<PAGE>
As filed with the Securities and Exchange Commission on October 1, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
Amendment No. 1 to
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. [_]
---------------
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 OCTOBER 1, 1999
[LOGO OF SONICWALL, INC.]
4,000,000 Shares of Common Stock
$ per share
-----------
This is the initial public offering of SonicWALL, Inc. We are selling 4,000,000
shares of our common stock. In addition, the shareholders listed on page 56
have granted the underwriters a 30-day option to purchase up to an additional
600,000 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 $10.00 and $12.00 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 600,000 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 October ,1999.
-----------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Thomas Weisel Partners LLC
The date of this prospectus is October , 1999
<PAGE>
[SonicWALL, Inc. LOGO]
GATEFOLD ARTWORK TEXT:
Title: SonicWALL ( (logo) Internet Security Appliances
SonicWALL PRO with VPN
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 SonicWALL at the branch office and
an enterprise VPN/firewall solution, such as Check Point's Firewall-1, at
headquarters.
SonicWALL DMZ
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.
SonicWALL with VPN
With SonicWALL, mobile workers can use VPN to connect securely to the office.
SonicWALL DMZ with Content Filter
With SonicWALL, schools and libraries can protect children from objectionable
Web sites as well as secure the network from Internet hackers.
GATEFOLD ARTWORK DESCRIPTION OF GRAPHICS:
Diagram showing the Internet as an oval symbol and lines connecting from the
Internet through depiction of SonicWALL products as they relate to various user
groups, such as Branch Offices, Small to Medium Size Businesses, Schools, and
Mobile Workers.
<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."
SonicWALL, Inc.
SonicWALL, Inc. is a leading provider of Internet infrastructure products
designed to provide secure Internet access to our broadband customers.
Broadband access allows users to connect to the Internet at speeds
significantly greater than analog modems. We sell our products to customers in
the small to medium enterprise, branch office, telecommuter and education
markets. Small to medium enterprises generally are considered to have less than
1,000 people. We design, develop, manufacture and sell high-performance, solid
state appliances that provide 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. From
inception in 1991 through 1996, our operations focused on the development and
marketing of Ethernet connectivity products for Apple Computer Inc. Macintosh
computers. In October 1997, we began shipments of our Internet security
appliance products, and we now focus all of our development, sales, and
marketing efforts on the Internet security appliance market. As of September
30, 1999, we have sold more than 18,000 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,
which is increasing the need for Internet security. New high-speed technologies
have emerged to address the bandwidth requirements of the small to medium
enterprise, branch office, telecommuter and education markets at a lower cost
than traditional solutions such as dedicated data lines. 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. The 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. Because broadband technologies, including DSL and cable, are always
connected to the Internet, they present greater security issues than dial-up
connections 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 requires extensive support, constant monitoring, and regular updates to
maintain effectiveness. The expense and complexity of these solutions makes
them impractical for the majority of small to medium enterprises, branch
offices, telecommuters, and education users. In addition, these solutions often
require additional products to incorporate enhanced functionalities such as
virtual private networking, capabilities, Internet address management and
content filtering. 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 a firewall (a function which blocks
access to the network by unauthorized persons), content filtering (a feature
which blocks objectionable web sites) and virtual private networking (a feature
which enables secure communications between branch offices or telecommuters and
their corporate network). The SonicWALL product line 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
3
<PAGE>
to reduce purchase costs and avoid hiring costly IT personnel. Our SonicWALL
products are designed to maximize reliability and uptime, provide scalability
for networks ranging in size from 1 to 1,000 users, and to be fully compatible
with more expensive enterprise wide security products offered by, among others,
Check Point Software Technologies, Ltd. and Cisco Systems, Inc.
Our strategy is to become the industry standard Internet security solution
for broadband access users in the small to medium enterprises, 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 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" and "us"
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.................. 4,000,000 shares
Common stock to be outstanding
after this offering............. 23,600,594 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
1,558,648 shares of common stock reserved for issuance under our stock plans
and 1,760,000 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 $ 46,689
Total assets............ 11,277 11,277 51,197
Redeemable Series A
convertible preferred
stock.................. 4,971 -- --
Total shareholders'
equity................. 318 5,289 45,209
</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 as adjusted balance sheet data to give effect to (1) the sale
by SonicWALL, Inc. of 4,000,000 shares of common stock in this offering
at an assumed initial public offering price of $ 11.00 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.
Company Risks
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 October 1997, we
introduced our SonicWALL line of products, and in 1998 we made a strategic
decision to concentrate our resources in the Internet security market. As a
result, we expect to stop shipment of Ethernet products by December 1999. In
1996, 1997 and 1998 our Ethernet revenues were $9,356,000, $9,092,000, and
$5,166,000 and represented approximately 100%, 97%, and 69%, respectively, of
our total revenues. For the six month period ended June 30, 1999, Ethernet
product revenues were approximately $1,200,000 and represented 18% of our total
revenues.
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 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%. In addition, we have experienced expansion in our
manufacturing and shipping requirements, our product lines, our customer base
and our end user installed base. 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.
These changes have increased the complexity of managing SonicWALL, Inc. If we
continue to experience significant growth, 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 we do not know if we will be
profitable in the future.
We incurred losses of $32,000, $467,000, and $1,186,000 in 1996, 1997 and
1998, which represented .01%, 5.1% and 15.7%, respectively, of total revenues.
We made $38,000 in profit (less than 1% of revenues) for the six months ended
June 30, 1999. We do not know if we will be able to increase our profitability
from this marginal level in the future. If we are not profitable, your
investment may decline in value.
6
<PAGE>
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;
. to maintain current and develop new relationships with key value
added resellers, 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 recently changed our business focus from Ethernet connectivity
products for Macintosh computers to Internet security products, 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.
We cannot predict our future revenues.
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 adversely affect our operating results.
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.
Over 90% of our sales are to distributors and original equipment
manufacturers. To date, sales to a limited number of customers have accounted
for a significant portion of our revenue. Two of our distributors, Ingram
Micro, Inc. and Tech Data Corp., account for over 40% of our revenue. In 1998,
sales to Ingram Micro accounted for 34% of our revenue. For the six months
ended June 30, 1999, sales to Ingram Micro and Tech Data 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 original equipment manufacturers 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.
Although we have limited one year agreements with Ingram Micro and Tech
Data, these contracts are subject to termination at any time, and we do not
know if these customers will continue to place orders for our products.
7
<PAGE>
Our sales are usually done on a purchase order basis and we have no binding
purchase commitments from our distributors or original equipment manufacturers,
which could result in a lack of sales.
We sell our products to end users through distributors, resellers and
original equipment manufacturers. 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;
. 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 or original equipment manufacturers is unable
to pay us, it could have an adverse effect on our business.
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 retroactive price protection to our major distributors and if we fail
to balance their inventory with end user demand for our products, our allowance
for price protection may be inadequate 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 reduce the list price of our
products, our major distributors receive refunds or credits from us that reduce
the price of products held in their inventory to the new list price. New
product introductions or price reductions by us or our competitors could result
in significant price adjustments. We reduce our revenues by an estimated
allowance for price protection adjustments, but if these estimates are too low,
our future results of operations could be materially adversely affected.
We are dependent on international sales. We face the risks of international
business and associated currency fluctuations, which might adversely affect our
operating results.
International revenues represented 38% of total revenues in 1998 and 35% of
total revenues for the six months ended June 30, 1999. For the six months ended
June 30, 1999, revenues from Japan constituted 17% of our revenues. We expect
that international revenues will continue to represent a substantial portion of
our total revenues in the foreseeable future. Because our sales are denominated
in United States dollars, the weakness of a foreign country's currency against
the dollar could increase the price of our products in such country and reduce
our product unit sales by making our products more expensive in the local
currency.
8
<PAGE>
We are subject to the risks of conducting business internationally,
including foreign government regulation of our technology, and general
geopolitical risks associated with political and economic stability, changes in
diplomatic and trade relationships, and foreign countries' laws affecting the
Internet generally.
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. We do not have long
term supply arrangements with any vendor and this may adversely affect our
ability to obtain necessary components or technology for our products. 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 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.
Our business liability insurance has no specific provisions for potential
liability for Internet security breaches.
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. Although we have not experienced
any act of sabotage or unauthorized access by a third party of our internal
network to date, 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 primarily on one contract manufacturer for all of our product
manufacturing and assembly, and if we cannot obtain its services, we may not be
able to ship products.
We outsource all of our hardware manufacturing and assembly primarily to one
third-party manufacturer and assembly house--Flash Electronics, Inc. We do not
have a long-term manufacturing contract with this vendor.
9
<PAGE>
Flash Electronics has produced products with acceptable quality, quantity and
cost in the past, but it 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.
10
<PAGE>
Undetected product errors or defects could result in loss of revenue, delayed
market acceptance and claims against us.
Historically, we have had limited claims for refunds based on product
warranty claims. We have had few product releases with errors or defects, but
our products and services may contain undetected errors or defects, especially
when first released. Because of our relatively recent introduction of Internet
security products, we have little experience in gauging the risk of unexpected
product failures or defects. 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.
Industry Risks
Our revenue growth is dependent on the continued growth 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. These broadband access services
typically are more expensive in terms of required equipment and ongoing access
charges than is the case with Internet dial-up access providers. Our business,
prospects, results of operations and financial condition would be materially
adversely affected if the use of 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 anticipate, 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
11
<PAGE>
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 world-wide and 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 the
following, all of whom sell world-wide or have a presence in most of the major
markets for such products:
. 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.;
. security appliance suppliers such as Watchguard Technologies, Inc.;
and
. low cost Internet router suppliers which may include limited
Internet security functionality.
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 to compete in 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.
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
12
<PAGE>
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.
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.
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; and
. errors in systems used by our customers.
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 are in the process of contacting our critical suppliers to determine if
the suppliers' operations and the products and services provided to us are Year
2000 compliant. 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.
13
<PAGE>
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.
If our internal systems, our products or the internal systems at our
manufacturers are not Year 2000 compliant, our business, results of operations
and financial condition would be materially adversely affected.
We do not currently have any contingency plans with respect to Year 2000
worst case scenarios.
Investment Risk
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."
Because of their significant stock ownership, our officers and directors will
be able to elect the board of directors and control all matters requiring
shareholder approval.
Executive officers, directors, and entities affiliated with them, will, in
the aggregate, beneficially own approximately 64% 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."
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; and
. changes in earnings estimates by, or failure to meet the
expectations of, analysts.
14
<PAGE>
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 limit the authority of our shareholders, and
therefore minority shareholders may not be able to significantly influence,
SonicWALL, Inc.'s governance or 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 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. As a result, minority shareholder
representation on the board of directors may be difficult to establish. 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 23,600,594 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 4,000,000 shares
sold in this offering will be freely tradable, and 19,592,595 are subject to
lock up agreements until the times described below when they are available for
sale.
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ----------
<S> <C>
180 days after the date of this prospectus...................... 16,881,195
At various times after 180 days (as Rule 144 holding periods
expire)........................................................ 2,711,400
</TABLE>
After this offering, 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") if more than 50% of the holders
of registration rights demand registration of at least half of their shares
having an expected aggregate offering price of $2,000,000 or more. 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
15
<PAGE>
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."
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. 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 4,000,000 shares of common
stock will be approximately $39.92 million, at an offering price of $11.00 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 4,000,000 shares of common stock at an assumed initial public
offering price of $11.00 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; 23,600,594 shares issued and
outstanding, pro forma as adjusted.... 3,499 8,470 48,390
Deferred stock compensation............ (1,994) (1,994) (1,994)
Notes receivable from shareholders..... (492) (492) (492)
Accumulated deficit.................... (695) (695) (695)
----------- ----------- -----------
Total shareholders' equity........... 318 5,289 45,209
----------- ----------- -----------
Total capitalization................. $ 5,289 $ 5,289 $ 45,209
=========== =========== ===========
</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 $5,289,000, or $0.27 per share of common stock.
After giving effect to the sale of 4,000,000 shares of common stock by us
offered through this prospectus at an assumed initial public offering price of
$11.00 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 $45.2 million, or $1.92 per share. This represents an immediate
increase in the net tangible book value of $1.65 per share to existing
shareholders and an immediate dilution of $9.08 per share to new investors, or
approximately 83% of the assumed initial offering price of $11.00 per share.
The following table illustrates this per-share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $11.00
Pro forma net tangible book value per share at June 30,
1999........................................................ 0.27
Increase per share attributable to the offering ............. 1.65
----
Net tangible book value per share after this offering.......... 1.92
------
Dilution per share to new investors............................ $ 9.08
======
</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.. 19,600,595 83.1 $ 8,470,00 16.1 $ 0.43
New Investors.......... 4,000,000 16.9 44,000,000 83.9 11.00
---------- ----- ----------- -----
Total................ 23,600,594 100.0% $52,470,000 100.0%
========== =========== =====
</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. We design, develop, market
and sell high-performance, solid state appliances that provide 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 September 30, 1999, we have sold more than 18,000
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 October 1997, we introduced our first Internet security
appliance, the SonicWALL DMZ, and began volume shipments in 1998. In 1998 we
began offering content filtering subscriptions to our SonicWALL customers.
Customers can purchase subscriptions for one to four years, and they receive
weekly updated lists of objectionable web site addresses to which they can
block access. We now focus all our development, marketing and sales efforts on
the Internet security appliance market. While we continue to ship our Ethernet
products, management has made a decision to focus on Internet security
products, and 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 products are sold primarily through distributors who then
resell our products to resellers 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. Product sales comprise over 90% of total revenues. We generally
recognize revenue when we ship products to our customers. Agreements with our
large distributors 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 distributors. 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 distributors 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
22
<PAGE>
significant customers experiences 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.
We primarily use one contract manufacturer 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
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 orginal equipment manufacturers 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 37.5%
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. In
determing this effective rate, we concluded that it was more likely than not
that we would realize the full value of this deferred tax asset based upon our
estimate of profitability and our assessment of tax refunds available from net
loss carrybacks in the event future profitability was less than our estimates.
We 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, SonicWALL, Inc. completed a private placement of
approximately $5.0 million of redeemable Series A convertible preferred stock.
SonicWALL, Inc. 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 with Comerica Bank of California 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%, which equaled 9.5% at June 30, 1999 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
Year 2000 Program
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 addressed and are continuing to address the Year 2000 problem
through the following means:
. Awareness--making our customers, suppliers and employees aware of the
problem.
. Identification--identifying date sensitive information technology
systems and non-information technology systems.
. Development--assessment of date sensitivity and modification or
replacement of date sensitive products.
. Testing--verification of our development efforts.
. Contingency planning--evaluating the needs for contingency plans to
address potential worst-case scenarios
Our state of readiness and business risks
We have completed an assessment of both our information technology systems
and our non-information technology systems. Based upon our examination, we
believe that our non-information technology systems do not contain any
elements that are susceptible to Year 2000 problems. However, we will modify
or replace
28
<PAGE>
some portions of our internal information technology systems as Year 2000
compliant versions of these systems are released by outside vendors (e.g.
Microsoft releases of Windows NT). If, in the worst case scenario, such
replacement is not made, or is not completed on a timely basis, our operations
could be materially affected.
As part of our Year 2000 program, we have tested and continue to test all of
the products we currently market. While we do not know of any Year 2000
compliance problems with any of our products, there can be no assurances that
products we developed will not contain undetected errors or defects associated
with Year 2000 date functions. If, in the worse case scenario, our products are
affected by date-related issues, our customers may file claims against us or
require us to repair any damage to their systems caused by our products. In
addition, our revenues may be adversely affected, our maintenance, technical
support and management costs could increase and our reputation could be
damaged.
