.5% to 5.64% 4.79% to 5.83%
Expected life................. 5 years 5 years 5 years 4 years
Dividend yield................ 0% 0% 0% 0%
</TABLE>
Note 5--Redeemable Series A Convertible Preferred Stock:
In February 1999, the Company issued 1,438,377 shares of redeemable Series A
convertible preferred stock (Preferred Stock) at $3.48 per share for net
proceeds of $4,971,000.
Conversion--Each share of Preferred Stock is convertible at the option of
the holder into two shares of common stock based on a conversion price of
$1.74. This conversion price is subject to adjustment in certain circumstances
including certain issuances of common stock at below the conversion price.
Preferred Stock will automatically convert into common stock in the event of an
underwritten public offering of the Company's common stock with proceeds of at
least $15,000,000, and at a price per share of not less than $5.00.
Voting--Preferred Stock has voting rights, on an as-if converted basis,
identical to common stock.
Dividends--Holders of the Preferred Stock are entitled to receive
noncumulative dividends in preference to any dividend on the common stock at
the rate of 8 percent per share per annum, when and if declared by the Board of
Directors.
Liquidation--In the event of liquidation, the holders of Preferred Stock are
entitled to receive $3.48 per share, plus any dividends declared, but unpaid on
such shares. If assets and funds are insufficient to meet the liquidation
preference of the Preferred Stock, such assets and funds will be distributed
ratably between the
F-13
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
holders of the Preferred Stock. Any surplus assets or funds will then be
distributed ratably between holders of the Preferred Stock on an as-converted
common stock basis and the holders of the common stock together until the
holders of the Preferred Stock have received a total of $12.17 per share.
Thereafter holders of common stock share ratably all remaining assets.
Redemption--Anytime after February 17, 2004, all outstanding shares of the
Preferred Stock are eligible to be redeemed in full upon a written notice by at
least 67% of the holder's of the outstanding Preferred Stock in two
installments the first 75 days followings the notice of redemption and the
second installment one year after the first redemption. In the event of
redemption, each holder of the Preferred Stock would be entitled to receive
$3.48 per share, plus all unpaid dividends on such shares, which have been
declared.
Note 6--Notes Receivable from Shareholders:
In December 1998, the Company issued notes receivable in connection with the
exercise of 2,134,880 shares of incentive stock options held by two
shareholders. The full recourse notes totaling $192,000 each, accrue interest
at a rate of 8% per annum. Principal and accrued interest shall be paid one-
fourth on the first anniversary date of the note, and one-fourth every year
thereafter for a total of four years.
In May 1999, the Company issued a full recourse note for $300,000 in
connection with the exercise of 300,000 shares of incentive stock options by
one shareholder. The note accrues interest at a rate of 8% per annum. Principal
and accrued interest shall be paid one-fourth on the first anniversary date of
the note, and one-fourth every year thereafter for a total of four years.
Note 7--Income Taxes:
The (benefit from) provision for income taxes consist of the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended
----------------- June 30,
1996 1997 1998 1999
---- ----- ---- ----------
<S> <C> <C> <C> <C>
Current tax expense (benefit):
Federal...................................... $336 $(138) $ 94 $ 1,620
State........................................ 87 1 1 251
---- ----- ---- -------
423 (137) 95 1,871
---- ----- ---- -------
Deferred tax expense (benefit):
Federal...................................... (65) 32 (89) (1,218)
State........................................ (8) 6 -- (160)
---- ----- ---- -------
(73) 38 (89) (1,378)
---- ----- ---- -------
$350 $ (99) $ 6 $ 493
==== ===== ==== =======
</TABLE>
F-14
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets comprise the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------ June 30,
1997 1998 1999
------------ --------
<S> <C> <C> <C>
Inventory reserves.................................... $ 77 $ 93 $ 105
Deferred revenue...................................... 10 560 882
Other reserves & accruals............................. 190 278 1,039
----- ------ ------
277 931 2,026
Valuation allowance................................... -- (565) (283)
----- ------ ------
$ 277 $ 366 $1,743
===== ====== ======
</TABLE>
In assessing the realizability of deferred tax assets management has
allocated, to the extent the Company does not have carryback rights, a
valuation allowance at December 31, 1997 and 1998. The ultimate realization of
deferred tax assets at June 30, 1999 is dependent upon the generation of future
taxable income during the periods in which temporary differences representing
net future deductible amounts become deductible.
Note 8--Segment Reporting
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No.131 requires publicly held
companies to report financial and other information about key revenue segments
of the entity for which such information is available and is utilized by the
chief operating decision maker. The Company conducts its business within one
business segment.
Revenue by geographic region is presented as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December Six Months Ended
31, June 30,
-------------------- ------------------
1996 1997 1998 1998 1999
------ ------ ------ ----------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
United States........................ $5,623 $5,986 $5,080 $2,203 $4,354
Other................................ 3,733 3,356 2,435 1,103 2,336
------ ------ ------ ------ ------
Total................................ $9,356 $9,342 $7,515 $3,306 $6,690
====== ====== ====== ====== ======
</TABLE>
Revenue to any one foreign country did not exceed 10% of total revenue in
1996, 1997 and 1998. Revenue attributed to Japan accounted for 17% of total
revenue for the six months ended June 30, 1999.
Note 9--Commitments and Contingencies:
The Company leases its facility under an operating lease which expires in
2001. Future minimum rental payments under the lease are $234,000 in 1999,
$243,000 in 2000 and $167,000 in 2001. Rent expense for the years ended
December 31, 1997 and 1998 was $118,000 and $163,000, respectively. Rent
expense for the six months ended June 30, 1999 was $115,000.
The Company is involved in various threatened legal actions arising in the
ordinary course of business. Management believes that the outcome of these
actions will not have a material adverse effect on the Company's financial
position or results of operations.
F-15
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Subsequent Events
Stock split
Share information for all periods presented has been retroactively adjusted
to reflect a 2 for 1 stock split effected on August 25, 1999.
1999 Employee Stock Purchase Plan
The 1999 employee stock purchase plan was adopted by the board of directors
in August 1999. A total of 250,000 shares of common stock have been reserved
for issuance under the plan.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that con-
tained in this prospectus. We are offering to sell, and seeking offers to buy,
shares of common stock only in jurisdictions where offers and sales are permit-
ted. The information contained in this prospectus is accurate only as of the
date of this prospectus, regardless of the time of delivery of this prospectus
or of any sale of our common stock.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Cautionary Note on Forward-Looking Statements............................ 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 30
Management............................................................... 44
Certain Transactions..................................................... 52
Principal and Selling Shareholders....................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 62
Experts.................................................................. 63
Where You Can Find More Information...................................... 63
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-------------------
Until , 1999 (25 days after the date of this prospectus), all dealers ef-
fecting transactions in the common stock offered hereby, whether or not partic-
ipating in this distribution, may be required to deliver a prospectus. This is
in addition to the obligations of dealers to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
[LOGO OF SONICWALL, INC.]
Common Stock
----------------
PROSPECTUS
----------------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Thomas Weisel Partners LLC
August , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table states the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in
connection with the sale of the common stock being registered by this
registration statement. All amounts shown are estimates, except the Securities
and Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $12,788
NASD filing fee................................................... *
Nasdaq National Market listing fee................................ *
Blue Sky fees and expenses........................................ *
Printing and engraving expenses................................... *
Legal fees and expenses .......................................... *
Accounting fees and expenses...................................... *
Transfer Agent and Registrar fees................................. *
Miscellaneous expenses............................................ *
-------
Total........................................................... $ *
=======
</TABLE>
----------
*To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 317 of the California General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Act. Article V of the
Registrant's Amended and Restated Articles of Incorporation, to be filed and
effective upon completion of this offering (Exhibit 3.1 hereto), provides for
indemnification of its directors and officers to the maximum extent permitted
by the California General Corporation Law, and Article VI of the Registrant's
Bylaws, to be effective upon completion of this offering (Exhibit 3.2 hereto),
provides for indemnification of its directors, officers, employees and other
agents to the maximum extent permitted by the California General Corporation
Law. In addition, the Registrant has entered into Indemnification Agreements
(Exhibit 10.4 hereto) with its directors and officers containing provisions
that are in some respects broader than the specific indemnification provisions
contained in the California General Corporation Law. The indemnification
agreements may require the Registrant, among other things, to indemnify its
directors and officers against certain liabilities that may arise by reason of
their status or service as directors of officers (other than liabilities
arising from willful misconduct of a culpable nature), to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms. Reference is also made to Section 7 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, which indemnifies
officers and directors of the Registrant against certain liabilities.
Item 15. Recent Sales of Unregistered Securities
Since August 1, 1996, SonicWALL has issued and sold the following
securities:
(1) SonicWALL issued and sold 2,640,064 shares of its common stock to
officers, directors, employees and consultants for an aggregate purchase
price of $609,643 pursuant to the exercise of options under its 1994 Stock
Option Plan and 1998 Stock Option Plan.
(2) On August 10, 1998, SonicWALL, Inc. issued an aggregate of 5,426,186
shares of its common stock to Ravi Anne, Sreekanth Ravi, Sudhakar Ravi and
Bruce Wonnacott, each a general partner of AckFin, a California general
partnership, in consideration of the purchase of all of the general partner
interests of AckFin and $150,000 cash.
II-1
<PAGE>
(3) On December 29, 1998, SonicWALL, Inc. issued an aggregate of 250,000
shares of its common stock for an aggregate purchase price of $37,500 to
several investors.
(4) On February 19, 1999, SonicWALL, Inc. issued an aggregate of
1,438,377 shares of its redeemable Series A convertible preferred stock for
an aggregate purchase price of $4,999,998.39 to several investors.
The issuances described in paragraph 1 were deemed exempt from registration
under the Act in reliance upon Rule 701 promulgated under the Act. The
issuances of the securities described in paragraphs 2 through 4 were deemed to
be exempt from registration under the Act in reliance on Section 4(2) of the
Act as transactions by an issuer not involving any public offering. In
addition, the recipients of securities in each such transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with SonicWALL, Inc., to information about SonicWALL, Inc.
No underwriters were used in connection with these sales and issuances.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Registrant's Amended and Restated Articles of Incorporation.
3.2 Registrant's Restated Bylaws.
4.1* Registrant's specimen common stock certificate.
4.2 Investor Rights Agreement dated February 19, 1999 by and between
Registrant and the investors named therein.
5.1* Legal opinion of Manatt, Phelps & Phillips, LLP, counsel for the
Registrant.
10.1 Registrant's 1994 Stock Option Plan.
10.2 Registrant's 1998 Stock Option Plan.
10.3 Registrant's 1999 Employee Stock Option Plan.
10.4 Form of Indemnity Agreement entered into by Registrant with each of
its executive officers and directors.
10.5 Loan and Security Agreement dated May 26, 1995 between Registrant and
Comerica Bank.
10.6++ OEM License Agreement dated January 27, 1999 between Registrant and
Com21, Incorporated.
10.7++ OEM Purchase Agreement dated January 5, 1999 between Registrant and
Ramp Networks.
10.8++ Distribution Agreement dated February 9, 1999 between Registrant and
Tech Data Product Management, Inc.
10.9++ Distribution Agreement dated July 5, 1998 between Registrant and
Sumitomo Metal Systems Development Co.
10.10++ Distribution Agreement dated November 11, 1992 between Registrant and
Ingram Micro, Inc.
10.11 Agreement of Sublease dated as of October 26, 1998 between Registrant
and AMP Incorporated.
23.1 Consent of Independent Accountants.
23.2* Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1).
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
</TABLE>
II-2
<PAGE>
- ----------
*To be filed by amendment.
++Confidential treatment has been requested for portions of this exhibit. The
omitted material has been separately filed with the Securities and
Exchange Commission.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts and Reserves
All financial statement schedules not listed are omitted because they are
inapplicable or the requested information is shown in the financial statements
of the registrant or in the related notes to the financial statements.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is
therefore unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted against such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act, and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that
(1) for purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(2) for the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California, on the 27th day of August, 1999.
SonicWALL, Inc.
/s/ Sreekanth Ravi
By:__________________________________
Sreekanth Ravi,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Sreekanth Ravi and Michael J. Sheridan jointly
and severally, his attorneys-in-fact, each with the power of substitution and
each with power to act alone, for him in any and all capacities, to sign any
amendments to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereto ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Sreekanth Ravi President, Chief Executive August 27, 1999
____________________________________ Officer and Director
Sreekanth Ravi (Principal Executive
Officer)
/s/ Sudhakar Ravi Vice President, Engineering August 27, 1999
____________________________________ and Director
Sudhakar Ravi
/s/ Robert M. Williams Director August 27, 1999
____________________________________
Robert M. Williams
/s/ David Shrigley Director August 27, 1999
____________________________________
David Shrigley
/s/ Jerrold F. Petruzzelli Secretary and Director August 27, 1999
____________________________________
Jerrold F. Petruzzelli
/s/ Michael J. Sheridan Vice President, Finance and August 27, 1999
____________________________________ Chief Financial Officer
Michael J. Sheridan (Principal Financial and
Accounting Officer)
</TABLE>
II-4
<PAGE>
Schedule I
Report of Independent Accountants
In connection with our audits of the consolidated financial statements of
SonicWall, Inc. as of December 31, 1997, 1998 and June 30, 1999, and for each
of the three years in the period ended December 31, 1998 and the six month
period ended June 30, 1999, which financial statements are included in the
Prospectus, we have also audited the financial statement schedule listed in
Item 16 herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 25, 1999
<PAGE>
Schedule II
SonicWALL, Inc.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Cost and Write-off End of
of Period Expenses of Accounts Period
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts... $ 69 $ 52 $ -- $121
Year ended December 31, 1998
Allowance for doubtful accounts... 121 122 50 193
Six months ended June 30, 1999
Allowance for doubtful accounts... 193 133 -- 326
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Registrant's Amended and Restated Articles of Incorporation.
3.2 Registrant's Restated Bylaws.
4.1* Registrant's specimen common stock certificate.
4.2 Investor Rights Agreement dated February 19, 1999 by and between
Registrant and the investors named therein.
5.1* Opinion of Manatt, Phelps & Phillips, LLP as to the legality of the
shares.
10.1 Registrant's 1994 Stock Option Plan.
10.2 Registrant's 1998 Stock Option Plan.
10.3 Registrant's 1999 Employee Stock Option Plan.
10.4 Form of Indemnity Agreement entered into by Registrant with each of
its executive officers and directors.
10.5 Loan and Security Agreement dated May 26, 1995 between Registrant and
Comerica Bank.
10.6++ OEM License Agreement dated January 27, 1999 between Registrant and
Com21, Incorporated.
10.7++ OEM Purchase Agreement dated January 5, 1999 between Registrant and
Ramp Networks.
10.8++ Distribution Agreement dated February 9, 1999 between Registrant and
Tech Data Product Management, Inc.
10.9++ Distribution Agreement dated July 5, 1998 between Registrant and
Sumitomo Metal Systems Development Co.
10.10++ Distribution Agreement dated November 11, 1992 between Registrant and
Ingram Micro, Inc.
10.11 Agreement of Sublease dated as of October 26, 1998 between Registrant
and AMP Incorporated.
23.1 Consent of Independent Accountants.
23.2* Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1).
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
</TABLE>
- ----------
* To be filed by amendment
++ Confidential treatment has been requested for portions of this exhibit. The
omitted material has been separately filed with the Securities and Exchange
Commission.
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF SONIC SYSTEMS
a California corporation
Sreekanth Ravi and Jerrold F. Petruzzelli certify as follows:
1. They are the duly elected and acting President and Secretary,
respectively, of Sonic Systems, a California corporation (the "Corporation").
2. The Articles of Incorporation of the Corporation are hereby amended and
restated in their entirety to read in full as follows:
ARTICLE I
The name of the Corporation is SonicWALL, Inc.
ARTICLE II
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
This Corporation is authorized to issue two classes of shares of stock,
which shall be designated as Common Stock and Preferred Stock, respectively.
The total number of shares of Common Stock the Corporation is authorized to
issue is Two Hundred Million (200,000,000) and the total number of shares of
Preferred Stock the Corporation is authorized to issue is Ten Million
(10,000,000). The Board of Directors may determine, fix, alter, or revoke by
resolution the rights, preferences, privileges, and restriction of any wholly
unissued class or series of shares, other than Common Shares, and the series
designation and number of shares to constitute any series (which number may
thereafter in the same manner be increased or decreased, but not below the
number of shares of such series then outstanding), and a certificate of
determination shall then be filed with the California Secretary of State. Upon
the filing of these Amended and Restated Articles of Incorporation, each one (1)
share of Common Stock then outstanding shall be split into two (2) shares of
Common Stock.
ARTICLE IV
The rights, preferences, privileges, restrictions and other matters
relating to the ten million (10,000,000) shares of Preferred Stock are as
follows:
A. Designation. One million four hundred thousand thirty eight thousand
-----------
three hundred seventy seven (1,438,377) of the shares of Preferred Stock shall
be designated and known as Series A
1
<PAGE>
Preferred Stock ("Series A Preferred Stock" or "Series A Preferred"). The
balance of the shares of Preferred Stock may be divided into such number of
series as the Board of Directors may determine with such rights, preferences,
privileges and restrictions as the Board of Directors may determine.
B. Liquidation Rights.
------------------
(1) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or not, the holders of Series A Preferred Stock
shall be entitled to receive, before any amount shall be paid to holders of
Common Stock, an amount equal to $3.476139 per share (as adjusted for stock
splits, stock dividends, recapitalizations and the like ("Original Issue Price")
plus an amount equal to all dividends declared but unpaid thereon (collectively,
- ----
the "Preference Amount"). Thereafter, if assets or surplus funds remain in the
Corporation after the payment of the Preference Amount to the holders of Series
A Preferred, remaining assets or surplus funds shall be distributed pro-rata to
the holders of Series A Preferred Stock on an as-converted to Common Stock basis
and to the holders of Common Stock together until the holders of the Series A
Preferred Stock shall have received a total of Twelve Dollars and Seventeen
Cents ($12.17) per share of Series A Preferred Stock (as adjusted for stock
splits, stock dividends, recapitalizations and the like) (which includes the
Preference Amount of $3.476139 per share). After the holders of Series A
Preferred have received such an amount, then all the remaining assets or surplus
funds shall be distributed solely to the holders of Common Stock. If, upon the
occurrence of a liquidation, dissolution or winding up, the assets and surplus
funds distributed among the holders of Series A Preferred Stock shall be
insufficient to permit the payment to such holders of Series A Preferred Stock
of the full Preference Amount, then the entire assets and surplus funds of the
Corporation legally available for distribution shall be distributed pro rata
among the holders of Series A Preferred Stock based on the number of shares held
by each.
(2) For purposes of this Section B, a liquidation, dissolution or
winding up of the Corporation shall be deemed to be occasioned by, and to
include, the Corporation's sale of all or substantially all of its assets or the
acquisition of the Corporation by or reorganization of this Corporation into or
with another entity in which the shareholders of the Corporation will not own,
by virtue of their share ownership in the Corporation, a majority of the
outstanding shares or other voting interests of the surviving, purchasing, or
newly resulting entity, whether by means of merger or consolidation or
reorganization resulting in the exchange of the outstanding shares of this
Corporation for securities or consideration issued, or caused to be issued, by
the acquiring corporation or its subsidiary. No later than thirty (30) days
before any actual or deemed liquidation, dissolution or winding up of the
Corporation as described in paragraph B(1) or this paragraph B(2), or before any
event or transaction of the type specified in paragraph D(5), or any other event
that permits a holder of Series A Preferred to have each share of Series A
Preferred held by such holder treated for all purposes as if it had been
converted into Common Stock, the Corporation shall deliver a notice to each
holder of Series A Preferred setting forth the principal terms of such merger or
sale of the Corporation. Such notice shall be deemed delivered upon personal
delivery or five (5) days after deposit in the United States mail, by first
class, registered or certified mail (in each case, prepaid), addressed to a
party at its address as shown on the stock records of the Corporation. Such
notice shall include a description of the amounts that would be paid to holders
of Series A Preferred under this Section B and of the consideration that such
holders would receive if they were to exercise their rights to have shares of
Series A Preferred treated as if they had been converted into Common Stock. No
later than fifteen (15) days after delivery of the notice, each holder of Series
A Preferred may deliver an election to the
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Corporation notifying the Corporation that the holder desires that such holder's
shares of Series A Preferred be treated as if they had been converted into
shares of Common Stock and, if no such election is delivered to the Corporation,
such holder shall receive such amounts as are provided for under this Section B.
(3) In the event the Corporation shall propose to take any action
regarding the liquidation, dissolution or winding up of the Corporation which
will involve the distribution of assets other than cash, the value of the assets
to be distributed to the holders of shares of the Series A Preferred Stock shall
be determined in good faith by the consent or vote of the Board of Directors,
and such determination shall be binding upon the holders of the Series A
Preferred Stock and Common Stock, except that any securities distributed shall
be valued as follows:
(a) Securities not subject to investment letter or other similar
restrictions on free marketability:
(i) if traded on a securities exchange, the value shall be
deemed to be the average of the security's closing prices on such exchange over
the thirty (30) day period ending two (2) days prior to the closing; and
(ii) if actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid prices over the thirty (30) day
period ending two (2) days prior to the closing; and
(iii) if there is no active public market, the value shall
be the fair market value thereof, as mutually determined by the Corporation and
the holders of not less than fifty percent (50%) of the outstanding Series A
Preferred Stock and such determination shall be binding on the holders of the
remaining Series A Preferred Stock and upon the holders of the Common Stock.
(b) The method of valuation of securities subject to investment
letter or other restrictions on free marketability shall be to make an
appropriate discount from the market value determined as above in subparagraphs
B(3)(a)(i), (ii) or (iii) to reflect the approximate fair market value thereof,
as mutually determined by the Corporation and the holders of not less than fifty
percent (50%) of the outstanding Series A Preferred Stock and such determination
shall be binding upon the remaining holders of the Series A Preferred Stock and
upon the holders of the Common Stock.
C. Dividends.
---------
(1) Preferred Stock. The holders of the outstanding Series A
---------------
Preferred Stock shall be entitled to receive in any fiscal year, if, when and as
declared by the Board of Directors, out of any assets at the time legally
available therefor, dividends in cash at the rate of eight percent (8%) of the
Original Issue Price per share of Series A Preferred Stock (as adjusted for
stock splits, stock dividends, recapitalizations and the like) per annum, before
any dividend is declared or paid on shares of Common Stock. Dividends may be
payable quarterly or otherwise as the Board of Directors may from time to time
determine. Dividends shall not be cumulative.
(2) Common Stock. No distributions (as defined below) shall be paid
------------
on the Common Stock until a dividend for the fiscal year shall have first been
paid to or declared and set apart for the
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<PAGE>
holders of the Series A Preferred Stock then outstanding at the rates specified
in paragraph C(1) above. No distributions (as defined below) shall be paid on
the Common Stock in excess of a rate of eight percent (8%) per annum of the fair
market value of the Common Stock, as determined in good faith by the consent or
vote of the Board of Directors.
(3) Distributions Defined. For purposes of this Section C, unless the
---------------------
context requires otherwise, "distribution" shall mean the transfer of cash or
property without consideration, whether by way of dividend or otherwise, payable
other than in Common Stock or other securities of the Corporation, or the
purchase or redemption of shares of the Corporation (other than repurchases of
Common Stock held by employees or directors of, or consultants to, the
Corporation upon termination of their employment or services pursuant to
agreements providing for such repurchase or pursuant to the Company's exercise
of any right of first refusal as to such shares) for cash or property, including
any such transfer, purchase, or redemption by a subsidiary of the Corporation.
D. Conversion to Common Stock
--------------------------
The Series A Preferred Stock shall be convertible into Common Stock of the
Corporation as follows:
(1) Definitions. For purposes of this Section D the following
-----------
definitions shall apply:
(a) "Issuance Date" shall mean the first date on which the
Corporation issues any shares of Series A Preferred Stock.
(b) "Series A Conversion Price" shall mean the price, determined
pursuant to this Section D, at which shares of Common Stock shall be deliverable
upon conversion of Series A Preferred Stock.
(c) "Current Conversion Price" shall mean the Series A
Conversion Price immediately before the occurrence of any event which, pursuant
to this Section D, causes an adjustment to the Series A Conversion Price.
(d) "Convertible Securities" shall mean any indebtedness or
shares of stock convertible into or exchangeable for Common Stock, including
Series A Preferred Stock.
(e) "Options" shall mean any rights, warrants or options to
subscribe for or purchase Common Stock or Convertible Securities.
(f) "Common Stock Outstanding" shall mean the aggregate of all
Common Stock outstanding and all Common Stock issuable upon exercise of all
outstanding Options and conversion of all outstanding Convertible Securities.
(g) "Common Stock Equivalents" shall mean Convertible Securities
and rights entitling the holder thereof to receive, directly or indirectly,
additional shares of Common Stock without the payment of any consideration by
such holder for such additional shares of Common Stock or Common Stock
Equivalents.
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<PAGE>
(2) Right to Convert; Initial Conversion Price.
------------------------------------------
(a) Each holder of Series A Preferred Stock may, at any time,
convert any or all of such Series A Preferred shares into fully-paid and
nonassessable shares of Common Stock at the Series A Conversion Price. Each
share of Series A Preferred Stock shall be convertible into the number of shares
of Common Stock that results from dividing the Series A Conversion Price in
effect at the time of conversion into $3.476139 for each share of Series A
Preferred Stock being converted; the initial Series A Conversion Price shall be
$3.476139. The Series A Conversion Price shall be subject to adjustment from
time to time in certain instances as hereinafter provided. No adjustments with
respect to conversion shall be made on account of any dividends that may be
declared but unpaid on the Series A Preferred surrendered for conversion, but no
dividends shall thereafter be paid on the Common Stock unless such unpaid
dividends have first been paid to the Series A Preferred holders entitled to
payment at the time of conversion of the Series A Preferred.
(b) Before any holder of Series A Preferred Stock shall be
entitled to convert the same into Common Stock, he shall surrender the
certificate or certificates therefor, duly endorsed, to the office of the
Corporation or any transfer agent for such Series A Preferred and shall give
written notice to the Corporation at such office that he elects to convert the
same. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred, or to his nominee
or nominees, certificates for the number of full shares of Common Stock to which
he shall be entitled, together with cash in lieu of any fraction of a share as
hereinafter provided, and, if less than all of the shares of Series A Preferred
represented by any such certificate are converted, a certificate representing
the shares of Series A Preferred not converted. Such conversion shall be deemed
to have been made as of the date of such surrender of the certificate for the
Series A Preferred to be converted, and the person or persons entitled to
receive the Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such Common Stock on such date. If
the conversion is in connection with an offer of securities registered pursuant
to the Securities Act of 1933, as amended, the conversion may, at the option of
any holder tendering Series A Preferred for conversion, be conditioned upon the
closing of the sale of securities pursuant to such offering, in which event the
holder shall not be deemed to have converted such Series A Preferred until
immediately prior to the closing of such sale of securities.
(3) Adjustments to Conversion Price. Subject to subsection D(3)(j)
-------------------------------
below, the Series A Conversion Price in effect from time to time shall be
subject to adjustment in certain cases as follows:
(a) Issuance of Additional Shares of Common Stock. In case the
---------------------------------------------
Corporation shall at any time after the Issuance Date issue or sell any Common
Stock, Options, Convertible Securities, or Common Stock Equivalents (hereinafter
the "Additional Shares of Common Stock") without consideration or for a
consideration per share of Common Stock less than the Current Conversion Price
for the Series A Preferred Stock, then such Current Conversion Price for the
Series A Preferred Stock shall simultaneously with such issuance or sale be
adjusted to a Series A Conversion Price (calculated to the nearest cent)
determined by multiplying such Current Conversion Price by a fraction,
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<PAGE>
(A) the numerator of which shall be (x) the Common Stock
Outstanding at the close of business on the day immediately preceding the date
of such issuance or sale, plus (y) the number of shares of Common Stock which
the aggregate consideration received (or by the express provisions hereof deemed
to have been received) by the Corporation for the total number of Additional
Shares of Common Stock so issued or sold would purchase at the Current
Conversion Price, and (B) the denominator of which shall be the number of shares
of Common Stock outstanding at the close of business on the date of such
issuance or sale after giving effect to such issuance or sale of Additional
Shares of Common Stock. For the purpose of the calculation described in this
Section D(3)(a), the Common Stock Outstanding shall include, in addition to the
number of shares of Common Stock actually outstanding, (A) the number of shares
of Common Stock into which the Series A Preferred Stock could be converted if
fully converted on the day immediately preceding the issuance or sale or deemed
issuance or sale of Additional Shares of Common Stock, and (B) the number of
shares of Common Stock which would be obtained through the exercise or
conversion of all rights, Options and Convertible Securities outstanding on the
day immediately preceding the issuance or sale or deemed issuance or sale of
Additional Shares of Common Stock but not including in such calculation any
additional shares of Common Stock issuable with respect to shares of Series A
Preferred Stock, Convertible Securities, or outstanding options, warrants or
other rights for the purchase of shares of stock or convertible securities,
solely as a result of the adjustment of the respective Conversion Prices (or
other conversion ratios) resulting from the issuance of Additional Shares of
Common Stock causing such adjustment.
For purposes of this subsection (D)(3)(a), the following provisions shall
also be applicable:
(i) Cash Consideration. In case of the issuance or sale of
------------------
Additional Shares of Common Stock for cash, the consideration received by the
Corporation therefor shall be deemed to be the amount of cash received by the
Corporation for such shares (or, if such shares are offered by the Corporation
for subscription, the subscription price, or, if such shares are sold to
underwriters or dealers for public offering without a subscription offering, the
initial public offering price), without deducting therefrom any compensation or
discount paid or allowed to underwriters or dealers or others performing similar
services or for any expenses incurred in connection therewith.
(ii) Non-Cash Consideration. In case of the issuance
----------------------
(otherwise than upon conversion or exchange of Convertible Securities) or sale
of Additional Shares of Common Stock for consideration other than cash or for
consideration a part of which shall be other than cash, the fair value of such
consideration as determined by the Board of Directors of the Corporation in the
good faith exercise of its business judgment, irrespective of the accounting
treatment thereof, shall be deemed to be the value, for purposes of this Section
D, of the consideration other than cash received by the Corporation for such
securities.
(iii) Options and Convertible Securities. In case the
----------------------------------
Corporation shall in any manner issue or grant any Options or any Convertible
Securities, the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon conversion or exchange of the total maximum
amount of such Convertible Securities at the time such Convertible Securities
first become convertible or exchangeable shall (as of the date of issue or grant
of such Options or, in the case of the issue or sale of Convertible Securities
other than where the same are issuable upon the exercise of
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<PAGE>
Options, as of the date of such issue or sale) be deemed to be issued and to be
outstanding for the purpose of Section D(3)(a) and to have been issued for the
sum of the amount (if any) paid for such Options or Convertible Securities and
the amount (if any) payable upon the exercise of such Options or upon conversion
or exchange of such Convertible Securities at the time such Convertible
Securities first become convertible or exchangeable; provided, however, that,
subject to the provisions of subsection D(3)(b), no further adjustment of the
Current Conversion Price shall be made upon the actual issuance of any such
Common Stock upon the exercise of Options or upon the conversion or exchange of
any such Convertible Securities.
(b) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any Option referred to in subsection D(3)(a)(iii), or the
rate at which any Convertible Securities referred to in subsection D(3)(a)(iii)
are convertible into or exchangeable for shares of Common Stock shall change at
any time, the Current Conversion Price in effect at the time of such event shall
forthwith be readjusted to the Series A Conversion Price that would have been in
effect at such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or conversion
rate, as the case may be, at the time same were initially granted, issued or
sold. If the purchase price provided for in any such Option referred to in
subsection D(3)(a)(iii), or the additional consideration (if any) payable upon
the conversion or exchange of any Convertible Securities referred to in
subsection D(3)(a)(iii), or the rate at which any Convertible Securities
referred to in subsection D(3)(a)(iii) are convertible into or exchangeable for
shares of Common Stock, shall be reduced at any time under or by reason of
provisions with respect thereto designed to protect against dilution, then in
case of the delivery of shares of Common Stock upon the exercise of any such
Option or upon conversion or exchange of any such Convertible Securities, the
Series A Conversion Price then in effect hereunder shall, upon issuance of such
shares of Common Stock, be adjusted to such amount as would have been obtained
had such Option or Convertible Securities never been issued and had adjustments
been made only upon the issuance of the shares of Common Stock delivered as
aforesaid and for the consideration actually received for such Option or
Convertible Securities and the Common Stock.
(c) Termination of Option or Conversion Rights. Upon the
------------------------------------------
termination or expiration of any right to purchase Common Stock under any Option
or of any right to convert or exchange Convertible Securities, the Current
Conversion Price shall, upon such termination, be changed to the Series A
Conversion Price that would have been in effect at the time of such expiration
or termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination, never been
issued, and the shares of Common Stock issuable thereunder shall no longer be
deemed to be Common Stock Outstanding.
(d) Stock Splits; Dividends; Distributions and Combinations. If
-------------------------------------------------------
the Corporation shall at any time or from time to time after the Issuance Date
fix a record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of holders of Common
Stock entitled to receive a dividend or other distribution payable in additional
shares of Common Stock or Common Stock Equivalents, then, following such record
date (or the date of such dividend, distribution, split or subdivision if no
record date is fixed), the Series A Conversion Price shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of Series A Preferred shall be increased in proportion to such
increase in the number of outstanding shares of Common Stock (including for this
purpose, Common Stock Equivalents). If the
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<PAGE>
number of shares of Common Stock outstanding at any time after the Issuance Date
is decreased by a combination of the outstanding shares of Common Stock, then,
following the record date of such combination, the Series A Conversion Price
shall be appropriately increased so that the number of shares of Common Stock
issuable on conversion of each share of Series A Preferred shall be decreased in
proportion to such decrease in the number of outstanding shares of Common Stock.
(e) Other Dividends. If this Corporation shall declare a
---------------
distribution payable in securities of other persons, evidence of indebtedness
issued by this Corporation or other persons, assets (excluding cash dividends)
or options or rights not referred to in subsection D(3)(a)(iii), then, in each
such case for the purpose of this subsection D(3)(e), the holders of Series A
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Series A Preferred are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
(f) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than as a result of a
subdivision, or combination, or a merger or a sale of assets transaction
provided for elsewhere in this Section D), provision shall be made so that the
holders of Series A Preferred shall thereafter be entitled to receive upon
conversion of shares of Series A Preferred the number of shares of stock or
other securities or property of the Corporation or otherwise, to which a holder
of Common Stock deliverable upon such conversion would have been entitled on
such recapitalization. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section D with respect to the rights
of the holders of Series A Preferred after the recapitalization to the end that
the provisions of this Section D (including adjustment of the Series A
Conversion Price then in effect and the number of shares or other property to be
received upon conversion of shares of Series A Preferred) shall be applicable
after that event as nearly equivalent as may be practicable.
(g) Successive Changes. The above provisions of this Section D
------------------
shall similarly apply to successive issuances, sales, dividends or other
distributions, subdivisions and combinations on or of the Common Stock after the
Issuance Date.
(h) Other Events Altering Conversion Price. Upon the occurrence
--------------------------------------
of any event not specifically described in this Section D as reducing the Series
A Conversion Price that, in the reasonable exercise of the business judgment of
the Board of Directors of the Corporation reached in good faith, requires, on
equitable principles, the reduction of the Series A Conversion Price, the Series
A Conversion Price will be so equitably reduced.
(i) No Impairment. The Corporation will not, by amendment of
-------------
these Amended and Restated Articles of Incorporation or through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section D and in the
taking of all such action as may be necessary or appropriate in order to protect
the conversion rights of the holders of Series A Preferred Stock against
impairment.
8
<PAGE>
(j) Excluded Events. The Series A Conversion Price shall not be
---------------
adjusted under subsection D(3)(a) above, by virtue of (a) the issuance of
capital stock or options to employees, consultants, officers or directors of the
Corporation pursuant to stock purchase or stock option plans approved by the
Board (including options granted prior to the date of these Amended and Restated
Articles) and the repurchase at cost of such shares and subsequent re-issuance,
(b) the issuance of securities as consideration for the acquisition of another
corporation or other business entity by merger or other reorganization, or for
the purchase of all or substantially all of the assets of such business entity,
(c) the issuance of securities to financial institutions or lessors in
connection with commercial credit arrangements, equipment financings or similar
transactions, (d) shares issued upon conversion of the Series A Preferred Stock,
(e) the issuance of securities pursuant to options, warrants, notes, or other
rights to acquire securities of the Corporation outstanding on or before the
filing date of these Amended and Restated Articles of Incorporation, or (g)
stock splits, stock dividends or like transactions (for which Conversion Price
adjustments are to be made under other subsections of Section D).
(k) No Fractional Shares. No fractional shares shall be issued
--------------------
upon conversion of shares of Series A Preferred. The Corporation shall deliver
cash to any holder of Series A Preferred in lieu of any fraction of a share. If
more than one share of Series A Preferred shall be surrendered for conversion at
any one time by the same holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of shares of Series A Preferred so surrendered.
(l) Taxes. The Corporation shall pay any and all issue and other
-----
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series A Preferred pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the Series A Preferred so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such issue has paid to the Corporation the
amount of any such tax, or has established, to the satisfaction of the
Corporation, that such tax has been paid.
(m) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Series A Conversion Price pursuant to this
Section D, the Corporation, at its expense, shall compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (a) such adjustment and
readjustment, (b) the Series A Conversion Price, and (c) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of a share of Series A Preferred Stock.
(n) Common Stock Reserve. The Corporation shall at all times
--------------------
reserve and keep available, out of its authorized but unissued Common Stock,
solely for the purpose of effecting the conversion of the Series A Preferred,
the full number of shares of Common Stock issuable upon the conversion of all
Series A Preferred from time to time outstanding. The Corporation shall from
time to time, in accordance with the laws of the State of California, increase
the authorized amount of its
9
<PAGE>
Common Stock if at any time the authorized number of shares of its Common Stock
remaining unissued shall not be sufficient to permit the conversion of all of
the shares of Series A Preferred at the time outstanding.
(4) Automatic Conversion. Each share of Series A Preferred Stock
--------------------
shall automatically be converted into shares of Common Stock, at the Series A
Conversion Price, upon the earlier of (a) the date specified by vote or written
consent or agreement of holders of at least two-thirds (2/3) of the then
outstanding shares of Series A Preferred Stock or (b) immediately upon the
closing of a firm commitment underwritten public offering registered under the
Securities Act of 1933, as amended, pursuant to which Common Stock is sold to
the public by the Corporation (or selling shareholders, if any) at (i) a public
offering price of at least Ten Dollars ($10.00) per share (as adjusted for stock
splits, stock dividends, recapitalizations and the like) and (ii) an aggregate
public offering price not less than Fifteen Million Dollars ($15,000,000), prior
to underwriting discounts, commissions and expenses. On and after said
conversion date, notwithstanding that any certificates for the shares of Series
A Preferred shall not have been surrendered for conversion, the shares of Series
A Preferred formerly evidenced thereby shall be deemed to be no longer
outstanding, and all rights with respect thereto shall forthwith cease and
terminate, except only the rights of the holder (a) to receive a certificate
representing the shares of Common Stock to which he shall be entitled upon
conversion thereof, (b) to receive the amount of cash payable in respect of any
fractional share of Common Stock to which he shall be entitled, and (c) with
respect to dividends declared but unpaid on Series A Preferred prior to such
conversion date. In the event that any holder of Series A Preferred presents
such holder's certificate therefor for surrender to the Corporation or its
transfer agent upon such conversion, a certificate for the number of shares of
Common Stock into which the shares of Series A Preferred surrendered were
convertible on such conversion date will be promptly issued and delivered to
such holder. Such conversion shall be deemed to have been made as of the date
of such closing or the date specified by such vote or written consent or
agreement, as applicable, and the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such Common Stock on such date.
(5) Business Combination, Merger, Sale of Corporation. After the
-------------------------------------------------
Issuance Date, in the event of any proposed business combination, consolidation
or merger of the Corporation with or into another corporation (other than a
business combination, consolidation or merger in which the Corporation is the
continuing corporation and which does not result in any reclassification of, or
change in, the outstanding shares of Common Stock), or in the event of any
proposed sale or transfer to another corporation of all or substantially all of
the assets of the Corporation, any holder of Series A Preferred Stock may, upon
delivery of such shares and election pursuant to Section B above, have each
share of Series A Preferred held by such holder treated for all purposes as if
it had been converted into Common Stock on the earlier of (a) the record date,
if any, for voting by holders of Common Stock on such event, and (b) the date of
such event.
E. Voting Rights.
-------------
(1) In General.
----------
(a) Each holder of shares of Series A Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such Series A Preferred
10
<PAGE>
Stock could be converted on the record date for the vote or the date of the
solicitation of any written consent of shareholders and shall have voting rights
and powers equal to the voting rights and powers of the Common Stock. The holder
of each share of Series A Preferred Stock shall be entitled to notice of any
shareholders' meeting in accordance with the Bylaws of the Corporation and,
except those matters required by law to be submitted to a class vote, shall vote
with holders of the Common Stock upon all matters submitted to a vote of
shareholders (including the election of directors). Holders of Common Stock and
Series A Preferred Stock shall be entitled to cumulate their votes in any
election of directors. Fractional votes by the holders of Series A Preferred
Stock shall not, however, be permitted and any fractional voting rights
resulting from the above formula (after aggregating all shares into which shares
of Series A Preferred Stock held by each holder could be converted) shall be
rounded to the nearest whole number.
(b) While there are at least Five Hundred Thousand (500,000)
shares of Series A Preferred Stock outstanding, the Corporation shall not,
without first obtaining the approval (by vote or written consent, as provided by
law) of the holders of two-thirds (2/3) or more of the then outstanding shares
of Series A Preferred Stock, voting together as one class:
(i) amend its Articles of Incorporation in any manner
(including filing a certificate of determination) that would alter or change any
of the rights, preferences, privileges or restrictions of the Series A Preferred
Stock;
(ii) pay or declare any dividend (other than a dividend
payable solely in shares of its own Common Stock) or distribution on any shares
of its capital stock, or apply any of its assets to the redemption, retirement,
purchase or acquisition, directly or indirectly, through subsidiaries or
otherwise, of any shares of its capital stock, except as otherwise permitted
under Section F and/or Section G;
(iii) permit any subsidiary of the Corporation in which the
Corporation holds a controlling voting interest to sell or issue stock to any
party other than the Corporation;
(iv) amend its Articles of Incorporation to increase or
decrease the authorized number of shares of Common Stock or Preferred Stock or
any series thereof;
(v) authorize, designate or issue, whether by
reclassification or otherwise, any new or existing class or classes or series of
capital stock having any preference or priority as to dividends or assets
superior to or on a parity with any such preference or priority of the Series A
Preferred, or having voting rights superior to the voting rights of the Series A
Preferred, or authorize or issue shares of stock of any class or any bonds,
debentures, notes or other obligations convertible into or exchangeable for, or
having rights to purchase, any shares of stock of the Corporation having any
preference or priority as to dividends or assets superior to or on a parity with
any such preference or priority of the Series A Preferred; or
(vi) amend its Articles of Incorporation or Bylaws to
change the authorized number of Directors.
11
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(2) Common Stock Voting Rights. Each holder of Common Stock shall be
--------------------------
entitled to one vote per share of Common Stock held by such holder in the
election of directors and upon each other matter coming before any vote of
shareholders.
F. Repurchase of Shares.
--------------------
In connection with repurchases by the Corporation of its Common Stock
pursuant to agreements with certain of the holders thereof (i) upon their
termination of any status pursuant to which they provide services to the
Corporation or (ii) pursuant to the Company's exercise of any rights of first
refusal as to such Common Stock, each holder of Series A Preferred Stock shall
be deemed to have consented, for purposes of Sections 500 through 503 of the
California General Corporation Law, to distributions made by the Corporation
with respect to such repurchases.
G. Redemption of Preferred Shares
------------------------------
(1) At any time after February 17, 2004, and upon the written request
of holders of sixty-seven percent (67%) of the Series A Preferred, the
Corporation shall redeem from any source of funds legally available therefor and
subject to Chapter 5 of the California General Corporation Law, all, but not
less, than all, of the outstanding Series A Preferred held by each holder in two
equal installments, the first such installment on a date not more than seventy
five (75) days following the date of receipt by the Corporation of notice from
sufficient holders requesting such redemption, and the second installment on the
one year anniversary of the first installment (each a "Redemption Date"). The
Corporation shall effect such redemptions on the applicable Redemption Dates by
paying in cash in exchange for each share of Series A Preferred Stock to be
redeemed a sum equal to the Original Issue Price (subject to adjustment for
stock splits, recapitalization and the like) plus any dividends declared but
unpaid, with respect to all such shares prior to the Redemption Date (the
"Redemption Price"). The number of shares of Series A Preferred Stock that the
Corporation shall be required under this Section G.(1) to redeem on any
Redemption Date shall be equal to the amount determined by dividing (a) the
aggregate number of shares of Series A Preferred Stock outstanding immediately
prior to the Redemption Date by (b) the number of remaining Redemption Dates
(including the Redemption Date to which such calculation applies). Any
redemption effected pursuant to this Section G.(1) shall be made on a pro-rata
basis among the holders of the Series A Preferred Stock in proportion to the
shares of Series A Preferred Stock then held by them.
(2) At least thirty (30) and no more than sixty (60) days prior to
each Redemption Date, written notice shall be mailed, first class postage
prepaid, to each holder of record (at the close of business on the business day
next preceding the day on which notice is given) of the Series A Preferred Stock
to be redeemed, at the address last shown on the records of the Corporation for
such holder, notifying such holder of the redemption to be effected, specifying
the number of shares to be redeemed from such holder, the Redemption Date, the
Redemption Price, the place at which payment may be obtained and calling upon
such holder to surrender to the Corporation, in the manner and at the place
designated, his certificate or certificates representing the shares to be
redeemed (the "Redemption Notice"). Except at provided in Section G.(3), on or
after the Redemption Date, each holder of Series A Preferred Stock to be
redeemed shall surrender to this Corporation the certificate or certificates
representing such shares, in the manner and at the place designated in the
Redemption Notice, and thereupon the Redemption Price of such shares shall be
payable to the order of the person whose name
12
<PAGE>
appears on such certificate or certificates as the owner thereof and each
surrendered certificate shall be cancelled. In the event less than all the
shares represented by any such certificate are redeemed, a new certificate shall
be issued representing the unredeemed shares.
(3) From and after the Redemption Date, unless there shall have been
a default in payment of the Redemption Price, all rights of the holders of
shares of Series A Preferred Stock designated for redemption in the Redemption
Notice as holders of Series A Preferred Stock (except the right to receive the
Redemption Price without interest upon surrender of their certificate or
certificates) shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever. If the funds of the Corporation legally
available for redemption of shares of Series A Preferred Stock on any Redemption
Date are insufficient to redeem the total number of shares of Series A Preferred
Stock to be redeemed on such date, those funds which are legally available will
be used to redeem the maximum possible number of such shares ratably among the
holders of such shares to be redeemed based upon their holdings of Series A
Preferred Stock. The shares of Series A Preferred Stock not redeemed shall
remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter, when additional funds of the Corporation are
legally available for the redemption of shares of Series A Preferred Stock, such
funds will immediately be used to redeem the balance of the shares which the
Corporation has become obliged to redeem on any Redemption Date, but which it
had not redeemed.
(4) On or prior to each Redemption Date, the Corporation shall
deposit the Redemption Price of all shares of Series A Preferred Stock
designated for redemption in the Redemption Notice and not yet redeemed with a
bank or trust corporation having aggregate capital and surplus in excess of
$100,000,000 as a trust fund for the benefit of the respective holders of the
shares designated for redemption and not yet redeemed, with irrevocable
instructions and authority to the bank or trust corporation to pay the
Redemption Price for such shares to their respective holders on or after the
Redemption Date upon receipt of notification from the Corporation that such
holder has surrendered his share certificate to the Corporation pursuant to
Section G.(1) above. As of the Redemption Date, the deposit shall constitute
full payment of the shares to their holders, and from and after the Redemption
Date the shares so called for redemption shall be redeemed and shall be deemed
to be no longer outstanding, and the holders thereof shall cease to be
shareholders with respect to such shares and shall have no rights with respect
thereto except the rights to receive from the bank or trust corporation payment
of the Redemption Price of the shares, without interest, upon surrender of their
certificates therefor. Such instructions shall also provide that any moneys
deposited by the Corporation pursuant to this Section G.(4) for the redemption
of shares thereafter converted into shares of the Corporation's Common Stock
pursuant to Section D hereof prior to the Redemption Date shall be returned to
the Corporation forthwith upon such conversion. The balance of any moneys
deposited by the Corporation pursuant to this Section G.(4) remaining unclaimed
at the expiration of two (2) years following the Redemption Date shall
thereafter be returned to the Corporation upon its request expressed in a
resolution of its Board of Directors, and thereafter the holders of any
unsurrendered certificates formerly representing shares of Series A Preferred
shall look solely to the Corporation for payment of the Redemption Price for
such shares.
13
<PAGE>
H. Residual Rights.
---------------
All rights accruing to the outstanding shares of the Corporation not
otherwise expressly provided for in these Amended and Restated Articles of
Incorporation shall be vested in the Common Stock.
ARTICLE V
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
The Corporation is authorized to provide indemnification of agents (as
provided in Section 317 of the California Corporations Code) for breach of duty
to the Corporation and its shareholders through Bylaw provisions or through
agreements with the agents, or both, in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations Code, subject to the
limits of excess indemnification set forth in Section 204 of the California
Corporations Code.
Any repeal or modification of the foregoing two paragraphs by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification."
ARTICLE VI
Cumulative voting by shareholders involving the election of directors
of the Corporation shall be eliminated on and after the date upon which the
Corporation is a "listed corporation" as defined in Section 301.5 of the
Corporations Code of California.
3. The foregoing amendment and restatement of the Articles of
Incorporation of the Corporation has been duly approved by the Board of
Directors of the Corporation.
4. The foregoing amendment and restatement of the Articles of
Incorporation of the Corporation has been duly approved by the required vote of
the shareholders of the Corporation in accordance with Section 902 and 903 of
the California Corporations Code. The total number of outstanding shares of
Common Stock of the Corporation is 8,361,920 and the total number of outstanding
shares of Preferred Stock is 1,438,377. The number of shares voting in favor of
the amendment equaled or exceeded the vote required. The percentage vote
required was more than fifty percent (50%) of the Common Stock and the Preferred
Stock, voting together as one class, and sixty two and two thirds percent (66
2/3%) of the Series A Preferred Stock, voting as a separate class.
[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK.]
14
<PAGE>
Sreekanth Ravi and Jerrold F. Petruzzelli each declare under penalty of perjury
that the matters set forth in the foregoing amended and restated articles are
true and correct.
Executed this 24th day of August, 1999, at Santa Clara, California.
/s/ Sreekanth Ravi
------------------
Sreekanth Ravi
President
/s/ Jerrold F. Petruzzelli
--------------------------
Jerrold F. Petruzzelli
Secretary
15
<PAGE>
EXHIBIT 3.2
BYLAWS OF
SONICWALL, INC.
As Amended August 24, 1999
<PAGE>
BYLAWS
OF
SONICWALL, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I - OFFICES.............................................................. 1
1.01 Principal Office..................................................... 1
1.02 Other Offices........................................................ 1
ARTICLE II - MEETINGS OF SHAREHOLDERS............................................ 1
2.01 Place of Meetings.................................................... 1
2.02 Annual Meetings of Shareholders...................................... 1
2.03 Special Meetings..................................................... 1
2.04 Notice of Shareholders' Meetings..................................... 2
2.05 Manner of Giving Notice; Affidavit of Notice......................... 2
2.06 Quorum............................................................... 3
2.07 Adjourned Meeting and Notice Thereof................................. 3
2.08 Voting............................................................... 3
2.09 Waiver of Notice or Consent by Absent Shareholders................... 5
2.10 Shareholder Action by Written Consent Without a Meeting.............. 5
2.11 Record Date for Shareholder Notice, Voting and Giving Consents....... 5
2.12 Proxies.............................................................. 5
2.13 Inspectors of Election............................................... 6
2.14 Advance Notice of Shareholder Proposals and Director Nominations..... 6
ARTICLE III - DIRECTORS.......................................................... 7
3.01 Powers............................................................... 7
3.02 Number and Qualification of Directors................................ 8
3.03 Election and Term of Office of Directors............................. 8
3.04 Vacancies............................................................ 8
3.05 Place of Meetings and Telephonic Meetings............................ 9
3.06 Annual Meetings...................................................... 9
3.07 Other Regular Meetings............................................... 9
3.08 Special Meetings..................................................... 9
3.09 Quorum............................................................... 10
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
3.10 Waiver of Notice..................................................... 10
3.11 Adjournment.......................................................... 10
3.12 Notice of Adjournment................................................ 10
3.13 Action Without Meeting............................................... 10
3.14 Fees and Compensation of Directors................................... 10
ARTICLE IV - COMMITTEES.......................................................... 11
4.01 Committees of Directors.............................................. 11
4.02 Meetings and Action of Committees.................................... 11
ARTICLE V - OFFICERS............................................................. 12
5.01 Officers............................................................. 12
5.02 Election of Officers................................................. 12
5.03 Subordinate Officers, Etc............................................ 12
5.04 Removal and Resignation of Officers.................................. 12
5.05 Vacancies in Offices................................................. 12
5.06 Chairman of the Board................................................ 13
5.07 President............................................................ 13
5.08 Vice Presidents...................................................... 13
5.09 Secretary............................................................ 13
5.10 Chief Financial Officer.............................................. 14
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS,EMPLOYEES AND OTHER AGENTS... 14
6.01 Indemnification of Directors and Officers............................ 14
6.02 Indemnification of Others............................................ 14
6.03 Advance of Expenses.................................................. 15
6.04 Other Contractual Rights............................................. 15
6.05 Limitations.......................................................... 15
6.06 Insurance............................................................ 15
6.07 Fiduciaries of Corporate Employee Benefit Plans...................... 15
6.08 Other Indemnification................................................ 16
ARTICLE VII - RECORDS AND REPORTS................................................ 16
7.01 Maintenance and Inspection of Share Register......................... 16
7.02 Maintenance and Inspection of Bylaws................................. 16
7.03 Maintenance and Inspection of Other Corporate Records................ 16
7.04 Inspection by Directors.............................................. 17
7.05 Annual Report to Shareholders........................................ 17
7.06 Financial Statements................................................. 17
7.07 Annual Statement of General Information.............................. 18
ARTICLE VIII - CORPORATE LOANS AND GUARANTEES.................................... 18
8.01 Shareholder Approval................................................. 18
8.02 Board Approval....................................................... 18
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE IX - GENERAL CORPORATE MATTERS........................................... 19
9.01 Record Date for Purposes Other Than Notice and Voting................ 19
9.02 Checks, Drafts, Evidences of Indebtedness............................ 19
9.03 Corporate Contracts and Instruments; How Executed.................... 19
9.04 Certificates for Shares.............................................. 19
9.05 Lost Certificates.................................................... 20
9.06 Representation of Shares of Other Corporations....................... 20
9.07 Construction and Definitions......................................... 20
ARTICLE X - AMENDMENTS........................................................... 20
10.01 Amendment by Shareholders............................................ 20
10.02 Amendment by Directors............................................... 20
CERTIFICATE OF SECRETARY......................................................... 21
</TABLE>
iii
<PAGE>
BYLAWS
OF
SONICWALL, INC.
ARTICLE I
OFFICES
1.01 Principal Office. The Board of Directors shall fix the location of
----------------
the principal executive office of the corporation at any place within or outside
the State of California. If the principal executive office is located outside
this state, and the corporation has one or more business offices in this state,
the Board of Directors shall likewise fix and designate a principal business
office in the State of California.
1.02 Other Offices. The Board of Directors may at any time establish
-------------
branch or subordinate offices at any place or places where the corporation is
qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.01 Place of Meetings. Meetings of shareholders shall be held at any
-----------------
place within or outside the State of California designated by the Board of
Directors. In the absence of any such designation, shareholders' meetings shall
be held at the principal executive office of the corporation.
2.02 Annual Meetings of Shareholders. The annual meeting of shareholders
-------------------------------
shall be held each year on a date and at a time designated by the Board of
Directors. At each annual meeting directors shall be elected, and any other
proper business may be transacted.
2.03 Special Meetings. A special meeting of the shareholders may be
----------------
called at any time by the Board of Directors, or by the Chairman of the Board,
or by the President, or by one or more shareholders holding shares in the
aggregate entitled to cast not less than ten percent (10%) of the votes at any
such meeting.
If a special meeting is called by any person or persons other than
the Board of Directors, the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the Chairman of the Board, the President, any
Vice President or the Secretary of the corporation. The officer receiving such
request forthwith shall cause notice to be given to the shareholders entitled to
vote, in accordance with the provisions of Sections 2.04 and 2.05, that a
meeting will be held at the time requested by the person or persons calling the
meeting, not less than thirty-five (35) nor more than sixty (60) days after the
receipt of the request. If the notice is not given within twenty (20) days after
1
<PAGE>
receipt of the request, the person or persons requesting the meeting may give
the notice. Nothing contained in this paragraph of this Section 2.03 shall be
construed as limiting, fixing or affecting the time when a meeting of
shareholders called by action of the Board of Directors may be held.
2.04 Notice of Shareholders' Meetings. All notices of meetings of
--------------------------------
shareholders shall be sent or otherwise given in accordance with Section 2.05
not less than ten (10) nor more than sixty (60) days before the date of the
meeting being noticed. The notice shall specify the place, date and hour of the
meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted, or (ii) in the case of the annual meeting those
matters which the Board of Directors, at the time of giving the notice, intends
to present for action by the shareholders. The notice of any meeting at which
directors are to be elected shall include the name of any nominee or nominees
which, at the time of the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i)
a contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California, (ii)
an amendment of the Articles of Incorporation, pursuant to Section 902 of such
Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of
such Code, (iv) a voluntary dissolution of the corporation, pursuant to Section
1900 of such Code, or (v) a distribution in dissolution other than in accordance
with the rights of outstanding preferred shares pursuant to Section 2007 of such
Code, the notice shall also state the general nature of such proposal.
2.05 Manner of Giving Notice; Affidavit of Notice. Notice of any meeting
--------------------------------------------
of shareholders shall be given either personally or by first-class mail or
telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or has been so
given, notice shall be deemed to have been given if sent by first-class mail or
telegraphic or other written communication to the corporation's principal
executive office, or if published at least once in a newspaper of general
circulation in the county where such office is located. Notice shall be deemed
to have been given at the time when delivered personally or deposited in the
mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of such
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at such address, all future notices or reports shall be deemed to have been duly
given without further mailing if the same shall be available to the shareholder
upon written demand of the shareholder at the principal executive office of the
corporation for a period of one (1) year from the date of the giving of such
notice.
An affidavit of the mailing or other means of giving any notice of
any shareholders' meeting shall be executed by the Secretary, Assistant
Secretary or any transfer agent of the corporation giving such notice, and shall
be filed and maintained in the minute book of the corporation.
2
<PAGE>
2.06 Quorum. The presence in person or by proxy of the holders of a
------
majority of the shares entitled to vote at any meeting of shareholders shall
constitute a quorum for the transaction of business. The shareholders present
at a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
2.07 Adjourned Meeting and Notice Thereof. Any shareholders' meeting,
------------------------------------
annual or special, whether or not a quorum is present, may be adjourned from
time to time by the vote of the majority of the shares represented at such
meeting, either in person or by proxy, but in the absence of a quorum, no other
business may be transacted at such meeting, except as provided in Section 2.06.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at a meeting at which the
adjournment is taken, unless a new record date for the adjourned meeting is
fixed, or unless the adjournment is for more than forty-five (45) days from the
date set for the original meeting, in which case the Board of Directors shall
set a new record date. Notice of any such adjourned meeting, if required, shall
be given to each shareholder of record entitled to vote at the adjourned meeting
in accordance with the provisions of Sections 2.04 and 2.05. At any adjourned
meeting, the corporation may transact any business which might have been
transacted at the original meeting.
2.08 Voting. The shareholders entitled to vote at any meeting of
------
shareholders shall be determined in accordance with the provisions of Section
2.11, subject to the provisions of Sections 702 and 704, inclusive, of the
Corporations Code of California (relating to voting shares held by a fiduciary,
in the name of a corporation or in joint ownership). Such vote may be by voice
vote or by ballot; provided, however, that all elections for directors must be
by ballot upon demand by a shareholder at any election and before the voting
begins. Any shareholder entitled to vote on any matter (other than the election
of directors) may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares such shareholder is voting
affirmatively, it will be conclusively presumed that the shareholder's approving
vote is with respect to all shares such shareholder is entitled to vote. If a
quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and entitled to vote on any matter (other than the
election of directors) shall be the act of the shareholders, unless the vote of
a greater number or voting by classes is required by the California General
Corporation Law or the Articles of Incorporation.
At a shareholders' meeting involving the election of directors, no
shareholder shall be entitled to cumulate votes (i.e., cast for any one or more
candidates a number of votes greater than the number of the shareholder's
shares) unless such candidate or candidates' names have been placed in
nomination prior to commencement of the voting and a shareholder has given
notice prior to commencement of the voting of the shareholder's intention to
cumulate votes. If any shareholder has given such notice, then every shareholder
entitled to vote may
3
<PAGE>
cumulate such shareholder's votes for candidates in nomination and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such shareholder's shares are
entitled, or distribute the shareholder's votes on the same principle among any
or all of the candidates, as the shareholder thinks fit. The candidates
receiving the highest number of votes, up to the number of directors to be
elected, shall be elected. On and after the date upon which this corporation
becomes a "listed corporation" as defined in Section 301.5 of the Corporations
Code of California, cumulative voting shall no longer be available to the
shareholders and the immediately preceding paragraph shall no longer be
applicable.
2.09 Waiver of Notice or Consent By Absent Shareholders. The transactions
--------------------------------------------------
of any meeting of shareholders, either annual or special, however called and
noticed, and wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present either in person or
by proxy, and if, either before or after the meeting, each person entitled to
vote, not present in person or by proxy, signs a written waiver of notice or a
consent to a holding of the meeting, or an approval of the minutes thereof. The
waiver of notice or consent need not specify either the business to be
transacted or the purpose of any annual or special meeting of shareholders,
except that if action is taken or proposed to be taken for approval of any of
those matters specified in the second paragraph of Section 2.04, the waiver of
notice or consent shall state the general nature of such proposal. All such
waivers, consents or approvals shall be filed with the corporate records or made
a part of the minutes of the meeting.