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 materially 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.
Our operations also rely on third party suppliers for Internet, cellular
telephone, telecommunications, utilities and building services. We have begun
the process of contacting our critical suppliers about the nature and progress
of their Year 2000 compliance to determine the extent to which their failure to
remedy their own Year 2000 problems could materially affect us. To date we have
not received written compliance statements from any of these entities. We
expect it will be difficult to obtain assurances of Year 2000 compliance from
telecommunications infrastructure and utility suppliers which generally do not
provide such assurances. We intend to consider use of alternative
telecommunications and utility suppliers if reasonable assurances are not
provided. In a worst case scenario, any Year 2000-related failure of any of our
critical suppliers could cause a significant disruption of our business.
We currently do not have any information concerning the Year 2000 compliance
status of our customers. We are in the process of requesting written compliance
statements from our two largest distributors, Ingram Micro and Tech Data. In a
worst case scenario, if any of our key customers encounter significant Year
2000 problems that cause them to delay or cancel substantial purchase orders or
product deliveries, our business, results of operations and financial condition
could be materially adversely affected.
We have obtained a Year 2000 compliance letter from our contract
manufacturer, Flash Electronics, which indicates that it is in the process of
evaluating its Year 2000 readiness. It further states that Flash Electronics
believes it will have addressed any Year 2000 problems prior to December 31,
1999. However, in a worst case scenario, Flash Electronics may experience
material unanticipated problems and costs caused by undetected errors or
defects in the technology used in its internal information technology and non-
information technology systems. These unanticipated problems and costs could
have a material adverse effect on its business, results of operations and could
adversely affect either firm's operations, which in turn could materially
adversely affect our business, results of operations and financial condition.
Status and Costs
We have completed 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
29
<PAGE>
manner. In a worst case scenario, 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.
Contingency Plan
We curently do not have a Year 2000 contingency plan with respect to Year
2000 worst case scenario. However, we have recently begun planning preparations
to handle the most reasonably likely worst case scenarios described above. We
intend to complete the contingency plans for these scenarios during the fourth
quarter of 1999.
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.
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BUSINESS
Overview
SonicWALL, Inc. is a leading provider of Internet infrastructure products
designed to provide secure Internet access to our broadband customers in the
small to medium enterprise, branch office, telecommuter and education markets.
We design, develop, market and sell high-performance, solid state appliances
that provide 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 September 30, 1999, we
have sold more than 18,000 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
virtual private network functionality so users can enjoy affordable, secure
Internet communications. SonicWALL products deliver 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 for
Internet security. 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 International
Data Corporation, or IDC, a market research organization, 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 virtual private networks offers
significant cost savings over alternative solutions such as private leased line
or frame relay networks. TeleChoice, a market researcher, estimates that
virtual private networks can cut telecommunication costs by as much as 90% over
private leased line networks, and for this reason, their use is expected to
grow rapidly. Infonetics Research projects worldwide expenditures on virtual
private networks 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.
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Increasing Demand for Broadband Access Technologies
Many small to medium enterprises 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
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 small to medium enterprises 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, small to medium enterprises,
branch offices, and telecommuters are increasingly deploying these technologies
as their Internet access solution. The 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.
Because broadband technologies, including DSL and cable, are always connected
to the Internet, they present greater security issues than dial up connections
and increase the risk that proprietary data or other sensitive information
might be compromised. These types of Internet connections present ongoing
security issues for small to medium enterprises, 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 products 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
suppliers of low cost Internet routers which may provide limited Internet
security functionality, we believe these products are difficult to install and
configure and provide relatively low performance.
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The SonicWALL Solution
SonicWALL, Inc. is a leading provider of Internet security products designed
for broadband access customers in the small to medium enterprise, branch
office, telecommuter and education markets. Our high performance, solid state
appliances provide 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
September 30, 1999, we have sold more than 18,000 of our Internet security
appliances worldwide. The SonicWALL product line 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 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 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
products are 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. SonicWALL products are 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 small to
medium enterprise 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.
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<PAGE>
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 products designed for our target 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 the current
Internet security offerings of 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 resellers and our end users, and public
relations. Our reputation as a reliable, high performance, easy-to-
use and affordable Internet security vendor 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 value added resellers, 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 Original Equipment Manufacturer Relationships. By
entering into original equipment manufacturer arrangements to sell
our products, we intend to build upon the brand awareness and
worldwide channels of major networking and telecommunications
equipment suppliers to further penetrate our target markets. We
presently have original equipment manufacturer agreements with the
following three companies: Ramp Networks, a manufacturer of shared
Internet access devices for small offices, Com21, a supplier of
cable modems, and 3COM Corporation, a provider of diversified
networking products. We are pursuing relationships with other
broadband access equipment providers with the intent of further
penetrating our target markets.
. Building Upon 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 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 of
registered users. Our AutoUpdate feature encourages our customers to
register their product by offering periodic notifications via email
of new security threats, bug fixes and marketing information on new
features and products. 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 virtual private networking 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
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<PAGE>
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.
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 virtual private networking 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 virtual
private networking 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 secure use of public Web and e-
commerce servers without exposing the private network to Internet based
attacks. Public servers on the DMZ port are also 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 virtual private networking and future expansion options. SonicWALL
PRO supports unlimited users.
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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, virtual private networking, number of user
upgrades, and extended warranties and premium support contracts.
<TABLE>
<CAPTION>
Upgrade or Subscription Description List Price
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Virtual Private Networking Activates optional virtual private
Upgrade networking feature for SonicWALL and
SonicWALL DMZ models $495 - $695
- ----------------------------------------------------------------------------------------
Number of Users 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 virtual private networking capabilities
enable affordable and secure communications over the Internet between branch
offices, telecommuters, mobile workers and business partners. SonicWALL virtual
private networking uses industry-standard data encryption algorithms and
interoperates with other virtual private networking 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 virtual private networking connectivity to allow secure communications with
headquarters. A SonicWALL at each branch office provides Pixar with firewall
security. With the SonicWALL virtual private networking 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 virtual private
networking 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 virtual private networking upgrade at home to create a
virtual private networking 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 small
to medium enterprise, 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 reseller channel 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 where it is not economically efficient for us to sell directly to the
end users of our products. We primarily market and sell our products in this
indirect channel through a two-tiered distribution structure consisting of
distributors and resellers, both in the United States and over 30 countries.
Resellers generally purchase our products from our distributors and they
include systems integrators, ISPs, dealers, mail order catalogs, and on-line
catalogs. This network of over 800 resellers then sells our products to end-
users in our target markets. Our distribution and reseller agreements are non-
exclusive. We also sell directly to select customers 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 primary responsibilities are
identifying, promoting, and managing strategic relationships to sell our
products with ISPs, industry leaders, and original equipment manufacturers as
well as to obtain technology for incorporation in our product line.
Domestic Channel. In the United States, our master distributors, those we
have selected to be the primary distributors of our products to resellers, 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 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
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<PAGE>
source our products through a master distributor. We also have a Sonic Platinum
Partner program for selected key strategic resellers 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.
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.
Original Equipment Manufacturer Channel. We enter into select original
equipment manufacturer relationships in order to take advantage of the channels
of well established companies that sell into our target markets. We believe
these channels expand our overall market while having a minor impact on our own
indirect channel sales. We currently have agreements to sell our products or
services through the following original equipment manufacturers: Com21, a
leading provider of cable modems, Ramp Networks, a leading provider of
networking equipment to small businesses, and 3COM Corporation.
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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Customers
As of September 30, 1999, we have sold over 18,000 Internet security
appliances to our global reseller channel, which resells our products to a wide
variety of end users. The following lists our largest distributors and
resellers and select end users in different industries and markets that have
purchased one or more of our products in the last nine months:
<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 .CompUSA
. General Magic .GE Network Services
. Johns Hopkins University .Hong Kong Telecom
. Los Angeles Lakers .Inacom
. Lucent Technologies .NEC
. Pixar .Nippon Telephone & Telegraph (Japan)
. PricewaterhouseCoopers LLP .PSINet
. Santa Clara County California Library . Solunet
. Sun Microsystems .SwissCom (Switzerland)
. Wells Fargo .Telia
.Verio
</TABLE>
Technology
We have designed our SonicWALL products 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
41
<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 virtual private networking
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 virtual private networking 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 virtual private networking technology on
industry standards--IPSec, DES and Triple-DES--we have been able to
establish virtual private networking interoperability with other
leading virtual private networking 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 virtual private networking
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. In 1996, 1997, and 1998, we
spent $1,048,000, $1,983,000, and $1,739,000 respectively on research and
development.
42
<PAGE>
Competition
The market for Internet security products is world-wide and 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 the
following, all of whom sell world-wide or have a presence in most of the major
markets for such products:
. 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;
. security appliance suppliers such as Watchguard Technologies; and
. low cost Internet router suppliers which may include limited
Internet security functionality.
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.
43
<PAGE>
Manufacturing
We currently outsource our manufacturing to one contract manufacturer, Flash
Electronics which agreement may be cancelled upon 180 days prior notice by
either party. The manufacturing processes and procedures for this manufacturer
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. On
September 28, 1999, we entered a five year lease starting October 1, 1999 for
approximately 32,256 square feet for facilities located in Sunnyvale,
California, less than ten miles from our current Santa Clara facility. We
intend to move to the new facility within sixty days subject to the
installation of miscellaneous improvements.
Legal Proceedings
We currently are not a party to any material legal proceeding.
44
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The following table lists the executive officers, directors and key
employees of SonicWALL as of September 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, Secretary
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 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. All are subject to termination at will.
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, and became Secretary in September, 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.
45
<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 November 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. From
July 1994 to August 1996, Dr. Pearce was Senior Manager, Technology Alliances
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 a director since October 1993. From
October 1993 through September 1999, Mr. Petruzzelli also was our Secretary.
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. Bay Partners, certain
shareholders of SonicWALL, Inc., and SonicWALL, Inc. are parties to a voting
agreement whereby Bay Partners is entitled to name a member of SonicWALL,
Inc.'s Board of Directors. The voting agreement terminates upon the effective
date of this offering. 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.
46
<PAGE>
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;
. 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.
47
<PAGE>
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 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
48
<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.......... 0 N/A N/A N/A N/A N/A
Sudhakar Ravi........... 0 N/A N/A N/A N/A N/A
Steven R. Perricone..... 600,000 59% $0.125 7/23/08 $ $
Michael J. Sheridan..... 0 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 N/A N/A
Sudhakar Ravi........... 1,067,440 0 0
Steven R. Perricone..... 0 111,600 488,400
Michael J. Sheridan..... 0 0 0 0 0
</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;
49
<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;
50
<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 SonicWALL, Inc. 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
51
<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.
52
<PAGE>
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) In August 1998, SonicWALL, Inc. acquired all the partnership interest of
AckFin Networks ("AckFin"), a California general partnership, in exchange
for an aggregate of 5,426,186 shares of common stock and the assumption of
$150,000 in liabilities. The controlling partners of AckFin were the same
individuals as the majority shareholders of SonicWALL, Inc. This
transaction occurred between entities under common control and the assets
and liabilities transferred have been accounted for at historical cost in a
manner similar to that in a pooling-of-interests accounting. The results of
AckFin have been included in SonicWALL, Inc.'s financial statements since
its inception in April 1997. Expenses totalling $150,000 and $775,000 for
the years ended December 31, 1997 and 1998, respectively were included in
SonicWALL, Inc.'s statements of operations. Assets at both December 31,
1997 and August 10, 1998 were less than $50,000. 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
SonicWALL, Inc. 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 SonicWALL, Inc.. As of June 30, 1999, aggregate principal
and interest of approximately $302,000 was outstanding.
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<PAGE>
(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 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.
(7) Jerrold Petruzzelli, a director of SonicWALL, Inc. is a partner of Manett,
Phelps & Phillips, LLP, legal counsel to SonicWALL, Inc.
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."
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<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.
55
<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>
Sreekanth Ravi 5,193,286 300,000 4,893,286 %
Sudhakar Ravi 5,193,286 300,000 4,893,286 %
</TABLE>
56
<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 23,600,594 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.
58
<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
Our common stock symbol on the Nasdaq National Market is SNWL.
59
<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, 23,600,594 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 4,000,000 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 4,000,000 shares sold
in this offering will be freely tradable without restriction under the Act. The
remaining 19,600,594 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 15,278,940
shares of common stock, and shareholders of SonicWALL, Inc. holding an
aggregate of 4,313,655 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
60
<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).
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement between us
and the underwriters named below, who are represented by Bear, Stearns & Co.
Inc., Hambrecht & Quist LLC and Thomas Weisel Partners LLC, the underwriters
have severally agreed to purchase from us the following respective number of
shares of common stock less the underwriting discounts and commissions set
forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number
of
Underwriter Shares
----------- ------
<S> <C>
Bear, Stearns & Co. Inc. .............................................
Hambrecht & Quist LLC.................................................
Thomas Weisel Partners LLC............................................
Total...............................................................
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock, other than shares of common stock
covered by the over-allotment option described below, if they purchase any of
the shares. Those obligations are subject, however, to various conditions,
including the approval of legal matters by their counsel.
We and the selling shareholders have agreed to indemnify the underwriters
against various 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.
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 selected dealers at such price less a concession not to
exceed $ per share. The underwriters may allow, and such selected dealers
may reallow, a concession not to exceed $ per share and that after the
commencement of this offering, the public offering price and the concessions
may be changed.
The selling shareholders have granted to the underwriters an option to
purchase in the aggregate up to 600,000 additional shares to be sold in this
offering at the public offering price less the underwriting discount set forth
on the cover page of this prospectus. The underwriters may exercise this option
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 several conditions, including the approval of legal matters by their
counsel, to purchase the additional shares of common stock in proportion to
their respective purchase commitments as indicated in the preceding table.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. We anticipate that the total underwriting fee will be approximately
seven percent of the aggregate initial offering price. The following table
shows the underwriters fees and expenses 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>
Per Share Total
------------------- -------------------
Without With Without With
Over- Over- Over- Over-
Allotment Allotment Allotment Allotment
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting Discounts and Commissions
payable by us........................ $ $ $ $
Expenses payable by us................ $ $ $ $
Underwriting Discounts and Commissions
paid by the selling shareholders..... $ $ $ $
Expenses payable by the selling
shareholders......................... $ $ $ $
</TABLE>
62
<PAGE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1,000,000. 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.
At our request, the underwriters have reserved for sale at the initial
public offering price up to 5% of the number of shares of common stock to be
sold in this offering to sale to persons designated by us. 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 19,592,594 shares of common stock, have
agreed that, subject to limited exceptions, without the prior written consent
of Bear, Stearns & Co. Inc., we 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 us and the representatives of the underwriters. The
primary factors considered in determining the public offering price will be:
. 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 ours.
In order to facilitate this offering, the underwriters 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 us. 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 them. 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 of the common stock. 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.
63
<PAGE>
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 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.
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.
64
<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.