Attendance of a person at a meeting shall also constitute a waiver of
notice of such meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at the meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if such objection is expressly made at the meeting.
2.10 Shareholder Action By Written Consent Without a Meeting. Any action
-------------------------------------------------------
which may be taken at any annual or special meeting of shareholders may be taken
without a meeting and without prior notice, if a consent in writing, setting
forth the action so taken, is signed by the holders of outstanding shares having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. In the case of election of directors, such consent shall
be effective only if signed by the holders of all outstanding shares entitled to
vote for the election of directors; provided, however, that a director may be
elected at any time to fill a vacancy not filled by the directors by the written
consent of the holders of a majority of the outstanding shares entitled to vote
for the election of directors. All such consents shall be filed with the
Secretary of the corporation and shall be maintained in the corporate records.
Any shareholder giving a written consent, or the shareholder's proxy holders, or
a transferee of the shares or a personal representative of the shareholder or
their respective proxy holder, may revoke the consent by a writing received by
the Secretary of the corporation prior to the time that written consents of the
number of shares required to authorize the proposed action have been filed with
the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been
4
<PAGE>
received, the secretary shall give prompt notice of the corporate action
approved by the shareholders without a meeting. Such notice shall be given in
the manner specified in Section 2.05. In the case of approval of (i) contracts
or transactions in which a director has a direct or indirect financial interest,
pursuant to Section 310 of the Corporations Code of California, (ii)
indemnification of agents of the corporation, pursuant to Section 317 of such
Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of
such Code, or (iv) a distribution in dissolution other than in accordance with
the rights of outstanding preferred shares pursuant to Section 2007 of such
Code, such notice shall be given at least ten (10) days before the consummation
of any such action authorized by any such approval. On and after the date upon
which this corporation becomes a "listed corporation" as defined in Section
301.5 of the Corporations Code of California, this Section 2.10 shall be deleted
in its entirety.
2.11 Record Date for Shareholder Notice, Voting and Giving Consents. For
--------------------------------------------------------------
purposes of determining the shareholders entitled to notice of any meeting or to
vote or entitled to give consent to corporate action without a meeting, the
Board of Directors may fix, in advance, a record date, which shall not be more
than sixty (60) days nor less than ten (10) days prior to the date of any such
meeting nor more than sixty (60) days prior to such action without a meeting,
and in such case only shareholders of record on the date so fixed are entitled
to notice and to vote or to give consents, as the case may be, notwithstanding
any transfer of any shares of the books of the corporation after the record date
fixed as aforesaid, except as otherwise provided in the California General
Corporation Law.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice
of or to vote at a meeting of shareholders shall be at the close of business on
the business day next preceding the day on which notice is given or, if notice
is waived, at the close of business on the business day next preceding the day
on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the Board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action of the Board has been taken, shall
be at the close of business on the day on which the Board adopts the resolution
relating thereto, or the sixtieth (60th) day prior to the date of such other
action, whichever is later.
2.12 Proxies. Every person entitled to vote for directors or on any other
-------
matter shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the Secretary
of the corporation. A proxy shall be deemed signed if the shareholder's name is
placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the shareholder or the shareholder's attorney-in-
fact. A validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless (i) revoked by the person executing it,
prior to the vote pursuant thereto, by a writing delivered to the corporation
stating that the proxy is revoked or by a subsequent proxy executed by, or
attendance at the meeting and voting in person by, the person executing the
proxy; or (ii) written notice of the death or incapacity of the maker of such
proxy is received by the corporation before the vote pursuant thereto is
counted; provided, however, that no such proxy shall be valid after the
expiration of eleven (11) months from the date of such
5
<PAGE>
proxy, unless otherwise provided in the proxy. The revocability of a proxy that
states on its face that it is irrevocable shall be governed by the provisions of
Section 705(e) and (f) of the Corporations Code of California.
2.13 Inspectors of Election. Before any meeting of shareholders, the
----------------------
Board of Directors may appoint any persons other than nominees for office to act
as inspectors of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the chairman of the meeting may, and on the request
of any shareholder or a shareholder's proxy shall, appoint inspectors of
election at the meeting. The number of inspectors shall be either one (1) or
three (3). If inspectors are appointed at a meeting on the request of one or
more shareholders or proxies, the holders of a majority of shares or their
proxies present at the meeting shall determine whether one (1) or three (3)
inspectors are to be appointed. If any person appointed as inspector fails to
appear or fails or refuses to act, the chairman of the meeting may, and upon the
request of any shareholder or a shareholder's proxy shall, appoint a person to
fill such vacancy.
The duties of these inspectors shall be as follows:
(a) Determine the number of shares outstanding and the voting power
of each, the shares represented at the meeting, the existence of a quorum, and
the authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
2.14 Advance Notice of Shareholder Proposals and Director Nominations.
----------------------------------------------------------------
Shareholders may nominate one or more persons for elections as directors at a
meeting of shareholders or propose business to be brought before a meeting of
shareholders, or both, only if such shareholder has given timely notice in
proper written form of such shareholder's intent to make such nomination or
nominations or to propose such business. To be timely, a shareholder's notice
must be received by the Secretary of the Corporation not later than sixty (60)
days prior to such meeting; provided, however, that in the event less than
seventy (70) days' notice or prior public disclosure of the date of the meeting
is given or made to shareholders, notice by such shareholder to be timely must
be so received not later than the close of business on the 10th day following
the day on which such notice of the date of the meting was mailed or such public
disclosure was made. To be in proper written form a shareholder's notice to the
6
<PAGE>
Secretary shall set forth (i) the name and address of the shareholder who
intends to make the nominations or propose the business and, as the case may be,
of the person or persons to be nominated or of the business to be proposed, (ii)
a representation that the shareholder is a holder of record of stock of the
corporation that indends to vote such stock at such meeting and, if applicable,
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice, (iii) if applicable, a description of all
arrangements or understandings between the shareholder and each nominee or any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder, (iv) such other
information regarding each nominee or each matter of business to be proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to Regulation 14A promulgated by the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934 had the nominee been nominated,
or intended to be nominated, or the matter been proposed, or intended to be
proposed, by the Board of Directors of the Corporation and (v) if applicable,
the consent of each nominee as director of the corporation if so elected. The
chairman of a meeting of shareholders may refuse to acknowledge the nomination
of any person or the proposal of any business not made in compliance with the
foregoing procedure.
ARTICLE III
DIRECTORS
3.01 Powers. Subject to the provisions of the California General
------
Corporation Law and any limitations in the Articles of Incorporation and these
Bylaws relating to action required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
Board of Directors.
Without prejudice to such general powers, but subject to the same
limitations, it is hereby expressly declared that the directors shall have the
power and authority to:
(a) Select and remove all officers, agents and employees of the
corporation, prescribe such powers and duties for them as may not be
inconsistent with law, the Articles of Incorporation or these Bylaws, fix their
compensation and require from them security for faithful service.
(b) Change the principal executive office or the principal business
office in the State of California from one location to another; cause the
corporation to be qualified to do business in any other state, territory,
dependency or foreign country and conduct business within or outside the State
of California; designate any place within or without the state for the holding
of any shareholders' meeting or meetings, including annual meetings; adopt, make
and use a corporate seal, and prescribe the forms of certificates of stock, and
alter the form of such seal and of such certificates from time to time as in
their judgment they may deem best, provided that such forms shall at all times
comply with the provisions of law.
(c) Authorize the issuance of shares of stock of the corporation
from time to time, upon such terms as may be lawful, in consideration of money
paid, labor done or services
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actually rendered, debts or securities cancelled or tangible or intangible
property actually received.
(d) Borrow money and incur indebtedness for the purposes of the
corporation, and cause to be executed and delivered therefor, in the corporate
name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges,
hypothecations or other evidences of debt and securities therefor.
3.02 Number and Qualification of Directors. The number of directors of
-------------------------------------
the corporation shall not be less than four (4) nor more than seven (7). The
exact number of directors shall be five (5) until changed, within the limits
specified above, by a resolution adopted by the majority of the Board. Such
minimum and maximum number of directors may be changed, or a definite number
fixed without provision for any indefinite number, by an amendment to this Bylaw
duly adopted by the vote or written consent of holders of a majority of the
outstanding shares entitled to vote; provided, however, that an amendment
reducing the number or the minimum number of directors to a number less than
five (5) cannot be adopted if the votes cast against its adoption at a meeting
of the shareholders, or the shares not consenting, in the case of action by
written consent, are equal to more than sixteen and two-thirds percent (16-2/3%)
of the outstanding shares entitled to vote. No amendment may change the stated
maximum number of authorized directors to a number greater than two (2) times
the stated minimum number of directors minus one (1).
3.03 Election and Term of Office of Directors. Directors shall be elected
----------------------------------------
at each annual meeting of the shareholders to hold office until the next annual
meeting. Each director, including a director elected to fill a vacancy, shall
hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
3.04 Vacancies. Vacancies in the Board of Directors may be filled by
---------
approval of the Board or, if the number of directors then in office is less than
a quorum, by (i) the unanimous written consent of the directors then in office,
(ii) the affirmative vote of a majority of the directors then in office at a
meeting held pursuant to notice or waivers of notice complying with Section 307
or (iii) a sole remaining director, except that a vacancy created by the removal
of a director by the vote or written consent of the shareholders or by court
order may be filled only by the vote of a majority of the shares entitled to
vote represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding shares entitled to
vote. Each director so elected shall hold office until the next annual meeting
of the shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the Board of Directors shall be deemed to
exist in the case of the death, resignation or removal of any director, or if
the Board of Directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, or if the authorized number of directors be increased, or if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at that meeting.
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The shareholders may elect a director or directors at any time to
fill any vacancy or vacancies not filled by the directors, but any such election
by written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
Any director may resign upon giving written notice to the Chairman of
the Board, the President, the Secretary or the Board of Directors. A resignation
shall be effective upon the giving of the notice, unless the notice specifies a
later time for its effectiveness. If the resignation of a director is effective
at a future time, the Board of Directors may elect a successor to take office
when the resignation becomes effective.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of his term of office.
3.05 Place of Meetings and Telephonic Meetings. Regular meetings of the
-----------------------------------------
Board of Directors may be held at any place within or without the State that has
been designated from time to time by resolution of the Board. In the absence of
such designation, regular meetings shall be held at the principal executive
office of the corporation. Special meetings of the Board shall be held at any
place within or without the State that has been designated in the notice of the
meeting or, if not stated in the notice or if there is no notice, at the
principal executive office of the corporation. Any meeting, regular or special,
may be held by conference telephone or similar communication equipment, so long
as all directors participating in such meeting can hear one another, and all
such directors shall be deemed to be present in person at such meeting.
3.06 Annual Meetings. Immediately following each annual meeting of
---------------
shareholders, the Board of Directors shall hold a regular meeting for the
purpose of organization, any desired election of officers and the transaction of
other business. Notice of this meeting shall not be required.
3.07 Other Regular Meetings. Other regular meetings of the Board of
----------------------
Directors shall be held without call at such time as shall from time to time be
fixed by the Board of Directors. Such regular meetings may be held without
notice.
3.08 Special Meetings. Special meetings of the Board of Directors for any
----------------
purpose or purposes may be called at any time by the Chairman of the Board or
the President or any Vice President or Secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at his or her address as
it is shown upon the records of the corporation. In case such notice is mailed,
it shall be deposited in the United States mail at least four (4) days prior to
the time of the holding of the meeting. In case such notice is delivered
personally, or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours prior to
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated to either the director or to a person at the
office of the director who the person giving the notice has reason to believe
will
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promptly communicate it to the director. The notice need not specify the purpose
of the meeting or the place if the meeting is to be held at the principal
executive office of the corporation.
3.09 Quorum. A majority of the authorized number of directors shall
------
constitute a quorum for the transaction of business, except to adjourn as
hereinafter provided. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the Board of Directors, subject to the provisions of
Section 310 of the Corporations Code of California (approval of contracts or
transactions in which a director has a direct or indirect material financial
interest), Section 311 (appointment of committees), and Section 317(e)
(indemnification of directors). A meeting at which a quorum is initially present
may continue to transact business notwithstanding the withdrawal of directors,
if any action taken is approved by at least a majority of the required quorum
for such meeting.
3.10 Waiver of Notice. The transactions of any meeting of the Board of
----------------
Directors, however called and noticed or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice if a quorum be
present and if, either before or after the meeting, each of the directors not
present signs a written waiver of notice, a consent to holding the meeting or an
approval of the minutes thereof. The waiver of notice or consent need not
specify the purpose of the meeting. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting. Notice of a meeting shall also be deemed given to any director who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to such director.
3.11 Adjournment. A majority of the directors present, whether or not
-----------
constituting a quorum, may adjourn any meeting to another time and place.
3.12 Notice of Adjournment. Notice of the time and place of holding an
---------------------
adjourned meeting need not be given, unless the meeting is adjourned for more
than twenty-four (24) hours, in which case notice of such time and place shall
be given prior to the time of the adjourned meeting, in the manner specified in
Section 3.08, to the directors who were not present at the time of the
adjournment.
3.13 Action Without Meeting. Any action required or permitted to be taken
----------------------
by the Board of Directors may be taken without a meeting, if all members of the
Board shall individually or collectively consent in writing to such action. Such
action by written consent shall have the same force and effect as a unanimous
vote of the Board of Directors. Such written consent or consents shall be filed
with the minutes of the proceedings of the Board.
3.14 Fees and Compensation of Directors. Directors and members of
----------------------------------
committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the
Board of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee or otherwise, and receiving compensation for such services.
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ARTICLE IV
COMMITTEES
4.01 Committees of Directors. The Board of Directors may, by resolution
-----------------------
adopted by a majority of the authorized number of directors, designate one (1)
or more committees, each consisting of two (2) or more directors, to serve at
the pleasure of the Board. The Board may designate one (1) or more directors as
alternate members of any committee, who may replace any absent member at any
meeting of the committee. Any such committee, to the extent provided in the
resolution of the Board, shall have all the authority of the Board, except with
respect to:
(a) the approval of any action which, under the General Corporation
Law of California, also requires shareholders' approval or approval of the
outstanding shares;
(b) the filling of vacancies on the Board of Directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
Board or on any committee;
(d) the amendment or repeal of Bylaws or the adoption of new Bylaws;
(e) the amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at
a rate or in a periodic amount or within a price range determined by the Board
of Directors; or
(g) the appointment of any other committees of the Board of
Directors or members thereof.
4.02 Meetings and Action of Committees. Meetings and actions of
---------------------------------
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these Bylaws, Section 3.05 (place of meetings),
3.07 (regular meetings), 3.08 (special meetings and notice), 3.09 (quorum), 3.10
(waiver of notice), 3.11 (adjournment), 3.12 (notice of adjournment) and 3.13
(action without meeting), with such changes in the context of those Bylaws as
are necessary to substitute the committee and its members for the Board of
Directors and its members, except that the time of regular meetings of
committees may be determined by resolution of the Board of Directors as well as
the committee, special meetings of committees may also be called by resolution
of the Board of Directors and notice of special meetings of committees shall
also be given to all alternate members, who shall have the right to attend all
meetings of the committee. The Board of Directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
Bylaws.
4.03 Compensation Committee. The Compensation Committee (the "Committee")
----------------------
shall be designated by the Board of Directors. The Committee shall have
exclusive power to set and approve the salaries and other compensation
including, but not limited to any equity (including stock or stock options), to
be paid or granted to any officer, director or Significant
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Shareholder (as defined in that certain Series A Preferred Stock Purchase
Agreement dated as of February 19, 1999) of the corporation and shall consist of
three non-employee directors of the Board as follows: one (1) non-employee
director elected by the Series A Preferred shareholders pursuant to that certain
Voting Agreement dated as of February 19, 1999, one (1) independent non-employee
director and one (1) additional non-employee director of the corporation. The
Committee's actions and meeting shall be governed by Section 4.02 of these
Bylaws. On and after the date upon which this corporation becomes a "listed
corporation" as defined in Section 301.5 of the Corporation Code of California,
this paragraph shall no longer be applicable.
ARTICLE V
OFFICERS
5.01 Officers. The officers of the corporation shall be a President, a
--------
Secretary and Chief Financial Officer. The corporation may also have, at the
discretion of the Board of Directors, a Chairman of the Board, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers
and such other officers as may be appointed in accordance with the provisions of
Section 5.03. Any number of offices may be held by the same person.
5.02 Election of Officers. The officers of the corporation, except such
--------------------
officers as may be appointed in accordance with the provisions of Section 5.03,
shall be chosen by the Board of Directors, and each shall serve at the pleasure
of the Board, subject to the rights, if any, of an officer under any contract of
employment.
5.03 Subordinate Officers, Etc. The Board of Directors may appoint, and
-------------------------
may empower the President to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority and perform such duties as are provided in the Bylaws or as the
Board of Directors may from time to time determine.
5.04 Removal and Resignation of Officers. Subject to the rights, if any,
-----------------------------------
of an officer under any contract of employment, any officer may be removed,
either with or without cause, by the Board of Directors, at any regular or
special meeting thereof, or, except in case of an officer chosen by the Board of
Directors, by any officer upon whom such power of removal may be conferred by
the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective. Any such resignation is without prejudice to the rights, if
any, of the corporation under any contract to which the officer is a party.
5.05 Vacancies in Offices. A vacancy in any office because of death,
--------------------
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.
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5.06 Chairman of the Board. The Chairman of the Board, if such an officer
---------------------
be elected, shall, if present, preside at all meetings of the Board of Directors
and exercise and perform such other powers and duties as may be from time to
time assigned to him by the Board of Directors or prescribed by the Bylaws. If
there is no President, the Chairman of the Board shall, in addition, be the
Chief Executive Officer of the corporation and shall have the powers and duties
prescribed in Section 5.07.
5.07 President. Subject to such supervisory powers, if any, as may be
---------
given by the Board of Directors to the Chairman of the Board, if there be such
an officer, the President shall be the Chief Executive Officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and the officers of
the corporation. He shall preside at all meetings of the shareholders and, in
the absence of the Chairman of the Board, or if there be none, at all meetings
of the Board of Directors. He shall have the general powers and duties of
management usually vested in the office of President of a corporation, and shall
have such other powers and duties as may be prescribed by the Board of Directors
or the Bylaws.
5.08 Vice Presidents. In the absence or disability of the President, the
---------------
Vice Presidents, if any, in order of their rank as fixed by the Board of
Directors or, if not ranked, a Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them, respectively, by
the Board of Directors or the Bylaws, the President or the Chairman of the Board
if there is no President.
5.09 Secretary. The Secretary shall keep, or cause to be kept, at the
---------
principal executive office or such other place as the Board of Directors may
order, a book of minutes of all meetings and actions of directors, committees of
directors and shareholders, with the time and place of holding, whether regular
or special, and, if special, how authorized, the notice thereof given, the names
of those present at directors' and committee meetings, the number of shares
present or represented at shareholders' meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, as determined by resolution of the Board of Directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all
meetings of the shareholders and of the Board of Directors required by the
Bylaws or by law to be given, and he shall keep the seal of the corporation, if
one be adopted, in a safe custody, and shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or by the
Bylaws.
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5.10 Chief Financial Officer. The Chief Financial Officer shall keep and
-----------------------
maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares. The books
of account shall be open at all reasonable times to inspection by any director.
The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the Board of Directors. He shall disburse
the funds of the corporation as may be ordered by the Board of Directors, shall
render to the President and directors, whenever they request it, an account of
all of his transactions as Chief Financial Officer and of the financial
condition of the corporation, and shall have other powers and perform such other
duties as may be prescribed by the Board of Directors or the Bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
6.01 Indemnification of Directors and Officers. the corporation shall, to
-----------------------------------------
the maximum extent and in the manner permitted by the Corporations Code of
California indemnify each of its directors and officers against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the Code), arising by reason of the fact that such
person is or was an agent of the corporation. For purposes of this Article VI, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.02 Indemnification of Others. The corporation shall have the power, to
-------------------------
the extent and in the manner permitted by the Corporations Code of California,
to indemnify each of its employees and agents (other than directors and
officers) against expenses (as defined in Section 317(a) of the Code),
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Article VI, an "employee" or "agent" of the
corporation (other than a director or officer) includes any person (i) who is or
was an employee or agent of the corporation, (ii) who is or was serving at the
request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
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6.03 Advance of Expenses. Expenses incurred in defending any proceeding
-------------------
shall be advanced by the corporation prior to the final disposition of such
proceeding upon receipt of an undertaking by or on behalf of the agent to repay
such amount unless it shall be determined ultimately that the agent is entitled
to be indemnified as authorized in this Article.
6.04 Other Contractual Rights. No provision made by the corporation to
------------------------
indemnify its or its subsidiary's directors or officers for the defense of any
proceeding, whether contained in a resolution of shareholders or directors, an
agreement or otherwise, shall be valid unless consistent with this Article.
Nothing contained in this Article shall affect any right to indemnification to
which persons other than such directors and officers may be entitled by contract
or otherwise.
6.05 Limitations. No indemnification or advance shall be made under this
-----------
Section, except as provided in Section 6.01 or Section 6.02, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the Articles,
Bylaws, a resolution of the shareholders or an agreement in effect at the time
of the accrual of the alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
6.06 Insurance. The corporation shall have the power to purchase and
---------
maintain insurance on behalf of any agent of the corporation against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such, whether or not the corporation would have the
power to indemnify the agent against such liability under the provisions of this
Article.
6.07 Fiduciaries of Corporate Employee Benefit Plans. This Article does
-----------------------------------------------
not apply to any proceeding against any trustee, investment manager or other
fiduciary of an employee benefit plan in such person's capacity as such, even
though such person may also be an agent as defined in Section 6.01 of the
employer corporation. The corporation shall, and it hereby agrees to, indemnify
each officer, director or employee of the corporation against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any action taken or omitted by such person in such person's
capacity as trustee, investment manager or other fiduciary of any employee
benefit plan of the corporation unless, or to the extent that, the Board of
Directors of the corporation shall reasonably determine that any such action so
taken or omitted by such person constituted gross negligence or willful
misconduct on the part of such person. Expenses reasonably incurred by any such
person in defending any liability asserted against such person in any such
capacity shall be advanced by the corporation but shall be repaid to the
corporation by such person if, or to the extent that, the Board of Directors of
the corporation shall reasonably determine that the action allegedly taken or
omitted by such person upon which the asserted liability is based constituted
gross negligence or willful misconduct on the part of such person.
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6.08 Other Indemnification. Nothing in this Article shall restrict the
---------------------
power of the corporation to indemnify its agents under any provision of the
California General Corporation Law, as amended from time to time, or under any
other provision of law from time to time applicable to the corporation, nor
shall anything in this Article authorize the corporation to indemnify its agents
in situations prohibited by the California General Corporation Law or other
applicable law.
ARTICLE VII
RECORDS AND REPORTS
7.01 Maintenance and Inspection of Share Register. The corporation shall
--------------------------------------------
keep at its principal executive office, or at the office of its transfer agent
or registrar, if either be appointed and as determined by resolution of the
Board of Directors, a record of its shareholders, giving the names and addresses
of all shareholders and the number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least
five percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (i) inspect and copy the records of shareholders' names and
addresses and shareholdings during usual business hours upon five (5) days'
prior written demand upon the corporation, and/or (ii) obtain from the transfer
agent of the corporation, upon written demand and upon the tender of such
transfer agent's usual charges for such list, a list of the shareholders' names
and addresses, who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which such list has been
compiled or as of the date specified by the shareholder subsequent to the date
of demand. Such list shall be made available to such shareholder or shareholders
by the transfer agent on or before the later of five (5) days after the demand
is received or the date specified therein as the date as of which the list is to
be compiled. The record of shareholders shall also be open to inspection upon
the written demand of any shareholder or holder of a voting trust certificate,
at any time during usual business hours, for a purpose reasonably related to
such holder's interests as a shareholder or as the holder of a voting trust
certificate. Any inspection and copying under this Section 1 may be made in
person or by an agent or attorney of the shareholder or holder of a voting trust
certificate making such demand.
7.02 Maintenance and Inspection of Bylaws. The corporation shall keep at
------------------------------------
its principal executive office, or if its principal executive office is not in
the State of California, at its principal business office in this State, the
original or a copy of the Bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours. If
the principal executive office of the corporation is outside this State and the
corporation has no principal business office in this State, the Secretary shall,
upon the written request of any shareholder, furnish to such shareholder a copy
of the Bylaws as amended to date.
7.03 Maintenance and Inspection of Other Corporate Records. The
-----------------------------------------------------
accounting books and records and minutes of proceedings of the shareholders and
the Board of Directors and any committee or committees of the Board of Directors
shall be kept at such place or places
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designated by the Board of Directors, or, in the absence of such designation, at
the principal executive office of the corporation. The minutes shall be kept in
written form and the accounting books and records shall be kept either in
written form or in any other form capable of being converted into written form.
Such minutes and accounting books and records shall be open to inspection upon
the written demand of any shareholder or holder of a voting trust certificate,
at any reasonable time during usual business hours, for a purpose reasonably
related to such holder's interests as a shareholder or as the holder of a voting
trust certificate. Such inspection may be made in person or by an agent or
attorney, and shall include the right to copy and make extracts. The foregoing
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.
7.04 Inspection by Directors. Every director shall have the absolute
-----------------------
right at any reasonable time to inspect all books, records and documents of
every kind and the physical properties of the corporation and each of its
subsidiary corporations. Such inspection by a director may be made in person or
by agent or attorney and the right of inspection includes the right to copy and
make extracts.
7.05 Annual Report to Shareholders. Unless otherwise expressly required
-----------------------------
by the General Corporation Law or by this Section 7.05, the annual report to
shareholders referred to in Section 1501 of the General Corporation Law is
hereby expressly waived and dispensed with; provided, that nothing herein set
forth shall be construed to prohibit or restrict the right of the Board to issue
such annual or other periodic reports to the shareholders of the corporation as
they may from time to time consider appropriate.
In the event that the corporation shall have one hundred (100) or
more shareholders of record (determined as provided in Section 605 of the
General Corporation Law) at the close of any fiscal year of the corporation, the
Board shall cause a report to be sent to the shareholders not later than one
hundred twenty (120) days after the close of said fiscal year, and each fiscal
year thereafter ensuing. The report shall be sent at least fifteen (15) days (or
thirty-five (35) days if sent by third-class mail as permitted by Section 2.04
before the annual meeting of shareholders to be held during the next fiscal year
in the manner specified in Section 2.04 of these Bylaws for reports to
shareholders of the corporation. The annual report shall contain a balance sheet
as of the end of the fiscal year and an income statement and statement of
changes in financial position for the fiscal year, accompanied by any report of
independent accountants, or if there is no such report, the certificate of an
authorized officer of the corporation that the statements were prepared without
audit from the books and records of the corporation. The annual report shall
also contain a brief description, as required by Section 1501(b) of the General
Corporation Law, of (i) any transaction with interested officers, directors or
shareholders during the previous fiscal year; and (ii) any indemnification or
advance made during the fiscal year to any officer or director of the
corporation.
7.06 Financial Statements. A copy of any annual financial statement and
--------------------
any income statement of the corporation for each quarterly period of each fiscal
year, and any accompanying balance sheet of the corporation as of the end of
each period, that has been prepared by the corporation shall be kept on file in
the principal executive office of the corporation for twelve (12) months and
each such statement shall be exhibited at all reasonable times to any
shareholder
17
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demanding an examination of any such statement or a copy shall be mailed to any
such shareholder.
If a shareholder or shareholders holding at least five percent (5%)
of the outstanding shares of any class of stock of the corporation make a
written request to the corporation for an income statement of the corporation
for the three-month, six-month or nine-month period of the current fiscal year
ended more than thirty (30) days prior to the date of the request, and a balance
sheet of the corporation as of the end of such period, the Chief Financial
Officer shall cause such statement to be prepared, if not already prepared, and
shall deliver personally or mail such statement or statements to the person
making the request within thirty (30) days after the receipt of such request. If
the corporation has not sent to the shareholders its annual report for the last
fiscal year, this report shall likewise be delivered or mailed to such
shareholder or shareholders within thirty (30) days after such request.
The corporation also shall, upon the written request of any
shareholder, mail to the shareholder a copy of the last annual, semi-annual or
quarterly income statement which it has prepared and a balance sheet as of the
end of such period.
The quarterly income statements and balance sheets referred to in
this Section shall be accompanied by the report thereon, if any, of any
independent accountants engaged by the corporation or the certificate of an
authorized officer of the corporation that financial statements were prepared
without audit from the books and records of the corporation.
7.07 Annual Statement of General Information. The corporation shall each
---------------------------------------
year during the calendar month in which its Articles of Incorporation were
originally filed with the California Secretary of State, or at any time during
the immediately preceding five (5) calendar months, file with the California
Secretary of State, a statement on the prescribed form and in compliance with
Section 1502 of the General Corporation Law.
ARTICLE VIII
CORPORATE LOANS AND GUARANTEES
8.01 Shareholder Approval. The corporation shall not make any loan of
--------------------
money or property to, or guarantee the obligation of, any director or officer of
the corporation or its parent or subsidiary, unless the transaction or an
employee benefit plan authorizing such loans or guarantees, after disclosure of
the right under such a plan to include officers or directors:
(a) is approved by the shareholders, with the shares owned by the
director or officer, or by the directors or officers then eligible to
participate in such plan not being entitled to vote thereon; or
(b) is approved by the unanimous vote of the shareholders.
8.02 Board Approval. Notwithstanding Section 8.01, in the event the
--------------
corporation has outstanding shares held of record by one hundred (100) or more
persons on the date of approval
18
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by the Board, the Board alone by a vote sufficient without counting the vote of
any interested director or directors may approve such a loan or guarantee to an
officer, whether or not a director, or an employee benefit plan authorizing such
a loan or guarantee to an officer, provided that the Board determines that such
a loan or guarantee or plan may reasonably be expected to benefit the
corporation.
ARTICLE IX
GENERAL CORPORATE MATTERS
9.01 Record Date for Purposes Other Than Notice and Voting. For purposes
-----------------------------------------------------
of determining the shareholders entitled to receive payment of any dividend or
other distribution or allotment of any rights or entitled to exercise any rights
in respect of any other lawful action (other than action by shareholders by
written consent without a meeting), the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty (60) days prior to any such
action, and in such case only shareholders of record on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights or to
exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date fixed as aforesaid,
except as otherwise provided in the California General Corporation Law.
If the Board of Directors does not so fix a record date, the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto,
or the sixtieth (60th) day prior to the date of such action, whichever is later.
9.02 Checks, Drafts, Evidences of Indebtedness. All checks, drafts or
-----------------------------------------
other orders for payment of money, notes or other evidences of indebtedness,
issued in the name of or payable to the corporation, shall be signed or endorsed
by such person or persons and in such manner as, from time to time, shall be
determined by resolution of the Board of Directors.
9.03 Corporate Contracts and Instruments; How Executed. The Board of
-------------------------------------------------
Directors, except as otherwise provided in these Bylaws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the corporation, and such authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the Board of Directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or to any amount.
9.04 Certificates for Shares. A certificate or certificates for shares of
-----------------------
the capital stock of the corporation shall be issued to each shareholder when
any such shares are fully paid, and the Board of Directors may authorize the
issuance of certificates or shares as partly paid, provided that such
certificates shall state the amount of the consideration to be paid therefor and
the amount paid thereon. All certificates shall be signed in the name of the
corporation by the Chairman of the Board or Vice Chairman of the Board or the
President or Vice President and by the Chief Financial Officer or an Assistant
Treasurer or the Secretary or any Assistant Secretary,
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certifying the number of shares and the class or series of shares owned by the
shareholder. Any or all of the signatures on the certificates may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if such person were an
officer, transfer agent or registrar at the date of issue.
9.05 Lost Certificates. Except as hereinafter in this Section 9.05
-----------------
provided, no new certificates for shares shall be issued in lieu of an old
certificate unless the latter is surrendered to the corporation and cancelled at
the same time. The Board of Directors may in case any share certificate or
certificate for any other security is lost, stolen or destroyed, authorize the
issuance of a new certificate in lieu thereof, upon such terms and conditions as
the Board may require, including provisions for indemnification of the
corporation secured by a bond or other adequate security sufficient to protect
the corporation against any claim that may be made against it, including any
expense or liability, on account of the alleged loss, theft or destruction of
such certificate or the issuance of such new certificate.
9.06 Representation of Shares of Other Corporations. The Chairman of the
----------------------------------------------
Board, the President, or any Vice President, or any other person authorized by
resolution of the Board of Directors or by any of the foregoing designated
officers, is authorized to vote on behalf of the corporation any and all shares
of any other corporation or corporations, foreign or domestic, standing in the
name of the corporation. The authority herein granted to said officers to vote
or represent on behalf of the corporation any and all shares held by the
corporation in any other corporation or corporations may be exercised by any
such officer in person or by any person authorized to do so by proxy duly
executed by said officer.
9.07 Construction and Definitions. Unless the context requires otherwise,
----------------------------
the general provisions, rules of construction and definitions in the California
General Corporation Law shall govern the construction of the Bylaws. Without
limiting the generality of the foregoing, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both a corporation and a natural person.
ARTICLE X
AMENDMENTS
10.01 Amendment By Shareholders. New Bylaws may be adopted or these
-------------------------
Bylaws may be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote; provided, however, that if
the Articles of Incorporation of the corporation set forth the number of
authorized directors of the corporation, the authorized number of directors may
be changed only by an amendment of the Articles of Incorporation.
10.02 Amendment By Directors. Subject to the rights of the shareholders
----------------------
as provided in Section 10.01, Bylaws, other than a Bylaw or an amendment thereof
changing the authorized number of directors, may be adopted, amended or repealed
by the Board of Directors.
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CERTIFICATE OF SECRETARY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned does hereby certify that the undersigned is the
Secretary of SonicWALL, Inc., a corporation duly organized and existing under
and by virtue of the laws of the State of California; that the above and
foregoing Bylaws of said corporation were duly and regularly adopted by the
Secretary; and that the above and foregoing Bylaws are now in full force and
effect.
Dated: August 24, 1999
/s/ Jerrold F. Petruzzelli
----------------------------------
Jerrold F. Petruzzelli, Secretary
21
<PAGE>
EXHIBIT 4.2
SONIC SYSTEMS
INVESTOR RIGHTS AGREEMENT
THIS SONIC SYSTEMS INVESTOR RIGHTS AGREEMENT (this "Agreement") is entered
into as of February 19, 1999 by and among Sonic Systems, a California
corporation (the "Company"), and each of the persons (the "Investors") who has
purchased shares of Series A Preferred Stock (the "Shares") of the Company
pursuant to the February 19, 1999 Sonic Systems Series A Preferred Stock
Purchase Agreement (the "Stock Purchase Agreement.") Collectively, Investors
and the Company are referred to herein as the parties and they are the only
parties hereto.
1. Registration Rights.
-------------------
1.01 Definitions. As used in this Agreement, the following terms shall
-----------
have the following respective meanings:
(a) "1933 Act" means the Securities Act of 1933, as amended.
(b) "1934 Act" means the Securities Exchange Act of 1934, as
amended.
(c) "Common Stock" means the Company's Common Stock.
(d) "Form S-3" means such form under the 1933 Act as in effect on
the date hereof or any registration form under the 1933 Act subsequently adopted
by the Securities and Exchange Commission ("SEC") which is suitable for
registration for resale to the public of Common Stock held by selling
shareholders and which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(e) "Holder" means any person owning of record Registrable
Securities or any permitted assignee thereof in accordance with Section 1.12
hereof.
(f) "Initiating Holders" shall mean any Holders who in the aggregate
possess more than fifty percent (50%) of the Registrable Securities.
(g) The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the 1933 Act, and the declaration or
ordering of the effectiveness of such registration statement or document by the
SEC.
(h) The term "Registrable Securities" means: (i) the Common Stock or
other equity or convertible equity securities of the Company issued or issuable
upon conversion of the Shares; and (ii) any Common Stock of the Company issued
(or issuable upon the conversion or exercise of any warrant, right or other
security which is issued) by way of a stock split, stock dividend,
recapitalization, merger or other distribution with respect to, or in exchange
for, or in
1
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replacement of, such Shares or any securities issued upon conversion of such
Shares, excluding in all cases, however, any Registrable Securities sold by a
person in a transaction in which its rights under this Section 1 are not
assigned. A holder of the Shares need not convert such security into Common
Stock prior to requesting registration hereunder but may make such a request in
contemplation of conversion of such Shares into Common Stock prior to the
closing of the disposition of such Shares pursuant to any such registration.
(i) The number of shares of "Registrable Securities then
outstanding" shall be the number of shares of Common Stock outstanding which
are, and the full or maximum number of shares of Common Stock issuable pursuant
to then outstanding Shares or other exercisable or convertible securities which
are or upon issuance would be Registrable Securities.
(j) "Convertible equity securities" or "equity securities" shall
mean any of the Company's securities.
1.02 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
Initiating Holders a written request that the Company file a registration
statement under the 1933 Act with respect to Fifty Percent (50%) of the then
outstanding shares of Registrable Securities or with respect to shares of
Registrable Securities having an expected aggregate offering price of at least
Two Million Dollars ($2,000,000), the Company will:
(i) promptly give written notice of such request to all other
Holders; and
(ii) subject to the limitations of Section 1.02(b), as soon as
practicable, use its best efforts to effect such registration under the 1933 Act
(including, without limitation, appropriate qualification under applicable blue
sky or other state securities laws and appropriate compliance with applicable
regulations issued under the 1933 Act and any other governmental requirements or
regulations) as may be so requested and as would permit or facilitate the sale
and distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request received by the Company within twenty (20) days after receipt
of such written notice from the Company; provided, however, that the Company
shall not be obligated to effect any such registration, qualification or
compliance pursuant to this Section 1.02:
(A) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the 1933 Act;
(B) Prior to the date six (6) months after the closing
date of the Company's first registered public offering of its stock (other than
a registration statement
2
<PAGE>
relating either to the sale of securities to employees of the Company pursuant
to a stock option, stock purchase or similar plan or a SEC Rule 145
transaction);
(C) After the Company has effected two (2) such
registrations pursuant to Initiating Holders' demand under this Section 1.02; or
(D) If the Company shall furnish to such Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company and its shareholders for a registration statement to be filed at
such time, then the Company's obligation to use its best efforts to register,
qualify or comply under this Section 1.02 shall be deferred for a period not to
exceed one hundred eighty (180) days from the date of receipt of the written
request from the Initiating Holders; provided, however, that the Company may not
make such certification more than once every twelve (12) months.
Subject to the foregoing clauses (A) through (D) inclusive, the Company
shall file a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable after receipt of the request
or requests of the Initiating Holders.
(b) Underwriting. In the event that the Initiating Holders determine
------------
that a registration pursuant to Section 1.02 is for a registered public offering
involving an underwriting, the Company shall so advise the Holders as part of
the notice given pursuant to Section 1.02(a)(i). In such event, the right of any
Holder to participate in that registration pursuant to Section 1.02 shall be
conditioned upon such Holder's participation in the underwriting arrangements
required by this Section 1.02, and the inclusion of such Holder's Registrable
Securities in the underwriting to the extent requested shall be limited to the
extent provided herein.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with a managing underwriter selected for such underwriting by the
Company and reasonably acceptable to the Initiating Holders. Notwithstanding any
other provision of this Section 1.02, if the managing underwriter advises the
Initiating Holders in writing that market factors require a limitation of the
number of shares to be underwritten, then the Company shall so advise all
holders of Registrable Securities and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Holders thereof (except those Holders who have indicated to
the Company their decision not to distribute any of their Registrable Securities
through such underwriting) in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by such Holders at the time of
filing the registration statement. No Registrable Securities excluded from the
underwriting by reason of the underwriter's market limitation shall be included
in such registration. To facilitate the allocation of shares in accordance with
the above provisions, the Company or the underwriters may round the number of
shares allocated to any Holder to the nearest one hundred (100) shares.
3
<PAGE>
If any Holder of Registrable Securities disapproves of the terms of
the underwriting, such person may elect to withdraw therefrom by written notice
to the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities held by such Holder affected
shall then be withdrawn from registration.
1.03 Piggy-back Registration Rights. If (but without any obligation to do
------------------------------
so) the Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
securities under the 1933 Act in connection with the public offering of such
securities solely for cash (other than a registration (i) on Form S-8 or Form S-
3 filed solely with respect to an employee benefit plan, or (ii) solely in
connection with a Rule 145 transaction under the 1933 Act), the Company shall,
each such time, promptly give each Holder written notice of such registration
together with a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under applicable state securities laws. Upon
the written request of each Holder given within twenty (20) business days after
delivery of such written notice by the Company in accordance with Section 1.04,
the Company shall, subject to the provisions of Section 1.08, use its best
efforts to cause to be registered under the 1933 Act all of the Registrable
Securities that each such Holder has requested to be registered.
1.04 Obligations of the Company. Whenever required under this Section 1
--------------------------
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to one hundred twenty (120) days.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under the securities laws of such
jurisdictions as shall be reasonably appropriate for the distribution of the
securities covered by the registration statement; provided, however, that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such jurisdiction, and further provided that (anything in this Agreement to
the contrary
4
<PAGE>
notwithstanding with respect to the bearing of expenses) if any jurisdiction in
which the securities shall be qualified shall require that expenses incurred in
connection with the qualification of the securities in that jurisdiction be
borne by selling shareholders, then such expenses shall be payable by the
selling Holders pro rata, to the extent required by such jurisdiction if such
Holders do not elect to withdraw from the registration in such jurisdiction
after notice of such requirement.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement in customary form with
terms generally satisfactory to the managing underwriter of such offering. Each
Holder participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act, of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing. In such
instance, Company shall use its best efforts to cure any such statement or
omission so as to render such statement or omission not misleading.
(g) Make all reasonable efforts to finish, at the request of the
managing underwriter (or, in the event the offering is not underwritten, of a
majority in interest of the participating Holders), on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 1 (or on the date three business
days after the date of effectiveness if the offering is not underwritten), (1)
an opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, -in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters
(or to the participating Holders), and (ii) a letter dated such date, from the
independent certified public accountants of the Company, in form and substance
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters
(or to the participating Holders).
1.05 Furnish Information. In connection with any registration pursuant to
-------------------
this Section 1, the selling Holders shall furnish to the Company such
information regarding themselves, the Registrable Securities held by them, and
the intended method of disposition of such securities as shall be required to
effect the registration of their Registrable Securities. In that connection,
each selling Holder shall be required to represent to the Company that all such
information which is given is both complete and accurate in all material
respects when made.
1.06 Definition of Expenses.
----------------------
(a) "Registration Expenses" shall mean all expenses incurred by the
---------------------
Company in complying with Sections 1.02, 1.03 and 1.15 hereof, including,
without limitation, all registration, filing and qualification fees,
underwriters' expense allowances, printing expenses,
5
<PAGE>
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and up to Fifteen Thousand Dollars ($15,000) in reasonable fees of one counsel
for the selling Holders in any registration pursuant to Section 1.02 (but
excluding the compensation of regular employees of the Company which shall be
paid in any event by the Company).
(b) "Selling Expenses" shall mean all underwriting discounts and
----------------
selling commissions applicable to the sale of the Registrable Securities in the
registration, and all fees of any counsel (other than the Company's regular
counsel) for the selling Holders in excess of Fifteen Thousand Dollars ($15,000)
in any registration pursuant to Section 1.02 (but excluding the compensation of
regular employees of the Company which shall be paid in any event by the
Company).
1.07 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
Sections 1.02, 1.03, and 1.15 shall be borne by the Company. All Selling
Expenses shall be borne by the Holders of the securities so registered, pro rata
on the basis of the number of shares so registered.
1.08 Underwriting Requirements in Piggy-back Registration. In the event
----------------------------------------------------
that a registration proposed under Section 1.03 involves an underwriting, the
right of any Holder to participate in that registration pursuant to Section 1.03
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Company and any other holders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected by the Company. Notwithstanding any other provision of Section 1.03
and this Section 1.08, if the underwriter determines that market factors require
a limitation of the number of shares to be underwritten, the underwriter may
(subject to the allocation priority set forth below) exclude some or all
Registrable Securities from such registration and underwriting; provided,
however, that no Registrable Securities shall be so excluded unless there are
first excluded all other securities proposed to be included in such registration
(other than securities registered for the account of the Company); and further
provided, that, in no event shall the amount of the Registrable Securities of
the Holders included in the offering be reduced below twenty percent (20%) of
the total amount of securities included in such offering, unless such offering
is the initial public offering of the Company's securities (from which all
Registrable Securities may be excluded). The Company shall so advise all
persons requesting registration, and the number of shares of securities that may
be included in the registration and underwriting shall be allocated in the
following manner. The number of shares that may be included in the registration
and underwriting shall be allocated among all Holders (except those Holders who
have indicated to the Company their decision not to distribute any of their
Registrable Securities through such underwriting) in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement. If any Holder
disapproves of the terms of any such underwriting, he may elect to withdraw
therefrom by written notice to the Company and the underwriter. Any Registrable
Securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration.
6
<PAGE>
1.09 Delay of Registration. No Holder shall have any right to obtain or
---------------------
seek an injunction restraining or otherwise delaying any such registration as a
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
---------------
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the officers, directors and partners of
each Holder, any underwriter (as defined in the 1933 Act) for such Holder and
each person, if any, who controls such Holder or underwriter within the meaning
of the 1933 Act or the 1934 Act, against any losses, claims, damages, or
liabilities (joint or several), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, to which they may become
subject under the 1933 Act, the 1934 Act or other federal or state law, insofar
as such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto; (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading; or (iii) any violation or alleged
violation by the Company of the 1933 Act, the 1934 Act, any state securities law
or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any
state securities law; and the Company will promptly reimburse each such Holder,
officer, director or partner, underwriter or controlling person for any legal or
other expenses reasonably incurred by them, as incurred, in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the Company's indemnity contained in this Section
1.10(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability,
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with information furnished in writing
and expressly stated to be for use in connection with such registration by any
such Holder, or such Holder's officers, directors or partners, underwriter, or
controlling person. The Company shall not be required to indemnify any person
against any liability arising out of the failure of any person to deliver a
prospectus as required by the 1933 Act. The indemnity provided for in this
Section 1.10(a) shall remain in full force and effect regardless of any
investigation made by or on behalf of such Holder, underwriter, participating
person or controlling person and shall survive transfer of such securities by
such Holder.
(b) To the extent permitted by law, each selling Holder
will indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the registration statement, each person, if any, who
controls the Company within the meaning of the 1933 Act, any underwriter (within
the meaning of the 1933 Act) for the Company, any person who controls such
underwriter, and any other Holder selling securities in such registration
7
<PAGE>
statement or any of its partners, directors or officers or any person who
controls such Holder, against any losses, claims, damages or liabilities (joint
or several), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, to which any of the foregoing persons may
become subject, under the 1933 Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by such Holder expressly stated
in a writing to be for use in connection with such registration; and each such
Holder will reimburse any legal or other expenses, as incurred, where same are
reasonably incurred by any person intended to be indemnified pursuant to this
Section 1.10(b), in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this Section 1.10(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld. Notwithstanding the foregoing, the liability of
each Holder under this Section 1.10(b) shall be limited to an amount equal to
the aggegate gross proceeds received by such Holder, net of commissions and
underwriting fees, from the shares sold by such Holder.
(c) Promptly after receipt by an indemnified party under
this Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, notify the
indemnifying party in writing of the commencement thereof, and the indemnifying
party shall have the right to participate in and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly noticed,
to assume the defense thereof with counsel mutually satisfactory to the parties;
provided, however, that an indemnified party shall have the right to retain its
own counsel, with the reasonable fees and expenses to be paid by the
indemnifying party if the indemnified party reasonably determines that
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to notify an indemnifying party within a
reasonable time of the commencement of any such action, to the extent
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to notify the indemnifying party will not relieve it
of any liability that it may have to any indemnified party otherwise than under
this Section 1.10.
(d) In order to provide for just and equitable contribution
to joint liability under the 1933 Act in any case in which any indemnified party
makes a claim under this Section 1.10 or any controlling person of such
indemnified party makes such a claim but it is judicially determined (by entry
of a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 1.10 provides for indemnification in such case, the
indemnifying party, in lieu of indemnifying such indemnified party under Section
1.10, shall to the extent permitted by applicable law, contribute to the
8
<PAGE>
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the circumstances that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, however, that, in any such case, (A) no Holder
-------- --------
shall be required to contribute any amount in excess of the aggregate gross
proceeds received by such Holder pursuant to such registration statement, net of
commissions and underwriting fees; and (B) no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person or entity who was not
guilty of such fraudulent misrepresentation.
1.11 Reports Under Securities Exchange Act of 1934. With a view to making
---------------------------------------------
available to the Holders the benefits of Rule 144 promulgated under the 1933 Act
and any other rule or regulation of the SEC that may at any time permit a Holder
to sell securities of the Company to the public without registration, the
Company agrees to:
(a) use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144, at all times
after ninety (90) days after the closing date of the first registration
statement filed by the Company;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective;
(c) use its best efforts to file with the SEC in a timely manner all
reports and other documents required of the Company under the 1933 Act and the
1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request: (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 (at any
time after ninety (90) days after the closing date of the first registration
statement filed by the Company), the 1933 Act and the 1934 Act (at any time
after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies); (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company; and (iii) such other information as may be reasonably requested in
order to permit any Holder to avail itself of any rule or regulation of the SEC
or any state securities authority which permits the selling of any such
securities without registration or pursuant to such form.
9
<PAGE>
1.12 Assignment of Registration Rights. The rights to cause the Company
---------------------------------
to register Registrable Securities pursuant to this Section 1 may be assigned by
a Holder to a transferee or assignee of such securities who (a) receives all of
the Registrable Securities originally purchased by any transferring, or
assigning Holder, (b) receives Registrable Securities which, upon full exercise
and conversion, represent the right to obtain at least 50,000 shares of
Registrable Securities (as adjusted for stock dividends, stock splits,
recapitalizations and the like that occur after the date of this Agreement), (c)
is a subsidiary, parent, general partner, limited partner or retired partner of
a Holder, or (d) is a Holder's immediate family member or a trust for the
benefit of an individual Holder or immediate family members.
1.13 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of at least a majority of the Registrable Securities then
outstanding, enter into any agreement with any holder or prospective holder of
any securities of the Company which would: (i) allow such holder or prospective
holder to include such securities in any registration filed under Sections 1.02,
1.03 or 1.15 hereof if such inclusion would adversely affect the rights of any
Holder of Registrable Securities hereunder (including, without limitation, if
such inclusion would diminish the number of Registrable Securities that may be
included in such registration); (ii) permit such holder or prospective holder to
require the Company to initiate any registration of any securities of the
Company; or (iii) otherwise be in conflict with the terms hereof.
1.14 "Market Stand-off" Agreement. Each Holder agrees, so long as such
---------------------------
Holder holds at least one percent (1%) of the Company's outstanding voting
equity securities, in connection with the Company's initial underwritten public
offering of the Company's securities that, upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities, not
to sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Common Stock of the Company (other than those Common
Stock shares included in the registration) without the prior written consent of
the Company or such underwriters, as the case may be, for such period of time
(not to exceed one hundred twenty (120) days) from the closing date of such
underwritten sale of securities as may be requested by the underwriters;
provided, however, that such covenants shall apply only if all of the officers
and directors of the Company who own stock of the Company also agree to such
restrictions on any shares not being registered in such offering.
In order to enforce the foregoing covenant, the Company may impose stop-
transfer instructions with respect to the Registrable Securities of each Holder
(and the shares of securities of every other person subject to the foregoing
restriction) until the end of such period.
1.15 Form S-3 Registration. In case the Company shall receive from
---------------------
Holders of at least twenty percent (20%) of the then outstanding Registrable
Securities a written request or requests that the Company effect a registration
on Form S-3 (or any similar successor form) and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holders, the Company will:
10
<PAGE>
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, use its best efforts to effect such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Securities as are specified in
such request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within fifteen (15) days after receipt of such written
notice from the Company; provided, however, that the Company shall not be
obligated to effect any such registration, qualification or compliance, pursuant
to this Section 1.15: (i) if the Company is not qualified as a registrant
entitled to use Form S-3 (or the applicable successor form); (ii) if the
Holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate price to the
public of less than Five Hundred Thousand Dollars ($500,000); (iii) if the
Company shall furnish to the Holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than one hundred twenty (120)
days after receipt of the request of the Holder or Holders under this Section
1.15; provided, however, that the Company shall not utilize this right more than
once in any twelve (12) month period; (iv) if the Company has already effected a
registration on Form S-3 (or applicable successor form) pursuant to this Section
1.15 during the preceding twelve (12) months; or (v) in any particular
jurisdiction in which the Company would be required to qualify to do business or
to execute a general consent to service of process in effecting such
registration, qualification or compliance.
Subject to the foregoing, the Company shall file and use its best efforts
to bring effective a registration statement covering the Registrable Securities
and other securities so requested to be registered as soon as practicable after
receipt of the request or requests of the Holders.
1.16 Termination of the Company's Obligations.
----------------------------------------
(a) The Company shall have no obligations pursuant to Sections 1.02,
1.03 or 1.15 with respect to any request or requests made by any Holder after
the five year anniversary of the effective date of a registration statement
filed by the Company with respect to an underwritten public offering of its
securities under the 1933 Act.
(b) Notwithstanding any contrary provision of this Section l, the
Company shall not be required to effect any registrations under the 1933 Act or
under any state securities laws on behalf of any Holder or Holders if, in the
opinion of counsel to the Company, the offering or transfer by such Holder or
Holders in the manner proposed (including, without limitation, the number of
shares proposed to be offered or transferred, the time of sale, and the
11
<PAGE>
method of offering or transfer) is exempt from the registration requirements of
the 1933 Act and the securities laws of applicable states and the Company
consents to such transfer, if required.
2. Affirmative Covenants and Pre-emptive Rights.
--------------------------------------------
2.01 Right of First Refusal. Each Investor shall have the opportunity to
----------------------
participate in subsequent financings of the Company as set forth in this Section
2.01. If, other than through equipment lease or credit arrangements from
recognized lessors or credit institutions, the Company shall seek capital
investment, from one or more third parties, then each Investor shall have the
right of first refusal to purchase a pro rata portion (equal to each such
Investor's percentage ownership of the then outstanding shares of capital stock,
counting all shares of Preferred Stock on an as-converted to Common Stock basis)
of any new shares of any equity securities or securities convertible into equity
securities which the Company proposes to issue to a third party or parties, from
time to time, on the same terms and conditions offered to such third party. For
purposes hereof, a "third party" does not include and the right of first refusal
shall not apply to (a) employees, consultants or others offered the opportunity
to purchase shares of Common Stock pursuant to any Company stock option plan,
stock purchase plan, or other employee benefit plan which plan has been approved
by the Company's Board of Directors; (b) Company shares issued upon the
conversion of any equity or convertible equity securities issued concurrently
herewith or subsequently hereto which were subject to these rights of first
refusal; (c) Company shares issued in the acquisition, merger, consolidation, or
other business combination of the Company with another person; or (d) Company
shares issued in a public offering registered under the 1933 Act.
2.02 Notification. After giving each Investor a written notice containing
------------
all the terms and conditions of any proposed issuance of the securities for cash
consideration as described in Section 2.01 and affording each Investor the
opportunity to purchase its pro rata portion or other portion thereof as set
forth in Section 2.01 during a period of not less than fifteen (15) days after
the date of giving such notice, without further offering said equity securities
to each Investor, the Company may thereafter sell for a period of ninety (90)
days any of such equity securities not purchased by each Investor on the same
terms and conditions as same were offered to each Investor. All preemptive
rights granted under Section 2.01 shall expire immediately prior to: (i) the
closing of Company's initial underwritten public offering of its Common Stock;
(ii) the sale of substantially all of the assets of the Company or (iii) the
closing of any merger or consolidation of the Company with any other corporation
in which the shareholders of the Company immediately prior to such merger or
consolidation do not, by virtue of their ownership of stock of the Company prior
to such merger or consolidation, own more than 50% of the voting control of the
resulting entity immediately following such merger or consolidation.
2.03 Continuing Covenants of the Company.
-----------------------------------
After the "Closing" of the Stock Purchase Agreement, as defined therein,
and until the earlier to occur of (i) the closing of any merger or consolidation
of the Company with any other corporation in which the shareholders of the
Company immediately prior to such merger or
12
<PAGE>
consolidation do not, by virtue of their ownership of stock of the Company prior
to such merger or consolidation, own more than 50% of the voting control of the
resulting entity immediately following such merger or consolidation, (ii) a
dissolution or a liquidation of the Company, (iii) the closing of the initial
underwritten public offering of the Company's securities under the 1933 Act or
(iv) the date on which the Company becomes subject to the reporting requirements
of the 1934 Act, the Company shall perform the following, unless the conditions
specified in the particular part of this Section 2.03 state otherwise:
(a) The Company shall deliver to each Holder who holds Series A Preferred
Shares convertible into at least Fifty Thousand (50,000) shares of Common Stock
and/or Common Stock issued upon conversion of such Series A Preferred Shares:
(i) as soon as practicable, but in any event within one hundred and
twenty (120) days after the end of each fiscal year of the Company, an audited
income statement for such fiscal year, an audited balance sheet of the Company
as of the end of such year, and a schedule as to the sources and applications of
funds for such year, such audited year-end financial reports to be in reasonable
detail, prepared in accordance with generally accepted accounting principles
("GAAP"), and performed by a Big 6 public accounting firm or equivalent firm of
national stature; and
(ii) as soon as practicable, but in any event within forty five (45)
days after the end of each of the first three (3) quarters of each fiscal year
of the Company, an unaudited balance sheet as of the end of such fiscal quarter
and an income statement for such quarter and for the fiscal year to the end of
such fiscal quarter, in reasonable detail and prepared in accordance with GAAP.
(b) The Company covenants that. so long as Shares or securities of the
Company issued in respect or upon conversion of the Shares are held by the
Investors (or transferees in whose hands the Shares or such other securities are
eligible to qualify as Qualified Small Business Stock as defined in Section
1202(c) of the Internal Revenue Code of 1986, as amended (the "Code")), the
Company will (1) use its reasonable efforts to cause the Shares and such other
securities to continue to qualify as Qualified Small Business Stock, (2) submit
such reports to the Internal Revenue Service and to the Investors as may be
required pursuant to Section 1202(d)(1)(C) of the Code, and will submit Form FTB
3565 and such other reports and forms to the California Franchise Tax Board and
to the Investors as may be required pursuant to Section 18152.5(d)(1)(D) of the
California Revenue and Taxation Code, and (3) provide to the Investors such
information and certifications as they may otherwise reasonably request for the
purpose of substantiating the qualification of the Shares and such other
securities as Qualified Small Business Stock.
3. General Provisions.
------------------
3.01 Further Assurances. Each party agrees to cooperate fully with the
------------------
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances, as may be reasonably requested by
any other party to better evidence and
13
<PAGE>
reflect the transactions described herein and contemplated hereby, and to effect
the intents and purposes of this Agreement.
3.02 Rights Cumulative. Each and all of the various rights, powers and
-----------------
remedies of the parties hereto shall be considered to be cumulative with and in
addition to any other rights, powers and remedies which such parties may have at
law or in equity in the event of the breach of any of the terms of this
Agreement. The exercise or partial exercise of any right, power or remedy shall
neither constitute the exclusive election thereof nor the waiver of any other
right, power or remedy available to such party.
3.03 Pronouns. All pronouns and any variations thereof shall be deemed to
--------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person, persons, entity or entities may require.
3.04 Notices. All notices, consents or demands of any kind which any party
-------
to this Agreement may be required or may desire to serve on any other party
hereto in connection with this Agreement shall be in writing and may be
delivered by personal service or overnight delivery, by telex or facsimile
transfer or by registered or certified mail, return receipt requested, deposited
in the United States mail with first-class postage thereon fully prepaid,
addressed: (a) if to the Company, at its address set forth on the signature page
of the Stock Purchase Agreement; or (b) if to an Investor, at its address as set
forth on Exhibit A of the Stock Purchase Agreement. Service of any such notice
or demand shall be deemed complete on the date of actual delivery or at the
expiration of the third (3rd) business day after the date of mailing, whichever
is earlier in time. Any party hereto may from time to time by notice in writing
served upon the others as aforesaid, designate a different mailing address or a
different person to which such notices or demands are thereafter to be addressed
or delivered.
3.05 Captions. Captions are provided herein for convenience only and they
--------
form no part of this Agreement and are not to serve as a basis for
interpretation or construction of this Agreement, nor as evidence of the
intention of the parties hereto.
3.06 Severability. The provisions of this Agreement are severable. The
------------
invalidity, in whole or in part, of any provision of this Agreement shall not
affect the validity or enforceability of any other of its provisions. If one or
more provisions hereof shall be so declared invalid or unenforceable, the
remaining provisions shall remain in full force and effect and shall be
construed in the broadest possible manner to effectuate the purposes hereof. The
parties further agree to replace such void or unenforceable provisions of this
Agreement with valid and enforceable provisions which will achieve, to the
extent possible, the economic, business and other purposes of the void or
unenforceable provisions.
3.07 Attorneys' Fees. In any action at law or in equity to enforce any of
---------------
the provisions or rights under this Agreement, the unsuccessful party to such
litigation, as determined by the court in a final judgment or decree, shall pay
the successful party all reasonable costs, expenses and attorneys' fees incurred
by the successful party (including, without limitation, costs, expenses and fees
on any appeal) with respect to such action.
14
<PAGE>
3.08 Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which shall be deemed an original, and when executed,
separately or together, shall constitute a single original instrument, effective
in the same manner as if the parties hereto had executed one and the same
instrument.
3.09 Waiver. Any party hereto may, as to itself, by a writing signed by
------
an authorized representative of such party: (i) extend the time for the
performance of any of the obligations of another party; (ii) waive any
inaccuracies in representations and warranties made by another party contained
in this Agreement or in any documents delivered pursuant hereto; (iii) waive
compliance by another party with any of the covenants contained in this
Agreement or the performance of any obligations of such other party; or (iv)
waive the fulfillment of any condition that is precedent to the performance by
such party of any of its obligations under this Agreement. No waiver of any
term, provision or condition of this Agreement, whether by conduct or otherwise,
in any one or more instances, shall be deemed to be, or be construed as, a
further or continuing waiver of any such term, provision or condition or as a
waiver of any other term, provision or condition of this Agreement.