In August 1998, the Company acquired all the partnership interest of AckFin
Networks ("AckFin"), a California general partnership, in exchange for an
aggregate of 5,426,186 shares of common stock and the assumption of $150,000 in
liabilities. The controlling partners of AckFin were the same individuals as
the majority shareholders of the Company. This transaction occurred between
entities under common control and the assets and liabilities transferred have
been accounted for at historical cost in a manner similar to that in a pooling-
of-interests accounting. The results of AckFin have been included in the
accompanying financial statements since its inception in April 1997. Expenses
totalling $150,000 and $775,000 for the years ended December 31, 1997 and 1998,
respectively were included in the accompanying statements of operations. Assets
at both December 31, 1997 and August 10, 1998 were less than $50,000.
The following is a summary of the Company's significant accounting policies:
Consolidation
The consolidated financial statements include those of the Company and its
wholly-owned subsidiary Sonic Systems International, Inc., a Delaware
corporation. Sonic Systems International, Inc. is intended to be a sales office
but to date has not had any significant transactions. 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.
F-7
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
F-8
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
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.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
totalled $660,000, $774,000, $515,000 and $218,000 for the years ended December
31, 1996, 1997 and 1998 and the six months ended June 30, 1999, respectively.
F-9
<PAGE>
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-10
<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-11
<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. Each share of redeemable Series A convertible preferred stock is
convertible into two shares of common stock. 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 for $1.00 per share. 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-12
<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 stock options granted in 1998 and
1999 was in excess of the exercise price of the options. The deemed fair value
for options granted in the six months ended June 30, 1999 was $3,900,000 which
exceeded the aggregate exercise price of these options by $2,771,000. This
difference is considered deferred stock compensation and is amortized over the
vesting periods of the applicable options and the repurchase periods for the
restricted stock.
Based upon the above assumptions, the weighted average fair value per share
of options granted in 1998 and 1999 were $0.03 and $2.61, respectively.
F-13
<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 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.
F-14
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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
December 31,
----------------- Six Months Ended
1996 1997 1998 June 30, 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>
The following is a reconciliation of pre-tax income (loss) per the financial
statements to taxable income (loss) (in thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------
1996 1997 1998
------ ------ --------
<S> <C> <C> <C> <C>
Pre-tax income (loss) per books .............. $ 318 $ (566) $ (1,180)
Differences between book and tax:
Distributor revenue deferral (net).......... 557 166 13
Changes in non-deductible reserves and
accruals .................................. 154 (181) 672
Non-deductible deferred stock compensation.. -- -- 42
Other....................................... -- 59 (6)
------ ------ --------
Taxable income (loss)......................... $1,029 $ (522) $ (459)
====== ====== ========
</TABLE>
F-15
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax provision for the six months end June 30, 1999 was calculated based
upon the Company's estimate of pre-tax income for the calendar year ending
December 31, 1999 prior to the consideration of deferred stock compensation,
which is a permanent book/tax difference. Based upon the Company's expected
level of pre-tax income it determined the estimated effective rate for the
calendar year ending December 31, 1999 to be 37.5%.
The following is the calculation of the provision for income taxes for the
six months ended June 30, 1999:
<TABLE>
<S> <C>
Pre-tax income per books............................................. $ 531
Non-deductible deferred stock compensation........................... 783
------
Adjusted income before taxes......................................... $1,314
Estimated effective tax rate......................................... 37.5%
------
Provision for income taxes........................................... $ 493
======
</TABLE>
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.
F-16
<PAGE>
SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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-17
<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................................................................. 31
Management............................................................... 45
Certain Transactions..................................................... 53
Principal and Selling Shareholders....................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 62
Legal Matters............................................................ 64
Experts.................................................................. 64
Where You Can Find More Information...................................... 64
Index to 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,000,000 Shares
[LOGO OF SONICWALL, INC.]
Common Stock
----------------
PROSPECTUS
----------------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Thomas Weisel Partners LLC
October , 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............ $ 15,346
NASD filing fee................................................ 5,100
Nasdaq National Market listing fee............................. 90,000
Blue Sky fees and expenses..................................... 15,000
Printing and engraving expenses................................ 220,000
Legal fees and expenses ....................................... 280,000
Accounting fees and expenses................................... 250,000
Transfer Agent and Registrar fees.............................. 50,000
Miscellaneous expenses......................................... 74,554
----------
Total........................................................ $1,000,000
==========
</TABLE>
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
Jerrold F. Petruzzelli, a director of SonicWALL, Inc., Pratibha and Mahi
DeSilva and Ankineedu and Suseela Ravi, relatives of Sreekanth and Sudhakar
Ravi.
(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 Bay Partners SBIC II, L.P.
and five individuals affiliated with Bay Partners SBIC II, L.P.
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.12++ OEM Purchase and Development Agreement between 3COM Corporation and
Registrant effective July 1, 1999.
10.13 Purchase Agreement dated September 28, 1999 between Registrant and
Flash Electronics, Inc.
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>
- ----------
*Previously filed.
+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 1st day of October, 1999.
SonicWALL, Inc.
/s/ Sreekanth Ravi
By:__________________________________
Sreekanth Ravi,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to 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 October 1, 1999
____________________________________ Officer and Director
Sreekanth Ravi (Principal Executive
Officer)
/s/ Sudhakar Ravi Vice President, Engineering October 1, 1999
____________________________________ and Director
Sudhakar Ravi
/s/ Robert M. Williams Director October 1, 1999
____________________________________
Robert M. Williams
/s/ David Shrigley Director October 1, 1999
____________________________________
David Shrigley
/s/ Jerrold F. Petruzzelli Director October 1, 1999
____________________________________
Jerrold F. Petruzzelli
/s/ Michael J. Sheridan Vice President, Finance and October 1, 1999
____________________________________ Chief Financial Officer and
Michael J. Sheridan Secretary (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.
10.12++ OEM Purchase and Development Agreement between 3COM Corporation and
Registrant effective July 1, 1999.
10.13 Purchase Agreement dated September 28, 1999 between Registrant and
Flash Electronics, Inc.
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>
- ----------
* Previously filed,
+ 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 10.12
CONFIDENTIAL TREATMENT REQUESTED
[*] Denotes information for which confidential treatment has been
requested. Confidential portion omitted have been filed separately with the
Commission.
OEM PURCHASE AND DEVELOPMENT AGREEMENT
--------------------------------------
BETWEEN 3Com CORPORATION
------------------------
and
---
SONIC SYSTEMS, INC.
-------------------
<TABLE>
<CAPTION>
Contents
<S> <C>
RECITALS........................................................................................2
TERMS AND CONDITIONS............................................................................3
1 Definitions..........................................................................3
2 Development of the Products..........................................................3
3 Purchase of Product; Software License; Support Services..............................4
4 Order Forecast.......................................................................5
5 Purchase Orders......................................................................5
6 Pricing; Taxes.......................................................................7
7 Delivery Terms.......................................................................7
8 Invoicing and Payment................................................................8
9 Quality Acceptance...................................................................8
10 Compliance with Specifications....................................................9
11 Regulatory Agency Compliance......................................................9
12 Compliance with Environmental Laws................................................9
13 Product Changes...................................................................9
14 Export Law Compliance; Commodity Classification..................................10
15 Warranty.........................................................................11
16 Indemnification; Insurance.......................................................12
17 Limitation of Liability..........................................................13
18 Confidentiality..................................................................13
19 Publicity........................................................................14
20 Federal Acquisition Regulations..................................................14
21 Term and Termination.............................................................14
22 Manufacturing Rights; Escrow.....................................................15
23 General..........................................................................16
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Exhibit A......................................................................................19
(1) Product list-prices; lead time; royalty and repair charges.......................19
(2) Non-Binding Forecast.............................................................19
(3) Unique Materials Leadtime (see Section 5.4.2)....................................20
(4) Sonic's Replenishment Cycle Time (see Section 5.4.2).............................20
Exhibit B PRODUCT SPECIFICATIONS..............................................................21
- ---------
Exhibit C Reserved............................................................................21
Exhibit D SUPPORT SERVICES....................................................................22
Exhibit E Reserved............................................................................28
Exhibit F PRODUCT ACCEPTANCE CRITERIA.........................................................28
Exhibit G THREE-PARTY ESCROW AGREEMENT........................................................31
Exhibit H Development of the Product..........................................................41
</TABLE>
This OEM Purchase and Development Agreement ("Agreement") is entered
into effective as of July 1 1999 ("Effective Date") between 3Com Europe Ltd.
("3Com"), a UK company located at Boundary Way, Hemel Hempstead, Herts. HP2 7YU
UK and Sonic Systems, Inc. ("Sonic"), a California corporation located at 5400
Betsy Ross Drive, Santa Clara, CA 95054.
RECITALS
WHEREAS, Sonic manufactures and sells or licenses certain hardware and
software products;
WHEREAS, 3Com is manufacturer of computer hardware and software
products;
WHEREAS, 3Com now desires to have the option to purchase, and Sonic
desires to grant 3Com the option to purchase, the Products, as defined below,
from Sonic on the terms and subject to the conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained
herein the parties agree as follows:
<PAGE>
TERMS AND CONDITIONS
1. Definitions
1.1 "Non-Binding Forecasts" means the minimum shipment numbers listed in
Exhibit A(2) and used in conjunction with procedures outlined in Sections 2.4
and 6.2.
1.2 "Products" means the products set forth in Exhibit A(1) attached
------------
hereto. Products shall include any updates to or enhancements of the Product as
well as any product introduced by Sonic during the term of this Agreement which
is a new version of or functional replacement for (regardless of price or
performance) any Product.
1.3 "Specifications" means specifications for the Products as set forth in
Exhibit B.
- ---------
1.4 "3Com" means 3Com Corporation and all its present and future
subsidiaries and affiliated companies.
1.5 "Unique Component" means a component which is sold by Sonic
exclusively to Buyer on behalf of 3Com or is only included in a Product which is
exclusively sold to Buyer on behalf of 3Com. A Unique Component is one which
Sonic has purchased exclusively for resale to Buyer on behalf of 3Com (whether
individually or as part of a Product) and is not purchased by any of Sonic's
other customers.
1.6 "Software Programs" means firmware embedded in the Products.
1.7 "Work In Progress" means. Product which has started manufacture at
Sonic or Sonic's subcontractor(s) but is not yet shipped to 3Com or held in
Safety Stock.
1.8 "Replenishment Cycle Time" means the time from arrival of all
materials at Sonic or Sonic's manufacturer, to completion of fully packaged
product on Sonic's shipping dock ready for shipment to 3Com.
1.9 "3Com Unique Material" means the components listed in 3Com document no
1007-053 which are not used on the Sonic SonicWALL product and are used to build
the Product to 3Com specifications.
2. Development of the Products
2.1 Develop Products to Specifications. The Products shall be designed and
developed by Sonic in accordance with the agreed upon Specifications listed in
and attached hereto as Exhibit B.
2.2 Ownership of Works Developed for 3Com. The parties agree that subject
to the payment mentioned in Section 2.1.3, 3Com solely will own the works listed
in and attached hereto Exhibit H (the "Works Developed for 3Com"). The parties
agree that 3Com solely shall own all intellectual property rights (including,
without limitation, patent, design, and copyright rights) in and to the Works
Developed for 3Com. In this regard, Sonic agrees to assign and does hereby
expressly assign to 3Com all right, title and interest world-wide in and to the
Works Developed for 3Com, including all copyright, patent, trade secret, mask
work and all other intellectual property rights associated therewith. During
this Agreement Sonic will assist 3Com in every reasonable way, at 3Com's
expense, to secure, perfect, register, maintain, and defend for 3Com's benefit
all copyrights, patent rights, mask work rights, trade secret rights, and other
proprietary rights in and to the Works Developed for 3Com. Sonic hereby
irrevocably agrees not to assert against 3Com or its direct or indirect
customers, assignees or sublicensees, any claim of intellectual property rights
of Sonic affecting the Works Developed for 3Com. Sonic, to the best of its
knowledge, represents and warrants that the Works Developed for 3Com do not
infringe any intellectual property rights (including, without limitation, any
patent, copyright and trade secret rights) of any third party. 3Com represents
and warrants that to the best of the knowledge of the 3Com Legal Department, the
mechanical specifications which 3Com will provide to Sonic under the terms of
this Agreement do not infringe the patent, copyright or trade secret rights of
any third party.
<PAGE>
2.3 Title: No Conflict. Sonic and 3Com represent and warrant that each has
sufficient right, title and interest to enter into this Agreement and to perform
its obligations hereunder. Further, Sonic represents and warrants that it has
not granted to any third party any rights which conflict or interfere with or
supersede the rights granted to 3Com hereunder.
2.4 Consideration. As full consideration for the development of the Works
Developed for 3Com and the rights transferred and licensed hereunder, 3Com will
pay to Sonic the fees listed in Exhibit H. Sonic shall invoice 3Com for amounts
due under Exhibit H, and 3Com shall pay any such invoice within thirty (30) days
after receipt of a correct invoice and after 3Com's acceptance of the
Deliverable(s) covered by the invoice. All payments hereunder shall be in US
Dollars. In return for said consideration, Sonic further agrees to refrain from
entering into an OEM agreement prior to 30 April 2000 relating to any product
similar in construction and operation to the Product(s) covered by this
Agreement (i.e., having the same CPU architecture as the current SonicWALL or
SonicWALL Plus DMZ products or derivatives of these products, including products
which may include a network hub) with the following companies or subsidiaries
thereof: (i) Cisco Systems Inc; (ii) Intel Corporation; (iii) Nortel Networks
Corporation; provided further, that Sonic sha!I be relieved of this obligation
in the event 3Com fails to purchase the quantity of Products on a monthly basis
through the month in which a claim is made under this Section 2.4 found in the
Non-Binding Forecast in Exhibit A(2) to this Agreement_ In the event that
delivery of the OfficeConnect Internet Firewall 25 (3C 16770) is delayed by more
than one month from the agreed date (01 November 1999) then the Non-Binding
Forecast numbers will also be reduced to the previous month's number (Sonic will
only be relieved of this obligation if December quantities are less than the
November Non-Binding Forecast number, and so on). In no event will this
obligation be extended beyond 30 April 2000.
3. Purchase of Products; Software License; Support Services
3.1 Purchase of Products. Sonic agrees to sell the Products to 3Com and to
accept purchase orders for the Products from 3Com under the terms and conditions
of this Agreement. It is expressly understood that notwithstanding the
provisions of Section 2.4 above, 3Com has no obligation to purchase any Products
hereunder. Further, nothing in this Agreement shall prevent 3Com from
manufacturing or procuring from other sources like or comparable products.
3.2 Software License. Sonic hereby grants 3Com, a worldwide, perpetual,
fully-paid and royalty-free license to use, reproduce, support, demonstrate and
distribute directly and indirectly all software, including all subsequent
updates or enhancements thereto or replacements therefor delivered as part of or
together with the Products or otherwise provided under this Agreement, with full
rights to sublicense and have sublicensed such software and the rights granted
to 3Com hereunder to third parties, including, but not limited to, 3Com's end-
user customers, distributors, OEM's, resellers and systems integrator customers
in connection with the purchase of the Products. In the event that Section 22,
Manufacturing Rights; Escrow, is invoked, Royalties will be paid per Exhibit A
3.3 Documentation License. Sonic hereby grants 3Com, a worldwide,
perpetual, fully-paid and royalty-free license to use, reproduce, modify, create
derivative works based on, support, demonstrate and distribute directly and
indirectly all documentation, including all subsequent updates or enhancements
thereto or replacements therefor delivered as part of or together with the
Products or otherwise provided under this Agreement, with full rights to
sublicense and have sublicensed such documentation and the rights granted to
3Com hereunder to third parties, including, but not limited to, 3Com's end-user
customers, distributors, OEM's, resellers and systems integrator customers in
connection with the purchase of the Products. In the event that Section 22,
Manufacturing Rights; Escrow, is invoked, Royalties will be paid per Exhibit A
3.4 Support Services. Training and support services for the Products shall
be provided as set forth in Exhibit D.
3.5 Trademark Rights. 3Com requests and Sonic agrees to provide certain
markings and identification, which includes the trademark(s) and/or tradename of
3Com, on the Products ordered and
<PAGE>
delivered to 3Com. Such markings and identification shall be strictly in
accordance with the requirements of 3Com as set 3Com's Trademark Guidelines, as
provided to Sonic and as may be updated from time to time by 3Com. Sonic is not
authorized to use the trademark(s) and tradenames of 3Com on any products, other
than Products ordered by and delivered to 3Com, or for any other purpose. Sonic
is hereby granted a limited trademark license with respect to the 3Com
trademarks set out in the above-mentioned markings and identification, solely
for the above-mentioned use. All other use is prohibited. This license shall
terminate on the termination of this Agreement. Sonic shall obtain no rights to
or interest of any kind in any 3Com trademarks or tradenames other than the
limited right to use set out above.
4. Order Forecast
3Com shall provide Sonic with a nine (9) month forward-looking rolling
forecast (the "Order Forecast") and update such Order Forecast on a monthly
basis. Sonic shall use such Order Forecast for internal inaterial planning
requirements only. Such Order Forecast does not represent any commitment by 3Com
to purchase Products. Further, Sonic shall view all Order Forecasts as
Confidential Information in accordance with Section 18 below.
5. Purchase Orders
5.1 Leadtime. Sonic agrees to supply Products to 3Com within the leadtime
stated in Exhibit A(1). Sonic will notify 3Com immediately upon any changes in
leadtime.
5.2 Purchase Orders. Purchases shall be initiated by 3Com's written or
electronically dispatched purchase orders referencing the quantity, the Product,
applicable price, shipping instructions and requested in-house delivery dates.
All purchase orders for Products placed by 3Com hereunder shall be governed by
the terms and conditions of this Agreement. In the event of a conflict between
the provisions of this Agreement and the terms and conditions of 3Com's purchase
order or Sonic's acknowledgment or other written communications, the provisions
of this Agreement shall prevail
5.3 Issuance and Acceptance. Sonic shall notify 3Com of receipt of a
purchase order by e-mail or facsimile within one (1) business day of receipt.
Sonic shall confirm acceptance or denial (stating the reason (s) for a denial)
of a purchase order by a writing or facsimile within one (1) business day after
receipt, or the purchase order is deemed accepted.
5.4 Change Orders. 3Com shall transmit change orders to a purchase order
by e-mail or facsimile. Sonic shall notify 3Com of receipt of a change order by
e-mail or facsimile within one (1) business day of receipt. Sonic shall confirm
acceptance or denial (stating reason(s) for a denial) within two (2) business
days of receipt, or the change order is deemed accepted.
5.4.1 Cancellation. 3Com may cancel any purchase order up to thirty
(30) days prior to original ship date upon written notice to Sonic with
liability for such cancellation limited to the value of Work in Progress and
Unique Components only. Rescheduled orders may not be cancelled.
5.4.2 In the event 3Com: (i) terminates this Agreement; or (ii)
notifies Sonic in writing that 3Com will not any longer purchase a particular
Product ("Terminated Product"), then 3Com shall be liable to Sonic up to a
maximum amount equal to the cost of any applicable Unique Components, whether in
the form of raw materials or Work In Progress, in Sonic's inventory or on order
as of the effective date of such termination or notification, less any such
Unique Components and Work In Progress in Sonic's inventory or on order which
are in excess of the Order Forecast based on Sonic's Replenishment Cycle Time
and the Unique ComponenVs Lead Time, set forth in Exhibit A(3).
5.4.3 Sonic agrees to minimize 3Com's liability hereunder by utilizing the
Order Forecast to proactively adjust Sonic's inventory and production schedules
and to reschedule and/or cancel future
<PAGE>
deliveries of Unique Components on a weekly basis. Prior to 3Com's payment of
any sums hereunder, Sonic will use its best efforts to cancel any outstanding
orders for Unique Components and return any Unique Components to Sonic's
suppliers or sell or otherwise dispose of any Unique Components and otherwise to
mitigate its costs and losses, for which Korn may be liable. To the extent Sonic
is unsuccessful, Sonic shall work with 3Com to negotiate termination liability
damages based upon Sonic's good faith adherence to this Section 9.4 and Sonic's
purchase, disposal and handling of Unique Components. In no event will 3Com be
liable for any purchases of Unique Components by Sonic in excess of applicable
Order Forecast based on Sonic's Replenishment Cycle Time and Unique Component
Lead Time
5.4.4 Rescheduling. 3Com shall be entitled to reschedule delivery of
Products at any time up to a maximum of sixty (60) days from original delivery
date. Sonic shall accommodate a request to expedite the ship date, if reasonably
able to do so. Subject to Section 7.6, Sonic may ship before the scheduled
shipment date, but not to arrive earlier than 3Com's requested delivery date.
6. Pricing; Taxes
6.1 Prices. The prices charged by Sonic for the Products shall be those
set forth as Exhibit A(1), less the applicable discount, if any, stated in said
exhibit. All prices are F.O.B. origin (Sonic's shipping dock). Prices are
exclusive of costs of transportation, insurance, taxes, customs, duties,
landing, storage and handling fees, and/or documents or certificates required
for exportation or importation.
6.2 Quarterly Market Price Reviews. Sonic and 3Com agree to meet each 3Com
fiscal quarter (3Com's fiscal year is June through May) and review prices of
each Product. Prices may be adjusted up or down to reflect: (i) substantial
increase or decrease in volume from the Order Forecast at the previous Quarterly
Market Price Review (or at the first review, the Order Forecast issued with
first production orders); (ii) change in market conditions of either components
or end user sales price of Products;(iii) pass through of cost increases or
reductions from Sonic to 3Com; and (iv) a decrease in the U.S. price of
SonicWALL Plus DMZ equal to or greater than fifteen percent ( 15%) which will
necessitate good faith negotiations between the Parties regarding the pricing of
the "three-port" Product which is the subject of this Agreement, so as to help
enable 3Com to market a competitively priced product. Price Changes resulting
from these reviews will take effect for all deliveries after the start of 3Com's
next fiscal quarter (1 June, 1 September, 1 December, 1 February of each year)
6.3 Reserved
6.4 Reserved.
6.5 Taxes and Duties. The prices for the Products are exclusive of all
taxes. 3Com shall pay all import duties, customs fees, sales (unless an
exemption certificate is furnished by 3Com to Sonic), use, and value added taxes
(except for taxes imposed on Sonic's net income) with respect to any products
sold or licensed and any services rendered to 3Com in respect of this Agreement.
Such taxes, when applicable, will appear as separate items on Sonic's invoice.
If applicable law requires 3Com to withhold any taxes levied by the United
States on payments to be made pursuant to this Agreement ("Withholding Tax"),
3Com shall be entitled to deduct such Withholding Tax from the payments due
Sonic hereunder. If Sonic is eligible to take advantage of the reduced
Withholding Tax provided for by an applicable United States tax treaty then in
force, Sonic shall furnish 3Com with all appropriate forms, documents and
paperwork required under the treaty to obtain such reduced Withholding Tax,
including a completed US Internal Revenue Service (IRS) Form 1001, Certificate
of Reduced Withholding, otherwise 3Com will apply the non-treaty withholding tax
rate on applicable payments.
6.6 Most Favored Purchaser. For purposes of this section, "Comparable
Customer" is defined as a customer that: (i) has signed an OEM Agreement with
Sonic with terms and conditions substantially the same
<PAGE>
as this agreement; (ii) has purchased less product in the most recently
completed one (I ) year period under its OEM agreement than the Order Forecast
for the comparable period, and (iii) is obligated to total minimum purchase
commitments no less than seventy five percent (75%) of said Order Forecast.
Sonic will evaluate each of its OEM customers on each anniversary date of the
applicable OEM agreement to determine if any OEM qualifies as a Comparable
Customer. This evaluation will be performed by comparing the most recent year of
activity under the agreement (the "Evaluation Period") to the comparable year of
the 3Com OEM Agreement (i.e. year 1 compared to year 1, year 2 compared to year
2, etc.). If Sonic has sold products listed in Exhibit A(1) to a Comparable
Customer at prices more favorable than those listed in Exhibit A(1), then the
prices in Exhibit A(l) will be adjusted to these more favorable prices for all
purchase orders issued by 3Com subsequent to the Evaluation Period. If in a
subsequent Evaluation Period it is determined that no OEM qualifies as a
Comparable Customer, then the original pricing in Exhibit A(1) will be
reinstated.
7. Delivery Terms
7.1 F 0. B. Point. All shipments shall be F.O.B. origin (Sonic's shipping
dock). Title and risk of loss shall pass to 3Com upon Sonic's tender of delivery
to the common carrier or 3Com's designee.
7.2 Shipping. All shipments are freight collect. Sonic may ship partial
orders provided Sonic notifies 3Com and 3Com agrees prior to shipment. 3Com's
purchase order shall specify the carrier or means of transportation or routing,
and Sonic will comply with 3Com's instructions. If 3Com fails to provide
shipping instructions, Sonic shall select the best available carrier, on a
commercially reasonable basis.
7.3 Packing Instructions. All Products shall be packaged and prepared for
shipment in a manner which: (i) follows the requirements set forth in Exhibit B
---------
and 3Com's purchase order; (ii) follows good commercial practice; (iii) is
acceptable to common carriers for shipment; and (iv) is adequate to ensure safe
arrival. Sonic shall mark the outside of each shrink wrapped pallet with the
applicable 3Com part numbers and any necessary lifting and handling information.
Each shipment shall be accompanied by a packing slip which will include 3Com's
part numbers, purchase order number, Sonic's part number and the quantity
shipped. 7.4 Responsibility for Export Licensing. Subject to all the rules and
regulations stated in Section 14, Sonic agrees, upon 3Com's request, to deliver
Products to 3Com's freight forwarder for export from the country of origin.
Subject to the terms of this Agreement, 3Com will be responsible for obtaining
the appropriate licenses or permits necessary to export Products from the
country of origin. Sonic shall furnish 3Com or 3Com's designee with the
information necessary for 3Com to timely obtain all required export and import
documentation. 7.5 Delivery Schedule. Delivery shall be pursuant to the schedule
set forth in 3Com's purchase order so long as it is no sooner than the standard
leadtime contained in this agreement, unless agreed to in writing in advance by
Sonic. Sonic shall immediately notify 3Com in writing of any anticipated delay
in meeting the delivery schedule, stating the reasons for the delay. If Sonic's
delivery fails to meet the committed delivery schedule, then Sonic, upon 3Com's
request, shall expedite the routing at Sonic's expense, however, if Sonic's
delivery fails to meet the schedule by in excess of twenty (20) days, then 3Com,
at its sole option and without penalty or any additional expense, may :(i)
require Sonic to expedite the routing by the fastest available commercial
carrier; (ii) reschedule the delivery; or (iii) cancel the delivery in whole or
in part.
7.6 Early Delivery. Sonic shall not deliver any Products earlier than
three (3) business days prior to the scheduled delivery date, without 3Com's
written consent, and 3Com may return early or excess shipments to Sonic at
Sonic's sole risk and expense.
7.7 In-Stock Minimum. At 3Com's request, Sonic agrees to carry in "Safety
Stock", defined as a minimum of two weeks supply (as set forth in the Order
Forecast) of completed units of each of the Products to accommodate any
unforeseen or expedited demand on the part of 3Com. In the event 3Com: (i)
terminates this
<PAGE>
Agreement for any reason other than non-conformity of Products (as defined in
Section 9); or (ii) notifies Sonic in writing that 3Com will not any longer
purchase a particular Product ("Terminated Product"). then 3Com shall be liable
to Sonic for the Safety Stock.
7.8 Country of Manufacturer Sonic represents and warrants that the
Products are manufactured in the USA. Sonic shall promptly advise 3Com at least
ninety (90) days prior to a change in country of manufacture or any addition to
manufacturing locations.
7.9 Commodity Classification. Sonic shall provide 3Com with a copy of the
Commodity Classification for the Products or, if this is not available, Sonic
shall provide 3Com with the Export Control Classification Number ("ECCN") that
was used by Sonic for self-certification. A copy of the Commodity Classification
is required for any Product containing security or encryption technology. In
addition, Sonic shall advise 3Com as to General License type pursuant to which
the Product may be exported.
8. Invoicing and Payment
Subject to acceptance of Products as provided in Section 9, invoices shall
be due and payable thirty (30) days after the date of actual receipt of the
Products or Sonic's invoice, whichever is later; provided, however, if payment
is made by 3Com on or prior to ten (10) days after such date, the aggregate
purchase price for the Products shall be reduced by two percent (2%). Payment
shall not constitute acceptance of the Products by 3Com. Payments shall be made
in US Dollars.
9. Quality Acceptance
9.1 At 3Com's Facility in Santa Clara. All Products are subject to 3Com's
inspection and test at 3Com's facility. Within thirty (30) days after receipt of
Product(s) at 3Com's facility, 3Com shall inspect the Products(s). Product(s)
will be presumed accepted upon shipment unless 3Com rejects in writing any such
product within the same timeframe as a result of any Product delivered hereunder
failing to conform to the Specifications set forth in Exhibit B or with 3Com's
---------
testing and acceptance criteria set forth in Exhibit F. Any return of such
---------
defective Product(s) are subject to the Return Material Authorization ("RMA")
procedures outlined in Exhibit D, section 4.5. Sonic shall have up to five
business (5) days to deliver to 3Com conforming Products. If Sonic fails to
deliver conforming Products within such five-day period, 3Com shall have the
right, without liability, to either cancel purchase orders for that Product and
any other Products, the acceptance of which is impractical in 3Com's reasonable
opinion, as a result of Sonic's failure to meet the Specifications, or require
expedited shipping of the conforming Products at Sonic's sole cost.
9.2 At Sonic's Facility. 3Com shall have the right to perform vendor
qualifications and/or on-site source inspections at Sonic's manufacturing
facilities and Sonic shall reasonably cooperate with 3Com in that regard. If an
inspection or test is made on Sonic's premises, Sonic shall provide 3Com's
inspectors with reasonable facilities and assistance at no additional charge.
9.3 ISO 9002 Certified Supplier. Sonic represents that any sub-contractors
used by Sonic in the manufacture of Products presently have ISO 9002
certification. Should Sonic's sub contractors lose the ISO 9002 certification,
Sonic will notify 3Com immediately. Sonic's sub contractors will then have sixty
(60) days to be recertified.
9.4 Epidemic Failure. "Epidemic Failure" shall mean those substantial
deviations from the Specifications which seriously impair the use of Products
existing at the time of delivery but which are not reasonably discernible at
that time and which are evidenced by an identical, repetitive defect due to the
same cause and occurring in the same series of the Products. In the case of an
Epidemic Failure, Sonic shall, within five (5) business days, propose an action
plan to fix the failure of any affected Product(s) and to implement this action
plan immediately upon 3Com's acceptance thereof. If the action plan is not
acceptable to 3Com, 3Com
<PAGE>
can require Sonic to repair or replace, at Sonic's option, the affected
Products. The repair or replacement shall be done at mutually agreed-upon
location(s);.provided, however, that costs of repair or replacement together
with the shipping, transportation and other costs of gathering and
redistributing the Products shall be borne by Sonic. In addition to bearing the
costs associated therewith, if requested by 3Com. Sonic shall support and
provide at Sonic's expense a sufficient number of Products to permit the field
exchange or "hot swap" of Product(s) at customer sites. The parties agree to
make all reasonable efforts to complete the repair or replacement of all of the
affected Products within twenty (20) business days after written notice of
Epidemic Failure by 3Com to Sonic. Sonic also agrees that 3Com will be supported
with accelerated shipments of replacement Product to cover to 3Com's supply
requirements.