3.10 Entire Agreement. This Agreement (together with its exhibits, the
----------------
other documents referred to herein, the Stock Purchase Agreement dated as of the
date hereof among the Company and the purchasers named therein and the Voting
Agreement dated as of the date hereof among the Company and the persons or
entities named therein) is intended by the parties hereto to be the final
expression of their agreement and constitutes and embodies the entire agreement
and understanding of the parties with regard to the subject matter hereof and is
a complete and exclusive statement of the terms and conditions thereof, and
shall supersede any and all prior correspondence, conversations, negotiations,
agreements or understandings relating to the same subject.
3.11 Choice of Law. It is the intention of the parties that the internal
-------------
laws of the State of California (irrespective of its choice of law principles)
shall govern the validity of this Agreement, the construction of its terms and
the interpretation of the rights and duties of the parties.
3.12 Binding on Heirs, Successors and Assigns; Assignment of Specific
----------------------------------------------------------------
Rights.
- ------
(a) This Agreement and all of its terms, conditions and covenants are
intended to be fully effective and binding, to the extent permitted by law, on
the heirs, executors, administrators, successors and permitted assigns of the
parties hereto.
(b) The rights held by any of the Investors under Sections 1 and/or 2
of this Agreement shall be assignable by such Investor to any person who (i)
receives all of the Registrable Securities originally purchased by any
transferring or assigning Holder; receives Registrable Securities which, upon
full exercise and conversion, represent the right to obtain at
15
<PAGE>
least 50,000 shares of Registrable Securities (as adjusted for the stock
dividends, stock splits, recapitizations and the like that occur after the date
of this Agreement); is a subsidiary, parent, general partner, limited partner or
retired partner of a Holder; or is a Holder's immediate family member or a trust
for the benefit of an individual Holder or immediate family member and (ii) has
agreed in writing to abide by (a) all the terms of this Agreement, and (b) to
the extent necessary, the Stock Purchase Agreement.
3.13 Survival. The respective representations and warranties given by
--------
each of the parties, as contained herein shall survive without regard to any
investigation made by any party. All statements as to factual matters contained
in any certificates, exhibits or other instruments delivered by or on behalf of
any party pursuant to the terms hereto or in connection with the transactions
contemplated hereby shall be deemed, for all purposes, to constitute
representations and warranties by such party under the terms of this Agreement
given as of the date of such certificate or instrument.
3.14 Amendment. Any provision of this Agreement may be amended or the
---------
observance thereof may be waived upon the written consent of the Company and the
Holders of a majority of the Registrable Securities then outstanding. Any
amendment or waiver effected in accordance with this Section 3.14 shall be
binding upon each Holder of any Registrable Securities then outstanding,
(including securities into which such securities are convertible), each future
Holder of all such Registrable Securities, and the Company.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Investor Rights
Agreement with the intent and agreement that the same shall be effective as of
the day and year first above written.
THE COMPANY: SONIC SYSTEMS
By: /s/ Sreekanth Ravi
-------------------------------------------
Name: Sreekanth Ravi
Title: President
INVESTOR: BAY PARTNERS SBIC II, L.P.
By: /s/ Robert M. Williams
-------------------------------------------
By: Bay Management Company 1997, General Partner
By: Robert M. Williams, Partner
INVESTOR: FRIEDENRICH FAMILY PARTNERSHIP
By: /s/ John Freidenrich
-------------------------------------------
Name: John Freidenrich
Title: General Partner
INVESTOR: DEMPSEY FAMILY LIMITED PARTNERSHIP
By: /s/ Neal Dempsey
-------------------------------------------
Name: Neal Dempsey
Title: General Managing Partner
INVESTOR: /s/ Robert M. Williams /s/ Margaret R. Caldwell
-------------------------------------------------
Robert M. Williams and Margaret R. Caldwell, JTWR
17
<PAGE>
INVESTOR: Kathryn S. Wunsch TTEE
Justin Yesil Wickett Trust
U/A Dtd 12/10/90
By: /s/ Kathryn S. Wunsch
-------------------------------------------
Name: Kathryn S. Wunsch
Title: Trustee
Kathryn S. Wunsch, TTEE
Troy Kevork Wickett Trust
U/A Dtd 12/10/90
By: /s/ Kathryn S. Wunsch
-------------------------------------------
Name: Kathryn S. Wunsch
Title: Trustee
18
<PAGE>
FIRST AMENDMENT TO SONIC SYSTEMS
INVESTOR RIGHTS AGREEMENT
THIS FIRST AMENDMENT TO SONIC SYSTEMS INVESTOR RIGHTS AGREEMENT (this
"Amendment") is entered into as of August 6, 1999 by and among Sonic Systems, a
California corporation (the "Company"), each of the persons (the "Investors")
who has purchased shares of Series A Preferred Stock (the "Shares") of the
Company pursuant to the February 19, 1999 Sonic Systems Series A Preferred Stock
Purchase Agreement (the "Stock Purchase Agreement") and Bay Sonic Investors,
LLC, a California limited liability company, David Shrigley, an individual, and
John McNulty, an individual (together, the "New Investors"). Collectively, the
Investors, the New Investors and the Company are referred to herein as the
parties and they are the only parties hereto.
WHEREAS, the Investors possess registration rights granted under the Sonic
Systems Investor Rights Agreement dated February 19, 1999 by and between the
Company and the Investors (the "Agreement").
WHEREAS, the New Investors have entered into purchase agreements with
certain shareholders of the Company for the purchase of an aggregate 1,150,700
shares of the Company's Common Stock.
WHEREAS, it is a condition to the sale of shares to the New Investors that
they be granted "piggyback" registration rights under Section 1.03 of the
Agreement.
WHEREAS, the Investors desire to amend the Agreement as set forth in this
Agreement.
NOW THEREFORE, in consideration of the mutual promises hereinafter set
forth, the parties agree as follows:
1. Amendment of Section 1.01(h). Section 1.01(h) is hereby amended and
---------------------------
restated as follows:
"(h) The term "Registrable Securities" means: (i) the Common Stock or
other equity or convertible equity securities of the Company issued or issuable
upon conversion of the Shares; (ii) any Common Stock of the Company issued (or
issuable upon the conversion or exercise of any warrant, right or other security
which is issued) by way of a stock split, stock dividend, recapitalization,
merger or other distribution with respect to, or in exchange for, or in
replacement of, such Shares or any securities issued upon conversion of such
Shares, excluding in all cases, however, any Registrable Securities sold by a
person in a transaction in which its rights under this Section 1 are not
assigned and (iii) for purposes of Section 1.03 only, shares of Common Stock
issued to the New Investors as of the date hereof. A holder of the Shares need
not convert such security into Common Stock prior to requesting registration
hereunder but may make such a request in contemplation of conversion of such
Shares into Common Stock prior to the closing of the disposition of such Shares
pursuant to any such registration.
1
<PAGE>
2. General Provisions.
------------------
2.01 Counterparts. This Amendment may be executed in separate
------------
counterparts, each of which shall be deemed an original, and when executed,
separately or together, shall constitute a single original instrument, effective
in the same manner as if the parties hereto had executed one and the same
instrument.
2.02 Entire Agreement. This Amendment and the Agreement is intended
----------------
by the parties hereto to be the final expression of their agreement with respect
to the subject matter hereof and is a complete and exclusive statement of the
terms and conditions thereof, and shall supersede any and all prior
correspondence, conversations, negotiations, agreements or understandings
relating to the same subject.
2.03 Choice of Law. It is the intention of the parties that the
-------------
internal laws of the State of California (irrespective of its choice of law
principles) shall govern the validity of this Amendment, the construction of its
terms and the interpretation of the rights and duties of the parties.
2.04 Amendment. This Amendment shall be effective upon its execution
---------
by the Company and the Holders of a majority of the Registrable Securities
outstanding as of the date hereof. Upon its execution, as set forth in the
preceding sentence, this Amendment shall be binding upon each Holder of any
Registrable Securities now outstanding, (including securities into which such
securities are convertible), each future Holder of all such Registrable
Securities, and the Company.
2.05 Reference to the Agreement. On or after the effective date of this
--------------------------
Amendment, each reference in the Agreement to "the Agreement", "this Agreement",
the "Agreement", "hereunder", and "hereof" or words of like import referring to
the Agreements shall mean the Agreement, as amended by this Amendment. The
Agreement, as amended by this Amendment, is and shall continue to be in full
force and effect and is hereby in all respects ratified and confirmed.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
with the intent and agreement that the same shall be effective as of the day and
year first above written.
THE COMPANY: SONIC SYSTEMS
By: /s/ Sreekanth Ravi
------------------------------------------------
Name: Sreekanth Ravi
Title: President
INVESTORS: BAY PARTNERS SBIC II, L.P.
By: /s/ John Freidenrich
-------------------------------------------------
By: Bay Management Company 1997, General Partner
By: John Freidenrich, Partner
FRIEDENRICH FAMILY PARTNERSHIP
By: /s/ John Freidenrich
------------------------------------------------
Name: John Freidenrich
Title: General Partner
DEMPSEY FAMILY LIMITED PARTNERSHIP
By: /s/ Neal Dempsey
------------------------------------------------
Name: Neal Dempsey
Title: General Managing Partner
/s/ Robert M. Williams /s/ Margaret R. Caldwell
-------------------------------------------------
Robert M. Williams and Margaret R. Caldwell, JTWR
By: /s/ Kathryn S. Wunsch
---------------------------------------------
Kathryn S. Wunsch, TTEE
Justin Yesil Wickett Trust U/A Dtd 12/10/90
3
<PAGE>
By: /s/ Kathryn S. Wunsch
--------------------------------------------
Kathryn S. Wunsch, TTEE
Troy Kevork Wickett Trust U/A Dtd 12/10/90
NEW INVESTORS: BAY SONIC INVESTORS, LLC
By: /s/ John Freidenrich
-----------------------------------------------
Name: John Freidenrich
Title: Managing Partner
/s/ David Shrigley
------------------------------------------------
David Shrigley
/s/ John McNulty
------------------------------------------------
John McNulty
4
<PAGE>
EXHIBIT 10.1
SONICWALL, INC.
1994 STOCK OPTION PLAN
Adopted December 20, 1994; as amended August 24, 1999
1. Purpose.
-------
(a) The purpose of the SonicWALL, Inc. 1994 Stock Option Plan (the
"Plan") is to provide a means whereby selected eligible employees and directors
of and consultants to SonicWAll, Inc., a California corporation (the "Company")
and its Affiliates, as defined below, may be given an opportunity to purchase
common stock of the Company (the "Common Stock"). The terms "Affiliate" or
"Affiliates" as used in the Plan shall mean any parent corporation or subsidiary
corporation of the Company, as those terms are defined in Sections 424(e) and
(f) of the Internal Revenue Code of 1986, as amended (the "Code").
(b) The Company, by means of the Plan, seeks to retain the services
of its current key employees, directors and consultants, and to secure and
retain the services of new key employees, corporate directors and consultants
necessary for the continued improvement of operations.
2. Stock Options. Stock options granted pursuant to the Plan may, at the
-------------
discretion of the Board of Directors of the Company, be granted either as 'an
Incentive Stock Option ("ISO") or as a Nonstatutory Stock Option ("NSO"). An ISO
shall mean an option described in Section 422 of the Code. An NSO shall mean an
option not described in Sections 422, 422A(b), 423(b) or 424(b) of the Code. An
option designated as an NSO will not be treated as an ISO.
3. Administration.
--------------
(a) Procedure. The Plan shall be administered by the Board of Directors
---------
(the "Board"). The Board may appoint a committee (the "Committee") consisting of
not less than two (2) members of the Board to administer the Plan, subject to
such terms and conditions as the Board may prescribe. Once appointed, the
Committee shall continue to serve until otherwise directed by the Board. From
time to time, the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies, however caused, and remove
all members of the Committee and, thereafter, directly administer the Plan.
Members of the Board or Committee who are either eligible for Options or
have been granted Options may vote on any matters affecting the administration
of the Plan or the grant of Options pursuant to the Plan, except that no such
member shall act upon the granting of an Option to himself, but any such member
may be counted in determining the existence of a quorum at any meeting of the
Board or the Committee during which action is taken with respect to the granting
of an Option to him or her.
<PAGE>
The Committee shall meet at such times and places and upon such notice as
the chairperson determines. A majority of the Committee shall constitute a
quorum. Any acts by the Committee may be taken at any meeting at which a quorum
is present and shall be by majority vote of those members entitled to vote.
Additionally, any acts reduced to writing or approved in writing by all of the
members of the Committee shall be valid acts of the Committee.
(b) Procedure After Registration Date. Notwithstanding subsection (a)
---------------------------------
above, after the date of registration of the Company's Common Stock on a
national securities exchange or the date of the first registration statement
filed by the Company pursuant to Section 12 of the Securities Exchange Act of
1934, as amended with respect to any class of the Company's equity securities,
the Plan shall be administered either by: (i) the full Board; or (ii) a
Committee of two (2) or more directors, each of whom is a Non-Employee Director.
After such date, the Board shall take all action necessary to administer the
Plan in accordance with the then effective provisions of Rule 16b-3 promulgated
under the Exchange Act, provided that any amendment to the Plan required for
compliance with such provisions shall be made consistent with the provisions of
Section 11 of the Plan, and said regulations.
4. Shares Subject to Plan and to Option.
------------------------------------
(a) Subject to the provisions of Section 10, below (relating to
adjustments upon changes in stock), the stock which may be sold pursuant to
options granted under the Plan shall not exceed in the aggregate 1,500,000
shares of the Company's authorized Common Stock and may be unissued shares,
reacquired shares, or shares bought on the market for the purpose of issuance
under the Plan. If any options granted under the Plan shall for any reason
terminate or expire without having been exercised in full, the stock not
purchased under such options shall be available again for the purpose of the
Plan.
(b) The option shall by its terms prohibit the exercise of all
options in excess of the amount as provided in Section 422A(b)(7) of the Code.
Should it be determined that any ISO granted under the Plan inadvertently
exceeds such maximum, such ISO grant shall be deemed to be a grant of an NSO to
the extent, but only to the extent, of such excess.
5. Eligibility. ISOs may be granted only to employees of the Company. No
-----------
ISO may be granted to a person who, at the time of the grant, owns stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company unless at the time such option is granted the
option price is at least one hundred ten percent (110%) of the fair market value
of the stock subject to the option and such option by its terms is not
exercisable after five (5) years from the date such ISO is granted. Directors of
the Company who are not also employees of the Company shall not be eligible for
ISOs, but are eligible for NSOs. Independent contractors shall be eligible for
NSOs. Any employee may hold more than one (1) option at any time.
6. Terms of Options. Options granted pursuant to the Plan need not be
----------------
identical, but each option shall be granted within ten (10) years from the date
the Plan is adopted by the
2
<PAGE>
Board or approved by the shareholders, whichever is earlier, shall specify the
number of shares to which it pertains and shall be subject to the following
terms and conditions:
(a) The purchase price of each option shall be determined by the
administrator of the Plan at the time the option is granted, but shall in no
event be less than eighty-five percent (85%) in the case of an NSO, or one
hundred percent (100%) in the case of an ISO, of the fair market value of the
stock subject to the option on the date the option is granted. Fair market value
of the Common Stock shall be determined by the Committee, using such criteria as
it deems relevant; provided, however, that if there is a public market for the
Common Stock, the fair market value per Share shall be the average of the last
reported bid and asked prices of the Common Stock on the date of grant, as
reported in The Wall Street Journal (or, if not so reported, as otherwise
-----------------------
reported by the National Association of Securities Dealers Automated Quotation
(NASDAQ) System) or, in the event the Common Stock is listed on a national
securities exchange (within the meaning of Section 6 of the Exchange Act) or on
the NASDAQ National Market System (or any successor national market system), the
fair market value per Share shall be the closing price on such exchange on the
date of grant of the Option, as reported in The Wall Street Journal.
-----------------------
(b) Except as otherwise set forth in Section 5, above, the term of
any ISO shall not be greater than ten (10) years from the date it was granted.
(c) An option by its terms, shall not be transferable otherwise than
by will or the laws of descent and distribution and may be exercisable, during
the lifetime of the option holder, only by the individual to whom the option is
granted.
(d) Each option shall become exercisable on an annual basis as to not
less than twenty percent (20%) of the total number of shares subject thereto.
(e) Upon the termination of a participant's employment, his rights to
exercise an option then held by him shall be only as follows:
(i) If a participant's employment is terminated by death or
disability, he or his estate, as the case may be, shall have the right for a
period of not less than six (6) months following the date of death or
disability, or for such longer period as the Board may fix, to exercise the
option to the extent the participant was entitled to exercise such option on
the-date of his death or disability, or to the extent otherwise specified by the
Board, which may so specify, at a time that is subsequent to the date of his
death or disability, provided the actual date of exercise is in no event after
the expiration of the term of the option. A participant's estate shall mean his
legal representative or any person who acquires the right to exercise an option
by reason of the participant's death or disability.
(ii) If a participant's employment is terminated for any reason
other than "Death or Disability," he may, within not less than three (3) months
following such termination (but in no event later than that date upon which the
option expires by reason of the lapse of time), or within such longer period as
the Board may fix, exercise the option to the
3
<PAGE>
extent such option was exercisable by the participant on the date of termination
of his employment, or to the extent otherwise specified by the Board, which may
so specify at a time that is subsequent to the date of the termination of his
employment, provided the date of exercise is in no event after the expiration of
the term of the option.
(f) Options may also contain such other provisions, which shall not
be inconsistent with any of the foregoing terms, as the Board shall deem
appropriate. No option, however, nor anything contained in the Plan, shall
confer upon any employee any, right to continue in the employ of the Company (or
affiliate) nor limit in any way the right of the Company (or affiliate) to
terminate his employment at any time.
(g) Subject to any required action by the Company's shareholders, if
the Company shall be the surviving corporation in any merger or consolidation,
each outstanding option shall pertain and apply to the securities to which a
holder of the number of shares subject to the option would have been entitled. A
dissolution or liquidation of the Company or a merger or consolidation in which
the Company is not the surviving corporation shall cause each outstanding option
to terminate, unless the surviving corporation in the case of a merger or
consolidation assumes outstanding options or replaces them with substitute
options having substantially similar terms and conditions.
7. Payments and Loans Upon Exercise.
--------------------------------
(a) The purchase price of stock sold pursuant to an option shall be
paid either in full in cash or by certified check at the time the option is
exercised or pursuant to any deferred payment arrangement that the Board in its
discretion may approve; provided, however, that any interest to be paid by an
optionee in connection with any such deferred payment arrangement shall be
charged at the applicable federal rate as defined in Section 1274(d) of the
Code.
(b) The Company may make loans or guarantee loans made by an
appropriate financial institution to individual optionees, including officers,
on such terms as may be approved by the Board for the purpose of financing the
exercise of options granted under the Plan and the payment of any taxes that may
be due by reason of such exercise.
(c) In addition, if and to the extent authorized by the Board,
optionees may make all or any portion of any payment due to the Company upon
exercise of an option by delivery of any property (including securities of the
Company) other than cash, so long as such property constitutes valid
consideration for the stock under applicable law.
(d) Where the Company has or will have a legal obligation to withhold
taxes relating to the exercise of any stock option, such option may not be
exercised, in whole or in part, unless such tax obligation is first satisfied in
a manner satisfactory to the Company.
8. Use of Proceeds from Stock. Proceeds from the sale of stock pursuant
--------------------------
to options granted under the Plan shall be used for general corporate purposes.
4
<PAGE>
9. Stock Transfer Restrictions; Repurchase Provisions. Stock issued
--------------------------------------------------
pursuant to the exercise of options granted under the Plan shall be subject to
those stock transfer restrictions and repurchase provisions which shall be set
forth in a Stock Restriction Agreement, substantially in the form attached
hereto as Exhibit A. Each individual shall be required to execute such Agreement
prior to receiving his shares.
10. Adjustments of and Changes in the Stock. Subject to the rights of the
---------------------------------------
Company set forth in Section 6 above, in the event that the shares of Common
Stock of the Company, as presently constituted, shall be changed into or
exchanged for a different number or kind of shares of stock or other securities
of the Company or of another corporation (whether by reason of merger,
consolidation, recapitalization, reclassification, split-up, combination of
shares, or otherwise), or if the number of shares of Common Stock of the Company
shall be increased through the payment of a stock dividend, then there shall be
substituted for or added to each share of Common Stock of the Company
theretofore appropriated or thereafter subject or which may become subject to an
option under the Plan, the number and kind of shares of stock or other
securities into which each outstanding share of Common Stock of the Company
shall be so changed, or for which each such share shall be exchanged or to which
each such share shall be entitled, as the case may be.
Outstanding options shall also be amended as to price and other terms if
necessary to reflect the foregoing events. In the event there shall be any other
change in the number or kind of the outstanding shares of Common Stock of the
Company, or of any stock or other securities into which such Common Stock of the
Company, or of any stock or other securities into which such Common Stock shall
have been changed, or for which it shall have been exchanged, then if the Board
of Directors shall, in its sole discretion, determine that such change equitably
requires an adjustment in any option theretofore granted or which may be granted
under the Plan, such adjustment shall be made in accordance with such
determination. No right to purchase fractional shares shall result from any
adjustment in options pursuant to this Section 10. In case of any such
adjustment, the shares subject to the option shall be rounded down to the
nearest whole share. Notice of any adjustment shall be given by the Company to
each holder of an option which shall have been so adjusted and such adjustment
(whether or not such notice is given) shall be effective and binding for all
purposes of the Plan.
11. Amendment of the Plan. The Board may at any time amend, alter,
---------------------
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made that would impair the rights of any participant
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with applicable laws, the Company
shall obtain shareholder approval of any Plan amendment in such a manner and to
such a degree required. No amendment or termination of the Plan shall adversely
affect options already granted, unless mutually agreed otherwise between the
participant and the Board, which agreement must be in writing and signed by the
participant and the Company.
12. Indemnification of Board (or Committee, if applicable). In addition
------------------------------------------------------
to such other rights of indemnification as they may have as directors or as
members of the Committee, the
5
<PAGE>
members of the Board (or the Committee, if applicable) shall be indemnified by
the Company against the reasonable expenses, including attorneys, fees, actually
and necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding except in
relation to matters as of which it shall be adjudged in such action, suit or
proceeding that such Board (or Committee, if applicable) member is liable for
negligence or misconduct in the performance of his duties; provided that within
sixty days after institution of any such action, suit or proceeding a Board (or
Committee, if applicable) member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
13. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
affirmative vote of the holders of a majority of the outstanding capital stock
of the Company entitled to vote within twelve (12) months before or after the
Plan is adopted. Any Option granted before shareholder approval is obtained must
be rescinded if shareholder approval is not obtained within twelve (12) months
before or after the Plan is adopted. Shares issued upon the exercise of such
Options shall not be counted in determining whether such approval is obtained.
14. Termination or Suspension of the Plan. The Board at any time may
-------------------------------------
suspend or terminate the Plan. The Plan, unless sooner terminated, shall
terminate at the end of ten (10) years from the date the Plan is adopted by the
Board or approved by the shareholders of the Company, whichever is earlier. An
option may not be granted under the Plan while the Plan is suspended or after it
is terminated. Rights and obligations under any option granted while the Plan is
in effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent of the person to whom the option was granted,
which may be obtained in any manner that the Board deems appropriate.
15. Listing, Qualification or Approval of Stock. All options granted
-------------------------------------------
under the Plan are subject to the requirement that if at any time the Board
shall determine in its discretion that the listing or qualification of the
shares of stock subject thereto on any securities exchange or under any
applicable law, or the consent or approval by any governmental regulatory body
or the shareholders of the Company, is necessary or desirable as a condition of
or in connection with the issuance of shares under the option, the option may
not be exercised in whole or in part, unless such listing, qualification,
consent or approval shall have been effected or obtained free of any condition
not acceptable to the Board.
16. Binding Effect of Conditions. The conditions and stipulations
----------------------------
hereinabove contained or in any option granted pursuant to the Plan shall be and
constitute a covenant running with all of the shares of the Company owned by the
participant at any time, directly or indirectly whether the same have been
issued or not, and those shares of the Company owned by the participant shall
not be sold, assigned or transferred by any person save and except in
6
<PAGE>
accordance with the terms and conditions herein provided, and the participant
shall agree to use his best efforts to cause the officers of the Company to
refuse to record on the books of the Company any assignment or transfer made
or attempted to be made, except as provided in the Plan and to cause said
officers to refuse to cancel old certificates or to issue or deliver new
certificates therefor where the purchaser or assignee has acquired
certificates for the stock - represented thereby, except strictly in
accordance with the provisions of this Plan.
17. Miscellaneous. The use of any masculine pronoun or similar term is
-------------
intended to be without legal significance as to gender.
18. Financial Reports. The Company shall provide financial and other
-----------------
information regarding the Company, on an annual or more frequent basis, to each
individual holding an outstanding option under the Plan, as required pursuant to
Section 260.140.46.2 of Title 10, California Code of Regulations.
<PAGE>
EXHIBIT 10.2
SONICWALL, INC.
1998 STOCK OPTION PLAN
Adopted July 23, 1998; as Amended August 24, 1999
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentives to Employees, Non-Employee
Directors and Consultants of SONICWALL, INC. ("the Company") and its
Subsidiaries, and to promote the success of the Company's business. Options
granted hereunder may be either Incentive Stock Options or Nonstatutory Stock
Options at the discretion of the Committee.
2. Definitions. As used herein, and in any Option granted hereunder, the
-----------
following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean SonicWALL, Inc., a California corporation.
-------
(e) "Committee" shall mean the Committee appointed by the Board in
---------
accordance with paragraph (a) of Section 4 of the Plan. If the Board does not
appoint or ceases to maintain a Committee, the term "Committee" shall refer to
the Board.
(f) "Consultant" shall mean any independent contractor retained to perform
----------
bona fide consulting services for the Company or any Subsidiary (other than
services in connection with the offer or sale of securities in a capital-raising
transaction) and who is compensated for such services.
(g) "Continuous Employment" shall mean the absence of any interruption or
---------------------
termination of service as an Employee or Non-Employee Director by the Company or
any Subsidiary. Continuous Employment shall not be considered interrupted
during any period of sick leave, military leave or any other leave of absence
approved by the Board or in the case of transfers between locations of the
Company or between the Company and any Parent, Subsidiary or successor of the
Company.
(h) "Covered Employee" shall mean any individual whose compensation is
----------------
subject to the limitations on tax deductibility provided by Section 162(m) of
the Code and any Treasury Regulations promulgated thereunder in effect at the
close of the taxable year of the Company in which an Option has been granted to
such individual.
(i) "Employee" shall mean any person, including officers (whether or not
--------
they are directors), employed by the Company or any Subsidiary. "Employee does
not include any individual who provides services to the Company or any
Subsidiary as an independent contractor whether or not such individual is
reclassified as a common law employee, unless the Company or a Subsidiary
withholds or is required to withhold U.S. Federal employment taxes for such
individual pursuant to Section 3402 of the Code.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
1
<PAGE>
(k) "Incentive Stock Option" shall mean any option granted under this Plan
----------------------
and any other option granted to an Employee in accordance with the provisions of
Section 422 of the Code, and the regulations promulgated thereunder.
(1) "Non-Employee Director" shall mean any director of the Company or any
---------------------
Subsidiary who (i) is not employed by the Company or such Subsidiary; (ii) does
not receive compensation, either directly or indirectly, from the Company or a
parent or Subsidiary for services rendered as a consultant or in any capacity
other than as a director, except for an amount that does not exceed the dollar
amount for which disclosure would be required pursuant to Item 404(a) of
Regulation S-K; (iii) does not possess an interest in any other transaction for
which disclosure would be required pursuant to Item 404(a) of Regulation S-K;
and (iv) is not engaged in a business relationship for which disclosure would be
required pursuant to Item 404 (b) of Regulation S-K.
(m) "Nonstatutory Stock Option" shall mean an option granted under the Plan
-------------------------
that is subject to the provisions of Section 1.83-7 of the Treasury Regulations
promulgated under Section 83 of the Code.
(n) "Option" shall mean a stock option granted pursuant to the Plan.
------
(o) "Option Agreement" shall mean a written agreement between the Company
----------------
and the Optionee regarding the grant and exercise of Options to purchase Shares
and the terms and conditions thereof as determined by the Committee pursuant to
the Plan.
(p) "Optionee" shall mean an Employee, NonEmployee Director or Consultant
---------
who receives an Option.
(q) "Outside Director" shall mean a director of the Company who qualifies
----------------
as an outside director as such term is used in Section 162(m) of the Code and
defined in any applicable Treasury Regulations promulgated thereunder.
(r) "Parent" shall mean a "parent corporation," whether now or hereafter
------
existing, as defined by Section 424(e) of the Code.
(s) "Plan" shall mean this 1998 Stock Option Plan.
----
(t) "Registration Date" shall mean the effective date of the first
-----------------
registration statement filed by the Company pursuant to Section 12 of the
Exchange Act with respect to any class of the Company's equity securities.
(u) "Section 162(m) Effective Date" shall mean the first date as of which
-----------------------------
the limitations on the tax deductibility of certain compensation provided by
Section 162(m) of the Code and any Treasury Regulations promulgated thereunder
are applicable to Options granted under the Plan.
(v) "Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
(w) "Share" shall mean a share of the Common Stock of the Company subject
-----
to an Option, as adjusted in accordance with Section 11 of the Plan.
(x) "Subsidiary" shall mean a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
2
<PAGE>
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 2,179,162 Shares of Common Stock, plus an automatic annual
increase on the first day of each of the Company's fiscal year beginning in
2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007 and 2008 equal to the lesser of
(i) 1,000,000 Shares; (ii) four percent (4%) of the Shares outstanding on the
last day of the immediately preceding fiscal year or (iii) such lesser number of
Shares as is determined by the Board. The Shares may be authorized but unissued
or reacquired shares of Common Stock. If an Option expires or becomes
unexercisable for any reason without having been exercised in full, the Shares
which were subject to the Option but as to which the Option was not exercised
shall become available for other Option grants under the Plan, unless the Plan
shall have been terminated. In addition, any shares of Common Stock which are
retained by the Company upon exercise of an Option in order to satisfy the
exercise or purchase price for such Option or any withholding taxes due with
respect to such exercise shall be treated as not issued and shall continue to be
available under the Plan. Shares repurchased by the Company pursuant to any
repurchase right which the Company may have shall be available for future grant
as nonstatutory stock options under the Plan.
The Company intends that as long as it is not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act and is not an investment
company registered or required to be registered under the Investment Company Act
of 1940, all offers and sales of Options and Shares issuable upon exercise of
any Option shall be exempt from registration under the provisions of Section 5
of the Securities Act, and the Plan shall be administered in such a manner so as
to preserve such exemption. The Company intends that the Plan shall constitute a
written compensatory benefit plan within the meaning of Rule 701(b) of 17 CFR
Section 230.701 promulgated by the Securities and Exchange Commission pursuant
to such Act or any successor rule. Unless otherwise specified Options granted
under the Plan are intended to be granted in reliance on Rule 701 whenever
applicable.
4. Administration of the Plan.
--------------------------
(a) Procedure. The Plan shall be administered by the Board. The Board may
---------
appoint a Committee consisting of not less than two (2) members of the Board to
administer the Plan, subject to such terms and conditions as the Board may
prescribe. Once appointed, the Committee shall continue to serve until otherwise
directed by the Board. From time to time, the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and, thereafter,
directly administer the Plan.
Members of the Board or Committee who are either eligible for Options or
have been granted Options may vote on any matters affecting the administration
of the Plan or the grant of Options pursuant to the Plan, except that no such
member shall act upon the granting of an Option to himself, but any such member
may be counted in determining the existence of a quorum at any meeting of the
Board or the Committee during which action is taken with respect to the granting
of an Option to him or her.
The Committee shall meet at such times and places and upon such notice as
the chairperson determines. A majority of the Committee shall constitute a
quorum. Any acts by the Committee may be taken at any meeting at which a quorum
is present and shall be by majority
3
<PAGE>
vote of those members entitled to vote. Additionally, any acts reduced to
writing or approved in writing by all of the members of the Committee shall be
valid acts of the Committee.
(b) Procedure After Registration Date. Notwithstanding subsection (a)
---------------------------------
above, after the date of registration of the Company's Common Stock on a
national securities exchange or the Registration Date, the Plan shall be
administered either by: (i) the full Board; or (ii) a Committee of two (2) or
more directors, each of whom is a Non-Employee Director. After such date, the
Board shall take all action necessary to administer the Plan in accordance with
the then effective provisions of Rule 16b-3 promulgated under the Exchange Act,
provided that any amendment to the Plan required for compliance with such
provisions shall be made consistent with the provisions of Section 13 of the
Plan, and said regulations.
(c) Procedure After Section 162(m) Effective Date. Notwithstanding
---------------------------------------------
subsections (a) and (b) above, after the Section 162(m) Effective Date the Plan
and all Option grants shall be administered and approved by a Committee
comprised solely of two or more Outside Directors.
(d) Powers of the Committee. Subject to the provisions of the Plan, the
-----------------------
Committee shall have the authority: (i) to determine, upon review of relevant
information, the fair market value of the Common Stock; (ii) to determine the
exercise price of Options to be granted, the Employees, Non-Employee Directors
or Consultants to whom and the time or times at which Options shall be granted,
and the number of Shares to be represented by each Option; (iii) to interpret
the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to
the Plan; (v) to determine the terms and provisions of each Option granted under
the Plan (which need not be identical) and, with the consent of the holder
thereof, to modify or amend any Option; (vi) to authorize any person to execute
on behalf of the Company any instrument required to effectuate the grant of an
Option previously granted by the Committee; (vii) to defer an exercise date of
any Option (with the consent of the Optionee), subject to the provisions of
Section 9(a) of the Plan; (viii) to determine whether Options granted under the
Plan will be Incentive Stock Options or Nonstatutory Stock Options; and (ix) to
make all other determinations deemed necessary or advisable for the
administration of the Plan.
(e) Acceleration of Vesting. In addition to its other powers, the Board
-----------------------
(or the Committee), in its discretion, has the right to accelerate unvested
Options in connection with (i) any tender offer for a majority of the
outstanding shares of Common Stock by any person or entity; (ii) any proposed
sale or conveyance of all or substantially all of the property and assets of the
Company; or (iii) any proposed consolidation or merger of the Company with or
into any other corporation, unless the Company is the surviving corporation. In
the case of such accelerated vesting, the Company shall give written notice to
the holder of any Option that such Option may be exercised even though the
Option or portion thereof would not otherwise have been exercisable had the
foregoing event not occurred. In such event, the Company shall permit the
holder of any Option to exercise during the time period specified in the
Company's notice, which period shall not be less than ten days following the
date of notice. Upon consummation of a tender offer or proposed sale,
conveyance, consolidation or merger to which such notice shall relate, all
rights under said Option which shall not have been so exercised shall terminate
unless the agreement governing the transaction shall provide otherwise.
(f) Effect of Committee's Decision. All decisions, determinations and
------------------------------
interpretations of the Committee shall be final and binding on all potential or
actual Optionee, any other holder of an Option or other equity security of the
Company and all other persons.
4
<PAGE>
5. Eligibility.
-----------
(a) Persons Eligible for Options. Options under the Plan may be granted
----------------------------
only to Employees, Non-Employee Directors or Consultants whom the Committee, in
its sole discretion, may designate from time to time. Incentive Stock Options
may be granted only to Employees. An Employee who has been granted an Option, if
he or she is otherwise eligible, may be granted an additional Option or Options.
However, the aggregate fair market value (determined in accordance with the
provisions of Section 8(a) of the Plan) of the Shares subject to one or more
Incentive Stock Options grants that are exercisable for the first time by an
Optionee during any calendar year (under all stock option plans of the Company
and its Parents and Subsidiaries) shall not exceed $100,000 (determined as of
the grant date). As of the Section 162(m) Effective Date, Options under the Plan
shall be granted to Covered Employees upon satisfaction of the conditions to
such grants provided pursuant to Section 162(m) and any Treasury Regulations
promulgated thereunder.
(b) No Right to Continuing Employment. Neither the establishment nor the
---------------------------------
operation of the Plan shall confer upon any Optionee or any other person any
right with respect to continuation of employment or other service with the
Company or any Subsidiary, nor shall the Plan interfere in any way with the
right of the Optionee or the right of the Company (or any Parent or Subsidiary)
to terminate such employment or service at any time.
6. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board or its approval by vote of the holders of the outstanding shares of the
Company entitled to vote on the adoption of the Plan (in accordance with the
provisions of Section 19 hereof), whichever is earlier. It shall continue in
effect for a term of ten (10) years unless sooner terminated under Section 13 of
the Plan.
7. Term of Option. Unless the Committee determines otherwise, the term of
--------------
each Option granted under the Plan shall be ten (10) years from the date of
grant. The term of the Option shall be set forth in the Option Agreement. No
Incentive Stock Option shall be exercisable after the expiration of ten (10)
years from the date such Option is granted, provided that no Incentive Stock
Option granted to any Employee who, at the date such Option is granted, owns
(including by attribution under Section 424(d) of the Code) more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or any Parent or Subsidiary shall be exercisable after the expiration of
five (5) years from the date such Option is granted.
8. Exercise Price and Consideration.
--------------------------------
(a) Exercise Price. Except as provided in subsections (b) and (c) below,
--------------
the exercise price for the Shares to be issued pursuant to any Option shall be
such price as is determined by the Committee, which shall in no event be less
than: (i) in the case of Incentive Stock Options, the fair market value of such
Shares on the date the Option is granted; or (ii) in the case of Nonstatutory
Stock Options, eighty five percent (85%) of such fair market value; provided
--------
that, in the case of any Optionee owning stock possessing more than ten percent
- ----
(10%) of the total combined voting power of all classes of stock of the Company
or any Parent or Subsidiary of the Company, the exercise price shall be one
hundred ten percent (110%) of fair market value on the date the Option is
granted. Fair market value of the Common Stock shall be determined by the
Committee, using such criteria as it deems relevant; provided, however, that if
there is a public
5
<PAGE>
market for the Common Stock, the fair market value per Share shall be the
average of the last reported bid and asked prices of the Common Stock on the
date of grant, as reported in The Wall Street Journal (or, if not so reported,
-----------------------
as otherwise reported by the National Association of Securities Dealers
Automated Quotation (NASDAQ) System) or, in the event the Common Stock is listed
on a national securities exchange (within the meaning of Section 6 of the
Exchange Act) or on the NASDAQ National Market System (or any successor national
market system), the fair market value per Share shall be the closing price on
such exchange on the date of grant of the Option, as reported in The Wall
--------
Street Journal.
- --------------
(b) Ten Percent Shareholders. No Incentive Stock Option shall be granted
------------------------
to any Employee who, at the date such Option is granted, owns (within the
meaning of Section 424(d) of the Code) more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, unless the exercise price for the Shares to be issued pursuant to
such Option is at least equal to one hundred ten percent (110%) of the fair
market value of such Shares on the grant date determined by the Committee in the
manner set forth in subsection (a) above.
(c) Section 162(m) Limitations. After the Section 162(m) Effective Date,
--------------------------
the Option Price of any Option granted to a Covered Employee shall be at least
equal to the fair market value of the Shares as of the date of grant as
determined in the manner set forth in subsection (a) above.
(d) Consideration. The consideration to be paid for the Shares to be
-------------
issued upon exercise of an Option, including the method of payment shall be
determined by the Committee (and, in the case of an Incentive Stock Option,
shall be determined at the time of grant) and may consist entirely of (1) cash,
(2) check, (3) promissory note, (4) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a fair market value on
the date of surrender equal to the aggregate exercise price of the date of
surrender equal to the aggregate price of the Shares as to which such Option
shall be exercised, (5) authorization for the Company to retain from the total
number of Shares as to which the Option is exercised that number of Shares
having a fair market value on the date of exercise equal to the exercise price
for the total number of Shares as to which the Option is exercised, (6) delivery
of a properly executed exercise notice together with such other documentation as
the Committee and the broker, if applicable, shall require to effect an exercise
of the Option and delivery to the Company of the sale or loan proceeds required
to pay the exercise price and any applicable income or employment taxes, (7)
delivery of an irrevocable subscription agreement for the Shares that
irrevocably obligates the option holder to take and pay for the Shares not more
than twelve (12) months after the date of delivery of the subscription
agreement, (8) any combination of the foregoing methods of payment, or (9) such
other consideration and method of payment for the issuance of Shares to the
extent permitted under applicable laws. In making its determination as to the
type of consideration to accept, the Committee shall consider if acceptance of
such consideration may be reasonably expected to benefit the Company.
6
<PAGE>
9. Exercise of Option.
------------------
(a) Vesting Period. Any Option granted hereunder shall be exercisable at
--------------
such times and under such conditions as determined by the Committee and as shall
be permissible under the terms of the Plan, which shall be specified in the
Option Agreement evidencing the Option. Options granted under the Plan shall
vest at a rate of at least twenty percent (20%) per year.
(b) Exercise Procedures. An Option shall be deemed to be exercised when
-------------------
written notice of such exercise has been given to the Company in accordance with
the terms of the option agreement evidencing the Option, and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. After the Registration Date, in lieu of delivery of a cash payment
for the purchase price of the Shares with respect to which the Option is
exercised, the Optionee may deliver to the Company a sell order to a broker for
the Shares being purchased and an agreement to pay (or have the broker remit
payment for) the purchase price for the Shares being purchased on or before the
settlement date for the sale of such shares to the broker.
Pursuant to the terms of the Option Agreement, the Committee may require
that any Option may be exercised only upon the execution of a Restricted Stock
Purchase Agreement which gives the Company a right of first refusal in the
Option Shares at the per share price at which the Option Shares are proposed to
be transferred. The right of first refusal shall terminate at such time as a
public market exists for the Company's Common Stock or the Company dissolves or
is a party to a merger, reorganization, consolidation, exchange of stock or sale
of assets in which it is not the surviving entity. The Restricted Stock Purchase
Agreement shall contain such provisions as the Committee may approve in its sole
discretion.
An Option may not be exercised for fractional shares. As soon as
practicable following the exercise of an Option in the manner set forth above,
the Company shall issue or cause its transfer agent to issue stock certificates
representing the Shares purchased. Until the issuance of such stock certificates
(as evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends
or any other rights as a shareholder shall exist with respect to the Shares
notwithstanding the exercise of the Option. No adjustment will be made for a
dividend or other rights for which the record date is prior to the date of the
transfer by the Optionee of the consideration for the purchase of the Shares,
except as provided in Section 11 of the Plan. After the Registration Date, the
exercise of an Option by any person subject to short-swing trading liability
under Section 16(b) of the Exchange Act shall be subject to compliance with all
applicable requirements of Rule 16b-3 promulgated under the Exchange Act.
(c) Death of Optionee. In the event of the death during the Option period
-----------------
of an Optionee who is at the time of his death, or was within the ninety (90)-
day period immediately prior thereto, an Employee or Non-Employee Director, and
who was in Continuous Employment as such from the date of the grant of the
Option until the date of death or termination, the may be exercised, at any time
prior to the expiration of the Option period, by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the accrued right to exercise at the time of the
termination or death, whichever comes first.
7
<PAGE>
(d) Disability of Optionee. In the event of the permanent and total
----------------------
disability during the Option period of an Optionee who is at the time of such
disability, or was within the ninety (90)-day period prior thereto, an Employee
or Non-Employee Director, and who was in Continuous Employment as such from the
date of the grant of the Option until the date of disability or termination, the
Option may be exercised at any time within one (1) year following the date of
such permanent and total disability, but only to the extent of the accrued right
to exercise at the time of the termination or disability, whichever comes first,
subject to the condition that no Option shall be exercised after the expiration
of the Option period.
(e) Termination of Status as Employee, NonEmployee Director or Consultant.
---------------------------------------------------------------------
If an Optionee shall cease to be an Employee or Non-Employee Director for any
reason other than permanent and total disability or death, or if an Optionee
shall cease to be Consultant for any reason, the Optionee may, but only within
ninety (90) days (or such other period of time not less than thirty (30) days as
is determined by the Committee) after the date he or she ceases to be an
Employee or Non-Employee Director, exercise his or her Option to the extent that
he or she was entitled to exercise it at the date of such termination, subject
to the condition that no Option shall be exercisable after the expiration of the
Option period. No termination shall be deemed to occur and this Section 9(e)
shall not apply if (i) the Optionee is a Consultant who becomes an Employee; or
(ii) the Optionee is an Employee who becomes a Consultant.
(f) Tax Withholding. As a condition of the exercise of an Option granted
---------------
under the Plan, the Optionee (or in the case of the Optionee's death, the person
exercising or receiving the Option) shall make such arrangements as a Committee
may require for the satisfaction of any applicable federal, state, local or
foreign withholding tax obligations that may arise in connection with the
exercise of an Option and the issuance of Shares. The Company shall not be
required to issue any Shares under the Plan until such obligations are
satisfied. In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from his or her compensation an amount sufficient to satisfy
such tax obligations from the next payroll payment otherwise payable after the
date of an exercise of the Option. After the Registration Date, when an Optionee
is required to pay to the Company an amount with respect to tax withholding
obligations in connection with the exercise of an Option granted under the Plan,
the Optionee may elect prior to the date the amount of such withholding tax is
determined (the "Tax Date") to make such payment, or such increased payment as
the Optionee elects to make up to the maximum federal, state and local marginal
tax rates, including any related FICA obligation, applicable to the Optionee and
the particular transaction, by: (i) delivering cash; (ii) delivering part or all
of the payment in previously owned shares of Common Stock (whether or not
acquired through the prior exercise of an Option); and/or (iii) irrevocably
directing the Company to withhold from the Shares that would otherwise be issued
upon exercise of the Option that number of whole Shares having a fair market
value equal to the amount of tax required or elected to be withheld (a
"Withholding Election"). If an Optionee's Tax Date is deferred beyond the date
of exercise and the Optionee makes a Withholding Election, the Optionee will
initially receive the full amount of Optioned Shares otherwise issuable upon
exercise of the Option, but will be unconditionally obligated to surrender to
the Company on the Tax Date the number of Shares necessary to satisfy his or her
minimum withholding requirements, or such higher payment as he or she may have
elected to make, with adjustments to be made in cash after the Tax Date.
8
<PAGE>
Any withholding of Optioned Shares with respect to taxes arising in
connection with the exercise of an Option by any person subject to short-swing
trading liability under Section 16(b) of the Exchange Act shall satisfy the
requirements of Section 16b-3(e).
Any adverse consequences incurred by an Optionee with respect to the use of
shares of Common Stock to pay any part of the exercise price or of any tax in
connection with the exercise of an Option, including without limitation any
adverse tax consequences arising as a result of a disqualifying disposition
within the meaning of Section 422 of the Code shall be the sole responsibility
of the Optionee. Shares withheld in accordance with this provision shall not
again become available for purposes of the Plan and for Options subsequently
granted thereunder.
10. Non-Transferability of Options. Options may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent and distribution, provided that, after the
Registration Date, the Committee may in its discretion grant transferable
Nonstatutory Stock Options pursuant to Option Agreements specifying (i) the
manner in which such Nonstatutory Stock Options are transferable and (ii) that
any such transfer shall be subject to the applicable laws. The designation of a
beneficiary by an Optionee will not constitute a transfer. Options may be
exercised or purchased during the lifetime of the Optionee, only by the
Optionee.
11. Adjustments Upon Changes in Capitalization. Subject to any required
------------------------------------------
action by the shareholders of the Company, the number of Optioned Shares covered
by each outstanding Option, and the per share exercise price of each such
Option, shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, recapitalization, combination, reclassification, the payment of a
stock dividend on the Common Stock or any other increase or decrease in the
number of such shares of Common Stock effected without receipt of consideration
by the Company; provided, however, that conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration". Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
The Committee may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the number or class of securities
covered by any Option, as well as the price to be paid therefor, in the event
that the Company effects one or more reorganizations, recapitalizations, rights
offerings, or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.
Unless otherwise determined by the Board, upon the dissolution or
liquidation of the Company the Options granted under the Plan shall terminate
and thereupon become null and void. The Optionee shall be given not less than
ten (10) days notice of such event and the opportunity to exercise each
outstanding Option before such event is effected.
9
<PAGE>
Upon any merger or consolidation, if the Company is not the surviving
corporation, the Options granted under the Plan shall either be assumed by the
new entity or shall terminate in accordance with the provisions of the preceding
paragraph.
12. Time of Granting Options. Unless otherwise specified by the
------------------------
Committee, the date of grant of an Option under the Plan shall be the date on
which the Committee makes the determination granting such Option; provided
however, that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Committee makes the determination granting
such Incentive Stock Option or the date of commencement of the Optionee's
employment relationship with the Company. Notice of the determination shall be
given to each Optionee to whom an Option is so granted within a reasonable time
after the date of such grant.
13. Amendment and Termination of the Plan. The Board may at any time
-------------------------------------
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with applicable laws,
the Company shall obtain shareholder approval of any Plan amendment in such a
manner and to such a degree required. No amendment or termination of the Plan
shall adversely affect Options already granted, unless mutually agreed otherwise
between the Optionee and the Board, which agreement must be in writing and
signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an Option granted under the Plan unless the exercise of such Option
and the issuance and delivery of such Shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act, the Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance. As a condition to the exercise of an Option, the Company
may require the person exercising such Option to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is required
by any of the aforementioned relevant provisions of law.
15. Reservation of Shares. During the term of this Plan the Company will
---------------------
at all times reserve and keep available the number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain from any regulatory body having jurisdiction and authority deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any Shares
hereunder shall relieve the Company of any liability in respect of the
nonissuance or sale of such Shares as to which such requisite authority shall
not have been obtained.
16. Information to Optionee. During the term of any Option granted under
-----------------------
the Plan, the Company shall provide or otherwise make available to each Optionee
a copy of its financial statements at least annually.
10
<PAGE>
17. Option Agreement. Options granted under the Plan shall be evidenced
----------------
by Option Agreements.
18. Indemnification of Board (or Committee, if applicable). In addition
------------------------------------------------------
to such other rights of indemnification as they may have as directors or as
members of the Committee, the members of the Board (or the Committee, if
applicable) shall be indemnified by the Company against the reasonable expenses,
including attorneys, fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any Option
granted thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding except in relation to matters as of which it shall be
adjudged in such action, suit or proceeding that such Board (or Committee, if
applicable) member is liable for negligence or misconduct in the performance of
his duties; provided that within sixty days after institution of any such
action, suit or proceeding a Board (or Committee, if applicable) member shall in
writing offer the Company the opportunity, at its own expense, to handle and
defend the same.
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
affirmative vote of the holders of a majority of the outstanding capital stock
of the Company entitled to vote within twelve (12) months before or after the
Plan is adopted. Any Option granted before shareholder approval is obtained must
be rescinded if shareholder approval is not obtained within twelve (12) months
before or after the Plan is adopted. Shares issued upon the exercise of such
Options shall not be counted in determining whether such approval is obtained.
11
<PAGE>
EXHIBIT 10.3
SONICWALL, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
Adopted August 24, 1999
The following constitute the provisions of the 1999 Employee Stock Purchase
Plan of SonicWALL, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the Common Stock of the Company.
------------
(d) "Company" means SonicWALL, Inc., a California corporation.
-------
(e) "Compensation" means total cash compensation received by an Employee
------------
from the Company or a Designated Subsidiary. By way of illustration, but not
limitation, Compensation includes regular compensation such as salary, wages,
overtime, shift differentials, bonuses, commissions and incentive compensation,
but excludes relocation, expense reimbursements, tuition or other reimbursements
and income realized as a result of participation in any stock option, stock
purchase, or similar plan of the Company or any Designated Subsidiary.
(f) "Continuous Status As An Employee" means the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of (i) sick leave; (ii)
military leave; (iii) any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company and its Designated Subsidiaries.
(g) "Contributions" means all amounts credited to the account of a
-------------
participant pursuant to the Plan.
1
<PAGE>
(h) "Corporate Transaction" means a sale of all or substantially all of the
---------------------
Company's assets, or a merger, consolidation or other capital reorganization of
the Company with or into another corporation.
(i) "Designated Subsidiaries" means the Subsidiaries which have been
-----------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan; provided however that the Board shall only have the
discretion to designate Subsidiaries if the issuance of options to such
Subsidiary's Employees pursuant to the Plan would not cause the Company to incur
adverse accounting charges.
(j) "Employee" means any person, including an Officer, who is customarily
--------
employed for at least twenty (20) hours per week and more than five (5) months
in a calendar year by the Company or one of its Designated Subsidiaries.
Employee does not include any individual who provides services to the Company or
any Subsidiary as an independent contractor whether or not such individual is
reclassified as a common law employee, unless the Company or a Subsidiary
withholds or is required to withhold U.S. Federal employment taxes for such
individual pursuant to Section 3402 of the Code.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
(l) "Offering Date" means the first business day of each Offering Period of
-------------
the Plan.
(m) "Offering Period" means a period of twenty-four (24) months commencing
---------------
on February 1 and August 1 of each year, except for the first Offering Period as
set forth in Section 4(a).
(n) "Officer" means a person who is an officer of the Company within the
-------
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "Plan" means this Employee Stock Purchase Plan.
----
(p) "Purchase Date" means the last day of each Purchase Period of the Plan.
-------------
(q) "Purchase Period" means a period of six (6) months within an Offering
---------------
Period, except for the first Purchase Period as set forth in Section 4(b).
(r) "Purchase Price" means with respect to a Purchase Period an amount
--------------
equal to 85% of the Fair Market Value (as defined in Section 7(b) below) of a
Share of Common Stock on the Offering Date or on the Purchase Date, whichever is
lower; provided, however, that in the event (i) of any increase in the number of
Shares available for issuance under the Plan as a result of a shareholder-
approved amendment to the Plan, and (ii) all or a portion of such additional
Shares are to be issued with respect to one or more Offering Periods that are
underway at the time of such increase ("Additional Shares"), and (iii) the Fair
Market Value of a Share of Common Stock on the date of such increase (the
"Approval Date Fair Market Value") is higher than the Fair Market Value on the
Offering Date for any such Offering Period, then in such instance the Purchase
Price with respect to Additional Shares shall be 85% of the Approval Date Fair
Market
2
<PAGE>
Value or the Fair Market Value of a Share of Common Stock on the Purchase Date,
whichever is lower.
(s) "Share" means a share of Common Stock, as adjusted in accordance with
-----
Section 19 of the Plan.
(t) "Subsidiary" means a corporation, domestic or foreign, of which not
----------
less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.
3. Eligibility.
-----------
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code; provided however that eligible Employees
may not participate in more than one Offering Period at a time.
(b) Any provisions of the Plan to the contrary notwithstanding, no Employee
shall be granted an option under the Plan (i) if, immediately after the grant,
such Employee (or any other person whose stock would be attributed to such
Employee pursuant to Section 424(d) of the Code) would own capital stock of the
Company and/or hold outstanding options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or of any Subsidiary of the Company, or (ii) if such
option would permit his or her rights to purchase stock under all employee stock
purchase plans (described in Section 423 of the Code) of the Company and its
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. Offering Periods And Purchase Periods.
-------------------------------------
(a) Offering Periods. The Plan shall be implemented by a series of
----------------
Offering Periods of twenty-four (24) months' duration, with new Offering Periods
commencing on or about February 1 and August 1 of each year (or at such other
time or times as may be determined by the Board of Directors). The first
Offering Period shall commence on the beginning of the effective date of the
Registration Statement on Form S-1 for the initial public offering of the
Company's Common Stock (the "IPO Date") and continue until July 31, 2001. The
Plan shall continue until terminated in accordance with Section 19 hereof. The
Board of Directors of the Company shall have the power to change the duration
and/or the frequency of Offering Periods with respect to future offerings
without shareholder approval if such change is announced at least five (5) days
prior to the scheduled beginning of the first Offering Period to be affected.
(b) Purchase Periods. Each Offering Period shall consist of four (4)
----------------
consecutive purchase periods of six (6) months' duration. The last day of each
Purchase Period shall be the "Purchase Date" for such Purchase Period. A
Purchase Period commencing on February 1 shall end on the next July 31. A
Purchase Period commencing on August 1 shall end on the next January 31.
3
<PAGE>
The first Purchase Period shall commence on the IPO Date and shall end on
January 31, 2000. The Board of Directors of the Company shall have the power to
change the duration and/or frequency of Purchase Periods with respect to future
purchases without shareholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Purchase Period to be
affected.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by completing
a subscription agreement on the form provided by the Company and filing it with
the Company's payroll office prior to the applicable Offering Date, unless a
later time for filing the subscription agreement is set by the Board for all
eligible Employees with respect to a given Offering Period. The subscription
agreement shall set forth the percentage of the participant's Compensation
(subject to Section 6(a) below) to be paid as Contributions pursuant to the
Plan.
(b) Payroll deductions shall commence on the first payroll following the
Offering Date and shall end on the last payroll paid on or prior to the last
Purchase Period of the Offering Period to which the subscription agreement is
applicable, unless sooner terminated by the participant as provided in Section
10.
6. Method Of Payment Of Contributions.
----------------------------------
(a) A participant shall elect to have payroll deductions made on each
payday during the Offering Period in an amount not less than one percent (1%)
and not more than fifteen percent (15%) (or such greater percentage as the Board
may establish from time to time before an Offering Date) of such participant's
Compensation on each payday during the Offering Period. All payroll deductions
made by a participant shall be credited to his or her account under the Plan. A
participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the Plan as
provided in Section 10, or, on one occasion only during a Purchase Period may
increase and on one occasion only during a Purchase Period may decrease the rate
of his or her Contributions with respect to the Offering Period by completing
and filing with the Company a new subscription agreement authorizing a change in
the payroll deduction rate. The change in rate shall be effective as of the
beginning of the next calendar month following the date of filing of the new
subscription agreement, if the agreement is filed at least ten (10) business
days prior to such date and, if not, as of the beginning of the next succeeding
calendar month.
(c) Notwithstanding the foregoing, to the extent necessary to comply with
Section 423(b)(8) of the Code and Section 3(b) herein, a participant's payroll
deductions may be decreased during any Purchase Period to 0%. Payroll deductions
shall re-commence at the rate provided in such participant's subscription
agreement at the beginning of the first Purchase Period which is scheduled to
end in the following calendar year, unless terminated by the participant as
provided in Section 10.
4
<PAGE>
7. Grant Of Option.
---------------
(a) On the Offering Date of each Offering Period, each eligible Employee
participating in such Offering Period shall be granted an option to purchase on
each Purchase Date a number of Shares of the Company's Common Stock determined
by dividing such Employee's Contributions accumulated prior to such Purchase
Date and retained in the participant's account as of the Purchase Date by the
applicable Purchase Price; provided however, that the maximum number of Shares
an Employee may purchase during each Purchase Period shall be 2,000 Shares
(subject to any adjustment pursuant to Section 19 below), and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 13.
(b) The fair market value of the Company's Common Stock on a given date
(the "Fair Market Value") shall be determined by the Board based on the closing
sales price of the Common Stock for such date (or, in the event that the Common
Stock is not traded on such date, on the immediately preceding trading date), as
reported by the National Association of Securities Dealers Automated Quotation
(Nasdaq) National Market or, if such price is not reported, the mean of the bid
and asked prices per share of the Common Stock as reported by Nasdaq or, in the
event the Common Stock is listed on a stock exchange, the Fair Market Value per
share shall be the closing sales price on such exchange on such date (or, in the
event that the Common Stock is not traded on such date, on the immediately
preceding trading date), as reported in The Wall Street Journal. For purposes
of the Offering Date under the first Offering Period under the Plan, the Fair
Market Value of a share of the Common Stock of the Company shall be the Price to
Public as set forth in the final prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as
amended.
8. Exercise Of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10, his or her option for the purchase of Shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full Shares subject to the option will be purchased at the
applicable Purchase Price with the accumulated Contributions in his or her
account. No fractional Shares shall be issued. The Shares purchased upon
exercise of an option hereunder shall be deemed to be transferred to the
participant on the Purchase Date. During his or her lifetime, a participant's
option to purchase Shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Purchase Date of each
--------
Offering Period, the Company shall arrange the delivery to each participant, as
appropriate, the Shares purchased upon exercise of his or her option. No
fractional Shares shall be purchased; any payroll deductions accumulated in a
participant's account which are not sufficient to purchase a full Share shall be
retained in the participant's account for the subsequent Purchase Period or
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 below. Any other amounts left over in a participant's account after a
Purchase Date shall be returned to the participant.
5
<PAGE>
10. Voluntary Withdrawal; Termination Of Employment.
-----------------------------------------------
(a) A participant may withdraw all but not less than all the Contributions
credited to his or her account under the Plan at any time prior to each Purchase
Date by giving written notice to the Company. All of the participant's
Contributions credited to his or her account will be paid to him or her promptly
after receipt of his or her notice of withdrawal and his or her option for the
current period will be automatically terminated, and no further Contributions
for the purchase of Shares will be made during the Offering Period.
(b) Upon termination of the participant's Continuous Status as an Employee
prior to the Purchase Date of an Offering Period for any reason, including
retirement or death, the Contributions credited to his or her account will be
returned to him or her or, in the case of his or her death, to the person or
persons entitled thereto under Section 15, and his or her option will be
automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as an
Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any effect
upon his or her eligibility to participate in a succeeding offering or in any
similar plan which may hereafter be adopted by the Company.
11. Automatic Withdrawal. If the Fair Market Value of the Shares on any
--------------------
Purchase Date of an Offering Period is less than the Fair Market Value of the
Shares on the Offering Date for such Offering Period, then every participant
shall automatically (i) be withdrawn from such Offering Period at the close of
such Purchase Date and after the acquisition of Shares for such Purchase Period,
and (ii) be enrolled in the Offering Period commencing on the first business day
subsequent to such Purchase Period.