10. Compliance with Specifications
All Products delivered hereunder shall fully comply with: (i) the Product
Specifications as agreed to in Exhibit B; (ii) the End User documentation; and
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(iii) all applicable United States and foreign laws, rules and regulations.
11. Regulatory Agency Compliance
All Products delivered hereunder shall fully comply with the regulatory
agency requirements listed in Exhibit B. Product Specifications. Sonic will
----------------------------------
obtain all required agency certifications and approvals for the Products in
3Com's name. Sonic will further ensure that the Product remains compliant with
those regulatory agency requirements. 3Com agrees to work with Sonic in
obtaining these certifications and approvals, and will supply 3Com Model numbers
to Sonic whenever appropriate. Prior to shipment of production units, Sonic will
submit to 3Com sufficient proof of the certifications and approvals.
12. Compliance with Environmental Laws
Sonic represents and warrants to 3Com that upon and after the Effective
Date of this Agreement, Sonic will not provide any Product to 3Com which has
come into physical contact with: (i) a Class I substance, as defined in Section
611 of the Federal Clean Air Act (the "Act"), during any portion of the
manufacturing process; or (ii) a Class 11 substance, as defined in the Act and
Title 40, Code of Federal Regulations, Section 82 (the "Code"), during any
portion of the manufacturing process, where there has been a determination by
the U.S. Environmental Protection Agency that there is a substitute product or
manufacturing process for such Product which does not rely on the use of such
Class II substance, that reduces overall risk to human health and the
environment, and that is currently or potentially available, in accordance with
the Code.
Sonic further represents and warrants that 3Com shall not be subjected to
any warning or labeling requirements regarding a Class I substance or a Class II
substance pursuant to the Act or any regulation promulgated under the Act as a
result of any Product provided by Sonic to 3Com under this Agreement.
Without limitation to the foregoing, Sonic represents and warrants that in
all respects, the manufacture and sale of the Products comply and will
throughout the term of this Agreement comply with all applicable environmental
laws, regulations and other regulatory requirements.
If Sonic discovers a breach of any of the representations and warranties in
this Section 12. it shall immediately notify 3Com of such breach in writing,
explaining the circumstances constituting the breach and identifying the
Product(s) involved. Further, Sonic shall defend, indemnify and hold harmless
3Com and its officers, directors, employees, agents, representatives, successors
and assigns from any liabilities, losses, demands, claims or judgments arising
from the breach of any of Sonic's representations
13. Product Changes
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13.1 Engineering Change. In the event that 3Com finds or becomes aware of a
situation which in its opinion necessitates or would benefit from an engineering
change in any of the Products, 3Com shall suggest such proposed engineering
change to Sonic and Sonic and 3Com agree to work with each other in good faith
to determine whether such change will be made and if so will work with each
other on the implementation of such change. Sonic agrees to work with 3Com in
good faith to upgrade or alter the Product to changing market requirements. If
applicable, any price increase associated with engineering changes will be
negotiated in good faith between the Parties.
13.2 Engineering Change Orders. Should Sonic change, improve, or add any
enhancements or updates to the Products or any related products at any time
(Engineering Change Order Or "ECO"), Sonic shall provide at least ninety (90)
days' prior written notice to 3Com of any such ECO that affects the form, fit or
function of any Product or related product or any changes to Sonic's part number
for the Product prior to its implementation. The notice period may be reduced if
the ECO improves safety or reliability. 3Com shall respond to the requested ECO
within forty-five (45) days or the ECO will be deemed accepted. For an emergency
ECO to the Product(s)which are the result of major problems, Sonic shall provide
fifteen (15) days' prior written notice to 3Com of any such ECO and 3Com shall
respond to the requested ECO within seven (7) days or the ECO will be deemed
accepted.
13.3 Rejection of Engineering Change Orders. Upon rejection of any proposed
ECO, 3Com shall be entitled to: (i) terminate in whole or in part, without cost
or penalty, any affected Product remaining undelivered under accepted Releases
or require delivery by Sonic of some or all of such unchanged Product; and (ii)
place a last-time purchase for the unchanged Product for delivery in amounts
requested by 3Com over a six (6) month period following such implementation.
13.4 Unauthorized Engineering Change Orders. If an ECO is implemented
without the written approval of 3Com, Sonic shall be liable for repair and/or
rework of all Product(s) affected, including to, but not limited to, product in
transit, Product in finished goods inventory, and any Product(s) located with a
reseller or at an end user location.
13.5 New Features and Functions. New features and functions developed for
Sonic products comparable to the Cerberus products will be made available to
3Com. The parties agree to negotiate in good faith the price of these features
and functions.
14. Export Law Compliance; Commodity Classification
14.1 Neither party will export/reexport, directly or indirectly, any
Product(s) or technical data acquired under this Agreement or the "direct
product" of software programs or such technical data to any country for which
the United States Government or any agency thereof, at the time of export,
requires an export license or other governmental approval, without first
obtaining such license or approval. The term "direct product" as used herein
means the immediate product (including processes and services) produced directly
by the use of the technical data or software programs. Both parties will
cooperate, to effect compliance with all applicable import and/or export
regulations. In addition, the parties agree to comply with all applicable local
country import and/or export laws or regulations in the country(ies) of
procurement, production and/or end destination of the Product(s). Both parties
understand that the foregoing obligations are legal requirements and agree that
they shall survive any term or termination of this Agreement.
14.2 Sonic shall provide 3Com with a copy of the U.S. Department of
Commerce, Bureau of Export Administration, Commerce Control List classification
(ECCN, Export Control Classification Number) for all products, software and
technical data contemplated under this Agreement with 3Com. If this confirmation
of classification was not obtained for the Products, or, if this is not
available, Sonic shall provide
<PAGE>
3Com with the ECCN self certified by a knowledge technical/regulatory resource
with sufficient supporting technical parameters for 3Com to confirm the
classification. A copy of the Commerce issued Commodity Classification is
required for any Product containing a security or encryption technology. In
addition, Sonic shall advise 3Com as to qualifying criteria for the Product(s)
for any license exception or "mass market" qualification under which the
Product(s) may be exported. Sonic shall provide 3Com with the Harmonized Tariff
Schedule Classification for the Product (s) and a Certificate of Manufacture
certifying to the country of origin of the Product(s) subject to this Agreement.
15. Warranty
15.1 Hardware Products.
15.1.1 Hardware Warranty. Sonic warrants that all hardware Products
(including associated firmware) sold by Sonic to 3Com under the terms of this
Agreement will be free from defects in workmanship and materials and conform to
the Specifications under normal use and service for a period of three (3) years
after delivery to 3Com. If it appears that any Product, or part thereof,
contains a defect in materials or workmanship, or otherwise fails to conform to
the Specifications, during the warranty period, Sonic shall at its expense
correct any such defect by repairing such defective Product or part or, at
3Com's option, by delivering to 3Com an equivalent Product or part replacing
such defective Product or part. In the event a Product completely fails to
function within the first forty-eight (48) hours of installation (dead-on-
arrival or DOA), Sonic agrees to replace the failed Product with a new Product
and will ship replacement within five (5) days of notification. Sonic shall
waive any expedite charges to 3Com in order to effect earliest reasonable
replacement of such defective Product(s).
15.1.2 Return of Products. 3Com will notify Sonic of nonconforming
Product(s). Such notification shall include serial numbers and reason for
nonconformance. Nonconforming Products will be repaired as specified in Exhibit
D, section 3. Sonic will be responsible for repair and transportation charges
for all Products returned to 3Com and 3Com shall be responsible for return of
Products to Sonic.
15.2 Software Programs
15.2.1 Software Warranty. Sonic warrants that the software programs
licensed hereunder will perform in substantial conformance to the user
documentation and other related documentation, including without limitation the
Specifications and other related engineering documentation program
specifications therefor. The warranty period applicable to software programs
shall be as specified in Exhibit D, but in no event shall the warranty period be
less than ninety (90) calendar days after delivery to an end user.
15.2.2 Reserved
15.3 Year 2000 Warranty. Sonic represents and warrants that the Products
provided under this Agreement: (i) will record, store, process and display and
receive calendar dates failing on or after January 1. 2000, in the same manner,
and with the same functionality as such software records, stores, processes,
displays and receives calendar dates failing on or before December 31, 1999;
(ii) shall include without limitation date data century recognition,
calculations that accommodate same century and multi-century formulas and date
values, and date data interface values that reflect the century; and (iii) be
capable of correctly processing, providing and/or receiving data and date
related data within and between the twentieth and twenty-first centuries;
15.4 Warranties Exclusive. THE FOREGOING WARRANTIES, TERMS OR CONDITIONS
ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES, TERMS OR CONDITIONS.
EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, STATUTORY OR
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OTHERWISE, INCLUDING WARRANTIES, TERMS OR CONDITIONS OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
15.5 Warranty Exclusions. SONIC SHALL NOT BE LIABLE UNDER THIS WARRANTY IF
ITS TESTING AND EXAMINATION DISCLOSES THAT THE ALLEGED DEFECT IN THE PRODUCT
DOES NOT EXIST OR WAS CAUSED BY 3COM OR ITS END USER'S MISUSE, NEGLECT. IMPROPER
INSTALLATION OR TESTING, UNAUTHORIZED ATTEMPTS TO REPAIR, OR BY ACCIDENT, FIRE.
LIGHTNING OR OTHER HAZARD.
16. Indemnification; Insurance
16.1 Patent, Copyright, Trademark Indemnification
16.1.1 Indemnity. At its expense, Sonic shall defend, indemnify, and
hold harmless 3Com and its officers, employees, agents and direct or indirect
customers, from and against any claims, suits, losses. liabilities, damages,
court judgements and/or awards (notwithstanding Section 17) and the reasonably
related costs and expenses (including reasonable attorney's fees incurred by
3Com or for which 3Com is judged liable), incurred because of actual or alleged
infringement by a Product supplied hereunder of any patent, copyright, trade
secret, trademark, mask work right or other proprietary right(s) of a third
party. Upon its receipt of notice of such claim, suit or action, 3Com shall
promptly tender said defense to Sonic, and thereafter, upon Sonic's request,
3Com shall render reasonable assistance at Sonic's expense to Sonic for defense
of same. Sonic shall undertake said defense with counsel reasonably experienced
in such matters; at its option, 3Com may obtain separate counsel at its expense
in such proceedings. Notwithstanding the foregoing, Sonic shall have no
obligation(s) described above in this section 16. 1.1 with respect to any claim
of infringement if- (a) 3Com or any end-user has modified the Product(s)
originally delivered by Sonic to 3Com or if said Product has been combined,
operated, or used contrary to its specifications or with other than its
recommended equipment, and (b) no such infringement would have occurred absent
such combination, operation, or use.
16.1.2 Additional Obligations. If the use of any Product by 3Com or
its customers shall actually, or threatened to, be enjoined, or if Sonic so
decides, then at its option and expense, Sonic may: (i) substitute a fully
equivalent non-infringing replacement unit for the Product; (ii) modify the
infringing Product so that it no longer infringes but remains functionally
equivalent; (iii) obtain for 3Com or its customers the right to continue use of
such Product; or (iv) if none of the foregoing choices is selected, then Sonic
may refund to 3Com the purchase price previously paid for such infringing
Product units in exchange for return by 3Com of all such previously delivered
units.
16.1.3 Exclusions. Sonic's indemnification obligations shall not
apply to infringement arising from changes made to the Product(s) by 3Com; in
such case 3Com shall defend, indemnify, and hold harmless Sonic and Sonic's
officers, employees, and agents from and against any claims, suits, losses,
liabilities, damages, court judgements and/or awards (notwithstanding Section
17) and the reasonably related costs and expenses (including reasonable
attorney's fees incurred by Sonic or for which Sonic is judged liable), incurred
because of actual or alleged infringement by a Product so changed by 3Com, all
on the same terms and conditions as set forth above under 16.1.1 with Sonic's
and 3Com's respective rights and obligations correspondingly reversed.
16.2 Sonic's Indemnity.
16.2.1 Sonic shall defend, indemnify, and hold harmless 3Com from and
against any and all third party claims, suits, and/or causes of action for
losses, liabilities or damages (including reasonable attorneys fees incurred if
Sonic shall not assume the defense of same) suffered by 3Com arising out of
Sonic's: (i) breach of warranty as to Product specifications or infringement of
proprietary rights; (ii) any actual or alleged Product design defect; or (iii)
or any intentional or negligent act of Sonic's officers, employees,
representatives or agents in discharge of Sonic's duties under this Agreement.
3Com shall promptly tender
<PAGE>
defense of such claim upon receipt thereof to Sonic. provided, however, that if
the specifications were furnished by 3Com and such specifications result in such
losses, liabilities or damages. then Sonic shall have no such indemnification
obligations hereunder, and in such case, if Sonic shall suffer a third party
claim, suit or cause of action which results in a loss, liability or damage,
then 3Com shall indemnify Sonic on the aforementioned terms.
16.2.2 Insurance. Sonic shall carry and maintain, under commercially
reasonable terms. liability insurance coverage to satisfactorily cover its
obligations under this Agreement. Upon 3Com's request. Sonic shall provide 3Com
with a Certificate of Insurance evidencing such coverage.
17. Limitation of Liability
IN NO EVENT, WHETHER BASED IN CONTRACT OR TORT (INCLUDING NEGLIGENCE) SHALL
EITHER PARTY BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL. INDIRECT OR SPECIAL
DAMAGES OF ANY KIND OR FOR LOSS OF PROFITS OR REVENUE OR LOSS OF BUSINESS
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE BREACH THEREOF, WHETHER OR
NOT THE PARTY WAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. ANY DAMAGES OF
EITHER PARTY TO THE OTHER ARE LIMITED TO THE VALUE OF THE PRODUCTS PURCHASED OR
DURING THE FIRST YEAR OF THE TERM OF THIS AGREEMENT TO A MAXIMUM OF THREE
MILLION DOLLARS ($3,000,000.), WITH THE EXCEPTION OF DAMAGES ARISING FROM: (i) A
BREACH OF SECTION 12, RELATING TO ENVIRONMENTAL LAWS; (ii) A BREACH OF SECTION
14, RELATING TO EXPORT LAW VIOLATIONS; (iii) A BREACH OF SECTION 18, RELATING TO
CONFIDENTIALITY; AND (iv) DEATH OR PERSONAL INJURY CAUSED BY NEGLIGENCE.
18. Confidentiality
18.1 Confidential Information. Information that is transmitted by one party
to the other in connection with the performance or implementation of this
Agreement and, if in written form, is marked "confidential" or with a similar
legend by the disclosing party before being furnished to the other, or if
disclosed orally or visually is identified as such prior to disclosure and
summarized, in writing, by the disclosing party to the receiving party within
thirty (30) days shall be deemed to be confidential information of the
disclosing party. Each party agrees that it shall use the same degree of care
and means that it utilizes to protect its own information of a similar nature,
but in any event not less than reasonable care and means, to prevent the
unauthorized use or the disclosure of such confidential information to third
parties. The confidential information may be disclosed only to employees or
contractors of a recipient with a "need to know" who are instructed and agree
not to disclose the confidential information and not to use the confidential
information for any purpose, except as set forth herein. Recipient shall have
appropriate written agreements with any such employees or contractors sufficient
to allow the recipient to comply with the provisions of this Agreement. Each of
the parties further agrees to make no use of such confidential information
except as expressly permitted by this Agreement. The obligations of
confidentiality and restricted use set forth in this Section 18.1 shall survive
the expiration or any earlier termination of this Agreement for a period of
three (3) years.
18.2 Exceptions. The confidential information of a party shall not include
and the foregoing obligation shall not apply to data or information which: (i)
was in the public domain at the time it was disclosed or falls within the public
domain, except through the fault of the receiving party, (ii) was known to the
receiving party at the time of disclosure without an obligation of
confidentiality; (iii) was disclosed after written approval of the disclosing
party; (iv) becomes known to the receiving party from a source other than the
disclosing party without breach of this Agreement by the receiving party; (v) is
furnished to a third party by the disclosing party without an obligation of
confidentiality; or (vi) was independently developed by the receiving party
without the benefit of confidential information received from the disclosing
party. Nothing in this
<PAGE>
Agreement shall prevent the receiving party from disclosing confidential
information to the extent the receiving party is legally compelled to do so by
any governmental investigative or judicial agency pursuant to proceedings over
which such agency has jurisdiction; provided, however, that prior to any such
disclosure, the receiving party shall: (a) assert the confidential nature of the
confidential information to the agency; (b) immediately notify the disclosing
party in writing of the agency's order or request to disclose; and (c) cooperate
fully with the disclosing party in protecting against any such disclosure and/or
obtaining a protective order narrowing the scope of the compelled disclosure and
protecting its confidentiality.
19. Publicity
Sonic shall not disclose, advertise, or publish the existence or the terms
or conditions of this Agreement, financial or otherwise, without the prior
written consent of 3Com, except as required under the rules and regulations of
the Securities Exchange Commission with connection to any filings made by Sonic
at it's discretion 3Com and Sonic agree that at some point before first customer
ship of the Products, one press release will be issued announcing the
relationship between the two companies. Such press release must be approved by
both parties and acceptance will not be unreasonably withheld.
20. Federal Acquisition Regulations
In furnishing the Products hereunder, Sonic agrees to comply with all
applicable Federal Acquisition Regulations (FARs) and related laws, rules,
regulations and executive orders in connection with its activities under this
Agreement, including, without limitation, the following FAR clauses:
52.222-26- Equal Opportunity, 52.222-35-Affirmative Action for Special Disabled
and Vietnam Era Veterans and 52.222-36-Affirmative Action for Handicapped
Workers. If Sonic has no place of business within the United States, the FAR
clauses will not be applicable to Sonic.
21. Term and Termination
21.1 Term. This Agreement shall commence on the Effective Date and shall
continue for three (3) years thereafter, unless otherwise specified herein or
unless terminated sooner under the provisions set forth herein. Thereafter, this
Agreement shall automatically be renewed for successive one (1) year terms,
unless one party requests in writing at least one hundred eighty (180) days
prior to the expiration of the then current term, that this Agreement not be so
renewed. Notwithstanding the foregoing, upon the occurrence of a Producer
Default under the Escrow Agreement (as described in Section 22 below), the
rights and obligations of Sections 3.2, 3.3 and 22 shall continue commencing on
the date that 3Com notifies the Escrow Agent of the Producer Default (in
accordance with Section 4.1 (b)(i) of the Escrow Agreement) and terminating at
the end of the period that includes the unexpired term of this Agreement but for
and as measured from the Producer Default (if any) plus one (1) year.
21.2 Termination for Cause. With the exception of the continuing
obligations, as set forth in Section 21.3, herein, either party shall have the
right to terminate this Agreement for cause as a result of:
21.2.1 The failure of the other party to perform any material term or
condition of this Agreement and to remedy such failure within thirty (30) days
after written notice of such failure given by the non-defaulting party; of:
21.2.2 The filing by or against the other party of a petition for
reorganization or liquidation under the U.S. Bankruptcy Code or corresponding
laws or procedures of any applicable jurisdiction; or
21.2.3 The filing by or against the other party of any other
proceeding concerning bankruptcy, insolvency, dissolution, cessation of
operations, reorganization of indebtedness, or the like by the
<PAGE>
other party. If such proceeding is involuntary and is contested in good faith,
this Agreement shall terminate only after the passage of one hundred twenty
(120) days without the dismissal of such proceedings; or
21.2.4 The voluntary or involuntary execution upon; the assignment or
conveyance to a liquidating agent, trustee, mortgages or assignee of whatever
description; or the making of any judicial levy against a substantial percentage
of the other party's assets, for the benefit of its creditors; or
21.2.5 The appointment of a receiver, keeper, liquidator or custodian
of whatever sort of description, for all or a substantial portion of the other
party's assets; or
21.2.6 The termination, dissolution, insolvency or failure in business
of the other party, the distribution of a substantial portion of its assets, or
its cessation to continue all or substantially all of its business affairs.
21.3 Rights and Obligations Upon Termination or Expiration. The termination
or expiration of this Agreement shall in no way relieve either party from its
obligations to pay the other any sums accrued hereunder prior to such
termination or expiration. The parties agree that their respective rights,
obligations and duties under Sections 2, 3.2, 3.3, 3.4, 3.5, 14.1 for events
occurring prior to contract termination, 15, 16, 17, 18, 19, 20, 21, 22 and 23
as well as any rights, obligations and duties which by their nature extend
beyond the expiration or termination of this Agreement shall survive any
expiration or termination and remain in effect for a period of three (3) years
thereafter or the specific period specified in this Agreement, whichever is
longer.
22. Manufacturing Rights; Escrow
22.1 Escrow Agreement As a condition to the effectiveness of this
Agreement, Sonic agrees to execute a Three Party Escrow Agreement with Fort Knox
Escrow Services, Inc
22.2 Manufacturing Rights. Sonic hereby grants to 3Com a worldwide,
irrevocable license for the term of this Agreement to make and have made, use,
develop, import, offer to sell, demonstrate, publicly display, modify,
reproduce, distribute and sell the Products, and to use Sonic Technology (as
defined below) to make and have made, use, develop, import, offer to sell,
demonstrate, publicly display, modify, reproduce, distribute and sell the Sonic
Technology, which license may be exercised by 3Com in the event Sonic is in
breach of (i) Sections 21.2. 2 through 21.2.6.; or (ii) the sale of Sonic
(including but not limited to substantially all of the assets of Sonic) to, or
merger with any of the following (including any subsidiaries thereof). (i) Cisco
Systems, Inc.; (ii) Intel Corporation, (iii) Nortel Networks Corporation. The
occurrence of any of the foregoing shall constitute a "Producer Default" in
accordance with the provisions of the Escrow Agreement between Sonic and Fort
Knox Escrow Services, Inc. which is attached and incorporated herein as Exhibit
G.
22.2.1 Royalties. 3Com will pay royalties associated with Section
22.2 per Exhibit A(1). Royalties shall be paid quarterly, thirty (30) days after
the end of each quarter by 3Com and be accompanied by a detailed accounting.
Sonic shall have the right upon twenty (20) days prior notice, to audit 3com's
records reasonably related to or bearing upon royalties due. Such audit shall be
by a national CPA firm. If there is a discrepancy in the amount due Sonic of
more than five percent (5%), 3Com shall pay the audit costs. Otherwise, Sonic
shall pay the audit costs. The audit right may not be exercised more than once
in any twelve (12) month period and shall not be exercised more than twelve (12)
months after the Agreement has ended.
22.3 Sonic Technology. "Sonic Technology" means all the Products and all
information, including but not limited to, fabrication drawings for all
proprietary mechanical parts, bills of material, inventions, works of
authorship, source code, object code, mask works, test procedures, test
specifications, design specifications, schematics, assembly drawings, artwork,
and any other information that would be useful to 3Com to modify, manufacture,
develop, distribute, support and/or maintain the Products, which information is
now in Sonic's possession or which during the term of this Agreement comes into
Sonic's possession. "Sonic Technology"
<PAGE>
shall be placed in escrow and updated from time to time in accordance with
Exhibit G - Escrow Agreement, attached hereto and incorporated herein by
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reference and delivered to 3Com upon a Producer Default under the Escrow
Agreement.
22.4 Sonic Support. Sonic agrees that, in the event of a Producer Default
under the Escrow Agreement, Sonic shall support 3Com in connection with
exercising its rights under the license granted 3Com in this Section 22
including, but not limited to, assisting 3Com in setting up facilities and
processes to manufacture, maintain and support the Products and to build
software products from source code components which are part of the Sonic
Technology. Sonic shall be compensated for such services on a time and material
basis at $1,000 per man day. Sonic will not be responsible for supporting
modifications made to the Product(s) by 3Com. This Section 22.4 shall survive
the termination or expiration of this Agreement for a period of two (2) years
thereafter.
22.5 Right to Purchase Components. Sonic hereby grants to 3Com the right
(which right shall be effective upon a Producer Default under the Escrow
Agreement), at 3Com's option and expense, to purchase or have purchased by
3Com's designated third party(ies) any or all of the components found in or used
to manufacture or support the Products (including, but not limited to, ASICs or
other components not generally commercially available without the approval of
Sonic) from Sonic's suppliers or vendors and Sonic will advice its suppliers or
vendors in writing of this fact. In the event Sonic fails or refuses to so
advise its suppliers or vendors at such time, the parties expressly agree that
3Com may submit a copy of this Agreement or a portion thereof to any such
supplier or vendor and that such supplier or vendor be entitled to rely on this
Section 22.5 as evidence of Sonic's approval for them to sell such components to
3Com or its designated third party(ies).
23. General
23.1 Relationship of the Parties. Each of the parties shall at all times
during the term of this Agreement act as, and shall represent itself to be, an
independent contractor, and not an agent or employee of the other.
23.2 Entire Agreement. This Agreement and Exhibits hereto are intended as
the complete, final and exclusive statement of the terms of the agreement
between the parties regarding the subject matter hereof and supersedes any and
all other prior or contemporaneous agreements or understandings, whether written
or oral, between them relating to the subject matter hereof. This Agreement may
not be modified except in writing executed by both parties. The terms and
conditions of this Agreement shall prevail notwithstanding any conflict with the
terms and conditions of any purchase order, acknowledgment or other instrument
submitted by Sonic.
23.3 Force Majeure. Neither party shall be liable to the other for any
alleged loss or damages resulting from failure to perform due to acts of God,
natural disasters, acts of civil or military authority, government priorities,
fire, floods, epidemics, quarantine, energy crises, war or riots. Each party
shall promptly notify the other party of such event. If Sonic is unable to
deliver in accordance with agreed delivery schedule, 3Com may either: (i) extend
the time of performance; or (ii) cancel the uncompleted portion of the purchase
order at no cost to 3Com.
23.4 Notices. Except for purchase orders which may be sent by normal
carrier, all notices and communications hereunder are required to be sent to the
address or facsimile number stated below (or such other address or facsimile
number as subsequently notified in writing to the other party): (i) by facsimile
with confirmation of transmission; (ii) personal same or next day delivery; or
(iii) sent by commercial overnight courier with written verification of
delivery. All notices so given shall be deemed given upon the earlier of receipt
or one (1) day after dispatch.
Any notices sent to 3Com hereunder should be sent to:
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3Com Europe Ltd.
3Com Centre
Boundary Way
Hemel Hempstead
Herts HP2 7YU
United Kingdom
Attn.: Purchasing Manager
Fax No. +44 1442 438076
with a copy to:
3Com Corporation
Legal Department
5400 Bayfront Plaza
Santa Clara, CA 95052
Atm.: General Counsel
Fax No. (408) 764-6434
Any notices sent to Sonic hereunder should be sent to:
Sonics Systems, Inc
5400 Betsy Ross Drive, Suite 206
Santa Clara, CA 95054-1101
United States of America
Attn: Sreekanth Ravi
Fax No. (408) 654 5171
23.5 Waiver. A waiver of any default hereunder or of any of the terms and
conditions of this Agreement shall not be deemed to be a continuing waiver or a
waiver of any other default or of any other term or condition, but shall apply
solely to the instance to which such waiver is directed. The exercise of any
right or remedy provided in this Agreement shall be without prejudice to the
right to exercise any other right or remedy provided by law or equity, except as
expressly limited by this Agreement.
23.6 Severability. In the event any provision of this Agreement is found
to be invalid, illegal or unenforceable, the validity, legality and
enforceability of any of the remaining provisions shall not in any way be
affected or impaired.
23.7 Assignment. Sonic may not assign or transfer this Agreement, whether
in whole or part, or any of its rights or obligations under this Agreement
without the prior written consent of 3Com. Any attempted assignment without such
written consent shall be null and void. Consent shall not be unreasonably
withheld by 3Com
23.8 Photocopy of Original. Neither party shall object to the use of a
photocopy of the original of this Agreement for the purpose of making any
required or allowed public filings.
23.9 Governing Law THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH,
AND ALL DISPUTES HEREUNDER SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF
CALIFORNIA. THE PARTIES EXCLUDE IN ITS ENTIRETY THE APPLICATION TO THIS
AGREEMENT OF THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL
SALE OF GOODS.
<PAGE>
23.10 Attorney's Fees. In any action to enforce this Agreement, the prevailing
party shall be awarded all arbitration costs or courts costs and reasonable
attorney's fees incurred, including such costs and attorneys' fees incurred in
enforcing and collecting any judgment.
23.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
23.12 Choice of Language. The original of this Agreement has been written in
English and the governing language of this Agreement shall be English.
23.13 List of Exhibits:
Exhibit A Product List and Prices; Royalty; Non-Binding Forecast;
--------- Unique Materials Leadtime; Replenishment Cycle Time
Exhibit B Product Specifications
---------
Exhibit C Reserved
---------
Exhibit D Support Services
---------
Exhibit E Reserved
---------
Exhibit F Product Acceptance Criteria
---------
Exhibit G Escrow Agreement
---------
Exhibit H Development of Product
---------
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives effective as of the date first
above written.
3Com Corporation Sonic Systems, Inc.
By:_________________________________ By: _________________________________
Printed Name:_______________________ Printed Name: _______________________
Title :_____________________________ Title: ______________________________
Date: ______________________________ Date: _______________________________
<PAGE>
Exhibit A
(1) Product list- prices; lead time; royalty and repair charges
Description of Products
3C 16770 OfficeConnect Internet Firewall 25
3C 16771 OfficeConnect Internet Firewall DMZ
3C 16772 OfficeConnect Web Site Filter for Internet Firewalls
Price, Specification, Lead time, Royalty, Repair Charges:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Product Initial 3Com Spec No. Lead Time Royalty Repair Charge
------- ------------ -------- --------- ------- -------------
price (US$)
-----------
- ----------------------------------------------------------------------------------------------------
(see Exhibit B) (see Section (see Section (out of
--------------- ------------ ------------ -------
5.1) 22.2.1) Warranty
---- ------- --------
repairs only)
-------------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
3C 16770 See below 1007-015 [*] $[*] $[*]
- ----------------------------------------------------------------------------------------------------
3C 16771 $[*] 1007-015 [*] $[*] $[*]
- ----------------------------------------------------------------------------------------------------
3C 16772 $[*] 1007-045 [*] $[*] [*]
- ----------------------------------------------------------------------------------------------------
</TABLE>
The initial 3Com price for the 3C 16770 product will be calculated as follows:
The total cost to Sonic of the 3Com Unique Material including shipping, duties
and taxes will be agreed by both parties and added to an agreed base cost of
$[*].