12. Interest. No interest shall accrue on the Contributions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment as provided in Section 19, the maximum number of
Shares which shall be made available for sale under the Plan shall be 125,000
Shares. If the Board determines that, on a given Purchase Date, the number of
shares with respect to which options are to be exercised may exceed (i) the
number of shares of Common Stock that were available for sale under the Plan on
the Offering Date of the applicable Offering Period, or (ii) the number of
shares available for sale under the Plan on such Purchase Date, the Board may in
its sole discretion provide (x) that the Company shall make a pro rata
allocation of the Shares of Common Stock available for purchase on such Offering
Date or Purchase Date, as applicable, in as uniform a manner as shall be
practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Purchase
6
<PAGE>
Date, and continue all Offering Periods then in effect, or (y) that the Company
shall make a pro rata allocation of the shares available for purchase on such
Offering Date or Purchase Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Purchase Date, and terminate any or all Offering Periods then in effect pursuant
to Section 20 below. The Company may make pro rata allocation of the Shares
available on the Offering Date of any applicable Offering Period pursuant to the
preceding sentence, notwithstanding any authorization of additional Shares for
issuance under the Plan by the Company's shareholders subsequent to such
Offering Date.
(b) The participant shall have no interest or voting right in Shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Board, or a committee named by the Board, shall
--------------
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan.
15. Designation Of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who is to
receive any Shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such Shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period. If
a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant (and
his or her spouse, if any) at any time by written notice. In the event of the
death of a participant and in the absence of a beneficiary validly designated
under the Plan who is living at the time of such participant's death, the
Company shall deliver such Shares and/or cash to the executor or administrator
of the estate of the participant, or if no such executor or administrator has
been appointed (to the knowledge of the Company), the Company, in its
discretion, may deliver such Shares and/or cash to the spouse or to any one or
more dependents or relatives of the participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as the Company may
designate.
16. Transferability. Neither Contributions credited to a participant's
---------------
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws
7
<PAGE>
of descent and distribution, or as provided in Section 15) by the participant.
Any such attempt at assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw funds in accordance with Section 10.
17. Use Of Funds. All Contributions received or held by the Company under
------------
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
18. Reports. Individual accounts will be maintained for each participant
-------
in the Plan. Statements of account will be given to participating Employees at
least annually, which statements will set forth the amounts of Contributions,
the per Share Purchase Price, the number of Shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes In Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the shareholders of the
----------
Company, the number of Shares covered by each option under the Plan which has
not yet been exercised and the number of Shares which have been authorized for
issuance under the Plan but have not yet been placed under option (collectively,
the "Reserves"), as well as the maximum number of shares of Common Stock which
may be purchased by a participant in a Purchase Period, the number of shares of
Common Stock set forth in Section 13(a)(i) above, and the price per Share of
Common Stock covered by each option under the Plan which has not yet been
exercised, shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock (including any
such change in the number of Shares of Common Stock effected in connection with
a change in domicile of the Company), or any other increase or decrease in the
number of Shares effected without receipt of consideration by the Company;
provided however that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of Shares subject to
an option.
(b) Corporate Transactions. In the event of a dissolution or liquidation
----------------------
of the Company, any Purchase Period and Offering Period then in progress will
terminate immediately prior to the consummation of such action, unless otherwise
provided by the Board. In the event of a Corporate Transaction, each option
outstanding under the Plan shall be assumed or an equivalent option shall be
substituted by the successor corporation or a parent or Subsidiary of such
successor corporation. In the event that the successor corporation refuses to
assume or substitute for outstanding options, each Purchase Period and Offering
Period then in progress shall be shortened and a new Purchase Date shall be set
(the "New Purchase Date"), as of which date any Purchase Period and Offering
Period then in progress will terminate. The New Purchase Date shall be on or
before the date of consummation of the transaction and the Board shall notify
each participant in writing, at least ten (10) days prior to the New Purchase
Date, that the Purchase Date for his or her option has been changed to the New
Purchase Date and that his or her option
8
<PAGE>
will be exercised automatically on the New Purchase Date, unless prior to such
date he or she has withdrawn from the Offering Period as provided in Section 10.
For purposes of this Section 19, an option granted under the Plan shall be
deemed to be assumed, without limitation, if, at the time of issuance of the
stock or other consideration upon a Corporate Transaction, each holder of an
option under the Plan would be entitled to receive upon exercise of the option
the same number and kind of shares of stock or the same amount of property, cash
or securities as such holder would have been entitled to receive upon the
occurrence of the transaction if the holder had been, immediately prior to the
transaction, the holder of the number of Shares of Common Stock covered by the
option at such time (after giving effect to any adjustments in the number of
Shares covered by the option as provided for in this Section 19); provided
however that if the consideration received in the transaction is not solely
common stock of the successor corporation or its parent (as defined in Section
424(e) of the Code), the Board may, with the consent of the successor
corporation, provide for the consideration to be received upon exercise of the
option to be solely common stock of the successor corporation or its parent
equal in Fair Market Value to the per Share consideration received by holders of
Common Stock in the transaction. The Board may, if it so determines in the
exercise of its sole discretion, also make provision for adjusting the Reserves,
as well as the price per Share of Common Stock covered by each outstanding
option, in the event that the Company effects one or more reorganizations,
recapitalizations, rights offerings or other increases or reductions of Shares
of its outstanding Common Stock, and in the event of the Company's being
consolidated with or merged into any other corporation.
20. Amendment Or Termination.
------------------------
(a) The Board may at any time and for any reason terminate or amend the
Plan. Except as provided in Section 19, no such termination of the Plan may
affect options previously granted, provided that the Plan or an Offering Period
may be terminated by the Board on a Purchase Date or by the Board's setting a
new Purchase Date with respect to an Offering Period and Purchase Period then in
progress if the Board determines that termination of the Plan and/or the
Offering Period is in the best interests of the Company and the shareholders or
if continuation of the Plan and/or the Offering Period would cause the Company
to incur adverse accounting charges as a result of a change after the effective
date of the Plan in the generally accepted accounting rules applicable to the
Plan. Except as provided in Section 19 and in this Section 20, no amendment to
the Plan shall make any change in any option previously granted which adversely
affects the rights of any participant. In addition, to the extent necessary to
comply with Rule 16b-3 under the Exchange Act, or under Section 423 of the Code
(or any successor rule or provision or any applicable law or regulation), the
Company shall obtain shareholder approval in such a manner and to such a degree
as so required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied
9
<PAGE>
toward the purchase of Common Stock for each participant properly correspond
with amounts withheld from the participant's Compensation, and establish such
other limitations or procedures as the Board (or its committee) determines in
its sole discretion advisable which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance Of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, applicable state securities laws and the requirements of
any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance. As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term Of Plan; Effective Date.
----------------------------
(a) The Plan was adopted by the Board on August 24, 1999 and shall become
effective upon the IPO Date, provided no purchase option granted under the Plan
shall be exercised, and no shares of Common Stock shall be issued hereunder,
until (i) the Plan shall have been approved by the shareholders of the Company
and (ii) the Company shall have complied with all applicable requirements of the
Securities Act of 1933, as amended (including the registration of the shares of
Common Stock issuable under the Plan on a Form S-8 registration statement filed
with the Securities and Exchange Commission), all applicable listing
requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock is listed for trading and all other
applicable requirements established by law or regulation. In the event such
shareholder approval is not obtained, or such compliance is not effected, within
twelve (12) months after the date on which the Plan is adopted by the Board, the
Plan shall terminate and have no further force or effect, and all sums collected
from Participants during the initial offering period hereunder shall be
refunded.
(b) Unless sooner terminated by the Board, the Plan shall terminate upon
the earliest of (i) the last business day in July 2009, (ii) the date on which
all shares available for issuance under the Plan shall have been sold pursuant
to purchase rights exercised under the Plan or (iii) the date on which all
purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
10
<PAGE>
24. Additional Restrictions of Rule 16b-3. The terms and conditions of
-------------------------------------
options granted hereunder to, and the purchase of Shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the Shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
25. General Provisions.
------------------
(a) All costs and expenses incurred in the administration of the Plan shall
be paid by the Company; however, each Plan participant shall bear all costs and
expenses incurred by such individual in the sale or other disposition of any
shares purchased under the Plan.
(b) Nothing in the Plan shall confer upon any participant any right to
continue in the employ of the Company or any Subsidiary for any period of
specific duration or interfere with or otherwise restrict in any way the rights
of the Company (or any Subsidiary employing such person) or of the participant,
which rights are hereby expressly reserved by each, to terminate such person's
employment at any time for any reason, with or without cause.
(c) The provisions of the Plan shall be governed by the laws of the State
of California without resort to its conflict-of-laws rules.
11
<PAGE>
SONICWALL, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the
SonicWALL, Inc. 1999 Employee Stock Purchase Plan (the "Plan") for the Offering
Period ______________, ____ to _______________, ____, and subscribe to and
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 15% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can increase or decrease the rate of my Contributions on one
occasion only with respect to any increase and one occasion only with respect to
any decrease during any Purchase Period by completing and filing a new
Subscription Agreement with such increase or decrease taking effect as of the
beginning of the calendar month following the date of filing of the new
Subscription Agreement, if filed at least ten (10) business days prior to the
beginning of such month. Further, I may change the rate of deductions for future
Offering Periods by filing a new Subscription Agreement, and any such change
will be effective as of the beginning of the next Offering Period. In addition,
I acknowledge that, unless I discontinue my participation in the Plan as
provided in Section 10 of the Plan, my election will continue to be effective
for each successive Offering Period.
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "SonicWALL, Inc. 1999 Employee Stock Purchase
Plan." I understand that my participation in the Plan is in all respects subject
to the terms of the Plan.
1
<PAGE>
6. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only): __________________________
____________________________________
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) ___________________________________
(First) (Middle) (Last)
____________________ ___________________________________
(Relationship) (Address)
___________________________________
8. I understand that if I dispose of any shares received by me pursuant to
the Plan within two (2) years after the Offering Date (the first day of the
Offering Period during which I purchased such shares) or within one (1) year
after the Purchase Date, I will be treated for federal income tax purposes as
having received ordinary compensation income at the time of such disposition in
an amount equal to the excess of the fair market value of the shares on the
Purchase Date over the price which I paid for the shares, regardless of whether
I disposed of the shares at a price less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.
I hereby agree to notify the Company in writing within thirty (30) days
after the date of any such disposition, and I will make adequate provision for
federal, state or other tax withholding obligations, if any, which arise upon
the disposition of the Common Stock. The Company may, but will not be obligated
to, withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the two (2)
year and one (1) year holding periods, I understand that I will be treated for
federal income tax purposes as having received compensation income only to the
extent of an amount equal to the lesser of (1) the excess of the fair market
value of the shares at the time of such disposition over the purchase price
which I paid for the shares under the option, or (2) 15% of the fair market
value of the shares on the Offering Date. The remainder of the gain or loss, if
any, recognized on such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
change. I further understand that I should consult a tax advisor concerning the
tax implications of the purchase and sale of stock under the Plan.
2
<PAGE>
10. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
SIGNATURE: _______________________________
SOCIAL SECURITY NUMBER: __________________
DATE: ____________________________________
SPOUSE'S SIGNATURE (necessary if beneficiary is not spouse):
_____________________________________
(Signature)
_____________________________________
(Print name)
3
<PAGE>
SONICWALL, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, __________________________, hereby elect to withdraw my participation in
the SonicWALL, Inc. 1999 Employee Stock Purchase Plan (the "Plan") for the
Offering Period that began on _________ ___, _____. This withdrawal covers all
Contributions credited to my account and is effective on the date designated
below. I understand that all Contributions credited to my account will be paid
to me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period. The undersigned further understands and
agrees that he or she shall be eligible to participate in succeeding offering
periods only by delivering to the Company a new Subscription Agreement.
Dated: __________________________
_________________________________
Signature of Employee
_________________________________
Social Security Number
<PAGE>
EXHIBIT 10.4
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of August __, 1999,
by and between SonicWALL, Inc., a California corporation (the "Company"), and
_________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the difficulty in obtaining
directors' and officers' liability insurance, the cost of such insurance and the
limited scope of coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner which Indemnitee
1
<PAGE>
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, by reason of
any action or inaction on the part of Indemnitee while an officer or director or
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) and, to the fullest extent permitted by law, amounts
paid in settlement, in each case to the extent actually and reasonably incurred
by Indemnitee in connection with the defense or settlement of such action or
suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in or not opposed to the best interests of the Company and its
shareholders, except that no indemnification shall be made in respect of any
claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company in the performance of Indemnitee's duty to the Company and
its shareholders unless and only to the extent that the court in which such
action or suit is or was pending shall determine upon application that, in view
of all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for expenses and then only to the extent that the court
shall determine.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Subsections (a) and (b) of this Section 1 or the
defense of any claim, issue or matter therein, Indemnitee shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
Indemnitee in connection therewith.
2. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company may advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section l(a) or (b) hereof (but not amounts actually paid in settlement of any
such action, suit or proceeding). Indemnitee hereby undertakes to repay such
amounts advanced only if, and to the extent that, it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. Any advances made hereunder shall be paid by the Company to
Indemnitee within twenty (20) days following delivery of a written request
therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in writing as soon as practicable of any claim made
against Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement
2
<PAGE>
(or such other address as the Company shall designate in writing to Indemnitee).
Notice shall be deemed received three business days after the date postmarked if
sent by domestic certified or registered mail, properly addressed, otherwise
notice shall be deemed received when such notice shall actually be received by
the Company. In addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 shall be made no later than forty-five (45) days after receipt of the
written request of Indemnitee. If a claim under this Agreement, under any
statute, or under any provision of the Company's Articles of Incorporation or
Bylaws providing for indemnification, is not paid in full by the Company within
forty-five (45) days after a written request for payment thereof has first been
received by the Company, Indemnitee may, but need not, at any time thereafter
bring an action against the Company to recover the unpaid amount of the claim
and, subject to Section 13 of this Agreement, Indemnitee shall also be entitled
to be paid for the expenses (including attorneys' fees) of bringing such action.
It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in connection with any action, suit or
proceeding in advance of its final disposition) that Indemnitee has not met the
standards of conduct which make it permissible under applicable law for the
Company to indemnify Indemnitee for the amount claimed. Indemnitee shall be
entitled to receive interim payments of expenses pursuant to Subsection 2(a)
unless and until such defense may be finally adjudicated by court order or
judgment from which no further right of appeal exists. It is the parties'
intention that if the Company contests Indemnitee's right to indemnification,
the question of Indemnitee's right to indemnification shall be for the court to
decide, and neither the failure of the Company (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its shareholders) to have made a determination that
indemnification of Indemnitee is proper in the circumstances because Indemnitee
has met the applicable standard of conduct required by applicable law, nor an
actual determination by the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its shareholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 2(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 2(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for
3
<PAGE>
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (i) Indemnitee shall have the right to employ his or
her counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the
employment of counsel by Indemnitee has been previously authorized by the
Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Articles of
Incorporation, the Company's Bylaws or by statute. In the event of any change
in any applicable law, statute or rule which narrows the right of a California
corporation to indemnify a member of its board of directors or an officer, such
changes, to the extent not otherwise required by such law, statute or rule to be
applied to this Agreement shall have no effect on this Agreement or the parties'
rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Articles of Incorporation, its Bylaws, any agreement, any
vote of shareholders or disinterested Directors, the Corporation Law of the
State of California, or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though he or she may have ceased to serve in such capacity at the time of any
action, suit or other covered proceeding.
4. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by him
or her in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
5. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
4
<PAGE>
6. Officer and Director Liability Insurance. The Company may, from time
----------------------------------------
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of director and officer liability insurance, Indemnitee shall be named
as an insured in such a manner as to provide Indemnitee the same rights and
benefits as are accorded to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company, but is an officer; or of the
Company's key employees, if Indemnitee is not an officer or director, but is a
key employee. Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain such insurance if the Company determines in
good faith that such insurance is not reasonably available, if the premium costs
for such insurance are disproportionate to the amount of coverage provided, if
the coverage provided by such insurance is limited by exclusions so as to
provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company. However, the
Company's decision whether or not to adopt and maintain such insurance shall not
affect in any way its obligations to indemnify its officers and directors under
this Agreement or otherwise.
7. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 7. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 317 of the California Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such suit.
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous.
5
<PAGE>
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company.
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include any constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors,
officers, and employees or agents, so that if Indemnitee is or was a director,
officer, employee or agent of such constituent corporation, or is or was serving
at the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, Indemnitee shall stand in the same position under the provisions of
this Agreement with respect to the resulting or surviving corporation as
Indemnitee would have with respect to such constituent corporation if its
separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises,"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
opposed to the best interests of the Company" as referred to in this Agreement.
10. Effectiveness. This Agreement shall be deemed to be effective as of
-------------
the commencement date of Indemnitee's employment as an Officer or Director of
the Company.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
6
<PAGE>
13. Attorneys Fees. In the event that any action is instituted by
--------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys, fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
14. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
16. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of California, as applied to
contracts between California residents entered into and to be performed entirely
within California.
17. Modification. This Agreement constitutes the entire agreement between
------------
the parties hereto with respect to the subject matter hereof. All prior
negotiations, agreements and understandings between the parties with respect
thereto are superseded hereby. This Agreement may not be modified or amended
except by an instrument in writing signed by or on behalf of the parties hereto.
[SIGNATURE PAGE FOLLOWS]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SONICWALL, INC.
By: ______________________________
Title: ___________________________
AGREED TO AND ACCEPTED:
INDEMNITEE
__________________________________
[Indemnitee]
__________________________________
__________________________________
__________________________________
(address)
8
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
OBLIGOR # NOTE # AGREEMENT DATE
May 26, 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CREDIT LIMIT INTEREST RATE B+1.75% OFFICER NO./INITIALS
$1,000,000.00 10.75% 48205 JOHN SUGG
- -----------------------------------------------------------------------------------------------------
</TABLE>
THIS AGREEMENT is entered into on May 26, 1995, between COMERICA BANK -
CALIFORNIA ("Bank") as secured party whose Headquarter Office is 333 West Santa
Clara Street, San Jose, CA and SONIC SYSTEMS ("Borrower"), a corporation whose
sole place of business (if it has only one), chief executive office (if it has
more than one place of business) or residence (if an individual) is located at
75 N. Pastoria, Suite 201, Sunnyvale, CA. The parties agree as follows:
1. DEFINITIONS
-----------
1.1 "Agreement" as used in this Agreement means and includes this
Loan & Security Agreement (Accounts and Inventory), any concurrent or
subsequent rider to this Loan & Security Agreement (Accounts and Inventory)
and any extensions, supplements or modifications to this Loan & Security
Agreement (Accounts and Inventory) and to any such rider.
1.2 "Bank Expense" as used in this Agreement means and includes: all
costs or expenses required to be paid by Borrower under this Agreement
which are paid or advanced by Bank; taxes and insurance premiums of every
nature and kind of Borrower paid by Bank; filing, recording, publication
and search fees, appraiser fees, auditor fees and costs, and title
insurance premiums paid or incurred by Bank in collection with Bank's
transactions with Borrower; costs and expenses incurred by Bank in
collecting the Receivables (with or without suit) to correct any default or
enforce any provision of this Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, disposing
of, preparing for sale and/or advertising to sell the Collateral, whether
or not a sale is consummated; costs and expenses of suit incurred by Bank
in enforcing or defending this Agreement or any portion hereof, including,
but not limited to, expenses incurred by Bank in attempting to obtain
relief from any stay, restraining order, injunction or similar process
which prohibits Bank from exercising any of its rights or remedies; and
attorneys' fees and expenses incurred by Bank in advising, structuring,
drafting, reviewing, amending, terminating, enforcing, defending or
concerning this Agreement, or any portion hereof or any agreement related
hereto, whether or not suit is brought. Bank Expenses shall include Bank's
in-house legal charges at reasonable rates.
1.3 "Base Rate" as used in this Agreement means that variable rate of
interest so announced by Bank at its headquarters office in San Jose,
California as its "Base Rate" from time to time and which serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto.
1.4 "Borrower's Books" as used in this Agreement means and includes
all of the Borrower's books and records including but not limited to:
minute books; ledgers; records indicating, summarizing or evidencing
Borrower's assets, liabilities, Receivables,
1
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
business operations or financial condition, and all information relating
thereto, computer programs; computer disk or tape files; computer
printouts; computer runs; and other computer prepared information and
equipment of any kind.
1.5 "Borrowing Base" as used in this Agreement means the sum of: (1)
eighty percent (80.00%) of the net amount of Eligible Accounts after
deducting therefrom all payments, adjustments and credits applicable
thereto ("Accounts Receivable Borrowing Base"); and (2) the amount, if any,
of the advances against inventory agreed to be made pursuant to any
Inventory Rider ("Inventory Borrowing Base"), or other rider, amendment or
modification to this Agreement, that may now or hereafter be entered into
by Bank and Borrower.
1.6 "Cash Flow" as used in this Agreement means for any applicable
period of determination, the Net Income (after deduction for income taxes
and other taxes of such person determined by reference to income or profits
of such person) for such period, plus, to the extent deducted in
computation of such Net Income, the amount of depreciation and amortization
expense and the amount of deferred tax liability during such period, all as
determined in accordance with GAAP. The applicable period of determination
will be ___________________, beginning with the period from _______________
to _______________.
1.7 "Collateral" as used in this Agreement means and includes each
and all of the following: the Receivables; the intangibles; the negotiable
collateral, the Inventory; all money, deposit accounts and all other assets
of Borrower in which Bank receives a security interest or which hereafter
come into the possession, custody or control of Bank; and the proceeds of
any of the foregoing, including, but not limited to, proceeds of insurance
covering the collateral and any and all Receivables, intangibles,
negotiable collateral, inventory, equipment, money, deposit accounts or
other tangible and intangible property of borrower resulting from the sale
or other disposition of the collateral, and the proceeds thereof.
Notwithstanding anything to the contrary contained herein, collateral shall
not include any waste or other materials which have been or may be
designated as toxic or hazardous by Bank.
1.8 "Credit" as used in this Agreement means all Obligations, except
those obligations arising pursuant to any other separate contract,
instrument, note, or other separate agreement which, by its terms, provides
for a specified interest rate and term.
1.9 "Current Assets" as used in this Agreement means, as of any
applicable date of determination, all cash, non-affiliated customer
receivables, United States government securities, claims against the United
States government, and inventories.
1.10 "Current Liabilities" as used in this Agreement means, as of any
applicable date of determination, (1) all liabilities of a person that
should be classified as current in accordance with GAAP, including without
limitation any portion of the principal of the indebtedness classified as
current, plus (2) to the extent not otherwise included, all liabilities of
the Borrower to any of its affiliates whether or not classified as current
in accordance with GAAP.
2
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
1.11 "Daily Balance" as used in this Agreement means the amount
determined by taking the amount of the Credit owed at the beginning of a
given day, adding any new Credit advanced or incurred on such date, and
subtracting any payments or collections which are deemed to be paid and are
applied by Bank in reduction of the Credit on that date under the
provisions of this Agreement.
1.12 "Eligible Accounts" as used in this Agreement means and includes
those accounts of Borrower which are due and payable within thirty (30)
days, or less, from the date of invoice, have been validly assigned to Bank
and strictly comply with all of Borrower's warranties and representations
to Bank; but Eligible Accounts shall not include the following: (a)
accounts with respect to which the account debtor is an officer, employee,
partner, joint venturer or agent of Borrower; (b) accounts with respect to
which goods are placed on consignment, guaranteed sale or other terms by
reason of which the payment by the account debtor may be conditional; (c)
accounts with respect to which the account debtor is not a resident of the
United States; (d) accounts with respect to which the account debtor is the
United States or any department, agency or instrumentality of the United
States; (e) accounts with respect to which the account debtor is any State
of the United States or any city, county, town, municipality or division
thereof; (f) accounts with respect to which the account debtor is a
subsidiary of, related to, affiliated or has common shareholders, officers
or directors with Borrower; (g) accounts with respect to which Borrower is
or may become liable to the account debtor for goods sold or services
rendered by the account debtor to Borrower; (h) accounts not paid by an
account debtor within ninety (90) days from the date of the invoice; (i)
accounts with respect to which account debtors dispute liability or make
any claim, or have any defense, crossclaim, counterclaim, or offset; (j)
accounts with respect to which any insolvency proceeding is filed by or
against the account debtor, or if an account debtor becomes insolvent,
fails or goes out of business; and (k) accounts owed by any single account
debtor which exceed twenty percent (20%) of all of the Eligible Accounts;
and (l) accounts with a particular account debtor on which over twenty-five
percent (25%) of the aggregate amount owing is greater than ninety (90)
days from the date of the invoice. Allow for 40% concentration on Ingram
Micro. Allow for foreign receivables less than 60 days. Also fifty percent
(50%) of foreign accounts receivable aged less than 60 days NTE 200,000.00.
1.13 "Event of Default" as used in this Agreement means those events
described in Section 7 contained herein below.
1.14 "Fixed Charges" as used in this Agreement means and includes for
any applicable period of determination, the sum, without duplication, of
(a) all interest paid or payable during such period by a person on debt of
such person, plus (b) all payments of principal or other sums paid or
payable during such period by such person with respect to debt of such
person having a final maturity more than one year from the date of creation
of such debt, plus (c) all debt discount and expense amortized or required
to be amortized during such period by such person, plus (d) the maximum
amount of all rents and other payments paid or required to be paid by such
person during such period under any lease or other contract or arrangement
providing for use of real or personal property in respect
3
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
of which such person is obligated as a lessee, use or obligor, plus (e) all
dividends and other distributions paid or payable by such person or otherwise
accumulating during such period on any capital stock of such person, plus (f)
all loans or other advances made by such person during such period to any
Affiliate of such person. The applicable period of determination will be
_________________N/A_________, beginning with period from ___________to
_______________________.
1.15 "GAAP" as used in this Agreement means as of any applicable
period, generally accepted accounting principles in effect during such
period
1.16 "Insolvency Proceeding" as used in this Agreement means and
includes any proceeding or case commenced by or against the Borrower, or
any guarantor of Borrower's Obligations, or any of Borrower's account
debtors, under any provisions of the Bankruptcy Code, as amended, or any
other bankruptcy or insolvency law, including but not limited to
assignments for the benefit of creditors, formal or informal moratoriums,
composition or extensions with some or all creditors any proceeding seeking
a reorganization arrangement or any other relief under the Bankruptcy code,
as amended, or any other bankruptcy or insolvency law.
1.17 "Intangibles" as used in this Agreement means and includes all
of Borrower's present and future general intangibles and other personal
property (including , without limitation, any and all rights in any legal
proceedings, goodwill, patents, trade names, copyrights, trademarks,
blueprints, drawings, purchase orders, computer programs, computer disks,
computer tapes, literature, reports, catalogs and deposit accounts) other
than goods and Receivables, as well as Borrower's Books relating to any of
the foregoing.
1.18 "Inventory" as used in this Agreement means and includes all
present and future inventory in which Borrower has any interest, including,
but not limited to, goods held by Borrower for sale or lease or to be
furnished under a contract of service and all of Borrower's present and
future raw materials, work in process, finished goods, advertising
materials, and packing and shipping materials, wherever located and any
documents of title representing any of the above, and any equipment,
fixture or other property used in the storing, moving, preserving,
identifying, accounting for and shipping or preparing for the shipping of
inventory, and any and all other items hereafter acquired by Borrower by
way of substitution, replacement, return, repossession or otherwise, and
all additions and accessions thereto, and the resulting product or mass,
and any documents of title respecting any of the above.
1.19 "Net Income" as used in this agreement means the net income (or
loss) of a person for any period determined in accordance with GAAP but
excluding in any event:
a. any gains or losses on the sale or other disposition, not in the
ordinary course of business, of investments or fixed or capital
assets, and any taxes on the excluded gains and any tax deductions or
credits on account on any excluded losses; and
4
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
b. in the case of the Borrower, net earnings of any Person in which
Borrower has an ownership interest, unless such net earnings shall
have actually been received by Borrower in the form of cash
distributions.
1.20 "Judicial Officer or Assignee" as used in this Agreement means
and includes any trustee, receiver, controller, custodian, assignee for the
benefit of creditors or any other person or entity having powers or duties
like or similar to the powers and duties of trustee, receiver, controller,
custodian or assignee for the benefit of creditors.
1.21 "Obligations" as used in this Agreement means and includes any
and all loans, advances, overdrafts, debts, liabilities (including, without
limitation, any and all amounts charged to Borrower's account pursuant to
any agreement authorizing Bank to charge Borrower's account), obligations,
lease payments, guaranties, covenants and duties owing by Borrower to Bank
of any kind and description whether advanced pursuant to or evidenced by
this Agreement; by any note or other instrument; or by any other agreement
between Bank and Borrower and whether or not for the payment of money,
whether direct or indirect, absolute or contingent, due or to become due,
now existing or hereafter arising, and including, without limitation, any
debt, liability or obligation owing from Borrower to others which Bank may
have obtained by assignment, participation, purchase or otherwise, and
further including, without limitation, all interest not paid when due and
all Bank Expenses which Borrower is required to pay or reimburse by this
Agreement, by law, or otherwise.
1.22 "Person" or "person" as used in this Agreement means and
includes any individual, corporation, partnership, joint venture,
association, trust, unincorporated association, joint stock company,
government, municipality, political subdivision or agency or other entity.
1.23 "Receivables" as used in this Agreement means and includes all
presently existing and hereafter arising accounts, instruments, documents,
chattel paper, general intangibles, all other forms of obligations owing to
Borrower, all of Borrower's rights in, to and under all purchase orders
heretofore or hereafter received, all moneys due to Borrower under all
contracts or agreements (whether or not yet earned or due), all merchandise
returned to or reclaimed by Borrower and the Borrower's books (except
minute books) relating to any of the foregoing.
1.24 "Subordinated Debt" as used in this Agreement means indebtedness
of the Borrower to third parties which has been subordinated to the
Obligations pursuant to a subordination agreement in form and content
satisfactory to the Bank.
1.25 "Subordination Agreement" as used in this Agreement means a
subordination agreement in form satisfactory to Bank making all present and
future indebtedness of the Borrower to N/A
-----------------------------------
subordinate to the Indebtedness.
1.26 "Tangible Effective Net Worth" as used in this Agreement means
net worth as determined in accordance with GAAP consistently applied,
increased by
5
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
subordinated debt if any, and decreased by the following: patents,
licenses, goodwill, subscription lists, organization expenses, trade
receivables converted to notes, and money due from affiliated (including
officers, directors, subsidiaries and commonly held companies).
1.27 "Tangible Net Worth" as used in this Agreement means, as of any
applicable date of determination, the excess of:
a. the net book value of all assets of a person (other than patents,
patent rights, trademarks, trade names, franchises, copyrights,
licenses, goodwill, and similar intangible assets) after all
appropriate deductions in accordance with GAAP (including, without
limitation, reserves for doubtful receivables, obsolescence,
depreciation and amortization), over
b. all total liabilities of such person.
1.28 "Total Liabilities" as used in this Agreement means the total of
all items of Indebtedness, obligation or liability which, in accordance
with GAAP consistently applied, would be included in determining the total
liabilities of the Borrower as of the date Total Liabilities is to be
determined, including without limitation (a) all obligations secured by any
mortgage, pledge, security interest or other lien on property owned or
acquired, whether or not the obligations secured thereby shall have been
assumed; (b) all obligations which are capitalized lease obligations; and
(c) all guaranties, endorsements or other contingent or surety obligations
with respect to the indebtedness of others, whether or not reflected on the
balance sheets of the Borrower, including any obligation to furnish funds,
directly or indirectly through the purchase of goods, supplies, services,
or by way of stock purchase, capital contribution, advance or loan or any
obligation to enter into a contract for any of the foregoing.
1.29 "Working Capital" as used in this Agreement means, as of any
applicable date of determination, Current Assets less Current Liabilities.
1.30 Any and all terms used in this Agreement shall be construed and
defined in accordance with the meaning and definition of such terms under
and pursuant to the California Uniform Commercial Code (hereinafter
referred to as the "Code") as amended.
2. LOAN AND TERMS OF PAYMENT
-------------------------
For value received, Borrower promises to pay to the order of Bank such
amount, as provided for below, together with interest, as provided for
below.
2.1 Upon the request of Borrower, made at any time and from time to
time during the term hereof, and so long as no Event of Default has
occurred, Bank shall lend to Borrower an amount equal to the Borrowing
Base; provided, however, that in no event shall Bank be obligated to make
advances to Borrower under this Section 2.1 whenever the Daily Balance
exceeds, at any time, either the Borrowing Base or the sum of One
6
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
Million and no/100 ($1,000,000.00), such amount being referred to herein as
"Overadvance".
2.2 Except as hereinbelow provided, the Credit shall bear interest on
the Daily Balance owing, at a rate of one and 750/1000 (1.750%) percentage
points per annum above the Base Rate (the "Rate"). The Credit shall bear
interest, from and after the occurrence of an Event of Default and without
constituting a waiver of any such Event of Default, on the Daily Balance
owing, at a rate three (3) percentage points per annum above the Rate. All
interest chargeable under this Agreement that is based upon a per annum
calculation shall be computed on the basis of a three hundred sixty (360)
day year for actual days elapsed.
The Base Rate as of the date of this Agreement is Nine and
no/1000 (9.000%) per annum. In the event that the Base Rate announced is,
from time to time hereafter, changed, adjustment in the Rate shall be made
and based on the Base Rate in effect on the date of such change. The Rate,
as adjusted, shall apply to the Credit until the Base Rate is adjusted
again. The minimum interest payable by the Borrower under this Agreement
shall in no event be less than N/A per month. All
---------------------
interest payable by Borrower under the Credit shall be due and payable on
the first day of each calendar month during the term of this Agreement and
Bank may, at its option, elect to treat such interest and any and all Bank
Expenses as advances under the Credit, which amounts shall thereupon
constitute Obligations and shall thereafter accrue interest at the rate
applicable to the Credit under the Terms of the Agreement.
2.3 Without affecting Borrower's obligation to repay immediately any
Overadvice in accordance with Section 2.1 hereof, all Overadvances shall
bear additional interest on the amount thereof at a rate equal to
N/A ( N/A %) percentage points per month in excess of
--------------------- --------
the interest rate set forth in Section 2.2, from the date incurred and for
each month thereafter, until repaid in full.
3. TERM
----
3.1 This Agreement shall remain in full force and effect until
terminated by notice, by either party. Notice of such termination shall be
effectuated by mailing of a registered or certified letter not less than
thirty (30) days prior to the effective date of such termination, addressed
to the other party at the address set forth herein and the termination
shall be effective as of the date so fixed in such notice. Notwithstanding
the foregoing, should Borrower be in default of one or more of the
provisions of this Agreement. Bank may terminate this Agreement at any time
without notice. Notwithstanding the foregoing, should either Bank or
Borrower become insolvent or unable to meet its debts as they mature, or
fall, suspend, or go out of business, the other party shall have the right
to terminate this Agreement at any time without notice. On the date of
termination all Obligations shall become immediately due and payable
without notice or demand; no notice of termination by Borrower shall be
effective until Borrower shall have paid all Obligations to Bank in full.
Notwithstanding termination, until all Obligations have been fully
satisfied, Bank shall retain its security interest in all existing
7
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
Collateral and Collateral arising thereafter, and Borrower shall continue
to perform all of its Obligations.
3.2 After termination and when Bank has received payment in full of
Borrower's Obligations to Bank, Bank shall reassign to Borrower all
Collateral held by Bank, and shall execute a termination of all security
agreements and security interests given by Borrower to Bank, upon the
execution and delivery of mutual general releases.
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Borrower hereby grants to Bank a continuing security interest in
all presently existing and hereafter arising Collateral in order to secure
prompt repayment of any and all Obligations owed by Borrower to Bank and in
order to secure prompt performance by Borrower of each and all of its
covenants and Obligations under this Agreement and otherwise created.
Bank's security interest in the Collateral shall attach to all Collateral
without further act on the part of Bank or Borrower. In the event that any
Collateral, including proceeds, is evidenced by or consists of a letter of
credit, advice of credit, instrument, money, negotiable documents, chattel
paper or similar property (collectively "Negotiable Collateral"), Borrower
shall, immediately upon receipt thereof, endorse and assign such Negotiable
Collateral over to Bank and deliver actual physical possession of the
Negotiable Collateral to Bank.
4.2 Bank's security interest in Receivables shall attach to all
Receivables without further act on the part of Bank or Borrower. Upon
request from Bank, Borrower shall provide Bank with schedules describing
all Receivables created or acquired by Borrower (including without
limitation agings listing the names and addresses of, and amounts owing by
date by account debtors), and shall execute and deliver written assignments
of all Receivables to Bank all in a form acceptable to Bank, provided,
however, Borrower's failure to execute and deliver such schedules and/or
assignments shall not affect or limit Bank's security interest and other
rights in and to the Receivables. Together with each schedule, Borrower
shall furnish Bank with copies of Borrower's customers' invoices or the
equivalent, and original shipping or delivery receipts for all merchandise
sold, and Borrower warrants the genuineness thereof. Bank of Bank's
designee may notify customers or account debtors of collection costs and
expenses in Borrower's account but, unless and until Bank does so or gives
Borrower other written instructions, Borrower shall collect all Receivables
for Bank, receive in trust all payments thereon as Bank's trustee, and, if
so requested to do so from Bank, Borrower shall immediately deliver said
payments to Bank in their original form as received from the account debtor
and all letters of credit, advices of credit, instruments, documents,
chattel paper or any similar property evidencing or constituting
Collateral. Notwithstanding anything to the contrary contained herein, if
sales of inventory are made for cash, Borrower shall immediately deliver to
Bank, in identical form, all such cash, checks, or other forms of payment
which Borrower receives. The receipt of any check or other item of payment
by Bank shall not be considered a payment on account until such check or
other item of payment is honored when presented for payment, in which
event, said check
8
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
or other item of payment shall be deemed to have been paid to Bank two (2)
calendar days after the date Bank actually receives such check or other
item of payment.
4.3 Bank's security interest in Inventory shall attach to all
Inventory without further act on the part of Bank or Borrower. Upon Bank's
request Borrower will from time to time at Borrower's expense pledge,
assemble and deliver such Inventory to Bank or to a third party as Bank's
bailee; or hold the same in trust for Bank's account or store the same in a
warehouse in Bank's name; or deliver to Bank documents of title
representing said Inventory; or evidence of Bank's security interest in
some other manner acceptable to Bank. Until a default by Borrower under
this Agreement or any other Agreement between Borrower and Bank, Borrower
may, subject to the provisions hereof and consistent herewith, sell the
inventory, but only in the ordinary course of Borrower's business. A sale
of inventory in Borrower's ordinary course of business does not include an
exchange or a transfer in partial or total satisfaction of a debt owing by
Borrower.
4.4 Borrower shall execute and deliver to Bank concurrently with
Borrower's execution of this Agreement, and at any time or times hereafter
at the request of Bank, all financing statements, continuation financing
statements, security agreements, mortgages, assignments, certificates of
title, affidavits, reports, notices, schedules of accounts, letters of
authority and all other documents that Bank may request, in form
satisfactory to Bank, to perfect and maintain perfected Bank's security
interest in the Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement. Borrower hereby irrevocably
makes, constitutes and appoints Bank (and any of Bank's officers, employees
or agents designated by Bank) as Borrower's true and lawful attorney-in-
fact with power to sign the name of Borrower on any financing statements,
continuation financing statements, security agreement, mortgage,
assignment, certificate of title, affidavit, letter of authority, notice of
other similar documents which must be executed and/or filed in order to
perfect or continue perfected Bank's security interest in the Collateral.
Borrower shall make appropriate entries in Borrower's Books
disclosing Bank's security interest in the Receivables. Bank (through any
of its officers, employees or agents) shall have the right at any time or
times hereafter during Borrower's usual business hours, or during the usual
business hours of any third party having control over the records of
Borrower, to inspect and verify Borrower's Books in order to verify the
amount of condition of, or any other matter, relating to, said Collateral
and Borrower's financial condition.
4.5 Borrower appoints Bank or any other person whom Bank may
designate as Borrower's attorney-in-fact, with power: to endorse Borrower's
name on any checks, notes, acceptances, money order, drafts or other forms
of payment or security that may come into Bank's possession; to sign
Borrower's name on any invoice or bill of lading relating to any
Receivables, on drafts against account debtors, on schedules and
assignments of Receivables, on verifications of Receivables and on notices
to account debtors; to establish a lock box arrangement and/or to notify
the post office authorities to change the address for delivery of
Borrower's mail addressed to Borrower to an address
9
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
designated by Bank, to receive and open all mail addressed to Borrower, and
to retain all mail relating to the Collateral and forward all other mail to
Borrower; to send, whether in writing or by telephone, requests for
verification of Receivables; and to do all things necessary to carry out
this Agreement. Borrower ratifies and approves all acts of the attorney-in-
fact. Neither Bank nor its attorney-in-fact will be liable for any acts or
omissions or for any error of judgment or mistake of fact or law. This
power being coupled with an interest, is irrevocable so long as any
Receivables in which Bank has a security interest remain unpaid and until
the Obligations have been fully satisfied.
4.6 In order to protect or perfect any security interest which Bank
is granted hereunder, Bank may, in its sole discretion, discharge any lien
or encumbrance or bond the same, pay any insurance, maintain guards,
warehousemen, or any personnel to protect the Collateral, pay any service
bureau, or, obtain any records, and all costs for the same shall be added
to the Obligations and shall be payable on demand.
4.7 Borrower agrees that Bank may provide information relating to
this Agreement or relating to Borrower to Bank's parent, affiliates,
subsidiaries and service providers.
5. CONDITIONS PRECEDENT
--------------------
5.1 Conditions precedent to the making of the loans and the extension
of the financial accommodations hereunder, Borrower shall execute, or cause
to be executed, and deliver to Bank, in form and substance satisfactory to
Bank and its counsel, the following:
a. This Agreement and other documents required by Bank;
b. Financing statements (Form UCC-1) in form satisfactory to Bank for
filing and recording with the appropriate governmental authorities;
c. If Borrower is a corporation, then certified extracts from the
minutes of the meeting of its board of directors, authorizing the
borrowings and the granting of the security interest provided for
herein and authorizing specific officers to execute and deliver the
agreements provided for herein;
d. If Borrower is a corporation, then a certificate of good standing
showing that Borrower is in good standing under the laws of the state
of its incorporation and certificates indicating that Borrower is
qualified to transact business and is in good standing in any other
state in which it conducts business;
e. If Borrower is a partnership, then a copy of Borrower's
partnership agreement certified by each general partner of Borrower;
f. UCC searches, tax lien and litigation searches, fictitious
business statement filings, insurance certificates, notices or other
similar documents which Bank may require and in such form as bank may
require, in order to reflect, perfect or protect Bank's first priority
security interest in the Collateral and in order to fully consummate
all of the transactions contemplated under this Agreement;
10
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
g. Evidence that Borrower has obtained insurance and acceptable
endorsements;
h. Waivers executed by landlords and mortgagees of any real property
on which any Collateral is located; and
i. Warranties and representations of officers.
6. Warranties, Representations and Covenants
-----------------------------------------
6.1 If so requested by Bank, Borrower shall, at such intervals
designated by Bank, during the term hereof execute and deliver a Report of
Accounts Receivable or similar report, in form customarily used by Bank.
Borrower's Borrowing Base at all times pertinent hereto shall not be less
than the advances made hereunder. Bank shall have the right to recompute
Borrower's Borrowing Base in conformity with this Agreement.
6.2 If any warranty is breached as to any account, or any account is
not paid in full by an account debtor within ninety (90) days from the date
of invoice, or an account debtor disputes liability or makes any claim with
respect thereto, or a position in bankruptcy or other application for
relief under the Bankruptcy Code or any other insolvency law is filed by or
against an account debtor, or an account debtor makes an assignment for the
benefit of creditors, becomes insolvent, fails or goes out of business,
then Bank may deem ineligible any and all accounts owing by that account
debtor, and reduce Borrower's Borrowing Base by the amount thereof. Bank
shall retain its security interest in all Receivables and accounts, whether
eligible or ineligible, until all Obligations have been fully paid and
satisfied. Returns and allowances, if any, as between Borrower and its
customers, will be on the same basis and in accordance with the usual
customary practices of the Borrower, as they exist at this time. Any
merchandise which is returned by an account debtor or otherwise recovered
shall be set aside, marked with Bank's name, and Bank shall retain a
security interest therein. Borrower shall promptly notify Bank of all
disputes and claims and settle or adjust them on terms approved by Bank.
After default by Borrower hereunder, no discount, credit or allowance shall
be granted to any account debtor by Borrower and no return of merchandise
shall be accepted by Borrower without Bank's consent. Bank may, after
default by Borrower, settle or adjust disputes and claims directly with
account debtors for amounts and upon terms which Bank considers advisable,
and in such cases Bank will credit Borrower's account with only the net
amounts received by Bank in payment of the accounts, after deducting all
Bank Expenses in connection therewith.
6.3 Borrower warrants, represents, covenants and agrees that;
a. Borrower has good and marketable title to the Collateral. Bank has
and shall continue to have a first priority perfected security
interest in and to the Collateral. The Collateral shall at all times
remain free and clear of all liens, encumbrances and security
interests (except those in favor of Bank).
11
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
b. All accounts are and will, at all times pertinent hereto, be bona fide
existing Obligations created by the sale and delivery of merchandise or the
rendition of services to account debtors in the ordinary course of
business, free of liens, claims, encumbrances and security interests
(except as held by Bank and except as may be consented to, in writing, by
Bank) and are unconditionally owed to Borrower with defenses, disputes,
offsets, counterclaims, rights of return or cancellation, and Borrower
shall have received no notice of actual or imminent bankruptcy or
insolvency of any account debtor at the time an account due from such
account debtor is assigned to Bank.
c. At the time each account is assigned to Bank, all property giving rise
to such account shall have been delivered to the account debtor or to the
agent for the account debtor for immediate shipment to, and unconditional
acceptance by, the account debtor. Borrower shall deliver to Bank, as Bank
may from time to time require, delivery receipts, customer's purchase
orders, shipping instructions, bills of lading and any other evidence of
shipping arrangements. Absent such a request by Bank, copies of all such
documentation shall be held by Borrower as custodian for Bank.
6.4 At the time each eligible account is assigned to Bank, all such
eligible accounts will be due and payable on terms set forth in Section 1.7, or
on such other terms approved in writing by Bank in advance of the creation of
such accounts and which are expressly set forth on the face of all invoices,
copies of which shall be held by Borrower as custodian for Bank, and no such
eligible account will then be past due.
6.5 Borrower shall keep the inventory only at the following locations:
_____________________________________________________ and the owner or
mortgagees of the respective locations are _____________________________________
______________________________________________________________________________.
a. Borrower, immediately upon demand by Bank therefor, shall now and from
time to time hereafter, at such intervals as are requested by Bank, deliver
to Bank, designations of inventory specifying Borrower's cost of Inventory,
the wholesale market value thereof and such other matters and information
relating to the Inventory as Bank may request;
b. Borrower's Inventory, valued at the lower of Borrower's cost or the
wholesale market value thereof, at all times pertinent hereto shall not be
less than N/A Dollars ($ N/A ) which no less than N/A
---------- -------- -------------------
Dollars ($ N/A ) shall be in raw materials and finished
---------------------
goods;
c. All of the Inventory is and shall remain free from all purchase money
or other security interests, liens or encumbrances, except as held by Bank;
d. Borrower does now keep and hereafter at all times shall keep correct
and accurate records itemizing and describing the kind, type, quality and
quantity of
12
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
the Inventory, its cost therefor and selling price thereof, and the daily
withdrawals therefrom and additions thereto, all of which records shall be
available upon demand to any of Bank's officers, agents and employees for
inspection and copying;
e. All Inventory, now and hereafter at all times, shall be new inventory
of good and merchantable quality free from defects;
f. Inventory is not now and shall not at any time or times hereafter be
located or stored with a bailee, warehouseman or other third party without
Bank's prior written consent, and, in such event, Borrower will
concurrently therewith cause any such bailee, warehouseman or other third
party to issue and deliver to Bank, in a form acceptable to Bank, warehouse
receipts in Bank's name evidencing the storage of Inventory or other
evidence of Bank's prior rights in the Inventory. In any event, Borrower
shall instruct any third party to hold all such inventory for Bank's
account subject to Bank's security interests and its instructions; and
g. Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower's usual business hours, to inspect and examine
the Inventory and to check and test the same as to quality, quantity, value
and condition and Borrower agrees to reimburse Bank for Bank's reasonable
costs and expenses in so doing.
6.6 Borrower represents, warrants and covenants with Bank that Borrower
will not, without Bank's prior written consent:
a. Grant a security interest in or permit a lien, claim or encumbrance
upon any of the Collateral to any person, association, firm, corporation,
entity or governmental agency or instrumentality;
b. Permit any levy, attachment or restraint to be made affecting any of
Borrower's assets;
c. Permit any judicial officer or assignees to be appointed or to take
possession of any or all of Borrower's assets;
d. Other than sales of inventory in the ordinary course of Borrower's
business, to sell, lease, or otherwise dispose of, move, or transfer,
whether by sale or otherwise, any of Borrower's assets;
e. Change its name, business structure, corporate identity or structure;
add any new fictitious names, liquidate, merge or consolidate with or into
any other business organization;
f. Move or relocate any Collateral;
g. Acquire any other business organization;
13
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
h. Enter into any transaction not in the usual course of Borrower's
business;
i. Make any investment in securities of any person, association, firm,
entity, or corporation other than the securities of the United States of
America;
j. Make any change in Borrower's financial structure or in any of its
business objectives, purposes or operations which would adversely affect
the ability of Borrower to repay Borrower's Obligations;
k. Incur any debts outside the ordinary course of Borrower's business
except renewals or extensions of existing debts and interest thereon;
l. Make any advance or loan except in the ordinary course of Borrower's
business as currently conducted;
m. Make loans, advances or extensions of credit to any Person, except for
sales on open account and otherwise in the ordinary course of business;
n. Guarantee or otherwise, directly or indirectly, in any way be or become
responsible for obligations of any other person, whether by agreement to
purchase the indebtedness of any other Person, agreement for the furnishing
of funds to any other Person through the furnishing of goods, supplies or
services, by way of stock purchase, capital contribution, advance or loan,
for the purpose of paying or discharging (or causing the payment or
discharge of) the indebtedness of any other person, or otherwise, except
for the endorsement of negotiable instruments by the Borrower in the
ordinary course of business for deposit or collection;
o. (a) Sell, lease, transfer or otherwise dispose of properties and assets
having an aggregate book value of more than N/A Dollars ($ N/A )
------------- -------
(whether in one transaction or in a series of transactions) except as to
the sale of inventory in the ordinary course of business; (b) change its
name, consolidate with or merge into any other corporation, permit another
corporation to merge into it, acquire all or substantially all the
properties or assets of any other Person, enter into any reorganization or
recapitalization or reclassify its capital stock, or (c) enter into any
sale-leaseback transaction;
p. Purchase or hold beneficially any stock or other securities of, or make
any investment or acquire any interest whatsoever in, any other Person,
except for the common stock of the Subsidiaries owned by the Borrower on
the date of this Agreement and except for certificates of deposit with
maturities of one year or less of United States commercial banks with
capital, surplus and undivided profits in excess of One Hundred Million
Dollars ($100,000,000) and direct obligations of the United States
Government maturing within one year from the date of acquisition thereof;
q. Allow any fact, condition or event to occur or exist with respect to
any employee pension or profit sharing plans established or maintained by
it which
14
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
might constitute grounds for termination of any such plan or for the court
appointment of a trustee to administer any such plan.
6.7 Borrower is not a merchant whose sales for resale of goods for
personal, family or household purposes exceeded seventy-five percent (75%) in
dollar volume of its total sales of all goods during the twelve (12) months
preceding the filing by Bank of a financing statement describing the Collateral.
At no time hereafter shall Borrower's sales for resale goods for personal,
family or household purposes exceed seventy-five percent (75%) in dollar volume
of its total sales.
6.8 Borrower's sole place of business or chief executive office or
residence is located at the address indicated above and Borrower covenants and
agrees that it will not, during the term of this Agreement, without prior
written notification to Bank, relocate said sole place of business or chief
executive office or residence.
6.9 If Borrower is a corporation, Borrower represents, warrants and
covenants as follows :
a. Borrower will not make any distribution or declare or pay any dividend
(in stock or in cash) to any shareholder or on any of its capital stock, of
any class, whether now or hereafter outstanding, or purchase, acquire,
repurchase, or redeem or retire any such capital stock;
b. Borrower is and shall at all times hereafter be a corporation duly
organized and existing in good standing under the laws of the state of its
incorporation and qualified and licensed to do business in California or
any other state in which it conducts its business;
c. Borrower has the right and power and is duly authorized to enter into
this Agreement; and
d. The execution by Borrower of this Agreement shall not constitute a
breach of any provision contained in Borrower's articles of incorporation
or by-laws.
6.10 The execution and performance by Borrower of all of the terms and
provisions contained in this Agreement shall not result in a breach of or
constitute an event of default under an Agreement to which Borrower is now or
hereafter becomes a party.
6.11 Borrower shall promptly notify Bank in writing of its acquisition by
purchase, lease or otherwise of any after acquired properly of the type included
in the Collateral, with the exception of purchases of inventory in the ordinary
course of business.
6.12 All assessments and taxes, whether real, personal or otherwise, due
or payable by, or imposed, levied or assessed against, Borrower or any of its
property have been paid, and shall hereafter be paid in full, before
delinquency. Borrower shall make
15
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
due and timely payment or deposit of all federal, state and local taxes,
assessments or contributions required of it by law, and will execute and deliver
to Bank, on demand, appropriate certificates attesting to the payment or deposit
thereof. Borrower will make timely payment or deposit of all F.I.C.A. payments
and withholding taxes required of it by applicable laws, and will upon request
furnish Bank with proof satisfactory to it that Borrower has made such payments
or deposit. If Borrower fails to pay any such assessment, tax, contribution, or
make such deposit, or furnish the required proof, Bank may, in its sole and
absolute discretion and without notice to Borrower, (i) make payment of the same
or any part thereof, or (ii) set up such reserves in Borrower's account as Bank
deems necessary to satisfy the liability therefor, or both. Bank may
conclusively rely on the usual statements of the amount owing or other official
statements issued by the appropriate governmental agency. Each amount so paid or
deposited by Bank shall constitute a Bank Expense and an additional advance to
Borrower.
6.13 There are no actions or proceedings pending by or against Borrower or
any guarantor of Borrower before any court or administrative agency and Borrower
has no knowledge of any pending, threatened or imminent litigation, governmental
investigations or claims, complaints, actions or prosecutions involving Borrower
or any guarantor of Borrower, except as heretofore specifically disclosed in
writing to Bank. If any of the foregoing arise during the term of the Agreement,
Borrower shall immediately notify Bank in writing.
6.14 a. Borrower, at its expense, shall keep and maintain it assets
insured against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use such
properties in similar businesses for the full insurable value thereof. Borrower
shall also keep and maintain business interruption insurance and public
liability and property damage insurance relating to Borrower's ownership and use
of the Collateral and its other assets. All such policies of insurance shall be
in such form, with such companies, and in such amounts as may be satisfactory to
Bank. Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All such
policies of insurance (except those of public liability and property damage)
shall contain an endorsement in a form satisfactory to Bank showing Bank as a
loss payee thereof, with a waiver of warranties (Form 438-BFU), and all process
payable thereunder shall be payable to Bank, and, upon receipt by Bank, shall be
applied on account of the Obligations owing to Bank. To secure the payment of
the Obligations, Borrower grants Bank a security interest in and to all such
policies of insurance (except those of public liability and property damage) and
the proceeds thereof, and Borrower shall direct all insurers under such policies
of insurance to pay all proceeds thereof directly to Bank.
b. Borrower hereby irrevocably appoints Bank (and any of Bank's officers,
employees or agents designated by Bank) as Borrower's attorney for the purpose
of making, selling and adjusting claims under such policies of insurance,
endorsing the name of Borrower on any check, draft, instrument or other item of
payment for the proceeds of such policies of insurance and for making all
determinations and decisions with respect to such policies of insurance.
Borrower will not cancel any of such policies
16
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
without Bank's prior written consent. Each such insurer shall agree by
endorsement upon the policy or policies of insurance issued by it to Borrower as
required above, or by independent instruments furnished to Bank, that it will
give Bank at least ten (10) days written notice before any such policy or
policies of insurance shall be altered or cancelled, and that no act or default
of Borrower, or any other person, shall affect the right of Bank to recover
under such policy or policies of insurance required above or to pay any premium
in whole or in part relating thereto. Bank, without waiving or releasing any
Obligations or any Event of Default, may, but shall have no obligation to do so,
obtain and maintain such policies of insurance and pay such premiums and take
any other action with respect to such policies which Bank deems advisable. All
sums so disbursed by Bank, as well as reasonable attorneys' fees, court costs,
expenses and other charges relating thereto, shall constitute Bank Expenses and
are payable on demand.
6.15 All financial statements and information relating to Borrower which
have been or may hereafter be delivered by Borrower to Bank are true and correct
and have been prepared in accordance with GAAP consistently applied and there
has been no material adverse change in the financial condition of Borrower since
the submission of such financial information to Bank.
6.16 a. Borrower at all times hereafter shall maintain a standard and
modern system of accounting in accordance with GAAP consistently applied with
ledger and account cards and/or computer tapes and computer disks, computer
printouts and computer records pertaining to the Collateral which contain
information as may from time to time be requested by Bank, not modify or change
its method of accounting or enter into, modify or terminate any agreement
presently existing, or at any time hereafter entered into with any third party
accounting firm and/or service bureau for the preparation and/or storage of
Borrower's accounting records without the written consent of Bank first obtained
and without said accounting firm and/or service bureau agreeing to provide
information regarding the Receivables and Inventory and Borrower's financial
condition to Bank; permit Bank and any of its employees, offices or agents, upon
demand, during Borrower's usual business hours, or the usual business hour of
third persons having control thereof, to have access to and examine all of the
Borrower's Books relating to the Collateral, Borrower's Obligations to Bank.
Borrower's financial condition and the results of Borrower's operations and in
connection therewith, permit Bank or any of its agents, employees or officers to
copy and make extracts therefrom.
b. Borrower shall deliver to Bank within thirty (30) days after the end of
each month, a company prepared balance sheet and profit and loss statement
covering Borrower's operations and deliver to Bank within ninety (90) days after
the end of each Borrower's fiscal years a(n) audited statement of the financial
condition of the Borrower for each such fiscal year, including but not limited
in, a balance sheet and profit and loss statement and any other report requested
by Bank relating to the Collateral and the financial condition of Borrowers, and
a certificate signed by an authorized employee of Borrower to the effect that
all reports, statements, computer disk or tape files, computer printouts,
computer runs, or other computer prepared information of any kind or nature
relating to the foregoing or documents delivered or caused to be delivered to
Bank under
17
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
its subparagraph are complete, correct and thoroughly present the financial
condition of Borrower and that there exists on the date of delivery to Bank no
condition or event which constitutes a breach or Event of Default under this
Agreement.
c. In addition to the financial statements requested above, the Borrower
agrees to provide Bank with the following schedules:
x Accounts Receivable Agings on a monthly basis
----- ---------
x Accounts Payable Agings on a monthly basis
----- ----------
_____ Job Progress Reports on a _________ basis; and
BORROWING BASE CERTIFICATE on a monthly basis
-------------------------- ---------
COMPLIANCE CERTIFICATE* on a monthly basis
---------
6.17 Borrower shall maintain the following financial ratios and covenants
on a consolidated and non-consolidated basis:
a. Working Capital in an amount not less than n/a
----------------------------
b. Tangible Effective Net Worth in an amount not less than $900,000.00
-----------
STEPPING UP TO $1,3000,000.00 AT 12/31/95
---------------------------------------------------------------------------
c. a ratio of Current Assets to Current Liabilities of not less than
1.25:1.00
-----------
___________________________________________________________________________
d. a quick ratio of cash plus securities plus Receivables to Current
Liabilities of not less than N/A
----------------------------------------------
e. a ratio of Total Liabilities (less debt subordinated to Bank) to
Tangible Effective Net Worth of less than 2.5:1.00 STEPPING UP TO 2.0:1.00
--------------------------------
AT 12/31/95
-----------
___________________________________________________________________________
f. a ratio of Cash Flow to Fixed Charges of not less than 1.5:1.00
--------
MEASURED QUARTERLY AT 4 TIMES MOST RECENT QUARTER
---------------------------------------------------------------------------
g. Net Income after taxes of POSITIVE QUARTERLY, EXCEPT 3RD QTR '95
------------------------------------------
h. Borrower shall not without Bank's prior written consent acquire or
expend for or commit itself to acquire or expend for fixed assets by lease,
purchase or otherwise in an aggregate amount that exceeds n/a Dollars ($
n/a ) in any fiscal year, and
i. MAXIMUM DILUTION NOT GREATER THAN 10%
----------------------------------------------------------------------
___________________________________________________________________________
18
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
______________________________________________________________________
______________________________________________________________________
All financial covenants shall be computed in accordance with GAAP
consistently applied except as otherwise specifically set forth in this
Agreement. All monies due from affiliates (including offers, directors and
shareholders) shall be excluded from Borrower's assets for all purposes
hereunder.
*Compliance Certificate will reflect "rest periods" on the $200M
sublimit, and dilution.
6.18 Borrower shall promptly supply Bank (and cause any guarantor to
supply Bank) with such other information (including tax returns) concerning
its affair (or that of any guarantor) as Bank may request from time to time
hereafter, and shall promptly notify Bank of any material adverse change in
Borrower's financial condition and of any condition or event which
constitutes a breach of or an event which constitutes an Event of Default
under this Agreement.
6.19 Borrower is now and shall be at all times hereafter solvent and
able to pay its debts (including trade debts) as they mature.
6.20 Borrower shall immediately and without demand reimburse Bank for
all sums expended by Bank in connection with any action brought by Bank to
correct any default or enforce any provision of this Agreement, including
all Bank Expenses; Borrower authorizes and approves all advances and
payments by Bank for items described in this Agreement as Bank Expenses.
6.21 Each warranty, representation and agreement contained in this
Agreement shall be automatically deemed repeated with each advance and
shall be conclusively presumed to have been relied on by Bank regardless of
any investigation made or information possessed by Bank. The warranties,
representations and agreements set forth herein shall be cumulative and in
addition to any and all other warranties, representations and agreements
which Borrower shall give, or cause to be given, to Bank, either now or
hereafter.
6.22 Borrower shall keep all of its principal bank accounts with Bank
and shall notify the Bank immediately in writing of the existence of any
other bank account, deposit account, or any other account into which money
can be deposited.
6.23 Borrower shall furnish to the Bank: (a) as soon as possible, but
in no event later than thirty (30) days after Borrower knows or has reason
to know that any reportable event with respect to any deferred compensation
plan has occurred, a statement of the chief financial officer of Borrower
setting forth the details concerning such reportable event and the action
which Borrower proposes to take with respect thereto, together with a copy
of the notice of such reportable event given to the Pension Benefit
Guaranty Corporation. If a copy of such notice is available to Borrower;
(b) promptly after filing thereof with the United States Securities of
Labor or the Pension
19
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
Benefit Guaranty Corporation, copies of each annual report with respect to
each deferred compensation plan; (c) promptly after receipt thereof, a copy
of any notice Borrower may receive from the Pension Benefit Guaranty
Corporation or the Internal Revenue Service with respect to any deferred
compensation plan; provided, however, this subparagraph shall not apply to
notice of general application issued by the Pension Benefit Guaranty
Corporation or the Internal Revenue Service; and (d) when the same is made
available to participants in the deferred compensation plan, all notices
and other forms of information from time to time disseminated to the
participants by the administrator of the deferred compensation plan.
6.24 Borrower is now and shall at all times thereafter remain in
compliance with all federal, state and municipal laws, regulations and
ordinances relating to the handling, treatment and disposal of toxic
substances, wastes and hazardous material and shall maintain all necessary
authorizations and permits.
6.25 Borrower shall maintain insurance on the life of ____________
in an amount not to be less than No/100 Dollars
--------------------
($ n/a ) under one more policies issued by insurance companies
-------------
satisfactory to Bank, which policies shall be assigned to Bank as security
for the indebtedness and on which Bank shall be named as sole beneficiary.
6.26 Borrower shall limit direct and indirect compensation paid to
the following employees___________,__________________,___________to an
aggregate of N/A Dollars ($ N/A ) per
------------------------------, ------------
N/A
--------------------
7. EVENTS OF DEFAULT. Any one or more of the following events shall constitute
-----------------
a default by Borrower under this Agreement:
a. If Borrower fails or neglects to perform, keep or observe any
term, provision, condition, covenant, agreement, warranty or
representation contained in this Agreement, or any other present or
future agreement between Borrower and Bank;
b. If any representation, statement, report or certificate made or
delivered by Borrower, or any of its officers, employees or agents to
Bank is not true and correct;
c. If Borrower fails to pay when due and payable or declared due and
payable, all or any portion of the Borrower's Obligations (whether of
principal, interest, taxes, reimbursement of Bank Expenses, or
otherwise);
d. If there is a material impairment of the prospect of repayment of
all or any portion of Borrower's Obligations or a material impairment
of the value or priority of Bank's security interest in the
Collateral;
20
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
e. If all or any of Borrower's assets are attached, seized, subject to a
writ of distress warrant, or are levied upon, or come into the possession
of any Judicial Officer or Assignee and the same are not released,
discharged or bonded against within ten (10) days thereafter;
f. If any insolvency Proceeding is filed or commenced by or against
Borrower without being dismissed within ten (10) days thereafter;
g. If any proceeding is filed or commenced by or against Borrower for its
dissolution or liquidation;
h. If Borrower is enjoined, restrained or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs;
i. If a notice of lien, levy or assessment is filed of record with respect
to any or all of Borrower's assets by the United States Government, or any
department, agency or instrumentality thereof, or by any state, county,
municipal or other government agency, or if any taxes or debts owing at any
time hereafter to any one or more of such entities becomes a lien, whether
choate or otherwise, upon any or all of the Borrower's assets and the same
is not paid on the payment date thereof;
j. If a judgment or other claim becomes a lien or encumbrance upon any or
all of Borrower's assets and the same is not satisfied, dismissed or bonded
against within ten (10) days thereafter;
k. If Borrower's records are prepared and kept by an outside computer
service bureau at the time this Agreement is entered into or during the
term of this Agreement such an agreement with an outside service bureau is
entered into, and at any time thereafter, without first obtaining the
written consent of Bank, Borrower terminates, modifies, amends or changes
its contractual relationship with said computer service bureau or said
computer service bureau fails to provide Bank with any requested
information or financial data pertaining to Bank's Collateral, Borrower's
financial condition or the results of Borrower's operations;
l. If Borrower permits a default in any material agreement to which
Borrower is a party with third parties so as to result in an acceleration
of the maturity of Borrower's indebtedness to others, whether under any
indenture, agreement or otherwise;
m. If Borrower makes any payment on account of indebtedness which has been
subordinated to Borrower's Obligations to Bank;
n. If any misrepresentation exists now or thereafter in any warranty or
representation made to Bank by any officer or director of Borrower, or if
any such warranty or representation is withdrawn by any officer or
director;
21
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
o. If any party subordinating its claims to that of Bank's or any
guarantor of Borrower's Obligations dies or terminates its
subordination or guaranty, becomes insolvent or an insolvency
Proceeding is commenced by or against any such subordinating party or
guarantor;
p. If Borrower is an individual and Borrower dies;
q. If there is a change of ownership or control of N/A
-------------
percent (_______%) or more of the issued and outstanding stock of
Borrower; or
r. If any reportable event, which the Bank determines constitutes
grounds for the termination of any deferred compensation plan by the
Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States District Court of a trustee to administer
any such plan, shall have occurred and be continuing thirty (30) days
after written notice of such determination shall have been given to
Borrower by Bank, or any such Plan shall be terminated within the
meaning of Title IV of the Employment Retirement Income Security Act
("ERISA"), or a trustee shall be appointed by the appropriate United
States District Court to administer any such plan, or the Pension
Benefit Guaranty Corporation shall institute proceedings to terminate
any plan and in case of any event described in this Section 7.0, the
aggregate amount of the Borrower's liability to the Pension Benefit
Guaranty Corporation under Sections 4062, 4063 or 4064 of ERISA shall
exceed five percent (5%) of Borrower's Tangible Effective Net Worth.
Notwithstanding anything contained in Section 7 to the contrary, Bank
shall refrain from exercising its rights and remedies and Event of
Default shall thereafter not be deemed to have occurred by reason of
the occurrence of any of the events set forth in Sections 7.e, 7.f or
7.j of this Agreement if, within ten (10) days from the date thereof,
the same is released, discharged, dismissed, bonded against or
satisfied; provided, however, if the event is the institution of
insolvency Proceedings against Borrower, Bank shall not be obligated
to make advances to Borrower during such cure period.
8. BANK'S RIGHTS AND REMEDIES
--------------------------
8.1 Upon the occurrence of an Event of Default by Borrower under this
Agreement, Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are
authorized by Borrower:
a. Declare Borrower's Obligations, whether evidenced by this
Agreement, installment notes, demand notes for otherwise, immediately
due and payable to the Bank;
b. Cease advancing money or extending credit to or for the benefit
of Borrower under this Agreement, or any other agreement between
Borrower and Bank;
22
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
c. Terminate this agreement as to any future liability or obligation of
Bank, but without affecting Bank's rights and security interests in the
Collateral, and the Obligations of Borrower to Bank;
d. Without notice to or demand upon Borrower or any guarantor, make such
payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to
assemble the Collateral if Bank so requires and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to enter
the premises where the Collateral is located, take and maintain possession
of the Collateral and the premises (at no charge to Bank), or any part
thereof, and to pay, purchase, contest or compromise any encumbrance,
charge or lien which in the opinion of Bank appears to be prior or superior
to its security interest and to pay all expenses incurred in connection
therewith;
e. Without limiting Bank's rights under any security interest, Bank is
hereby granted a license or other right to use, without charge, Borrower's
labels, patents, copyrights, rights of use of any name, trade secrets,
trade names, trademarks and advertising matter, or any property of a
similar nature as it pertains to the Collateral, in completing production
of, advertising for sale and selling any Collateral and Borrower's rights
under all licenses and all franchise agreement shall inure to Bank's
benefit, and Bank shall have the right and power to enter into sublicense
agreements with respect to all such rights with third parties on terms
acceptable to Bank;
f. Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sales and sell (in the manner provided for herein) the
Inventory;
g. Sell or dispose the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as
is commercially reasonable in the opinion of Bank. It is not necessary that
the Collateral be present at any such sale;
h. Bank shall give notice of the disposition of the Collateral as follows:
(1) Bank shall give the Borrower and each holder of a security
interest in the Collateral who has filed with Bank a written
request for notice, a notice in writing of the time and place of
public sale, or, if the sale is a private sale of some
disposition other than a public sale is to be made of the
Collateral, the time on or after which the private sale or other
disposition is to be made;
(2) The notice shall be personally delivered or mailed, postage
prepaid, to Borrower's address appearing in this Agreement, at
least five (5) calendar days before the date fixed of the sale,
or at least five (5) calendar days before the date on or after
which the
23
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory
private sale or other disposition is to be made, unless the
Collateral is perishable or threatens to decline speedily in
value. Notice to persons other than Borrower claiming an
interest in the Collateral shall be sent to such addresses
as have been furnished to Bank;
(3) If the sale is to be a public sale, Bank shall also
give notice of the time and place by publishing a notice one
time at least five (5) calendar days before the date of the
sale in a newspaper of general circulation in the county in
which the sale is to be held; and
(4) Bank may credit bid and purchase at any public sale.
i. Borrower shall pay all Bank Expenses incurred in connection with
Bank's enforcement and exercise of any of its rights and remedies as
herein provided, whether or not suit is commenced by Bank;
j. Any deficiency which exists after disposition of the Collateral
as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third
parties, to Borrower by Bank, or, in Bank's discretion, to any party
who Bank believes, in good faith, is entitled to the excess; and
k. Without constituting a retention of Collateral in satisfaction of
an obligation within the meaning of 9505 of the Uniform Commercial
Code or an action under California Code of Civil Procedure 726, apply
any and all amounts maintained by Borrower as deposit accounts (as
that term is defined under 9105 of the Uniform Commercial Code) or
other accounts that Borrower maintains with Bank against the
Obligations.
8.2 Bank's rights and remedies under this Agreement and all other
agreements shall be cumulative. Bank shall have all other rights and
remedies not inconsistent therewith as provided by law or in equity. No
exercise by Bank of one right or remedy shall be deemed an election, and no
waiver by Bank of any default on Borrower's part shall be deemed a
continuing waiver. No delay by Bank shall constitute a waiver, election or
acquiescence by Bank.
9. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY
------------------------------------------------
If Borrower fails to pay promptly when due to another person or entity, monies
which Borrower is required to pay by reason of any provision in this Agreement,
Bank may, but need not, pay the same and charge Borrower's account therefor, and
Borrower shall promptly reimburse Bank. All such sums shall become additional
indebtedness owing to Bank, shall bear interest at the rate hereinabove
provided, and shall be secured by all Collateral. Any payments made by Bank
shall not constitute (i) an agreement by it to make similar payments in the
future, or (ii) a waiver by Bank of any default under this Agreement. Bank need
not inquire as to, or contest the validity of, any such expense, tax, security
interest, encumbrance or lien and the receipt of the usual
24
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory
official notice of the payment thereof shall be conclusive evidence that the
same was validly due and owing. Such payments shall constitute Bank Expenses and
additional advances to Borrower.
10. WAIVERS
-------
10.1 Borrower agrees that checks and other instruments received by
Bank in payment or on account of Borrower's Obligations constitute only
conditional payment until such items are actually paid to Bank and Borrower
waives the right to direct the application of any and all payments at any
time or times hereafter received by Bank on account of Borrower's
Obligations and Borrower agrees that Bank shall have the continuing
exclusive right to apply and reapply such payments in any manner as Bank
may deem advisable, notwithstanding any entry by Bank upon its books.
10.2 Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension
or renewal of any or all commercial paper, accounts, documents,
instruments, chattel paper and guarantees at any time held by Bank on which
Borrower may in any way be liable.
10.3 Bank shall not in any way or manner be liable or responsible for
(a) the safekeeping of the Inventory; (b) any loss or damage thereto
occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency or other person whomsoever. All
risk of loss, damage or destruction of Inventory shall be borne by
Borrower.
10.4 Borrower waives the right and the right to assert a confidential
relationship, if any, it may have with any accountant, accounting firm
and/or service bureau or consultant in connection with any information
requested by Bank pursuant to or in accordance with this Agreement, and
agrees that a Bank may contact directly any such accountants, accounting
firm and/or service bureau or consultant in order to obtain such
information.
10.5 BORROWER AND BANK EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTION
HEREUNDER, OR CONTEMPLATED HEREUNDER, OR ANY OTHER CLAIM (INCLUDING TORT OR
BREACH OF DUTY CLAIMS) OR DISPUTE HOWSOEVER ARISING BETWEEN BANK AND
BORROWER.
10.6 In the event that Bank elects to waive any rights or remedies
hereunder, or compliance with any of the terms hereof, or delays or fails
to pursue or enforce any term, such waiver, delay or failure to pursue or
enforce shall only be effective with respect to that single act and shall
not be construed to affect any subsequent transactions or Bank's right to
later pursue such rights and remedies.
11. ONE CONTINUING LOAN TRANSACTION. All loans and advances heretofore, now or
-------------------------------
at any time or times hereafter made by Bank to Borrower under this Agreement or
any
25
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory
other agreement between Bank and Borrower, shall constitute one loan secured by
Bank's security interests in the Collateral and by all other security interests,
liens, encumbrances heretofore, now or from time to time hereafter granted by
Borrower to Bank.
Notwithstanding the above, (i) to the extent that any portion of the Obligations
are consumer loan, that portion shall not be secured by any deed of trust or
mortgage on or other security interest in the Borrower's principal dwelling
which is not a purchase money security interest as to that portion, unless
expressly provided to the contrary in another place, or (ii) if the Borrower (or
any of them) has (have) given or give(s) Bank a deed of trust or mortgage
covering real property, that deed of trust or mortgage shall not secure the loan
and any other Obligation of the Borrower (or any of them), unless expressly
provided to the contrary in another place.
12. NOTICES. Unless otherwise provided in this Agreement, all notices or
-------
demands by either party on the other relating to this Agreement shall be in
writing and sent by regular United States mail, postage prepaid, properly
addressed to Borrower or to Bank at the addresses stated in this Agreement, or
to such other addresses as Borrower or Bank may from time to time specify to the
other in writing. Request to Borrower by Bank hereunder may be made orally.
13. AUTHORIZATION TO DISBURSE. Bank is hereby authorized to make loans and
-------------------------
advances hereunder upon telephonic or other instructions received from anyone
purporting to be an officer, employee, or representative of Borrower, or at the
discretion of Bank if said loans and advances are necessary to meet any
Obligations of Borrower to Bank. Bank shall have no duty to make inquiry or
verify the authority of any such party, and Borrower shall hold Bank harmless
from any damage, claims or liability by reason of Bank's honor of, or failure to
honor, any such instructions.
14. DESTRUCTION OF BORROWER'S DOCUMENTS. Any documents, schedules, invoices or
-----------------------------------
other papers delivered to Bank, may be destroyed or otherwise disposed of by
Bank six (6) months after they are delivered to or received by Bank, unless
Borrower requests, in writing, the return of the said documents, schedules,
involves or other papers and makes arrangements, at Borrower's expense, for
their return.
15. CHOICE OF LAW. The validity of this Agreement, its construction,
-------------
interpretation and enforcement, and the rights of the parties hereunder and
concerning the Collateral, shall be determined according to the laws of the
State of California. The parties agree that all actions or proceedings arising
in connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or the County of Santa
Clara.
16. GENERAL PROVISIONS
------------------
16.1 This Agreement shall be binding and deemed effective when
executed by the Borrower and accepted and executed by Bank at its
headquarter office.
16.2 This Agreement shall bind and inure to the benefit of the
respective successors and assigns of each of the parties, provided,
however, that Borrower may not assign this Agreement or any rights
hereunder without Bank's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by
26
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory
Bank shall release Borrower or any guarantor from their Obligations to
Bank. Bank may assign this Agreement and its rights and duties hereunder.
Bank reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in Bank's rights and
benefits hereunder. In connection therewith, Bank may disclose all
documents and information which Bank now or hereafter may have relating to
Borrower or Borrower's business.
16.3 Paragraph headings and paragraph numbers have been set forth
herein for convenience only; unless the contrary is compelled by the
context, everything contained in each paragraph applies equally to this
entire Agreement.
16.4 Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Bank or Borrower, whether under any
rule of construction or otherwise; on the contrary, this Agreement has been
reviewed by all parties and shall be construed and interpreted according to
the ordinary meaning of the words used so as to fairly accomplish the
purposes and intentions of all parties hereto. When permitted by the
context, the singular includes the plural and vice versa.
16.5 Each provision of this Agreement shall be severable from every
other provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
16.6 This Agreement cannot be changed or terminated orally. Except as
to currently existing Obligations owing by Borrower to Bank, all prior
agreements, understandings, representations, warranties, and negotiations,
if any, with respect to the subject matter hereof, are merged into this
Agreement.
16.7 The parties intend and agree that their respective rights,
duties, powers, liabilities, obligations and discretions shall be
performed, carried out, discharged and exercised reasonably and in good
faith.
27
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory
16.8 In addition, if this Agreement is secured by a deed of trust or
mortgage covering real property, then the trustor or mortgagor shall not
mortgage or pledge the mortgaged premises as security for any other
indebtedness or obligations. This Agreement, together with all other
indebtedness secured by said deed of trust or mortgage, shall become due
and payable immediately, without notice, at the option of Bank, (a) if said
trustor or mortgagor shall mortgage or pledge the mortgaged premises or any
other indebtedness or obligations or shall convey, assign or transfer the
mortgaged premises by deed, installment sale contract or other instrument;
(b) if the title to the mortgaged premises shall become vested in any other
person or party in any manner whatsoever, or (c) if there is any
disposition (through one or more transactions ) of legal or beneficial
title to a controlling interest of said trustor or mortgagor.
IN WITNESS WHEREOF, the parties hereto have caused this Loan & Security
Agreement (Accounts and Inventory) to be executed as of the date first
hereinabove written.
ATTEST:
__________________________________
Title:
BORROWER: SONIC SYSTEMS
Accepted and effective as of May 26, 1995 By: /s/ Sreekanth Ravi
------------------------------
at Bank's Headquarter Office Signature of
Title:____________________________
COMERICA BANK - CALIFORNIA By:_______________________________
Signature of
By: /s./ John Sugg Title:____________________________
------------------------------
Signature of John Sugg
Title:____________________________ By:_______________________________
Signature of
Title:____________________________
By:_______________________________
Title:____________________________
28
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory
FIRST MODIFICATION TO LOAN & SECURITY AGREEMENT
-----------------------------------------------
This First Modification to Loan & Security Agreement (this "Modification")
is entered into by and between SONIC SYSTEMS ("Borrower") and Comerica Bank-
California ("Bank") as of this 9th day of JULY, 1996, at San Jose, California.
RECITALS
--------
A. Bank and Borrower have previously entered into or are concurrently
herewith entering into a Loan & Security Agreement (Accounts & Inventory) (the
"Agreement") dated May 26, 1995.
B. Borrower has requested, and Bank has agreed, to modify the Agreement
as set forth below.
AGREEMENT
---------
For good and valuable consideration, the parties agree as set forth below:
Section 1.5 "Borrowing Base" as used in this Agreement means the sum of (1)
SEVENTY-FIVE percent (75%) of the net amount of Eligible
------------ ---
Accounts after deducting therefrom all payments, adjustments and
credits applicable thereto ("Accounts Receivable Borrowing
Base"); and (2) the amount, if any, of the advances against
Inventory agreed to be made pursuant to any Inventory Rider
("Inventory Borrowing Base"), or other rider, amendment or
modification to this Agreement, that may now or hereafter be
entered into by Bank and borrower.
Section 2.4 A fee of 25bp on the unused commitment is to be calculated and
payable in arrears on a quarterly basis.
Section 6.16d Decrease the periodic A/R audits to at least one per year versus
the approved at least 2 per year.
Section 6.16e Management letter required with annual CPA audited financial
statements.
Section 6.17b Tangible Effective Net Worth in an amount not less than
----
$600,000.00 stepping up to $900,000.00 at 12/31/96.
--------------------------------------------------
29
<PAGE>
Section 6.17e A ratio of Total Liabilities (less debt subordinated to Bank) to
Tangible Effective Net Worth of less than 3.40:1.00 to step down
----------------------
to 3.00:1.00 at 12/31/96, Borrower to be below 3.10:1.00
--------------------------------------------------------
leverage in order to borrow.
---------------------------
Section 6.17g Net Income after taxes of quarterly profitability, except to
----------------------------------
allow loss for 3rd quarter 1996.
-------------------------------
Incorporation by Reference. The Agreement as modified hereby
--------------------------
and the Recitals are incorporated herein by this reference.
Legal Effect. Except as specifically set forth in this
------------
Modification, all of the terms and conditions of the Agreement remain in full
force and effect.
Integration. This is an integrated Modification and
-----------
supersedes all prior negotiations and agreements regarding the subject matter
hereof. All amendments hereto must be in writing and signed by the parties.
WITNESS WHEREOF, the parties have agreed as of the date
first set forth above.
BORROWER: BANK:
SONIC SYSTEMS COMERICA BANK-CALIFORNIA
By: /s/ Sreekanth Ravi By: /s/ John Sugg
---------------------------- --------------------------------
John Sugg
Title: President/CEO Vice President
-------------------------
By: /s/ Sudhakar Ravi
----------------------------
Title: VP Engineering
-------------------------
30
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory
MODIFICATION TO THE LOAN & SECURITY AGREEMENT
---------------------------------------------
This second Modification to Loan & Security Agreement (this "Modification")
is entered into by and between SONIC SYSTEMS ("Borrower") and COMERICA BANK-
CALIFORNIA ("Bank") as of this 24th day of December, 1997, at San Jose,
California.
RECITALS
--------
A. Bank and Borrower have previously entered into or are concurrently
herewith entering into a Loan & Security Agreement (Accounts & Inventory) (the
"Agreement") dated May 26, 1995.
B. Borrower has requested, and Bank has agreed, to modify the Agreement
as set forth below.
AGREEMENT
---------
For good and valuable consideration, the parties agree as set forth below:
Incorporation by Reference. The Agreement as modified hereby and the
--------------------------
Recitals are incorporated herein by this reference.
SECTION 6.17 Borrower shall maintain the following financial ratios and
covenants:
(b) Tangible Effective Net Worth in an amount not less than
$900,000.00
(e) A ratio of Total Liabilities (less debt subordinated to
Bank) to Tangible Effective Net Worth of less than
2.50.00:1.00.
Legal Effect. Except as specifically set forth in this Modification, all
------------
of the terms and conditions of the Agreement remain in full force and effect.
31
<PAGE>
Exhibit 10.5
LOAN & SECURITY AGREEMENT
(Accounts & Inventory
Integration. This is an integrated Modification and supersedes all prior
-----------
negotiations and agreements regarding the subject matter hereof. All amendments
hereto must be in writing and signed by the parties.
IN WITNESS WHEREOF, the parties have agreed as of the date first set forth
above.
SONIC SYSTEMS COMERICA BANK-CALIFORNIA
By: /s/ Sreekanth Ravi By: /s/ John Sugg
-------------------------- --------------------------
Sreekanth Ravi John Sugg
President Vice President
By: /s/ Sudhakar Ravi
- --------------------------
Sudhakar Ravi
Vice President
32
<PAGE>
EXHIBIT 10.6
CONFIDENTIAL TREATMENT REQUESTED
[*] Denotes information for which confidential treatment has been requested.
Confidential portions omitted have been filed separately with the Commission.
OEM License Agreement
Between
Sonic Systems, Inc. and Com21, Incorporated
THIS AGREEMENT is entered into between Sonic Systems, Inc., a California
corporation principally located at 5400 Betsy Ross Drive, Suite 206, Santa
Clara, CA 95054 ("Sonic"), and Com21, Incorporated, a California corporation
-----
located at 750 Tasman Drive, Milpitas, CA 95035 ("Com21"), and is made as of
-----
this ______ day of ________________, 1999 ("Effective Date").
Background
----------
Sonic will provide to Com21 an object code license of the software to a 16-user
version of Sonic's SonicWALL Internet Security Appliance. Com21 will integrate
the object code into one or more of its cable modem products.
1. Definitions
-----------
Channel Partners. "Channel Partners" shall mean any third party authorized
----------------
by Com21 to resell the Licensed Software and includes, but is not limited to,
distributors, resellers, value-added resellers, system integrators, and OEMs.
Confidential Information. "Confidential Information" means any data or
------------------------
information, oral or written, which a party reasonably should understand to be
confidential that relates to either Party's (or, if either Party is bound to
protect the confidentiality of any other person's information, such other
person's) past, present, or future research, development, or business
activities, including any unannounced Licensed Software or products and
services, and including any information relating to services, developments,
inventions, processes, plans, financial information, customer and supplier
lists, forecasts, and projections. Confidential Information also includes the
terms of this Agreement. Notwithstanding the foregoing, Confidential
Information is deemed not to include information that (i) is publicly available
or in the public domain at the time disclosed; (ii) is or becomes publicly
available or enters the public domain through no fault of the Party receiving
such information; (iii) is rightfully communicated to the recipient by persons
not bound by confidentiality obligations with respect thereto; (iv) is already
in the recipient's possession free of any confidentiality obligations with
respect thereto (excluding, however, any copies of the Licensed Software that
may be in Com21's possession prior to the date of this Agreement); (v) is
independently developed by the recipient; (vi) is approved for release or
disclosure by the disclosing Party without restriction; or (vii) is required to
be disclosed or is disclosed pursuant to the order or requirement of a court,
administrative agency, or other governmental body; provided, however, that the
recipient shall provide prompt notice thereof to the disclosing Party to enable
the disclosing Party to seek a protective order or otherwise prevent or restrict
such disclosure.
Deliverables. "Deliverables" shall mean the items listed in Exhibit A.
------------
Derivative Works. "Derivative Works" means programming or design changes
----------------
made to the Licensed Software.
1
<PAGE>
Documentation. "Documentation" shall mean the user manual associated with
-------------
the Licensed Software.
End User. "End User" means end user customers located within the Territory
--------
who receive OEM Products containing the Licensed Software.
"End User Agreement" shall mean an agreement, in printed or electronic
------------------
form, between Com21 and an End User substantially in the form and no less
restrictive than the agreement attached hereto as Exhibit E.
Enhancements. "Enhancements" means any modification or addition that, when
------------
made or added to the Licensed Software, materially changes its utility,
efficiency, functional capability, or application, but that does not constitute
solely an Error Correction. Enhancements may be designated by Sonic as minor or
major, depending on Sonic's assessment of their value and of the function added
to the preexisting Licensed Software.
Error. "Error" means the failure of the Licensed Software to conform in
-----
all material respects to its functional specifications as published from time to
time by Sonic, the current version of which is attached as Exhibit C hereto.
However, any nonconformity resulting from Com21's or its customers' material
misuse, improper use, or alteration of the Licensed Software is not an Error.
Error Correction. "Error Correction" means either a modification or an
----------------
addition that, when made or added to the Licensed Software, establishes material
conformity of the Licensed Software to its Specifications.
First-Tier Support. "First-Tier Support" shall mean technical support of
------------------
the Licensed Software or OEM Products directly to End Users.
Licensed Software. "Licensed Software" means a 16-user version of the
-----------------
firmware developed by Sonic for its SonicWALL product family in machine
executable, object code format and includes all Documentation, Software,
Enhancements, Error Corrections, Modifications, Licensed Upgrades, and Releases
Sonic makes available to Com21 hereunder.
Licensed Upgrades. "Licensed Upgrades" shall mean any upgrade for the
-----------------
Licensed Software for which there is a defined upgrade price in Exhibit B and
for which Sonic will provide to Com21 a software upgrade key to enable such
upgrade.
Modifications. "Modifications" means any changes to the Licensed Software
-------------
made by Sonic.
NRE. "NRE" means non-recurring engineering.
---
OEM Product License. "OEM Product License" means the license set forth
-------------------
below in Section 2.1 of this Agreement.
OEM Products. "OEM Products" shall mean any product or service produced by
------------
Com21 that includes all or a portion of the Licensed Software.
2
<PAGE>
Options. "Options" shall mean Licensed Software add-ons that may be made
-------
available to customers from time to time for an additional charge.
Party or Parties. "Party" or "Parties" means Sonic or Com21, as
----------------
applicable, or both Sonic and Com21 as parties to this Agreement.
Prices. "Prices" shall mean the Prices listed in Exhibit B.
------
Releases. "Releases" means new versions of the Licensed Software, which
--------
may include, without limitation, Error Corrections, Enhancements, and
Modifications.
Second-Tier Support. "Second-Tier Support" shall mean technical support of
-------------------
the Licensed Software or OEM Products directly to Channel Partners.
Severity I Bug. "Severity I Bug" shall mean any demonstrable Error in the
--------------
Licensed Software that (i) causes the Licensed Software to have a significant
loss of intended function as set forth in the applicable Specifications; (ii)
causes or is likely to cause data to be lost or destroyed; or (iii) prevents the
Licensed Software from being installed or executed on the properly configured
environment.
Specifications. "Specifications" shall mean the specifications for the
--------------
Licensed Software set forth on Exhibit A, Exhibit C, and as otherwise mutually
agreed upon by the Parties in writing.
Third-Tier Support. "Third-Tier Support" shall mean technical support of
------------------
the Licensed Software directly to Com21.
Territory. The "Territory" is the world, subject to the export
---------
restrictions covered in Section 10.1.
2. Rights and Restrictions
-----------------------
2.1 License Grants. Sonic hereby grants to Com21 a non-exclusive,
--------------
worldwide right to reproduce the Documentation and to use, support, sublicense,
and distribute object code versions of the Licensed Software only when
incorporated as part of the OEM Products. Com21 does not have right to transfer
or assign this OEM Product License to any third party except as permitted under
Section 11.8 below.
2.2 Use of Trademarks/Logos. No license is granted to Com21 to use any
-----------------------
Sonic trademarks, service marks or logos, or those trademarks or logos of any of
Sonic's OEMs without the prior, express written permission of Sonic.
2.3 Ownership of Intellectual Property in Licensed Software. The Sonic
-------------------------------------------------------
Licensed Software, including any associated intellectual property rights and/or
Derivative Works, are and remain the sole property of Sonic regardless of
whether Com21, its employees, or contractors may have contributed to the
conception of such work, joined in the effort of its development, or paid Sonic
for the use of the Licensed Software. Com21 shall from time to time take any
further action and execute and deliver any further instrument, including
documents of assignment or
3
<PAGE>
acknowledgment, that Sonic may reasonably request in order to establish and
perfect its exclusive ownership rights in such works, including any associated
intellectual property rights.
2.4 Software License Restrictions. Com21 shall not reverse compile or
-----------------------------
disassemble object code versions of the Licensed Software or otherwise create,
attempt to create, or knowingly permit or assist others to create a source code
of the Software.
2.5 Proprietary Notices. Com 21 and its employees and agents shall not
-------------------
remove or alter any trademark, trade name, copyright, or other proprietary
notices, legends, symbols or labels appearing on or in copies of the Licensed
Software delivered to Com21 and shall use the same notices, legends, symbols, or
labels in and on all copies of the Licensed Software made by Com21. Each portion
of the Derivative Works thereof shall include the intellectual property notice
or notices appearing in or on the corresponding portion of such materials as
delivered by Sonic hereunder.
2.6 Enforcement of Channel Partner and End User Agreements. Com21 shall
------------------------------------------------------
use commercially reasonable efforts to enforce all agreements it enters into
with any authorized distributor or reseller under which such distributor or
reseller distributes or resells any OEM Products that contain the Licensed
Software. Each such agreement shall contain provisions requiring any such
distributor or reseller to provide Com21 with reasonable assistance in enforcing
the End User Agreements, and Com21 shall use commercially reasonable efforts to
ensure the End Users materially comply with such End User Agreements. Com21
shall use commercially reasonable efforts to protect all copyrights related to
the Licensed Software and Documentation, and shall notify Sonic of any breach of
a material obligation under any of Com21's applicable distribution and/or
reseller agreements or of any End User License Agreement of which Com21 becomes
aware, and will cooperate with Sonic in any legal action to prevent or stop
unauthorized use, reproduction or distribution of the Licensed Software.
2.7 Temporary Exclusivity. Sonic agrees not to enter into OEM License
---------------------
Agreements with other companies specifically to integrate current SonicWALL
technology with their cable modem products for a period of [*] months from
First Customer Ship of the Com21 Product. As Sonic develops new technology,
Com21 will have 30 days after its release by Sonic to determine if Com21 would
like to license it. If Com21 so chooses to enter into an agreement with Sonic
for the new technology, then this section 2.7 will be incorporated into that
agreement granting temporary exclusivity for a period of [*] months
following the effective date of the new agreement associated with the licensing
of the new technology.
2.8 Price Guarantee. Once the temporary exclusivity expires as per
---------------
section 2.7, should Sonic enter into an agreement materially identical to this
Agreement with another company who specifically intends to integrate the same
Sonic technology into a cable modem product, Com21 shall receive the same annual
license and per unit royalty fees as that company if the pricing is lower than
is specified in this Agreement and annual quantity commitments are the same as
this Agreement. In the event a price decrease is granted to Com21, it shall be
in effect from the Effective Date of the agreement Sonic signs with the other
company and under no circumstances shall be retroactive.
4
<PAGE>
3. Consideration
-------------
3.1 Purchase from Sonic. A per unit software royalty fee shall be owed by
-------------------
Com21 to Sonic for each OEM Product unit shipped, net of returns. However, Com21
shall be able to ship up to [*] OEM Product beta units (non-revenue producing
units) prior to First Customer Ship without having to pay this fee to Sonic.
Com21 shall also be able to ship a quantity of MDU ("Marketing Demonstration
Units") OEM Product with no per unit royalty fee owed to Sonic as long as Com21
does not receive revenue for those units. Should Com21 eventually receive
revenue from beta or MDU, then Com21 shall owe the associated per unit royalty
to Sonic. During the term of this Agreement, the Parties agree to a maximum MDU
quarterly quantity not to exceed [*] of that quarter's revenue producing OEM
Product unit shipments. If a customer does not purchase the beta or MDU units
from Com21, no per unit fee for those units shall be owed to Sonic. In addition,
Com21 shall pay an annual software license fee. These fees are listed in Exhibit
B.
3.2 Terms of Purchase.
-----------------
(a) Per Unit Software Royalties: Payment of royalties shall be net 30
---------------------------
days after the end of each calendar quarter for software royalties owed for
shipments of OEM Product that quarter.
(b) Annual License Fee: Fifty-percent (50%) of the [*] annual
------------------
license fee or [*] is due upon delivery of the Object Code to Com21. The
remaining fifty-percent (50%) shall be due upon Com21 beta release of the OEM
Product or upon acceptance of the deliverables specified in Exhibit D, whichever
comes first. Thereafter, the 50% of the full annual license fee shall be due
annually on the Agreement anniversary date and the remaining 50% on the
anniversary date of the first year's second payment. The Parties agree that the
payment for year two is guaranteed, except in the event Sonic materially
breaches and does not cure per the terms in Section 9.2 of this Agreement, and
will be made by Com21 to Sonic.
(c) NRE: Applicable NRE fees are due upon execution of this Agreement.
---
4. Upgrade License Accounting Reports and Audit Rights
---------------------------------------------------
4.1 Accounting Reports. Com21 shall maintain an accurate list of OEM
------------------
Products and Licensed Upgrades shipped based on the OEM Products' serial number
for a period of three (3) years after such OEM Products or Licensed Upgrade
ship. Within fifteen (15) days after the end of each calendar quarter, Com21
shall complete and submit to Sonic a detailed report setting forth all sales of
the OEM Product, software royalties, and Licensed Upgrades during such calendar
quarter and remit to Sonic the appropriate license, royalty, or other fee
payments due based on such report. If necessary and at Sonic's discretion, Com21
shall allow a mutually agreed upon third party auditor to review Com21 records
associated with such OEM Products and/or Licensed Upgrades per the Audit Rights
in Section 4.2 below.
4.2 Audit Rights. Sonic has the right to direct a mutually agreed upon
------------
third party auditor to conduct, during normal business hours and upon reasonable
prior written notice to Com21, an audit of the appropriate records of Com21 to
verify the accuracy of Com21's reports to Sonic; provided, that (i) such third
party auditor shall have executed a nondisclosure
5
<PAGE>
agreement satisfactory to Com21 under which the auditor shall agree to keep
confidential and not to disclose to third parties confidential information to
which the auditor is given access, as well as to disclose to Sonic only such
information provided to the auditor by Com21 as is relevant to the audit
conducted, and (ii) Sonic shall conduct no more than one (1) such audit during
any twelve (12) month period. Such audit shall be at Sonic's expense, unless the
adjustment to the Licensed Upgrade or other fees owing from Com21 is greater
than five-percent (5%) of fees reported by Com21, in which case Com21 shall pay
all expenses associated with the audit. Within ten (10) days after receipt of
notice from Sonic, Com21 shall remit to Sonic all amounts found in any such
audit to be due to Sonic and not previously paid by Com21.
5. Customization and Deliverables
------------------------------
5.1 Customization. Sonic agrees, for any applicable NRE charges to Com21
-------------
as specified in Exhibit B, to make specific minor modifications to Sonic's
preexisting Licensed Software as set forth on Exhibit A.
5.2 Deliverables. The Deliverables are fully described in Exhibit A
------------
attached. Sonic will deliver all Deliverables to Com21 in accordance with the
schedule set forth on Exhibit D. Com21 will have the right to test the
Deliverables for a period of ten (10) working days following Com21's receipt of
such Deliverables to determine whether the Deliverables conform to the
Specifications. If Com21 determines the Deliverables fail to conform to the
Specifications, Com21 will notify Sonic, and Sonic will use its best efforts to
correct such defect within ten (10) working days. At the end of this period,
Sonic will submit the corrected Deliverables to Com21 for acceptance by Com21
under this Section 5.2. The procedure set forth in this Section 5.2 will repeat
until Com21 either accepts or permanently rejects the Deliverables.
6. Support Obligations, Licensed Software Updates, and Licensed Software
---------------------------------------------------------------------
Upgrades
--------
6.1 Scope of Services. During the term of this Agreement, Sonic shall
-----------------
render certain services in support of the Licensed Software, during Sonic's
normal working hours (Monday through Friday, 9 a.m. to 5 p.m., PST, excluding
holidays).
(a) Sonic shall maintain a trained staff capable of rendering the
services set forth in this Agreement.
(b) Com21 shall provide First-Tier Support and Second-Tier Support.
(c) Sonic shall provide only Third-Tier support. Under no
circumstances shall Sonic be obligated to directly support a Com21 Channel
Partner or an End User of the Licensed Software.
6.2 Updates and Upgrades. During the term of this Agreement, Sonic, at
--------------------
its own discretion, shall release Licensed Software updates and upgrades and
shall make such updates and upgrades available to Com21. Sonic shall not charge
Com21 for such upgrades or updates unless Sonic generally charges its customers
for such upgrades and updates.
(a) Sonic is responsible for using all reasonable diligence to
correct verifiable and reproducible Errors when reported to Sonic by Com21 in
accordance with Sonic's standard
6
<PAGE>
reporting procedures. Sonic shall, within two (2) days of verifying that such an
Error is present, initiate work in a diligent manner toward development of an
Error Correction. Following completion of the Error Correction, Sonic shall make
such Error Correction available to Com21 and shall include the Error Correction
in all subsequent Releases of the Licensed Software. Sonic shall not be
responsible for correcting Errors in any version of the Licensed Software other
than the most recent Release of the Licensed Software.
(b) Sonic may, from time to time, issue new firmware releases of the
Software at no cost to its customers generally, containing error corrections,
minor Enhancements, and, in certain instances if Sonic so elects, major
Enhancements. These new releases shall be provided to Com21 at no additional
charge as new Com21 versions (which replace prior Com21 versions, as customized
by Sonic for Com21 hereunder pursuant to Section 5) within 30 days after the
general release.
(c) Sonic may, from time to time, offer major Enhancements and/or
Options to customers generally for an additional per unit charge. Com21, at its
discretion, may choose to purchase and resell these major Enhancements and/or
Options to its customers.
(d) Sonic shall consider and evaluate the custom development of
Enhancements for the specific use of Com21 and shall respond to Com21's requests
for additional services pertaining to the Licensed Software (including, without
limitation, graphical user interface modifications, new custom functionality,
and formatting assistance), provided that such assistance, if agreed to be
provided, is subject to supplemental NRE charges and support fees mutually
agreed to by Sonic and Com21. The Parties shall negotiate in good faith for
Sonic to accommodate Com21 customization requests and the associated NRE fee,
but Sonic may decline the request due to lack of available engineering
resources, scheduling conflicts, or the nature of the requested customization.
(e) Sonic shall make its best effort to fix Severity I Bugs within 5
working days, and other bugs within 15 working days. The Parties acknowledge
that due to the unpredictable nature of future bugs, Sonic can not be expected
to absolutely deliver the fixes within the specified time frames in every case.
7. Title and Confidentiality
-------------------------
7.1 Title. The Licensed Software is and remains at all times the property
-----
of Sonic, and Com21 has no right, title, or interest therein, except such
license rights expressly set forth in this Agreement. Com21 acknowledges that
neither Com21 nor any Com21, Channel Partner, or End User acquires any rights of
ownership in the Licensed Software by virtue of this Agreement. At the request
of Sonic, Com21 will cause the execution of any instruments that may be
appropriate to perfect Sonic's exclusive ownership rights in the Licensed
Software. Except as expressly contemplated by this Agreement, Com21 shall not
disclose, copy, or otherwise disseminate the Licensed Software, or any part
thereof, to any third person or entity.
7.2 Confidentiality. During the course of performance of this Agreement,
---------------
and thereafter, either Party may disclose certain Confidential Information to
the other Party. The Party receiving any such Confidential Information shall
maintain the confidentiality of such
7
<PAGE>
Confidential Information and shall not use, disclose, or otherwise exploit any
Confidential Information for any purpose not expressly contemplated by this
Agreement.
8. Representation and Warranties
-------------------------------
8.1 Corporate Power and Title. Sonic is a corporation duly organized,
validly existing and in good standing under the laws of the State of California,
and has full corporate power and authority to enter into this Agreement. In
addition, Sonic has good and marketable title to all of the Licensed Software,
free and clear of restrictions on or conditions to the license, transfer or
assignment of the Licensed Software.
8.2 Intellectual Property Infringement. No person has made a claim against
----------------------------------
Sonic that any of the Licensed Software infringes any patent, copyright, or
proprietary process of interest of another, and Sonic does not require rights
under any patent, copyright (or any application or registration respecting any
thereof), discovery, improvement, process, formula, know-how, data, plan,
specification, drawing or the like belonging to another. Finally, Sonic
represents and warrants that the Licensed Software does not and shall not
infringe any patent rights, copyright rights, mask-work rights, trade secret
rights or other intellectual property rights of any third party.
8.3 Warranty. Sonic represents and warrants that the Licensed Software
--------
will perform in accordance with all specifications therefor, all Documentation,
and for the uses contemplated hereunder and be substantially free of errors in
operation for a period of twelve (12) months after the date of delivery by
Sonic. In the event the Licensed Software is found to be modified (except as
specifically permitted under this Agreement), tampered with, or misused, this
warranty shall not apply to the extent the failure of the Licensed Software to
function as warranted is the result of such modification, tampering, or misuse.
8.4 Limitation of Warranty. EXCEPT AS SET FORTH IN THIS SECTION 8, SONIC
----------------------
DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, ANY WARRANTIES AS TO THE SUITABILITY OR MERCHANTABILITY OR FITNESS
FOR ANY PARTICULAR PURPOSE.
8.5 Indemnification by Sonic. Except to the extent Com21 indemnifies
------------------------
Sonic pursu ant to Section 8.6 below, and except to the extent that any claims
arise from Com21's negligence or willful misconduct, Sonic agrees to indemnify
and hold harmless Com21, its successors and assigns, officers, directors,
employees and customers (collectively, "Indemnitees"), from and against any and
-----------
all claims and causes of action arising out of any claims of any third parties
with respect to Sonic's breach of any of its representations, warranties or
covenants contained in this Agreement; provided that Sonic receives prompt
written notice of and has sole control over the defense and settlement of such
claims and actions. Sonic shall pay all costs, expenses and reasonable attorneys
fees incurred by Com21 in connection with any such defense unless Com21 chooses
to defend itself, in which case it would be at Com21's own cost. In the event of
any such claim or suit, unless Com21 chooses to defend itself at its own cost,
Sonic shall have the right to select counsel and the right to control the
defense and settlement of such suit or claim. Sonic further agrees to indemnify
and save harmless Indemnitees from all claims or causes of action based upon
defective design, manufacture, or a failure of the Licensed
8
<PAGE>
Software to perform according to their specifications. This indemnity shall not
expire upon termination of this Agreement, but shall remain in force and effect
thereafter.
8.6 Indemnification by Com21. Except to the extent Sonic indemnifies
------------------------
Com21 pursuant to Section 8.5 above, and except to the extent that any claims
arise from Sonic's negligence or willful misconduct, Com21 agrees to indemnify
and hold harmless Sonic from any losses from claims of personal injury arising
from Com21's sale and distribution of the Licensed Software, or from its breach
of any representations, warranties or covenants contained in this Agreement.
Com21 shall pay all costs, expenses and reasonable attorneys fees incurred by
Sonic in connection with any such defense, unless Sonic chooses to defend
itself. This indemnity shall not expire upon termination of this Agreement, but
shall remain in force and effect thereafter.
8.7 Limitation of Liability. Except with respect to Sonic's
-----------------------
indemnification obligations under Section 8.5 above, the maximum
cumulative liability owed by Sonic to Com21 hereunder shall be limited
to the total amount paid by Com21 to Sonic as of the date a court
makes a final determination in the matter in question. Except for
claims which arise from the willful misconduct of Com21 or Com21's
employees, officers, or agents, the maximum cumulative liability owed
by Com21 to Sonic hereunder above shall be limited to the total amount
received by Sonic from Com21 as of the date a court makes a final
determination in the matter in question. As used in this section 8.7,
a `final determination' is the date no further appeal is possible in
the action at issue. EXCEPT TO THE EXTENT AWARDED IN ANY ACTION
ALLEGING INTELLECTUAL PROPERTY INFRINGEMENT WITH RESPECT TO WHICH
SONIC IS OBLIGATED TO INDEMNIFY COM21 UNDER SECTION 8.5 ABOVE, NEITHER
PARTY SHALL HAVE ANY LIABILITY TO THE OTHER FOR INCIDENTAL, INDIRECT,
SPECIAL, CONSEQUENTIAL OR OTHER SIMILAR DAMAGES UNDER ANY CONTRACT,
NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY.
9. Term & Termination
------------------
9.1 Term. Subject to Section 9.2, the term of this Agreement begins on
----
the Effective Date and shall continue for a period of 2 years, provided that
this Agreement shall then automatically renew for successive one year terms,
unless either Party gives the other Party thirty (30) days' written notice prior
to the expiration of the then-current term of such Party's intent to terminate
this Agreement.
9.2 Termination. Either Party may terminate this Agreement in the event
------------
the other Party is in material breach of this Agreement (including any failure
to timely pay amounts owed to a Party) and the breaching Party fails to cure
such breach within thirty (30) days following its receipt of written notice of
such breach from the other Party; provided, however, that the 30-day cure period
is shortened to a period of five (5) days in the event Com21 is in breach of any
terms of this Agreement pertaining to the confidentiality, reproduction of
copyright and other notices, or in the event Sonic is in breach of any terms of
this Agreement pertaining to confidentiality of Com21's Confidential
Information.
9
<PAGE>
9.3 Default. The following are events of default:
-------
(a) Failure to Pay or Breach. If either Party is in default of any
------------------------
material term or condition hereunder and such default continues for thirty (30)
days following written notice thereof by the non-breaching Party; or
(b) Insolvency, Assignment or Bankruptcy. If either Party is in
------------------------------------
material default of its obligations to its vendors or suppliers, becomes
insolvent, files or has filed against it a petition under any Bankruptcy Law
(which, if involuntary, is unresolved after sixty days).
9.4 Return of Confidential Information. Upon termination of this
----------------------------------
Agreement and receipt of written request from either Party, each Party shall
return at its expense any and all copies of Confidential Information or
materials in its possession or under its control.
9.5 Purchases After Termination. Upon termination of this Agreement
---------------------------
(except for termination due to breach of contract by Com21), Com21 shall be able
to continue to purchase the Licensed Software and receive Third-Tier Support for
a period of ninety (90) days per the original terms of this Agreement.
9.6 Return of Licensed Software. Within fifteen (15) days of any
---------------------------
expiration or termination of this Agreement, Com21 shall return to Sonic all
full or partial copies of the Licensed Software in its possession or under its
control, including any master version of the Licensed Software, and shall so
certify such return by a duly authorized officer of Com21. Upon any expiration
or termination of this Agreement, Com21 is deemed to have assigned, transferred,
and conveyed back to Sonic all license rights in and to the Licensed Software.
9.7 Technical Support After Termination and/or Expiration. Upon
-----------------------------------------------------
termination or expiration of this Agreement, Sonic shall continue to offer
Third-Tier support including bug fixes but not feature enhancements to Com21 for
an annual fee of ($20,000) twenty thousand dollars.
10. Source Code Escrow
------------------
10.1 Escrow Agreement. Sonic agrees to deposit a full and complete
----------------
electronic copy of the source code and hardware design to the Product, and all
updates and enhancements thereto (the "Source Materials"), into escrow with a
mutually agreed upon escrow services company. The parties will enter into a
mutually agreeable escrow agreement. Com21 shall pay all fees for such escrow
and Sonic shall bear its own costs in preparing the Source Materials for
deposit. The escrow agreement shall provide for the release of such Source
Materials upon the occurrence of an Event (as defined in 10.2).
10.2 Release Event. The definitive escrow agreement will provide for
-------------
the release of such Source Materials to Com21 in the event Sonic (i) becomes the
subject of any voluntary or involuntary proceeding for liquidation under the
U.S. Bankruptcy Code and such proceeding is not terminated with respect to Sonic
within sixty (60) days of its commencement, or (ii) ceases to do business in the
normal course (except in the cases of corporate restructuring or acquisition),
or (iii) Sonic exits the Internet security market and ceases development and
ongoing technical support of the technology licensed to Com21 in this Agreement.
10
<PAGE>
10.3 Source Code License. Subject to the terms and conditions of this
-------------------
Agreement, upon release from escrow, Com21 shall have a nonexclusive,
nontransferable license to use and modify the Source Materials and distribute
the same in accordance with the licenses herein granted. Title in all Source
Materials shall remain in Sonic, and Com21 will take all reasonable precautions
to maintain the secrecy of the Source Materials. Further, upon the release from
escrow of the Source Materials, Com21 shall pay royalties to Sonic, or Sonic's
designate or successor, in the amount of twenty dollars ($20) per unit shipped
which contains the Source Materials or any portion thereof.
10.4 Right to Use Source Materials. Upon the release from escrow of the
------------------------------
Source Materials, Com21 agrees to not independently develop products which use
any portion of the Source Materials.
11. Miscellaneous
-------------
11.1 Export Restrictions. Com21 shall not re-export, either directly or
-------------------
indirectly, the Licensed Software (including any technical data, manuals, or
other materials delivered pursuant to this Agreement) to any country or
countries to which such re-exports are prohibited under the laws of the United
States or the laws of any country in the Territory, including but not limited to
any Derivative Works or Modifications. Com21 shall obtain appropriate license
approvals and certifications necessary, if any, to comply with the applicable
export and re-export restrictions of the United States or any country in the
Territory. Com21 understands and recognizes that the Licensed Software and
other materials made available to it hereunder may be subject to the Export
Administration Regulations of the U.S. Department of Commerce and other U.S.
government regulations relating to the export of technical data and equipment
and Licensed Software produced therefrom. Com21 is familiar with and agrees to
comply, and to require Channel Partners and End Users to, with all such
regulations, including any future modifications thereof.
11.2 Force Majeure. If either Party is prevented from performing any
-------------
portion of the Agreement by causes beyond its control, including labor disputes,
civil commotion, war, governmental regulations or controls, casualty, inability
to obtain materials or services, or acts of God, such defaulting Party shall be
excused from performance for a period of delay and for a reasonable time
thereafter.
11.3 Governing Law. This Agreement shall in all respects be governed by
-------------
and interpreted in accordance with the laws of the State of California, without
reference to conflict of law provisions.
11.4 Arbitration. Any controversy or claim arising out of this Agreement
-----------
or a breach thereof shall, on written request of either Party served on the
other, be submitted to binding arbitration before a single arbitrator to be
conducted in accordance with the Rules and Regulations of the American
Arbitration Association (Commercial Division). If the Parties are unable to
agree on an arbitrator within thirty (30) days after a Party has served notice
of a request to arbitrate, then an arbitrator shall be selected by the American
Arbitration Association pursuant to its then-current rules, within fifteen (15)
days after the Parties are unable to agree on the arbitrator. Arbitration shall
take place in the County of Santa Clara, California. No discovery
11
<PAGE>
shall be allowed in such arbitration. The maximum number of days of hearing in
such arbitration shall be ten (10), all of which shall occur in a twenty (20)
day period. The arbitrators shall issue a written decision in the arbitration
giving the findings of facts and reasons for the award made by the arbitrator.
The award shall be specifically enforceable in a court of law with jurisdiction
over the Parties and subject matter.
11.5 Attorney's Fees. In any litigation or arbitration between the
---------------
Parties, the prevailing Party shall be entitled to reasonable attorney fees and
all costs of proceedings incurred in enforcing this Agreement.
11.6 Consequential Damages. EXCEPT AS EXPLICITLY SET FORTH IN THIS
---------------------
AGREEMENT, UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER OR
ANY OTHER PARTY FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, OR SPECIAL DAMAGES
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR A PARTY'S PERFORMANCE OR FAILURE
TO PERFORM HEREUNDER.
11.7 The terms of this Agreement shall supersede and void any and all
standard terms and conditions on each Party's respective forms.
11.8 Binding Nature and Assignment. Neither Party may assign any of its
-----------------------------
rights or obligations under this Agreement without the prior written consent of
the other Party; provided, that either Party may in its sole discretion assign
its rights and obligations under this Agreement to an entity which acquires all
or substantially all of its assets or to any successor in a merger or
acquisition without the prior written consent of the other Party. Subject to the
foregoing, this Agreement is binding on the Parties and their respective
successors and assigns.
11.9 Amendment and Waiver. No modification, amendment, or waiver of or
--------------------
under this Agreement is binding unless executed in writing by the Party against
whom enforcement of such modification, amendment or waiver is sought. No waiver
of any of the provisions of this Agreement constitutes a waiver of any other
provision nor shall such waiver constitute a continuing waiver unless otherwise
expressly provided .
11.10 Further Assurances. Each Party shall provide such further documents
------------------
or instruments required by the other Party as may be reasonably necessary or
desirable to give effect to this Agreement and to carry out its provisions.
11.11 Publicity. For purposes of marketing, each Party may publicize the
---------
business relationship generally contemplated by this Agreement.
11.12 Severability. Any provision of this Agreement which is prohibited
------------
or unenforceable in any jurisdiction is, as to such jurisdiction, ineffective to
the extent of such prohibition or unenforceability without invalidating the
remaining provisions or affecting the validity or enforceability of such
provision in any other jurisdiction.
11.13 Entire Agreement. This Agreement, including the Exhibits hereto,
----------------
constitutes the entire agreement between the Parties pertaining to the subject
matter hereof and supersedes all prior and contemporaneous agreements,
understandings, negotiations and discussions, whether
12
<PAGE>
oral or written, of the Parties pertaining to the subject matter hereof. There
are no representations or warranties of the Parties in connection with the
subject matter hereof except as specifically referenced herein.
11.14 Notices. Any notice, demand or other communication required or
-------
permitted to be given under this Agreement must be in writing and is deemed
delivered to a Party (a) when delivered by hand or courier, (b) when sent by
confirmed facsimile with a copy sent by another means specified in this Section,
or (c) six (6) days after the date of mailing if mailed by certified or
registered mail, return receipt requested, postage prepaid, in each case to the
address of such Party set forth below (or at such other address as the Party may
from time to time specify by notice delivered in the foregoing manner):
If to Sonic:
-----------
Sonic Systems
5400 Betsy Ross Drive, Suite 206
Santa Clara, CA 95054
Attn: Sreekanth Ravi
If to Com21:
-----------
Com21, Incorporated
750 Tasman Drive
Milpitas, CA 95035
Attn: Ken Gorman
11.15 Independent Contractors. The Parties act as independent contractors
-----------------------
of each other. Nothing herein is deemed to constitute Sonic and Com21 as
partners, joint venturers, or principal and agent. Except as expressly
contemplated by this Agreement, the Parties have no authority to bind each other
legally or equitably by contract, admission, acknowledgment, or undertaking or
to represent each other as to any matters.
11.16 No Third Party Beneficiaries. Nothing in this Agreement confers any
----------------------------
rights on any person or entity not a Party to this Agreement.
11.17 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which is deemed an original but all of which taken
together constitute one and the same instrument.
11.18 Survival. Sections 1, 2.2, 2.3, 2.4, 4, 7, 8, 9.4, 9.5, 9.6, 9.7,
--------
10.3, 11, and all payment obligations incurred prior to the termination of this
Agreement, will survive the termination or expiration of this Agreement for any
reason.
13
<PAGE>
IN WITNESS WHEREOF, the Parties have entered into this Agreement to take effect
on the date executed by Sonic.
COM21, INCORPORATED SONIC SYSTEMS, INC.
Signature /s/ Kenneth C. Gorman Signature /s/ Sreekanth Ravi
-------------------------- ----------------------
Print Name Kenneth C. Gorman Print Name Sreekanth Ravi
------------------------ ---------------------
Print Title VP, Engineering Print Title President
----------------------- --------------------
Date Jan. 27, 1999 Date 1/27/99
------------------------------- ---------------------------
14
<PAGE>
EXHIBIT A
---------
Deliverables
- - A 16-user version of the SonicWALL Firmware in object code form.
- - The firmware version is 3.x, and includes future bug fix releases and non-
charged upgrades. The right to enable Sonic charged upgrades (such as VPN and
content filter list subscription) is not included in the base price.
- - An electronic version of the SonicWALL Documentation.
- - Sonic to provide code performance tuning as applicable.
- - Com21 Product and Company name to be customized by Sonic in the software
Graphical User Interface (GUI).
- - VPN option IS AVAILABLE as a separately priced option.
- - Optional weekly update of the CyberNOT list IS AVAILABLE as a separately
priced option.
- - Sonic will provide hardware schematics of its SonicWALL product to help Com21
with its Product hardware design.
<PAGE>
EXHIBIT B
---------
Licensed Software Pricing and Minimums
There are two components associated with the licensing of the code as per
Section 3.1 of this Agreement:
1) A [ * ] Annual Software License Fee; and
2) A Per Unit Software Royalty as per the tables below. If in any 1-year term
of this Agreement Com21 ships [ * ] revenue units of the OEM Product, the per
unit price shall drop from [ * ] to [ * ] for the remaining term of this
Agreement.
<TABLE>
<CAPTION>
________________________________________________________________________________________________
DESCRIPTION Up to [ * ] units annually [ * ] annually
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Per unit license fee [ * ] [ * ]
- ------------------------------------------------------------------------------------------------
</TABLE>
AVAILABLE OPTIONS:
<TABLE>
<CAPTION>
_______________________________________________________________________________________________
DESCRIPTION Per Unit Price
- -----------------------------------------------------------------------------------------------
<S> <C>
VPN Upgrade [ * ]
Annual CyberNOT Filter List Subscription [ * ]
- -----------------------------------------------------------------------------------------------
</TABLE>
NON-RECURRING ENGINEERING FEES
- ------------------------------
Sonic Systems will provide certain custom engineering for one-time fees of:
- Software Customization: [ * ]
- Code performance tuning - [ * ]
<PAGE>
EXHIBIT C
---------
Licensed Software Specification
INSERT SONICWALL SPECIFICATION SHEET HERE
<PAGE>
EXHIBIT D
---------
Deliverables Schedule
The Deliverables listed in Exhibit A shall be delivered to Com21 within 5
working days after the Effective Date of this Agreement.
Performance Tuning - Sonic shall make its best effort to deliver code
- ------------------
performance tuning before the end of February 1999 that, when combined with
Com21's enhanced hardware design incorporating a 33Mhz Motorola 360 processor,
meets Com21's stated throughput performance goals of 7Mbps for firewalling only
(no content filtering or VPN) and 500Kbps for firewalling, content filtering,
and a single session of 56-bit ARC4 IPsec VPN simultaneously. However, Sonic
can not absolutely guarantee these goals will be met.
Release of Second Installment of the Annual License Fee: The following items
- -------------------------------------------------------
shall be delivered by Sonic to Com21 for purposes of the payment of the second
installment of the Annual License fee as per section 3.2(b):
(1) Sonic shall complete delivery of the deliverables specified in Exhibit A.
(2) Sonic shall assist Com21 in setting-up it's product registration, automatic
software update, and CyberNOT list subscription servers associated with the
successful delivery of the OEM Product.
(3) Sonic shall provide technical support and sales training at Com21 not to
exceed one full day each.
(4) Sonic shall provide an electronic version of the documentation complete
with Com21 requested reasonable minor changes and enhancements.
(5) Sonic shall make its best effort to complete performance tuning as
specified earlier in this Exhibit.
<PAGE>
EXHIBIT E
---------
End User License Agreement
This End User Software License Agreement (Agreement) is a legal agreement
between you, either an individual or a single entity, (Licensee) and Com21, Inc.
(Com21) for the Licensed Product (defined below). By installing, copying or
otherwise using the Licensed Product, you agree to be bound by the terms of this
Agreement. If you do not agree to the terms of this Agreement, promptly return
the unused Licensed Product to the place where you obtained it for a full
refund.
1. Definitions.
a. Documentation means the end user documentation associated with the Software
-------------
provided by Com21.
b. Hardware means, collectively, Com21's headend controller unit. Com21's
--------
subscriber-end data over cable modem and/or voice over cable modem and a central
processing unit (CPU) operating on a SUN platform with HP Open View software.
c. Licensed Product means, collectively, the Software and the Documentation.
----------------
d. Software means, collectively, the version(s) of the Com21 network management
--------
applications programs (the NMAPS Software), Com21 cable modem image software and
other software contained as any Hardware, an object code form including updates,
modifications or enhancements of such programs that may be provided byCom21 in
its sole discretion from time to time.