In addition, an overhead charge of [*]% of the total cost of the 3Com Unique
Material will be added to the above price to cover Sonic's costs of acquiring
this material.
Out of Warranty Repairs will incur a fixed charge as above
(2) Non-Binding Forecast
The Non-Binding Forecast quantities for Products 3C 166770 and 3C 16771 combined
are:
<TABLE>
<CAPTION>
---------------------------------------
Quantity
---------------------------------------
<S> <C>
Nov-99 [*]
---------------------------------------
Dec-99 [*]
---------------------------------------
Jan-00 [*]
---------------------------------------
Feb-00 [*]
---------------------------------------
Mar-00 [*]
---------------------------------------
Apr-00 [*]
---------------------------------------
</TABLE>
<PAGE>
(3) Unique Materials Leadtime (see Section 5.4-2)
Leadtimes listed below are still unconfirmed at the Effective Date. Actual
leadtimes and costs will be agreed by both parties before 1 November 1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Material Lead Time Value (US$)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Long lead time capacitors [*] [*]
- --------------------------------------------------------------------------------------------------
Power Regulation Components, Chassis,
Plastic Mouldings [*] [*]
- --------------------------------------------------------------------------------------------------
Packaging, etc. [*] [*]
- --------------------------------------------------------------------------------------------------
</TABLE>
Material liability for cancellation, etc. will be based on actual prices paid by
Sonic at the time.
(4) Sonic's Replenishment Cycle Time (see Section 5.4.2)
4 weeks
<PAGE>
Exhibit B
---------
PRODUCT SPECIFICATIONS
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
3C 16770 OfficeConnect Internet Firewall 25 3Com Document no. 1007-015
- ------------------------------------------------------------------------------------------------------------
3C 16771 OfficeConnect Internet Firewall DMZ 3Com Document no. 1007-015
- ------------------------------------------------------------------------------------------------------------
3C 16772 OfficeConnect Web Site Filter for Internet Firewalls 3Com Document no.1007-045
- ------------------------------------------------------------------------------------------------------------
</TABLE>
In all cases, the latest issue level signed and approved by 3Com and Sonic is
applicable.
Exhibit C
Reserved
<PAGE>
Exhibit D
SUPPORT SERVICES
1 Definitions:
Authorized Caller. "Authorized Caller" means a person or persons designated
by 3Com as the technical/engineering support interface for the Products.
Designated Support Engineer. "Designated Support Engineer" means a person
or persons designated by Sonic as the technical/engineering support interface
for the Products.
End User. "End User" means a company or organization that uses 3Com
products in the operation of their business.
Error. "Error" means a defect in the Product which is reproducible and
which causes such Product not to function substantially in conformance with the
Specifications, end user documentation, or other related documentation,
including without limitation any functional specifications or other engineering
documentation for the Product, or commonly accepted operating principles as
defined by industry standards. Errors are classified according to the Problem
severity.
Incident. "Incident" means a situation which necessitates an End User to
contact 3Com for assistance.
Problem. "Problem" means any error, or any actual or perceived failure or
functional impairment that causes reduced functionality to the Product. Problems
are assigned a classification at the time of 3Com's initial contact with Sonic.
Problem classifications may be changed based upon new information or customer
situation. Problems are classified by 3Com according to Severity level, based
upon Technical and/or Customer Sensitivity as follows:
Severity 1: Technical: Production network failure which results in a
critical impact to business operations. No viable workaround is known. Customer
Sensitivity: Customer account is in jeopardy, and there is risk of losing
business.
Severity 2: Technical: Critical production network service interruption or
degradation creating difficulty in the execution of a network function which
results in a critical impact to business operations. Customer acceptable
workaround is available. Customer Sensitivity: There is potential risk of losing
actual or future business.
Severity 3: Technical: Significant system problems which prevent some
network functions from meeting the production specifications or cause particular
features or functionality to be inoperative. Some business operations are
impaired, but the network continues to function. Customer acceptable workaround
is available. Customer Sensitivity: The problem is impacting the customer's day
to day business, there is no risk of losing business.
Severity 4: Technical: Enhancement requests for hardware, software, manuals
or electronic services. Customer Sensitivity: The problem is not currently
impacting the customer's day to day business, but may in the future; there is no
risk of losing business.
Repair. "Repair" means the repair or replacement of a Product or part.
<PAGE>
Software Patch. "Software Patch" refers to executable software created and
made available to correct an Error or malfunction identified in a specific
version of software.
Software Update. "Software Update" means a formal software release (i)
which providees functionality enhancements, reliability enhancements, and other
modifications to the Product software or (ii) that is a maintenance release that
corrects deficiencies and/or bugs affecting performance to the published
specifications.
Technical Support Levels. "Level" means a certain class of service provided
to authorized resellers and end users. Definitions are as follows:
Level One: First call support on all customer calls, technical support
staff answers technical inquiries regarding Products, and provides problem
diagnostics services for identifying Problems and generic application faults,
analysis, and where possible, Problem resolution.
Level Two: Specialist level technical support, technical
support/escalation staff performs Problem isolation and replication, lab
simulations and interoperability testing, provides remote diagnostics
capabilities and on-site troubleshooting, if required, and implements a solution
for a Problem that is not the result of a Product Error. In the case of a
Product Error, the technical staff is able to identify the source of the Error,
create a reproducible test case, and document the details of the Error for
escalation to Sonic.
Level Three: Backup engineering and technical support; staff isolates
a Problem/Error and implements a solution, including, but not limited to, a
Product change.
Workaround. A "Workaround" is a feasible change in operating procedures
whereby an end user can avoid any deleterious effects of an Error.
2 Technical Support Services
2.1 Support Services. 3Com shall provide Level One and Level Two support
----------------
services to its authorized resellers and End Users. Sonic shall provide Level
Three back-up technical support to 3Com, and shall make support available to
3Com via telephone, FAX or E-Mail to 3Com's Authorized Caller(s). Sonic will
provide such support during normal business hours (8:30-5:30 Pacific Time),
excluding holidays. Sonic will provide support via pager outside of normal
business hours for Severity 1 and Severity 2 Problems. 3Com will receive most
favored class of priority from Sonic. 3Com will have direct access to Sonic's
Level Two and Level Three technical support, as well as to Sonic's technical
management support as required for escalation purposes. The support shall
commence as of the Effective Date and shall be provided at no cost to 3Com.
The Authorized Callers and Designated Support Engineers will be the
primary contacts between 3Com's and Sonic's technical support and/or escalation
centers. 3Com will provide a list of Authorized Callers including names,
address, phone numbers, and internet e-mail address. Sonic will provide a list
of Designated Support Engineers. These lists will be reviewed quarterly and
updated as required. 3Com will be permitted to register up to ten (10)
Authorized Callers; all Authorized Callers shall receive training as set forth
in Section 5 of this Exhibit.
3Com shall reasonably attempt to resolve customer problems for the
Products prior to contacting Sonic. Sonic will not contact or provide direct
support to 3Com's customers with respect to the Products pursuant to this
Agreement without 3Com's prior approval. Sonic will provide an initial response
to all 3Com support inquiries according to the following: one (1) hour for
Severity 1 Problems. two (2) hours for Severity 2 Problems, three (3) hours for
Severity 3 Problems, and one (1) business day for Severity 4 Problems. If unable
to resolve, 3Com and Sonic will agree, in good faith, what additional
information and/or
<PAGE>
documentation will be required for resolution. Sonic shall work with 3Com in
attempting to reproduce any such problem. Problem resolution shall be managed in
accordance with Section 2.3.
2.2 Emergency Technical Support. Except as set forth in Section 9.3 of
---------------------------
this Agreement (Epidemic Failure), and in this Exhibit D (Support Services),
Sonic shall have no responsibility for providing technical support directly to
3Com's authorized resellers and end users.. However, for Severity 1 Problems
deemed by Kom to require emergency, on-site support that would be significantly
facilitated by Sonic assistance and such support is requested by 3Com, Sonic
agrees to use its best efforts to provide such emergency support within two (2)
business days. 3Com will attempt to manage the Incident, such that Sonic's
assistance will be transparent to the customer and shall reimburse Sonic for its
time at mutually agreeable and reasonable rates, plus other reasonable expenses
approved in advance by 3Com. In situations where the site visit was precipitated
by a known (but unresolved) or acknowledged Sonic problem, 3Com will not
reimburse Sonic for costs, labor or other expenses.
2.3 Problem Resolution/Error Correction. 3Com and Sonic shall promptly
-----------------------------------
agree in good faith to any information and/or documentation which may be
required to permit Sonic to identify and resolve Product Problems, including but
not limited to Errors. Sonic agrees to respond to identified Problems based on
the following correction periods:
Severity 1. Sonic shall use its best efforts to resolve or reduce the
-----------
severity via Workaround and/or Software Patch within two (2) business
days of receipt of notice of such Error. Sonic shall provide its
action plan within one (1) business day, and regular status updates. A
final resolution shall be identified in the action plan. 3Com and
Sonic problem managers shall review incident after two (2) business
days.
Severity 2. Sonic shall use its best efforts to resolve or reduce the
-----------
severity via Workaround and/or patch within five (5) business days of
receipt of notice of such Error. Sonic shall provide an action plan
within three (3) business days, and regular status updates. 3Com and
Sonic problem managers shall review incident after five (5) business
days. A final engineering resolution shall be identified in the action
plan.
Severity 3. Sonic shall use its best efforts to acknowledge the
-----------
Problem within ten (10) business days of receipt of notice. Sonic
shall provide a final engineering resolution within three (3) months
or next scheduled release, whichever is sooner.
Severity 4. Sonic shall use its best efforts to acknowledge the
-----------
Problem within thirty (30) business days of receipt of notice. A final
engineering resolution will be determined and scheduled through mutual
agreement between 3Com and Sonic Engineering and Marketing management.
The prescribed correction periods above may be extended as mutually
agreed, e.g., if resolution of problem requires timely hardware certification or
test, or if resolution represents significant risk to the essential functions.
2.4 Problem Status. Sonic shall provide 3Com, as a common business
--------------
practice, a mechanism by which 3Com may receive a monthly status report of all
Problems reported and/or resolved. This report shall contain known Product
Problems, Workarounds, fixes and open Effors/Bugs.
2.5 Support Tools. At no charge to 3Com, Sonic shall provide diagnostic
-------------
software tools and procedures and a list/description of test/diagnostic
equipment necessary to troubleshoot Problems and assist in Problem
identification, isolation and resolution.
<PAGE>
Sonic shall also provide the following additional support tools. if
available: (i) troubleshooting guide, (ii) technical tips, (iii) compatibility/
inter-operability matrix and (iv) supported and not supported configurations
statement. Sonic shall further promptly provide to 3Com when available, all
modifications or other revisions to such support tools.
2.6 Support Evaluation. From time to time following acceptance by 3Com
------------------
of the Products, but no less frequently than once each calendar quarter,
management-level support representatives from each party will meet to review the
performance of, and recommend improvements regarding, the technical support,
escalation and warranty assistance provided to 3Com under this Agreement.
3 Software Support Services
3.1 Software Updates. 3Com is entitled to receive or access all Software
----------------
Updates for the Products, as provided for in this Exhibit D (Support Services),
and as required under Section 13 (Product Changes) of the Agreement. 3Com has
the right to duplicate both the Software and associated documentation and
distribute to customers according to 3Com entitlement process.
3.2 Sunport for Prior Release. Sonic will provide support hereunder for
-------------------------
the current and immediately preceding two (2) Major Releases (including all
interim Minor, and/or Maintenance Releases) of the Software.
4 Hardware Support Services
4.1 Repair Services. 3Com shall have the right to purchase Product Repair,
---------------
spare parts and upgrade kits as applicable during the term of this Agreement,
and thereafter, for a period of three (3) years after the last shipment of the
affected Product hereunder, notwithstanding the expiration of this Agreement.
Such purchases shall be governed by the applicable terms and conditions set
forth herein. The prices charged for such Product Repair, spare parts and
upgrade kits shall be at the lowest prices then charged by Sonic to any other
customer for similar quantities of the same or comparable items. Should Sonic
fail to fulfill Repair obligations, then Sonic will provide suitable and form,
fit, and function compatible replacement products at no additional charge to
3Com.
4.2 Inventory Management Requirements. Sonic will provide failure analysis
---------------------------------
data for the Products. The data shall include predicted, demonstrated and field
data for the whole unit assembly and individual subassemblies (FRUs/Field
Replaceable Units), including MTBF/Mean Time Between Failure data, and how MTBF
is computed. Sonic will also provide the sparing/inventory rationale and spares
inventory recommendations, based on the failure analysis data. This data will
provided within ten (10) days after Effective Date.
4.3 Test and Repair Procedures. At no charge to 3Com. Sonic shall provide
--------------------------
test specifications, test equipment specifications, test scripts and written
test procedures necessary to enable 3Com personnel to verify functional
failures, perform adjustments and alignments, as required, and verify functional
performance.
4.4 Product Repairs. Sonic will Repair a defective Product and forward the
---------------
same back to 3Com. Sonic will Repair defective product to 3Com standards. Sonic
will upgrade Repaired Product to the most recent 3Com approved ECO level,
excluding hardware revisions. Sonic shall charge rates as specified in Exhibit
A(1) and that are equal to or less the largest discount offered to Sonic's other
customers. Any Repair shall be warranted for the remainder of the warranty
period or three (3) months, whichever is longer. This statement excludes Product
that has been damaged by accident, abuse or misuse. 3Com reserves the option to
perform out-of-warranty Repairs at Repair facilities designated by 3Com. In the
event 3Com exercises the option to perform Repairs' at such designated
facilities, Sonic shall provide all required product specifications, engineering
documentation, and test and Repair procedures.
<PAGE>
4.5 Return Material Authorization (RMA). Sonic shall provide 3Com with RMA
-----------------------------------
procedures. The following procedure shall apply to Sonic's Repair of Products.
(i) Management. Sonic will use its best efforts to provide 3Com with
----------
RMA number within one (1) business day after receipt of request. 3Com Repair RMA
returns of Products will be managed through a 3Com Repair center. 3Com will
return defective/failed Products monthly or in quantities of 5-10 units. 3Com
shall notify Sonic if it opens more than five (5) such Repair centers. Sonic
will provide domestic and international interfaces to manage 3Com returns. 3Com
shall return Product to Sonic's closest geographic Repair center.
(ii) Turn-Around Time. Sonic will Repair the defective/failed Product
----------------
and forward the same back to 3Com within five (5), not to exceed ten (10),
business days after receipt. Sonic will provide expedited Repair service to
accommodate 3Com emergency requirements at a minimal expedite charge, not to
exceed five (5%) of Repair charge.
(iii) Reporting. 3Com Repaired Products will be returned with a
---------
detailed Repair report for each unit. Sonic will provide a monthly report of:
(i) RMAs processed, including failure analysis and (ii) physical inventory of
3Com owned material. Upon special request, Sonic will provide inventory status
within two (2) business days.