2. Grant of License. Subject to all the terms and conditions of this
Agreement, Com21 grants Licensee a non-exclusive, non-sublicensable, non-
transferable right (License) to use the Software only in accordance with the
Documentation and only in connection with the Hardware licensed or purchased by
Licensee. Licensee has no right to receive, use, examine, or modify any source
code or design documentation relating to the Software.
3. Ownership of Software. As between the parties, Com21 retains all title to
and ownership of and, except as expressly and unambiguously licensed herein, all
rights and interest in the Licensed Products including all customizations,
enhancements, modifications, improvements, derivatives or other changes (by
whomever produced) and all copies and portions thereof, whether or not
incorporated into or with other software, and all intellectual property and
proprietary rights anywhere in the world therein. The License does not
constitute a sale of the Software or any portion or copy of it.
4. Restrictions. Except as reasonably required to use the Software with the
Hardware strictly in accordance with the License, copying or modifications of
the Licensed Products or any portion thereof, including Software that has been
modified or incorporated into or with other software, is expressly forbidden.
Licensee shall not remove, alter, obscure or fail to reproduce all copyright,
trademark and other proprietary rights noticed that appear in or on the Licensed
<PAGE>
Products. Except to the extent expressly prohibited by applicable law, Licensee
shall not (and shall not allow any third party to) decompile, disassemble, or
otherwise reverse engineer or attempt to reconstruct or discover any source code
or underlying ideas, structure, sequence, organization, algorithms, file
formats, programming or interoperability interfaces of the Software or of any
files contained in or generated using the Software by any means whatsoever.
Further, Licensee shall not (i) load or use any portion of the NMAP Software on
or with more than on CPU, whatsoever. Further, Licensee shall not (i) load or
use any portion of the NMAP Software on or with more than one CPU, (ii) provide,
lease, lend or otherwise use or allow others to use the Software to or for the
benefit of third parties, (iii) except as specified in the Documentation,
modify, incorporate into or with other software or create a derivative work of
any part of the specified in the Documentation, modify, incorporate into or with
other software or create a derivative work of any part of the Software, (iv)
load or use any portion of the Software (whether or not modified or incorporated
into or with order software) on or with any machine or system other than the
Hardware, (v) except if, as and to the extent expressly authorized in the
Documentation, transmit or use the Software over a network, or (vi) disseminate
performance information or analysis (including, without limitation, benchmarks)
from any source relating to the Software.
5. Termination of License. The License shall remain in effect for so long as
Licensee's use of the Licensed Products is in compliance with the terms and
conditions of this Agreement. The License will terminate immediately without
notice from Com21 if Licensee fails to comply with any provision of this
Agreement. Upon termination, Licensee shall immediately cease all use of the
Licensed Products and return or destroy all copies of the Licensed Products and
all portions thereof (whether or not modified or incorporated with or into other
software) and so certify to Com21. Except for the Licensee and except as
otherwise expressly provided herein, the terms of this Agreement shall survive
termination. Termination is not an exclusive remedy and all other remedies will
be available whether or not the Licensee is terminated.
6. Limited Warranty and Disclaimer. THE LICENSED PRODUCT IS PROVIDED "AS IS"
WITHOUT WARRANTY OF ANY KIND INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. FURTHER, COM21 DOES NOT
WARRANT, GUARANTEE, OR MAKE ANY REPRESENTATIONS REGARDING THE USE, OR THE
RESULTS OF THE USE, OF THE LICENSE PRODUCTS IN TERMS OF CORRECTNESS, ACCURACY,
RELIABILITY, OR THAT THE LICENSED PRODUCTS ARE OR WILL BE ERROR-FREE. This
limited warranty does not affect or prejudice statutory rights Licensee may have
acquired in the country in which the Licensed Products are being used.
7. Limitation of Remedies and Damages. TO THE MAXIMUM EXTENT PERMITTED UNDER
APPLICABLE LAW, COM21 SHALL NOT BE RESPONSIBLE OR LIABLE WITH RESPECT TO ANY
SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT
LIABILITY OR OTHER THEORY FOR (I) ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL
DAMAGES, LOST PROFITS OR LOSS OR INACCURACY OF DATA OR (II) COST OF PROCUREMENT
OF SUBSTITUTE GOODS, SERVICES OR TECHNOLOGY OR (III) ANY MATTER BEYOND ITS
REASONABLE CONTROL NOTHING IN THIS AGREEMENT SHALL EXCLUDE OR RESTRICT COM21'S
LIABILITY FOR DEATH OR PERSONAL INJURY SOLELY
<PAGE>
CAUSED BY COM21'S WILLFUL MISCONDUCT OR GROSS NEGLIGENCE OR TO THE EXTENT
EXPRESSLY PROHIBITED UNDER APPLICABLE MANDATORY PRODUCT LIABILITY LAWS, IF ANY.
8. Indemnification. Com21 shall hold Licensee harmless from liability
resulting from infringement by the Software of any United States patent issued
as of the date sixty (60) days before delivery of the Software or any United
States copyright, provided Com21 is promptly notified in writing of any and all
threats, claims and proceedings related thereto, given reasonable assistance and
has sole control over the defense and all negotiations for a settlement or
compromise; Com21 will not be responsible for any settlement it does not approve
in writing. THE FOREGOING CONSTITUTES COM21'S SOLE LIABILITY, AND LICENSEE'S
SOLE REMEDY IN THE EVENT OF ANY INFRINGEMENT OF THIRD PARTY RIGHTS BY THE
LICENSED PRODUCTS AND IS IN LIEU OF ANY WARRANTIES OR NONINFRINGEMENT, WHICH ARE
HEREBY DISCLAIMED TO THE MAXIMUM EXTENT PERMITTED UNDER APPLICABLE LAW. The
foregoing obligation of Com21 does not apply with respect to Software or
portions or components thereof (i) not supplied by Com21, (ii) made in whole or
in part in accordance to Licensee's specifications, (iii) which are modified
after delivery by Com21, (iv) combined with other products, processes or
materials (excluding the Hardware) not supplied by Com21, (v) where Licensee
continues allegedly infringing activity after being modified thereof or after
being informed of modifications that would have avoided the alleged
infringement, or (vi) where Licensee's use of the Software is incident to an
infringement not resulting primarily form the Software or is not strictly in
accordance with the License; Licensee will indemnify Com21 and its officers,
directors, agents and employees from all damages, settlements, attorneys' fees
and expenses related to a claim of infringement excluded from Com21's indemnity
obligation by this sentence.
9. Government Matters. Licensee shall comply with the U.S. Foreign Corrupt
Practices Act regarding among other things, payments to government officials)
and all export laws, restrictions, national security controls and regulations of
the United States or other applicable foreign agency or authority, and not to
export or re-export, or allow the export or re-export of any Software or any
copy or direct product thereof in violation of any such restrictions, laws or
regulations or, without all required licenses and authorizations, to any Group
D1 or E2 country, including, without limitation, Cuba, Libya, North Korea, Iran,
Iraq or Rwanda (or any national or such country) specified in the then-current
Supplement No. 1 to Part 740 of the U.S. Export Administration Regulations (or
any successor supplement or regulations).
10. Miscellaneous.
a Assignment. The License and this Agreement are not assignable or
----------
transferable by Licensee without the prior written consent of Com21; any attempt
to do so shall be void.
b. Waivers and Amendments. No failure to exercise, and no delay in exercising,
----------------------
on the part of either party, any privilege, any power or any rights hereunder
will operate as a waiver thereof, nor will any single or partial exercise of any
right or power hereunder preclude further exercise of any other right hereunder.
Any waivers of or amendments to any provision of this Agreement shall be
effective only if made in writing clearly understood by both parties to be an
amendment or waiver and signed by a representative of the respective parties
authorized to bind the parties.
<PAGE>
c. Severability. If any provision of this Agreement shall be adjudged by any
------------
court of competent jurisdiction to be unenforceable or invalid, that provision
shall be limited or eliminated to the minimum extent necessary so that this
Agreement shall otherwise remain in full force and effect and enforceable.
d. Governing Law; Attorneys' Fees. This Agreement shall be deemed to have been
------------------------------
made in, and shall be construed pursuant to the laws of the State of California
and the United States of America without regard to conflicts of laws provisions
thereof and without regard to the U.N. Convention on Contracts for the
International Sale of Goods. The sole and exclusive jurisdiction and venue for
any action or dispute relating to the subject matter of this Agreement shall be
the California state and U.S. federal courts having within their jurisdiction
the location of Com21 and each of the parties hereto submits itself to the
exclusive jurisdiction and venue of such courts for the purpose of any such
action or dispute and hereby waives any venue objection thereto. The prevailing
party in any action to enforce this Agreement shall be entitled to recover costs
and expenses including, without limitation, attorneys' fees.
e. English Language. The original of this Agreement has been written in
----------------
English. Licensee hereby agrees to waive my right under the law of the country
in which the Software was initially licensed to have this Agreement written in
the native language.
f. Equitable Relief. The parties agree that a material breach of this
----------------
Agreement adversely affecting Com21's proprietary rights in the Software would
cause irreparable injury to Com21 for which monetary damages would not be an
adequate remedy and that the Com21 shall be entitled to equitable relief in
addition to any remedies it may have hereunder or at law.
g. Entire Agreement. Both parties agree that this Agreement is the complete
----------------
and exclusive statement of the mutual understanding of the parties and
supersedes and cancels all previous written and oral agreements and
communications relating to the subject matter of this Agreement.
<PAGE>
EXHIBIT 10.7
CONFIDENTIAL TREATMENT REQUESTED
[*] Denotes information for which confidential treatment has been requested.
Confidential portions omitted have been filed separately with the Commission.
OEM Purchase Agreement
Between
Sonic Systems, Inc. and Ramp Networks
THIS AGREEMENT is entered into between Sonic Systems, Inc. a California
corporation principally located at 5400 Betsy Ross Drive, Suite 206, Santa
Clara, CA 95054 ("Sonic") and Ramp Networks, a California corporation located at
-----
3100 De La Cruz Blvd, Santa Clara, CA 95054 ("Ramp") is made as of this 5th day
----
of January 1999 ("Effective Date").
--------------
Background
----------
Sonic has developed an Internet Security appliance called SonicWALL. Ramp
wishes to OEM the standard version of the 2-port SonicWALL with minor cosmetic
modifications. Sonic has agreed to provide this customized version of the 2-
port SonicWALL to Ramp subject to the terms of this Agreement and in reliance
upon Ramp's representation that it has the technical, marketing, financial, and
business capabilities to fulfill Ramp's obligations set forth in this Agreement.
1. Definitions
-----------
Channel Partners. "Channel Partners" shall mean any third party authorized
----------------
by Ramp to resell the Product and includes, but is not limited to, distributors,
resellers, value-added resellers, system integrators, and OEMs.
Confidential Information. "Confidential Information" means any data or
------------------------
information, oral or written, treated as confidential that relates to either
Party's (or, if either Party is bound to protect the confidentiality of any
other person's information, such other person's) past, present, or future
research, development, or business activities, including any unannounced
products and services, and including any information relating to services,
developments, inventions, processes, plans, financial information, customer and
supplier lists, forecasts, and projections. Confidential Information, also
includes the terms of this Agreement. Notwithstanding the foregoing,
Confidential Information is deemed not to include information that: (i) is
publicly available or in the public domain at the time disclosed; (ii) is or,
becomes publicly available or enters the public domain through no fault of the
Party receiving such information; (iii) is rightfully communicated to the
recipient by persons not bound by confidentiality obligations with respect
thereto; (iv) is already in the recipient's possession free of any
confidentiality obligations with respect thereto (excluding, however, any copies
of the Product that may be in Ramp's possession prior to the date of this
Agreement); (v) is independently developed by the recipient; (vi) is approved
for release or disclosure by the disclosing Party without restriction; or (vii)
is required to be disclosed or is disclosed pursuant to the order or requirement
of a court, administrative agency, or other governmental body; provided,
however, that the recipient shall provide prompt notice thereof to the
disclosing Party to enable the disclosing Party to seek a protective order or
otherwise prevent or restrict such disclosure.
Deliverables. "Deliverables" shall mean the items listed in Exhibit A.
------------
Derivative Works. "Derivative Works" means programming or design changes
----------------
made to the Product.
Documentation. "Documentation" shall mean the user manual associated with
-------------
the Products.
1
<PAGE>
End User. "End-User" means end user customers located within the Territory
--------
who receive the Product.
Enhancements. "Enhancements" means any modification or addition that, when
------------
made or added to the Product, materially changes its utility, efficiency,
functional capability, or application, but that does not constitute solely an
Error Correction. Enhancements may be designated by Sonic as minor or major,
depending on Sonic's assessment of their value and of the function added to the
preexisting Product.
Error. "Error" means the failure of the Product to conform in all material
-----
respects to its functional specifications as published from time to time by
Sonic, the current version of which is attached as Exhibit C hereto. However,
any nonconformity resulting from Ramp's or its customers' misuse, improper use,
alteration, or damage of the Product is not an Error.
Error Correction. "Error Correction" means either a modification or an
----------------
addition that, when made or added to the Product, establishes material
conformity of the Product to its Specifications.
First-Tier Support. "First-Tier Support" shall mean technical support of
------------------
the Product directly to End Users.
Initial Purchase Order. "Initial Purchase Order" shall mean the first
----------------------
purchase order submitted by Ramp and accepted by Sonic and dated ______________.
Licensed Upgrades. "Licensed Upgrades" shall mean any upgrade for the
-----------------
Product for which there is a defined upgrade price in Exhibit B and for which
Sonic will provide to Ramp a software upgrade key to enable such upgrade.
Modifications. "Modifications" means any changes to the Product made by
-------------
Sonic.
NRE. "NRE" means non-recurring engineering.
---
Options. "Options" shall mean Product Software add-ons that may be made
-------
available to customers from time to time for an additional charge.
Party or Parties. "Party" or "Parties" means Sonic or Ramp, as applicable,
----------------
or both Sonic and Ramp as parties to this Agreement.
Products and Prices. "Products" and "Prices" shall mean the Products (as
-------------------
modified for Ramp in accordance with Exhibit A and Section 5) and Prices listed
in Exhibit B. Products includes all Documentation, Software, Enhancements,
Error Corrections, Modifications, Licensed Upgrades, and Releases Sonic makes
available to Ramp hereunder.
Releases. "Releases" means new versions of the Software or Product, which
--------
may include, without limitation, Error Corrections, Enhancements, and
Modifications.
Second-Tier Support. "Second-Tier Support" shall mean technical support of
-------------------
the Product directly to Channel Partners.
Severity I Bug. "Severity I Bug" shall mean any demonstrable Error in the
--------------
Product that: (i) causes the Product to have a significant loss of intended
function as set forth in the applicable Specifications; (ii) causes or is likely
to cause data to be lost or destroyed; or (iii) prevents the Product from being
installed or executed on the properly configured environment.
2
<PAGE>
Software. "Software" shall mean the computer programs and/or firmware
--------
which are necessary in order to cause the Products to operate properly, which
are described on Exhibit A, and which Sonic will provide to Ramp hereunder.
Specifications. "Specifications" shall mean the specifications for the
--------------
Products set forth on Exhibit A, Exhibit C, and as otherwise mutually agreed
upon by the Parties in writing.
Third-Tier Support. "Third-Tier Support" shall mean technical support of
------------------
the Product directly to Ramp.
Territory. The "Territory" is the world, subject to the export
---------
restrictions covered in Section 11.1.
2. Rights and Restrictions
-----------------------
2.1 License Grants. Sonic hereby grants to Ramp a non-exclusive, worldwide
--------------
right to reproduce the Documentation and to use, support, sell, modify (as set
forth in Section 3.4), and distribute the Products. Ramp does not have the
right to re-license the Products to a third party for purposes of manufacturing
the Products. However, should a case arise where Ramp needs manufacturing
rights or to convey manufacturing rights to a third party in order to secure a
large OEM opportunity, the Parties agree to negotiate such an arrangement in
good faith.
2.2 Use of Trademarks/Logos. No license is granted to Ramp to use any Sonic
-----------------------
trademarks, service marks or logos, or those trademarks or logos of any of
Sonic's OEMs without the prior, express written permission of Sonic.
2.3 Ownership of Intellectual Property in Products. The Sonic Products,
----------------------------------------------
including any associated intellectual property rights and/or Derivative Works,
are and remain the sole property of Sonic. Ramp shall from time to time take
any further action and execute and deliver any further instrument, including
documents of assignment or acknowledgment, that Sonic may reasonably request in
order to establish and perfect its exclusive ownership rights in such Products,
including any associated intellectual property rights.
2.4 Software License Restrictions. Ramp shall not reverse compile or
-----------------------------
disassemble object code versions of the Software included in the Product or
otherwise create, attempt to create, or permit or assist others to create a
source code of the Software.
2.5 Independent Developments. It is understood that the Parties have performed
------------------------
and will continue to perform substantial independent development relating to
networking products and associated technologies. Each Party also understands
that, over time, the other Party's employees may gain familiarity with the
general concepts and ideas in the other Party's technology disclosed under the
Agreement from independent sources. Consequently, each Party acknowledges that
each Party shall be free to use such independently developed or received
concepts and ideas free of all restrictions, other than those set forth in this
Section 2.
3. Consideration
-------------
3.1 Purchase from Sonic. Products may be purchased by Ramp at the Prices
-------------------
listed in Exhibit B. Ramp shall issue individual purchase orders for each
Product listed in Exhibit B. Each purchase order must be received 60 days in
advance of the applicable shipping date and must be non-cancelable, however, the
purchase orders may be increased by up to 50% in quantity of Products being
ordered upon not less than 30 days notice prior to the scheduled shipping date.
A non-binding 90-day forecast must accompany all purchase orders covering the
three consecutive months following the current purchase order. All Products are
fully tested and verified in
3
<PAGE>
accordance with existing manufacturing procedures. All Products are shipped in
bulk packaging in anti-static bags individually wrapped, FOB Sonic's factory in
San Jose, CA. However, the second shipment against the Initial Purchase Order,
due to arrive at Ramp no earlier than April 1, 1999, shall be F.O.B. Ramp's
location in Fremont, California. All other shipments shall be F.O.B. Sonic's
factory in San Jose, CA. Title and risk of loss for the Product shall pass to
Ramp once it is turned over to Ramp's shipping agent or freight forwarder.
3.2 Terms of Purchase. Terms of purchase shall be net 30 days. Sonic will
-----------------
grant such credit approval to Ramp, provided Ramp meets Sonic's credit approval
standards. However, payment terms for only the first shipment against the
Initial Purchase Order (due January 29, 1999) shall be net 45 days.
3.3 Minimum Purchase Orders. Each purchase order presented to Sonic must be
-----------------------
for a minimum of [*] units of Product to be delivered in a single shipment.
3.4 Inventory Balancing. Ramp will have the right to modify Product in its
-------------------
inventory as needed via a software key to increase or decrease the number of
users per model (for example, if Ramp needs 25-user units and only has 5-user
units in inventory, Ramp can use a software key to upgrade the 5-user units to
25-user units). The detailed mechanics of how such upgrade shall be done will
be mutually agreed to by the Parties. The charge or credit to Ramp (depending
on the nature of the upgrade/downgrade) shall be the actual price difference
between the models, and shall be reconciled and paid no later than fifteen (15)
days following the end of each calendar quarter.
4. Upgrade License Accounting Reports and Audit Rights
---------------------------------------------------
4.1 Accounting Reports. Ramp shall maintain an accurate list of Licensed
------------------
Upgrade units based on the Product's serial number associated with each copy of
the Licensed Upgrades described in Exhibit B for a period of three (3) years
after such Licensed Upgrade is made in accordance with Section 3.4. Within
fifteen (15) days after the end of each calendar quarter, Ramp shall complete
and submit to Sonic a detailed report setting forth all sales of the Licensed
Upgrades during such calendar month and remit to Sonic the appropriate license
or other fee payments due based on such report. If necessary and at Sonic's
discretion, Ramp shall allow a mutually agreed upon, third party auditor to
review Ramp records associated with such Licensed Upgrades per the Audit Rights
in Section 4.2 below.
4.2 Audit Rights. Sonic has the right to direct a mutually agreed upon third
------------
party auditor to conduct, during normal business hours and upon reasonable prior
written notice to Ramp, an audit of the appropriate records of Ramp to verify
the accuracy of Ramp's reports to Sonic; provided, that Sonic shall conduct no
more than one (1) such audit during any twelve (12) month period. Such audit
shall be at Sonic's expense, unless the adjustment to the Licensed Upgrade or
other fees owing from Ramp is greater than five percent (5%) of fees reported by
Ramp, in which case Ramp shall pay all expenses associated with the audit.
Within ten (10) days after receipt of notice from Sonic, Ramp shall remit to
Sonic all amounts found in any such audit to be due to Sonic and not previously
paid by Ramp.
5. Customization and Deliverables
------------------------------
5.1 Customization. Sonic agrees, at no charge to Ramp, to make specific minor
-------------
cosmetic and pre-configuration modifications to Sonic's pre-existing products as
set forth on Exhibit A.
5.2 Deliverables. The Deliverables are fully described in Exhibit A attached.
------------
Sonic will deliver all Deliverables to Ramp in accordance with the schedule set
forth on Exhibit D. Ramp will have the right to test the Deliverables for a
period of five (5) working days following
4
<PAGE>
Ramp's receipt of such Deliverables to determine whether the Deliverables
conform to the Specifications. If Ramp determines the Deliverables, fail to
conform to the Specifications, Ramp will notify Sonic, and Sonic will use its
best efforts to correct such defect within two (2) days. At the end of this
period, Sonic will submit the corrected Deliverables to Ramp for acceptance by
Ramp under this Section 5.2; provided, however, that if the corrected
Deliverables fail to conform to the Specifications, Ramp will have the right to
terminate this Agreement upon written notice to Sonic. The procedure set forth
in this Section 5.2 will repeat until Ramp either accepts or permanently rejects
the Deliverables.
6. Support Obligations, Product Updates, and Product Upgrades
----------------------------------------------------------
6.1 Scope of Services. During the term of this Agreement, Sonic shall render
-----------------
certain services in support of the Products, during Sonic's normal working hours
(Monday through Friday, 9am to 5pm, PST, excluding holidays).
(a) Sonic shall maintain a trained staff capable of rendering the services
set forth in this Agreement.
(b) Ramp shall provide First-Tier support and Second-Tier support.
(c) Sonic shall only provide Third-Tier support. Under no circumstances
shall Sonic be obligated to directly support a Ramp Channel Partner or an End
User of the Product.
6.2 Updates and Upgrades. During the term of this Agreement Sonic, at its own
--------------------
discretion, shall release Product updates and upgrades and shall make such
updates and upgrades available to Ramp. Sonic shall not charge Ramp for such
upgrades or updates unless Sonic generally charges its customers for such
upgrades and updates.
(a) Sonic is responsible for using all reasonable diligence to correct
verifiable and reproducible Errors when reported to Sonic by Ramp in accordance
with Sonic's standard reporting procedures communicated in writing to Ramp.
Sonic shall, within two (2) days of verifying that such an Error is present,
initiate work in a diligent manner toward development of an Error Correction.
Following completion of the Error Correction, Sonic shall make such Error
Correction available to Ramp and shall include the Error Correction in all
subsequent Releases of the Product. Sonic shall not be responsible for
correcting Errors in any version of the Product other than the most recent
Release of the Product, provided that Sonic continues to support prior Releases
superseded by recent Releases in accordance with Section 6.3.
(b) Sonic may, from time to time, issue new firmware releases of the
Software at no cost to its customers generally, containing error corrections,
minor Enhancements, and, in certain instances if Sonic so elects, major
Enhancements. These new releases shall be provided to Ramp at no additional
charge as new Ramp versions (which replace prior Ramp versions, as customized by
Sonic for Ramp hereunder pursuant to Section 5) within 30 days after the general
release.
(c) Sonic may, from time to time, offer major Enhancements and/or Options
to its customers generally for an additional per unit charge. Ramp, at its
discretion, may choose to purchase and resell these major Enhancements and/or
Options to its customers.
(d) Sonic shall consider and evaluate the custom development of
Enhancements for the specific use of Ramp and shall respond to Ramp's requests
for additional services pertaining to the Product (including, without
limitation, graphical user interface modifications, new custom functionality,
and formatting assistance), provided that such assistance, if agreed to be
provided, is subject to supplemental NRE charges and support fees mutually
agreed to by Sonic and
5
<PAGE>
RAMP. The Parties shall negotiate in good faith for Sonic to accommodate Ramp
customization requests and the associated NRE fee, but Sonic may decline the
request due to lack of available engineering resources, scheduling conflicts, or
the nature of the requested customization.
(e) Sonic shall make its best effort to fix Severity I Bugs within 5
working days, and other bugs within 15 working days. The Parties acknowledge
that due to the unpredictable nature of future bugs Sonic cannot be expected to
absolutely deliver the fixes within the specified timeframes in every case.
6.3 Support for Previous Releases. Sonic shall continue to provide Third-Tier
-----------------------------
Support to Ramp for the firmware release immediately preceding the latest
release of firmware for a period of ninety (90) days after delivery of a new
version to Ramp.
7. Confidentiality
---------------
During the course of performance of this Agreement, and thereafter, either Party
may disclose certain Confidential Information to the other Party. The Party
receiving any such Confidential Information shall maintain the confidentiality
of such Confidential Information and shall not use, disclose, or otherwise
exploit any Confidential Information for any purpose not expressly contemplated
by this Agreement.
8. Representation and Warranties
-----------------------------
8.1 Non-infringement. Sonic is a corporation duly organized, validly existing
----------------
and in good standing under the laws of the State of California, and has full
corporate power and authority to enter into this Agreement. In addition, Sonic
has good and marketable title to all of the Products, free and clear of
restrictions on or conditions to the license, transfer or assignment of the
Products. No person has made a claim against Sonic that any of the Products
infringe any patent, copyright, or proprietary process of interest of another,
and Sonic does not require rights under any patent, copyright (or any
application or registration respecting any thereof), discovery, improvement,
process, formula, know-how, data, plan, specification, drawing or the like
belonging to another. Finally, Sonic represents and warrants that the Products
do not and shall not infringe any patent, copyright, mask right or trade secret
of any third party.
8.2 Warranty. Sonic represents and warrants that the Products will perform in
--------
accordance with their uses and be substantially free of errors in their
operation for a period of 15 months after the date of shipment by Sonic.
Products that are found to be defective and are under warranty that are returned
to Sonic shall be replaced with new or refurbished Products within 30 days of
receipt. In the event that the Products are found to be modified (except as
specifically permitted under this Agreement), tampered with, or mis-used this
warranty shall not apply.
8.3 Limitation of Liability. EXCEPT AS SET FORTH IN THIS SECTION 8, SONIC
-----------------------
DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, ANY WARRANTIES AS TO THE SUITABILITY OR MERCHANTABILITY OR FITNESS
FOR ANY PARTICULAR PURPOSE.
8.4 Indemnification by Sonic. Except to the extent Ramp indemnifies Sonic
------------------------
pursuant to Section 8.5 below, and except for claims which arise from Ramp's
negligence or willful misconduct, Sonic agrees to indemnify and hold harmless
Ramp, its successors and assigns, officers, directors, employees and customers
(collectively "Indemnitees"), from and against any and all claims and causes of
-----------
action arising out of any claims of any third parties with respect to Sonic's
breach of any of its representations, warranties or covenants contained in this
Agreement; provided that Sonic receives prompt written notice of and has sole
control over the defense and settlement of such claims and actions. Sonic shall
pay all costs, expenses and
6
<PAGE>
reasonable attorneys fees incurred by Ramp in connection with any such defense
unless Ramp chooses to defend itself, in which case it would be at Ramp's own
cost. In the event of any such claim or suit, unless Ramp chooses to defend
itself at its own cost, Sonic shall have the right to select counsel and the
right to control the defense and settlement of such suit or claim. Sonic further
agrees to indemnify and save harmless Indemnitees from all claims or causes of
action based upon defective design, manufacture, or a failure of the Products to
perform according to their specifications.
8.5 Indemnification by Ramp. Except to the extent Sonic indemnities Ramp
-----------------------
pursuant to Section 8.4 above, and except for claims which arise from Sonic's
negligence or willful misconduct, Ramp agrees to indemnify and hold harmless
Sonic from any losses from claims of personal injury arising from Ramp's sale
and distribution of the Product, or from its breach of any representations,
warranties or covenants contained in this Agreement; provided that Ramp receives
prompt written notice of and has sole control over the defense and settlement of
such claims and actions. Ramp shall pay all costs, expenses and reasonable
attorneys fees incurred by Sonic in connection with any such defense, unless
Sonic chooses to defend itself. This indemnity shall not expire upon
termination of this Agreement, but shall remain in force and effect thereafter.
8.6 Limitation of Liability. Except for claims which arise from the negligence
-----------------------
or willful misconduct of Sonic or Sonic's employees, officers, or agents, the
maximum cumulative liability owed by Sonic to Ramp under Section 8.4 above shall
be limited to the total amount paid by Ramp to Sonic as of the date a court
makes a final determination in any action alleging a breach of Sonic's rights or
representations under Section 8.1 or 8.2. Except for claims which arise from
the negligence or willful misconduct of Ramp or Ramp's employees, officers, or
agents, the maximum cumulative liability owed by Ramp to Sonic under Section 8.5
above shall be limited to the total amount received by Sonic from Ramp as of the
date a court makes a final determination in any action brought by Sonic under
section 8.5. As used in this section 8.6, a `final determination' is the date
no further appeal is possible in the action at issue.
9. Term & Termination
------------------
9.1 Term. Subject to Section 9.2, the term of this Agreement begins on the
----
Effective Date and shall continue for a period of 1 year, provided that this
Agreement shall automatically renew for successive one year terms, unless either
Party gives the other, Party thirty (30) days written notice prior to the
expiration of the then-current term of such Party's intent to terminate this
Agreement.
9.2 Termination. Either Party may terminate this Agreement in the event the
-----------
other Party is in material breach of this Agreement (including any failure to
timely pay amounts owed to a Party) and the breaching Party fails to cure such
breach within thirty (30) days following its receipt of written notice of such
breach from the other Party; provided, however, that such cure period shall be
shortened to a period of five (5) days if Ramp is in material breach of any of
the terms of Section 2 of this Agreement.
9.3 Custom Inventory. In the event of termination of this Agreement by either
----------------
Party, any custom parts in Sonic's inventory that were ordered specifically to
fulfill a purchase order submitted by Ramp and accepted by Sonic shall be paid
for by Ramp to Sonic within 30 days of the termination of this Agreement.
9.4 Minimum Quantities. Ramp agrees to use commercially reasonable efforts to
------------------
purchase certain initial, quarterly, and annual minimum quantities. With the
exception of the Initial Purchase Order, these minimum quantities are not
binding financial commitments, except as set forth in Section 9.5(c). Such
minimum quantities include:
7
<PAGE>
(a) Initial Purchase Order. The Initial Purchase Order of [*] units
----------------------
total will be delivered in two batches of [*] each, the first to have a
requested delivery date of no later than January 31, 1999, and the second to
have a requested delivery date no earlier than April 1, 1999.
(b) Quarterly Minimum. From the Effective Date of this Agreement, Ramp
-----------------
will use commercially reasonable efforts to purchase [*] units per quarter. The
first shipment of [*] on the Initial Purchase Order shall constitute the entire
minimum with respect to the first calendar quarter during the term of this
Agreement and the second shipment of [*] shall be counted towards meeting the
minimum with respect to the second calendar quarter.
(c) Annual Minimum. From the Effective Date of this Agreement, of [*]
--------------
units per calendar year.
9.5 Default. The following are events of default:
-------
(a) Failure to Pay or Breach. If either Party is in default of any
------------------------
material term or condition hereunder and such default continues for thirty (30)
days following written notice thereof by the non breaching Party; or
(b) Insolvency. Assignment or Bankruptcy. If either Party is in material
------------------------------------
default of its obligations to its vendors or suppliers, becomes insolvent, files
or has filed against it a petition under any Bankruptcy Law (which, if
involuntary, is unresolved after sixty days); or
(c) Performance. Should Ramp fail to meet the quarterly minimum of one
-----------
thousand (1,000) units as specified in Section 9.4(b) for any two consecutive
quarters.
(d) Right to Cure Default. Notwithstanding Sections 9.5(a), 9.5(b), and
---------------------
9.5(c) above, either Party will have a 30-day right to cure any deficiency
claimed or presented in writing that would constitute default.
9.6 Return of Confidential Information. Upon termination of this Agreement and
----------------------------------
receipt of written request from either Party, each Party shall return at its
expense any and all copies of Confidential Information or materials in its
possession or under its control.
9.7 Purchases after Termination. Upon termination of this Agreement (except
---------------------------
for termination due to breach of contract by Ramp) Ramp shall be able to
continue to purchase the Product and receive Third-Tier Support for a period of
ninety (90) days per the original terms of this Agreement.
10. Source Code and Hardware Design Escrow
--------------------------------------
10.1 Escrow Agreement. Sonic agrees to deposit a full and complete electronic
----------------
copy of the source code and hardware design to the Product, and all updates and
enhancements thereto (the "Source Materials"), into escrow with a mutually
----------------
agreed upon escrow services company. The Parties will enter into a mutually
agreeable escrow agreement. Ramp shall pay all fees for such escrow and Sonic
shall bear its own costs in preparing the Source Materials for deposit. The
escrow agreement shall provide for the release of such Source Materials upon the
occurrence of an Event (as defined in 10.2).
10.2 Release Event. The definitive escrow agreement will provide for the
-------------
release of the Source Materials to Ramp in the event of (a) institution by or
against Sonic of insolvency, receivership or bankruptcy proceedings or any other
proceedings for the settlement of Sonic's debts, provided such proceeding is not
dismissed within forty-five (45) days after its filing,
8
<PAGE>
(b) upon Sonic's making an assignment for the benefit of creditors, or (c) upon
Sonic's dissolution or ceasing to do business (each of Sections 10.2(a), (b),
and (c) an "Event").
-----
10.3 Source Code License. Subject to the terms and conditions of this
-------------------
Agreement, upon release from escrow Ramp shall have a nonexclusive,
nontransferable license to use and modify the Source Materials and distribute
the same in accordance with the licenses herein granted. Title in all Source
Materials shall remain in Sonic and Ramp will take all reasonable precautions to
maintain the secrecy of the Source Materials. Further, upon the release from
escrow of the Source Materials, Ramp shall pay royalties to Sonic, or Sonic's
designate or successor, in the amount of $50 per unit shipped which contains the
Source Materials or any portion thereof.
10.4 Right to Use Source Materials. Upon the release from escrow of the Source
-----------------------------
Materials, Ramp agrees to not integrate the Source Materials into products other
than the Products.
11. Miscellaneous
-------------
11.1 Export Restrictions. Ramp shall not re-export, either directly or
-------------------
indirectly, the Product (including any technical data, manuals, or other
materials delivered pursuant to this Agreement) to any country or countries to
which such re-exports are prohibited under the laws of the United States, or the
laws of any country in the Territory, including but not limited to any
Derivative Works or Modifications. Ramp shall obtain appropriate license
approvals and certifications necessary, if any, to comply with the applicable
export and re-export restrictions of the United States or any country in the
Territory. Ramp understands and recognizes that the Product and other materials
made available to it hereunder may be subject to the Export Administration
Regulations of the U.S. Department of Commerce and other U.S. government
regulations relating to the export of technical data and equipment and products
produced therefrom. Ramp is familiar with and agrees to comply, and to require
Channel Partners and End-Users to, with all such regulations, including any
future modifications thereof.
11.2 Force Majeure. If either Party is prevented from performing any portion
-------------
of the Agreement by causes beyond its control, including labor disputes, civil
commotion, war, governmental regulations or controls, casualty, inability to
obtain materials or services, or acts of God, such defaulting Party shall be
excused from performance for a period of delay and for a reasonable time
thereafter.
11.3 Governing Law. This Agreement shall in all respects be governed by and
-------------
interpreted in accordance with the laws of the State of California, without
reference to conflict of law provisions.
11.4 Arbitration. Any controversy or claim arising out of this Agreement or a
-----------
breach thereof shall, on written request of either Party served on the other, be
submitted to binding arbitration before a single arbitrator to be conducted in
accordance with the Rules and Regulations of the American Arbitration
Association (Commercial Division). If the Parties are unable to agree on an
arbitrator within thirty (30) days after a Party has served notice of a request
to arbitrate, then an arbitrator shall be selected by the American Arbitration
Association pursuant to its then current rules, within fifteen (15) days after
the Parties are unable to agree on the arbitrator. Arbitration shall take place
in the County of Santa Clara, California. No discovery shall be allowed in such
arbitration. The maximum number of days of hearing in such arbitration shall be
ten (10), all of which shall occur in a twenty (20) day period. The arbitrators
shall issue a written decision in the arbitration giving the findings of facts
and reasons for the award made by the arbitrator. The award shall be
specifically enforceable in a court of law with jurisdiction over the Parties
and subject matter.
9
<PAGE>
11.5 Attorney's Fees. In any litigation or arbitration between the Parties,
---------------
the prevailing Party shall be entitled to reasonable attorney fees and all costs
of proceedings incurred in enforcing this Agreement.
11.6 Consequential Damages. EXCEPT AS EXPLICITLY SET FORTH IN THIS AGREEMENT,
---------------------
UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER OR ANY OTHER
PARTY FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, OR SPECIAL DAMAGES ARISING
OUT OF OR RELATED TO THIS AGREEMENT OR A PARTY'S PERFORMANCE OR FAILURE TO
PERFORM HEREUNDER.
11.7 The terms of any invoice, acknowledgment, purchase order, or any other
document issued in connection with any transaction under this Agreement shall be
disregarded except for quantities ordered, prices applicable, freight and
insurance charges, and delivery dates specified. The terms of this Agreement
shall supersede and void any and all standard terms and conditions on each
Party's respective forms as described in the first sentence of this Section
11.7.
11.8 Binding Nature and Assignment. Neither Party may assign any of its rights
-----------------------------
or obligations under this Agreement without the prior written consent of the
other Party; provided, that either Party may in its sole discretion assign its
rights and obligations under this Agreement to an entity which acquires all or
substantially all of its assets or to any successor in a merger or acquisition
without the prior written consent of the other Party. Subject to the foregoing,
this Agreement is binding on the Parties and their respective successors and
assigns.
11.9 Amendment and Waiver. No modification, amendment, or waiver of or under
--------------------
this Agreement is binding unless executed in writing by the Party against whom
enforcement of such modification, amendment or waiver is sought. No waiver of
any of the provisions of this Agreement constitutes a waiver of any other
provision nor shall such waiver constitute a continuing waiver unless otherwise
expressly provided.
11.10 Further Assurances. Each Party shall provide such further documents or
------------------
instruments required by the other Party as may be reasonably necessary or
desirable to give effect to this Agreement and to carry out its provisions.
11.11 Publicity. For purposes of marketing the Products each Party may
---------
publicize the business relationship generally contemplated by this Agreement
only with the prior consent of the other Party.
11.12 Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction is, as to such jurisdiction, ineffective to
the extent of such prohibition or unenforceability without invalidating the
remaining provisions or affecting the validity or enforceability of such
provision in any other jurisdiction.
11.13 Entire Agreement. This Agreement, including the Exhibits hereto,
----------------
constitutes the entire agreement between the Parties pertaining to the subject
matter hereof and supersedes all prior and contemporaneous agreements,
understandings, negotiations and discussions, whether oral or written, of the
Parties pertaining to the subject matter hereof. There are no representations
or warranties of the Parties in connection with the subject matter hereof except
as specifically referenced herein.
11.14 Notices. Any notice, demand or other communication required or permitted
-------
to be given under this Agreement must be in writing and is deemed delivered to a
Party (a) when delivered by hand or courier, (b) when sent by confirmed
facsimile with a copy sent by another means specified in this Section, or (c)
six (6) days after the date of mailing if mailed by certified or
10
<PAGE>
registered mail, return receipt requested, postage prepaid, in each case to the
address of such Party set forth below (or at such other address as the Party may
from time to time specify by notice delivered in the foregoing manner):
If to Sonic:
-----------
Sonic Systems
5400 Betsy Ross Drive, #206
Santa Clara, CA 95054
Attn: Sreekanth Ravi
If to RAMP:
----------
Ramp Networks, Inc.
3180 De La Cruz Blvd., Suite 200
Santa Clara, CA 95054
Attn: John Humphreys
11.15 Independent Contractors. The Parties act as independent contractors of
-----------------------
each other. Nothing herein is deemed to constitute Sonic and Ramp as partners,
joint venturers, or principal and agent. Except as expressly contemplated by
this Agreement, the Parties have no authority to bind each other legally or
equitably by contract, admission, acknowledgment, or undertaking or to represent
each other as to any matters.
11.16 No Third Party Beneficiaries. Nothing in this Agreement confers any
----------------------------
rights on any person or entity not a Party to this Agreement.
11.17 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which is deemed an original but all of which taken
together constitute one and the same instrument.
11.18 Survival. Sections 1, 2.3, 2.4, 2.5, 4, 8, 9.6, 9.7, 10.3, 11, and all
--------
payment obligations incurred prior to the termination of this Agreement, will
survive the termination or expiration of this Agreement for any reason. Section
7 will survive the termination of this Agreement for a period of five (5) years.
IN WITNESS WHEREOF the Parties have entered into this Agreement to take effect
on the date executed by Sonic.
RAMP NETWORKS, INC. SONIC SYSTEMS, INC.
Signature /s/ Mahesh Veerina Signature /s/ Sreekanth Ravi
--------------------- --------------------
Print Name Mahesh Veerina Print Name Sreekanth Ravi
--------------------- --------------------
Print Title President Print Title President
--------------------- --------------------
Date 1/5/99 Date 1/5/99
--------------------- --------------------
11
<PAGE>
EXHIBIT A
---------
Deliverables
PRODUCT OVERVIEW
- ----------------
Sonic shall deliver a customized version of its two-port SonicWALL product.
There will be three models of this single hardware version, each model software-
keyed to limit it to a particular maximum number of Users. The limit will be
based on the first ``X'' number of IP Addresses on the LAN that attempt to
access the WAN through the SonicWALL. The three models shall be 5-User, 25-
User, and 100-User.
PRODUCT SPECIFICATION
- ---------------------
The product specifications for the purposes of this Agreement are as detailed
below. The baseline product is Sonic Systems' current two-port SonicWALL
Internet Security Appliance, Firmware version 3.x (Exhibit C attached). Sonic
will make the following modifications:
HARDWARE:
. The Product shall include Sonic's standard SonicWALL Plastic faceplate
. The entire enclosure will have a standard plastic color to match or
complement current Ramp products.
. Product and Ramp company name to be customized on the hardware
SOFTWARE
. Versions shall only be 5-User, 10-User, and 100-User.
. Product and Ramp company name to be customized in the software Graphical User
Interface (GUI)
. Set default IP address to Ramp Default
. Customer registration to be directed to Ramp URL
. Sonic to help Ramp set-up the CyberNOT server on a PC at Ramp and direct the
Product to this server for any CyberNOT updates.
MISCELLANEOUS
. Future Sonic charged Options (such as VPN) are not included in the base
Product and are only available if they are list in the Table in Exhibit B.
. An electronic version of the SonicWALL documentation shall be provided by
Sonic to Ramp for Ramp to customize and produce hard copy documentation.
. Only the individual units shall be supplied and bulk shipped by Sonic. Hard
copy documentation, product packaging (other than anti-static bags), and
power supplies are not part of this Agreement.
. Sonic to provide Ramp technical training prior to February 5, 1999
. A list of known bugs shall be provided and updated as available.
12
<PAGE>
EXHIBIT B
---------
Products and Pricing
Product Pricing
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Product Model Per Unit Price
- --------------------------------------------------------------------------------
<S> <C>
5 - User [*]
- --------------------------------------------------------------------------------
15-User [*]
- --------------------------------------------------------------------------------
100-User [*]
- --------------------------------------------------------------------------------
</TABLE>
Upgrade Pricing
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Upgrade Per Unit Upgrade Price
- --------------------------------------------------------------------------------
<S> <C>
VPN Upgrade [*]
- --------------------------------------------------------------------------------
30 Day CyberNOT Trial Subscription [*]
- --------------------------------------------------------------------------------
Annual CyberNOT List Subscription Update [*]
- --------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
EXHIBIT C
---------
Product Specification
INSERT SONICWALL SPECIFICATION SHEET HERE
14
<PAGE>
Internet Firewall Appliance
. Firewall Security. SonicWALL uses stateful packet inspection to protect the
private LAN from hackers and vandals on the Internet. Stateful packet
inspection is similar to the algorithms used by enterprise level firewall
vendors, such as Check Point and Cisco, and is widely considered to be the
most effective method of protecting the private LAN.
. Hacker Attack Prevention. SonicWALL is pre-configured to automatically
detect and thwart Denial of Service (DoS) attacks such as Ping of Death,
SYN Flood, LAND Attack, IP Spoofing, etc. The goal of a DoS Attack is not
to steal information, but to disable a device or network so users no longer
have access to network resources. For example, "WinNuke," a widely
available DoS tool, is used to remotely crash any unprotected Windows PC on
the Internet; SonicWALL protects the private LAN from WinNuke and many
other DoS attacks.
. Internet Content Filtering. Content filtering allows businesses to create
and enforce Internet access policies tailored to the needs of the
organization. An optional Content Filter List subscription is available
which allows the administrator to select categories of Internet sites, such
as pornography or racial intolerance, to block or monitor access.
Automatic weekly updates of the customizable Content Filter List make sure
that access restrictions to new and relocated sites are properly enforced.
Users may be given a password to bypass the filter, giving them
unrestricted access to the Internet.
. Network Address Translation (NAT). NAT translates the IP addresses used on
the private LAN to a single, valid IP address that is used on the Internet.
This adds a level of security since the address of a PC on the LAN is never
transmitted on the Internet. NAT also allows SonicWALL to support LANs
using low cost Internet accounts, such as xDSL or cable modems, where only
one IP address is provided by the ISP.
. DHCP Server and Client. DHCP Server provides centralized management of IP
clients on the LAN by automatically configuring their IP address, gateway
address, DNS address, and more. DHCP Client allows SonicWALL to acquire
its IP settings (such as IP address, gateway address, DNS address, etc.)
from the ISP. This is ideal when the IP settings, which may change from
time to time, are automatically provided by the ISP, as is the case with
some xDSL and cable modem Internet accounts.
. Remote Access Authentication. Users can access Intranet resources on the
private LAN by successfully logging into SonicWALL from the Internet.
Authentication is established using an MD5-based encrypted security
mechanism.
. Web Browser Management. SonicWALL is easily and securely configured and
monitored through a Web-based interface. Authentication is established
using an MD5-based encrypted security mechanism.
. Network Access Rules. Network Access Rules allow the administrator to
extend SonicWALL's firewall functions. For example, a rule may be created
which blocks all traffic of a certain type, such as Internet Chat (IRC),
from the LAN to the Internet, another rule may be created which gives
Internet users access to a server on the LAN, such as the organization's
public Web server.
. ICSA Certified. After being subjected to a rigorous suite of tests intended
to expose vulnerabilities to attacks and intrusions, SonicWALL has been
awarded the internationally accepted ICSA Firewall Certification.
Administrators can rest assured
15
<PAGE>
that SonicWALL has been tested and approved by the worldwide authority in
independent security services.
. Optional Enterprise Features. In addition to the unlimited number of LAN
clients supported, SonicWALL Plus has features that make it ideally suited
for use in larger, enterprise networks. SonicWALL/10 and SonicWALL/50 may
be upgraded to support more users and to add the following Optional
Enterprise Features.
. Custom Network Access Rules. The administrator has fine-grain control
over network traffic. For example, Custom Network Access Rules may be
created which allow access to a Web server to everyone but
competitors, or restrict use of certain protocols, such as Telnet, to
authorized users on the LAN.
. Web Proxy Relay. If use of a caching proxy server is required,
SonicWALL Plus may be used to transparently redirect all Web requests
to the proxy without client configuration.
. Intranet Support. SonicWALL Plus allows Intranet firewalling by
allowing the administrator to restrict access to certain resources on
the LAN. For example, protection may be required for a company's
accounting department against unauthorized access by other users on
the same network.
Businesses can greatly benefit from the wealth of information that is available
on the Internet. But with that benefit comes the security risk that
unauthorized users may access the network to steal information. Some hackers
get their thrill by crashing or corrupting PCs and servers. To help companies
reduce these security risks, Sonic Systems developed SonicWALL. SonicWALL
offers state-of-the-art software and hardware technology to provide a secure,
easy-to-install, reliable, and affordable firewall for businesses with a few
users to several hundreds of users.
To protect the private network against Internet-based theft, destruction or
modification of data, SonicWALL implements stateful packet inspection, a
technology similar to that used in enterprise-level firewall products offered by
Check Point and Cisco. SonicWALL will allow data coming from the Internet only
if it's part of a session that was initiated by one of the users on the secure
Local Area Network (LAN). Hackers and other unauthorized users will be stopped
at SonicWALL and not allowed on the private network.
When SonicWALL is installed, the network is protected from Denial of Service
Attacks, such as Ping of Death, SYN Flood, IP Spoofing, and LAND. When new
hacker attacks are discovered, Sonic adds protection from them to the SonicWALL
software. SonicWALL goes an extra step by automatically notifying the
administrator when there is a new software release available. SonicWALL
customers get free software updates.
In addition to stopping unauthorized users from accessing the secure LAN,
SonicWALL allows company management to determine which Internet sites or
Newsgroups should be accessible. The network administrator simply selects the
categories of content to block, such as pornography, intolerance or violence,
and SonicWALL will automatically block the sites that fall under those
categories. SonicWALL uses the highly regarded CyberNOT filter list from
Microsystems Software, also used in products offered by distinguished
organizations such as America Online, AT&T, IBM, Microsoft, Netscape and The
Scholastic Network.
16
<PAGE>
SonicWALL was designed for ease of installation and administration.
Installation involves simply connecting SonicWALL between the private network
and Internet router, spending a few minutes selecting the filtering options from
the intuitive, Web browser based configuration screen, and the users and network
are secure. No reconfiguration of any PC applications is needed.
17
<PAGE>
EXHBIT D
--------
Deliverables Schedule
The customized version of the software is to be delivered to Ramp no later than
January 15, 1999.
18
<PAGE>
Amendment to
------------
EXHIBIT B
---------
OEM Purchase Agreement
Between
Sonic Systems, Inc. and Ramp Networks
July 20, 1999
Products and Pricing
Product Pricing
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Product Model Per Unit Price
- --------------------------------------------------------------------------------
<S> <C>
5 - User [*]
- --------------------------------------------------------------------------------
25-User [*]
- --------------------------------------------------------------------------------
100-User [*]
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Product Model Per Unit Price
- --------------------------------------------------------------------------------
<S> <C>
5 - User with Four Port Hub [*]
- --------------------------------------------------------------------------------
25-User with Four Port Hub [*]
- --------------------------------------------------------------------------------
100-User with Four Port Hub [*]
- --------------------------------------------------------------------------------
</TABLE>
Pricing for the Four-Port Hub Model is effective upon product availability.
Ramp and Sonic will work out a mutually acceptable plan to phase in the Four-
Port Hub Model and discontinue the single-port model.
Upgrade Pricing
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Upgrade Per Unit Upgrade Price
- --------------------------------------------------------------------------------
<S> <C>
5-User Model to 250-User Model [*]
- --------------------------------------------------------------------------------
25-User Model to 250 Model [*]
- --------------------------------------------------------------------------------
100-User to 250-User Model [*]
- --------------------------------------------------------------------------------
VPN Upgrade [*]
- --------------------------------------------------------------------------------
30 Day CyberNOT Trial Subscription [*]
- --------------------------------------------------------------------------------
Annual CyberNOT List Subscription Update [*]
- --------------------------------------------------------------------------------
</TABLE>
RAMP NETWORKS, INC. SONIC SYSTEMS, INC.
Signature /s/ Mahesh Veerina Signature /s/ Sreekanth Ravi
-------------------- --------------------
Print Name Mahesh Veerina Print Name Sreekanth Ravi
-------------------- --------------------
Print Title President Print Title President
-------------------- --------------------
Date 7/29/99 Date 7/21/99
-------------------- --------------------
21
<PAGE>
EXHIBIT 10.8
CONFIDENTIAL TREATMENT REQUESTED
[*] Denotes information for which confidential treatment has been requested.
Confidential portions omitted have been filed separately with the Commission.
DISTRIBUTION AGREEMENT
BETWEEN
TECH DATA PRODUCT MANAGEMENT, INC.
AND
SONIC SYSTEMS, INC.
<PAGE>
DISTRIBUTION AGREEMENT
THIS AGREEMENT, dated as of this 9th day of February, 1999, is between
TECH DATA PRODUCT MANAGEMENT, INC., a Florida corporation ("Tech Data"), with
its principal corporate address at 5350 Tech Data Drive, Clearwater, Florida
33760 and SONIC SYSTEMS, INC., a California corporation ("VENDOR" or "Vendor"),
with its principal corporate address at: 5400 Betsy Ross Drive, Suite 206, Santa
Clara, CA 95054-1101.
RECITALS
A. Tech Data desires to purchase certain Products from VENDOR from
time to time and VENDOR desires to sell certain Products to Tech Data in
accordance with the terms and conditions set forth in this Agreement.
B. VENDOR desires to appoint Tech Data as its non-exclusive
distributor to market Products within the Territory (as hereinafter defined) and
Tech Data accepts such appointment on the terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the Recitals, the mutual covenants
contained in this Agreement and other good and valuable consideration, Tech Data
and VENDOR hereby agree as follows:
ARTICLE I.
----------
DEFINITIONS, APPOINTMENT AND TERM OF AGREEMENT
----------------------------------------------
1.1 Definitions. The following definitions shall apply to this Agreement.
-----------
(a) "Customers" of Tech Data shall include dealers, resellers, value added
resellers, mail order resellers and other entities that acquire the
Products from Tech Data.
(b) "DOA" shall mean Product, or any portion thereof, which fails to
operate properly on initial "burn in," boot, or use, as applicable.
(c) "Documentation" shall mean user manuals, training materials, product
descriptions and specifications, brochures, technical manuals, license
agreements, supporting materials and other printed information relating to
the Products, whether distributed in print, electronic, or video format.
(d) "Effective Date" shall mean the date on which this Agreement is signed
and dated by a duly authorized representative of Tech Data.
(e) "End Users" shall mean the final retail purchasers or licensees who
have acquired Products for their own use and not for resale, remarketing or
redistribution.
(f) "Non-Saleable Products" shall mean any Product that has been returned
to Tech Data by its Customers that has had the outside shrink wrapping or
other packaging seal
2
<PAGE>
broken; any components of the original package are missing, damaged or
modified; or is otherwise not fit for resale.
(g) "Products" shall mean, individually or collectively as appropriate,
hardware, licensed software, Documentation, supplies, accessories, and
other commodities related to any of the foregoing produced by VENDOR, as
more particularly described in Schedule 1.1 (g) attached hereto.
(h) "Return Credit" shall mean a credit to Tech Data in an amount equal to
the price paid by Tech Data for Products less any price protection credits
but not including any early payment or prepayment discounts.
(i) "Services" means any warranty, maintenance, advertising, marketing or
technical support and any other services performed or to be performed by
VENDOR.
(j) "Territory" shall mean the United States of America, Canada, Mexico and
South America.
1.2 Term of Agreement. The term of this Agreement shall commence on the
-----------------
Effective Date and, unless terminated by either party as set forth in this
Agreement, shall remain in full force and effect for a term of one (1)
year, and will be automatically renewed for successive one (1) year terms
unless prior written notification of termination is delivered by one of the
parties in accordance with the notice provision of this Agreement.
1.3 Appointment as Distributor. VENDOR hereby grants to Tech Data the non-
--------------------------
exclusive right to distribute Products within the Territory during the term
of this Agreement. This Agreement does not grant VENDOR or Tech Data an
exclusive right to purchase or sell Products and shall not prevent either
party from developing or acquiring other vendors or customers or competing
Products. Tech Data will use commercially reasonable efforts to promote
sales of the Products. VENDOR agrees that Tech Data may obtain Products in
accordance with this Agreement for the benefit of its parent, affiliates
and subsidiaries of Tech Data. Said parent, affiliates and subsidiaries of
Tech Data shall be entitled to order Products directly from VENDOR pursuant
to this Agreement.
ARTICLE II. PURCHASE ORDERS
---------------------------
2.1 Issuance and Acceptance of Purchase Order.
-----------------------------------------
(a) This Agreement shall not obligate Tech Data to purchase any Products or
Services except as specifically set forth in a written purchase order.
(b) Tech Data may issue to VENDOR one or more purchase orders identifying
the Products Tech Data desires to purchase from VENDOR. Notwithstanding
any preprinted terms or conditions on Tech Data's purchase orders, the
terms and conditions of this Agreement shall apply to and govern all
purchase orders accepted or shipped by VENDOR hereunder, except that
purchase orders may include other terms and conditions which are consistent
with the terms and conditions of this Agreement, or which are
3
<PAGE>
mutually agreed to in writing by Tech Data and VENDOR. Purchase orders will
be placed by Tech Data by fax or electronically transferred.
(c) A purchase order shall be deemed accepted by VENDOR unless VENDOR
notifies Tech Data in writing within five (5) days of the date of the
purchase order that VENDOR does not accept the purchase order.
2.2 Purchase Order Alterations or Cancellations. Prior to shipment of Products,
-------------------------------------------
VENDOR shall accept alterations or cancellation to a purchase order in
order to: (i) change a location for delivery, (ii) modify the quantity or
type of Products to be delivered or (iii) correct typographical or clerical
errors.
2.3 Evaluation or Demonstration Purchase Orders. VENDOR shall provide to Tech
-------------------------------------------
Data a reasonable number of demonstration or evaluation Products at no
charge.
2.4 Product Shortages. If for any reason VENDOR's production is not on
-----------------
schedule, VENDOR may allocate available inventory to Tech Data and make
shipments based upon a fair and reasonable percentage allocation among
VENDOR's customers.
2.5 Proof of Delivery. Vendor shall provide to Tech Data, at no charge, a hard
-----------------
copy Proof of Delivery ("POD") for any drop shipment requested by Tech
Data. The POD shall be faxed to Tech Data within five (5) business days of
the initial request. If the POD is not received within the specified time,
the invoice will be considered disputed and no payment shall be made to
Vendor on that invoice.
ARTICLE III. DELIVERY AND
-------------------------
ARTICLE IV. ACCEPTANCE OF PRODUCTS
----------------------------------
3.1 Acceptance of Products. Tech Data shall, after a reasonable time to
----------------------
inspect each shipment, which will not exceed thirty (30) days, accept
Product (the "Acceptance Date") if the Products and all necessary
documentation delivered to Tech Data are in accordance with the purchase
order. Any Products not ordered or not otherwise in accordance with the
purchase order (e.g. mis-shipments, overshipments) may be returned to
VENDOR at VENDOR's expense (including without limitation costs of shipment
or storage). VENDOR shall refund to Tech Data within ten (10) business
days following notice thereof, all monies paid in respect to such rejected
Products. Tech Data shall not be required to accept partial shipment
unless Tech Data is notified prior to shipment.
3.2 Title and Risk of Loss. FOB Origin, Santa Clara, CA. Title and risk of loss
----------------------
or damage to Products shall pass to Tech Data at the time the Products are
delivered to Tech Data's designated carrier.
3.3 Transportation of Products. VENDOR shall deliver the Products clearly
--------------------------
marked on the Product package with serial number, Product description and
machine readable bar code (employing UPC or other industry standard bar
code) to Tech Data at the location shown and on the delivery date set forth
in the applicable purchase order or as otherwise agreed upon by the
parties. Charges for transportation of the Products shall be paid by
VENDOR. VENDOR shall use only those common carriers preapproved by Tech
Data
4
<PAGE>
or listed in Tech Data's published routing instructions, unless prior
written approval of Tech Data is received.
ARTICLE IV RETURNS
------------------
4.1 Inventory Adjustment. VENDOR agrees to accept return of overstocked
--------------------
Products up to [*] of net quarterly purchases for the preceding quarter.
Shipments of Product being returned shall be new, unused and in sealed
cartons. VENDOR shall credit Tech Data's account in the amount of the
Return Credit.
4.2 Defective Products/Dead on Arrival (DOA). Tech Data shall have the right
----------------------------------------
to return to VENDOR for Return Credit any DOA Product that is returned to
Tech Data within ninety (90) days after the initial delivery date to Tech
Data's Customer and any Product that fails to perform in accordance with
VENDOR's Product warranty. VENDOR shall bear all costs of shipping and risk
of loss of DOA and in-warranty Products to VENDOR's location.
4.3 Obsolete or Outdated Product. Tech Data shall have the right to return for
----------------------------
Return Credit, without limitation as to the dollar amount, all Products
that become obsolete or VENDOR discontinues or are removed from VENDOR's
current price list; provided Tech Data returns such Products within ninety
(90) days after Tech Data receives written notice from VENDOR that such
Products are obsolete, superseded by a newer version, discontinued or are
removed from VENDOR's price list. VENDOR shall bear all costs of shipping
and risk of loss of obsolete or outdated Products to VENDOR's location.
4.4 Miscellaneous Returns.
---------------------
(a) Bad Box. Tech Data shall have the right to return to VENDOR for Return
-------
Credit Products which have boxes that are or become damaged.
(b) Non-Saleable. Tech Data shall have the right to return to VENDOR for
------------
Return Credit Non-Saleable Products.
4.5 Condition Precedent to Returns. As a condition precedent to returning
------------------------------
Products, Tech Data shall request and VENDOR shall issue a Return Material
Authorization Number ("RMA") in accordance with this Agreement as provided
in Section 8.9.
ARTICLE V. PAYMENT TO VENDOR
----------------------------
5.1 Charges, Prices and Fees for Products. Charges, prices, quantities and
-------------------------------------
and discounts, if any, for Products shall be determined as set forth in
Schedule 1.1 (g), or as otherwise mutually agreed upon by the parties in
writing, and may be confirmed at the time of order. In no event shall
charges exceed VENDOR's then current established charges. Tech Data shall
not be bound by any of VENDOR's suggested prices.
5.2 Payment. Except as otherwise set forth in this Agreement, any undisputed
-------
sum due to VENDOR pursuant to this Agreement shall be payable as follows:
[*], net forty five (45) days after the invoice receipt. VENDOR shall
invoice Tech Data no earlier than the
5
<PAGE>
applicable shipping date for the Products covered by such invoice. Products
which are shipped from outside the United States shall not be invoiced to
Tech Data prior to the Products being placed on a common carrier within the
United States for final delivery to Tech Data. The due date for payments
directly associated with a bona fide dispute shall be extended during any
time the parties have a bona fide dispute concerning such payment. During
the time a bona fide dispute is being rectified all other payments shall be
made as per the terms in this section. Notwithstanding anything herein to
the contrary, for the initial order only, payment shall be made by Tech
Data net ninety (90) days after receipt of invoice.
5.3 Invoices. A "correct" invoice shall contain (i) VENDOR's name and invoice
--------
date, (ii) a reference to the purchase order or other authorizing document,
(iii) separate descriptions, unit prices and quantities of the Products
actually delivered, (iv) credits (if applicable), (v) shipping charges (if
applicable) (vi) name (where applicable), title, phone number and complete
mailing address as to where payment is to be sent, and (vii) other
substantiating documentation or information as may reasonably be required
by Tech Data from time to time. Notwithstanding any pre-printed terms or
conditions on VENDOR's invoices, the terms and conditions of this Agreement
shall apply to and govern all invoices issued by VENDOR hereunder, except
that invoices may include other terms and conditions which are consistent
with the terms and conditions of this Agreement, or which are mutually
agreed to in writing by Tech Data and VENDOR.
5.4 Taxes. Tech Data shall be responsible for franchise taxes, sales or use
-----
taxes or shall provide VENDOR with an appropriate exemption certificate.
VENDOR shall be responsible for all other taxes, assessments, permits and
fees, however designated which are levied upon this Agreement or the
Products, except for taxes based upon Tech Data's income. No taxes of any
type shall be added to invoices without the prior written approval of Tech
Data.
5.5 Fair Pricing and Terms. VENDOR represents that the prices charged and the
----------------------
terms offered to Tech Data are and will be at least as beneficial to Tech
Data as those charged or offered by VENDOR to any of its other distributors
in the Territory. If VENDOR offers price discounts, payment discounts,
promotional discounts or other special prices to its other distributors in
the Territory, Tech Data shall also be entitled to participate and receive
notice of the same no later than other distributors.
5.6 Price Adjustments.
-----------------
(a) Price Increases. VENDOR shall have the right to increase prices from
---------------
time to time, upon written notice to Tech Data not less than thirty (30)
days prior to the effective date of such increase. All orders placed prior
to the effective date of the increase, for shipment within thirty (30) days
after the effective date, shall be invoiced by VENDOR at the lower price.
(b) Price Decreases. VENDOR shall have the right to decrease prices from
---------------
time to time, upon written notice to Tech Data not less than the notice
which it provides its other distributors in the channel. VENDOR shall
grant to Tech Data, its parent, affiliates and
6
<PAGE>
subsidiaries and Tech Data's Customers (any Customer price protection will
be determined on a case by case basis), a price credit for the full amount
of any VENDOR price decrease on all Products on order, in transit and in
their inventory on the effective date of such price decrease. Tech Data and
its Customers shall, within forty five (45) days after receiving written
notice of the effective date of the price decrease, provide a list of all
Products for which they claim a credit. VENDOR shall have the right to a
reasonable audit at VENDOR's expense.
5.7 Advertising.
-----------
(a) Cooperative Advertising. VENDOR offers a three percent (3%) co-op
-----------------------
program and may offer additional advertising credits, or other promotional
programs or incentives to Tech Data as it offers to its other distributors
or customers. Tech Data shall have the right, at Tech Data's option, to
participate in such programs. Attached as Schedule 5.7 is a copy of
VENDOR's co-op policy.
(b) Advertising Support. VENDOR shall provide at no charge to Tech Data
-------------------
and the Customers of Tech Data, marketing support, and advertising
materials in connection with the resale of Products as are currently
offered or that may be offered by VENDOR. Tech Data reserves the right to
charge VENDOR for advertising, marketing and training services.
(c) Launch Funds. Prior to receipt of the initial purchase order, VENDOR
------------
shall pay Tech Data for all launch funds expenditures to which VENDOR and
Tech Data have agreed.
ARTICLE VI.
-----------
WARRANTIES, INDEMNITIES AND OTHER OBLIGATIONS OF VENDOR
-------------------------------------------------------
6.1 Warranty. VENDOR hereby represents and warrants that VENDOR has all right,
--------
title, ownership interest and marketing rights necessary to provide the
Products to Tech Data. VENDOR further represents and warrants that it has
not entered into any agreements or commitments which are inconsistent with
or in conflict with the rights granted to Tech Data in this Agreement; the
Products are new and shall be free and clear of all liens and encumbrances;
Tech Data and its Customers and End Users shall be entitled to use the
Products without disturbance; the Products have been listed with
Underwriters' Laboratories or other nationally recognized testing
laboratory whenever such listing is required; the Products meet all FCC
requirements; the Products do and will conform to all codes, laws or
regulations; the Products have the ability to accurately recognize and
process date data related to the 20/th/ and 21/st/ centuries and leap year,
without error or interruption (are Year 2000 compliant); and the Products
conform in all respects to the Product warranties. VENDOR agrees that Tech
Data shall be entitled to pass through to Customers of Tech Data and End
Users of the Products all Product warranties granted by VENDOR. Tech Data
shall have no authority to alter or extend any of the warranties of VENDOR
expressly contained or referred to in this Agreement without prior approval
of VENDOR. VENDOR has made express warranties in this Agreement and in
Documentation, promotional and advertising materials. EXCEPT AS SET FORTH
7
<PAGE>
HEREIN OR THEREIN, VENDOR DISCLAIMS ALL WARRANTIES WITH REGARD TO THE
PRODUCTS, INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THIS SECTION SHALL
SURVIVE TERMINATION OR EXPIRATION OF THIS AGREEMENT.
6.2 Proprietary Rights Indemnification. VENDOR hereby represents and warrants
----------------------------------
that the Products and the sale and use of the Products do not infringe upon
any copyright, patent, trademark, trade secret or other proprietary or
intellectual property right of any third party, and that there are no suits
or proceedings, pending or threatened, alleging any such infringement.
VENDOR shall indemnify and hold Tech Data, Tech Data's parent, affiliates
and subsidiaries and their respective officers, directors, employees and
agents harmless from and against any and all actions, claims, losses,
damages, liabilities, awards, costs and expenses, which they or any of them
incur or become obligated to pay resulting from or arising out of any
breach or claimed breach of the foregoing warranty. Tech Data shall inform
VENDOR of any such suit or proceeding filed against Tech Data and shall
have the right, but not the obligation, to participate in the defense of
any such suit or proceeding at Tech Data's expense. VENDOR shall, at its
option and expense, either (i) procure for Tech Data, its Customers and End
Users the right to continue to use the Product as set forth in this
Agreement, or (ii) replace, to the extent Products are available, or modify
the Product to make its use non-infringing while being capable of
performing the same function without degradation of performance. If neither
of the foregoing alternatives (i) or (ii) is reasonably available, VENDOR
shall accept a return of the Products from Tech Data, at VENDOR's sole cost
and expense, and shall refund to Tech Data the full amount of the price
paid by Tech Data for said returned Products, less any price protection
credits, but not including any early payment or prepayment discounts.
VENDOR shall have no liability under this Section 6.2 for any infringement
based on the use of any Product, if the Product is used in a manner or with
equipment for which it was not reasonably intended. VENDOR's obligations
under this Section 6.2 shall survive termination or expiration of this
Agreement.
6.3 Indemnification.
---------------
(a) Vendor. VENDOR shall be solely responsible for the design,
------
development, supply, production and performance of the Products. VENDOR
agrees to indemnify and hold Tech Data, its parent, affiliates and
subsidiaries and their officers, directors and employees harmless from and
against any and all claims, damages, costs, expenses (including, but not
limited to, reasonable attorneys' fees and costs) or liabilities that may
result, in whole or in part, from any warranty or Product liability claim,
or any claim for infringement, or for claims for violation of any of the
warranties contained in this Agreement.
(b) Tech Data. Tech Data agrees to indemnify and hold VENDOR, its
---------
officers, directors and employees harmless from and against any and all
claims, damages, costs, expenses (including, but not limited to, reasonable
attorneys' fees and costs) or liabilities that may result, in whole or in
part, from Tech Data's gross negligence or willful misconduct in the
distribution of the Products pursuant to this Agreement, or for
8
<PAGE>
representations or warranties made by Tech Data related to the Products in
excess of the warranties of VENDOR.
6.4 Insurance.
---------
(a) The parties shall be responsible for providing Workers' Compensation
insurance in the statutory amounts required by the applicable state laws.
(b) Without in any way limiting VENDOR's indemnification obligation as set
forth in this Agreement, VENDOR shall maintain Commercial General Liability
or Comprehensive General Liability Insurance in such amounts as is
reasonable and standard for the industry. Either policy form should
contain the following coverages: Personal and Advertising Injury, Broad
Form Property Damage, Products and Completed Operations, Contractual
Liability, employees as Insured and Fire Legal Liability.
(c) VENDOR will provide evidence of the existence of insurance coverages
referred to in this Section 6.4 by certificates of insurance, which should
also provide for at least thirty (30) days notice of cancellation, non-
renewal or material change of coverage to Tech Data. The certificates of
insurance shall name Tech Data Product Management, Inc., its parent,
affiliates and subsidiaries as an additional insured for the limited
purpose of claims arising pursuant to this Agreement.
6.5 Limitation of Liability. NEITHER PARTY SHALL BE LIABLE TO THE OTHER
-----------------------
PURSUANT TO THIS AGREEMENT FOR AMOUNTS REPRESENTING INDIRECT, SPECIAL,
INCIDENTAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES OF THE OTHER PARTY ARISING
FROM THE PERFORMANCE OR BREACH OF ANY TERMS OF THIS AGREEMENT.
6.6 ECCN/Export. VENDOR agrees to provide Tech Data, upon signing this
-----------
Agreement and at any time thereafter that VENDOR modifies or adds Products
distributed or to be distributed by Tech Data, with the Export Control
Classification Number (ECCN) for each of VENDOR's Products, and information
as to whether or not any of such Products are classified under the U.S.
Munitions List.
6.7 Financial Statements. VENDOR agrees that for the term of this Agreement,
--------------------
VENDOR shall provide, within one hundred and twenty (120) days after the
end of VENDOR's 1998 fiscal year, audited financial statements for the 1998
fiscal year prepared by an independent certified public accountant. Such
financial statements shall include profit and loss statement, balance
sheets and such other accounting data as may be requested by Tech Data and
be acknowledged by VENDOR's authorized representative in writing as true
and correct.
6.8 Vendor Reports. VENDOR shall, if requested, render monthly reports to
--------------
Tech Data setting forth the separate Products, dollars invoiced for each
Product, and total dollars invoiced to Tech Data for the month, and such
other information as Tech Data may reasonably request.
9
<PAGE>
6.9 Tech Data Reports. Tech Data shall, if requested, render monthly sales
-----------------
out reports on Tech Data's BBS system. Information provided will include:
month and year sales activity occurred, internal product number (assigned
by Tech Data), written description, state and zip-code of Customer's
location, unit cost (distributor's cost at quantity 1), quantity and
extended cost (cost times quantity). A monthly inventory report will be
provided on a paper format once a month. VENDOR agrees that any such
information provided by Tech Data shall be received and held by VENDOR in
strict confidence and shall be used solely for sell through or compensation
reporting information and shall not be used for purposes related to
VENDOR's direct sales activities.
6.10 Trademark Usage. Tech Data is hereby authorized to use trademarks and
---------------
tradenames of VENDOR and third parties licensing VENDOR, if any, used in
connection with advertising, promoting or distributing the Products. Tech
Data recognizes VENDOR or other third parties may have rights or ownership
of certain trademarks, trade names and patents associated with the
Products. Tech Data will act consistent with such rights, and Tech Data
shall comply with any reasonable written guidelines when provided by VENDOR
or third parties licensing VENDOR related to such trademark or trade name
usage. Tech Data will notify VENDOR of any infringement of which Tech Data
has actual knowledge. Tech Data shall discontinue use of VENDOR's
trademarks or trade names upon termination of this Agreement, except as may
be necessary to sell or liquidate any Product remaining in Tech Data's
inventory.
ARTICLE VII.
------------
TERMINATION; EXPIRATION
-----------------------
7.1 Termination.
-----------
(a) Termination With or Without Cause. Either party may terminate this
---------------------------------
Agreement, without cause, upon giving the other party thirty (30) days
prior written notice. In the event that either party materially or
repeatedly defaults in the performance of any of its duties or obligations
set forth in this Agreement, and such default is not substantially cured
within thirty (30) days after written notice is given to the defaulting
party specifying the default, then the party not in default may, by giving
written notice thereof to the defaulting party, terminate this Agreement or
the applicable purchase order relating to such default as of the date
specified in such notice of termination.
(b) Termination for Insolvency or Bankruptcy. Either party may immediately
----------------------------------------
terminate this Agreement and any purchase orders by giving written notice
to the other party in the event of (i) the liquidation or insolvency of the
other party, (ii) the appointment of a receiver or similar officer for the
other party, (iii) an assignment by the other party for the benefit of all
or substantially all of its creditors, (iv) entry by the other party into
an agreement for the composition, extension, or readjustment of all or
substantially all of its obligations, or (v) the filing of a petition in
bankruptcy by or against a party under any bankruptcy or debtors' law for
its relief or reorganization which is not dismissed within ninety (90)
days.
7.2 Rights Upon Termination or Expiration.
-------------------------------------
10
<PAGE>
(a) Termination or expiration of this Agreement shall not affect VENDOR's
right to be paid for undisputed invoices for Products already shipped and
accepted by Tech Data or Tech Data's rights to any credits or payments owed
or accrued to the date of termination or expiration. Tech Data's rights to
credits upon termination or expiration shall include credits against which
Tech Data would, but for termination or expiration, be required under this
Agreement to apply to future purchases.
(b) VENDOR shall accept purchase orders from Tech Data for additional
Products which Tech Data is contractually obligated to furnish to its
Customers and does not have in its inventory upon the termination or
expiration of this Agreement; provided Tech Data notifies VENDOR of any and
all such transactions within fifteen (15) days following the termination or
expiration date.
(c) Upon termination or expiration of this Agreement, Tech Data shall
discontinue holding itself out as a distributor of the Products.
7.3 Repurchase of Products Upon Termination or Expiration. Upon the effective
-----------------------------------------------------
date of termination or expiration of this Agreement for any reason, VENDOR
agrees to repurchase all Products in Tech Data's inventory and Products
which are returned to Tech Data by its Customers within one hundred twenty
(120) days following the effective date of termination or expiration.
VENDOR will repurchase such Products at the original purchase price, less
any deductions for price protection. The repurchase price shall not be
reduced by any deductions or offsets for early pay or prepay discounts.
Such returns shall not reduce or offset any co-op payments or obligations
owed to Tech Data. Within forty five (45) days following the effective date
of termination or expiration, Tech Data shall return to VENDOR for
repurchase all Product held in Tech Data's inventory as of the effective
date of termination or expiration. VENDOR will issue an RMA to Tech Data
for all such Products; provided, however, that VENDOR shall accept returned
Products in accordance with this Section absent an RMA if VENDOR fails to
issue said RMA within five (5) business days of Tech Data's request. VENDOR
shall credit any outstanding balances owed to Tech Data. If such credit
exceeds amounts due from Tech Data, VENDOR shall remit in the form of a
check to Tech Data the excess within ten (10) business days of receipt of
the Product. Customized Products shall not be eligible for repurchase
pursuant to this Section.
7.4 Survival of Terms. Termination or expiration of this Agreement for any
-----------------
reason shall not release either party from any liabilities or obligations
set forth in this Agreement which (i) the parties have expressly agreed
shall survive any such termination or expiration, or (ii) remain to be
performed or by their nature would be intended to be applicable following
any such termination or expiration. The termination or expiration of this
Agreement shall not affect any of VENDOR's warranties, indemnification
obligations or obligations relating to returns, co-op advertising payments,
credits or any other matters set forth in this Agreement that should
survive termination or expiration in order to carry out their intended
purpose, all of which shall survive the termination or expiration of this
Agreement.
11
<PAGE>
ARTICLE VIII.
-------------
MISCELLANEOUS
-------------
8.1 Binding Nature, Assignment, and Subcontracting. This Agreement shall be
----------------------------------------------
binding on the parties and their respective successors and assigns. Neither
party shall have the power to assign this Agreement without the prior
written consent of the other party.
8.2 Counterparts. This Agreement may be executed in several counterparts, all
------------
of which taken together shall constitute one single agreement between the
parties.
8.3 Headings. The Article and Section headings used in this Agreement are for
--------
reference and convenience only and shall not affect the interpretation of
this Agreement.
8.4 Relationship of Parties. The Parties are performing pursuant to this
-----------------------
Agreement only as independent contractors. Nothing set forth in this
Agreement shall be construed to create the relationship of principal and
agent between Tech Data and VENDOR. Neither party shall act or represent
itself, directly or by implication, as an agent of the other party.
8.5 Confidentiality. Each party acknowledges that in the course of
---------------
performance of its obligations pursuant to this Agreement, it may obtain
certain information specifically marked as confidential or proprietary.
Each party hereby agrees that all such information communicated to it by
the other party, its parent, affiliates, subsidiaries, or Customers,
whether before or after the Effective Date, shall be and was received in
strict confidence, shall be used only for purposes of this Agreement, and
shall not be disclosed without the prior written consent of the other
party, except as may be necessary by reason of legal, accounting or
regulatory requirements beyond either party's reasonable control. The
provisions of this Section shall survive termination or expiration of this
Agreement for any reason for a period of one (1) year after said
termination or expiration.
8.6 Arbitration. Any disputes arising under this Agreement shall be submitted
-----------
to arbitration in accordance with such rules as the parties jointly agree.
If the parties are unable to agree on arbitration procedures, arbitration
shall be conducted in Pinellas County, Florida, in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. Any
such award shall be final and binding upon both parties.
8.7 Notices. Wherever one party is required or permitted to give notice to
-------
the other party pursuant to this Agreement, such notice shall be deemed
given when actually delivered by hand, by telecopier (if and when
immediately confirmed in writing by any of the other means provided herein
ensuring acknowledgment of receipt thereof for purposes of providing notice
of default or termination), via overnight courier, or when mailed by
registered or certified mail, return receipt requested, postage prepaid,
and addressed as follows:
12
<PAGE>
In the Case of Vendor: In the Case of Tech Data:
--------------------- ------------------------
Sonic Systems, Inc. Tech Data Product Management, Inc.
5400 Betsy Ross Drive 5350 Tech Data Drive
Suite 206 Clearwater, FL 33760
Santa Clara, CA 95054 Attn: Stephen Giese, Vice President-
Attn: Sreekanth Ravi, CEO Marketing Operations
cc: Contracts Administration
Either party may from time to time change its address for notification
purposes by giving the other party written notice of the new address and
the date upon which it will become effective.
8.8 Force Majeure. The term "Force Majeure" shall be defined to include fires
-------------
or other casualties or accidents, acts of God, severe weather conditions,
strikes or labor disputes, war or other violence, or any law, order,
proclamation, regulation, ordinance, demand or requirement of any
governmental agency.
(a) If a Force Majeure condition prevents a party from performance, such
performance is excused so long as the excused party provides prompt written
notice describing the Force Majeure condition and immediately continues
performance once the Force Majeure condition is removed.
(b) If, due to a Force Majeure condition, the scheduled time of delivery or
performance is or will be delayed for more than ninety (90) days after the
scheduled date, the party not relying upon the Force Majeure condition may
terminate, without liability to the other party, any purchase order or
portion thereof covering the delayed Products.
8.9 Return Material Authorization Numbers. VENDOR is required to issue a
-------------------------------------
Return Material Authorization number ("RMA") to Tech Data within five (5)
business days of Tech Data's request; however, if the RMA is not received
within five (5) business days, VENDOR shall accept returned Products absent
an RMA.
8.10 Credits to Tech Data. In the event any provision of this Agreement or any
--------------------
other agreement between Tech Data and VENDOR requires that VENDOR grant
credits to Tech Data's account, and such undisputed credits are not
received within thirty (30) days, all such undisputed credits shall become
effective immediately upon notice to VENDOR. In such event, Tech Data
shall be entitled to deduct any such undisputed credits from the next
monies owed to VENDOR. In the event undisputed credits exceed any balances
owed by Tech Data to VENDOR, VENDOR shall, upon request from Tech Data,
issue a check payable to Tech Data within thirty (30) days of such notice.
Credits owed to Tech Data shall not be reduced by early payment or
prepayment discounts. Tech Data shall have the right to set off against
any amounts due to VENDOR under this Agreement or any invoices issued by
VENDOR related to this Agreement any and all amounts due to Tech Data from
VENDOR.
8.11 Severability. If, but only to the extent that, any provision of this
------------
Agreement is declared or found to be illegal, unenforceable or void, then
both parties shall be relieved of all
13
<PAGE>
obligations arising under such provision, it being the intent and agreement
of the parties that this Agreement shall be deemed amended by modifying
such provision to the extent necessary to make it legal and enforceable
while preserving its intent.
8.12 Waiver. A waiver by either of the parties of any covenants, conditions or
------
agreements to be performed by the other party or any breach thereof shall
not be construed to be a waiver of any succeeding breach thereof or of any
other covenant, condition or agreement herein contained.
8.13 Remedies. All remedies set forth in this Agreement shall be cumulative and
--------
in addition to and not in lieu of any other remedies available to either
party at law, in equity or otherwise, and may be enforced concurrently or
from time to time.
8.14 Entire Agreement. This Agreement, including any Exhibits and documents
----------------
referred to in this Agreement or attached hereto, constitutes the entire
and exclusive statement of Agreement between the parties with respect to
its subject matter and there are no oral or written representations,
understandings or agreements relating to this Agreement which are not fully
expressed herein. The parties agree that unless otherwise agreed to in
writing by the party intended to be bound, the terms and conditions of this
Agreement shall prevail over any contrary terms in any purchase order,
sales acknowledgment, confirmation or any other document issued by either
party affecting the purchase or sale of Products hereunder.
8.15 Governing Law. This Agreement shall have Florida as its situs and shall be
-------------
governed by and construed in accordance with the laws of the State of
Florida, without reference to choice of laws. The parties agree that this
Agreement excludes the application of the 1980 United Nations Convention on
Contracts for the International Sale of Goods, if otherwise applicable.
8.16 Software Licenses. Whenever the Products described in this Agreement shall
-----------------
include software licenses, VENDOR hereby grants to Tech Data a non-
exclusive right to market, demonstrate and distribute the software to
Customers of Tech Data. Tech Data acknowledges that no title or ownership
of the proprietary rights to any software is transferred by virtue of this
Agreement notwithstanding the use of terms such as purchase, sale or the
like within this Agreement.
8.17 Time of Performance. Time is hereby expressly made of the essence with
-------------------
respect to each and every term and condition of this Agreement.
14
<PAGE>
IN WITNESS WHEREOF, the parties have each caused this Agreement to be
signed and delivered by its duly authorized officer or representative as of
the Effective Date.
SONIC SYSTEMS, INC. TECH DATA PRODUCT MANAGEMENT, INC.
By: /s/ Sreekanth Ravi By: /s/ G.M. Labie
------------------------- ------------------------------------
Printed Name: SREEKANTH RAVI Printed Name: G.M. LABIE
Title: President & CEO Title: Senior Vice President, Marketing
Date: 1/25/99 Date: 2/9/99
15
<PAGE>
SCHEDULE 5.7
CO-OP GUIDELINES
To increase the effectiveness of advertising and sales promotions Tech Data has
developed the following advertising requirements:
HOW CO-OP IS EARNED:
- - Co-op dollars will be [*]% of the purchases made by Tech Data, net of
returns.
- - Co-op dollars will be accrued on a monthly basis.
HOW CO-OP IS SPENT:
- - Tech Data will obtain VENDOR's prior approval for all co-op expenditures.
- - Tech Data will be reimbursed for [*]% of the cost for ads or promotions that
feature Vendor products.
- - Co-op dollars will be used within the 12 months immediately following the
month in which they are earned.
HOW CO-OP IS CLAIMED:
- - Claims for co-op will be submitted to vendor within 60 days of the event
date.
- - Claims for co-op will be submitted with a copy of vendor prior approval and
proof of performance.
- - Payment must be remitted within 30 days of the claim date, or Tech Data
reserves the right to deduct from the next invoice.
CO-OP REPORTING:
- - Vendor will submit a quarterly co-op statement outlining (i) co-op earned,
(ii) co-op used and (iii) co-op claims paid.
Accepted:
SONIC SYSTEMS, INC.
/s/ Sreekanth Ravi
- -----------------------
Name: Sreekanth Ravi
Title: President & CEO
Date:
16
<PAGE>
Sonic Products (2/1/99)
For more information: Sonic Systems 888-557-6642
<TABLE>
<CAPTION>
UPC Codes Network Access and Security Appliances Sonic Part # ECCN Retail Price T.D. Cost
--------------------------------------------------------------
Internet Firewall Appliance [*]
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0758479025504 SonicWALL/10 01-SSC-2550 5E991 [*] [*]
0758479025528 SonicWALL/50 01-SSC-2552 5E991 [*] [*]
0758479025542 SonicWALL Plus 01-SSC-2554 5E991 [*] [*]
0758479025566 SonicWALL Plus DMZ 01-SSC-2556 5E991 [*] [*]
0758479026501 SonicWALL PRO (AVAILABLE APPROX. 3/15/99) 01-SSC-2650 5E991 [*] [*]
--------------------------------------------------------------
Internet Firewall Appliance Upgrades
--------------------------------------------------------------
0758479025955 SonicWALL VPN for SonicWALL/10 & SonicWALL/50 01-SSC-2595 5D992 [*] [*]
0758479025962 SonicWALL VPN for SonicWALL Plus & SonicWALL Plus DMZ 01-SSC-2596 5D992 [*] [*]
0758479025603 SonicWALL/10 Content Filter Subscription 01-SSC-2560 5D991 [*] [*]
0758479025634 SonicWALL/50 Content Filter Subscription 01-SSC-2563 5D991 [*] [*]
0758479025665 SonicWALL Plus, Plus DMZ & PRO Content Filter Subscription 01-SSC-2566 5D991 [*] [*]
0758479025726 SonicWALL/10 to SonicWALL/50 Upgrade (50 Nodes) 01-SSC-2572 5D991 [*] [*]
0758479025733 SonicWALL/10 to SonicWALL Plus Upgrade (Unlimited Nodes) 01-SSC-2573 5D991 [*] [*]
0758479025740 SonicWALL/50 to SonicWALL Plus Upgrade (Unlimited Nodes) 01-SSC-2574 5D991 [*] [*]
</TABLE>
17
<PAGE>
EXHIBIT 10.9
page 1
CONFIDENTIAL TREATMENT REQUESTED
[*] Denotes information for which confidential treatment has been requested.
Confidential portions omitted have been filed separately with the Commission.
THIS AGREEMENT is made on July 5,1998.
-----------
BETWEEN: Sonic Systems, Inc. of 575 N. Pastoria Ave., Sunnyvale, CA, 94086 USA
("SONIC")
AND: Sumitomo Metal Systems Development Co., Ltd, SMISoft Products
-------------------------------------------------------------
Division, 3-11-36 Mita, Minato-ku, Tokyo 108, Japan ("DISTRIBUTOR")
---------------------------------------------------
WHEREAS:
A. SONIC owns or has the right to license and/or arrange the distribution of
certain complete computer hardware and related software programs known as
Products, more fully described in Schedule One.
B. DISTRIBUTOR has requested SONIC to permit it to distribute such computer
hardware and software Products in the countr(y/ies) listed in Schedule Two
and has submitted to SONIC a Business Plan specifying the manner in which
it proposes to distribute and support the same.
C. If so noted in Exhibit One, DISTRIBUTOR has agreed to translate the English
language version of the Product packaging, documentation and software
programs into the language used in the pertinent countr(y/ies) and to
assign copyright in that translation to SONIC on the condition that SONIC
provide DISTRIBUTOR with code suitably designed to support localization
into said local language.
D. SONIC has agreed to grant the DISTRIBUTOR the right to distribute such
Products upon and subject to the terms and conditions of this Agreement.
NOW THE PARTIES AGREE as follows:
1. Definitions
(a) "Business Plan" means the business plan referred to in Recital B above,
which is annexed to this Agreement and marked Exhibit One, as amended or
added to pursuant to this Agreement, or any business plan substituted
therefor pursuant to this Agreement.
(b) Effective Date" means the date of execution of this Agreement by the final
party to execute this Agreement.
(c) "Products" means:
(i) the before recited computer hardware and related software Products,
including upgrades and enhancements thereof from time to time, and any
other computer hardware and related software Products agreed between SONIC
and DISTRIBUTOR to be incorporated herein; and
(ii) all documentation including (without limitation all user manuals
pertaining to such Products;
(d) "Sub-Distributor" means any person or corporation to whom the DISTRIBUTOR
grants distribution rights;
(e) "Territory" means the countr(y/ies) listed in Schedule Two.
<PAGE>
page 2
2. Term
2.1 This Agreement shall commence on the Effective Date and shall continue for
the term set out in Schedule Two from the Effective Date, unless earlier
terminated in accordance with the terms hereof, and thereafter shall be
automatically renewed after the initial term for successive periods of 1
year each unless terminated by 3 months notice in writing by one party to
the other.
3. Distributor Rights and Duties
3.1 During the term of this Agreement and subject to its terms and conditions,
SONIC grants to the DISTRIBUTOR a non-exclusive, non-transferable right to
market and distribute the Products either directly or through its Sub-
Distributors, limited to the Territories set out in Schedule Two only and
only as expressly permitted by this Agreement. DISTRIBUTOR shall have no
right to reproduce the Products in whole or in part.
3.2 Should SONIC appoint a new distributor in the Territory or enter into an
OEM Agreement that will cover the territory, SONIC shall notify the
DISTRIBUTOR prior to or immediately after such an appointment or execution
of an OEM agreement. Upon such notification, both Parties shall negotiate
in good faith to determine the anticipated impact in the Territory of this
new SONIC partnership and to modify the level of commitment in this
Agreement.
3.3 The grant herein is subject to and conditional upon the DISTRIBUTOR
obtaining all the necessary Territory's governmental licenses or permits,
other than the obligation of the producer under the laws in the Territory,
necessary to enable it to effectively exercise all or any of the rights
herein granted in the Territory. The grant herein is subject to and
conditional upon the SONIC obtaining all necessary export license or
permits of the Products from the United States Government.
3.4 Distribution of Products
(a) The DISTRIBUTOR may within the Territory appoint non-exclusive Sub-
Distributors of the Products to assist in the marketing and distribution of
the Products in the Territory, and shall keep SONIC advised from time to
time of the names and addresses of the Sub-Distributors so appointed. Such
Sub-Distributors shall not be granted permission or any right by
DISTRIBUTOR to reproduce the Products, in whole or in part, for any purpose
whatsoever.
(b) The appointment by DISTRIBUTOR of any Sub-Distributor shall not
operate as an assignment of any or all of DISTRIBUTOR's obligations
hereunder. The DISTRIBUTOR shall remain responsible for the acts and
omissions of such Sub-Distributors and shall cause each Sub-Distributor to
covenant to comply with the obligations of the DISTRIBUTOR herein.
(c) DISTRIBUTOR shall not provide the Products to any person or
organization whom DISTRIBUTOR reasonably suspects will re supply the
Products outside the Territory. SONIC shall not provide the Products to
any person or organization whom SONIC reasonably suspects may export to
supply the Products in the Territory.
(d) DISTRIBUTOR shall pass to SONIC any leads it obtains as to persons or
organizations interested in obtaining copies of the Software outside the
Territory. SONIC shall pass to DISTRIBUTOR any leads it obtains as to
persons or organizations interested in obtaining copies of the Products
inside the Territory.
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(e) DISTRIBUTOR shall within thirty days of the end of each quarter
prepare a list of the names and addresses of any people (including
organizations) who have registered with DISTRIBUTOR or its Sub-Distributors
as a user of the Products.
(f) Sub-Distributors shall be free to set their own price for the
Products, however, DISTRIBUTOR will specify a recommended retail price of
the Products as set out in Schedule Two and shall vary this recommended
retail price, subject to prevailing market and exchange rate conditions, to
ensure that competitive price positioning of the Products is maintained.
DISTRIBUTOR shall notify SONIC in writing 14 days in advance of changes to
the recommended retail price which shall be subject to the consent of SONIC
and which consent shall not be unreasonably withheld.
(g) DISTRIBUTOR shall market and distribute the Products only in the
packaging supplied by SONIC, including without limiting the generality
foregoing, the SONIC standard license agreement. The License agreement may
be amended by the DISTRIBUTOR for localization purposes, which amendments
shall be subject to the consent of SONIC and which consent shall not be
unreasonably withheld.
(h) DISTRIBUTOR will participate in sales of the Products to Original
Equipment Manufacturers (OEM's) for inclusion with OEM's product(s). Such
transactions will be negotiated individually and at pricing not necessarily
relating to standard pricing for the Products. DISTRIBUTOR's participation
in such transactions will vary with the degree of involvement as set out in
Schedule Two.
3.5 Advertising of Products
(a) DISTRIBUTOR at its expense shall diligently seek to develop in the
Territory the market for and to exert its best efforts to advertise and
promote in the Territory distribution of the Products to the extent
practicable under the circumstances and shall make such provisions as it
deems adequate to supply Products in sufficient quantity to reasonably
satisfy such market.
(b) Such advertising and promotion shall at all times fairly and
accurately represent the Products in relation to other products of its type
and shall comply with any reasonable directions as to content or format
that SONIC may from time to time give to DISTRIBUTOR in that regard. Copies
of all advertising and promotional material shall be supplied to SONIC in
the form published within a reasonable time after publication provided,
however, that SONIC will not reproduce or republish any such advertising or
promotional material bearing the name of DISTRIBUTOR or any of its trade
marks at any time during or after termination of this Agreement without the
written consent of DISTRIBUTOR.
(c) In support of DISTRIBUTOR's best efforts in the marketing and
promotion of the Products, SONIC shall make available to DISTRIBUTOR
without charge examples of creative material, artwork, and editorial
already in its possession from other markets in which the Products are
distributed which may be of assistance to DISTRIBUTOR.
(d) Every six (6) months from the date of this Agreement, DISTRIBUTOR
shall provide a report to SONIC detailing methods and frequency of
advertising, marketing, and promotional activity by DISTRIBUTOR in relation
to the Products for the previous 6 month period.
3.6 Marketing
No later than thirty (30) days prior to the start of any calendar year
during the term hereof, DISTRIBUTOR shall prepare and deliver to SONIC for
SONIC's review and
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comment, a marketing plan for the Products including without limitation, a
description of:
(a) the market trends in the Territory
(b) the DISTRIBUTOR's channels of distribution
(c) promotional activities contemplated by the DISTRIBUTOR; and
(d) other marketing activities contemplated by the DISTRIBUTOR.
All such marketing information shall be confidential information in
accordance with Clause 9.4.
3.7 Title
The original and any copies or versions of the Products, in whole or in
part, whether or not incorporated in other Products, including without
limitation translations, partial copies, modifications and updates are and
shall be the property of SONIC or a third party which has licensed its
right in the Products to SONIC. This Agreement shall not convey title nor
grant any rights of ownership in the Products to the DISTRIBUTOR, nor
shall the DISTRIBUTOR grant or purport to grant any rights of ownership in
the Products to any third parties.
3.8 Compliance with Business Plan
In the exercise of its rights hereunder, and performance of its
obligations, DISTRIBUTOR shall use its best efforts to conduct business in
accordance with its representations and performance forecasts in the
Business Plan, unless and to the extent that the Business Plan is amended
by agreement between SONIC and DISTRIBUTOR. As a condition to its
agreement to any such amendment, each party may desire additions to the
Business Plan. DISTRIBUTOR shall be entitled to amend the Business Plan
according to the prevailing market conditions with the approval of SONIC,
which approval shall not be unreasonably withheld.
3.9 Copyright
The DISTRIBUTOR acknowledges that it has no interest in the copyright of
the Products.
3.10 Minima
For the term of this Agreement DISTRIBUTOR shall obtain Products from
SONIC in the minimum quantities set out in Schedule Four. Upon the signing
of this Agreement, DISTRIBUTOR shall place an Initial Stocking Order with
Sonic for the minimum quantities set out in Schedule Four. After the first
6 months of this Agreement, failure by DISTRIBUTOR to achieve these
minimum quantities in any period, except if such failure is due to force
majeure or to any action or omission of SONIC, shall allow SONIC to
terminate this Agreement.
4. Trade Marks
4.1 SONIC grants to the DISTRIBUTOR for the duration of this Agreement the
non-exclusive, non-assignable right to use and display the trade marks and
the names set out in Schedule Three ("the Trade Marks") only in the
Territory and only in relation to the Products subject to the terms and
conditions herein contained. Such use shall at all times comply with
SONIC's corporate and/or product identity guidelines from time to time
notified to DISTRIBUTOR.
4.2 DISTRIBUTOR acknowledges, and SONIC warrants, that SONIC is the sole owner
of all rights including, but not limited to, patent, trademark and
copyright in the Product supplied pursuant to this Agreement. DISTRIBUTOR
agrees not to remove any Product identification or notices of such
proprietary restrictions from SONIC's Product and
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agrees to reproduce such identification or notices as reasonably necessary
to protect SONIC's proprietary rights.
4.3 DISTRIBUTOR will market the Products only in the packaging supplied or
approved by SONIC.
4.4 Agreement to Use
DISTRIBUTOR covenants and agrees to ensure that the said trade marks appear
in all catalogs and other promotional material relating to the Products.
DISTRIBUTOR shall not give undue prominence to its own names and marks in
such catalogs or other promotional material. In all such catalogs and
promotional material DISTRIBUTOR shall:
(a) acknowledge the proprietorship of SONIC's trade marks; and
(b) insert the following wording in the language or languages used in the
materials: "__________ is the trade mark and the product of Sonic Systems,
Inc. of the U.S.A.". In the event that DISTRIBUTOR is requested to supply
information in relation to the Products for the preparation of promotional
materials, newspaper articles or trade journals, DISTRIBUTOR shall supply
accurate details as to the proprietorship of SONIC trade marks and
production of the Products.
5. Payment Terms
5.1 In consideration of the rights herein granted, DISTRIBUTOR shall pay to
SONIC for each unit of the Products ordered by DISTRIBUTOR from SONIC per
the current DISTRIBUTOR Price List (Exhibit Three to this Agreement). Such
amount shall be paid in accordance with the terms specified in Schedule
Five.
5.2 In consideration of the marketing and localization costs which will be
borne by the DISTRIBUTOR in establishing the Products in the Territory,
SONIC shall negotiate with the DISTRIBUTOR in good faith appropriate
pricing concessions to ensure amortization of these costs over the term of
this Agreement, subject to DISTRIBUTOR achieving performance goals of the
Agreement.
5.3 Interest at the rate of two percent (2%) per month on the amount of any
unpaid invoice may be added to any overdue amounts owed to SONIC. When the
DISTRIBUTOR will pay the amount within fifteen (15) days from issue date of
invoice, DISTRIBUTOR may receive two percent (2%) discount from the payment
obligations.
5.4 Ordering procedures for the Products shall be as set out in Schedule Five
to the Agreement. SONIC will use its best efforts to deliver orders within
20 days of receipt of such orders and SONIC will endeavor to do all that is
necessary to facilitate delivery of the Products PROVIDED HOWEVER that
SONIC shall not be liable for any delay in delivery or cancellation of any
order arising from the unavailability of any goods ordered or any other
circumstance beyond SONIC's control. SONIC shall be entitled to allocate
orders in such manner as it deems fit.
5.5 The DISTRIBUTOR shall be solely responsible for all costs and expenses
(including without limitation, all taxes, levies, duties and export or
import duties and similar charges of whatever nature, whether imposed by
local, state or federal governments or agencies) incurred by it in the
Territory in the marketing, sub-distributing and distribution of the
Products.
5.6 SONIC may declare all sums immediately due and payable in the event of a
material breach by DISTRIBUTOR of any of its obligations to SONIC contained
in this Agreement, including without limitation, the failure of DISTRIBUTOR
to comply with
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credit terms if not remedied within thirty (30) days after written notice
thereof has been given to DISTRIBUTOR. No property in or title to any of
the goods embodying the Products shall pass to DISTRIBUTOR until the full
price thereof has been duly paid to SONIC and SONIC shall have received in
cash the full amount thereof.
6. Purchase of goods from SONIC
6.1 Orders, Terms & Title
DISTRIBUTOR may purchase, whether for re supply or otherwise, any SONIC
products on its product price list from time to time at such discount as
may be agreed between SONIC and DISTRIBUTOR from time to time. In
addition, DISTRIBUTOR may purchase from SONIC in quantity any marketing
materials, such as point of sale materials, brochures and product
specifications, or packaging materials, produced by or for SONIC, at cost
plus reasonable handling and shipping charges, in order to assist it in the
carrying out of its obligations hereunder. All prices for any SONIC
products shall be FOB the offices of SONIC, exclusive of sales tax (if
any). Orders may be placed upon SONIC at its address first hereinbefore
appearing by facsimile transmission, first class mail or any other written
means, and shall be effective upon the execution by SONIC of an order
confirmation. Title shall not pass in any goods ordered by DISTRIBUTOR
until full payment has been received therefor. DISTRIBUTOR shall have the
right to nominate the freight forwarder and customs agents of its choice.
6.2 Price Changes
SONIC shall have the right to revise product prices by giving thirty(30)
days advance written notice to DISTRIBUTOR. Such revisions shall apply to
all orders received after the effective date of revision.
6.3 Stock Rotation
DISTRIBUTOR shall be allowed once every six months to return to SONIC any
slow moving products in its inventory for credit. If and when DISTRIBUTOR
intends to take this action, DISTRIBUTOR must first contact SONIC to make
this request and SONIC shall authorize this request and issue a RMA
("Return Merchandise Authorization") number for this return. In this
event, DISTRIBUTOR must place an offsetting order equal to or greater than
in value to the return; the offsetting order must be placed at the same
time as the request is made to return the slow moving products. SONIC
shall ship the offsetting order upon return of the slow moving products.
If the offsetting order is greater in value than the return, then the
excess shall be treated as a standard order with standard terms as outlined
in section 6. 1.
7. Product support
7.1 Product Enhancements
DISTRIBUTOR will maintain and support the Products in the Territory at no
charge to SONIC provided that SONIC shall provide DISTRIBUTOR promptly and
without charge such technical advice and assistance as DISTRIBUTOR may
reasonably require to enable it to provide such maintenance and support.
DISTRIBUTOR will promptly disclose to SONIC in writing any errors, bugs and
required corrections in the Products of which it becomes aware. SONIC will
promptly rectify or notify DISTRIBUTOR in writing of any errors, bugs and
required corrections in the Products of which it becomes aware and will
advise DISTRIBUTOR as to a recommended course of action in supporting
customers who may be affected by such defects and will advise DISTRIBUTOR
of SONIC's timetable for providing correction of said defects.
7.2 Enhancements and Upgrades
SONIC will use its best efforts to ensure that at all times the Products
are enhanced in accordance with the changes necessary to ensure the
Products continue to be up to date and competitive. DISTRIBUTOR will
advise SONIC of market conditions and reactions
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to the Products which indicate needs or opportunities to enhance the
Products. SONIC will consult with DISTRIBUTOR in relation to the provision
of enhancements or upgrades and shall give DISTRIBUTOR as much advance
notice as possible of its intention to provide an enhancement or upgrade,
such information shall be treated as confidential under clause 8.2 of this
Agreement. SONIC will provide upgrades and enhancements of the Products to
DISTRIBUTOR for re supply to registered end users on the following terms:
(a) Enhancements and upgrades shall be in one of two categories as
determined by SONIC:
(i) Error corrections ("error corrections" ), which shall be supplied
to DISTRIBUTOR by SONIC without accompanying manuals or packaging;
(ii) Upgrades in functionality ("upgrades" ) which shall be supplied
to DISTRIBUTOR by SONIC packaged in a manner which replaces the
packaging in which the Products was previously marketed.
(b) Error corrections shall be supplied to registered end users free of
charge.
(c) DISTRIBUTOR may render a reasonable charge for upgrades based on the
price paid by DISTRIBUTOR to SONIC for said upgrade.
(d) Prior to the formal announcement of an error correction or an upgrade
DISTRIBUTOR shall inform SONIC of the number of copies of the error
correction or minor upgrade it reasonably believes it will need to
satisfy the likely demand of registered end users. SONIC will supply
the nominated number of copies to DISTRIBUTOR.
(e) Error corrections will be provided to DISTRIBUTOR by SONIC at the
expense of SONIC and DISTRIBUTOR will, where necessary, at its expense
repackage them and provide them to end users in accordance with this
clause.
(f) Upgrades will be supplied by DISTRIBUTOR to end users from the normal
stock of the Products kept by DISTRIBUTOR and shall be priced to the
DISTRIBUTOR at the discretion of SONIC.
(g) SONIC will provide DISTRIBUTOR notice in writing at least 15 days in
advance of the release of an upgrade.
(h) SONIC will provide DISTRIBUTOR free of charge with a reasonable number
of copies of error corrections and upgrades for demonstration purposes
and for the purpose of exhibition thereof.
7.3 Outdated Stock
In the event of an upgrade or enhancement being released, the following
clauses shall apply:
(a) In the case of an error correction DISTRIBUTOR shall continue to
market such stock as it has on hand and will offer end users who register
with DISTRIBUTOR a free copy of the upgrade or enhancement.
(b) In the case of upgrades such stock of the Products as remains on the
premises of DISTRIBUTOR may be returned to SONIC or to such address as
SONIC may reasonably direct. The transportation costs of such returns
shall be shared equally by SONIC and DISTRIBUTOR. Upon receipt of such
returned packages SONIC shall send the same number of replacement major
upgrade packages to DISTRIBUTOR.
7.4 Customer Support
DISTRIBUTOR shall train and maintain a sufficient number of capable sales
and technical personnel sufficient to market and support the Products so as
to assure customer satisfaction, and otherwise to carry out its obligations
and responsibilities under this Agreement. Where requested by any
organization which is authorized by DISTRIBUTOR (whether directly or
indirectly) to market directly to end users and which provides the Products
to end users, DISTRIBUTOR shall conduct such sales training of its
personnel as may be necessary to impart such knowledge.
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8. Translations
8.1 SONIC has made and will make translation of the manuals and user interface
of the software of the Products into the local language of the Territory.
8.2 The DISTRIBUTOR shall consult with SONIC as to the appropriate wording for
the packaging of the Products in the Territory.
8.3 The DISTRIBUTOR hereby assigns to SONIC the copyright and all other rights
of a like nature which do now, or will, subsist in the Territory or in any
other part of the world, in the translation of the Products including all
plans, notes, memoranda and documentation related to the said translation
and future amendments and versions of the translation as specified in
Section 8. 1.
9. Representations warranties and covenants
9.1 Warranty Claims
SONIC agrees to replace at no charge any and all Products supplied by
DISTRIBUTOR to users as replacement of goods returned under terms of the
Limited Warranty set out on the Products License Agreement as attached
hereto.
9.2 Right to Distribute
SONIC represents and warrants that it has a right and will have a right to
distribute the Products in accordance with the terms of this Agreement, and
has a right and will have a right to grant to DISTRIBUTOR the non-exclusive
right to market and distribute the Products in the Territory.
9.3 Confidentiality of Source Codes
DISTRIBUTOR acknowledges that the source codes of the Products and all
corrections, amendments, variations, extensions or additions to such source
codes is confidential information of SONIC.
Nothing in this Agreement shall entitle DISTRIBUTOR access to the whole or
any part of the source code of any of the Products unless otherwise
authorized by SONIC in writing in which case source code shall be held in
confidence in accordance with the terms of Clause 9.4.
9.4 Both parties acknowledge that any confidential information which is marked
as such and which is disclosed by a party to the other is confidential to
that party and shall not be disclosed to any third party and DISTRIBUTOR
agrees that confidential information or material provided to DISTRIBUTOR in
relation to the Products shall not be disclosed to any third person or used
for any purpose by DISTRIBUTOR other than for the purpose of performing its
obligations under this Agreement unless such information or material or use
thereof has been disclosed or has otherwise come into the public domain
without fault or neglect on the part of DISTRIBUTOR, its servants or
agents, or has been disclosed by the party which has the right to the
information to a third party without restrictions of confidentiality, or
has been independently developed by the receiving party, or can be shown to
have been known to the receiving party prior to receipt or has been
received from a third party as a matter of right.
9.5 If notified promptly in writing of any action (and all prior claims
relating to such action) against DISTRIBUTOR, based upon any claim that the
sale or use of the Products by DISTRIBUTOR or its customers under this
Agreement infringes a patent, trade mark, trade secret or copyright
enforceable in the Territory, SONIC shall at its own expense undertake the
defense of such action and shall pay all costs (including but not limited
to, legal, and traveling expenses and communication expenses) and damages
(if any)
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awarded in any such action. SONIC will not have any liability to
DISTRIBUTOR under this clause if the alleged infringement is based upon
the use of the Products in combination with any other application software
not supplied by SONIC.
SONIC may, on the advice of its counsel remove any infringing product from
the possession of DISTRIBUTOR, refund any amounts paid by DISTRIBUTOR for
that product, and cease to supply such product to DISTRIBUTOR. SONIC shall
indemnify and hold DISTRIBUTOR harmless from and against all and any
damage, liability, costs or expenses including legal and traveling
expenses incurred by DISTRIBUTOR as a result of a finding by a court, or a
decision reached through settlement.
9.6 Prohibition of Reverse Engineering, Modification
(a) The DISTRIBUTOR covenants that the DISTRIBUTOR will not disassemble
or reverse engineer the Products, in whole or in part, however the
DISTRIBUTOR may open the case of the Product for maintenance provided that
SONIC has made an instruction to do so.
(b) In addition, DISTRIBUTOR shall not knowingly permit any contractor or
third party to have access or gain access to, or work on or do any work on
the Products (or effect any part thereof) or make any correction,
amendment, variation, extension or addition thereto.
9.7 Other than as set out in this clause 9, SONIC makes no warranties
whatsoever to DISTRIBUTOR as to the merchantability or fitness for purpose
of the Products and to the full extent permitted by United States law
SONIC excludes any implied warranties or conditions including any
warranties of merchantability or fitness for a particular purpose.
DISTRIBUTOR acknowledges that it has exercised its own skill and judgment
in deciding to distribute the Products. In no event will SONIC be liable
to DISTRIBUTOR for any loss of profits, or loss of business resulting from
warranty claims made by end users against DISTRIBUTOR. In no event will
either party be liable to the other for any indirect or consequential
damages of any kind.
9.8 SONIC warrants that the hardware of the Products and all related parts
shall be free from defects in design, materials and workmanship for a
period of one (1) year from the date of purchase by any end user of the
Products. SONIC shall be liable for the proven claim and arising from the
defects of the Products hereof and shall reimburse the cost of DISTRIBUTOR
related to such a claim, provided that such claim is related to the
material safety of the Products.
9.9 Other than as set out in this clause 9, under no circumstances shall SONIC
be liable for any loss of profit, indirect or consequential loss, damage
or injury arising from the supply or use of the Products PROVIDED THAT
DISTRIBUTOR shall be entitled to recover direct compensatory damages from
SONIC arising from the material breach by SONIC of any of its obligations
under this agreement. Such compensatory damages shall be limited to the
value of the Products purchased by DISTRIBUTOR which caused the loss.
10. Termination
10.1 Either party hereto may terminate this Agreement forthwith upon the
happening of any of the following events:
(a) the other party fails to observe or perform any material provision of
this Agreement and fails to remedy such breach within thirty (30) days
after written notice thereof has been given to the party in breach;
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(b) the other commits any act of bankruptcy or insolvency or a petition
is presented for the bankruptcy or winding up of the other or a resolution
is passed for the winding up of the other otherwise than for the purposes
of amalgamation or reconstruction;
(c) the other enters a compromise or arrangement with creditors or a
receiver or official manager of the other or of any of its assets is
appointed.
Either party may terminate this Agreement if the corporate entity of
either is substantially changed or modified through acquisition or merger.
10.2 In the event that this Agreement is terminated pursuant to clause 2.1
then:
(a) neither party shall have any liability to the other by virtue of such
termination;
(b) where such survival is not inconsistent with the termination of this
Agreement, the obligations of each party to the other with respect to
names of registered users, copyright, payment of monies owed - including
applicable interest, payments pursuant to Clause 5.5, confidentiality of
source codes and financial information, rights of inspection, rights in
relation to trade marks, and prohibition of reverse engineering shall
survive termination.
(c) each party shall within seven (7) days of the effective date of
termination deliver to the other all documents and other things (including
microfiche, magnetic tape, disks, or other storage media) embodying any
confidential information obtained from the other during the term hereof or
before this Agreement and relating thereto, or, in the event that any such
information is embodied in valuable property belonging to the receiving
party thereof, the receiving party shall certify its obliteration by
erasure or other appropriate means.
(d) DISTRIBUTOR will forthwith deliver to SONIC copies of all customer
lists, prospect lists, copies of license agreements, lists of distributors
and all other material relating to the distribution of the Products.
(e) DISTRIBUTOR may sell the Products in its stock at the termination
day.
10.3 In the event that this Agreement is terminated by either party upon the
happening of any of the events set forth in Clause 10.1 then the
provisions of Clauses 10.2 (b), (c), and (d) shall apply mutatis mutandis
to such termination, provided however, that Clause 10.2 (d) and (e) shall
not apply to such termination in the event that DISTRIBUTOR is the party
terminating the Agreement.
11. Relationship of the Parties
DISTRIBUTOR is an independent contractor and neither has nor shall have
any power, right or authority, nor will DISTRIBUTOR represent that
DISTRIBUTOR has any power, right or authority, to bind SONIC, or to assume
or to create any obligation or responsibility, express or implied, on
behalf of SONIC or in SONIC's name. Nothing stated in this Agreement shall
be construed as constituting DISTRIBUTOR and SONIC as partners, or as
creating the relationships of employer and employee, master and servant,
or principal and agent between the parties hereto.
12. Waiver
No waiver by either party whether express or implied of any provisions of
this Agreement or of any breach or default of either party shall
constitute a continuing waiver or a waiver of any other provision of this
Agreement unless made in writing and signed by the party against whom the
waiver would otherwise be enforced.
13. Entire Agreement
This Agreement constitutes the entire agreement between the parties
regarding the subject matter hereof, and supersedes and replaces all
agreements, arrangements and understandings relating to the subject matter
hereof, whether reduced to writing or not, that may have preceded this
Agreement.
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14. Force Majeure
Notwithstanding any other provision in this Agreement, no default, delay or
failure to perform on the part of either party shall be considered a breach
of this Agreement if such default, delay or failure to perform is shown to
be due entirely to causes beyond the reasonable control of the party
charged with such default including, but not limited to causes such as
strikes, lock-outs or other labor disputes, riots, civil disturbance,
actions or inaction of governmental authorities or suppliers, epidemics,
wars, embargoes, storms, floods, fires, earthquakes, acts of God or the
public enemy, nuclear disasters or default of a common carrier.
15. Assignment
Neither party may assign its rights and obligations under this Agreement
without obtaining the prior written consent of the other party to this
Agreement PROVIDED HOWEVER, that such consent shall not be unreasonably
withheld in the event that assignment is to be made to an affiliate, or
necessitated due to a transfer of business.
16. Severability
If any clause or section of this Agreement is now or should become in
contravention of any local, state or federal law, such clause or section
shall be null and void and the terms of said prevailing local, state or
federal law shall govern the transaction. The clauses or sections of this
Agreement are independent and severable and the nullification of any
particular clause or section shall in no way impair the validity of this
Agreement nor the intent of the parties to remain bound by its terms and
conditions.
17. Counterparts
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one
instrument.
18. Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of California in the United States of America. Any
dispute, resolution, or proceeding regarding this Agreement shall be
resolved through Binding Arbitration, with the loser of arbitration held
responsible for payment of the winner's attorney fees.
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In witness of the above the parties have executed this Agreement on the day and
date first set out above.
Executed for and on behalf of )
Sonic Systems, Inc. by )
its duly authorized officer and )
in the presence of:
/s/ Sreekanth Ravi
--------------------------------
Signatory
/s/ Steven Perricone
--------------------------------
Witness
Executed for and on behalf of )
________________________ )
its duly authorized officer )
and in the presence of: )
/s/ Masao Tatsuwaki
--------------------------------
Signatory
/s/ Hidekazu Yasuda
--------------------------------
Witness
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SCHEDULE ONE
Description of Products:
- -----------------------
The Products known as Interpol, SonicWALL, and others listed in the SONIC
Distributor Price List (Exhibit Three) and future additions and enhancements
thereof.
SCHEDULE TWO
Term: Provided the minimum quantities set out in Schedule Four hereof are met,
this agreement shall commence on the "Effective Date" and shall continue for a
period of one (1) year from the "Effective Date", unless earlier terminated in
accordance with the terms hereof.
Territory: Japan
Translation Language: Japanese
SONIC will provide localized materials for the Products as listed below:
Interpol: localized Web management interface and localized QuickStart
User's Guide.
SonicWALL: localized Web management interface and localized QuickStart
User's Guide.
Price per unit:
1. The Recommended Retail Price (R.R.P.) shall be the local currency
equivalent of the U.S. dollar prices set out in the SONIC Distributor Price List
(Exhibit Three) except as specifically amended by agreement between SONIC and
DISTRIBUTOR.
Initially established local currency prices will be based on the U.S. dollar
exchange rate in effect in the territory at the time of introduction. Subsequent
variation in exchange rate of greater than (plus minus) 10% will cause the local
currency price to be adjusted subject to negotiation in good faith between
DISTRIBUTOR and SONIC.
The R.R.P. and the line up of the PRODUCTS shall be equal to the R.R.P and the
line up for the other distributors in the Territory.
2. The Distributor Cost for each Product shall be as set out in the Sonic
Distributor Price List and will be based on U.S. dollar prices.
OEM pricing:
<PAGE>
page 14
1. SONIC and DISTRIBUTOR shall negotiate in good faith appropriate pricing and
margin allocation for all OEM sales in the territory in which DISTRIBUTOR
actively participates either before, during, or after conclusion of the sale.
<PAGE>
page 15
SCHEDULE THREE
Trade Marks and names referred to in 4.1
Sonic Systems, Inc. Sonic SonicWALL
Interpol
SonicWALL Plus DMZ
SCHEDULE FOUR
Minimum purchase volume as per section 3.9 hereof shall be as follows:
Total Minimum Purchase Volume for Initial Term of Agreement:
[*]
Minimum initial Stocking Order:
Interpol - [*] Units (to be purchased on or before July 31, 1998 as Interpol
will not be available after that date)
SonicWALL - [*] Units (any mix of models, to be purchased on or before August
31, 1998, as long as the Japanese version of the product is available. If it
is not available prior to that date the product is to be purchased as soon as
it is.)
Minimum Quarterly Purchases (after first Quarter after signing Agreement):
Accumulative from signing to the end of second quarter from signing US$[*]
Accumulative from signing to the end of third quarter from signing US$[*]
It is agreed that purchases against the Minimum Quarterly Purchase
requirements shall not roll over from one term of the Agreement to the next.
SCHEDULE FIVE
Ordering Procedures and Payments:
1. Upon receipt of a numbered purchase order from DISTRIBUTOR, SONIC will
process order promptly and dispatch via the carrier nominated by
DISTRIBUTOR. All invoices will include the following data. SONIC shall fax
a copy of the original invoice to DISTRIBUTOR the day of each shipment and
the original itself by regular mail within 5 days from issuance.
a) description of goods
<PAGE>
page 16
b) number of units shipped
c) date of invoice
d) invoice number
e) name of intended forwarder nominated by DISTRIBUTOR
f) purchase order number of DISTRIBUTOR
g) _______________ DISTRIBUTOR to SONIC
h) payment terms of Net 30 days unless otherwise arranged will apply.
2. DISTRIBUTOR will make payment for the full invoice amount within thirty
(30) days by wire transfer of funds to:
Bank information: ComericA Bank California
1299 Oakmead Parkway
Sunnyvale, CA 94086
SWIFT address: MNBD US33CAL
***Please advise your bank to use the SWIFT address when transferring
funds ***
Federal Routing Number: 1211-37522
ABA number: 1211-37522
Beneficiary Address: Sonic Systems, Inc.
575 N. Pastoria Avenue
Sunnyvale, CA 94086
Beneficiary account name: Sonic Systems, Inc.
Sonic bank account number: [*]
All payments made to SONIC pursuant to this Agreement shall be made in
United States currency.
<PAGE>
page 17
EXHIBIT ONE
The "Business Plan" referred to in Section 1 (a) hereof is outlined below:
[OUTLINE OF SALES AND MARKETING TASKS TO BE UNDERTAKEN BY DISTRIBUTOR]
EXHIBIT TWO
LICENSE AGREEMENT
Copyright Notice
(C) 1998 Sonic Systems, Inc. All rights reserved.
Under the copyright laws, this manual or the software described within, may not
be copied, in whole or part, without the written consent of the manufacturer,
except in the normal use of the software to make a backup copy. The same
proprietary and copyright notices must be affixed to any permitted copies were
affixed to the original. This exception does not allow copies to be made for
others, whether or not sold, but all of the material purchased (with all backup
copies) may be sold, given, or loaned to another person. Under the law, copying
includes translating into another language or format. SonicWALL, SonicWALL Plus,
and SonicWALL Plus DMZ are trademarks of Sonic Systems, Inc.
All other trademarks and trade names belong to their respective holders.
Specifications in this manual are subject to change without notice.
Limited Warranty
Sonic Systems, Inc. warrants SonicWALL (the Product) for one (1) year from the
date of purchase against defects in materials and workmanship. If there is a
defect in the hardware, Sonic Systems will replace the product at no charge to
you, provided you return it to Sonic Systems with transportation charges
prepaid. A Return Materials Authorization (RMA) number must be displayed on the
outside of the package for product(s) being returned for replacement or the
product(s) will be refused. This may be obtained by calling Sonic Systems
Customer Service between the hours of 7:00 AM and 5:00 PM Pacific Standard Time,
Monday through Friday.