(iv) Shipping charges. 3Com will pay shipping charges on Products
----------------
shipped to Sonic for Repair. Sonic will pay shipping charges on Products
returned to 3Com.
(v) Packaging requirements. Sonic and 3Com will jointly develop a
----------------------
Repair shipping process prior to FCS/First Customer Ship of a Product by 3Com
that satisfies packaging requirements for both parties. On all Products returned
to 3Com, Sonic will affix a label that identifies Product, including model
number, serial number, current hardware and/or software revision level, and RMA
number.
4.6 No Problem Found (NPF). Sonic shall provide statistics on Product NPF
----------------------
returns on a quarterly basis. In the event that more than twenty-five percent
(25%) of the Products returned within a six (6) month period are NPF, Sonic may
charge the lesser of US$150 per unit or twenty-five percent (25%) of the Repair
price of the unit for each unit in excess of the allowed twenty-five percent
(25%) to cover the costs of testing and administration. Sonic shall waive any
NPF charges on in-warranty Products returned for Repair. Further, both parties
agree to work together to reduce the frequency of NPF returns.
5 Training Services
5.1 Technical Training. During the term of this Agreement, Sonic shall, at
------------------
its expense, provide 3Com with one (1) course per Product of basic training and
of advanced training for 3Com employees (including the Authorized Callers)
engaged in the technical support and training of the Product. Training will be
conducted at 3Com's facility in Santa Clara, California or at Sonic's facility
in Santa Clara, California, as mutually agreed. If conducted at other than
3Com's Santa Clara facility or Sonic's facility, 3Com shall pay all reasonable
costs incurred by Sonic's instructor(s) for travel and living expenses during
the period of such training.
Each training course shall commence on a mutually agreed upon date. Such
training shall cover in detail, the installation, configuration, operation,
troubleshooting, adjustment, test and maintenance of the Product. Sonic shall
provide a reasonable quantity of appropriate Product units as training aids.
When such classes are conducted at 3Com's facilities, 3Com shall provide other
required equipment as training aides. Sonic shall provide copies of the student
training guide, and all other necessary materials to each trainee and to
<PAGE>
3Com. 3Com may record any or all training courses on video tape and may
reproduce and distribute such recordings, for internal use only, under 3Com's
name.
Upon the release of each new Product or new version of existing Product
with substantial functional chances, Sonic shall provide to 3Com, without cost,
complete technical training relating to such new Product or version.
Sonic shall offer additional training throughout the term of this
Agreement, at Sonic's most favored pricing to similarly situated customers. If
conducted at other than 3Com's Santa Clara facility or Sonic's facility, 3Com
shall pay all reasonable costs incurred by Sonic's instructor(s) for travel and
living expenses during the period of such training. Sonic shall pay for the
salary of its instructor(s) and all other costs and expenses related to such
training. Sonic shall submit invoices to 3Com after the conclusion of such
training classes which itemize all expenses incurred and shall include copies of
all receipts therefor. Payment terms shall be net thirty (30) days from receipt
of invoice.
5.2 Training Courses and Materials. During the term of this Agreement,
------------------------------
Sonic shall provide 3Com with all materials utilized to provide training in
connection with the Products. Training shall include, but is not limited to,
customer reseller and End-User courses. Training materials shall also include,
but are not limited to, instructor guides, overheads, student workbooks, and
manual/guides. Sonic shall provide masters of such training materials in both
hard copy and electronic media. Sonic shall further provide copies of all
modifications or other revisions to such training materials as they become
available. 3Com is permitted to use such material for its internal use only in
training 3Com's sales and support staff on the Products.
Sonic hereby grants to 3Com a royalty-free non-exclusive, worldwide license
to use, modify. create derivative works based upon, reproduce, display,
demonstrate and distribute the training materials (whether modified or
unmodified but excepting proprietary technical information relating to the
products) for course development use solely in connection with the Products
distributed under the terms of the Agreement.
6 Product Documentation
Sonic will provide all documentation for the Products, including, but not
limited to, specifications, user manual, troubleshooting guides, etc.
Documentation will be provided in suitable electronic format and in hardcopy
format.
7. Manufacturing Discontinued and Support After Termination.
For Products that have been deemed "manufacturing discontinued" and
following termination of the Agreement, Sonic agrees to provide Support
Services, as defined in this Exhibit D, to 3Com for a period of three (3) years
to enable 3Com to support its customers. Sonic will provide all required product
specifications, engineering documentation, test specifications, plans and Repair
procedures to enable 3Com to support its customers beyond the termination of
such Support Services. Following termination of the Agreement, Sonic agrees to
-------------------------------------------------------
fulfill subscription obligations for OfficeConnect Web Site Filter for Internet
- -------------------------------------------------------------------------------
Firewalls Product for a mriod of one (1) Year. Sonic will provide all required
- ------------------------------------------------------------------------------
information to enable 3Com to purchase such Product from the originator, i.e.
- -----------------------------------------------------------------------------
the source company.
- ------------------
<PAGE>
Exhibit E
Reserved
Exhibit F
PRODUCT ACCEPTANCE CRITERIA
I. PURPOSE
This Exhibit establishes the Quality and Reliability provisions which shall
apply to all Products shipped under this Agreement.
II. SCOPE
III. Quality Requirements
IV. Reliability Requirements
V. Workmanship Standard
VI. Quality System Requirements
VII. Electrical Overstress / Electrostatic Discharge
III. QUALITY
A. ACCEPTANCE CRITERIA
Qualification for initial and on-going shipments, including spares, shall
require inspection to a mutually agreed upon specification for major
defects per section III C. Inspections shall be performed by 3Com
personnel or by 3Com's designated representative at 3Com or Sonic's
facility. 3Com reserves the right to witness on-going qualification tests
as long as witnessing does not cause delay in meeting program goals..
Product will be considered acceptable for shipment if it does not contain
a major defect as defined per Section III C of this Exhibit F.
<PAGE>
B. REMEDIES FOR EXCEEDING THE ACCEPTABLE DEFECT RATE
If Major Defects, defined in Section III C, are identified during, an
audit at 3Com, Sonic's facility, or as a result of failure to meet
physical or electrical specifications at the end user location. the Sonic
will assume responsibility for replacement of defective material at
Sonic's expense. Further, Sonic is responsible for 100% Audit of all
material at 3Com and Sonic's facility if during the audit process or based
on the quantity of customer returns, it is determined that the defect
number falls below the acceptable level based on an AQL of 1.0.
C. MAJOR DEFECT DEFINITIONS
1) A system failure when tested to mutually agreed upon test
specifications:
2) A major cosmetic defect or serious violation of workmanship standards
e.g., plastic or sheet metal deformities that are readily visible to
end user;
3) Failure to meet the safety standards identified in Exhibit B.
4) Materially reduces the usability of the products for its intended
purpose per the Product Specifications.
5) Failure to comply with the EMC standards identified in Exhibit B.
D. TESTING BY SONIC
Should 3Com identify a major defect (as defined above) in Products held in
3Com stock or shipped to 3Com customers, and Sonic and 3Com mutually agree
that this defect is not detected under Sonic's then current manufacturing
test procedures, Sonic agrees to put an action plan in place within 5
business days to modify its test procedure to adequately test for that
defect in the future.
IV. RELIABILITY REQUIREMENTS
A. RELIABILITY DEMONSTRATION TESTING
Reliability demonstration may be accomplished by 3Com or its designated
representative. The demonstration shall use either field data from an
installed base of production version product or data collected from a
reliability demonstration test (PDT).
B. RELIABILITY MATURITY TESTING
A reliability maturity test (RMT) may be performed by 3Com or its
designated representative on a continuing basis. MTBF must be equal to or
greater than that specified in the Specifications.
V. WORKMANSHIP STANDARD
Sonic's workmanship standard shall conform to ANSI /IPC-A-610 Class II.
V1. QUALITY SYSTEM REQUIREMENTS
A. Sonic shall notify 3Com of any major changes in process, process
locations and quality practices employed by Sonic that affect this
Agreement and that occur after Agreement is signed.
<PAGE>
B. BURN-IN
All assemblies including field replaceable units shipped under this
Agreement require dynamic testing as per product specification.
C. MINIMUM INSPECTION REQUIREMENTS
3Com requires Sonic's inspection of all product. Revisions to this
requirements may be accomplished by mutual written agreement between 3Com
and the Sonic at any time.
D. CORRECTIVE ACTION CONTROL
Sonic will be responsible for implementation of a Corrective Action
Control procedure for all process and component related failure
mechanisms. The procedure must cover as a minimum the following:
1) Problem Identification
2) Assignment of responsibility
3) Schedule of completion
4) Tracking of corrective actions
5) Verification of effectiveness of corrective action.
NOTE: All in-process corrective action information will be available to
3Com upon request.
E. COMPLIANCE TO DESIGN STANDARDS
Sonic is responsible for on going conformance to the Design Standards
(Drop & Vibration, Environmental Cooling, Structure and Packaging,
Acoustic Noise Limits, Transportability, Electrostatic Discharge & Primary
Power Limits, etc.) for all products supplied hereunder.
F. INSPECTION AND AUDIT
Upon at least twenty-four (24) hour notice, 3Com or its designated
representative may audit the manufacturing process and products in such a
manner as not to be disruptive to normal productions. Any mutually agreed
upon out-of-control condition at Sonic's facility will trigger the need
for the above audit process. Corrective action is to follow all items
listed in section VI item D of this Exhibit.
VII. ELECTRICAL OVERSTRESS/ELECTROSTATIC DISCHARGE PROTECTION
Protection for all components and assemblies shall be accomplished in a
manner to prevent damage by ESD. All field replaceable board level
assembles shipped to 3Com must be contained in a conductive ESD package.
Reasonable precautions must be taken regarding the ESD protection of all
other subassemblies.
<PAGE>
Exhibit H
Development of the Product
Non-Recurring Engineering (NRE)
In return for a consideration of $[*] Sonic will carry out the following: (See
Section 2.4)
Re-design SonicWALL to fit OfficeConnect format as per product specification
1007-015
. New PCB layout to cover both products by population options
. New Power Regulation Circuit for 3Com Power Adapter
. Noise suppression circuitry for FCC B
. Move flash reset switch to external access
. Relayout to fit 3Com enclosure
. Make modifications to Web Management GUI
. Make modifications to Back-end Server GUI
. Design and test to product spec 1007-015 **
. Supply base manual(s) for 3Com to re-work
. Provide five (5) sample units of each version
NRE charee is payable in the following installments
- ---------------------------------------------------
$[*] at program start
$[*] on prototype acceptance
$[*] on first production shipment
**3Com to bear the cost of any approval fees billed to Sonic by third parties.
Sonic to bill 3Com separately for these fees.
Sonic to source designed and completed case and packaging items from 3Com
designated suppliers including, but not limited to, chassis, top covers,
manuals, registration cards, boxes, CDs, seals, clips etc.
Additional Services
In consideration of $[*], Sonic will provide the following service:
. Setup of back-end server(s) for Content Filter List, Product Registration
and Product updates.
Works Developed For 3Com
The following IP will be owned by 3Com at the completion of the development:
. Design of printed circuit board assembly (PCBA) to fit into 3Com enclosure
. Specific on-board power regulation circuit design provided to Sonic by 3Com
. Web Management GUI: Specific combination of colors, fonts, GUI element
styles and GUI element locations for the Cerberus web-based management
interface.
. Backend Registration Server: Specific combination of colors, fonts, GUI
elements styles and GUI element locations for the web interface to the
back-end server user for registration, upgrade activation and other
functions.
<PAGE>
EXHIBIT 10.13
Purchase Agreement
Between
FLASH Electronics Inc.
and
SONICWALLs
This purchase agreement is entered into effect as of 9/28/99 between FLASH
Electronics Inc. located at 4050 Starboard Drive, Fremont, CA 94538 and
SONICWALL located at 5400 Betsy Ross Dr., Santa Clara, CA 95054.
This agreement is intended to define the basic business agreement between
the two companies. Additional details may be defined in subsequent business
agreement.
Under the agreement FLASH Electronics will provide custom manufacturing
services to SONICWALL. These services include purchasing components, material
management, assembling of printed circuit boards, testing, troubleshooting,
reworks, final assembly, packaging and shipping. The products will be covered by
a 6-month warrantee for workmanship to IPC 610 class 2 standards.
PURCHASE OF MATERIAL
In order for FLASH to purchase material for SONICWALL products
manufacturing, SONICWALL will provide a 3 month hard copy Purchase Order plus a
3 months rolling forecast. This forecast is required to allow sufficient time to
plan and procure material in timely and orderly manner. It is understood that
SONICWALL will be responsible for the costs of the 30 days material inventory,
WIP inventory and unique SONICWALL materials (Enclosure, PWA, etc.,) at Flash
Electronics. SONICWALL will also be liable for material with long leadtimes
provided Flash identifies such items in writing either as an attachment to this
agreement or other mutually acceptable manner. Flash Electronics shall follow
common industry practice to plan and buy in reasonable quantity to protect
lead-time requirements, safety stock, minimum buy quantity and volume discounts
if available.
INVOICING AND PAYMENT
Subject to acceptance of Products and parts within 3 days of receiving,
invoices shall be due and payable thirty (30) days after the date of actual
receipt of the products or parts. Any other applicable discounts or price
reductions shall be referenced on the invoice. Payments past 45 days may be
subject to 1.5% monthly finance charge.
CANCELLATIONS
In the event SONICWALL decides to terminate a purchase order either
actually or constructively (i.e. engineering change resulting in obsolescence.),
SONICWALL liability, in addition to NCNR components, shall include excess or
obsolete safety stock if these items are non-returnable such as open package and
incomplete reel. SONICWALL will reimburse Flash Electronics the restocking
charge or other penalties required by component vendor. SONICWALL will also be
liable for all work in process (WIP). Products in WIP and non-returnable
components will be shipped to SONICWALL 30 days from the date of
cancellation notice.
<PAGE>
Page 2 Flash Purchase agreement
RESCHEDULES
SONICWALL shall not cancel nor reschedule the delivery date if it is within 30
days of the original scheduled date. However a 50% adjustment in quantity is
acceptable for increased quantity and 30% adjustment for decreased quantity
between 30 and 60 days of the original scheduled date. A change in total
quantity is acceptable beyond the 60 days delivery window as long as SONICWALL
agrees to buy back the NCNR material in excess of 60 days supply based on the
new schedule. In return, Flash shall purchase from SONICWALL before buying them
from other supplies for future demand.
FREIGHT AND SHIPPING CONTAINERS
Flash will follow SONICWALL instructions in the selection of freight
carrier and to determine shipping priority. SONICWALL shall provide complete
packing instruction and a list packing material. Shipments will be FOB Fremont
billed to SONICWALL freight account. Flash will provide free local pick up and
delivery with company vehicles to SONIC facility within 30 miles distance of the
Flash Fremont facility.
TERMINATION OF THIS CONTRACT
Either party may terminate this agreement, by a written notice to the other
party not less than 180 days prior to the effective date of such termination.
The termination of this agreement shall in no way relieve either party of any
sum of money and liability that have accrued prior to such termination.
By: /s/ Michael J. Sheridan By: /s/ Paul Belknap
-------------------------------- -----------------------------
Printed name: Michael J. Sheridan Printed name: Paul Belknap
---------------------- ------------------
Title: Chief Financial Officer Title: Director of Sales
----------------------------- -------------------------
Date: 9/29/99 Date: 9/29/99
------------------------------ --------------------------
<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 25, 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
October 1, 1999