Phone: (408) 736-1900
Fax: (408) 736-7228
E-mail: [email protected]
--------------------
This warranty does not apply if the Product has been damaged by accident, abuse,
misuse, or misapplication or has been modified without the written permission of
Sonic Systems.
<PAGE>
page 18
In no event shall Sonic Systems, Inc. or its suppliers be liable for any damages
whatsoever (including, without limitation, damages for loss of profits, business
interruption, loss of information, or other pecuniary loss) arising out of the
use of or inability to use the Product.
Some states do not allow the exclusion or limitation of implied warranties or
liability for incidental or consequential damages, so the above limitation or
exclusion may not apply to you. Where liability may not be limited under
applicable law, Sonic's liability shall be limited to the amount you paid for
the Product. This warranty gives you specific legal rights, and you may have
other rights which vary from state to state. By using this Product, you agree to
these limitations of liability.
THIS WARRANTY AND THE REMEDIES SET FORTH ABOVE ARE EXCLUSIVE AND IN LIEU OFALL
OTHER WARRANTIES, ORAL OR WRITTEN, EXPRESS OR IMPLIED. No dealer, agent, or
employee of Sonic Systems is authorized to make any extension or addition to
this warranty.
<PAGE>
page 19
EXHIBIT THREE
JAPANESE DISTRIBUTOR PRICE LIST
Note: It is agreed that the following price list shall be used by all SONIC
Distributors in the Territory and that only the Internet products listed shall
be available in the Territory (excluding Macintosh LAN Products which do not
pertain to this Agreement):
Internet Solutions Price List
Japanese SRP
<TABLE>
<CAPTION>
Sonic # Lbs Kgs Description Retail JSRP Cost
QuickStream
PPP Remote Access Hardware
Server
<S> <C> <C> <C> <C> <C> <C>
01-SSC- 3.5 1.5 QuickStream Pro (110v) 3-port w/Web-based [*] [*] [*]
2110 Management & IPX
SonicWALL
Internet Filter & Firewall Hardware
01-SSC- 3 1.3 SonicWALL 50 User (110v) [*] [*] [*]
2552
01-SSC- 3 1.3 SonicWALL 50 User w/1 Year Filter [*] [*] [*]
2590 Subscription (110v)
01-SSC- 3 1.3 SonicWALL Unlimited Plus (110v) [*] [*] [*]
2554
01-SSC- 3 1.3 SonicWALL Unlimited Plus w/1 Year Filter [*] [*] [*]
2591 Subscription (110v)
01-SSC- 3 1.3 SonicWALL Plus DMZ (110v) [*] [*] [*]
2556
01-SSC- 3 1.3 SonicWALL Plus DMZ w/1 Year Filter [*] [*] [*]
2592 Subscription (110v)
01-SSC- 1 Year Filter Subscription for SonicWALL [*] [*] [*]
2566
Bandit
Bandwidth Aggregation Internet Router
01-SSC- 3 1.3 Bandit (110v) [*] [*] [*]
2200
01-SSC 0 0 Bandit Dial-In Upgrade [*] [*] [*]
2200
</TABLE>
<PAGE>
EXHIBIT 10.10
CONFIDENTIAL TREATMENT REQUESTED
[*] Denotes information for which confidential treatment has been requested.
Confidential portions omitted have been filed separately with the Commission.
DISTRIBUTION AGREEMENT
----------------------
THIS AGREEMENT (the "Agreement") is made and entered into as of November 11,
1992 by and between INGRAM MICRO INC., a California corporation (hereinafter
"Ingram") and SONIC SYSTEMS, INC., a California corporation (hereinafter
"Vendor").
RECITALS
Vendor manufactures, produces, and/or supplies microcomputer products and
desires to grant to Ingram the right to sell and distribute the products, as
hereinafter defined, upon the terms and conditions set forth below. Ingram is
engaged in the sale and distribution of microcomputer products and desires to
have the right to sell and distribute Vendor's products upon said terms and
conditions. In consideration of the mutual covenants and agreements set forth
below, the parties hereto agree as follows:
1. RECITALS.
1.1 The recitals stated above are incorporated herein by reference.
2. GRANT OF DISTRIBUTION RIGHTS.
2.1 Vendor hereby grants to Ingram, and Ingram accepts, the non-exclusive right
to distribute all computer products produced and/or offered by Vendor during the
term of this Agreement, including those products listed on Exhibit A attached
hereto and made a part hereof (hereinafter all products to be distributed shall
be referred to as the "Product" or "Products").
2.2 Vendor agrees to make available and to sell to Ingram such Product as
Ingram shall order from Vendor at the prices and subject to the terms set forth
in this Agreement. Ingram shall not be required to purchase any minimum amount
or quantity of the Product.
2.3 Vendor may appoint other distributors to distribute its products. Ingram
shall have the right to obtain and/or retain the rights to distribute any other
products, including products which may compete with the Products.
3. TERM.
3.1 The term of this Agreement shall be for a period of one (1) year, beginning
on the date first above written. Thereafter, this Agreement shall be renewed
for successive one (1) year terms without further notice, unless terminated
sooner as provided under the provisions of this Agreement.
3.2 Either party may terminate this Agreement, with or without cause, by giving
ninety (90) days' written notice to the other party.
4. OBLIGATIONS OF VENDOR.
4.1 Vendor shall use its best efforts to ship the Product within five (5) days
after receipt of Ingram's order for the Product, unless otherwise directed by
Ingram.
4.2 At no charge to Ingram, Vendor shall support the Product and any efforts to
sell the Product by Ingram, and provide sales literature, advertising materials
and reasonable training and
<PAGE>
support in the sale and use of the Product to Ingram's employees and customers,
if requested by Ingram.
4.3 Vendor shall notify Ingram at least thirty (30) days prior to the date any
new Product is to be introduced and shall make such Product available for
distribution by Ingram not later than the date it is first introduced in the
marketplace.
4.4 Vendor agrees to maintain sufficient Product inventory to permit it to fill
Ingram's orders as required herein. If a shortage of any Product in Vendor's
inventory exists in spite of Vendor's good faith efforts, Vendor agrees to
allocate its available inventory of such Product to Ingram in proportion to
Ingram's percentage of all of Vendor's customer orders for such Product during
the previous sixty (60) days.
4.5 For each Product shipment to Ingram, Vendor shall issue to Ingram an
invoice showing Ingram's order number and the Product part number, description,
price and any discount. At least monthly, Vendor shall provide Ingram with a
current statement of account, listing all invoices outstanding and any payments
made and credits given since the date of the previous statement, if any.
5. OBLIGATIONS OF INGRAM.
5.1 Ingram will list the Product in one or more of its catalogs and make the
Product available to its customers.
5.2 Ingram will advertise and/or promote the Products in a commercially
reasonable manner and will transmit Product information and promotional
materials to its customers, as reasonably necessary.
5.3 As reasonably necessary, Ingram will make its facilities available for, and
will assist Vendor in providing, Product training and support required under
Section 4.2 hereof.
5.4 Ingram will provide Product technical assistance to its customers as it is
reasonably able to do so, and will refer all other technical matters directly to
Vendor.
5.5 Ingram will handle its customer's Product returns and batch them for return
to Vendor at regular intervals.
6. PRICE AND TERMS.
6.1 The price and applicable discount, if any, for the Product shall be as set
forth in Exhibit A. Ingram shall not be bound by any pricing suggested by
Vendor.
6.2 Vendor shall have the right to change the list price of any Product upon
giving thirty (30) days' prior written notice to Ingram. In the event that
Vendor shall raise the list price of a Product, all orders for such Product
placed prior to the effective date of the price increase shall be invoiced at
the lower price.
6.3 In the event that Vendor shall reduce the price of any Product or offer the
Product at a lower price to any other party, Vendor shall promptly credit Ingram
for the difference between the invoice price charged to Ingram and the reduced
price for each unit of Product held in inventory by Ingram on the date the
reduced price is first offered.
2
<PAGE>
6.4 Terms of payment for any order shall be net thirty (30) days; except for
Ingram's initial order for any Product, for which payment shall be due forty-
five (45) days from receipt of the applicable invoice by Ingram. For the
purposes of earning a discount, payment is deemed to be made on the postmark
date of Ingram's transmittal.
6.5 Notwithstanding any other provision in this Agreement to the contrary,
Ingram shall not be deemed in default under this Agreement if it withholds any
payment to Vendor because of a legitimate dispute between the parties.
7. SHIPPING.
7.1 Vendor shall ship Product only pursuant to Ingram purchase orders received
by Vendor. Product shall be shipped F.O.B. Ingram's Fremont, California
consolidation warehouse, with risk of loss or damage to pass to Ingram upon
delivery by Vendor to that warehouse.
8. COOPERATIVE ADVERTISING.
8.1 Ingram may advertise and promote the Product in a commercially reasonable
manner and may use Vendor's trademarks, service marks and trade names in
connection therewith; provided that Ingram shall submit the advertisement or
promotion to Vendor for review and approval prior to initial release, which
approval shall not be unreasonably withheld or delayed.
8.2 Vendor agrees to cooperate with Ingram in advertising and promoting the
Product and hereby grants Ingram a cooperative advertising allowance of up to
three percent (3%) of invoice amounts for Product purchased by Ingram from
Vendor to the extent that Ingram or customer/dealers use the allowance for any
advertising which features Product. Upon receipt of reasonable evidence of
advertising expenditures, Vendor agrees to credit the amount of any such
expenditures against future purchases by Ingram.
8.3 Vendor agrees to participate in the "Go With Ingram Micro" marketing
program currently in effect, subject to the terms and conditions set forth on
Exhibit B attached hereto and made a part hereof.
9. DEMONSTRATION UNITS.
9.1 At the request of Ingram, Vendor shall consign to Ingram a reasonable
number of demonstration units of the Product to aid Ingram and its sales staff
in the support and promotion of the Product. All units consigned will be
returned to Vendor in good condition, reasonable wear and tear expected, when
requested by Vendor at any time eleven (11) months after delivery to Ingram.
10. STOCK BALANCING.
10.1 At any time during the term of this Agreement, Ingram may return Products
which are in their original packaging to Sonic for full credit of the Products'
purchase price, less any discounts or credits previously received. All Product
returns must be accompanied by a valid Return Merchandise Authorization (RMA)
number issued by Sonic prior to the return. All Freight charges for returned
Products will be paid by Ingram. Any Products returned to Sonic by Ingram will
be subject to a [*] restocking fee. The restocking fee shall be waived if a new
Purchase Order is issued by Ingram which offsets dollar for dollar the amount of
credit associated with the returned Product.
3
<PAGE>
10.2 Ingram may return any Product in its inventory to Vendor for credit
against outstanding invoices for cash refund if there are no invoices then
outstanding, within sixty (60) days following (a) the expiration or earlier
termination of this Agreement, or (b) Vendor's notice to Ingram that it is
discontinuing production of the Product or any version thereof. Any credit or
refund due Ingram for returned Product shall be equal to the purchase price of
the Product, less any discounts or credits previously received.
11. PRODUCT WARRANTIES.
11.1 Vendor warrants that the Products will be free from defects in design,
materials and workmanship for a period of one (1) year from the date of purchase
by an end user. Vendor warrants that the Products are merchantable and fit for
their intended use, and that the Products will perform in conformance with the
specifications and documentation provided with the Products. Vendor agrees that
such warranties are made for the benefit of Ingram, its customers and dealers,
and the Product end user.
11.2 Ingram may return Product found to be defective for immediate credit of
the amount of the Product's purchase price plus all freight charges incurred by
Ingram in returning the Product.
11.3 In the event Vendor recalls any or all of the Products due to defects,
revisions, or upgrades, Ingram shall provide reasonable assistance in such
recall; provided that, Vendor shall pay all of Ingram's expenses in connection
with such recall, including handling charges per unit of Product of not less
than [*] of the Product's list price.
12. INDEMNITY.
12.1 Vendor shall defend, indemnify, and hold harmless Ingram from and against
any claims, demands, liabilities, or expenses (including attorney's fees and
costs) for any injury or damage, including, but not limited to, any personal or
bodily injury or property damage, arising out of or resulting in any way from
any defect in Products. This duty to indemnify Ingram shall be in addition to
the warranty obligations of Vendor.
12.2 Vendor shall indemnify and hold Ingram harmless from and against all
damages and costs incurred by Ingram arising from the infringement of any
patents, copyrights, or trademarks in the manufacture or marketing of the
Products; provided that, Ingram promptly notifies Vendor of the charge of
infringement or legal proceeding. If there is a claim made or threatened,
Vendor may, at its expense and option, either procure the right to continue
using any part of Product, replace same with a non-infringing Product, or modify
Product such that it is non-infringing; provided that, if within ninety (90)
days after a claim has been made, Vendor has not procured such right, replaced
the Product, or modified the Product so that it does not infringe, Ingram may
return the Product to Vendor for a full credit against future purchases or for a
cash refund, at Ingram's option.
13. PRODUCT MARKINGS.
13.1 Vendor shall clearly mark on the packaging of each unit Product the
Product's name and computer compatibility. Such packaging shall also bear a
machine-readable bar code identifier scannable in standard ABCD format which
identifies the Product and its serial number.
4
<PAGE>
14. REPRESENTATIONS AND WARRANTIES.
Vendor warrants and represents that:
14.1 The Products or their use do not infringe upon any patents, copyrights, or
trademarks of others, and that there are not any suits or proceedings pending or
threatened which allege that any Product or the use thereof infringes upon such
patents, copyrights, or trademarks;
14.2 The Product prices offered herein are the best prices available to any
distributor to whom Vendor sells, and that in the future all prices for Product
made available to Ingram shall be the best prices available to any distributor
of the Products;
14.3 Sales to Ingram of the Products at the listed prices and/or discounts do
not in any way constitute violations of federal, state, or local laws,
ordinances, rules or regulations, including any antitrust laws or trade
regulations.
15. DEFAULTS.
15.1 For purposes of this Agreement, a party shall be in default if (a) it
materially breaches a term of this Agreement and such breach continues for a
period of ten (10) days after it has been notified of the breach, or (b) it
shall cease conducting business in the normal course, become insolvent, make a
general assignment for the benefit of creditors, suffer or permit the
appointment of a receiver for its business or assets, or shall avail itself of
or become subject to any proceeding under the Federal Bankruptcy Act or any
other federal or state statute relating to insolvency or the protection of
rights of creditors.
15.2 Upon the occurrence of an event of default as described in Section 15.1,
the party not in default may immediately terminate this Agreement by giving
written notice to the party in default.
15.3 The rights and remedies provided to the parties in this Section 15 shall
not be exclusive and are in addition to any other rights and remedies provided
by this Agreement or by law or in equity.
16. INSURANCE.
16.1 This Section intentionally left blank.
17. OTHER PROVISIONS.
17.1 CONSTRUCTION. This Agreement shall be construed and enforced in
-------------
accordance with the laws of the State of California.
17.2 NOTICES. All notices, requests, demands and other communications called
--------
for or contemplated hereunder shall be in writing and shall be deemed to have
been duly given when delivered or two (2) days after mailing by U.S. certified
or registered first-class mail, prepaid, and addressed to the parties at the
addresses set forth at the end of this Agreement or at such other addresses as
the parties may designate by written notice.
17.3 ATTORNEY'S FEES. In the event suit is commended to enforce this Agreement
----------------
or otherwise relating to this Agreement, the prevailing party shall be entitled
to reasonable attorneys' fees and costs incurred in connection herewith.
5
<PAGE>
17.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts,
-------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument; however, this Agreement shall be of no
force or effect until executed by both parties.
17.5 CONFIDENTIAL INFORMATION. Neither party shall disclose to the other any
-------------------------
information regarded as confidential information by the disclosing party or any
third party. Any confidential disclosures shall be exclusively governed by a
separate agreement.
17.6 NO IMPLIED WAIVERS. The failure of either party at any time to require
-------------------
performance by the other party of any provision hereof shall not affect in any
way the full rights to require such performance at any time thereafter. The
waiver by either party of a breach of any provision hereof shall not be taken,
construed, or held to be a waiver of the provision itself or a waiver of any
breach thereafter or any other provision hereof.
17.7 CAPTIONS AND SECTION HEADINGS. Captions and section headings used herein
------------------------------
are for convenience only, are not a part of this Agreement, and shall not be
used in construing it.
17.8 COVENANT OF FURTHER COOPERATION. Each of the parties agrees to execute
--------------------------------
and deliver such further documents and to cooperate in such manner as may be
necessary to implement and give effect to the agreements contained herein.
17.9 BINDING ON HEIRS AND SUCCESSORS. This Agreement shall be binding upon and
--------------------------------
shall inure to the benefit of each party, its successors and assigns.
17.10 SEVERABILITY. A judicial determination that any provision of this
-------------
Agreement is invalid in whole or in part shall not affect the enforceability of
those provisions found not to be invalid.
17.11 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
-----------------
between the parties hereto pertaining to the subject matter hereof, superseding
any and all previous proposals, representations or statements, oral or written.
Any previous agreements between the parties pertaining to the subject matter of
this Agreement are hereby expressly canceled and terminated. The terms of this
Agreement shall supersede the terms of any invoice or purchase order issued by
either party. Any modifications of this Agreement must be in writing and signed
by authorized representatives of both parties hereto.
6
<PAGE>
17.12 PARTIES EXECUTING. The parties executing this Agreement warrant that they
------------------
have the requisite authority to do so.
IN WITNESS WHEREOF, the parties hereunto have executed this Agreement.
"Ingram" "Vendor"
Ingram Micro Inc. Sonic Systems, Inc.
1600 E. St. Andrew Place 333 W. El Camino Real #280
Santa Ana, California 92705 Sunnyvale, California 94087
By: /s/ Sanat K Dutta By: /s/ Sreekanth Ravi
----------------------------- ---------------------------------
Sanat K. Dutta Name: Sreekanth Ravi
-------------------------------
Senior Vice President (print or type)
Operations Title:* President
-----------------------------
Date: 11-12-92 Date: 11/17/92
--------------------------- -------------------------------
*AGREEMENT MUST BE SIGNED BY PRESIDENT OR BY A DULY AUTHORIZED VICE
PRESIDENT OR PARTNER.
7
<PAGE>
EXHIBIT A
---------
PRODUCT PRICE LIST
------------------
The prices for the Products offered under this Agreement shall be (check one):
X As shown on Vendor's price list dated November 1, 1992.
- -----
_____ As shown below.
Product List Price Discount
- ------- ---------- --------
<PAGE>
Sonic Systems, Inc. Nov. 1, 1992
Domestic Distributor Price List
<TABLE>
<CAPTION>
Networking Software Retail Distributor
<S> <C> <C> <C>
01-SSC-1104 PowerBridge/TCP` [*] [*]
01-SSC-1105 SuperBridge/TCP [*] [*]
01-SSC-1101 LaserBridge [*] [*]
01-SSC-1102 PowerBridge [*] [*]
01-SSC-1103 SuperBridge [*] [*]
01-SSC-0504 Radar 3.0 [*] [*]
01-SSU-1106 PowerBridge/TCP Upgrade [*] [*]
01-SSU-1107 SuperBridge/TCP Upgrade [*] [*]
01-SSU-1108 Radar 3.0 Upgrade [*] [*]
Ethernet Cards with Twisted Pair and Thick (AUI) connectors
01-SSC-0401 Ether TwP for Mac SE [*] [*]
01-SSC-0402 Ether TwP for Mac SE/30,IIsi [*] [*]
01-SSC-0403 Ether TwP for Mac II Family [*] [*]
01-SSC-0404 Ether TwP for Mac LC (Twisted Pair only) [*] [*]
Ethernet Cards with Thin Coax and Thick (AUI) connectors
01-SSC-0405 Ether TnT for Mac SE [*] [*]
01-SSC-0406 Ether TnT for Mac SE/30,IIsi [*] [*]
01-SSC-0407 Ether TnT for Mac II Family [*] [*]
01-SSC-0408 Ether TnT for Mac LC (Thin Coax only) [*] [*]
Ethernet Cards with Thick, Thin Coax & Twisted Pair connectors
01-SSC-0409 Ether A1 for Mac SE with 64K RAM [*] [*]
01-SSC-0410 Ether A1 for Mac SE/30,IIsi with 64K RAM [*] [*]
01-SSC-0411 Ether A1 for Mac II with 64K RAM [*] [*]
01-SSC-0412 Ether A1 for Mac LC with 64K RAM (Thin [*] [*]
Coax & Twisted Pair only) [*] [*]
Ethernet Cards with Pass Through PDS (Processor Direct Slot)
01-SSC-0901 MagicSlot IIsi (Thin Coax) [*] [*]
01-SSC-0902 MagicSlot IIsi (Twisted Pair) [*] [*]
01-SSC-0903 MagicSlot SE30 (Thin Coax) [*] [*]
01-SSC-0904 MagicSlot SE30 (Twisted Pair) [*] [*]
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
The Diskless Mac (TDM)**
01-SSC-0601 TDM for Sonic Systems, Apple, Asante or Farallon
Ethernet Cards [*] [*]
01-SSC-0602 TDM purchased with Sonic Systems Ethernet Card [*] [*]
01-SSC-0603 TDM for Apple or Asante LC Eethernet Card [*] [*]
Ethernet Twisted Pair Hub
01-SSC-1001 StarBase T9 Port (8-RJ-45 + 1-BNC) [*] [*]
Ethernet Accessories
01-SSC-0701 64KB Static RAM Upgrade for Ethernet Cards [*] [*]
01-SSC-0702 FPU Upgrade for Mac IIsi & LC [*] [*]
ISDN
01-SSC-2001 DigiLINK Ethernet to ISDN Bridge [*] [*]
</TABLE>
2
<PAGE>
EXHIBIT B
---------
GO WITH INGRAM MICRO MARKETING PROGRAM
--------------------------------------
Vendor agrees to participate in the "Go with Ingram Micro" marketing program
(hereinafter the "Program") subject to the following terms and conditions:
1. Vendor hereby grants to Ingram, and Ingram is hereby authorized to deduct
from each invoice, a Program allowance equal to two percent (2%) of invoice
amounts for Product purchased by Ingram. The cooperative advertising allowance
granted under Section 8.2 of the Agreement shall be reduced by an amount equal
to the Program allowance granted hereunder, it being the understanding of the
parties that the Program allowance is to be a part of the cooperative
advertising allowance and not an addition thereto. Ingram agrees to reconcile
and adjust the Program allowance quarterly to account for any Product returns.
2. The Program allowance will be used by Ingram to fund Product promotions and
advertising, to provide general sales incentives throughout its distribution
channels, and to administer the Program.
3. The term of the Program shall end on June 30 following the commencement
date of this Agreement, and shall be renewed for successive one (1) year terms
without further notice, subject to Ingram's right to terminate the Program, or
Vendor's right to terminate its participation therein, at the end of a term by
giving the other party at least ninety (90) days' written notice prior to the
end of the term.
<PAGE>
WORKPAGE
Addendum Number 1 to Distribution Agreement Dated November 11, 1992 by and
between Ingram Micro Inc. and SONIC SYSTEMS, INC.
The above-referenced agreement is hereby amended as follows:
1. Following Section 10.1 add the following:
"10.2 Ingram may return any Product in its inventory to Vendor for credit
against outstanding invoices for cash refund if there are no invoices then
outstanding, within sixty (60) days following (a) the expiration or earlier
termination of this Agreement, or (b) Vendor's notice to Ingram that it is
discontinuing production of the Product or any version thereof. Any credit
or refund due Ingram for returned Product shall be equal to the purchase
price of the Product, less any discounts or credits previously received."
Agreed this 4th day of December, 1992.
Ingram Micro Inc. Sonic Systems, Inc.
1600 E. St. Andrew Place 333 W. El Camino Real #280
Santa Ana, CA 92705 Sunnyvale, CA 94087
By: /s/ Sanat K. Dutta By: /s/ Sreekanth Ravi
------------------------------ -------------------------------
Sanat K. Dutta Name: Sreekanth Ravi
-----------------------------
Senior Vice President, Title: President
----------------------------
Operations
<PAGE>
EXHIBIT 10.11
AGREEMENT OF SUBLEASE
---------------------
THIS AGREEMENT OF SUBLEASE is made as of the 26 day of October, 1998, by
--
and between AMP Incorporated, a Pennsylvania corporation ("Sublandlord"), having
an office at 470 Friendship Road, Harrisburg, PA, and Sonic Systems, Inc., a
California corporation ("Subtenant"), having an office at 575 North Pastoria
Ave., Sunnyvale, CA 94086.
WITNESS
-------
WHEREAS, by Agreement of Lease dated March 5, 1997, as amended (the
"Lease") by and between Marie A. Batton, Trustee of the W.F. Batton Trust UTA
dated January 12, 1988, as amended ("Landlord") and Sublandlord, Landlord leased
to Sublandlord certain real property commonly referred to as 5400 Betsy Ross
Drive, Santa Clara, California, consisting of approximately 3.5 acres of land
together with the building (the "Building") and other improvements constructed
thereon, as more particularly described in the Lease (the "Premises"). A copy of
the Lease is attached hereto as Exhibit A and made a part hereof; and
WHEREAS, Sublandlord desires to sublease to Subtenant and Subtenant desires
to sublease from Sublandlord a portion of the Premises on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the parties agree as follows:
1. Subleasing of Subpremises. Subject to the written consent of the
-------------------------
Landlord, Sublandlord hereby subleases to Subtenant and Subtenant hereby
subleases from Sublandlord that portion of the Building containing approximately
7,914 usable square feet, as more particularly shown as the crosshatched area on
the floor plan attached hereto as Exhibit B and made a part hereof (the
"Subpremises"), upon and subject to all of the terms and conditions hereinafter
set forth. Subtenant shall have the right, in common with others, to use: (i)
the parking lot serving the Building for the parking of Subtenant's employees'
cars on a first come, first serve basis, and (ii) Common Areas 1, 4, 6, 7, 8 and
9 as marked on Exhibit B. After obtaining the prior written consent of
Sublandlord and Landlord which shall not be unreasonably withheld, Subtenant
may, at its sole cost and expense, place a sign on the existing (or any
replacement) monument sign at the Premises. At the end of this Sublease,
Subtenant shall remove any such sign and restore the monument sign to its
original condition.
2. Term.
----
(a) The term (the "Term") of this Sublease shall commence on November 1,
1998 (the "Commencement Date") and shall continue for a period of thirty-four
(34) months, unless sooner terminated as hereinafter provided.
(b) The parties acknowledge that Sublandlord, Subtenant and TekEdge
Corporation ("TekEdge") have entered an agreement (the "Agreement") whereby,
upon ninety (90) days' written notice to Sublandlord and Subtenant, TekEdge may
claim the right to occupy the Subpremises as of September 1, 2000. The Agreement
is attached hereto as Exhibit C. Provided TekEdge exercises such right and all
the conditions set forth in the Agreement are satisfied, this Sublease shall
terminate effective August 31, 2000.
1
<PAGE>
3. Base Rent.
---------
During the Term, Subtenant shall pay to Sublandlord, in lawful money
of the United States which at the time shall be legal tender in payment of all
debts and dues, public and private, an annual fixed rent (the "Base Rent")
calculated by multiplying the usable square footage of the Subtenant (7,914 SF)
plus Subtenant's proportionate share of Common Areas 1, 4, 6, 7, 8 and 9 (832
SF) - a total rental area of 8,746 square feet (the "Rental Square Footage") -by
the following amounts per square foot per month, payable in equal monthly
installments:
<TABLE>
<CAPTION>
Monthly Base Rent Rate
Per Rental Square Foot for
Time Period Subpremises
<S> <C>
11/1/98-8/31/99 $2.20
9/1/99-8/31/2000 $2.29
9/1/2000-8/31/2001 $2.38
</TABLE>
All monthly installments shall be paid in advance on the first (1st) day of each
month during the Term at the office of the Sublandlord, or such other place as
Sublandlord may designate, without any setoff or deduction of any kind
whatsoever. The first payment of Base Rent shall be due on the execution date of
this Sublease.
3A. Rent Adjustment.
(a) The following terms shall have the following meanings with respect to
the provisions of this Section 3A:
(i) "Subtenant's Pro Rata Share" shall mean that proportion of the
Operating Expenses for any calendar year that equals the Rental Square Footage
divided by the total number of rentable square feet in the Building. The parties
agree that for the Term, Subtenant's Pro Rata Share shall be 14.25%.
(ii) "Operating Expenses" shall:
(A) Mean all operating expenses actually incurred of any kind or
nature with respect to the Building as determined in accordance with generally
accepted accounting principles and shall include, but not be limited to, all
general and special real estate or ad valorem taxes or special assessments
levied against the Building by any governmental or quasi-governmental authority
or any taxes or assessments which shall be levied on the Building in lieu of or
in addition to all or any portion of any such real estate taxes or assessments,
or which shall be levied on the rentals of the Building (other than net income
taxes), or which shall be levied on Sublandlord as a result of the use,
ownership or operation of the Building; the cost of Building supplies; costs
incurred in connection with all energy sources for the common areas of the
Building such as propane, butane, natural gas, steam, electricity, solar energy
and fuel oil; the costs of water and sewer services; janitorial services;
general maintenance and normal repair of the Building, including the heating and
air conditioning systems of the Building; landscaping maintenance; maintenance,
repair, striping and replacement of all parking areas furnished by
2
<PAGE>
Sublandlord for use by tenants of the Building; the cost of rubbish removal,
service contracts for the elevator, HVAC and alarm systems of the Building; the
cost of such security guard and protection services as may be deemed reasonably
necessary by Sublandlord; insurance in amounts and coverages determined by
Sublandlord, including fire and extended coverage, rental interruption,
sprinkler leakage, plate glass and public liability insurance (but Subtenant
shall have no interest in such insurance or the proceeds thereof); labor costs
incurred in the operation and maintenance of the Building, including wages and
other payments, costs to Sublandlord of Workers' Compensation and disability
insurance, payroll taxes and fringe benefits; professional building management
fees; legal, accounting, inspection and consultation fees incurred in connection
with the Building to the extent required by any governmental authority or any
other inspection or consultation fees required for the normal prudent operation
of the Building and not normally the responsibility of the managing agent; the
cost of any capital improvements to the Building or of any machinery or
equipment installed in the Building which is made or becomes operational, as the
case may be, after the Commencement Date; all other common area costs and
expenses relating to the Building and all other charges properly allocable to
the repair, operation and maintenance of the Building in accordance with
generally accepted accounting principles. If the Building is not fully occupied
during any calendar year, the Operating Expenses for such year shall be adjusted
to reflect the greater of: (a) actual occupancy; or (b) a ninety-five percent
(95%) occupancy of the Building. If Sublandlord selects an accrual accounting
basis for calculating Operating Expenses, Operating Expenses shall be deemed to
have been paid when such expenses have accrued in accordance with generally
accepted accounting principles.
(B) Expressly exclude Sublandlord's income taxes; leasing
commissions; interest on debt or amortization payments on any mortgages or deeds
of trust and rental under any ground or underlying leases or lease; advertising
and promotional expenditures; costs occasioned by the act, omission or violation
of any law by Sublandlord, any other occupant of the Building or their
respective agents, employees, or contractors; costs occasioned by fire or other
casualties for which insurance proceeds are received by Sublandlord or by
exercise of power of eminent domain; costs of any renovation or improvement of
any portion of the Building not made available for Subtenant's use; costs
incurred in connection with negotiations or disputes with any other occupant of
the Building; costs incurred in connection with the presence of any Hazardous
Material (responsibility for such costs are addressed by other provisions of
this Sublease); costs relating to the replacement of the structural elements of
the Building or associated with utilities and services of a type not provided to
Subtenant; any fee, profit or compensation retained by Sublandlord or its
affiliates for management and administration of the Building in excess of the
management fee which would be charged by a professional management service or
operation of comparable projects in the vicinity of the Building; and any other
expense which under generally accepted accounting principles would not be
considered a normal maintenance or operating expense, except as otherwise
specifically provided herein.
(b) It is hereby agreed that during each calendar year of the term hereof,
Subtenant shall pay to Sublandlord Subtenant's Pro Rata Share of the amount of
any Operating Expenses. Beginning with the first calendar year in which this
Sublease commences, the monthly rent to be paid by Subtenant to Sublandlord
shall be increased by an amount equal to 1/12th of Subtenant's Pro Rata Share of
the Operating Expenses for each calendar year, with an adjustment to be made
between the parties at a later date as hereinafter provided. However, in
computing the monthly rental for Subtenant's Pro Rata Share of the Operating
Expenses for any calendar year, there shall be taken into account any prior
increases in the monthly rent attributable to Subtenant's Pro Rata Share of the
estimated increases in such Operating Expenses. As soon as practicable following
the end of each calendar year during the term of this Sublease, Sublandlord
shall submit to Subtenant a statement setting forth the exact amount of the
increase, if any, in Subtenant's Pro Rata Share of the Operating Expenses for
the calendar year just completed over Subtenant's Pro Rata Share of the Base
Operating Expenses, and the difference, if any, between
3
<PAGE>
Subtenant's actual Pro Rata Share of the Operating Expenses for the calendar
year just completed and the estimated amount of Subtenant's Pro Rata Share of
the Operating Expenses (on which its rent was based) for such year. Prior to the
end of each calendar year during the term hereof, Sublandlord shall submit to
Subtenant a statement setting forth the amount reasonably estimated by
Sublandlord as the increase, if any, in the Base Operating Expenses for the
subsequent year and the amount of the increased monthly rent to be paid by
Subtenant for such subsequent year computed in accordance with the foregoing
provisions. It is to be understood and agreed that all estimating provisions as
referenced above shall be computed on the basis of the Operating Expenses being
adjusted as if the Building were not less than ninety-five percent (95%)
occupied. To the extent that Subtenant's Pro Rata Share of the actual Operating
Expenses for the period covered by such statement is different from the
estimated increases upon which Subtenant paid rent during the calendar year just
completed, Sublandlord shall pay to Subtenant, or Subtenant shall pay to
Sublandlord, as the case may be, the difference within thirty (30) days
following receipt of said statement from Sublandlord. In addition, with respect
to the monthly rent, until Subtenant receives such statement, Subtenant's
monthly rent for the new calendar year shall continue to be paid at the then
current rate, but Subtenant shall commence payment to Sublandlord of the monthly
installments of rent on the basis of the statement beginning on the first day of
the month following the month in which Subtenant receives such statement.
Moreover, Subtenant shall pay to Sublandlord, or shall receive a credit against
the next installment due hereunder, as the case may be, on the date required for
the first payment of rent as adjusted, the difference, if any, between the
monthly installments of rent so adjusted and the monthly installments of rent
actually paid during the new calendar year. In no event shall any adjustment
hereunder result in a decrease in the Base Rent or additional rent payable
pursuant to any other provision of this Lease (except escalation pursuant to
this Section 3A), it being agreed that the payments under this Section 3A are an
obligation supplemental to Subtenant's obligation to pay the Base Rent.
(c) If Subtenant occupies the Subpremises for less than a full calendar
year during the first or last calendar years of the term hereof, Subtenant's Pro
Rata Share for such partial year shall be calculated by proportionately reducing
the Base Operating Expenses to reflect the number of months in such year during
which Subtenant occupied the Premises (the "Adjusted Base Operating Expenses").
The Adjusted Base Operating Expenses shall then be compared with the actual
Operating Expenses for said partial year to determine the amount, if any, of any
increases in the actual Operating Expenses for such partial year over the
Adjusted Base Operating Expenses. Subtenant shall pay its Pro Rata Share of any
such increases within thirty (30) days following receipt of notice thereof.
(d) Sublandlord's failure during the Lease term to prepare and deliver any
statement or bills, or Sublandlord's failure to make a demand under this Section
or under any other provision of this Sublease shall not in any way be deemed to
be a waiver of, or cause Sublandlord to forfeit or surrender, its rights to
collect any items of additional rent which may have become due pursuant to this
Section during the term of this Sublease, except as otherwise specifically set
forth in this Sublease. Subtenant's liability for all additional rent due under
this Section 3A shall survive the expiration or earlier termination of this
Sublease.
(e) At its sole cost and expense, Subtenant shall have the right, to be
exercised within ninety (90) days following receipt of Sublandlord's statement,
to have an independent auditor review Sublandlord's actual operating expenses
during regular business hours. Notice of such an audit shall be given in writing
to Sublandlord at least ten (10) days prior to such audit. If the audit reveals
that the actual Operating Expenses due for any given year was less than the
amount paid by Subtenant, Sublandlord agrees to pay such excess to Subtenant.
4
<PAGE>
4. Additional Rent.
---------------
(a) All amounts payable by Subtenant to Sublandlord pursuant to
this Sublease, including, without limitation, Base Rent and any additional rent
required by the terms hereof, shall be deemed to constitute rent and, in the
event of any non-payment thereof, Sublandlord shall have all of the rights and
remedies provided herein, in the Lease, at law or in equity for non-payment of
rent.
(b) Subtenant's obligation to pay additional rent hereunder
shall be on account of the period from and after the Rent Commencement Date and
shall survive the Expiration Date or sooner termination of the Term.
(c) The items of additional rent as provided in this Agreement
of Sublease shall be billed to Subtenant by Sublandlord (whether or not such
items have been incurred by the time of billing) within thirty (30) days of
incursion by Sublandlord. Subtenant shall have thirty (30) days after receipt of
such statement to reimburse Sublandlord for these costs.
5. Subordination to and Incorporation of Terms of Lease.
----------------------------------------------------
(a) This Sublease is in all respects subject and subordinate to the
terms and conditions of the Lease and to the matters to which the Lease is or
shall be subordinate. Except as otherwise expressly provided in this Sublease,
all terms and conditions of the Lease are incorporated in this Sublease by
reference and made a part hereof as if herein set forth at length, and shall, as
between Sublandlord and Subtenant (as if they were the Landlord and Tenant,
respectively, under the Lease and as if the Subpremises being sublet hereby were
the Lease Premises demised under the Lease), constitute the terms of this
Sublease, except to the extent that they do not relate to the Subpremises or are
inapplicable to, inconsistent with, or modified or eliminated by, the terms of
this Sublease. Sublandlord and Subtenant acknowledge and agree that Subtenant
has reviewed and is familiar with the Lease and Sublandlord hereby represents
that the copy delivered to Subtenant for such purpose and attached hereto as
Exhibit A is a true, correct and complete copy of such Lease and that the Lease
represents the entire agreement between Sublandlord and Landlord with respect to
the lease of the Premises. Sublandlord also represents that (i) there is no
default, or any condition which with the passage of time or the giving of
notice, or both, would constitute a default, on the part of either party to the
Lease, (ii) Sublandlord has not assigned, encumbered or otherwise transferred
any interest of Tenant under the Lease, and (iii) the Commencement Date of the
Lease was September 1, 1997 and the scheduled expiration date of the Lease is
August 31, 2007.
(b) In the event of a default by Sublandlord, as Tenant under the
Lease, resulting in the termination, reentry or dispossession thereunder,
Landlord may, at its option, and Sublandlord shall use reasonable efforts to
cause Landlord to, take over all of the right, title and interest of Sublandlord
under this Sublease and Subtenant hereunder shall, at the option of the
Landlord, attorn to and recognize Landlord as Sublandlord hereunder except that
Landlord shall not (i) be liable for any previous act or omission of Sublandlord
under this Sublease, (ii) be subject to any offset, not expressly provided for
in this Sublease, which theretofore accrued to Subtenant against Sublandlord, or
(iii) be bound by any previous modification of this Sublease or by any previous
prepayment of more than one month's rent, and shall, promptly upon Landlord's
request, execute and deliver all instruments necessary or appropriate to confirm
such attornment and recognition. Subtenant hereby waives all rights under any
present or future law to elect, by reason of the termination of such Lease, to
terminate this Sublease or surrender possession of the Subpremises.
5
<PAGE>
6. Care, Surrender and Restoration of the Subpremises.
--------------------------------------------------
(a) Without limiting any other provision of this Sublease or the
Lease, Subtenant shall take good care of the Subpremises, suffer no waste or
injury thereto and shall comply with all those laws, orders and regulations
applicable to the Subpremises, the Building and Subtenant's use or manner of use
thereof, which are imposed on Sublandlord, as Tenant under the Lease, in
connection with the Subpremises and the Building.
(b) Sublandlord shall be responsible to maintain common areas,
building-wide systems and the roof membrane of the Building. In the event one of
the foregoing require repair, Sublandlord shall be responsible for such repair,
provided that Subtenant notifies Sublandlord as soon as practicable. Sublandlord
agrees to such repair request respond within a reasonable time. Notwithstanding
the foregoing, Subtenant covenants and agrees that it will repair promptly at
its own expense any damage to the Subpremises arising out of or from its
occupancy of the Subpremises.
(c) Upon the Expiration Date or sooner termination of the Term,
Subtenant shall quit and surrender the Subpremises to Sublandlord, broom clean,
in good order and condition, ordinary wear and tear and damage by fire and other
casualty excepted, and Subtenant shall remove all of its property. If the
Expiration Date or sooner termination of the Term of this Sublease falls on a
Sunday, this Sublease shall expire at noon on the preceding Saturday unless it
be a legal holiday, in which case it shall expire at noon on the preceding
business day. Subtenant shall observe and perform the covenants herein stated
and Subtenant's obligations hereunder shall survive the Expiration Date or
sooner termination of the Term.
7. Use. Subtenant shall use and occupy the Subpremises for office,
---
storage and distribution purposes, other related legal uses, and for no other
purpose. Subtenant shall have access to the Subpremises seven days a week, 24
hours a day and shall comply with Sublandlord's security systems relating to the
Building.
8. Subtenant's Obligations. Except as otherwise specifically provided
-----------------------
herein, all acts to be performed and all of the terms and conditions to be
observed by and inuring to the benefit of, Sublandlord, as Tenant under the
Lease of the Premises, shall be performed, and observed by, and shall inure to
the benefit of, Subtenant, and Subtenant's obligations shall run to Sublandlord
as appropriate or required by the respective interests of Sublandlord and
Landlord. Subtenant shall indemnify Sublandlord against, and hold Sublandlord
harmless from, all liabilities, obligations, damages, penalties, claims, costs,
expenses and liabilities (including, but not limited to, reasonable attorneys'
fees and disbursements) paid, suffered or incurred by Sublandlord as a result of
the nonperformance or non-observance by Subtenant, Subtenant's agents,
contractors, employees, invitees or licensees of any such terms and conditions
contained in the Lease. In furtherance of the foregoing, Subtenant shall not (i)
do or permit to be done anything prohibited to Sublandlord as Tenant under the
Lease, or (ii) take any action or do or permit anything which would result in
any additional cost or other liability to Sublandlord under the Lease and/or
this Sublease. In the event of any inconsistency between the Lease and this
Sublease, such inconsistency (i) if it relates to obligations of, or
restrictions on, Subtenant, shall be resolved in favor of that obligation which
is more onerous to Subtenant or that restriction which is more restrictive of
Subtenant, as the case may be, or (ii) if it relates to any other matter, the
Lease shall govern.
9. Landlord's Obligations. Anything contained in this Sublease or in
----------------------
the Lease to the contrary notwithstanding, Landlord shall have no responsibility
to Subtenant for, and shall not be required to provide, any of the services or
make any of the repairs or restorations that Landlord has agreed to make or
provide, or cause to be made or provided, under the Lease, and Subtenant shall
rely upon, and look solely to, Sublandlord for the provision or making thereof.
6
<PAGE>
Except as may result from a default of Sublandlord from its obligations
specified in the preceding sentence, Subtenant shall not make any claim against
Sublandlord for any damage which may arise, nor shall Subtenant's obligations
hereunder be impaired or abated by reason of (i) the failure of Landlord to
keep, observe or perform its obligations pursuant to the Lease, or (ii) the acts
or omissions of Landlord and each of its agents, contractors, servants,
employees, invitees or licensees.
10. Covenants with respect to the Lease. Subtenant covenants and agrees
-----------------------------------
that Subtenant shall not do anything that would constitute a default under the
Lease or omit to do anything that Subtenant is obligated to do under the terms
of this Sublease as to cause there to be a default under the Lease.
11. Broker. Sublandlord and Subtenant represent and warrant to each
------
other that they have not dealt with any broker in connection with this Sublease
other than Cushman & Wakefield of California, Inc. by Sublandlord and Wayne
Mascia Associates by Subtenant. Sublandlord shall be responsible for the
brokerage commissions of Cushman & Wakefield of California, Inc., pursuant to
the terms of a brokerage agreement, and Cushman & Wakefield shall be responsible
for any payment to Wayne Mascia Associates. Subtenant shall indemnify
Sublandlord against, and hold Sublandlord harmless from, any claim on, or
liability to, any other broker or any other party with whom Subtenant shall have
dealt in connection with this transaction and Sublease.
12. [INTENTIONALLY OMITTED]
13. Indemnification.
---------------
13.1 Indemnification of Sublandlord and Subtenant.
--------------------------------------------
(a) Subtenant shall indemnify, defend with competent and
experienced counsel and hold harmless Sublandlord, its subsidiaries and
affiliates and their respective officers, directors, shareholders and employees,
from and against any and all damages, liabilities, actions, causes of action,
suits, claims, demands, losses, costs and expenses (including without limitation
reasonable attorneys' fees and disbursements and court costs) to the extent
arising from or in connection with the negligence or willful misconduct of
Subtenant, its agents, employees, representatives or contractors, except to the
extent covered by insurance required to be carried by Sublandlord hereunder.
(b) Sublandlord shall indemnify, defend with competent and
experienced counsel and hold harmless Subtenant from and against any and all
damages, liabilities, actions, causes of action, suits, claims, demands, losses,
costs and expenses (including without limitation reasonable attorneys' fees and
disbursements and court costs) to the extent arising from or in connection with
the negligence or willful misconduct of Sublandlord, its agents, employees,
representatives or contractors, except to the extent covered by insurance
required to be carried by Subtenant hereunder.
(c) The party seeking indemnification under this Section (the
"Indemnified Party") shall provide prompt written notice of any third party
claim to the party from whom indemnification is sought (the "Indemnifying
Party"). The Indemnifying Party shall have the right to assume exclusive control
of the defense of such claim or, at the option of the Indemnifying Party, to
settle the same. The Indemnified Party agrees to cooperate reasonably with the
Indemnifying Party in connection with the performance of the Indemnifying
Party's obligations under this Section.
7
<PAGE>
(d) Notwithstanding anything to the contrary contained in this
Sublease, neither party hereto shall be liable to the other for any indirect,
special, consequential or incidental damages (including without limitation loss
of profits, loss of use or loss of goodwill) regardless of (A) the negligence
(either sole or concurrent) of either party or (B) whether either party has been
informed of the possibility of such damages. It is expressly understood and
agreed that damages payable by either party to Landlord shall be deemed to
constitute direct damages of such party.
13.2 Indemnification by Subtenant of Sublandlord and Landlord.
--------------------------------------------------------
Subtenant agrees to defend, save harmless and indemnify Sublandlord, its
subsidiaries and affiliates and their respective officers, directors,
shareholders and employees, and Landlord to the same extent as Sublandlord is
required to do so under the provisions of the Lease; provided, however, that all
references therein, to (i) "Lessee" shall be replaced with "Subtenant" and (ii)
"Premises" shall be replaced with "Subpremises".
13.3 Survival. The provisions of this Section shall survive the
--------
expiration or earlier termination of this Sublease.
14. Quiet Enjoyment. As long as Subtenant pays all of the Base Rent and
---------------
Additional Rent due hereunder and otherwise performs and observes all of the
obligations, terms and conditions contained herein and in the Lease as herein
incorporated, Subtenant shall peaceably and quietly have, hold and enjoy the
Subpremises, subject to Section 15 below.
15. Termination of Lease. If for any reason the term of the Lease is
--------------------
terminated prior to the Expiration Date of this Sublease, this Sublease shall
thereupon terminate, and neither Sublandlord nor Landlord shall be liable to
Subtenant by reason thereof. Notwithstanding the foregoing, if the termination
of the Lease does not result in the termination of this Sublease by reason of
Subtenant's attornment to, and recognition of, Landlord as landlord hereunder in
accordance with the provisions of Section 5(b) hereof, Sublandlord shall not be
liable to Subtenant hereunder for damages or otherwise, and Sublandlord's
obligation to Subtenant shall be limited to returning to Subtenant a portion of
any rent paid in advance by Subtenant, if any, prorated as of the date of such
termination.
16. Modification of Lease. For the purposes of this Sublease, in all
---------------------
provisions of the Lease requiring the approval, consent or notification of the
Landlord, Subtenant shall be required to obtain the approval or consent of, or
give notice to both Landlord and Sublandlord.
17. Consents. Sublandlord's refusal to consent to or approve any matter
--------
or thing, whenever Sublandlord's consent or approval is required under this
Sublease or under the Lease, as incorporated herein, shall be deemed reasonable
if Landlord has refused or failed to give its consent or approval to such matter
or thing.
18. Condition of the Subpremises; Subtenant's Changes.
-------------------------------------------------
(a) Subtenant represents it has made a thorough examination of the
Subpremises and it is familiar with the condition thereof. Subtenant
acknowledges that it enters into this Sublease without any representation or
warranties by Sublandlord except as set forth in this Lease, or anyone acting or
purporting to act on behalf of Sublandlord, as to the present or future
conditions of the Subpremises or the appurtenances thereto or any improvements
therein or of the Building. Sublandlord represents that upon commencement of
this Sublease, the roof, HVAC systems, electric and plumbing systems, the
parking lot and the lighting systems will be in good working conditions.
8
<PAGE>
(b) Notwithstanding anything to the contrary contained in the Lease,
Subtenant shall not make any changes to the Subpremises whatsoever, including,
without limitation, structural or non-structural changes, without the prior
written consent of Sublandlord and Landlord. All permitted alterations or
additions shall be constructed in accordance with the requirements of the Lease.
19. Assignment and Subletting. Subtenant, for itself, its successors and
-------------------------
assigns, expressly covenants that it shall not assign, whether by operation of
law or otherwise, or pledge or otherwise encumber this Sublease, or sublet all
or any part of the Subpremises. Any purported assignment, pledge, encumbrance or
sublease by Subtenant shall be void and of no force or effect and shall
constitute a default by Subtenant hereunder. Subject to complying with the
provisions of the Lease, Sublandlord reserves the right to transfer and assign
its interest in and to this Sublease to any entity or person who shall succeed
to Sublandlord's interest in and to the Lease.
20. Insurance.
---------
(a) Subtenant agrees to maintain in responsible companies qualified
to do business, and in good standing, in California (i) public liability
insurance covering the Subpremises insuring Landlord and Sublandlord as well as
Subtenant (to the extent of Subtenant's negligence) with limits which shall be
equal to those required to be maintained by Sublandlord under the Lease, and
naming Sublandlord and Landlord as additional insureds, (ii) Worker's
Compensation Insurance with statutory limits covering all of Subtenant's
employees working in the Subpremises, and (iii) Commercial All-Risk Property
Insurance written on an all risk of loss form, and on a replacement cost basis,
covering Subtenant's personal property and leasehold improvements. Subtenant
shall deposit promptly with Sublandlord certificates for such insurance, and all
renewals thereof, bearing the endorsement that the policies will not be canceled
until after thirty (30) days written notice to both Sublandlord and Landlord.
Subtenant shall pay all premiums and charges for such insurance, and if
Subtenant shall fail to obtain such insurance, Sublandlord may, but shall not be
obligated to, obtain the same, in which event the amount of the premium paid
shall be paid by Subtenant to Sublandlord upon Sublandlord's demand therefor,
shall be deemed Additional Rent and shall be collectible by Sublandlord in the
same manner and with the same remedies as though said sums were Additional Rent
reserved hereunder.
(b) Subtenant acknowledges that Sublandlord will not carry any
insurance in favor of Subtenant, and that neither Landlord nor Sublandlord will
carry insurance on Subtenant's furniture and/or furnishings or any fixtures or
equipment, improvements or appurtenances of Subtenant in or about the
Subpremises.
21. Waiver of Subrogation.
---------------------
(a) Anything in Section 20 of this Sublease to the contrary
notwithstanding, Sublandlord and Subtenant shall each endeavor to secure an
appropriate clause in, or an endorsement upon, any fire or extended coverage
insurance policy obtained by it and covering the Subpremises or the personal
property, fixtures and equipment located therein or thereon, pursuant to which
the respective insurance companies waive subrogation or permit the insured,
prior to any loss, to agree with a third party to waive any claim it might have
against such third party. The waiver of subrogation or permission for waiver of
any claim herein before referred to shall extend to the agents of each party and
its employees. If, and to the extent that such waiver or permission can be
obtained only upon payment of an additional charge, then, except as provided
herein, the party benefiting from the waiver or permission shall pay such charge
upon demand, or shall be deemed to have agreed that the party obtaining the
insurance coverage in
9
<PAGE>
question shall be free of any further obligations under the provisions hereof
relating to such waiver or permission.
(b) Subject to the provisions of this Section 21, and insofar as may
be permitted by the terms of the insurance policies carried by it, each party
hereby releases the other with respect to any claim (including a claim for
negligence) which it might otherwise have against the other party for loss,
damage or destruction with respect to its property by fire or other casualty.
22. End of Term. If Subtenant shall remain in possession of the
-----------
Subpremises or any part thereof after the expiration or prior termination of the
Term hereof, the parties agree that no such holding over by Tenant shall operate
to extend or renew this Sublease, and that any such holding over shall be
construed as a tenancy-at-will as per Section 17 of the Lease when such holding
over shall have commenced, and such tenancy shall otherwise be subject to all
the terms, conditions, covenants and agreements of this Sublease. Subtenant
further agrees to pay to Sublandlord any additional amounts payable by
Sublandlord to Landlord under the Lease by reason of any such holding over by
Subtenant
23. Default.
-------
(a) In the event that Subtenant shall default in the payment of
Annual Fixed Rent, Additional Rent or any other charge payable hereunder, or
shall default in the performance or observance of any of the terms, conditions
and covenants of this Sublease, Sublandlord, in addition to and not in
limitation of any rights otherwise available to it, shall have the same rights
and remedies with respect to such default as are provided to Landlord under the
Lease with respect to defaults by Sublandlord as Tenant thereunder, with the
same force and effect as though all such provisions relating to any such default
or defaults were set forth herein in their entirety, and Subtenant shall have
all of the obligations of the Tenant under the Lease with respect to such
default or defaults.
(b) In the event of a default by Subtenant in the performance of any
of its non-monetary obligations hereunder, Sublandlord may, at its option, and
without waiving any other remedies for such default herein or at law or by
incorporation by reference of the Lease provided, at any time thereafter, give
written notice to Subtenant that if such default is not cured, or the cure not
commenced, within twenty (20) days after receipt of such notice by Subtenant,
and if so commenced is not thereafter pursued diligently to completion,
Sublandlord may cure such default for the account of Subtenant, and any amount
paid or incurred by Sublandlord in so doing shall be deemed paid or incurred for
the account of Subtenant and Subtenant agrees promptly to reimburse Sublandlord
therefor and save Sublandlord harmless therefrom; provided, however, that
Sublandlord may cure any such default as aforesaid prior to the expiration of
any waiting period if reasonably necessary to protect Sublandlord's interest
under the Lease or to prevent injury or damage to persons or property.
24. Destruction, Fire and other Casualty. If the whole or any part of the
------------------------------------
Subpremises or the Building shall be damaged by fire or other casualty and the
Lease is not terminated on account thereof by either Sublandlord or Landlord in
accordance with the terms thereof, this Sublease shall remain in full force and
effect and Base Rent and Additional Rent shall not abate except to the extent
Base Rent and Additional Rent for the Subpremises shall abate under the terms of
the Lease.
10
<PAGE>
25. Notices.
-------
(a) Whenever, by the terms of this Sublease, notice demand or other
communication shall or may be given to either party, the same shall be in
writing and address as follows:
If to Sublandlord: Real Estate Manager
Building 81-06
AMP Incorporated
P.O. Box 3608
Harrisburg, PA 17105-3608
Legal Department
AMP Incorporated
Building 176-41
P.O. Box 3608
Harrisburg, PA 17105-3608
If to Landlord: Marie A. Batton, Trustee
1190 East Meadow Drive
Palo Alto, CA 94303
Copy to: David L. Fletcher
Attorney at Law
6262 N. Swan Road, Suite 185
Tucson, AZ 85718
If to Subtenant: Sreekanth Ravi
Sonic Systems, Inc.
5400 Betsy Ross Drive
Santa Clara, CA 95054
or to such other address or addresses as shall from time to time be designated
by written notice by either party to the other as herein provided. All notices
shall be sent by registered or certified mail, postage prepaid and return
receipt requested, or by Federal Express or other comparable courier providing
proof of delivery, and shall be deemed duly given and received (i) if mailed, on
the third business day following the mailing thereof, or (ii) if sent by
courier, the date of its receipt (or, if such day is not a business day, the
next succeeding business day).
(b) Each party hereunder shall promptly furnish the other with
copies of all notices, requests, demands or other communications which relate to
the Subpremises or the use or occupancy thereof after receipt of the same from
Landlord or others.
25. Sublease Conditional Upon Certain Consents. Sublandlord and Subtenant
------------------------------------------
each acknowledge and agree that this Sublease is subject to Sublandlord's
obtaining the unconditional consent of Landlord in accordance with the terms of
the Lease, and that if such consent shall not
11
<PAGE>
be obtained, or condition waived, within fifteen (15) days of the date hereof,
then this Sublease shall be deemed canceled and terminated and neither of the
parties hereto shall have any liability to the other.
26. Security Deposit. Subtenant shall deposit with Sublandlord, upon the
----------------
completion, execution and delivery of this Sublease, the sum of Twenty Thousand
Eight Hundred Fifteen Dollars ($20,815.00) to be held by Sublandlord, without
obligation to pay interest thereon, as security for Subtenant's covenant to pay
the rental herein reserved and for the keeping and performance of all other
covenants and obligations required to be kept or performed by Subtenant under
the terms and provisions of the Sublease. In the event of any default on the
part of Subtenant in the payment of said rental, or in the keeping of
performance of any of the other covenants required to be kept or performed by
Subtenant, Sublandlord shall have the right, but not the obligation, to apply
said security deposit, or any portion thereof, to cure such default. In the
event the security is reduced by reason of such application, then within five
(5) days after written notice thereof from Sublandlord, Subtenant shall deposit
with Sublandlord such sum as may be necessary to restore the security deposit to
the original amount. In the absence of any default on the part of the Subtenant,
Sublandlord shall repay the said security deposit without deduction to Subtenant
promptly upon the termination of this Lease, but if the security deposit has
been reduced to cure any default on the part of Subtenant, and has not been
restored to its original amount, the remainder of the security deposit if any,
shall be promptly paid to Subtenant upon termination of this Lease.
27. Subtenant Authority. Subtenant is a duly organized and validly
-------------------
existing corporation in good standing under the laws of the California and is
duly and legally qualified to do business as a corporation and has powers
adequate for the execution, delivery and performance of its obligations under
the Sublease and for carrying on the business now conducted or proposed to be
conducted by it. Subtenant has taken all necessary corporate action required to
make the Sublease the legal, valid and binding obligations they purport to be.
The Sublease is in full force and effect and is a legal, valid and binding
obligation of the Subtenant and, subject to applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting the enforcement
of creditors' rights generally, and general equitable principles, is enforceable
in accordance with its terms.
28. Miscellaneous.
-------------
(a) This Sublease may not be extended, renewed, terminated, or
otherwise modified except by an instrument in writing signed by the party
against whom enforcement of any such modification is sought.
(b) It is understood and agreed that all understandings and
agreements heretofore had between the parties hereto are merged in this
Sublease, which alone fully and completely expresses their agreement, and that
the same is entered into after full investigation, neither party relying upon
any statement, representation or warranty made by the other not embodied in this
Sublease.
(c) The paragraph headings appearing herein are for purposes of
convenience only and are not deemed to be a part of this Sublease.
(d) The provisions of this Sublease shall be governed by and
construed in accordance with the laws of the California.
(e) No delay or omission on the part of either party to this Sublease
in requiring performance by the other party or in exercising any right hereunder
shall operate as a waiver of any provision hereof or of any right hereunder, and
the waiver, omission or delay in
12
<PAGE>
requiring performance or exercising any right hereunder on any one occasion
shall not be construed as a bar to or waiver of such performance or right on any
future occasion.
(f) Any and all rights and remedies which either party may have under
this Sublease, at law or in equity, shall be cumulative and shall not be deemed
inconsistent with each other, and any two or more of all such rights and
remedies may be exercised at the same time insofar as permitted by law.
(g) If any term or provision of this Sublease or the application
thereof to any person or circumstance shall to any extent be held invalid or
unenforceable, the remainder of this Sublease or the application of such term or
provision to other persons or circumstances shall not be affected thereby, and
each term and provision of this Sublease shall be valid and enforceable to the
fullest extent permitted by law. Section headings and the organization of this
Sublease are for descriptive purposes only and shall not control or after the
meaning of this Sublease.
(h) This Sublease shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
IN WITNESS WHEREOF, this Agreement of Sublease has been duly executed as of the
day and year first above written.
SUBLANDLORD:
AMP Incorporated
By: /s/ Robert Ripp
-------------------------------
R. Ripp
Chairman & CEO
SUBTENANT:
Sonic Systems, Inc.
By: /s/ Sreekanth Ravi
-------------------------------
Name: Sreekanth Ravi
-------------------------------
Title: President/CEO
------------------------------
13
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated August 26, 1999, relating to the consolidated financial
statements and financial statement schedules of SonicWALL, Inc., which appear
in such Registration Statement. We also consent to the reference to us under
the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 1,051 6,769
<SECURITIES> 0 0
<RECEIVABLES> 870 2,165
<ALLOWANCES> 193 326
<INVENTORY> 331 649
<CURRENT-ASSETS> 2,456 11,069
<PP&E> 313 415
<DEPRECIATION> 206 228
<TOTAL-ASSETS> 2,584 11,277
<CURRENT-LIABILITIES> 3,263 5,988
<BONDS> 0 0
0 4,971
0 0
<COMMON> 290 3,499
<OTHER-SE> (969) (3,181)
<TOTAL-LIABILITY-AND-EQUITY> 2,584 11,277
<SALES> 7,515 6,690
<TOTAL-REVENUES> 7,515 6,690
<CGS> 3,308 1,998
<TOTAL-COSTS> 8,749 6,291
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 122 133
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,180) 531
<INCOME-TAX> 6 493
<INCOME-CONTINUING> (1,186) 38
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,186) 38
<EPS-BASIC> (0.11) 0
<EPS-DILUTED> (0.11) 0
</TABLE>
